-----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, Q6w0B+4Lu5uEIafGsgYoh+CPmGEYUMmBA8lMpt+YM6JDok4WqdvagtU6xxOI89/5 OPYUrWRRsoInKMw0E/9WSg== 0000950134-98-006772.txt : 19980814 0000950134-98-006772.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950134-98-006772 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980813 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: 10-K405 SEC ACT: SEC FILE NUMBER: 000-14939 FILM NUMBER: 98684542 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 10-K405 1 FORM 10-K FOR YEAR ENDED APRIL 30, 1998 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: Commission file number: APRIL 30, 1998 0-14939
CROWN GROUP, INC. (Exact name of registrant as specified in its charter) TEXAS 63-0851141 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS (Address of principal executive offices) 75038 (Zip Code) (972) 717-3423 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 par share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of August 10, 1998 the aggregate market value of the voting stock held by non-affiliates (all persons other than executive officers, directors and holder's of 5% or more of the Registrant's common stock) of the Registrant (7,516,394 shares) was $26,777,154. As of August 10, 1998 there were 10,243,731 shares of the Registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Annual Report to Stockholders for the year ended April 30, 1998 are incorporated by reference into Part II of this report, and portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders to be held in 1998 are incorporated by reference into Part III of this report, with the exception of information regarding executive officers required under Item 10 of Part III, which information is included in Part I, Item 1. 2 PART I ITEM 1. BUSINESS FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. Certain information included in this Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities as well as capital spending, financing sources and the effects of regulation and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to the development of the Company's businesses, continued availability of lines of credit for the Company's businesses, changes in the industries in which the Company operates, competition, dependence on existing management, the stability of Argentina's government, currency exchange rate fluctuations, the repatriation of funds from Argentina, domestic or global economic conditions (particularly in the Dallas/Ft. Worth area), changes in foreign or domestic tax laws or the administration of such laws and changes in gaming or lending laws or regulations. GENERAL AND HISTORY Crown Group, Inc. ("Crown") and collectively with its subsidiaries (the "Company"), is a publicly traded buy-out firm which presently owns (i) 65% of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco"), a vertically integrated used car sales and finance company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of intermediate bulk containers, (iii) 80% of Concorde Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of Neuquen, Argentina, and (v) 80% of Home Stay Lodges I, Ltd. ("Home Stay"), a partnership focusing on the development and operation of extended-stay lodging facilities. In addition, from time to time the Company purchases and sells small ownership interests in securities of privately held and publicly traded firms. For a summary of the Company's operating results and other financial data by business segment, see Note S of the Company's consolidated financial statements appearing elsewhere in this annual report. The Company is presently focusing on (i) the development and expansion of its existing businesses, and (ii) the potential acquisition or development of other businesses unrelated to its existing businesses. Since its inception in 1983 through June 1993 the Company was engaged in various facets of the cable and related programming businesses. During 1992 the Company sold the majority of its programming business and began exploring new business opportunities. In June 1993 the Company made the decision to enter the gaming business, and, as a result, proceeded to sell the balance of its cable assets. From June 1993, with the acquisition of 100% of St. Charles Gaming Company, Inc. ("SCGC"), until November 1996, the Company's primary business focus was that of owning, operating and developing casino gaming properties. SCGC owns and operates a riverboat gaming casino located in Calcasieu Parish, Louisiana which had been in the development stage until opening in July 1995. The Company sold a 50% interest in SCGC in June 1995 and the remaining 50% interest in May 1996, in each case resulting in a substantial gain. In November 1996 the Company decided to expand its business interests beyond casino gaming and began pursuing business opportunities in other fields. As a result the Company has either acquired or formed a number of businesses in a variety of industries as follows: CMN - In June 1997 the Company acquired a 49% interest in CMN from Casino Magic Corp. ("Casino Magic") for a purchase price of $7 million. CMN operates casinos in the cities of Neuquen and San Martin de los Andes ("San Martin") in the Province of Neuquen, Argentina under an exclusive concession contract. 2 3 CONCORDE - In June 1997 the Company, along with certain newly hired management personnel, formed Concorde. Concorde is in the business of originating, purchasing, servicing and selling sub-prime mortgage loans which are secured primarily by first and second liens on residential properties. These loans are sold in privately negotiated transactions to institutional investors and other third parties. PAACO - In February 1998 the Company acquired 53% of the common stock of Paaco for a purchase price of approximately $9.1 million cash. Approximately $4.9 million of Paaco common stock was purchased directly from Paaco, and the remaining $4.2 million was purchased from Paaco management personnel who prior to this transaction were the sole shareholders of Paaco. Effective May 1, 1998 the Company purchased an additional 12% interest in Paaco from the management shareholders. The purchase price of approximately $1.5 million was paid by issuing 375,000 shares of the Company's common stock. Paaco is a vertically integrated used car sales and finance company which operates seven used car dealerships in the Dallas-Ft. Worth metropolitan area. Paaco sells, underwrites and finances used cars and trucks with a focus on the Hispanic market. PRECISION - In February 1998 the Company acquired 80% of the common stock of Precision IBC, Incorporated ("Original Precision") for a purchase price of approximately $2.4 million cash. In March 1998 the Company acquired 80% of the common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65 million cash. Original Precision and M&S were subsequently merged together into a newly formed corporation, Precision IBC, Inc. ("Precision"). Effective May 1, 1998 the Company acquired the remaining 20% of Precision by issuing 288,027 shares of the Company's common stock. Precision is in the business of renting, selling, testing and servicing principally stainless steel intermediate bulk containers. CMN - GAMING GENERAL CMN operates casinos in the cities of Neuquen and San Martin in the Province of Neuquen, Argentina. Prior to 1995 these casinos were operated by the provincial government. In January 1995 CMN entered into a twelve-year exclusive concession contract to operate these casinos. The concession contract can be extended by CMN for an additional five years under certain circumstances. CMN is owned 51% by Casino Magic and 49% by the Company. In addition, the Company also owns (i) a 16.4% interest in a certain management agreement relating to CMN, and (ii) a 49% interest in (a) slot machines and a related lease agreement, and (b) a certain royalty agreement relating to CMN. In addition to receiving periodic dividends from CMN's earnings, the Company also receives its pro-rata share of fees and rentals from these agreements. For a summary of CMN's operating results and identifiable assets, see Note C of the Company's consolidated financial statements appearing elsewhere in this annual report. LOCATION, FACILITIES AND OPERATIONS The Province of Neuquen is located approximately 400 miles east of Buenos Aires in central Argentina. The Neuquen facility, which is leased by CMN from the Province of Neuquen, is located at the Neuquen International Airport approximately 15 miles from downtown Neuquen City. This facility has approximately 1,000 dedicated parking spaces available to its patrons, and has an additional 3,000 parking spaces available at the adjacent airport. The San Martin facility is leased from a third party and is located in the center of the city. Certain combined information regarding the Neuquen and San Martin casinos is as follows: Gaming square feet 29,500 Slot machines 473 Table games 56 Revenues (in millions): Calendar 1995 $ 13.0 Calendar 1996 15.9 Calendar 1997 17.5
3 4 The casinos are open seven days a week generally from 10:00 p.m. to 5:00 a.m. Monday through Thursday, 5:00 p.m. to 5:00 a.m. on Friday, and 2:00 p.m. to 5:00 a.m. on Saturday and Sunday. Peak admission occurs around 1:00 a.m. The casinos offer slot machines, table games, food, beverages and gift items, as well as live entertainment at the Neuquen casino on weekends. Table games include roulette, black jack, punto y banca and big six. MARKET AND MARKETING STRATEGY Greater Neuquen City has a population of approximately 220,000 with an estimated 600,000 people living within 120 miles while San Martin has a population of approximately 17,000 with an estimated 150,000 people living within 120 miles. Neuquen is one of the wealthiest Argentine provinces per capita, principally due to energy production. The Province of Neuquen holds approximately 40% of Argentina's proven oil and gas reserves. San Martin is located in the Andes Mountains near one of the country's largest ski resorts, and is well known for its trout and salmon fly fishing. CMN's marketing strategy has been to provide the customer with an American style gaming atmosphere. Most casinos in Argentina have a European style gaming atmosphere. European style casinos tend to be more formal, oftentimes with casino dealers dressed in tuxedos, little or no emphasis on slot play and rarely provide live entertainment. Since taking over operating control of the Neuquen and San Martin casinos in early 1995 CMN has substantially increased the number of slot machines, eliminated admission fees, reduced the price of food and beverages, encouraged a casual dress code and provided live entertainment at no charge on the weekends. As a result of these changes, CMN has dramatically increased the customer count and revenues of its two casinos. CONCESSION CONTRACT In January 1995 CMN entered into a twelve-year concession contract with the Province of Neuquen providing CMN with the exclusive right to develop and operate all gaming activities within 50 kilometers (31 miles) of each of the Neuquen and San Martin casinos, within the boundaries of the Province, during the concession term. The concession term will automatically be extended an additional five years in the event CMN individually, or jointly with others, invests at least $5 million in lodging infrastructure. The transfer of the ownership of the concession is subject to the approval of the Province. In connection with the granting of the concession contract CMN paid a one-time concession fee of $9 million to the Province of Neuquen. CMN also pays the Province $220,000 per month as a combination tax/rent payment. If CMN decides to move from the Neuquen casino location, which is currently being leased from the Province, it will receive a $40,000 per month reduction in its payment to the Province. The monthly tax/rent payment is subject to increase in the event annual net gaming revenues exceed $52.8 million. In addition, CMN is obligated to pay all applicable federal and provincial taxes including a 2% provincial tax on net gaming revenue, and a 33% federal income tax on earnings. Pursuant to the concession, the Province of Neuquen guarantees that no additional municipal or provincial taxes will be levied on CMN's operations, and that existing provincial and municipal taxes will not be increased. SHAREHOLDERS' AGREEMENT In connection with the Company's 49% purchase of CMN, the Company and Casino Magic entered into a shareholders' agreement (the "Shareholders' Agreement") which provides, among other things, that in the event either the Company or Casino Magic desires to sell its interest in CMN such shareholder must first offer to sell its interest to the other shareholder under the terms and conditions provided in the Shareholders' Agreement. Except as expressly permitted by the Shareholders' Agreement, neither the Company nor Casino Magic may sell, assign, or otherwise transfer or encumber any part of the CMN stock owned by either of them without the written consent of the other shareholder. As required by the Shareholders' Agreement CMN has four directors on its board, two of which are appointed by the Company and the other two are appointed by Casino Magic. The Shareholders' Agreement requires the unanimous approval of all shareholders prior to authorizing certain corporate actions. Those actions requiring unanimous CMN shareholder approval include matters pertaining to (i) the issuance or purchase of CMN stock, (ii) amendments to CMN's articles of incorporation or by-laws, (iii) a liquidation or merger, (iv) the sale of a substantial portion of CMN's assets, (v) material or related party contracts, (vi) incurring debt, and (vii) amendments to the concession contract with the Province of Neuquen. 4 5 The Shareholders' Agreement also provides that the Company and Casino Magic may jointly develop additional casinos in Argentina on mutually satisfactory terms, and that neither the Company nor Casino Magic may own, operate or obtain any material benefit from another casino in Argentina without the prior written consent of the other shareholder. COMPETITION CMN's two casinos are currently the only operating casinos in the Province of Neuquen. Since the concession contract restricts competition in the Province of Neuquen that is within 50 kilometers (31 miles) of CMN's two casinos, CMN does not experience significant competition in its primary market area. There are, however, approximately 44 government-operated casino properties throughout the country, including a casino in Chipolletti, across the Rio Negro River from the City of Neuquen in the Rio Negro Province, and a second casino in the Rio Negro Province approximately 30 miles southeast of the City of Neuquen. REGULATION The Province of Neuquen enacted a casino privatization program in order for it to issue the twelve-year exclusive concession contract to CMN to operate the Neuquen and San Martin casinos. These two casinos are the only casinos in the Province of Neuquen. The casinos had previously been operated by the provincial government. The Ministry of Finance of Argentina has adopted a modified regulatory system for casinos, based on the regulatory system utilized by the State of Nevada, and such regulatory system is being administered by the Province of Neuquen. Such modified regulatory system provides rules and regulations relating to, among other things, (i) the suitability of officers, directors and significant shareholders, (ii) maintenance of effective controls over operating and financial practices, and (iii) the submission of financial reports. CMN can not predict what effect the enactment of other laws, regulations or pronouncements that relate to casino gaming may have on the operations of CMN. CONCORDE - MORTGAGE BUSINESS GENERAL In June 1997 the Company, along with certain newly hired management personnel, formed Concorde. Concorde is in the business of originating, purchasing, servicing and selling sub-prime mortgage loans which are secured primarily by first and second liens on residential properties. These loans are sold in privately negotiated transactions to institutional investors and other third parties, and in the future may be sold in the secondary market through securitization programs. Concorde focuses on lending to individuals who have impaired or unsubstantiated credit histories and/or unverifiable income. Loans made to these individuals do not qualify for purchase by government-sponsored agencies such as the Federal Home Loan Mortgage Association and the Federal Home Loan Mortgage Corporation, and thus are sometimes referred to as non-conforming or sub-prime mortgage loans. Such loans generally provide higher yields than conforming loans. The principal differences between conforming loans and non-conforming loans include the applicable loan-to-value ratios, the credit and income histories of the mortgagors, the documentation required for approval of the mortgagors, the type of properties securing the mortgage loans, the loan sizes, and the mortgagors' occupancy status with respect to the mortgaged properties. Second mortgage loans are made to borrowers owning single-family homes for the purpose of debt consolidation, home improvements, education and a variety of other purposes. These loans generally provide a higher interest rate yield than first mortgage loans, and are secured by a second lien on the property. Management believes the sub-prime mortgage loan industry is fragmented and operates inefficiently compared to the conforming loan industry, and as a result, higher interest rate yields are available to sub-prime mortgage lenders even after considering a higher rate of loan defaults. Management also believes the sub-prime mortgage loan industry is less cyclical than the conforming loan industry because the sub-prime mortgage borrower is more "payment" sensitive rather than "interest rate" sensitive. In addition, the federal tax code's preferential treatment of the interest expense deduction for home mortgage loans makes it financially advantageous for many individuals to convert their credit card and other consumer loans into a mortgage loan. 5 6 LOAN ORIGINATIONS AND PURCHASES Concorde began originating and purchasing mortgage loans in July 1997. Concorde originates loans through a network of independent retail mortgage brokers and directly through telemarketing and direct mail programs. Concorde also purchases mortgage loans from a network of wholesale loan brokers and correspondents, including banks and thrift institutions. Loans purchased from wholesale loan brokers and correspondents typically require Concorde to pay a premium, whereas Concorde generally does not pay premiums on loans originated through retail mortgage brokers. Prior to purchasing loans through wholesale loan brokers and correspondents, Concorde reviews the loan packages to determine whether the packages are complete and adhere to Concorde's underwriting guidelines. Depending on the size of the pool of loans purchased, Concorde may engage a third-party underwriter to reunderwrite the loans, verify the borrower's employment status, determine the quality of the appraisal and assign a credit grade. Concorde also analyzes the financial condition of the mortgage banker, which includes a review of the mortgage bankers' licenses and financial statements. Upon approval, Concorde typically requires each mortgage banker to enter into a purchase and sale agreement that contains customary representations and warranties regarding the loans such mortgage banker will sell to Concorde. UNDERWRITING Concorde's underwriting guidelines are provided to mortgage loan brokers and mortgage bankers so they can create loan applications or bulk purchase packages which meet such guidelines. Upon receipt of a completed loan package from a mortgage loan broker, Concorde's underwriting staff reviews the package, which includes the loan application, a current appraisal of the underlying collateral property, a preliminary title report and a credit report to determine if the proposed loan meets its underwriting guidelines. To assess the credit quality of each loan, Concorde's underwriters consider various factors, including the appraised value of the collateral property, the applicant's debt payment history, credit profile and employment status, and the combined debt ratio and loan-to-value ratio upon completion of the proposed mortgage loan. Personal circumstances including divorce, family illnesses or deaths and temporary job loss due to layoffs and corporate downsizing often impair an applicant's credit record. On an exception basis mortgage loans may be made to individuals whose credit profile does not conform to Concorde's guidelines, but only with the approval of an officer of Concorde. Concorde does not delegate underwriting authority to any broker or correspondent. Property appraisals for loans originated or purchased by Concorde are conducted by licensed, independent appraisers who are approved by Concorde. Upon receipt of the appraisal, Concorde's underwriting staff reviews the value of the underlying collateral based upon a full review of the appraisal. Concorde selects its appraisers based on professional experience, education, membership in related professional organizations and experience with the appraiser. For wholesale and correspondent loans purchased, Concorde will typically request a second appraisal if the original appraisal was completed by an appraiser who is not acceptable to Concorde. Prior to funding a loan, Concorde's underwriting staff determines the applicant's creditworthiness and ability to service the loan. Verification of personal financial information, credit history, and employment history is required prior to closing the loan. Concorde has established classifications with respect to its borrowers based upon the credit profile of such borrower and certain other borrower characteristics. Each loan applicant is placed into one of four letter ratings ("A" through "D", with sub-ratings within each category), depending upon a number of factors including the applicant's credit history and employment status. Terms of loans made by Concorde, as well as the maximum loan-to- value ratio and debt service-to-income ratio (calculated by dividing fixed monthly debt payments by gross monthly income), vary depending upon the classification of the borrower. Borrowers with lower credit ratings generally pay higher interest rates and loan origination fees. Generally, loan applicants are required to have two years of employment with their current employer or two years of similar business experience. Verification of information regarding the first mortgage, if any, is also required, including balance, status and whether local taxes, interest, insurance and assessments are included in the applicant's monthly payment. All taxes and assessments not included in the payment are required to be verified as current. Upon successful completion of the underwriting process, the closing of the loan is scheduled with an independent closing attorney or title company who is responsible for closing the loan in accordance with Concorde's closing procedures. LOAN SERVICING AND COLLECTIONS Servicing involves, among other things, collecting payments, applying such payments of principal and interest to the appropriate loan, ensuring the underlying collateral is properly insured, preparing reports relative to such loans and enforcing the lender's rights with respect to the loans, including, recovering delinquent payments, instituting foreclosures and liquidating the underlying collateral. Management believes that servicing Concorde's own portfolio enhances certain operating efficiencies 6 7 and provides an additional and profitable revenue stream that is less cyclical than the business of originating and purchasing loans. Concorde's servicing portfolio is subject to reduction by normal monthly payments, prepayments and foreclosures. In general, revenue from Concorde's loan servicing portfolio may be adversely affected as interest rates decline and loan prepayments increase. In some states in which Concorde operates, prepayment fees may be limited or prohibited by applicable law. Concorde sends borrowers a monthly billing statement twenty days prior to the monthly payment due date. Although borrowers generally make loan payments within ten to fifteen days after the due date (the "grace period"), if a borrower fails to pay the monthly payment within the grace period, Concorde commences collection efforts by notifying the borrower of the delinquency. If the loan remains unpaid, Concorde will contact the borrower to determine the cause of the delinquency and to obtain a commitment to cure the delinquency at the earliest possible time. As a general matter, if efforts to obtain payment have not been successful, a pre-foreclosure notice will be sent to the borrower generally 30 days after the due date of the next subsequently scheduled installment, providing 30 days notice of the impending foreclosure action. During the 30-day notice period, collection efforts continue. However, if no substantial progress has been made in collecting delinquent payments from the borrower, foreclosure proceedings generally begin. Generally, Concorde will have commenced foreclosure proceedings when a loan is over 60 days delinquent. Loans originated or purchased by Concorde are secured by mortgages, deeds of trust, security deeds or deeds to secure debt, depending upon the prevailing practice in the state in which the property securing the loan is located. Depending on local law, foreclosure is effected by judicial action or nonjudicial sale, and is subject to various notice and filing requirements. In general, the borrower, or any person having a junior encumbrance on the real estate, may cure a monetary default by paying the entire amount in arrears plus other designated costs and expenses incurred in enforcing the obligation during a statutorily prescribed reinstatement period. Generally, state law controls the amount of foreclosure expenses and costs, including attorneys' fees, which may be recovered by a lender. After the reinstatement period has expired without the default having been cured, the borrower or junior lienholder no longer has the right to reinstate the loan and must pay the loan in full to prevent the scheduled foreclosure sale. Although foreclosure sales are typically public sales, frequently no third-party purchaser bids in excess of the lender's lien because of the difficulty of determining the exact status of title to the property, the possible deterioration of the property during the foreclosure proceedings and a requirement that the purchaser pay for the property in cash or by cashier's check. Thus, it is likely the lender will purchase the property from the trustee or referee for an amount equal to the principal amount outstanding under the loan, accrued and unpaid interest and the expenses of foreclosure. Depending upon market conditions and loan-to-value ratios, the ultimate proceeds from the sale of the collateral may not equal Concorde's investment in the property. LOAN SALES AND SECURITIZATIONS Concorde sells the majority of the loans it originates and purchases to institutional investors and other third parties. In the future Concorde may sell loans in the secondary market through securitization transactions. Loans are sold periodically to provide Concorde with greater flexibility and operating leverage than that of a traditional portfolio lender. Loans sold on a wholesale basis are done so to third party institutions on a limited recourse basis for cash with servicing rights released. Securitizations, on the other hand, are loan sales in which the lender continues to be exposed to some prepayment and credit risk as long as the underlying loan portfolio remains outstanding. Generally, in a securitization transaction, a lender sells mortgage loans it has originated or purchased to a special purpose trust. The trust issues mortgage passthrough certificates. The senior certificates, which typically carry a coupon well below the weighted average coupon of the underlying mortgage loans, are sold in an offering and the lender retains the interest-only and residual certificates, which are amortized over the estimated average life of the loan portfolio. The cash flow realized from these interest only and residual certificates is subject to the prepayment and loss characteristics of the underlying loans. These interest only and residual certificates are valued at the time of the securitization. The valuation takes into account certain loss and prepayment assumptions, servicing and other fees to be paid and discounts the projected future net cash flow stream to its present value. Thus, to the extent loss and prepayment rates exceed the original assumptions used in recording the interest-only and residual certificates, the value of such certificates will be reduced. 7 8 Typically the special purpose trust has the benefit of a financial guaranty policy from a monoline insurance company, which insures the timely payment of interest and the ultimate payment of principal of the investor certificate. Loan losses first reduce the amounts otherwise available to the interest-only and residual certificate holders and thereafter, if necessary, the monoline insurance company will pay any further losses experienced by the holders of the senior certificates. REGULATION The operations of Concorde are subject to extensive regulation, supervision and licensing by federal, state and local government authorities. Regulated matters include, without limitation, loan origination, credit activities, maximum interest rates and finance and other charges, disclosure to customers, the terms of secured transactions, the collection, repossession and claims-handling procedures utilized by Concorde, multiple qualification and licensing requirements for doing business in various jurisdictions and other trade practices. Concorde's loan origination activities are subject to the laws and regulations in each of the states in which those activities are conducted. Concorde's activities as a lender are also subject to various federal laws including, among others, the Truth in Lending Act ("TILA"), the Real Estate Settlement Procedures Act ("RESPA"), the Equal Credit Opportunity Act of 1974, as amended ("ECOA"), the Home Mortgage Disclosure Act and the Fair Credit Reporting Act of 1970, as amended ("FCRA"). The TILA and Regulation Z promulgated thereunder contain disclosure requirements designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loans and credit transactions in order to give them the ability to compare credit terms. TILA also guarantees consumers a three-day right to cancel certain credit transactions including loans of the type originated by Concorde. Management of Concorde believes that it is in compliance with TILA and Regulation Z in all material respects. Concorde is also required to comply with the ECOA, which prohibits creditors from discriminating against applicants on the basis of race, color, sex, age or marital status. Regulation B promulgated under ECOA restricts creditors from obtaining certain types of information from loan applicants. It also requires certain disclosures by the lender regarding consumer rights and requires lenders to advise applicants of the reasons for any credit denial. In instances where the applicant is denied credit or the rate or charge for a loan increases as a result of information obtained from a consumer credit agency, another statute, the FCRA, requires the lender to supply the applicant with a name and address of the reporting agency. Concorde is also subject to RESPA and is required to file an annual report with the Department of Housing and Urban Development pursuant to the Home Mortgage Disclosure Act. In the course of its business, Concorde may acquire properties as a result of foreclosure. There is a risk that hazardous or toxic waste could be found on such properties. In such event, under certain state and federal environmental laws, Concorde could be held responsible for the cost of cleaning up or removing such waste, and such cost could exceed the value of the underlying properties. The laws, rules and regulations applicable to Concorde are subject to amendment and change. Changes or amendments to existing law, or new laws could make compliance much more difficult or expensive, restrict Concorde's ability to originate, purchase, broker or sell loans, further limit or restrict the amount of commissions, interest and other charges earned on loans originated or sold by Concorde, or otherwise adversely affect the business or prospects of Concorde. COMPETITION The Company is a new entrant in the sub-prime mortgage lending industry, is small compared to many of its competitors and faces intense competition in the business of originating, purchasing and selling mortgage loans. Competition in the industry takes many forms including convenience in obtaining a loan, customer service, marketing and distribution channels, and amount and terms of the loan. Traditional competitors in the financial services business include other mortgage banking companies, commercial banks, credit unions, thrift institutions, credit card issuers and finance companies. Most of these competitors in the consumer finance business are substantially larger and have considerably greater financial, technical and marketing resources than Concorde. 8 9 PAACO - USED CAR SALES AND FINANCE GENERAL Paaco is a vertically integrated used car sales and finance company that presently operates seven used car dealerships in the Dallas-Ft. Worth metropolitan area ("DFW Metroplex"). Paaco's dealerships target Hispanic customers who have limited credit histories, low incomes, or past credit problems (hereinafter referred to as "Sub-Prime Borrowers"). Paaco's operations include the purchase, reconditioning and sale of used cars and trucks, and the underwriting, financing and servicing of the related retail installment contract, and, if necessary, the repossession and remarketing of a vehicle. INDUSTRY Used Car Sales Used car retail sales typically occur through franchised new car dealerships that sell used cars or independent used car dealerships. The market for used car sales in the United States is significant and has steadily increased over the past five years. Paaco believes that the factors that have led to growth in this industry include (i) substantial increases in new car prices, which have made new cars less affordable to the average consumer relative to used cars, (ii) the greater reliability and durability of used cars resulting from the production of higher quality cars, and (iii) the increasing number of vehicles coming off lease programs in recent years. Many analysts expect these trends to continue, leading to further expansion of the used car sales market. Paaco participates in the sub-prime segment of the independent used car sales and finance market. This segment is serviced primarily by numerous small independent used car dealerships that sell and finance sales of used cars to Sub-Prime Borrowers ("Buy Here-Pay Here" dealers). Buy Here-Pay Here dealers typically offer their customers certain advantages over more traditional financing sources, such as broader and more flexible underwriting guidelines, flexible payment terms (including prorating customer payments dues within one month into several smaller payments and scheduling payments to coincide with a customer's pay days), and the ability to make payments in person, an important feature to many Sub-Prime Borrowers who may not have checking accounts or are otherwise unable to make payments by the due date through the mail because of the timing of paychecks. Used Car Financing The automobile financing industry is the third-largest consumer finance market in the country, after mortgage debt and revolving credit card debt. Growth in automobile financing has been fueled by increasing prices of both new and used cars, which has forced more buyers to seek financing when purchasing a car. This industry is served by such traditional lending sources as banks, savings and loans, and captive finance subsidiaries of automobile manufacturers, as well as by independent finance companies and Buy Here-Pay Here dealers. In general, the industry is categorized according to the type of car sold (new versus used) and the credit characteristics of the borrower. Despite significant opportunities, many of the traditional lending sources do not consistently provide financing to the sub-prime consumer finance market. Paaco believes traditional lenders avoid this market because of its high credit risk and the associated collection efforts. Many of the approximately 64,000 independent used car dealers are not able to obtain debt financing from traditional lending sources such as banks, credit unions, or major finance companies. These dealers typically finance their operations through the sale of contract receivables at a discount. OPERATIONS Purchasing Vehicles Paaco purchases the majority of its vehicles from about twelve auctions held in cities throughout the State of Texas and in neighboring states. In addition, Paaco purchases vehicles on a wholesale basis from dealers in and around the DFW Metroplex. Vehicles are purchased at prices ranging from about $4,000 to $9,000, with an average purchase price of $6,000. Prior to purchasing a vehicle, Paaco performs certain inspections and, as permitted, test drives each vehicle. The identity of the buyer responsible for each vehicle acquired is tracked through Paaco's system in order for Paaco to monitor the results of that buyer's purchases. For each buyer Paaco monitors (i) the average number of days vehicles are held in inventory, and (ii) the cost of each vehicle in comparison to similar models purchased by other buyers and in comparison to NADA wholesale values. 9 10 Reconditioning Each vehicle purchased is taken to Paaco's centralized reconditioning center in Irving, Texas where a variety of parts, assemblies, and systems are inspected and, if necessary, repaired or replaced. In addition to inspecting, repairing and preparing acquired vehicles for sale, the Irving facility performs repair and service work on vehicles for cash paying customers and pursuant to service contracts. More than 90% of Paaco's customers elect to purchase a service contract when purchasing a vehicle. Selling, Marketing and Advertising Each lot is typically staffed with a manager, up to six bilingual sales personnel, and several others including clerical workers, collectors, mechanics and a porter. The lots are operated six days a week, generally between the hours of 10:00 am and 9:00 pm. Each lot maintains an inventory level of 40 to 75 cars and trucks. Each week Paaco's sales personnel attend training classes conducted by a full-time sales trainer. Each phase of the sales process is rehearsed with the salesman employing trial closing questions. Salesmen are paid principally on a commission basis. Paaco's marketing objective is to cause Paaco to become a distinguishable brand name among the Hispanic community that stands for value, dependability and service. Paaco achieves this goal by (i) locating its dealerships in densely populated Hispanic neighborhoods, (ii) frequently airing a series of advertisements on local Hispanic television and radio stations, and (iii) offering a thoroughly inspected and reconditioned vehicle for sale at a fair price. In addition to its television and radio advertising, Paaco conducts a variety of promotional activities including a sales referral program, occasional live entertainment at its dealerships, and distribution of promotional items. Existing customers have historically been a good source of referrals. Paaco also has a mascot named "Senor Paaco", a jovial Hispanic gentleman who wears an oversized sombrero and has become very popular with the customers. Underwriting and Finance Paaco finances approximately 98% of the used cars and trucks sold at its dealerships. These retail installment contracts are serviced exclusively by Paaco. In connection with such financing, Paaco requires an acceptable deal structure and credit profile. The required deal structure typically involves a down payment between 10% and 15% of the vehicles purchase price, a term not to exceed 36 months, an acceptable interest rate and payment terms that coincide with the customer's pay dates. Upon the customer agreeing to a specific deal structure, the salesmen turns the potential customer over to credit personnel who obtain a credit application. Paaco's credit personnel reviews and verifies the credit information including employment, residence and credit history, income information and personal references. Upon completion of the review and verification process, each deal is forwarded to a centralized deal desk where the proposed transaction is reviewed for adherence to Paaco's underwriting and financing guidelines. Collections Paaco believes a key element in the success of its business is its effective collections department. Upon completion of a financed sale pertinent data is entered into Paaco's computer system. Paaco's bilingual collection staff utilizes its collection software to monitor the payment activity of its installment contracts. This software provides its collections staff with reports stratified principally by the number of days a payment is past due. If a customer's payment is late, collection personnel will contact the customer by phone within three days (one day if its the first payment) of the scheduled due date. Paaco personnel document pertinent information (promises to pay, alternative payment schedules, etc.) from each phone contact with a customer. The collections staff works in teams and team members can receive bonuses based upon the results of their collection efforts. Paaco monitors the results of its collections department based upon a number of quantitative criteria including (i) the number of calls placed, contacts made and promises received, (ii) the gross number of payments and dollars collected each week, (iii) the average number of days past due, (iv) installment contract agings, and (v) static pool analysis. If a customer becomes seriously delinquent in his payments and management determines that timely collection of future payments is not probable, Paaco will take steps to repossess the vehicle. Of the vehicles repossessed, many are returned to Paaco by the customer on a voluntary basis. Other repossessions are performed using third party repossession agents. The majority of repossessed vehicles are reconditioned and resold through Paaco's dealerships. 10 11 COMPETITION The used automotive retailing industry is highly competitive and fragmented. Presently there are an estimated 23,000 franchised automobile dealers and 64,000 independent used vehicle dealers. In recent years a number of large companies including Auto Nation USA and Driver's Mart have entered the used car sales business or announced plans to develop large used car sales operations. Management believes these operations do not provide significant competition for Paaco as they tend to sell higher priced vehicles to consumers with stronger credit histories. Paaco competes principally with other Buy Here-Pay Here dealers, and to a lesser degree with (i) the used vehicle retailing operation of franchised automobile dealerships, (ii) independent used vehicle dealers, and (iii) individual consumers who sell used vehicles in private transactions. Paaco believes the principal competitive factors in the sale of its used vehicles include (i) the availability of financing to Sub-Prime Borrowers, (ii) the breadth and quality of vehicle selection, (iii) the availability of popular vehicles, (iv) pricing, (v) the convenience of a dealership's location, (vi) customer service, and (vii) the ability to communicate in Spanish and English with its customers. Paaco believes that its dealerships are competitive in each of these areas. REGULATION AND LICENSING Paaco's operations are subject to ongoing regulation, supervision, and licensing under various federal, state, and local statues, ordinances, and regulations. These laws include the Truth In Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act of 1970. Among other things, these laws required that Paaco obtain and maintain certain licenses and qualifications, limit or prescribe terms of the contracts that Paaco originates, require specified disclosures to customers, limit Paaco's right to repossess and sell collateral, and prohibit Paaco from discriminating against customers on the basis of certain characteristics including age, race and gender. Paaco typically charges fixed interest rates in excess of traditional finance companies on the contracts originated at its dealerships. The State of Texas imposes limits on the interest rates the Paaco may charge on its loans, with such limits generally being a function of the age of the vehicle. PRECISION - IBC RENTALS AND SALES GENERAL Precision is in the business of renting and selling intermediate bulk containers ("IBC's" or "tanks") to petroleum related, industrial and manufacturing concerns. Precision's tanks generally come in two sizes (350 gallon and 550 gallon) and are used primarily to store liquids in bulk. These liquids include industrial and textile chemicals (surfactants, soaps, dyes and brighteners), solvents, lubricants, water clarifiers, corrosive inhibitors, contract packaging items (shampoo), and food items (mayonnaise, ketchup, barbecue sauce, honey, syrup and concentrate). Precision also performs certain tank maintenance and testing services, and sells spare parts such as valves and lids. Precision operates from facilities in Fairhope, Alabama and Lafayette, Louisiana and presently has a fleet of approximately 4,800 stainless steel tanks. MARKET AND MARKETING Precision's primary focus is on renting tanks. As a secondary focus Precision sells new and used tanks and related spare parts. A large portion of tank rentals and sales comes from existing customers and referrals. On occasion Precision mails marketing literature to a list of potential customers. Precision's sales personnel also attend certain industry trade shows and make sales calls to existing and potential customers. Presently, Precision has about 100 customers in 20 states throughout the United States. Precision's customers are principally in the oil field production and drilling, chemical, textile and manufacturing industry segments. A portion of Precision's new business comes from industrial and manufacturing concerns that previously used 55 gallon polyethylene or carbon steel drums ("drums") to store liquids in bulk. Management believes its stainless steel 350 and 550 gallon tanks are far superior to drums in many respects. In particular, drums are expensive to dispose of as a result of the environmentally damaging materials they sometimes contain. Drums are also more difficult to handle and dispense from, have more problems with leaks, and require more space to store the same amount of liquid. Typically fluids are extracted from drums via a removable pump, which may require cleaning prior to placing it into another drum. Tanks, on the other hand, discharge fluids through a valve located on the bottom of the tank which operates on the principal of gravity. 11 12 Management believes there is a trend of drums being replaced by reusable and returnable 350 and 550 gallon tanks, and that Precision is in a position to benefit from those making the transition. OPERATIONS Tanks are purchased principally from two suppliers, although other manufacturing sources are available. Precision maintains a supply of tanks, valves and lids to meet the needs of its customers. The lids are also sold to tank manufacturers as a component in making new tanks. These lids are manufactured by Precision utilizing certain subcontractors, while valves are manufactured overseas according to Precision's specifications. Periodically Precision receives tanks back from customers who are returning them from rental. As necessary, these tanks are cleaned and repaired, and either returned to the rental fleet, or sold as a used tank. Precision also performs testing services on a fee basis for its customers. The U.S. Department of Transportation regulations require that Precision's tanks be tested every 30 months if they are being used to transport regulated materials (flammables, corrosives, methanol) over public roadways. This certification is the customer's responsibility to maintain. For some customers Precision performs maintenance services on its tanks. For a fee Precision will change valves and lids as needed and perform external cleanings. COMPETITION Precision competes with other companies specializing in the sale and rental of tanks. Precision believes it is the second largest supplier of tanks in the country. Competitive factors in the industry include price, availability, service, product quality and convenience. Precision believes it competes effectively with other tank suppliers. Precision's tanks also compete with 55 gallon drums. Precision's 350 and 550 gallon tanks are considerably more expensive than drums. However, Precision believes its tanks have certain competitive advantages over drums, including their (i) greater durability and ease in storing and dispensing liquids, (ii) longer useful life, and (iii) higher space efficiencies. HOME STAY - LODGING In May 1998 the Company along with a 20% minority partner formed Home Stay to develop and operate extended-stay lodging facilities in the Southeastern United States. Presently, Home Stay has two facilities under construction in the Pensacola, Florida area. Each of these facilities will contain 120 units. The total cost of these two facilities is estimated to be approximately $6.2 million, of which $5.4 million is being financed by a local bank. If the initial two properties perform as anticipated, the Company expects to build additional properties throughout the Southeastern United States. Home Stay will target a market niche in the lodging industry which it believes is currently underserved by other extended-stay chains. Its facilities will be designed to offer quality accommodations for guests, at rates generally lower than are charged by most other extended-stay lodging providers. Weekly lodging rates are expected to average less than $150 for single occupancy and less than $175 for double occupancy. Management expects Home Stay customers to primarily include business travelers (particularly those with limited expense accounts), blue-collar workers on temporary assignments, persons between domestic situations, and persons relocating or purchasing a home, with most guests staying for multiple weeks. Each Home Stay studio unit will contain 288 square feet and will provide a variety of features which are attractive to the extended-stay guest, including a fully-equipped kitchenette, weekly housekeeping, color television with cable or satellite hook-up, coin-operated laundromat, and telephone service with voice mail messaging. In order to control operating costs and offer attractive rental rates, no restaurants, swimming pools, or recreational facilities will be provided. Management plans to locate Home Stay facilities near commercial, industrial and/or military centers where the employment base consists largely of lower to moderate income workers, or where large numbers of people are living on modest pensions. The initial properties will be managed by the Windham Company, an experienced property manager for hotels, motels and apartments. REQUIRED DIVESTITURE OF COMMON STOCK The Articles of Incorporation of the Company provide that any shareholder of the Company who is found to be unsuitable by any gaming regulatory authority with jurisdiction over the Company's operations, may, in the discretion of the Board of 12 13 Directors, be required to divest the shares of Company stock owned by such person within forty-five (45) days from the date on which the Company notifies the disqualified holder of the regulatory authority's determination of unsuitability, or the Company will have the right to purchase such stock at a price equal to its fair market value, as defined in the Articles of Incorporation, less twenty-five percent (25%). In addition, the Articles of Incorporation require that the Company maintain compliance under the federal Merchant Marine Act of 1936 and the federal Shipping Act of 1916, as amended, restricting the amount of shares of Company common stock which may be held by non-U.S. citizens. The Company may require foreign persons to divest their shares of Company common stock in accordance with the provisions of the Articles of Incorporation in the event that the Company determines that it is in violation of either of these Acts. EMPLOYEES As of April 30, 1998 the Company, including its consolidated subsidiaries employed approximately 275 persons full time. None of the Company's employees are covered by a collective bargaining agreement and the Company believes that its employee relations are satisfactory. EXECUTIVE OFFICERS The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Edward R. McMurphy . . . . . . . . . . . . . . . 47 Chairman of the Board, President and Chief Executive Officer Tilman J. Falgout, III . . . . . . . . . . . . . 49 Executive Vice President, General Counsel and Director Mark D. Slusser . . . . . . . . . . . . . . . . . 40 Chief Financial Officer, Vice President Finance and Secretary
EDWARD R. MCMURPHY, has served as President of the Company since July 1984 and as Chief Executive Officer since January 1988. He has been a director of the Company since its inception in April 1983. Prior to and during his involvement with the Company, Mr. McMurphy served as President of Marion Properties, Inc., a real estate investment and development company, from 1979 to 1986. TILMAN J. FALGOUT, III, has served as Executive Vice President and General Counsel of the Company since March 1995 and as a director of the Company since September 1992. From 1978 through June 1995, Mr. Falgout was a partner in the law firm of Stumpf & Falgout, Houston, Texas. MARK D. SLUSSER, has served as Chief Financial Officer of the Company since October 1989 and as Secretary since April 1990. From 1981 until joining the Company, Mr. Slusser was employed by Ernst & Young LLP, where he held various positions in the Audit Department including Senior Manager. ITEM 2. PROPERTIES As of April 30, 1998 the Company owned the properties on which two of its automobile dealerships are located, and a 3.5 acre tract of land in Louisiana where it plans to build an office/warehouse facility that will house a portion of Precision's IBC business. In addition, the Company leases nine other facilities, five of which are automobile dealerships and four are office facilities. The Company's corporate headquarters are located in approximately 6,000 square feet of leased space in Irving, Texas. 13 14 ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings to which the Company is a party or to which its properties are subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the fourth quarter ended April 30, 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is included in the Company's 1998 Annual Report to Stockholders ("1998 Annual Report") under the heading "Common Stock Information, Dividends and Related Stockholder Matters" and such information is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included in the Company's 1998 Annual Report under the heading "Selected Financial Data" and such information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included in the Company's 1998 Annual Report under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" and such information is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements included in the Company's 1998 Annual Report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 15 PART III Except as to information with respect to executive officers which is contained in a separate heading under Item 1 to this Form 10-K, the information required by Part III of Form 10-K is, pursuant to General Instruction G(3) of Form 10-K, incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A for the Company's Annual Meeting of Stockholders to be held in 1998. The Company will, within 120 days of the end of its fiscal year, file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning directors and executive officers of the registrant is set forth in the Proxy Statement to be delivered to stockholders in connection with the Company's Annual Meeting of Stockholders to be held in 1998 (the "Proxy Statement") under the headings "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934," which information is incorporated herein by reference. The name, age and position of each executive officer of the Company is set forth under the heading "Executive Officers" in Item 1 of this report. ITEM 11. EXECUTIVE COMPENSATION The information concerning executive compensation is set forth in the Proxy Statement under the heading "Executive Compensation," which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management," which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information concerning certain relationships and related transactions is set forth in the Proxy Statement under the heading "Certain Transactions," which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1). FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT The following financial statements and accountant's report included in the Company's 1998 Annual Report are incorporated herein by reference in Item 8 of this report: 15 16 Report of Independent Accountants Consolidated Balance Sheets as of April 30, 1997 and 1998 Consolidated Statements of Operations for the fiscal years ended April 30, 1996, 1997 and 1998 Consolidated Statements of Cash Flows for the fiscal years ended April 30, 1996, 1997 and 1998 Consolidated Statements of Stockholders' Equity for the fiscal years ended April 30, 1996, 1997 and 1998 Notes to Consolidated Financial Statements (a)(2). FINANCIAL STATEMENT SCHEDULES Schedule I - Condensed Financial Information of Crown Group, Inc. (Parent Company Only) The other financial statement schedules are omitted since the required information is not present, or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements and notes thereto. (a)(3). EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 2.1 Purchase Agreement dated as of May 31, 1997 by and among the Company and Casino Magic Corp. ("Casino Magic"). (11) 2.2 Stock Purchase Agreement dated as of February 1, 1998 by and among Paaco Automotive Group, Inc., Premium Auto Acceptance Corporation, Larry Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13) 2.3 Stock Purchase Agreement dated February 3, 1998 by and among Van P. Finger and Crown Group, Inc. (13) 3.1 Articles of Incorporation of the Company (formerly SKAI, Inc.). (3) 3.1.1 Articles of Merger of the Company and SKAI, Inc. filed with the Secretary of State of the State of Alabama on September 29, 1989. (3) 3.1.2 Articles of Merger of the Company and SKAI, Inc. filed with the Secretary of State of the State of Texas on October 10, 1989. (3) 3.1.3 Articles of Amendment filed with the Secretary of State of the State of Texas on October 7, 1993. (8) 3.1.4 Articles of Amendment filed with the Secretary of State of the State of Texas on October 5, 1994. (8) 3.1.5 Articles of Amendment filed with the Secretary of State of the State of Texas on October 2, 1997. (1) 3.2 By-Laws dated August 24, 1989. (4) 4.1 Specimen stock certificate. (9) 4.2 Form of Registration Rights Agreement dated January 5, 1994 by and between the Company and Dabney-Resnick, Inc. (8) 4.2.1 Form of Stock Purchase Warrant dated January 5, 1994 allowing Dabney-Resnick, Inc. to purchase shares of common stock of the Company. (8) 16 17 4.3 Form of Registration Rights Agreement dated January 5, 1994 by and between the Company and Sun Life Insurance Company of America, Inc. (8) 4.3.1 Form of Stock Purchase Warrant dated January 5, 1994 allowing Sun Life Insurance Company of America, Inc. to purchase shares of common stock of the Company. (8) 4.4 Form of Stock Purchase Warrant dated March 18, 1994 granting Dabney-Resnick, Inc. the right to purchase 120,000 shares of Common Stock of the Company. (8) 4.5 Stock Purchase Warrant dated October 6, 1994 granting Don Farris the right to purchase 50,000 shares of Common Stock of the Company. (8) 4.6 Stock Purchase Warrant dated June 2, 1994 granting Gerard M. Jacobs the right to purchase 50,000 shares of Common Stock of the Company. (8) 4.7 Loan and Security Agreement by and among Finova Capital Corporation, Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation including the Eighth Amended and Restated Schedule to Loan and Security Agreement and the Eighth Amended and Restated Promissory Note. (1) 10.1 1986 Incentive Stock Option Plan. (2) 10.1.1 Amendment to 1986 Incentive Stock Option Plan adopted September 27, 1990. (5) 10.2 1991 Non-Qualified Stock Option Plan. (6) 10.3 1997 Stock Option Plan. (12) 10.4 Form of Indemnification Agreement between the Company and Edward R. McMurphy, Mark D. Slusser, T.J. Falgout, III, David J. Douglas, J. David Simmons, Gerald L. Adams, Robert J. Kehl, Gerard M. Jacobs and Michael B. Cloud. (7) 10.5 Form of Severance Agreement dated July 2, 1996 between the Company and Edward R. McMurphy, T.J. Falgout, III and Mark D. Slusser. (10) 10.6 Shareholders' Agreement dated as of May 31, 1997 between the Company and Casino Magic. (11) 10.7 Shareholders' Agreement dated as February 1, 1998 by and among Larry Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13) 13.1 Annual Report to Stockholders for the fiscal year ended April 30, 1998. (1) 21.1 Subsidiaries of Crown Group, Inc. (1) 23.1 Consent of Independent Accountants. (1) 23.2 Opinion of Independent Accountants on Financial Statement Schedule. 24.1 Power of Attorney of Edward R. McMurphy. (1) 24.2 Power of Attorney of Tilman J. Falgout, III. (1) 24.3 Power of Attorney of David J. Douglas. (1) 24.4 Power of Attorney of J. David Simmons. (1) 24.5 Power of Attorney of Gerald L. Adams. (1) 24.6 Power of Attorney of Gerard M. Jacobs. (1) 24.7 Power of Attorney of Robert J. Kehl. (1) 17 18 27.1 Financial Data Schedule. (1) - ---------- (1) Filed herewith. (2) Previously filed as an Exhibit to the Company's Registration Statement on Form 10, as amended (No. 0-14939) and incorporated herein by reference. (3) Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 1989 and incorporated herein by reference. (4) Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended April 30, 1990 and incorporated herein by reference. (5) Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended April 30, 1991 and incorporated herein by reference. (6) Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended April 30, 1992 and incorporated herein by reference. (7) Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1993 and incorporated herein by reference. (8) Previously filed as an Exhibit to the Company's Registration Statement on Form S-1, as amended, initially filed with the Securities and Exchange Commission on May 31, 1994 (No. 33-79484) and incorporated herein by reference. (9) Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended April 30, 1994 and incorporated herein by reference. (10) Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1997 and incorporated herein by reference. (11) Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated June 2, 1997 and incorporated herein by reference. (12) Previously filed as an Exhibit to the Company's Registration Statement on Form S-8, as amended, initially filed with the Securities and Exchange Commission on October 20, 1997 (No. 333-38475) and incorporated herein by reference. (13) Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated February 1, 1998 and incorporated herein by reference. (b) REPORTS ON FORM 8-K During the fiscal quarter ended April 30, 1998 the Company filed reports on Form 8-K and 8-K/A as follows:
EVENT FORM DATE DESCRIPTION OF EVENT - ------------------ ----------------- ------------------------------------------------------- 8-K February 1, 1998 Acquisition of 53% of Paaco and 80% of Precision. 8-K/A February 1, 1998 Amendment No. 1 to Form 8-K dated February 1, 1998 including the financial statements of Paaco and pro-forma financial information of the Company. 8-K April 15, 1998 Ownership of Inktomi stock.
18 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CROWN GROUP, INC. Dated: August 11, 1998 By: /s/ Edward R. McMurphy ------------------------------------ Edward R. McMurphy President and Chief Executive Officer (principal executive officer) Dated: August 11, 1998 By: /s/ Mark D. Slusser ------------------------------------ Mark D. Slusser Vice President Finance and Chief Financial Officer (principal financial and accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- * Chairman of the Board, President August 11, 1998 - ------------------------------------- and Chief Executive Officer Edward R. McMurphy * Executive Vice President, August 11, 1998 - -------------------------------------- General Counsel and Director Tilman J. Falgout, III * Director August 11, 1998 - -------------------------------------- David J. Douglas * Director August 11, 1998 - -------------------------------------- John David Simmons * Director August 11, 1998 - -------------------------------------- Gerald L. Adams * Director August 11, 1998 - -------------------------------------- Gerard M. Jacobs * Director August 11, 1998 - -------------------------------------- Robert J. Kehl * By /s/ Mark D. Slusser August 11, 1998 --------------------------------- Mark D. Slusser As Attorney-in-Fact Pursuant to Powers of Attorney filed herewith
19 20 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF CROWN GROUP, INC. (PARENT COMPANY ONLY) CONDENSED BALANCE SHEET APRIL 30, 1998 Assets: Cash and cash equivalents $ 5,030,861 Marketable equity securities 4,742,180 Receivables from subsidiaries 4,640,718 Investment in subsidiaries 17,590,658 Investment in CMN and related assets, net 6,606,114 Other 688,329 ----------- $39,298,860 =========== Liabilities and stockholders' equity: Accounts payable and accrued liabilities $ 373,165 Payables to subsidiaries 2,641,637 Deferred tax liability 1,251,805 ----------- Total liabilities 4,266,607 ----------- Stockholders' equity 35,032,253 ----------- $39,298,860 ===========
CONDENSED STATEMENT OF OPERATION FOR THE YEAR ENDED APRIL 30, 1998 Revenues: Interest income $ 1,081,583 Interest income from subsidiaries 387,615 Interest, fees and rentals from CMN 680,697 Other 388,827 ----------- 2,538,722 ----------- Costs and expenses: Selling, general and administrative 2,924,675 Interest expense 13,444 Depreciation and amortization 557,318 ----------- 3,495,437 ----------- Other income: Equity in earnings of CMN 926,598 Equity in loss of subsidiaries (25,341) Gain on sale of securities 38,258 ----------- 939,515 ----------- Loss before income taxes (17,200) Benefit for income taxes 365,295 ----------- Net income $ 348,095 ===========
See accompanying notes to condensed financial information. 21 SCHEDULE I (CONTINUED) CROWN GROUP, INC. (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED APRIL 30, 1998 Operating activities: Net income $ 348,095 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 557,318 Amortization of discount (252,765) Deferred income taxes 305,341 Gain on sale of assets (373,999) Gain on sale of securities (38,258) Equity in earnings of CMN (926,598) Equity in loss of subsidiaries 25,341 Changes in assets and liabilities, net of transactions: Other 86,139 Accounts payable and accrued liabilities (169,203) Income taxes payable (271,525) ----------- Net cash used by operating activities (710,114) ----------- Investing activities: Purchase of assets (788,784) Sale of assets 2,191,861 Purchase of securities (5,551,714) Sale of securities 3,772,792 Advances to subsidiaries (4,618,220) Repayments from subsidiaries 13,732,772 Collection of notes receivable 1,050,750 Formation of Concorde (2,000,800) Purchase of CMN and related assets (7,000,001) Purchase of Paaco (9,174,212) Purchase of Precision and M&S (4,032,389) ----------- Net cash used by investing activities (12,417,945) ----------- Financing activities: Issuance of common stock 93,282 Purchase of common stock (3,052,322) ----------- Net cash used by financing activities (2,959,040) ----------- Decrease in cash and cash equivalents (16,087,099) Cash and cash equivalents at: Beginning of year 21,117,960 ----------- End of year $ 5,030,861 ===========
See accompanying notes to condensed financial information. 22 SCHEDULE I (CONTINUED) CROWN GROUP, INC. (PARENT COMPANY ONLY) NOTES TO CONDENSED FINANCIAL INFORMATION A - GUARANTEES Crown Group, Inc. ("Crown") has made the following guarantees with respect to its subsidiaries:
Amount Facility Drawn at Maximum Debtor Amount April 30, 1998 Guarantee ------ ------ -------------- --------- Concorde $20 million $11.1 million $5.0 million Home Stay 5.4 million -- 5.4 million
In addition, Crown has entered into a reimbursement agreement with the minority shareholders of Paaco who have guaranteed Paaco's debt with a specific lender. At April 30, 1998 the amount of debt guaranteed by such minority shareholders was approximately $26 million. To the extent such minority shareholders pay monies pursuant to such guaranties, Crown has agreed to reimburse the minority shareholders 65% thereof. B - ELIMINATION OF BALANCES AND TRANSACTIONS WITH SUBSIDIARIES As of April 30, 1998 the following balances were eliminated in the consolidated financial statements of Crown: Receivables from subsidiaries $ 4,640,718 Investments in subsidiaries 17,590,658 Payables to subsidiaries 2,641,637
For the year ended April 30, 1998 the following transactions were eliminated in the consolidated financial statements of Crown: Interest income $ 387,615
23 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 3.1.5 Articles of Amendment filed with the Secretary of State of the State of Texas on October 2, 1997. 4.7 Loan and Security Agreement by and among Finova Capital Corporation, Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation including the Eighth Amended and Restated Schedule to Loan and Security Agreement and the Eighth Amended and Restated Promissory Note. 13.1 Annual Report of Stockholders for the fiscal year ended April 30, 1998. 21.1 Subsidiaries of Crown Group, Inc. 23.1 Consent of Independent Accountants. 23.2 Opinion of Independent Accountants on Financial Statement Schedule. 24.1 Power of Attorney of Edward R. McMurphy. 24.2 Power of Attorney of Tilman J. Falgout, III. 24.3 Power of Attorney of David J. Douglas. 24.4 Power of Attorney of J. David Simmons. 24.5 Power of Attorney of Gerald L. Adams. 24.6 Power of Attorney of Gerard M. Jacobs. 24.7 Power of Attorney of Robert J. Kehl. 27.1 Financial Data Schedule.
EX-3.1.5 2 ARTICLES OF AMENDMENT OF CROWN CASINO CORP 1 EXHIBIT 3.1.5 ARTICLES OF AMENDMENT of CROWN CASINO CORPORATION I. The name of the Corporation is Crown Casino Corporation. II. The Articles of Incorporation of Crown Casino Corporation shall be amended by deleting Article I thereof in its entirety and substituting the following in lieu thereof: "Article One The name of the Corporation is Crown Group, Inc." III. The amendment set forth in these Articles of Amendment was adopted by the stockholders of the Corporation on October 1, 1997. IV. On August 15, 1997, the record date for determining stockholders entitled to vote at the stockholders' meeting there were 9,935,785 shares of common stock outstanding and entitled to vote on the amendment to the Articles of Incorporation. V. The amendment set forth in these Articles of Amendment received the number of votes in favor of and against its adoption as indicated below:
Votes in Votes Favor Against ----- ------- 9,211,650 37,567
IN WITNESS WHEREOF, the Corporation has caused the Articles of Amendment to be executed by its president, a duly authorized officer of the Corporation on this 1st day of October, 1997. CROWN CASINO CORPORATION By: /s/ EDWARD R. McMURPHY ----------------------------- Edward R. McMurphy President and Chief Executive Officer EX-4.7 3 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 4.7 - -------------------------------------------------------------------------------- FINOVA Capital Corporation Rediscount Finance LOAN AND SECURITY AGREEMENT (MULTIPLE BORROWERS) BORROWER: PREMIUM AUTO ACCEPTANCE CORPORATION ADDRESS: 5420 LBJ FREEWAY, SUITE 240 DALLAS, TEXAS 75240 BORROWER: PAACO, INC. ADDRESS: 5420 LBJ FREEWAY, SUITE 240 DALLAS, TEXAS 75240 DATE: DECEMBER 14, 1995 ================================================================================ THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), whose corporate address is Dial Tower, Dial Corporate Center, Phoenix, Arizona 85077 and whose Rediscount Finance Office address is 13355 Noel Road, Suite 800, Dallas, Texas 75240 and the borrowers named above (collectively referred to herein as the "Borrowers" and singularly as "Borrower"), all of whose chief executive offices are located at the above addresses (collectively referred to herein as "Borrowers' Address"). Each Borrower shall be separately defined as set forth in the Schedule. All representations, warranties, covenants, agreements, undertaking or other obligations of Borrowers as set forth in this Agreement and all other Loan Documents are made by each Borrower as if separately set forth for each Borrower in this Agreement and the other Loan Documents. All financial covenants and ratios set forth herein shall be applied to the Borrowers in the aggregate. 1. DEFINITIONS 1.1. ACCOUNT DEBTOR. The term "Account Debtor" shall mean any person or persons that are an obligor in any contractual arrangement with Borrower or any co-signor in respect of any Receivable. 1.2. AGREEMENT. The term "Agreement" shall mean this Loan and Security Agreement and any amendment, modifications or extension hereof. 1.3. BUSINESS DAY. The term "Business Day" shall mean a day, other than a Saturday or Sunday, on which -1- 2 commercial banks are open for business to the public in Phoenix, Arizona and New York, New York. 1.4. CHARGE OFFS. The term "Charge Offs" shall mean the amount due (including the principal balance plus all earned fees and charges) pursuant to a Receivable on the date that Borrower charges off such Receivable as uncollectible, pursuant to Borrower's policies and/or procedures. 1.5. CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 1.6. COLLATERAL. The term "Collateral" shall have the meaning set forth in Section 3.1. hereof. 1.7. COLLATERAL RECOVERY RATE. The term "Collateral Recovery Rate" shall mean, for any period of determination, (i) the total cash collected from all Receivables (including but not limited to all cash proceeds from charge off recoveries), divided by (ii) the sum of (a) the Included Rebates plus (b) the total cash collected from all Receivables (excluding all cash proceeds from charge off recoveries) plus (c) the aggregate of all Charge Offs for that period. 1.8. COMMONLY CONTROLLED ENTITY. The term "Commonly Controlled Entity" shall mean an entity, whether or not incorporated, which is under common control with Borrower within the meaning of Section 414(b) or (c) of the Code. 1.9. DEFAULT. The term "Default" shall mean an event which with the passage of time or notice or both would constitute an Event of Default (as defined in Section 7.1). 1.10. DISTRIBUTIONS. The term "Distributions" shall mean any dividends or other distribution of earnings to Borrower's shareholders, loans to officers, directors, affiliates or shareholders. 1.11. ELIGIBLE RECEIVABLES. The term "Eligible Receivables" shall mean those Receivables of Borrower that are acceptable to Lender, in its reasonable discretion, and, in each case, that meet, at a minimum, all of the following requirements: (i) arise from the extension of credit, the sale and delivery of vehicles or the rendering of services in conjunction with the sale of such vehicles in the ordinary course of Borrower's business; (ii) represent a valid and binding obligation enforceable in accordance with its terms for the amount outstanding thereof without offset, counterclaim or defense (whether actual or alleged); (iii) comply in all respects with all applicable laws and regulations, including, but not limited to, truth in lending and credit disclosure laws and regulations; (iv) all amounts and information appearing thereon or furnished to Lender in connection therewith are true and correct and undisputed by the Account Debtor thereon or any guarantor thereof; (v) Borrower and the Account Debtor are not engaged in any litigation regarding nonpayment of the Receivable; (vi) to the best knowledge of Borrower neither the Account Debtor thereon nor any guarantor thereof is subject to any receivership, insolvency or bankruptcy proceeding, is insolvent or has failed to meet its debts as they mature; (vii) Borrower has good and sufficient right to pledge, assign and deliver the Receivables free from all liens, claims, encumbrances or security interests whatsoever; (viii) neither the Account Debtor thereon nor any guarantor thereof is employed by, related to or affiliated with Borrower; (ix) to the best knowledge of Borrower no condition exists that materially or adversely affects the value of the Receivables or jeopardizes any security therefor; (x) if the Receivables arise from the sale of goods, such goods have been delivered and accepted by the Account Debtor and are still subject to the lawful possession and control of the Account Debtor and have not been otherwise returned to or repossessed by Borrower; (xi) is not a renewal or extension of any Receivable previously ineligible hereunder; (xii) the original principal amount thereof does not exceed the Maximum Amount of an Eligible Receivable (Schedule Sections 1.11.A.) and the original term thereof does not exceed the Maximum Term of an Eligible Receivable (Schedule Section 1.11.B.); (xiii) meets the Eligibility Test and has been reported to Lender in compliance with the Aging Procedures (Schedule Section 1.11.C.); (xiv) is not evidenced by a judgment or has not been reduced to judgment; (xv) is not an open account; (xvi) is evidenced by a written payment agreement, bearing interest or containing a time price differential, which has been executed by the Account Debtor; (xvii) the Account Debtor thereunder is a legal resident of the United States; and (xviii) payments under the Receivable are to be made in United States dollars. 1.12. ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.13. GAAP. The term "GAAP" shall mean generally accepted accounting principles and other standards as promulgated by the American Institute of Certified Public Accountants. 1.14. GUARANTOR. The term "Guarantor" shall mean any person or persons who execute a guaranty agreement in favor of Lender guaranteeing the repayment of the Borrower's Indebtedness to Lender (Schedule Section 4.5). 1.15. GUARANTY AGREEMENT. The term "Guaranty Agreement" shall mean that certain agreement executed by the Guarantor, in a form and substance approved by Lender. -2- 3 1.16. GOVERNING RATE. The term "Governing Rate" shall mean the "Prime" rate publicly announced by Citibank N.A., New York, New York (or such other "money center" bank as Lender, in its sole discretion, may select from time to time, but shall not be more than the highest rate of the five largest banks in the Continental United States as their respective corporate base, reference, prime or similar benchmark rate), provided however, that such rate may not be the lowest rate charged to such bank's customers. 1.17. INCLUDED REBATE PERCENTAGE. The term "Included Rebate Percentage" shall mean, for any period of determination, the percentage determined by (i) the aggregate of all Charge Offs for that period, divided by (ii) the Nonpayment Net Receivable Reductions for that period. 1.18. INCLUDED REBATES. The term "Included Rebates" shall mean, for any period of determination, (i) the aggregate of all rebates of interest for that period, multiplied by (ii) the Included Rebate Percentage. 1.19. INDEBTEDNESS. The term "Indebtedness" shall mean all amounts advanced hereunder by Lender to Borrower together with all other amounts owing or becoming owing to Lender by Borrower, direct or indirect, absolute or contingent, now or hereafter existing, whether pursuant to the terms of this Agreement or any document or instrument evidencing or securing the transaction contemplated hereby. 1.20. LEVERAGE RATIO. The term "Leverage Ratio" shall mean, at any date of determination, the remainder of the total liabilities of Borrower, including the outstanding balance of the Indebtedness, less the outstanding balance pursuant to all Subordinated Debt, divided by the sum of the amount of Borrower's Tangible Net Worth plus the outstanding balance due pursuant to all Subordinated Debt. 1.21. LOAN DOCUMENTS. The term "Loan Documents" shall mean this Agreement, the Note, the Schedule, the Guaranty, Subordination Agreements Agency and Custodian Agreements and all other documents executed in connection with this Agreement, together with any and all renewals, amendments, restatements or replacements of such documents. 1.22. MAXIMUM RATE. The term "Maximum Rate" shall mean the highest lawful and nonusurious rate of interest applicable to the Note made and delivered by Borrower to Lender in connection herewith, that at any time or from time to time may be contracted for, taken, reserved, charged, or received on the Note and the Indebtedness under the laws of the United States and the laws of such states as may be applicable thereto, that are in effect or, to the extent allowed by such laws, that may be hereafter in effect and that allow a higher maximum nonusurious and lawful interest rate than would any applicable laws now allow. 1.23. NET INCOME. The term "Net Income" shall mean with respect to any fiscal period, the net earnings of Borrower (excluding all extraordinary gains or nonrecurring income) before provision for income taxes for such fiscal period of Borrower, all as reflected on the financial statements of Borrower supplied to Lender pursuant to Sections 4.4(A) and 4.4(B) hereof. 1.24. NONPAYMENT NET RECEIVABLE REDUCTIONS. The term "Nonpayment Net Receivable Reductions" shall mean, for any period of determination, the sum of (i) the aggregate of all Charge Offs for that period, plus (ii) the aggregate of all net refinanced balances of a Receivable for that period. 1.25. NOTE. The term "Note" shall mean the promissory note of even date herewith, executed by Borrower and payable to the order of Lender. 1.26. PLAN. The term "Plan" shall mean any pension plan that is covered by Title IV of ERISA and with respect to which Borrower or a Commonly Controlled Entity is an "Employer" as defined in section 3(5) of ERISA. 1.27. RECEIVABLES. The term "Receivables" shall mean all accounts of Borrower and any other right of Borrower to receive payment, including, without limitation, all loans, extensions of credit or Borrower's right to payment for goods sold or services rendered by Borrower. 1.28. REQUEST FOR ADVANCE. The term "Request for Advance" shall mean a written request for an advance in the form of Exhibit "A" attached hereto and made a part hereof. 1.29. SCHEDULE. The term "Schedule" shall mean the schedule executed in conjunction with this Agreement of even date herewith, as may be amended from time to time, upon written agreement of Lender and Borrower. 1.30. SUBORDINATED DEBT. The term "Subordinated Debt" shall mean the aggregate amount of any indebtedness of Borrower to persons other than Lender that by its terms is subordinated in all respects, including, but not limited to, the right of payment, to the prior payment in full of the Indebtedness. A subordination and standstill agreement, in a form and substance satisfactory to Lender, shall be entered into by all holders of Subordinated Debt. 1.31. TANGIBLE NET WORTH. The term "Tangible Net Worth" shall mean, at any time of determination, the -3- 4 shareholder's equity of Borrower determined in accordance with GAAP minus the aggregate amount of all intangible assets and all assets consisting of obligations due to Borrower from shareholders, directors, officers, or any affiliate of Borrower or any Guarantor hereunder. 2. LOAN 2.1. AMOUNT OF LOAN. Subject to the terms, covenants and conditions hereinafter set forth, Lender agrees upon the Borrower's request from time to time, until the Maturity Date, to make advances to Borrower (collectively, the "Loan"), in an aggregate amount not to exceed at any time outstanding the lesser of the following: (a) the Amount of Revolving Credit Line (SCHEDULE SECTION 2.1.A.) or (b) the Availability on Eligible Receivables (SCHEDULE SECTION 2.1.B.). Within the limits of this Section 2.1, Borrower may borrow, repay and reborrow the advances. The Loan shall be evidenced by the Note. 2.2. INTEREST RATE. The outstanding principal balance of Loan shall bear interest at the Stated Interest Rate (SCHEDULE SECTION 2.2). If Lender is ever prevented from charging or collecting interest at the rate set forth in Stated Interest Rate Section (i) because interest at such rate would exceed interest at the Maximum Rate, then the rate set forth in Stated Interest Rate Section (i) shall continue to be the Maximum Rate until Lender has charged and collected the full amount of interest chargeable and collectable had interest at the rate set forth in Stated Interest Rate Section (i) always been lawfully chargeable and collectible. As the Governing Rate changes, the rate set forth in Stated Interest Rate Section (i) shall be increased or decreased (subject to the Maximum Rate) on the first day of each calendar month to correspond with the change in the Governing Rate then in effect and shall remain fixed at such rate until the first day of the next succeeding calendar month, notwithstanding fluctuations in the Governing Rate during the month. All changes in the Governing Rate shall be made without notice to Borrower. The monthly interest due on the principal balance of the Loan outstanding shall be computed for the actual number of days elapsed during the month in question on the basis of a year consisting of three hundred sixty (360) days and shall be calculated by determining the average daily principal balance outstanding for each day of the month in question. The daily rate shall be equal to 1/360th times the Stated Interest Rate (but shall not exceed the Maximum Rate). 2.3. PAYMENTS. All payments to Lender shall be payable at FINOVA Capital Corporation, File No. 96425, P.O. Box 668100, Charlotte, NC 28266-8100. All payments received pursuant to this Agreement shall be applied to Borrower's Indebtedness three (3) Business Days after the actual receipt of such payment by Lender's depository bank if such payment is credited to Lender's account. The Indebtedness shall be due and payable as follows: A. Accrued but unpaid interest for each calendar month during the term hereof shall be due and payable, in arrears, on or before the fifteenth (15th) day of the immediately succeeding calendar month; if such accrued but unpaid interest for the preceding month is not received by the fifteenth (15th) of the month, such unpaid interest shall be added to the Indebtedness. B. Costs, fees and expenses payable pursuant to this Agreement shall be due and payable by Borrower to Lender or to such other person(s) designated by Lender in writing on demand; and C. The entire outstanding balance of the Indebtedness shall be due and payable, if not prepaid, on the Maturity Date (SCHEDULE SECTION 2.3.). 2.4. PAYMENT DUE ON A NON-BUSINESS DAY. If any payment of the Indebtedness falls due on a day other than a Business Day, then such due date shall be extended to the next succeeding Business Day. 2.5. MANDATORY PAYMENTS. Provided that Borrower is not otherwise in Default hereunder, if at any time the amount advanced by Lender to Borrower exceeds the maximum amount of the Loan allowed pursuant to Section 2.1, Borrower shall immediately and without notice, repay to Lender an amount sufficient to eliminate such excess, or, at Lender's option, assign and deliver additional Eligible Receivables sufficient for such purpose. In the event Borrower sells, transfers, assigns or otherwise disposes of all or any portion of its Receivables, other than in the ordinary course of business, Borrower shall apply all proceeds of any such sale, transfer, assignment or other disposition to reduce the outstanding balance of the Indebtedness. 2.6. VOLUNTARY PREPAYMENTS. Borrower may, at its option, voluntarily prepay the Indebtedness in full at any time, provided, however, that Borrower has given Lender ninety (90) days written notice of any such intention to prepay the Indebtedness in full, requests Lender to terminate its security interest in the collateral upon such prepayment in full and as liquidated damages, not as a penalty, Borrower pays to Lender the amount of liquidated damages ("Liquidated Damages") (SCHEDULE SECTION 2.6). Borrower may not make such prepayment prior to the expiration of such ninety (90) day period. Upon written notice of prepayment of the Indebtedness in full, the commitment by Lender to advance funds to Borrower and all the obligations of Lender shall terminate on the expiration of said ninety (90) day notice -4- 5 period, and the entire amount of the Indebtedness and the Liquidated Damages shall be due and payable on such date. 2.7. MAXIMUM INTEREST; CONTROLLING AGREEMENT. If a court of competent jurisdiction determines that the laws of any state other than the State of Arizona apply to this Agreement then the following paragraph A. shall be applicable to this Agreement and paragraph 2.7.B. hereinbelow shall be of no force or effect. A. It is the intent of the parties hereto to conform strictly to the usury laws in force that apply to this transaction. Accordingly, all agreements between Lender and Borrower, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of demand or acceleration of the maturity of the Indebtedness or otherwise, shall the interest (and all other sums that are deemed to be interest) contracted for, charged, received, paid or agreed to be paid to Lender exceed interest computed at the Maximum Rate. If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of interest computed at the Maximum Rate and, if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of interest computed at the Maximum Rate, then Lender's receipt of the same shall be deemed unintentional, the interest payable to Lender shall be reduced to interest computed at the Maximum Rate; and such excess interest received by Lender shall, at the option of Lender, be repaid to Borrower or credited to the unpaid principal balance of the Indebtedness. If the Indebtedness is prepaid or the maturity of the Indebtedness is accelerated by reason of an election of Lender, then the unearned interest, if any, shall be canceled and, if theretofore paid, shall be either refunded to Borrower or credited on the Indebtedness as the Lender elects. All interest paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full period until payment in full of the principal (including the period of any renewal and extension thereof) so that the interest so computed shall not exceed the Maximum Rate. Notwithstanding that the parties hereto in good faith deem each and every fee provided by this Agreement or paid to Lender in connection with this Agreement to be a bona fide fee for services rendered and to be rendered separate and apart from the lending of money or the provision of credit, if any such fee is ever determined by a court of competent jurisdiction or other tribunal or by Lender to constitute interest, then the treatment of such fee for usury purposes shall be controlled by the provisions of this Section 2.7. This paragraph shall control all agreements between Borrower and Lender. If a court of competent jurisdiction determines that the laws of the State of Arizona apply to this Agreement then the following paragraph B. shall be applicable to this Agreement and paragraph 2.7.A. hereinabove shall be of no force or effect. B. The contracted for rate of interest of the loan contemplated hereby, without limitation, shall consist of the following: (i) the Stated Interest Rate, calculated and applied to the principal balance of this Agreement in accordance with the provisions of this Agreement and the other Loan Documents; (ii) interest after event of default or due date, calculated and applied to the amounts due under this Agreement in accordance with the provisions hereof; and (iii) all Additional Sums (as herein defined), if any. Borrower agrees to pay an effective contracted for rate of interest which is the sum of the above-referenced elements. All fees, charges, goods, things in action or any other sums or things of value (other than amounts described in the immediately previous paragraph), paid or payable by Borrower (collectively, the "Additional Sums"), whether pursuant to this Agreement, the Loan Agreement or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Borrower as, and shall be deemed to be, additional interest and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the inclusion of the Additional Sums. It is the intent of the parties to comply with the usury law ("Applicable Usury Law") applicable pursuant to the terms of the preceding paragraph or such other usury law which is applicable if the law chosen by the parties is not applicable. Accordingly, it is agreed that notwithstanding any provisions to the contrary in this Agreement, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Agreement or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Borrower or otherwise in connection with the loan evidenced hereby, or (b) the maturity of the indebtedness evidenced by this Agreement is accelerated in whole or in part, or (c) all or part of the principal or interest of this Agreement shall be prepaid, so that under any of such circumstances the amount of interest contracted for, shared or received in connection with the -5- 6 loan evidenced hereby, would exceed the maximum contract rate permitted by the Applicable Usury Law, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Borrower nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Borrower, at Lender's option, and (4) the effective rate of interest will be automatically reduced to the maximum amount of interest permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law; (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Borrower or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the maximum contract rate allowed under the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Lender from time to time, if and when the effective interest rate on the loan otherwise falls below the maximum amount permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Borrower further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. 2.8. STATEMENT OF ACCOUNT. Lender shall provide Borrower, each month, with a statement of Borrower's account, prepared from Lender's records, which shall conclusively be deemed correct and accepted by Borrower, unless Borrower gives Lender a written statement of exceptions within ten (10) days after receipt of such statement. 2.9. CONDITIONS PRECEDENT TO ADVANCES. The obligation of Lender to make advances is subject to the following conditions: (i) no Default or Event of Default shall have occurred; (ii) all actions to be taken by Borrower in connection with the transactions contemplated hereby shall be reasonably satisfactory in form and substance to Lender; (iii) the warranties and representations of Borrower contained herein shall be true and correct on the date hereof and shall be deemed to have been made again on the date of each advance and shall then also be true and correct; (iv) Borrower shall have performed and complied with all obligations or conditions required by this Agreement to be performed or complied with prior to each advance and Borrower shall not then be in default under any document or instrument evidencing or securing the Indebtedness; (v) Borrower shall submit to Lender a completed Request for Advance Report in the form and substance of Exhibit "A" attached hereto, on the date such advance is requested or shall have complied with the provisions concerning oral advances hereunder as set forth in Section 2.10 hereof; (vi) prior to the initial advance hereunder, Borrower shall submit to Lender the initial Availability Report and all other documents, instruments, financing statements, evidence of authority, evidence of compliance with applicable laws, opinions of counsel and other information which Lender may reasonably request; and (vii) Borrower shall submit to Lender resolutions of its Board of Directors designating personnel authorized by Borrower to execute Availability Reports on behalf of Borrower and each specific request for advance shall be executed by one such person. 2.10. ORAL REQUEST FOR ADVANCE. All oral requests for advances shall be made only by an authorized agent of Borrower designated by or acting under the authority of a resolution of the Board of Directors of Borrower, a duly certified or executed copy of which shall be furnished to Lender prior to any oral request. Lender shall be entitled to rely upon such authorization until written notice to the contrary is received by Lender. Borrower covenants and agrees to furnish to Lender written confirmation of any such oral request within two (2) days after such oral request, in a form set forth on Exhibit "A" attached hereto and incorporated herein, but any such loan or advance shall be deemed to be made under and entitled to the benefits of this Agreement and any other documents or instruments executed in connection herewith irrespective of any failure by Borrower to furnish such written confirmation. Any loan or advance shall be conclusively presumed to have been made under the terms of this Agreement, to or for the benefit of Borrower, when made pursuant to the terms of any written agreement executed in connection herewith; or in accordance with such requests and directions; or when an advance is deposited to the credit of the -6- 7 account of any person or persons corporation or corporations comprising Borrower, regardless of the fact that persons other than those authorized hereunder may have authority to draw against such account or regardless of the fact that the advance was not made or deposited for the benefit of all persons or corporations comprising Borrower. 2.11. ALL ADVANCES TO CONSTITUTE ONE LOAN. All evidences of credit, loans and advances made by Lender to Borrower under this Agreement and any other documents or instruments executed in connection herewith shall constitute one loan, and all indebtedness and obligations of Borrower to Lender under this Agreement and all other such documents and instruments shall constitute one general obligation secured by Lender's security interest in all of the Collateral and by all other security interests, liens, claims and encumbrances heretofore, now, or at any time or times hereafter granted by Borrower to Lender. Borrower agrees that all of the rights of Lender set forth in this Agreement shall apply to any modification of or supplement to this Agreement and any other such documents and instruments. 2.12. ADVANCES. Lender shall have the right in Lender's discretion, subject to availability hereunder on behalf of and without notice to Borrower, to make and use advances to pay Lender for any amounts due to Lender pursuant to this Agreement or otherwise, to cure any default hereunder, notwithstanding the expiration of any applicable cure period. 2.13. APPLICATION OF PAYMENTS. Borrower does hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all payments and collections at any time or times hereafter received by Lender against the Indebtedness, in such manner as Lender may determine. 3. SECURITY AGREEMENT 3.1. SECURITY INTEREST. To secure the prompt payment to Lender of the Indebtedness and any and all other obligations now existing or hereinafter arising owed by Borrower to Lender, Borrower hereby irrevocably grants to Lender a first and continuing security interest in the following property and interests in property of Borrower, whether now owned or existing or hereafter acquired or arising and wheresoever located: A. All Receivables and all accounts, chattel paper, instruments, contract rights and general intangibles, all of Borrower's right, remedies, security, liens, guaranties, or other contracts of suretyship with respect thereto, all deposits or other security or support for the obligation of any Account Debtor thereunder and credit and other insurance acquired by Account Debtor or the Borrower in connection therewith; B. All inventory, new or used, including parts and accessories; C. All bank accounts of Borrower; D. All monies, securities and property, now or hereafter held, received by, or intrusted to, in the possession or under the control of Lender or a bailee of Lender; E. All accessions to, substitutions for and all replacements, products and proceeds of the foregoing, including, without limitation, proceeds of insurance policies referenced in Section 3.1.A above (including but not limited to claims paid and premium refunds); and F. All books and records (including, without limitation, customer lists, credit files, tapes, ledger cards, computer software and hardware, electronic data processing software, computer printouts and other computer materials and records) of Borrower evidencing or containing information regarding any of the foregoing. 3.2. FINANCING STATEMENTS AND FURTHER ASSURANCES. Borrower hereby agrees to execute UCC-1 Financing Statements, in the form and substance of Exhibit "B" hereto, and any other instruments or documents reasonably necessary to evidence, preserve or protect Lender's security interest in the Collateral. Borrower agrees that financing statements shall be filed covering all of Borrower's locations (SCHEDULE SECTION 3.2.). Upon Lender's request, Borrower agrees to deliver to Lender, at such places as Lender may reasonably designate, schedules executed by Borrower, listing the Receivables and fully and correctly specifying in adequate detail the aggregate unmatured unpaid face amount of each Receivable and the amount of the deferred installments thereof falling due each month. These schedules shall be in form and tenor satisfactory to or supplied by Lender. All schedules delivered and Collateral pledged to Lender shall be assigned to Lender pursuant to the "Schedule of Receivables and Assignment" in the form and substance of Exhibit "E" attached hereto. Borrower further warrants and agrees that in each case where the terms of any Receivable require the Borrower or the Account Debtor named in such Receivable to place or carry fire insurance or other insurance in respect of the merchandise or property to which such Receivable relates, the Borrower shall or shall cause the Account Debtor to maintain such insurance until the full amount of such Receivable is collected and if not, Lender, at its option, may place and maintain such insurance, charging the cost thereof to Borrower. 3.3. FAILURE TO DELIVER. Failure to deliver physical possession of any instruments, documents or writings in -7- 8 respect of any Receivable to Lender shall not invalidate Lender's security interest therein. To the extent that possession may be required by applicable law for the perfection of Lender's security interest, the original chattel paper and instruments representing the Receivables shall be deemed to be held by Lender, although kept by the Borrower as the custodial agent of Lender. 3.4. NOTICE OF COLLATERAL ASSIGNMENT. All contracts, documents or instruments representing or evidencing a Receivable shall contain (by way of stamp or other method satisfactory to Lender) the following language: "ASSIGNED TO FINOVA CAPITAL CORPORATION AS COLLATERAL". 3.5. LOCATION OF RECEIVABLES. Borrower shall, at any reasonable time and at Borrower's own expense, upon Lender's request, physically deliver to Lender all Receivables (including any instruments, documents or writings in respect of any Receivable together with all instruments, documents or writings in respect of any collateral securing each Receivable) assigned to Lender to any reasonable place or places designated by Lender. All Receivables shall, regardless of their location, be deemed to be Lender Under's domination and control (with files so labeled) and deemed to be in Lender's possession. 3.6. RECORDS AND INSPECTIONS. Borrower shall at all times keep complete and accurate records pertaining to the Collateral, which records shall be current on a daily basis and located only at the locations (SCHEDULE SECTION 3.2.). Lender by or through any of its officers, agents, employees, attorneys or accountants, shall have the right to enter any such locations, at any reasonable time or times during regular business hours, for so long as Lender may desire, to inspect the Collateral and to inspect, audit and make extractions or copies from the books, records, journals, orders, receipts, correspondence or other data relating to the Collateral or this Agreement. 3.7. ADDITIONAL DOCUMENTS. Borrower hereby agrees to execute any additional documents or financing statements which Lender deems necessary in its reasonable discretion in order to evidence Lender's security interest in the Collateral. Borrower shall not allow any financing statement or notice of assignment of accounts receivable, other than those executed in connection with this Agreement, to be on file in any public office covering any Collateral, proceeds thereof or other matters subject to the security interest granted to Lender. 3.8. COLLECTION. Borrower agrees at its own expense to promptly and diligently collect each installment of all Receivables in trust for the exclusive account of Lender, to hold Lender harmless from any and all loss, damage, penalty, liability, fine or expense arising from such collection by Borrower or its agents and to faithfully account therefor to Lender. Upon the occurrence of a Default, Lender expressly retains the unqualified right at any time it so elects to take over the collection of the Receivables. 3.9. BLOCKED ACCOUNTS. Upon the occurrence of a Default or an Event of Default, at Lender's request, any checks, notes, drafts or any other payment upon and/or proceeds of the Collateral received by Borrower (or any subsidiaries, divisions, affiliates, proprietorships, shareholders, directors, officers, employees, agents or those persons acting for or in concert with Borrower), shall no later than the next Business Day following receipt thereof, be delivered to Lender, at Lender's address set forth above, for application on account of the Indebtedness and shall be reflected in the Statement of Account as provided in Section 2.8 herein, until such time as Lender has established a depository account at a bank for the deposit of such payments, made arrangements for such deposits to be transferred to Lender daily and thereafter established a lock-box arrangement or otherwise. Borrower shall (i) deposit or cause all Items, as defined below, to be deposited in the special account so established by Lender or transfer all Items to Lender for application on account of the Indebtedness and to be reflected in the Statement of Account as provided in Section 2.8 herein and (ii) maintain copies of all checks or other items of payment and deposit slips related thereto, together with a collection report in a form satisfactory to Lender. All cash payments, checks, drafts, or similar items of payment upon and/or proceeds of the Receivables (collectively "Items") by or for the account of Borrower shall be the sole and exclusive property of Lender immediately upon the earlier of the receipt of such Items by Lender or the receipt of such Items by Borrower; provided, however, that no such item received by Lender shall constitute payment to Lender and be applied to reduce the Indebtedness until the later of: (i) three (3) Business Days from collection of such Item by Lender's depository bank, or (ii) such Item being actually collected by Lender's depository bank and such collection being credited to Lender's account. Notwithstanding anything to the contrary herein, all such items of payment shall be deemed not received if the same is subsequently dishonored or not duly credited to Lender's depository account for any reason whatsoever. 3.10. PROTECTION OF RECEIVABLE RECORDS. Borrower hereby agrees to take the following protective actions to prevent destruction of Borrower's Collateral and records pertaining to such Collateral: (i) if Borrower maintains its Collateral records on a manual system such records shall be kept in a fire proof cabinet or on no less than a monthly basis, a record of all payments on Receivables and all other matters relating to the Collateral shall be placed in an off site safety deposit box (and Lender shall have access to -8- 9 such safety deposit box); or (ii) if the Collateral records are computerized, Borrower agrees to create a tape or diskette "back-up" of the computerized information and upon the request of Lender, provide Lender with a tape or diskette copy of such "back-up" information. 3.11. USE OF COLLECTIONS AND MODIFICATION OF RECEIVABLES. Provided that Lender has not required that Borrower remit all collections or proceeds of Collateral to Lender, Borrower may use or dispose of the funds received on the Receivables in the ordinary course of business (including returned or repossessed goods), collect or compromise accounts or obligations and accept returned goods or make repossessions, as Borrower shall determine based upon its reasonable discretion. 3.12. USE OF PROCEEDS. Borrower shall use the proceeds of the Loan in the ordinary course of business, solely in its operations for costs incurred in the purchasing of Receivables, or for payments to Lender hereunder. 3.13. RETURN OF COLLATERAL. Upon the payment in full or renewal of any Receivable to which the written documents evidencing such Receivable are held by Lender, Borrower shall submit all requests for the return of such documents pursuant to the "Request For Return of Collateral" form, a copy of which is attached hereto as Exhibit "C". 3.14. LENDER'S PAYMENT OF CLAIMS. Lender may, in its sole discretion, discharge or obtain the release of any security interest, lien, claim or encumbrance asserted by any person against the Collateral. All sums paid by Lender in respect thereof shall be payable, on demand, by Borrower to Lender and shall be a part of the Indebtedness. 3.15. CROSS COLLATERALIZATION Each Borrower agrees that the Collateral of each Borrower pledged hereunder shall secure all of the obligations of the Borrowers to Lender hereunder. Upon and after an Event of Default by any Borrower, Lender may pursue all rights and remedies it may have against all or any part of the Collateral regardless of the status of legal title to such Collateral. Each Borrower hereby acknowledges that this Cross Collateralization of their Collateral is in consideration of Lender's extending the credit hereunder and mutually beneficial to each Borrower. 4. REPORTING REQUIREMENTS 4.1. ACCOUNTING PRACTICES. Borrower shall maintain (i) a modern system of accounting in accordance with GAAP or other systems of accounting acceptable to Lender and (ii) standard operating procedures applicable to all of its locations with respect to the handling and disposition of cash receipts and other proceeds of Collateral on a daily basis, including the depositing thereof, aging of account receivables, record keeping and such other matters as Lender may reasonably request. For the purpose of determining the availability pursuant to Section 2.1 hereof, Lender shall have the right to recast any financial statement or report presented to Lender by or on behalf of Borrower. 4.2. PLEDGE OF RECEIVABLES. Borrower hereby agrees to pledge all Receivables and, if so requested by Lender, Borrower shall deliver to Lender all documents evidencing Receivables of Borrower, no less often than on the twentieth (20th) day of each calendar month during the term of this Agreement. If the evidence of title of the collateral securing the pledged Receivables is not delivered to Lender with the original Receivable documentation, such evidence of title shall be delivered to Lender not later than fifteen (15) days after such evidence of title is received by Borrower. Borrower will deliver monthly, with the delivery of the documentation evidencing the Receivables above, a "Vehicle Title Exception Report" listing all vehicle titles which have not been received by Lender or are due from the appropriate state motor vehicle department, together with the Schedule of Receivables and Assignment, as set forth in Section 3.2 hereof. 4.3. ACCOUNT DEBTORS' ADDRESSES. Borrower agrees to furnish to Lender from time to time, promptly upon request, a list of all Account Debtors' names and their most current addresses. Borrower agrees that Lender may from time to time, consistent with standard or generally accepted auditing practices, verify the validity, amount and any other matters relating to the Receivables by means of mail, telephone or otherwise, in the name of Borrower and upon the occurrence of an Event of Default in the name of Lender or such other name as Lender may choose. 4.4. FINANCIAL REPORTS. Borrower shall furnish to Lender the following financial statements and reports, in a form satisfactory to Lender: A. As soon as practicable and in any event mailed within twenty (20) days after the end of each fiscal month: (i) "Availability Report," in the form and substance of Exhibit "D" attached hereto; (ii) Statement of Accounts Receivable showing the detailed aging of each Receivable according to the procedures (SCHEDULE SECTION 1.11.C.); (iii) a monthly Profit and Loss Statement and Balance Sheet, certified by Borrower's chief financial officer or equivalent duly elected officer of Borrower; and (iv) Schedule of Receivables and Assignment in the form and substance of Exhibit "E" attached hereto. B. Within one hundred twenty (120) days after the end of each of Borrower's fiscal years, annual financial statements, or consolidated statements, as the case may be, of Borrower -9- 10 prepared in accordance with GAAP, consistently applied and certified by its chief financial officer or equivalent duly elected officer. The financial statements shall be prepared by and under the method acceptable to Lender and shall consist of a balance sheet as of the end of such fiscal year and comparative statements of earnings, cash flows, and change in stockholders' equity for such fiscal year (SCHEDULE SECTION 4.4.). C. With reasonable promptness, such other financial data as Lender may reasonably request, including but not limited to tax returns, business plans and reports. Together with each delivery of financial statements required by subsections A, B and C above, Borrower shall deliver to Lender and shall cause each of its subsidiaries to deliver to Lender, if requested by Lender, a certificate in form satisfactory to Lender, certifying that no Default or Event of Default exists under this Agreement as of the date of such certificate, or if a Default or an Event of Default exists, specifying the nature and period of existence thereof and what action Borrower proposes to take with respect thereto. 4.5. FINANCIAL STATEMENTS OF GUARANTORS. Each of the Guarantors (SCHEDULE SECTION 4.5.) shall furnish to Lender annual personal financial statements in form reasonably satisfactory to Lender and certified by such Guarantor and a copy of each Guarantor's personal Federal Income Tax Return (including all schedules thereto and amendments thereof) filed during the term hereof, within thirty (30) days of the filing of the same. 4.6. NOTICE OF CHANGES. Borrower shall promptly notify Lender in writing of any change of its officers, directors or key employees; change of location of its principal offices, change of location of any of its principal assets; any acquisition, disposition or reorganization of any corporate subsidiary, affiliate or parent of Borrower; change of Borrower's name; death or withdrawal of any partner (if Borrower is a partnership); any sale or purchase out of the regular course of Borrower's business; litigation of which Borrower or a Guarantor is a party; and any other material change in the business or financial affairs of Borrower. 5. REPRESENTATIONS AND WARRANTIES OF BORROWERS AND GUARANTOR. 5.1. REPRESENTATIONS AND WARRANTIES. Borrower and Guarantor hereby continuously represent and warrant to Lender as follows: A. Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its incorporation, is duly qualified to do business and is in good standing as a foreign corporation in all states where such qualification is required, has all necessary corporate power and authority to enter into this Agreement and each of the documents and instruments relating hereto and to perform all of its obligations hereunder and thereunder. B. Borrower operates its business only under the assumed names (SCHEDULE SECTION 5.1.) and has not used any other assumed name for the operation of its business activities for the previous seven (7) years. C. Borrower has all requisite corporate right and power and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and all documents and instruments relating hereto and this Agreement and all documents and instruments relating hereto are the legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their terms. D. Each Guarantor is competent to enter into this Agreement and the Guaranty and to perform all of Guarantor's obligations thereunder. E. The execution, delivery and performance by Borrower of this Agreement does not and shall not (i) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to Borrower; (ii) violate any provision of its Articles of Incorporation or Bylaws; or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which Borrower is a party or by which it or any of its assets or properties may be bound or affected; and Borrower is not in default of any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument. F. No consent, approval, license, exemption of or filing or registration with, giving of notice to, or other authorization of or by, any court, administrative agency or other governmental authority is or shall be required in connection with the execution, delivery or performance by Borrower for the valid consummation of the transactions contemplated by this Agreement. G. No event has occurred and is continuing which constitutes a Default or an Event of Default, as defined in this Agreement. There is no action, suit, proceeding or investigation pending or threatened against or affecting Borrower before or by any court, administrative agency or other governmental authority that brings into question the validity of the transactions contemplated hereby, or that might -10- 11 result in any material adverse change in the businesses, assets, properties or financial conditions of Borrower or Guarantor. H. Borrower and/or Guarantor are not in default in the payment of any taxes levied or assessed against either of them or any of their assets or properties, except for taxes being contested in good faith and by appropriate proceedings. I. Borrower and Guarantor have good and marketable title to their assets and properties as reflected in their financial statements furnished to Lender. J. Each of the financial statements furnished to Lender by the Borrower and Guarantor was prepared in accordance with GAAP and fairly and accurately reflects their financial condition as of the date thereof; and each hereby certifies that there have been no material adverse changes in their condition, financial or otherwise, since the date of such statements, and there are no contingent liabilities not provided for or disclosed in such statements. K. Neither this Agreement, any Availability Report or any statement or document referred to herein or delivered to Lender by Borrower and/or Guarantor contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made herein or therein not misleading. L. Borrower has good, indefeasible and merchantable title to and ownership of the Collateral, free and clear of all liens, claims, security interests and encumbrances, except those of Lender and except where such liens, claims, charges, security interests and encumbrances are removed contemporaneously with the execution of this Agreement or are subordinate to those of Lender, in a form and substance acceptable to Lender. M. All books, records and documents relating to the Collateral are and shall be genuine and in all respects what they purport to be; the original amount and the unpaid balance of each Receivable shown on the books and records of Borrower and in the schedules represented as owing by each Account Debtor is and shall be the correct amount actually owing or to be owing by such Account Debtor at maturity; each Account Debtor liable upon the Receivables has and shall have capacity to contract; Borrower has no knowledge of any fact which would impair the validity or collectibility of any of the Receivables; and the payments shown to have been made by each Account Debtor on the books and records of Borrower shall reflect the amounts of and dates on which said payments were actually made. N. Borrower has places of business only at the locations (SCHEDULE SECTION 3.2.). Borrower shall not begin or do business (either directly or through subsidiaries) at other locations or cease to do business at any of the above locations or at Borrower's principal place of business without first notifying Lender. O. The present value of all benefits vested under all Plans of Borrower or any Commonly Controlled Entity (based on the assumptions used to fund the Plans) did not, as of the last annual valuation date (which in case of any Plan was not earlier than December 31, 1982) exceed the value of the assets of the Plans applicable to such vested benefits. P. The liability to which Borrower or any Commonly Controlled Entity would become subject under Sections 4063 or 4064 of ERISA if Borrower or any Commonly Controlled Entity were to withdraw from all Multi-employer Plans or if such Multi-employer Plans were to be terminated as of the valuation date most closely preceding the date hereof, is not in excess of One Thousand Dollars ($1,000.00); Q. Borrower is not engaged nor shall it engage, principally or as one of its important activities, in a business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulations G or X of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any advances hereunder shall be used for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of the Regulations of such Board of Governors. If requested by Lender, Borrower shall furnish to Lender a statement in conformity with the requirement of Federal Reserve Form G-3 referred to in said Regulation G to the foregoing effect. All of the outstanding securities of Borrower have been offered, issued, sold and delivered in compliance with, or are exempt from, all federal and state laws and rules and regulations of federal and state regulatory bodies governing the offering, issuance, sale and delivery of securities. R. Borrower is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. S. Each of the Exhibits and Schedules to this Agreement contain true, complete and correct information. T. To the best of Borrower's knowledge, the land and improvements owned or leased by Borrower for use in its business operations are free of dangerous levels of contaminates, oils, asbestos, radon, PCB's, hazardous substances or waste as defined by federal, state or local -11- 12 environmental laws, regulations or administrative orders or other materials, the removal of which is required or the maintenance of which is prohibited, regulated or penalized by any federal, state or local governmental authority. U. Borrower is solvent, generally able to pay its obligations as they become due, has sufficient capital to carry on its business and transactions and all businesses and transactions in which it intends to engage, and the current value of Borrower's assets, at fair saleable valuation, exceeds the sum of its liabilities. Borrower shall not be rendered insolvent by the execution and delivery of the Loan Documents and the consummation of the transactions contemplated thereby and the capital remaining in Borrower is not now and shall not foreseeably become unreasonably small to permit Borrower to carry on its business and transactions and all businesses and transactions in which it is about to engage. Borrower does not intend to, nor does it reasonably believe it shall, incur debts beyond its ability to repay the same as they mature. V. Lender has a perfected security interest in favor of Lender in all of Borrower's right, title and interest in the Collateral, prior and superior to any other security interest or lien, except any statutory or constitutional lien for taxes not yet due and payable. W. There are no material actions, suits or proceedings pending, or threatened against or affecting the assets of Borrower or the consummation of the transactions contemplated hereby, at law, or in equity, or before or by any governmental authority or instrumentality or before any arbitrator of any kind. Neither Borrower nor Guarantor is subject to any judgment, order, writ, injunction or decree of any court or governmental agency. There is not a reasonable likelihood of an adverse determination of any pending proceeding which would, individually or in the aggregate, have a material adverse effect on the business operations or financial condition of Borrower or Guarantor. 5.2. WARRANTIES AND REPRESENTATIONS AS TO ELIGIBLE RECEIVABLES. With respect to Eligible Receivables, Borrower and Guarantor continuously warrant and represent to Lender that during the term of this Agreement and so long as any of the Indebtedness remains unpaid: (i) in determining which Receivables are "Eligible Receivables," Lender may rely upon all statements or representations made by Borrower; and (ii) those Receivables designated as Eligible Receivables meet each requirement set forth below at the time any request for advance is provided to Lender. A. The Eligible Receivables are genuine; are in all respects what they purport to be; and are evidenced by at least one executed original instrument, agreement, contract or document which has been or shall be delivered to Lender; B. The Eligible Receivables represent undisputed, bona fide transactions completed in accordance with the terms and provisions contained in any documents related thereto; C. The amounts of the face value shown on any schedule of Receivables provided to Lender, and/or all invoices or statements delivered to Lender with respect to any Eligible Receivables, are actually and absolutely owing to Borrower and are not contingent for any reason; D. No set-offs, counterclaims or disputes as to payments or liability thereon exist or have been asserted with respect thereto and Borrower has not made any agreement with any Account Debtor thereunder for any deduction therefrom, except a discount or allowance allowed by Borrower in the ordinary course of its business for prompt payment, all of which discounts or allowances are reflected in the calculation of the outstanding amount of the Receivable; E. No facts, events or occurrences exist that, in any way, impair the validity or enforcement thereof or tend to reduce the amount payable thereunder from the amount of the Receivable shown on any schedule, or on all contracts, invoices or statements delivered to Lender with respect thereto; F. All Account Debtors in connection with Eligible Receivables: (i) had the capacity to contract at the time any contract or other document giving rise to the Receivable was executed; and (ii) generally have the ability to pay their debts as become due; G. Within Borrower's knowledge, no proceedings or actions are threatened or pending against any Account Debtor that might result in any material adverse change in the Account Debtor's financial condition; H. The Eligible Receivables have not been assigned or pledged to any other person or entity; I. The goods giving rise to the Eligible Receivables are not, and were not at the time of the sale, rental and/or lease thereof, subject to any lien, claim, encumbrance or security interest except those of Lender, those removed or terminated prior to the date hereof or those subordinated to Lender's security interest, by a subordination and standstill agreement acceptable to Lender; J. The End of Month Delinquency set forth in Section 12 of the Availability Report shall be delivered to Lender by -12- 13 Borrower hereunder as determined pursuant to the Aging Procedures and Eligibility Test (SCHEDULE SECTION 1.11.D.). 6. COVENANTS AND OTHER AGREEMENTS 6.1. AFFIRMATIVE COVENANTS. During the term of this Agreement and so long as any of the Indebtedness remains unpaid, Borrower and Guarantor agree and covenant, jointly and severally, that they shall: A. Pay or cause to be paid currently all of their expenses, including all payments on their obligations whenever due, as well as all payments of any and all taxes of whatever nature when due. This provision shall not apply to taxes or expenses which are due, but which are challenged in good faith. B. Maintain, preserve, and protect the Collateral, including, but not limited to, keeping documents, instruments or other written records otherwise evidencing the Collateral in a fire proof cabinet. C. Furnish to Lender written notice as to the occurrence any Default or Event of Default hereunder. D. Furnish to Lender notice of: (i) any development related to the business, financial condition, properties or assets of Borrower or Guarantor, that would have or has a materially adverse affect on such business, financial condition, properties or assets, or ability to perform their obligations under this Agreement and (ii) any material and adverse litigation or investigation to which either of them may be a party. E. Carry on and conduct their business in the same manner and in the same fields of enterprise as they are presently engaged, and Borrower shall preserve its corporate existence, licenses or qualifications as a domestic corporation in the jurisdiction of its incorporation and as a foreign corporation in every jurisdiction in which the character of its assets or properties or the nature of the business transacted by it at any time makes qualification as a foreign corporation necessary, and to maintain all other material corporate rights and franchises, provided, however, nothing herein shall be construed to prevent Borrower from closing any retail location in the good faith exercise of its business judgment. F. Comply, and cause each affiliate to comply, with all statutes, governmental rules and regulations applicable to them. G. Permit and authorize Lender, without notifying Borrower or Guarantor, to make such inquiries through business credit or other credit reporting services concerning Borrower or Guarantor as Lender shall deem appropriate. H. Provide Lender with evidence of insurance issued by a reputable carrier, as reasonably required by Lender. This insurance shall reflect Lender as the loss payee or additional insured, as required by Lender, and contain a provision that Lender shall be notified by the carrier thirty (30) days prior to the termination or cancellation of any such insurance. 6.2. NEGATIVE COVENANTS. During the term of this Agreement and until the Indebtedness secured hereby has been paid in full, Borrower and Guarantor covenant and agree that they shall not, without Lender's prior written consent, which consent shall not be unreasonably withheld, do any of the following: A. Incur or permit to exist any mortgage, pledge, title retention lien or other lien, encumbrance or security interest with respect to the Collateral now owned or hereafter acquired by Borrower, except liens in favor of Lender. B. Delegate, transfer or assign any of their obligations or liabilities under this Agreement, or any part thereof, to any other person or entity. C. Be a party to or participate in: (i) any merger or consolidation; (ii) any purchase or other acquisition of all or substantially all of the assets or properties or shares of any class of, or any partnership or joint venture interest in, any other corporation or entity; (iii) any sale, transfer, conveyance or lease of all or substantially all of Borrower's assets or properties; or (iv) any sale or assignment with or without recourse of any Receivables. D. Cause or take any of the following actions with respect to Borrower: (i) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's outstanding securities; or (ii) purchase or acquire, directly or indirectly, any shares of capital stock, evidences of indebtedness or other securities of any person or entity. E. Amend, supplement or otherwise modify Borrower's Articles of Incorporation or Bylaws which would have a material adverse affect on the condition and operations, prospects or financial condition of the Borrower. F. Incur, assume or suffer to exist any debt (including capitalized leases) other than (i) the Indebtedness, (ii) accounts payable incurred in the ordinary course of business, (iii) Subordinated Debt, or (iv) other Debt consented to in writing, by Lender. G. Directly or indirectly make loans to, invest in, extend credit to, or guaranty the debt of any person or entity, other than in the ordinary course of Borrower's business. -13- 14 H. Amend, modify, or otherwise change in any respect any material agreement, instrument, or arrangement (written or oral) by which Borrower, or any of its assets, are bound. I. Allow Borrower to be owned and controlled directly or indirectly by any person or entity other than the shareholders and senior management that own and control Borrower as of the date hereof. 6.3. JOINT NEGATIVE COVENANTS. During the term of this Agreement until the Indebtedness secured hereby has been paid in full, both Borrowers, as defined in (SCHEDULE SECTION 1.A.) jointly covenant and agree that they shall not, allow or permit any of the following, which covenants shall be applied in the aggregate by combining each element of such financial covenants for each Borrower: A. Permit the aggregate Leverage Ratio to be more than the Leverage Ratio Limit (SCHEDULE SECTION 6.3.A.). B. Permit the aggregate Net Income to be less than the Minimum Net Income Requirement (SCHEDULE SECTION 6.3.B.). C. Make or allow Distributions, in the aggregate, to exceed, without Lender's prior written consent, which consent shall not be unreasonably withheld, the Distributions Limitation (SCHEDULE SECTION 6.3.C.); provided, however, that no Distribution shall be made if a Default or an Event of Default shall exist. 7. EVENTS OF DEFAULT AND REMEDIES 7.1. EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default": A. If any payment of principal or interest or any other amount due Lender is not paid within five (5) days after the same shall be due and payable. B. If Borrower or Guarantor fails or neglects to perform, keep or observe any of the terms, provisions, conditions or covenants, contained in this Agreement, any of the other Loan Documents or any other agreement or document executed in connection with the transactions contemplated by this Agreement or if any representation, warranty or certification made by Borrower herein or in any certificate or other writing delivered pursuant hereto shall prove to be untrue in any material respect as of the date upon which the same was made or at any time thereafter, and the same is not cured to Lender's satisfaction within ten (10) days after Lender has given written notice to Borrower identifying such default. C. If the validity or enforceability of any lien, charge, security interest, mortgage, pledge or other encumbrance granted to Lender to secure the Indebtedness shall be impaired in any respect or to any degree, for any reason, or if any other lien, charge, security interest, mortgage, pledge or other encumbrance shall be created or imposed upon the Collateral unless such lien, charge, security interest, mortgage, pledge or other encumbrance is subordinate to that of Lender, pursuant to a subordination and standstill agreement in a form and substance acceptable to Lender. D. If any judgment against Borrower not covered by insurance in an amount in excess of Twenty-Five Thousand Dollars ($25,000.00), or any attachment or other levy against the properties or assets of Borrower with respect to a claim for any amount in excess of Twenty-Five Thousand Dollars ($25,000.00), remains unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of thirty (30) days. E. Default in the payment of any sum due under any instrument of indebtedness for borrowed money owed by Borrower or any Guarantor to any person, or any other default under such instrument of indebtedness for borrowed money that permits such indebtedness for borrowed money to become due prior to its stated maturity or permits the holders of such indebtedness for borrowed money to elect a majority of the board of directors or manage the business of Borrower or any Guarantor. F. If a court or governmental authority of competent jurisdiction shall enter an order, judgment or decree appointing, with or without Borrower's or Guarantor's consent or acquiescence, a receiver, custodian, liquidator, trustee or other officer with similar powers of Borrower or Guarantor or of the whole or any substantial part of its properties or assets, or approving a petition filed against Borrower or Guarantor seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the federal bankruptcy laws or any other applicable law, and such order, judgment or decree shall remain unvacated, unstayed or not set aside for an aggregate of thirty (30) days (whether or not consecutive) from the date of the entry thereof or if any petition seeking such relief shall be filed against Borrower or Guarantor and such petition shall not be dismissed within thirty (30) days. G. An event shall occur which shall have a material adverse affect on the condition and operations, prospects or financial condition of the Borrower or Guarantor. H. If either Borrower or Guarantor shall: (i) be generally not paying their respective debts as they become due; (ii) file a petition in bankruptcy or a petition to take advantage of any -14- 15 insolvency act or other act for the relief or aid of debtors; (iii) make an assignment for the benefit of their creditors; (iv) consent to or acquiesce in the appointment of a receiver, custodian, liquidator, trustee or other officer with similar powers of either of their properties or assets; (v) file a petition or answer seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the federal bankruptcy laws or any other applicable law; (vi) be adjudicated insolvent or be liquidated; (vii) admit in writing either of their inability to pay debts as they become due; (viii) voluntarily suspend transaction of usual business; or (ix) take any action, corporate or otherwise, for the purpose of any of the foregoing. I. Any of the following shall occur: (i) entry of a court order that enjoins, restrains or in any way prevents Borrower from conducting all or any material part of its business affairs in the ordinary course of business or (ii) withdrawal or suspension of any license or authority required for the conduct of any material part of Borrower's business. J. If any Guarantor gives notice of termination or terminates his liability pursuant to the Guaranty Agreement executed in conjunction with this Agreement. 7.2. ACCELERATION OF THE INDEBTEDNESS. Upon and after an Event of Default, the outstanding principal balance together with all accrued but unpaid interest on the Indebtedness and all other sums due and payable by Borrower to Lender may, at the option of Lender and without demand, presentment, notice of dishonor, notice of intent to demand or accelerate payment, diligence in collecting, grace, notice and protest or a legal process of any kind, all of which are hereby expressly waived, be declared, and immediately shall become due and payable. 7.3. LOUISIANA CONFESSION OF JUDGMENT. In the event that Borrower is domiciled in, or Collateral is located in, Louisiana, and to the extent of such domicile or location where Louisiana law is applicable to this Agreement: A. Borrower hereby confesses judgment, up to the full amount of principal, interest and attorney's fees and for any sums that Lender may advance during the life of this Agreement for the payment of premiums of insurance, taxes and assessments or for the protection and preservation of this Agreement as authorized elsewhere in this Agreement, and does by these presents, consent, agree and stipulate that, in the event of any payment of principal or interest due hereunder not being promptly and fully paid when the same becomes due and payable, or in the event of failure to comply with any of the obligations set forth herein, the Indebtedness shall, at the option of Lender become due and payable, and it shall be lawful for Lender, without making a demand and without notice or putting in default, the same being hereby expressly waived, to cause all and singular the Collateral herein secured to be seized and sold by executory process issued by any competent court or to proceed with enforcement of its security interest in any other manner provided by law; and B. Borrower hereby expressly waives: (a) the benefit of appraisement, as provided in Articles 2332, 2336, 2723, and 2724, Louisiana Code of Civil Procedure, and all other laws conferring the same; (b) the demand and three (3) days delay according by Articles 2639 and 2721, Louisiana Code of Civil Procedure, and all other laws conferring the same; (c) the notice of seizure required by Articles 2293 and 2721, Louisiana Code of Civil Procedure, and all other laws conferring the same; (d) the three (3) days delay provided by Articles 2331 and 2722, Louisiana Code of Civil Procedure, and all other laws conferring the same; and (e) the benefit of the other provisions of Articles 2331, 2722 and 2723, Louisiana Code of Civil Procedure, and all other Articles not specifically mentioned above; and Borrower expressly agrees to the immediate seizure of the Collateral in the event of suit thereon. 7.4. REMEDIES. Upon and after an Event of Default, Lender shall have the following rights and remedies, which individual remedies shall be non-exclusive, cumulative and in addition to each and every other remedy set forth in the Loan Documents or in this Agreement: A. All of the rights and remedies of a secured party under the Uniform Commercial Code as enacted in the State of Arizona, as amended, or other applicable law. B. The right, to the fullest extent permissible by law, to: (i) enter upon the premises of Borrower, or any other place or places where the Collateral is located and kept, without any obligation to pay rent to Borrower, through self-help and without judicial process, without first obtaining a final judgment or giving Borrower notice and opportunity for a hearing on the validity of Lender's claim, and remove the Collateral therefrom to the premises of Lender or any agent of Lender, for such time as Lender may desire, in order to effectively collect and liquidate the Collateral; and/or (ii) require Borrower to assemble the Collateral and make it available to Lender at a place to be designated by Lender, in Lender's reasonable discretion. C. The right to sell or otherwise dispose of any or all Collateral in its then condition at public or private sale or sales, in lots or in bulk, for cash or on credit, all as Lender, in its discretion, may deem advisable; provided that such sales may be adjourned from time to time with or without notice. The requirement of reasonable notice to Borrower of the time and place of any public sale of the Collateral or of the time -15- 16 after which any private sale either by Lender or at its option, a broker, or any other intended disposition thereof is to be made, shall be met if such notice is mailed, postage prepaid, to Borrower at the address of Borrower designated herein at least ten (10) Business Days before the date of any public sale or at least ten (10) Business Days before the time after which any private sale or other disposition is to be made unless applicable law requires otherwise. Lender shall have the right to conduct such sales on Borrower's premises or elsewhere and shall have the right to use Borrower's premises without charge for such sales for such time or times as Lender may see fit. Lender is hereby granted a license or other right to use, without charge, Borrower's labels, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit. Lender agrees to hold Borrower harmless from any liability arising out of Lender's use of Borrower's premises, labels, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature as it pertains to advertising for sale, marshalling or selling the Collateral. Lender shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may purchase all or part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Indebtedness owing by Borrower to Lender. The proceeds realized from the sale of any Collateral shall be applied first to reasonable costs and expenses, attorney's fees, expert witness fees incurred by Lender for collection and for acquisition, completion, protection, removal, storage, sale and delivery of the Collateral; second to all payments, other than principal and interest, due under this Agreement; third to interest due upon any of the Indebtedness; fourth to the principal balance owing on the Indebtedness; and fifth the remainder, if any, to Borrower, its successors or assigns, or to whomsoever may be lawfully entitled to receive the same. If any deficiency shall arise, Borrower shall remain liable to Lender therefor. D. In the event that Borrower is domiciled in, or Collateral is located in, Louisiana, and to the extent of such domicile or location where Louisiana law is applicable to this Agreement, the right to cause all and singular the hereinabove described Collateral to be seized and sold under executory process without appraisement, appraisement being hereby expressly waived, as an entirety or in parcels, as Lender may determine, to the highest bidder for cash. E. The right to appoint or seek appointment of a receiver, custodian or trustee of Borrower or any of its properties or assets pursuant to court order. F. The right to cease all advances hereunder. G. All other rights and remedies that Lender may have at law or in equity. 7.5. NO WAIVER. No delay, failure or omission of Lender to exercise any right upon the occurrence of any Default or Event of Default shall impair any such right or shall be construed to be a waiver of any such Default or Event of Default or an acquiescence therein. Lender may, from time to time, in a writing waive compliance by the other parties with any of the terms of this Agreement and its rights and remedies upon any Default or Event of Default, and, Borrower agrees that no waiver by Lender shall ever be legally effective unless such waiver shall be acknowledged and agreed in writing by Lender. No waiver of any Default or Event of Default shall impair any right or remedy of Lender not specifically waived. No single, partial or full exercise of any right of Lender shall preclude any other or further exercise thereof. No modification or amendment of or supplement to this Agreement or any other written agreement between the parties hereto shall be valid or effective (or serve as a basis of reliance by way of estoppel) unless the same is in writing and signed by the party against whom it is sought to be enforced. The acceptance by Lender at any time and from time to time of a partial payment or partial performance of any of Borrower's obligations set forth herein shall not be deemed a waiver, reduction, modification or release from any Default or Event of Default then existing. No waiver by Lender of any Default or Event of Default shall be deemed to be a waiver of any other existing or any subsequent Default or Event of Default. 7.6. GENERAL INDEMNIFICATION. Borrower hereby agrees to indemnify and hold Lender harmless from and against any and all claims, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (collectively "Claim" or "Claims") of any kind or nature whatsoever, asserted by any party other than Borrower, or with respect to Borrower only as otherwise provided in this Agreement or pursuant to applicable law regarding Lender's obligations to Borrower, which may be imposed on, incurred by or asserted against Lender, or any of its officers, directors, employees or agents (including accountants, attorneys or other professionals hired by Lender) in any way relating to or arising out of the Loan Documents or any action taken or omitted by Lender, or any of its officers, directors, employees or agents (including accountants, attorneys or other professionals hired by Lender) under the Loan Documents, except to the extent such -16- 17 indemnified matters are finally found by a court to be caused by Lender's gross negligence or wilful misconduct. 7.7. APPLICATION OF PROCEEDS. After an Event of Default shall have occurred and is continuing, all amounts received by Lender on account of any Indebtedness and realized by Lender with respect to the Collateral, including any sums which may be held by Lender, or the proceeds of any thereof, shall be applied in the same manner as proceeds of Collateral as set forth in Section 7.4.C. hereof. 7.8. APPOINTMENT OF LENDER AS ATTORNEY-IN-FACT. Borrower irrevocably designates, makes, constitutes and appoints Lender (and all persons reasonably designated by Lender), with full power of substitution, as Borrower's true and lawful attorney-in-fact (and not agent-in-fact) and Lender, or Lender's agent, may, without notice to Borrower, and at such time or times thereafter as Lender or said agent, in its discretion, may determine, in Borrower's or Lender's name, at no duty or obligation on Lender, do the following: A. All acts and things necessary to fulfill Borrower's administrative duties pursuant to this Agreement, including, but not limited to, the execution of financing statements; B. Upon the occurrence of any Default, all acts and things necessary to fulfill Borrower's obligations under this Agreement and the Loan Documents, except as set forth in Section 7.8.C below, at the cost and expense of Borrower. C. In addition to, but not in limitation of the foregoing, at any time or times upon the occurrence of an Event of Default, Lender shall have the right: (i) to enter upon Borrower's premises and to receive and open all mail directed to Borrower and remove all payments to Borrower on the Receivables; however, Lender shall turn over to Borrower all of such mail not relating to Receivables; (ii) in the name of Borrower, to notify the Post Office authorities to change the address for the delivery of mail addressed to Borrower to such address as Lender may designate (notwithstanding the foregoing, for the purposes of notice and service of process to or upon Borrower as set forth in this Agreement, Lender's rights to change the address for the delivery of mail shall not give Lender the right to change the address for notice and service of process to or upon Borrower in this Agreement); (iii) demand, collect, receive for and give renewals, extensions, discharges and releases of any Receivable; (iv) institute and prosecute legal and equitable proceedings to realize upon the Receivables; (v) settle, compromise, compound or adjust claims in respect of any Receivable or any legal proceedings brought in respect thereof; (vi) generally, sell in whole or in part for cash, credit or property to others or to itself at any public or private sale, assign, make any agreement with respect to or otherwise deal with any of the Receivables as fully and completely as though Lender were the absolute owner thereof for all purposes, except to the extent limited by any applicable laws and subject to any requirements of notice to Borrower or other persons under applicable laws; (vii) take possession and control in any manner and in any place of any cash or non-cash items of payment or proceeds of Receivables; (viii) endorse the name of Borrower upon any notes, acceptances, checks, drafts, money orders, chattel paper or other evidences of payment of Receivables that may come into Lender's possession; and (ix) sign Borrower's name on any instruments or documents relating to any of the Collateral, or on drafts against Account Debtors. The appointment of Lender as attorney-in-fact for Borrower is coupled with an interest and is irrevocable. 8. MISCELLANEOUS 8.1. REIMBURSEMENT FOR EXPENSES. Upon the occurrence of a Default, except as set forth in the SCHEDULE SECTION 8.1., Borrower agrees to reimburse Lender, upon demand, for all reasonable out-of-pocket expenses (including costs of establishing and maintaining accounts or arrangements set forth in Section 3.9, attorney's fees, expert witness fees and legal expenses) incurred in connection with the evaluation of collateral, preservation of collateral, or collection of the indebtedness. 8.2. NOTICES. All notices, demands, billings, requests and other written communications hereunder shall be deemed to have been properly given: (i) upon personal delivery; (ii) on the third Business Day following the day sent, if sent by registered or certified mail; (iii) on the next Business Day following the day sent, if sent by overnight express courier; or (iv) on the day sent or if such day is not a Business Day on the next Business Day after the day sent if sent by telecopy providing the receiving party has acknowledged receipt by return telecopy, in each case, to Lender, Borrower or Guarantors at its address and/or telecopy number as set forth in this Agreement or SCHEDULE SECTION 8.2, or at such other address and/or telecopy number as either party may designate for such purpose in a written notice given to the other party. Lender shall have the right, on or after initial funding pursuant to the terms of this Agreement, to issue a press release or other brochure announcing the consummation of the Loan Documents and to distribute that information to third parties in the normal course of Lender's business, at no cost to Borrower. 8.3. PARTICIPATIONS. Borrower and Guarantors acknowledge and agree that Lender may from time to time sell or offer to sell interests in the Indebtedness and the Loan -17- 18 Documents to one or more participants. Borrower and Guarantors authorize Lender to disseminate any information it has pertaining to the Indebtedness, including without limitation, complete and current credit information on Borrower and any of its principals and Guarantors, to any such participant or prospective participant. 8.4. SURVIVAL OF AGREEMENTS. All of the various representations, warranties, covenants and agreements of Borrower (including without limitation, any agreements to pay costs and expenses and to indemnify Lender) in the Loan Documents shall survive the execution and delivery of the Loan Documents and the performance under such Loan Documents, and shall further survive until one (1) year and one (1) month after all of the Indebtedness is paid in full to Lender and all of Lender's obligations to Borrower under the Loan Documents are terminated. 8.5. NO OBLIGATION BEYOND MATURITY. Borrower agrees and acknowledges that upon the Maturity Date, Lender shall have no obligation to renew, extend, modify or rearrange the Loan and shall have the right to require all amounts due and owing under the Loan to be paid in full upon such date. 8.6. PRIOR AGREEMENTS SUPERSEDED. This Agreement constitutes the sole and only agreement of the parties hereto and supersedes any prior understandings or written or oral agreements between the parties respecting the subject matter of this Agreement. No provision of this Agreement or other document or instrument relating hereto may be modified, waived or terminated except by instrument in writing executed by the party against whom a modification, waiver or termination is sought to be enforced. 8.7. PARTIES BOUND. This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors and assigns, except as otherwise expressly provided for herein. Borrower and Guarantor shall not assign any of their respective rights or obligations pursuant this Agreement. 8.8. NUMBER AND GENDER. Whenever used herein, the singular number shall include the plural and the plural the singular, and the use of any gender shall be applicable to all genders. The duties, covenants, obligations and warranties of Borrower in this Agreement shall be joint and several obligations of Borrower and of each Borrower if more than one. 8.9. NO THIRD PARTY BENEFICIARY. This Agreement is for the sole benefit of Lender and Borrower and is not for the benefit of any third party. 8.10. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original, and all of which taken together shall constitute but one and the same instrument. 8.11. SEVERABILITY OF PROVISIONS. Any provision which is determined to be unconscionable, against public policy or any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 8.12. HEADINGS. The Article and Section headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement. 8.13. SCHEDULES AND EXHIBITS. Any and all exhibits hereto are hereby expressly incorporated by reference as though fully set forth at that point verbatim. All terms and provisions as defined or set forth in Article 1 and in any Schedule are hereby incorporated into and made a part of this Agreement. Each reference in this Agreement and the Schedule hereto to any information or definitions contained in Article 1 or the Schedule shall mean and refer to the information or definitions as set forth in Article 1 and the Schedule unless the context specifically requires otherwise. Any terms used in Article 1 and in the Schedule which are not defined shall have the meanings ascribed to such terms, as of the date of this Agreement, by the Uniform Commercial Code as enacted in the State of Arizona to the extent the same are defined therein. 8.14. FURTHER INSTRUMENTS. Borrower and Guarantors shall from time to time execute and deliver, and shall cause each of Borrower's subsidiaries to execute and deliver, all such amendments, supplements and other modifications hereto and to the other Loan Documents and all such financing statements or continuation statements, instruments of further assurance and any other instruments, and shall take such other actions, as Lender reasonably requests and deems necessary or advisable in furtherance of the agreements contained herein. 8.15. LENDER'S EXPENSES AND ATTORNEY'S FEES. UPON AND AFTER AN EVENT OF DEFAULT, LENDER SHALL BE ENTITLED TO RECOVER FROM BORROWER AND GUARANTORS ALL OF LENDER'S ATTORNEY'S FEES AND REASONABLE COSTS AND EXPENSES INCURRED IN THE EXERCISE OF LENDER'S RIGHTS SET FORTH IN THIS AGREEMENT, -18- 19 AND ALL DAMAGES SUSTAINED BY LENDER BY REASON OF MISREPRESENTATION, BREACH OF WARRANTY OR BREACH OF COVENANT OF BORROWER HEREIN, EXPRESSED OR IMPLIED, WHETHER CAUSED BY THE ACTS OR DEFAULTS OF BORROWER, ACCOUNT DEBTORS OR OTHERS; INCLUDING WITHOUT LIMITATION, ALL ATTORNEY'S FEES ARISING FROM SUCH SERVICES, EXPERT WITNESS FEES AND ANY EXPENSES, COSTS AND CHARGES RELATING THERETO, AND ALL OF THE FOREGOING SHALL CONSTITUTE PART OF THE INDEBTEDNESS SECURED BY THE COLLATERAL AND SHALL BE PAYABLE ON DEMAND. 8.16. GOVERNING LAW. THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED BY BORROWER AND GUARANTOR AND ACCEPTED BY LENDER IN MARICOPA COUNTY, ARIZONA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ARIZONA. 8.17. JURISDICTION AND VENUE. TO INDUCE THE LENDER TO ENTER INTO THIS AGREEMENT, BORROWER, GUARANTORS AND LENDER IRREVOCABLY AGREE THAT, SUBJECT TO THE LENDER'S ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE COUNTY OF MARICOPA, STATE OF ARIZONA. BORROWER, GUARANTORS AND LENDER HEREBY CONSENT AND SUBMIT TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY AND STATE AND WAIVE PERSONAL SERVICE OF ANY AND ALL PROCESS UPON BORROWER, AND AGREE THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED MAIL DIRECTED TO BORROWER AT THE ADDRESS SET FORTH IN SCHEDULE SECTION 8.17 AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF. 8.18. WAIVER. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS AGREEMENT AND TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW, BORROWER AND EACH GUARANTOR HEREBY WAIVES (i) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON-PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, AND ONE OR MORE EXTENSIONS OR RENEWALS OF ANY OR ALL ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY THE LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER THE LENDER MAY DO IN THIS REGARD; (ii) ALL RIGHTS TO NOTICE AND HEARING PRIOR TO THE LENDER'S TAKING POSSESSION OR CONTROL OF, OR THE LENDER'S REPLEVIN, ATTACHMENT OR LEVY ON OR OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING THE LENDER TO EXERCISE ANY OF THE LENDER'S REMEDIES; AND (iii) THE BENEFIT OF ALL VALUATION, APPRAISEMENT OR EXEMPTION LAWS. 8.19. ADVICE OF COUNSEL. BORROWER AND EACH GUARANTOR ACKNOWLEDGES THAT THEY HAVE BEEN REPRESENTED AND ADVISED BY INDEPENDENT LEGAL COUNSEL WITH RESPECT TO THE NEGOTIATION, EXECUTION AND ACCEPTANCE OF THIS AGREEMENT AND THE TRANSACTION GOVERNED BY THIS AGREEMENT AND SPECIFICALLY WITH RESPECT TO THE PROVISIONS CONTAINED IN SECTIONS 7.3, 8.15, 8.16, 8.17, 8.18, 8.19 and 8.20 HEREOF AND HAS RELIED UPON THE ADVICE OF ITS INDEPENDENT LEGAL COUNSEL IN AGREEING TO THE TERMS AND CONDITIONS HEREIN AND IN EXECUTING AND DELIVERING THIS AGREEMENT, AND THAT THEY HAVE FREELY AND VOLUNTARILY ENTERED INTO THIS AGREEMENT AS THE PRODUCT OF ARMS' LENGTH NEGOTIATIONS. 8.20. WAIVER OF RIGHT TO TRIAL BY JURY. LENDER, BORROWER AND GUARANTORS HEREBY COVENANT AND AGREE THAT IN ANY SUIT, ACTION OR PROCEEDING IN RESPECT OF ANY MATTER ARISING OUT OF THIS AGREEMENT, THE DOCUMENTS EXECUTED IN CONNECTION HEREWITH, ANY WRITTEN AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER NOW EXISTING OR HEREAFTER ARISING OR IN ANY WAY RELATED TO, CONNECTED WITH OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, TRIAL SHALL BE TO A COURT OF COMPETENT JURISDICTION AND NOT TO A JURY: LENDER, BORROWER AND EACH GUARANTOR HEREBY EXPRESSLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY. ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS -19- 20 AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 8.21. TIME OF ESSENCE Time is of the essence for the performance the obligations set forth in this Agreement and the Loan Documents. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first set forth above. BORROWER: PREMIUM AUTO ACCEPTANCE CORPORATION By: /s/ DANIEL CHU --------------------------------------- (Signature) Daniel Chu, President - ------------------------------------------ (Printed Name and Title) (Date) 75-2573171 - ------------------------------------------ Tax Payer Identification No. PAACO, INC. By: /s/ DANIEL CHU --------------------------------------- (Signature) Daniel Chu, President - ------------------------------------------ (Printed Name and Title) (Date) 75-2457739 - ------------------------------------------ Tax Payer Identification No. GUARANTORS: /s/ LARRY W. LANGE - ------------------------------------------ Larry W. Lange ###-##-#### - ------------------------------------------ Social Security No. /s/ MARY LANGE - ------------------------------------------ Mary Lange ###-##-#### - ------------------------------------------ Social Security No. /s/ DANIEL CHU - ------------------------------------------ Daniel Chu ###-##-#### - ------------------------------------------ Social Security No. /s/ VICKY CHU - ------------------------------------------ Vicky Chu ###-##-#### - ------------------------------------------ Social Security No. /s/ THEODORE LANGE - ------------------------------------------ Theodore Lange ###-##-#### - ------------------------------------------ Social Security No. LENDER: FINOVA CAPITAL CORPORATION, a Delaware corporation By: /s/ STEPHEN J. THOMAS --------------------------------------- (Signature) Stephen J. Thomas, Vice President 12/14/95 - ------------------------------------------ (Printed Name and Title) (Date) 94-1278569 - ------------------------------------------ Tax Payer Identification Number -20- 21 [FINOVA LOGO] - -------------------------------------------------------------------------------- EIGHTH AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: PREMIUM AUTO ACCEPTANCE CORPORATION ADDRESS: 605 SOUTH LOOP 12 IRVING, TEXAS 75225 BORROWER: PAACO, INC. ADDRESS: 605 SOUTH LOOP 12 IRVING, TEXAS 75225 DATE: FEBRUARY 5, 1998 This Eighth Amended and Restated Schedule ("Eighth Amended Schedule") is executed in conjunction with a certain Loan and Security Agreement ("Agreement"), dated December 14, 1995, and as an amendment to and a restatement of that certain Schedule to Loan and Security Agreement ("Original Schedule"), dated December 14, 1995, that certain Amended and Restated Schedule to Loan and Security Agreement ("Amended Schedule"), dated May 22, 1996, that certain Second Amended and Restated Schedule to Loan and Security Agreement ("Second Amended Schedule"), dated January 7, 1997, that certain Third Amended and Restated Schedule to Loan and Security Agreement ("Third Amended Schedule"), dated March 24, 1997, that certain Fourth Amended and Restated Schedule to Loan and Security Agreement ("Fourth Amended Schedule"), dated April 17, 1997, that certain Fifth Amended and Restated Schedule to Loan and Security Agreement ("Fifth Amended Schedule"), dated October 2, 1997, that certain Sixth Amended and Restated Schedule to Loan and Security Agreement ("Sixth Amended Schedule"), dated October 27, 1997, and that certain Seventh Amended and Restated Schedule to Loan and Security Agreement ("Seventh Amended Schedule"), dated November, 1997, by and between FINOVA Capital Corporation, as Lender, and the above Borrower, as Borrower. All references to Section numbers herein refer to Sections in the Agreement. The terms and provision of this Eighth Amended Schedule shall supersede all terms and provisions contained in all prior Schedules. ================================================================================ 1.A. BORROWERS (SECTION 1). Each Borrower shall be referred to herein as follows: Premium Auto Acceptance Corporation - "Premium" PAACO, Inc. - "PAACO" -1- 22 ================================================================================ 1.11.A. MAXIMUM AMOUNT OF AN ELIGIBLE RECEIVABLE (SECTION 1.11). The term "Maximum Amount of an Eligible Receivable" shall mean the sum of Eighteen Thousand Dollars ($18,000.00) remaining due thereon at any date of determination, including all unearned finance charges, insurance fees and other fees and charges pursuant to the Eligible Receivables. ================================================================================ 1.11.B. MAXIMUM TERM OF AN ELIGIBLE RECEIVABLE (SECTION 1.11). The "Maximum Term of an Eligible Receivable" shall be thirty-six (36) months remaining until the due date of such Eligible Receivable at any date of determination. ================================================================================ 1.11.C. AGING PROCEDURES AND ELIGIBILITY TEST (SECTION 1.11). AGING PROCEDURES FOR A CONTRACTUAL AGING: 1. No payment missed or due = Current. 2. 1 to 30 days past due = "30 day Account". 3. 31 to 60 days past due = "60 day Account". 4. 61 or more days past due = "60 + day Account" ELIGIBILITY TEST: The term "Eligibility Test" shall mean the test to determine the eligibility of a Receivable for the purposes of Section 1.11 hereof, that test, being as follows: no payment due on said Receivable remains unpaid more than sixty (60) days from the specific date on which such payment was due pursuant to the terms of said Receivable. ================================================================================ 2.1.A. AMOUNT OF REVOLVING CREDIT LINE (SECTION 2.1): The "Amount of the Revolving Credit Line shall be as follows, provided, however, if a Default or Event of Default exist on the date of any increase of the "Amount of the Revolving Credit Line" as set forth below, the "Amount of the Revolving Credit Line shall not increase, and shall only increase thereafter, at the sole discretion of Lender: (1) If the date of determination is on or before June 30, 1998, then the Amount of Revolving Credit Line shall be Thirty Million Dollars ($30,000,000.00); (2) If the date of determination is after June 30, 1998, but on or before September 30, 1998, then the Amount of Revolving Credit Line shall be Thirty Two Million Five Hundred Thousand Dollars ($32,500,000.00); and (3) If the date of determination is after September 30, 1998, then the Amount of the Revolving Credit Line shall be Thirty Five Million Dollars ($35,000,000.00). -2- 23 Notwithstanding any provision contained in the Loan Documents to the contrary, the Amount of the Revolving Credit Line shall not exceed Thirty Million Dollars ($30,000,000.00), until Borrower has hired, as a full time employee of Borrower, a qualified chief financial officer that has experience and qualifications commensurate with a chief financial officer in a same or similar industry and value of assets as that of Borrower. ================================================================================ 2.1.B. AVAILABILITY ON ELIGIBLE RECEIVABLES (SECTION 2.1): The "Availability on Eligible Receivables" shall be an amount equal to sixty-seven and one-half percent (67.5%) of the aggregate unmatured and unpaid amount due to Borrower from the Account Debtor named thereon, excluding all unearned finance charges, insurance fees and other fees and charges pursuant to the Eligible Receivables. Notwithstanding any provision contained in the Loan Documents to the contrary, if (i) for the twelve (12) calendar month period immediately prior to any date of determination, the Collateral Recovery Rate is less than seventy-two percent (72%), or (ii) on any date of determination the percentage, determined by the aggregate outstanding balance of all Receivables that are ineligible, divided by the aggregate outstanding balance of all Receivables, is greater than seven percent (7%), then in either event, Lender, in its sole and absolute discretion, may modify the Availability on Eligible advance percentage set forth above. ================================================================================ 2.2. STATED INTEREST RATE (SECTION 2.2). The lesser of (i) the Governing Rate plus three percent (3.0%) per annum or (ii) the Maximum Rate. ================================================================================ 2.3. MATURITY DATE (SECTION 2.3.C). The primary term of this Agreement shall expire on April 30, 2000. If Borrower desires to extend the primary term or any term thereafter of this Agreement, Borrower shall give Lender notice of its intent to extend the term no earlier than one hundred and eighty (180) days and no later than one hundred and fifty (150) days prior to any expiration date of this Agreement. Upon the receipt by Lender of Borrower's notice to extend the term of this Agreement, if Lender desires to renew and extend the term of this Agreement, Lender shall give Borrower notice of Lender's intent to extend the term of this Agreement, within sixty (60) days of Lenders receipt of Borrower's notice to extend. If Lender does not give Borrower notice of Lender's intent to extend the term of this Agreement within the sixty (60) days period, then it shall be deemed that Lender does not intend to renew and extend the term of this Agreement. Notwithstanding the foregoing, this Agreement shall remain in full force and effect until the Indebtedness due and owing to Lender has been paid in full. ================================================================================ 2.6. LIQUIDATED DAMAGES (SECTION 2.6). The amount of "Liquidated Damages" shall be, prior to April 30, 2000, Borrower pays the balance of the Indebtedness in full and Borrower requests Lender to terminate Lender's security interest in the Collateral, an amount equal to three percent (3%) of the Amount of the Revolving Credit Line. ================================================================================ 2.14 FACILITY INCREASE FEE (SECTION 2.14) The following Section 2.14 is hereby added to the Agreement. -3- 24 2.14 FACILITY INCREASE FEE. Immediately upon the execution of the those certain Loan Documents to increase the Amount of the Revolving Credit Facility from Twenty Million Dollars ($20,000,000.00) to a maximum of Thirty Five Million Dollars ($35,000,000.00), with such Thirty Five Million Dollars ($35,000,000.00) to be available on or after October 1, 1998, upon Borrower's compliance with all of the conditions with respect thereto, Borrower shall pay a facility increase fee in the amount of One Hundred Fifty Thousand Dollars ($150,000.00). ================================================================================ 3.2. BUSINESS LOCATIONS OF BORROWER (SECTIONS 3.2, 3.6 and 5.1.N.). All locations are as follows: 605 South Loop 12 Irving, Texas 75225 3200 E. Randol Mill Road Arlington, Texas 76011 3500 N.E. 28th Street Ft. Worth, Texas 76111 821 Avenue K Plano, Texas 75074 5125 Ross Avenue Dallas, Texas 75206 945 E. Jefferson Street Dallas, Texas 75203 2751-2781 S. Garland Road Garland, Texas 75041 ================================================================================ 4.4. ANNUAL FINANCIAL STATEMENTS (SECTION 4.4). Annual financial statements shall be audited annually by independent certified public accountants acceptable to Lender. ================================================================================ 4.5. GUARANTOR (WHETHER ONE OR MORE) (SECTION 4.5). Larry Lange and Mary Lange Daniel Chu and Vicky Chu Theodore Lange ================================================================================ 5.1. BORROWER'S TRADENAMES (WHETHER ONE OR MORE)(SECTION 5.1.B.) None ================================================================================ 6.1. AFFIRMATIVE COVENANTS (SECTION 6.1.I) -4- 25 Section 6.1.1 of the Agreement is hereby deleted in its entirety and the following is hereby substituted in lieu thereof: I. Open a new location without Lender's prior written consent. ================================================================================ 6.2.A. MODIFICATION TO A NEGATIVE COVENANT (SECTION 6.2.A.) Section 6.2.A. is hereby deleted in its entirety and the following is substituted in lieu thereof: A. Incur or permit or exist any mortgage, pledge, title retention lien or other lien, encumbrance or security interest with respect to the Collateral now owned or hereafter acquired by Borrower, except liens in favor of Lender or in favor of a floor plan lender who has executed an intercreditor agreement with Lender, in a form and substance acceptable to Lender. ================================================================================ 6.3.A. LEVERAGE RATIO LIMIT (SECTION 6.3.A). The term "Leverage Ratio Limit" shall mean 4.0 to 1.0. ================================================================================ 6.3.B. MINIMUM NET INCOME (SECTION 6.3.B). The Minimum Net Income shall be One Dollar ($1.00) for any fiscal quarter of Borrower. ================================================================================ 6.3.C. DISTRIBUTIONS LIMITATION (SECTION 6.3.C). Maximum Distributions shall not exceed seventy-five percent (75%) of Net Income of the fiscal year in which such Distributions are made. ================================================================================ 8.1. REIMBURSEMENT OF EXPENSES (SECTION 8.1). Borrower shall reimburse Lender for all of Lenders' legal costs and expenses incurred by Lender with respect to preparation, negotiation, and execution of this Eighth Amended and Restated Schedule to Loan and Security Agreement and the review of all documentation and other due diligence with respect to the Crown, Inc. and Alexander Group transactions. ================================================================================ 8.2. NOTICES (SECTION 8.2). Lender: FINOVA Capital Corporation (copy each office below with all notices) CORPORATE FINANCE OFFICE: FINOVA Capital Corporation 355 South Grand Avenue, Suite 2400 Los Angeles, CA 90071 Attn: John J. Bonano, Senior Vice President Telephone: (213) 253-1600 Telecopy No.: (213) 625-0268 -5- 26 CORPORATE OFFICE: FINOVA Capital Corporation 1850 N. Central Avenue Phoenix, AZ 85077 Attn: Joseph R. D'Amore, Vice President - Group Counsel Telephone: (602) 207-4900 Telecopy No.: (602) 207-5543 REDISCOUNT FINANCE OFFICE: FINOVA Capital Corporation 13355 Noel Road, Suite 800 Dallas, TX 75240 Attn: Dan Black (Account Executive) Telephone: (214) 458-5600 Telecopy No.: (214) 458-5650 Borrower: Premium Auto Acceptance Corporation 605 South Loop 12 Irving, Texas 75225 Telephone: -------------- Telecopy No.: -------------- Borrower: PAACO, Inc. 605 South Loop 12 Irving, Texas 75225 Telephone: -------------- Telecopy No.: -------------- Guarantor: Larry W. Lange & Mary Lange 6 Braewick Ct. Dallas, TX 75225 Telephone: -------------- Telecopy No.: -------------- Guarantor: Daniel Chu & Vicky Chu 10165 Gaywood Dallas, TX 75229 Telephone: -------------- Telecopy No.: -------------- Guarantor: Theodore Lange 4040 Avondale, #408 Dallas, TX 75219 Telephone: -------------- Telecopy No.: -------------- ================================================================================ 8.17. AGENT FOR SERVICE OF PROCESS (SECTION 8.17). Daniel Chu, whose address is 605 South Loop 12, Irving, Texas 75225. (Agent) ================================================================================ -6- 27 IN WITNESS WHEREOF, the parties have executed this Schedule on the day and year first set forth above. LENDER: FINOVA CAPITAL CORPORATION, a Delaware corporation By: /s/ BRAD FYHER ---------------------------------------------- (Signature) Brad Fisher, Vice President 2-17-98 ---------------------------------------------- (Printed Name and Title) (Date) BORROWER: PREMIUM AUTO ACCEPTANCE CORPORATION By: /s/ DANIEL CHU ---------------------------------------------- (Signature) Daniel Chu, President ---------------------------------------------- (Printed Name and Title) (Date) PAACO, INC. By: /s/ DANIEL CHU ---------------------------------------------- (Signature) Daniel Chu, President ---------------------------------------------- (Printed Name and Title) (Date) GUARANTORS: /s/ LARRY W. LANGE ---------------------------------------------- Larry W. Lange /s/ MARY LANGE ---------------------------------------------- Mary Lange /s/ DANIEL CHU ---------------------------------------------- Daniel Chu /s/ VICKY CHU ---------------------------------------------- Vicky Chu /s/ THEODORE LANGE ---------------------------------------------- Theodore Lange -7- 28 [FINOVA LOGO] - -------------------------------------------------------------------------------- EIGHTH AMENDED AND RESTATED PROMISSORY NOTE $35,000,000.00 PHOENIX, ARIZONA February 5, 1998 FOR VALUE RECEIVED, the undersigned ("MAKER"), hereby unconditionally promises to pay to the order of FINOVA CAPITAL CORPORATION, a Delaware corporation, ("HOLDER") formerly known as Greyhound Financial Corporation, at HOLDER's branch address at 13355 Noel Road, Suite 800, Dallas, Texas 75240, or at such other place as HOLDER may designate in writing, the principal sum of Thirty Five Million Dollars ($35,000,000.00) or so much thereof as shall be advanced or readvanced, with interest thereon at the Stated Interest Rate calculated on the average daily balance outstanding, as follows: 1. DEFINITIONS. When used herein, the following terms have the meanings given in this paragraph: A. Loan Agreement. The term "Loan Agreement" shall mean that certain Loan and Security Agreement dated December 14, 1995, entered into by and between FINOVA Capital Corporation, as Lender, and MAKER, as Borrower, and all amendments, substitutions, renewals and extensions thereof. All terms used herein which are not expressly defined herein shall have the meanings ascribed to them in the Loan Agreement. B. Maximum Rate. The term "Maximum Rate" shall mean the highest lawful rate of interest applicable to this NOTE. In determining the Maximum Rate, due regard shall be given to all payments, fees, charges, deposits, balances and agreements which may constitute interest or be deducted from principal when calculating interest. 2. PAYMENT. The principal and interest of this NOTE are payable as follows: A. Accrued but unpaid interest for each calendar month during the term hereof shall be due and payable monthly, in arrears, on the fifteenth (15th) day of the immediately succeeding calendar month that commences on February 15, 1997. All outstanding principal together with all accrued and unpaid interest shall be due and payable, if not sooner paid, on April 30, 2000. All payments received hereunder shall be applied as set forth in the Loan Agreement. B. Notwithstanding the foregoing, principal shall be immediately due and payable without written notice and demand from Lender in such amounts so that the outstanding balance hereunder does not, at anytime, exceed the amount of the Loan as determined pursuant to Section 2.1 of the Loan Agreement. The amount of such payments shall be determined by HOLDER pursuant to the terms of the Loan Agreement and based upon the principal balance of this NOTE then outstanding as determined pursuant to the Loan Agreement and as shown on the books and records of HOLDER, maintained in accordance with its usual practice, the entries of which being conclusive evidence of the existence and amounts as therein recorded. C. All of the principal hereunder may be prepaid in full or in part at any time; however, such voluntary prepayments shall be subject to the voluntary prepayment provisions set forth in Article 2.6 of the Loan Agreement. -1- 29 3. PRINCIPAL BALANCE. The unpaid principal balance of this NOTE at any time shall be the total amounts loaned or advanced hereunder by HOLDER, less the amount of payments or prepayments of principal made hereon by or for the account of MAKER. It is contemplated that by reason of payments or prepayments hereon there may be times when no indebtedness is owing hereunder; but notwithstanding such occurrences, this NOTE shall remain valid and shall be in force and effect as to loans or advances made pursuant to and under the terms of this NOTE subsequent to each such occurrence. All loans or advances and all payments or prepayments made hereunder on account of principal or interest may be evidenced by HOLDER, or any subsequent holder, maintaining in accordance with its usual practice an account or accounts evidencing the indebtedness of MAKER resulting from all loans or advances and all payments or prepayments hereunder from time to time in the amounts of principal and interest payable and paid from time to time hereunder, in which event, in any legal action or proceeding in respect of this NOTE, subject to Section 2.8 of the Loan Agreement, the entries made in such account or accounts shall be conclusive evidence of the existence and amounts of the obligations of MAKER therein recorded. In the event that the unpaid principal amount hereof, at any time and for any reason, exceeds the maximum amount hereinabove specified, MAKER covenants and agrees to pay the excess principal amount immediately without notice or demand; such excess principal amount shall in all respects be deemed to be included among the loans or advances made pursuant to the other terms of this NOTE and shall bear interest at the rate hereinabove stated. 4. ADVANCES. This Promissory Note is the "Note" referred to in the Loan Agreement and the Holder is entitled to all the rights, remedies and benefits of the Lender thereunder. Reference is hereby made to the Loan Agreement for the terms and conditions under which this Note is to be made and to be repaid. 5. DEFAULT, REMEDIES. Upon the occurrence of any one or more of the Events of Default set forth in the Loan Agreement, at the option of the holder of this NOTE, the entire unpaid principal balance and accrued and unpaid interest hereon shall at once become due and payable without notice or demand and the Holder may foreclose and enforce all liens and security interests securing this NOTE. If this NOTE is not paid when due, whether at maturity or by acceleration, or if it is collected through a bankruptcy, probate, or other judicial proceeding, whether before or after maturity, MAKER agrees to pay attorney's fees, together with all actual expenses of collection and litigation and costs of court incurred by the Holder, whether or not suit is actually filed or not. 6. WAIVER. MAKER and all other makers, signers, sureties, guarantors and endorsers of this NOTE waive demand, presentment, notice of dishonor, notice of intent to demand or accelerate payment hereof, diligence in the collecting, grace, notice and protest, and agree to one or more extensions for any period or periods of time and partial payments, before or after maturity, without prejudice to HOLDER. 7. SECURITY. This NOTE is secured by certain security interests as set forth in the Loan Agreement. 8. CONTROLLING AGREEMENT. The contracted for rate of interest of the Loan without limitation, shall consist of the following: (i) the Stated Interest Rate, calculated and applied to the principal balance of the Note in accordance with the provisions of this Note and the Loan Agreement; (ii) Interest After Event of Default or Due Date, calculated and applied to the amounts due under this Note in accordance with the provisions thereof; and (iii) all Additional Sums (as herein defined), if any. Borrower agrees to pay an effective contracted for rate of interest which is the sum of the above-referenced elements. All fees, charges, goods, things in action or any other sums or things of value (other than amounts described in the immediately previous paragraph), paid or payable by Borrower (collectively, the "Additional Sums"), whether pursuant to this Note, the Loan Agreement or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Borrower as, and shall be deemed to be, additional interest and for such purposes only, the agreed upon and "contracted for rate of interest" of this -2- 30 lending transaction shall be deemed to be increased by the rate of interest resulting from the inclusion of the Additional Sums. It is the intent of the parties to comply with the usury law ("Applicable Usury Law") applicable pursuant to the terms of the preceding paragraph or such other usury law which is applicable if the law chosen by the parties is not applicable. Accordingly, it is agreed that notwithstanding any provisions to the contrary in this NOTE, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this NOTE or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Maker or otherwise in connection with the loan evidenced hereby, or (b) the maturity of the indebtedness evidenced by this NOTE is accelerated in whole or in part, or (c) all or part of the principal or interest of this NOTE shall be prepaid, so that under any of such circumstances the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the maximum contract rate permitted by the Applicable Usury Law, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Maker nor any other person or entity now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Maker, at Holder's option, and (4) the effective rate of interest will be automatically reduced to the maximum amount of interest permitted by the Applicable Usury Law. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law; (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the maximum contract rate allowed under the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Holder from time to time, if and when the effective interest rate on the loan otherwise falls below the maximum amount permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Maker further agrees that should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. 9. APPLICABLE LAW. This NOTE shall be construed in accordance with the laws of the State of Arizona and the laws of the United States applicable to transactions in the State of Arizona. 10. NO WAIVER. No delay on the part of the HOLDER in the exercise of any power or right under this NOTE, or under the LOAN AGREEMENT or any other instrument executed in connection herewith, shall operate as a waiver thereof, nor shall a single or partial exercise of any power or right preclude other or further exercise thereof or exercise of any other power or right. Enforcement by HOLDER of any security for the payment hereof shall not constitute any election by it of remedies so as to preclude the exercise of any other remedy available to it. 11. SUCCESSORS, ASSIGNS. The term "HOLDER" shall include all of HOLDER's successors and assigns to whom the benefits of this NOTE shall inure. -3- 31 12. RENEWAL AND EXTENSION. This Eighth Amended and Restated Promissory Note is executed in conjunction with that certain Eighth Amended and Restated Schedule to Loan and Security Agreement, dated of even date herewith, by and between HOLDER and MAKER amending that certain Amended and Restated Schedule to Loan and Security Agreement, dated May 22, 1996, that certain Second Amended and Restated Schedule to Loan and Security Agreement, dated January 7, 1997, that certain Third Amended and Restated Schedule to Loan and Security Agreement, dated March 24, 1997, that certain Fourth Amended and Restated Schedule to Loan and Security Agreement, dated April 17, 1997, that certain Fifth Amended and Restated Schedule to Loan and Security Agreement, dated October 2, 1997, that certain Sixth Amended and Restated Schedule to Loan and Security Agreement, dated October 27, 1997, and that certain Seventh Amended and Restated Schedule to Loan and Security Agreement, dated November 25, 1997. This Eighth Amended and Restated Promissory Note is a renewal and extension of and not an extinguishment of that certain Promissory Note, dated December 14, 1995, in the stated principal amount of $6,500,000.00, that certain Amended and Restated Promissory Note, dated May 22, 1996, in the stated principal amount of Twelve Million Dollars ($12,000,000.00), that certain Second Amended and Restated Promissory Note, dated January 7, 1997, in the stated principal amount of Thirteen Million Dollars ($13,000,000.00), that certain Third Amended and Restated Promissory Note, dated March 24, 1997, in the stated principal amount of Fourteen Million Dollars ($14,000,000.00), that certain Fourth Amended and Restated Promissory Note, dated April 17, 1997, in the stated principal amount of Twenty Million Dollars ($20,000,000.00), that certain Fifth Amended and Restated Promissory Note, dated October 2, 1997, in the stated principal amount of Twenty One Million Dollars ($21,000,000.00), and that certain Sixth Amended and Restated Promissory Note, dated October 27, 1997, in the stated principal amount of Twenty Two Million Dollars ($22,000,000.00), and that certain Seventh Amended and Restated Promissory Note, dated November 25, 1997, in the stated principal amount of Twenty Five Million Dollars ($25,000,000.00) each executed by MAKER in favor of HOLDER. This Eighth Amended and Restated Promissory Note is secured by liens granted to Holder on certain collateral, this Eighth Amended and Restated Promissory Note is a continuation of MAKER's obligations to HOLDER and such obligations and liens, mortgages, deeds of trust or security interests are not extinguished by this Eighth Amended and Restated Promissory Note but are hereby renewed and extended. 13. AVAILABILITY LIMITATIONS. The maximum outstanding balance of this Note shall be limited as the Amount of the Revolving Credit Line is restricted in the Eighth Amended and Restated Schedule to Loan and Security Agreement, as even date herewith, as follows: if a Default or Event of Default exist on the date of any increase of the "Amount of the Revolving Credit Line" as set forth below, the "Amount of the Revolving Credit Line" shall not increase, and shall only increase thereafter, at the sole discretion of Lender: i. If the date of determination is on or before June 30, 1998, then the Amount of Revolving Credit Line shall be Thirty Million Dollars ($30,000,000.00); ii. If the date of determination is after June 30, 1998, but on or before September 30, 1998, then the Amount of Revolving Credit Line shall be Thirty Two Million Five Hundred Thousand Dollars ($32,500,000.00); and iii. If the date of determination is after September 30, 1998, then the Amount of the Revolving Credit Line shall be Thirty Five Million Dollars ($35,000,000.00). -4- 32 MAKER: Premium Auto Acceptance Corporation, a Texas corporation By: /s/ DANIEL CHU --------------------------------- Name: Daniel Chu ------------------------------- Title: President ------------------------------ PAACO, Inc., a Texas corporation By: /s/ DANIEL CHU --------------------------------- Name: Daniel Chu ------------------------------- Title: President ------------------------------ -5- EX-13.1 4 ANNUAL REPORT OF STOCKHOLDERS 1 EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CROWN GROUP, INC. FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements appearing elsewhere in this annual report. OVERVIEW Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the "Company"), is a publicly traded buy-out firm which presently owns (i) 65% of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco"), a vertically integrated used car sales and finance company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of intermediate bulk containers, (iii) 80% of Concorde Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of Neuquen, Argentina, and (v) 80% of Home Stay Lodges I, Ltd., a partnership focusing on the development and operation of extended-stay lodging facilities. In addition, from time to time the Company purchases and sells small ownership interests in securities of privately held and publicly traded firms. The Company is presently focusing on (i) the development and expansion of its existing businesses, and (ii) the potential acquisition or development of other unrelated businesses. Since its inception in 1983 through June 1993 the Company was engaged in various facets of the cable and related programming businesses. During 1992 the Company sold the majority of its programming business and began exploring new business opportunities. In June 1993 the Company made the decision to enter the gaming business, and as a result, proceeded to sell the balance of its cable assets. From June 1993, with the acquisition of 100% of St. Charles Gaming Company, Inc. ("SCGC"), until November 1996, the Company's primary business focus was that of owning, operating and developing casino gaming properties. SCGC owns and operates a riverboat gaming casino located in Calcasieu Parish, Louisiana which had been in the development stage until opening in July 1995. The Company sold a 50% interest in SCGC in June 1995 and the remaining 50% interest in May 1996, in each case resulting in a substantial gain. In November 1996 the Company decided to expand its business interests beyond casino gaming and began pursuing business opportunities in other fields. As a result the Company has either acquired or formed a number of businesses in a variety of industries. RECENT ACQUISITIONS CMN - In June 1997 the Company acquired a 49% interest in CMN for a purchase price of $7 million cash. CMN operates casinos in the cities of Neuquen and San Martin de los Andes in the Province of Neuquen, Argentina under an exclusive concession contract. CONCORDE - In June 1997 the Company, along with certain newly hired management personnel, formed Concorde. Concorde is in the business of originating, purchasing, servicing and selling sub-prime mortgage loans which are secured primarily by first and second liens on residential properties. These loans are sold in privately negotiated transactions to institutional investors and other third parties. PAACO - In February 1998 the Company acquired 53% of the common stock of Paaco for a purchase price of approximately $9.1 million cash. Approximately $4.9 million of Paaco common stock was purchased directly from Paaco, and the remaining $4.2 million was purchased from Paaco management personnel who prior to this transaction were the sole shareholders of Paaco. Effective May 1, 1998 the Company purchased an additional 12% interest in Paaco from the management shareholders. The purchase price of approximately $1.5 million was paid by issuing 375,000 shares of the Company's common stock. Paaco is a vertically integrated used car sales and finance company which operates seven used car dealerships in the Dallas-Ft. Worth metropolitan area. Paaco sells, underwrites and finances used cars and trucks with a focus on the Hispanic market. PRECISION - In February 1998 the Company acquired 80% of the common stock of Precision IBC, Incorporated ("Original Precision") for a purchase price of approximately $2.4 million cash. In March 1998 the Company acquired 80% of the common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65 million cash. Original Precision and M&S were subsequently merged together into a newly formed corporation, Precision IBC, Inc. ("Precision"). Effective May 1, 1998 the Company purchased the remaining 20% of Precision. The purchase price of approximately $1.1 million was paid by issuing 288,027 shares of the Company's common stock. Precision is in the business of renting, selling, testing and servicing principally stainless steel intermediate bulk containers. 2 RESULTS OF OPERATIONS SCGC was a consolidated subsidiary of the Company through June 8, 1995. From June 9, 1995 (the date the first 50% interest in SCGC was sold) through May 3, 1996 (the date the remaining 50% interest in SCGC was sold) the Company accounted for its 50% interest in SCGC using the equity method. The Company's investment in 49% of CMN is accounted for on the equity method. The operating results of Paaco and Precision have been included in the Company's consolidated results of operations from their respective dates of acquisition. As a result of the above transactions, operating results of the Company for the years ended April 30, 1998, 1997 and 1996 are not entirely comparable. FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997 Revenues from sales, rental income, gain on sale of mortgage loans and interest, fees and rentals from CMN pertain to the businesses of Paaco, Precision, Concorde and CMN, which were acquired or formed during fiscal 1998. Interest income for fiscal 1998 increased $1,887,365 compared to fiscal 1997. The increase resulted from (i) the acquisition of Paaco during the fourth quarter of fiscal 1998 ($1,519,249), and (ii) interest earned on Concorde's mortgage loans ($761,252), partially offset by a decrease in Crown's interest income as a result of Crown using its cash to make acquisitions and investments. Cost of sales pertains to Paaco and Precision's operations. Provision for credit losses pertains principally to Paaco's operations. Selling, general and administrative expenses for fiscal 1998 increased $5,771,341 compared to fiscal 1997. The increase resulted principally from (i) the acquisitions of Paaco and Precision during the fourth quarter of fiscal 1998 ($3,641,834), and (ii) the formation and development of Concorde's mortgage based lending business ($2,034,895). Interest expense for fiscal 1998 increased $1,166,601 compared to fiscal 1997. The increase resulted from interest associated with the debt of Paaco, Precision and Concorde. Depreciation and amortization for fiscal 1998 increased $616,626 compared to fiscal 1997. The increase resulted from (i) amortizing certain agreements and other assets obtained in the acquisition of 49% of CMN ($284,735), (ii) amortizing goodwill that was created in the acquisitions of Paaco and Precision ($137,430), and (iii) depreciating the assets of Paaco and Precision ($156,218). FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 General and administrative expenses for fiscal 1997 decreased $245,801 compared to fiscal 1996. The decrease was primarily attributable to a reduction in compensation costs, partially offset by increases in consulting and transportation expenses. Gaming development and abandonment costs for fiscal 1997 decreased $144,012 compared to fiscal 1996 as a result of the Company's decision to begin pursuing business opportunities in fields other than casino gaming. Interest expense for fiscal 1997 decreased $939,955 compared to fiscal 1996. The decrease was principally the result of the Company no longer consolidating the operating results of SCGC from and after June 9, 1995 as SCGC was formerly responsible for substantially all of the Company's consolidated interest expense. Interest income for fiscal 1997 decreased $762,272 compared to fiscal 1996. The decrease was principally the result of the prepayment of a $10 million note by Louisiana Riverboat Gaming Partnership in August 1996 and the sale of a second $10 million note in October 1996 both of which had been earning interest at 11.5% per annum. The proceeds from such notes were placed in money market funds which earned interest at approximately 5.3% per annum. Other income in fiscal 1997 pertains to a fee earned by the Company in assisting another company complete an acquisition. LIQUIDITY AND CAPITAL RESOURCES As of July 31, 1998 the Company's sources of liquidity included approximately (i) $3 million of cash on hand, of which $2 million was held by Crown, (ii) $12 million of marketable equity securities held by Crown, the majority of which is subject to a lock-up agreement with an underwriter which prohibits Crown from selling such securities until December 8, 1998, (iii) $17 million remaining to be drawn on the credit facilities of Paaco, Concorde and Precision, although the majority of such additional draws may only be made in connection with a corresponding increase in the related collateral asset (i.e., finance receivables, mortgage loans held for sale and intermediate bulk containers), and (iv) the issuance of additional debt and/or equity. The loan agreements which govern the credit facilities of Crown's subsidiaries limit dividends and other distributions from such subsidiaries to Crown. The total amount of restricted net assets of such subsidiaries as of April 30, 1998 was approximately $15 million. For fiscal 1998 net cash used by operating activities amounted to $12.5 million. The principal use of cash was to originate and acquire mortgage loans. The excess of mortgage loans originated or acquired over mortgage loans sold and principal repayments was $13.3 million. Net cash used by investing activities of $11.1 million included (i) an $8.6 million use of cash in finance receivable originations over principal payments received, (ii) a $15.4 million use of cash in the acquisitions of Paaco, Precision and CMN, and (iii) a $17.7 million source of cash resulting from the sale of certain assets including $15.3 million from the sale of the Company's 18.6 acre tract of land in Las Vegas. Net cash provided by financing activities of $8.9 million principally relates to $14.0 million of cash provided by the asset based revolving credit facilities of Paaco, Concorde and Precision, offset by (i) $3.1 million of cash used to 3 repurchase the Company's common stock, and (ii) $2.1 million of net debt repayments. The Company is presently focusing on the development and expansion of its existing businesses and the potential acquisition or development of other unrelated businesses. The Company's existing credit facilities can support the majority of the expected growth of the Company's existing businesses over the next twelve months. In August 1998 the Company reached a preliminary agreement, subject to certain conditions, to acquire Bengal Chemical, Inc. ("Bengal") for approximately $8.3 million, of which $6 million is to be paid in cash. Bengal specializes in the distribution of pesticide products in the southeastern United States. The Company plans to finance a significant portion of the cash required in this acquisition. Presently management believes that the Company's capital resources are sufficient to satisfy its identified capital needs for the next twelve months. In March 1996 the Company's Board of Directors approved a program, as amended, to repurchase up to 3,000,000 shares of the Company's common stock from time to time in the open market. As of April 30, 1998 the Company had repurchased 2,383,739 shares pursuant to this program. The timing and amount of future share repurchases, if any, will depend on various factors including market conditions, available alternative investments and the Company's financial position. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997 the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Comprehensive income includes net income and certain other items that are excluded from net income but are included as a separate component of stockholders' equity such as unrealized appreciation of securities and foreign currency translation adjustments. If the Company had adopted SFAS No. 130 during fiscal 1998 comprehensive income would have been $2,278,595, or $.23 per share, as a result of including the $1,930,500 of unrealized appreciation of securities in comprehensive income. DATA PROCESSING AND YEAR 2000 Each of the Crown and its subsidiaries operate their data processing systems independently. The Crown and its subsidiaries are at different stages with respect to their hardware, software and networking systems being year 2000 compliant. Some of the software utilized by the Company is licensed from third parties, and to the extent such software is not presently year 2000 compliant, the Company has been advised by such third party software vendor that their software will be updated in the near future. The Company presently has a limited amount of electronic communication with third parties, and as such, has a lower level of exposure to interruptions in its operations due to these third parties not being year 2000 compliant. The Company has contacted some of the third parties in which it communicates with electronically to assess their compliance with the year 2000. Based upon a preliminary review of its data processing systems, the Company does not anticipate the cost to bring all its systems year 2000 compliant will have a material adverse impact on its financial position or results of operations. SEASONALITY The Company's automobile sales operation is seasonal in nature. In the automobile business, the Company's third fiscal quarter (November through January) is historically the slowest period of time for car and truck sales. Many of the Company's operating expenses such as administrative personnel, rent and insurance are fixed and cannot be reduced during periods of decreased sales. None of the Company's other businesses experience significant seasonal fluctuations. 4 CONSOLIDATED BALANCE SHEETS CROWN GROUP, INC.
April 30, 1998 1997 ------------ ------------ Assets: Cash and cash equivalents $ 6,481,706 $ 21,117,960 Marketable equity securities 4,742,180 Accounts and other receivables 2,311,668 345,780 Mortgage loans held for sale, net 14,350,437 Finance receivables, net 36,049,525 Inventory 3,783,290 Prepaid and other assets 572,089 37,674 Property and equipment, net 9,165,703 1,585,177 Investment in CMN and related assets, net 6,606,114 Goodwill, net 9,613,972 Land held for sale 15,150,000 ------------ ------------ $ 93,676,684 $ 38,236,591 ============ ============ Liabilities and stockholders' equity: Accounts payable $ 2,014,698 $ 41,284 Accrued liabilities 1,952,828 422,609 Income taxes payable 142,572 335,000 Revolving credit facilities 41,164,524 Other notes payable 4,870,074 Deferred sales tax 2,090,303 Deferred income taxes 2,961,727 1,725,000 ------------ ------------ Total liabilities 55,196,726 2,523,893 ------------ ------------ Minority interests 3,447,705 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.01 per share, 1,000,000 shares authorized; none issued or outstanding Common stock, par value $.01 per share, 50,000,000 shares authorized; 9,433,963 issued and outstanding (10,394,585 in 1997) 94,340 103,946 Additional paid-in capital 35,547,369 38,496,803 Accumulated deficit (2,539,956) (2,888,051) Unrealized appreciation of securities 1,930,500 ------------ ------------ Total stockholders' equity 35,032,253 35,712,698 ------------ ------------ $ 93,676,684 $ 38,236,591 ============ ============
See accompanying notes to consolidated financial statements. 5 CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
Years Ended April 30, 1998 1997 1996 ------------ ------------ ------------ Revenues: Sales $ 14,938,617 Rental income 494,374 Gain on sale of mortgage loans 1,087,303 Interest income 3,417,689 $ 1,530,324 $ 2,292,596 Interest, fees and rentals from CMN 680,697 Other 596,709 500,000 ------------ ------------ ------------ 21,215,389 2,030,324 2,292,596 ------------ ------------ ------------ Costs and expenses: Cost of sales 9,275,055 Selling, general and administrative 8,567,614 2,796,273 3,042,074 Provision for credit losses 1,761,469 Interest expense 1,235,358 68,757 1,008,712 Depreciation and amortization 785,069 168,443 130,556 Write-down of land held for sale 1,019,709 Gaming development and abandonment 736,942 880,954 SCGC pre-opening and development 536,110 ------------ ------------ ------------ 21,624,565 4,790,124 5,598,406 ------------ ------------ ------------ Other income (expense): Equity in earnings of CMN 926,598 Gain (loss) on sale of securities 38,258 (5,254,858) Gain on sale of SCGC 14,934,543 21,512,640 Equity in loss of SCGC (2,408,213) ------------ ------------ ------------ 964,856 9,679,685 19,104,427 ------------ ------------ ------------ Income before taxes and minority interest 555,680 6,919,885 15,798,617 Provision (benefit) for income taxes (131,279) (1,940,000) 3,500,000 Minority interests 338,864 ------------ ------------ ------------ Net income $ 348,095 $ 8,859,885 $ 12,298,617 ============ ============ ============ Earnings per share: Basic $ 0.04 $ 0.82 $ 1.05 Diluted $ 0.04 $ 0.80 $ 1.03 Weighted average number of shares outstanding: Basic 9,829,392 10,868,119 11,716,462 Diluted 9,905,819 11,027,077 11,981,757
See accompanying notes to consolidated financial statements. 6 CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
Years Ended April 30, 1998 1997 1996 ------------ ------------ ------------ Operating activities: Net income $ 348,095 $ 8,859,885 $ 12,298,617 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 785,069 168,443 130,556 Amortization of debt issuance costs (discount) (252,765) 389,360 Deferred income taxes (990,592) (2,275,000) 3,500,000 Provision for credit losses 1,761,469 Minority interests 338,864 Write down of assets 1,715,718 51,496 Gain on sale of mortgage loans (1,087,303) Gain on sale of assets (437,171) (Gain) loss on sale of securities (38,258) 5,254,858 Gain on sale of SCGC (14,934,543) (21,512,640) Equity in earnings of CMN (926,598) Equity in loss of SCGC 2,408,213 Changes in assets and liabilities, net of transactions: Accounts and other receivables (625,637) 396,466 (780,747) Mortgage loans originated or acquired (36,757,608) Mortgage loans sold and principal repayments 23,441,905 Inventory 862,753 Prepaids and other assets 107,938 12,092 54,347 Accounts payable, accrued liabilities and deferred sales tax 1,178,323 (145,398) 243,606 Income taxes payable (192,428) (335,000) ------------ ------------ ------------ Net cash used by operating activities (12,483,944) (1,282,479) (3,217,192) ------------ ------------ ------------ Investing activities: Finance receivable originations (13,324,694) Collections of finance receivables 4,723,150 Purchase of assets (4,061,196) (1,076,142) (4,536,401) Sale of land/assets 17,721,787 325,000 441,023 Purchase of securities (5,551,714) (4,023,118) Sale of securities 3,772,792 11,593,260 Sale/collection of notes receivable 1,050,750 19,200,000 Sale of SCGC 1,000,000 Purchase of CMN and related assets (7,000,001) Purchase of Paaco, net of cash acquired (4,378,459) Purchase of Precision, net of cash acquired (4,021,142) ------------ ------------ ------------ Net cash provided (used) by investing activities (11,068,727) 26,019,000 (3,095,378) ------------ ------------ ------------ Financing activities: Issuance of common stock 93,282 23,125 Purchase of common stock (3,052,322) (3,299,845) (298,723) Proceeds from revolving credit facilities, net 13,979,273 Proceeds from (repayments of) other debt, net (2,103,816) (987,569) 936,684 Advances from LRGP 4,627,897 ------------ ------------ ------------ Net cash provided (used) by financing activities 8,916,417 (4,287,414) 5,288,983 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents (14,636,254) 20,449,107 (1,023,587) Cash and cash equivalents at: Beginning of year 21,117,960 668,853 1,692,440 ------------ ------------ ------------ End of year $ 6,481,706 $ 21,117,960 $ 668,853 ============ ============ ============
See accompanying notes to consolidated financial statements. 7 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CROWN GROUP, INC.
For the Three Years in the Period Ended April 30, 1998 Additional Unrealized Total Common Stock Paid-In Accumulated Appreciation Stockholders' Shares Amount Capital Deficit of Securities Equity ------------ ------------ ------------ ------------ ------------- ------------ Balance at April 30, 1995 11,678,459 $ 116,785 $ 41,859,407 $(24,046,553) $ 17,929,639 Issuance of common stock 50,000 500 199,500 200,000 Purchase of common stock (90,900) (909) (297,814) (298,723) Stock options exercised 13,000 130 22,995 23,125 Net income 12,298,617 12,298,617 ------------ ------------ ------------ ------------ ------------ ------------ Balance at April 30, 1996 11,650,559 116,506 41,784,088 (11,747,936) 30,152,658 Purchase of common stock (1,255,974) (12,560) (3,287,285) (3,299,845) Net income 8,859,885 8,859,885 ------------ ------------ ------------ ------------ ------------ ------------ Balance at April 30, 1997 10,394,585 103,946 38,496,803 (2,888,051) 35,712,698 Purchase of common stock (1,102,765) (11,028) (3,041,294) (3,052,322) Stock options exercised 142,143 1,422 91,860 93,282 Unrealized appreciation of securities $ 1,930,500 1,930,500 Net income 348,095 348,095 ------------ ------------ ------------ ------------ ------------ ------------ Balance at April 30, 1998 9,433,963 $ 94,340 $ 35,547,369 $ (2,539,956) $ 1,930,500 $ 35,032,253 ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CROWN GROUP, INC. A - HISTORY AND DESCRIPTION OF BUSINESS Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the "Company"), is a publicly traded buy-out firm which presently owns (i) 65% of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco"), a vertically integrated used car sales and finance company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of intermediate bulk containers, (iii) 80% of Concorde Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of Neuquen, Argentina, and (v) 80% of Home Stay Lodges I, Ltd., a partnership focusing on the development and operation of extended-stay lodging facilities. In addition, from time to time the Company purchases and sells small ownership interests in securities of privately held and publicly traded firms. The Company is presently focusing on (i) the development and expansion of its existing businesses, and (ii) the potential acquisition or development of other unrelated businesses. Since its inception in 1983 through June 1993 the Company was engaged in various facets of the cable and related programming business. During 1992 the Company sold the majority of its programming business and began exploring new business opportunities. In June 1993 the Company made the decision to enter the gaming business, and, as a result, proceeded to sell the balance of its cable assets. From June 1993, with the acquisition of 100% of St. Charles Gaming Company, Inc. ("SCGC"), until November 1996, the Company's primary business focus was that of owning, operating and developing casino gaming properties. SCGC owns and operates a riverboat gaming casino located in Calcasieu Parish, Louisiana which had been in the development stage until opening in July 1995. The Company sold a 50% interest in SCGC in June 1995 and the remaining 50% interest in May 1996, in each case resulting in a substantial gain (see Note D). In November 1996 the Company decided to expand its business interests beyond casino gaming and began pursuing business opportunities in other fields. As a result the Company has either acquired (see Note C) or formed a number of businesses in a variety of industries. Generally, it is the Company's desire to hold majority ownership positions in businesses that have above average potential for growth in earnings. B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principals of Consolidation The consolidated financial statements include the accounts of Crown Group, Inc. and all of its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company's subsidiaries are included in its consolidated results of operations from the point in time such subsidiary became a majority-owned subsidiary of the Company. The Company has accounted for its investment in 49% of CMN on the equity method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Concentration of Risk The Company provides financing in connection with the sale of substantially all of its used vehicles. These sales are made primarily to customers residing in the Dallas-Ft. Worth metropolitan area. Periodically, the Company maintains cash in financial institutions in excess of the amounts insured by the federal government. CMN's revenues principally originate from persons living in and around the City of Neuquen, Argentina. Cash Equivalents The Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. Cash equivalents generally consist of interest bearing money market accounts. 9 Marketable Equity Securities Investments in marketable equity securities are recorded at market value based upon closing stock prices as quoted on national stock exchanges or over-the-counter markets. To the extent the Company considers a particular equity security to be a "trading" security, the difference between the Company's historical cost and such security's market value is included in the accompanying statement of operations. All other equity securities are considered to be "available for sale" securities, and the difference between the Company's historical cost and such security's market value is included as a separate component of stockholders' equity entitled "unrealized appreciation of securities," on a net of tax basis. At April 30, 1998 the Company had trading securities and available for sale securities of $742,180 and $4,000,000, respectively. At April 30, 1998 the Company held 222,222 shares of Inktomi Corporation common stock, which company completed its initial public offering ("IPO") on or about June 9, 1998. The Company's Inktomi shares are subject to an underwriter's lock-up agreement which restricts the Company from selling its Inktomi stock until December 8, 1998. Further, the Company's Inktomi shares are not registered, and thus the Company may not sell such shares in the public markets until the completion of a one year holding period which ends on February 25, 1999. The Company valued its Inktomi shares based upon the IPO price of $18.00 per share. Accordingly, at April 30, 1998 the carrying value of the Company's Inktomi stock was $4,000,000, which reflects a gross unrealized gain of $2,925,000 over the Company's cost of $1,075,000. The Company considers its Inktomi shares to be "available for sale." Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost or market. Market value is determined by current investor yield requirements. A portion of these loans are pledged against the Company's revolving credit facility. The cost of mortgage loans held for sale includes the cost of originating or purchasing the mortgage loans reduced by (i) deferred loan origination fees, and (ii) an allowance for loan losses of $27,000 at April 30, 1998. While management believes the allowance for loan losses included in the financial statements to be adequate, such estimate may be more or less than the amount ultimately charged off. The adequacy of the allowance for loan losses is periodically reviewed by management with any changes reflected in current operations. Finance Receivables and Allowance for Credit Losses The Company originates installment sales contracts from the sale of used vehicles at its dealerships. Finance receivables consist of contractually scheduled payments from installment sales contracts net of unearned finance charges and an allowance for credit losses. Unearned finance charges represent the balance of interest income remaining from the capitalization of the total interest to be earned over the original term of the related installment sales contract. The Company discontinues the accrual of interest income when the receivable becomes greater than sixty days delinquent. The Company maintains an allowance for credit losses at a level it considers sufficient to cover anticipated losses in the collection of its finance receivables. The allowance for credit losses is based upon a periodic analysis of the portfolio, economic conditions and trends, historical credit loss experience, borrowers' ability to repay, and collateral values. While management believes the allowance for credit losses included in the financial statements to be adequate, such estimate may be more or less than the amount ultimately charged off. The allowance for credit losses is periodically reviewed by management with any changes reflected in current operations. Inventory Inventory is valued at the lower of cost or market on a specific identification basis. Inventory includes used vehicles, parts for vehicles and supplies and parts related to the intermediate bulk container ("IBC") business. Repossessed vehicles are recorded at the lower of cost or market, which approximates wholesale value. Vehicle reconditioning costs are capitalized as a component of inventory. The cost of used vehicles and IBC's sold is determined on a specific identification basis. Property and Equipment Property and equipment are stated at cost. Expenditures for additions, renewals and improvements are capitalized. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the following estimated useful lives: Leasehold improvements Life of lease Furniture, fixtures and equipment 3 to 10 years Rental equipment 12 years Buildings 39 years Goodwill Goodwill represents the excess of the Company's cost over the fair value of net identifiable assets acquired in its purchases of Paaco and Precision. Goodwill is amortized on a straight line basis over periods ranging from 15 to 25 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. At April 30, 1998 accumulated amortization of goodwill amounted to $137,430. 10 Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Revenue Recognition Interest income on finance receivables is recognized using the interest method. Revenue from the sale of used vehicles is recognized upon delivery, when the sales contract is signed and the down payment has been received. Stock Option Plan The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Beginning in fiscal 1997, the Company adopted the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which requires entities to provide pro forma earnings and earnings per share disclosures for employee stock option grants as if the fair value based method as defined in SFAS No. 123 had been applied (see Note L). Earnings Per Share Basic earnings per share is computed by dividing net income by the average number of common shares outstanding during the period. Diluted earnings per share takes into consideration the potentially dilutive effect of common stock equivalents, such as outstanding stock options and warrants, that if exercised or converted into common stock would then share in the earnings of the Company. Recent Accounting Pronouncements In June 1997 the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Comprehensive income includes net income and certain other items that are excluded from net income but are included as a separate component of stockholders' equity such as unrealized appreciation of securities and foreign currency translation adjustments. If the Company had adopted SFAS No. 130 during fiscal 1998 comprehensive income would have been $2,278,595 or $.23 per share, as a result of including the $1,930,500 of unrealized appreciation of securities in comprehensive income. Reclassifications Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 1998 presentation. C - ACQUISITIONS CMN Purchase On June 2, 1997 the Company acquired 49% of the capital stock of CMN, as well as interests in certain other assets and contracts related to CMN, from Casino Magic Corp. ("Casino Magic") for a purchase price of $7 million cash. CMN owns and operates casinos in the cities of Neuquen and San Martin de los Andes in the Province of Neuquen, Argentina under an exclusive concession contract that expires in 2007, but can be extended by CMN for an additional five years under certain circumstances. The interests in certain other assets and contracts included (i) a demand promissory note in the amount of $4,226,743 issued by CMN, (ii) a 16.4% interest in a certain management agreement relating to CMN, and (iii) a 49% interest in (a) slot machines and a related lease agreement and (b) a certain royalty agreement relating to CMN. Pursuant to the various CMN agreements, the Company receives its respective share of fees and rental payments due under such agreements. At April 30, 1998 accumulated amortization and depreciation of the Company's investment in various CMN agreements and slot machines, respectively, amounted to $284,735. In October 1997 each of the Company and Casino Magic converted approximately $2.5 million of principal due on certain notes receivable from CMN into shares of CMN capital stock such that each party retained the same ownership percentage of CMN as previously held. At April 30, 1998 CMN had assets, liabilities and stockholders' equity of approximately $12.6 million, $3.6 million, and $9.0 million, respectively. For the twelve months ended April 30, 1998 CMN's summarized unaudited results of operations were as follows (in thousands): Revenues $18,255 Costs and expenses 13,355 Interest, fees and rentals to shareholders 1,910 Provision for income taxes 978 ------- Net income $ 2,012 =======
11 Paaco Purchase Effective February 1, 1998 the Company acquired 53% of the common stock of Paaco for a purchase price of approximately $9.1 million cash. Approximately $4.9 million of Paaco common stock was purchased directly from Paaco, and the remaining $4.2 million was purchased from Paaco management personnel who prior to this transaction were the sole shareholders of Paaco (the "Paaco Management Shareholders"). Effective May 1, 1998 the Company acquired an additional 12% interest in Paaco directly from the Paaco Management Shareholders. With this purchase the Company now owns 65% of Paaco. The purchase price of approximately $1.5 million was paid by issuing 375,000 shares of the Company's common stock (see Note R). In connection with the Paaco transactions, the Company and the Paaco Management Shareholders entered into a Shareholders' Agreement (the "Paaco Shareholders' Agreement") which provides, among other things, that in the event either the Company or any Paaco Management Shareholder desires to sell their interest in Paaco such shareholder must first offer to sell such interest to Paaco and the other shareholders in accordance with the provisions of the Paaco Shareholders' Agreement. Paaco is a vertically integrated used car sales and finance company which operates seven used car dealerships in the Dallas-Ft. Worth metropolitan area. Paaco sells, underwrites and finances used cars and trucks with a focus on the Hispanic market. For the years ended December 31, 1997, 1996 and 1995, Paaco's revenues were approximately $48.3 million, $28.9 million and $20.1 million, respectively. Precision Purchase On February 3, 1998 the Company acquired 80% of the common stock of Precision IBC, Incorporated ("Original Precision") for a purchase price of approximately $2.4 million cash. On March 5, 1998 the Company acquired 80% of the common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65 million cash. Original Precision and M&S were subsequently merged together into a newly formed corporation, Precision IBC, Inc. ("Precision"). Effective May 1, 1998 the Company acquired the remaining 20% interest in Precision it did not previously own by issuing 288,027 shares of the Company's common stock. All references to Precision include the former entities of Original Precision and M&S. Precision is in the business of renting, selling, testing and servicing principally stainless steel IBC's to customers primarily in the petroleum and chemical industries. For the years ended December 31, 1997, 1996 and 1995 Precision's unaudited revenues were approximately $4.1 million, $2.8 million and $.7 million, respectively. Each of the above acquisitions have been accounted for using the purchase method of accounting. Goodwill resulting from the transactions is being amortized on a straight-line basis over periods ranging from 15 to 25 years. The activities of CMN, Paaco and Precision have been included in the Company's consolidated results of operations since their respective dates of acquisition. In each of fiscal 1997 and 1996 the Company elected not to complete the proposed acquisition of a casino gaming property. As a result of these decisions the Company recorded charges of $696,009 and $664,991 in fiscal 1997 and 1996, respectively. Such amounts are included in "gaming development and abandonment" in the accompanying Consolidated Statements of Operations. Pro Forma Financial Information The following unaudited pro forma condensed consolidated results of operations of the Company for the years ended April 30, 1998 and 1997 were prepared as if the CMN, Paaco and Precision acquisitions had occurred on May 1, 1997 and May 1, 1996, respectively (in thousands, except per share amounts). The adjustments to the historical financial statements principally consist of (i) recognizing the Company's pro-rata share of CMN earnings and contractual fees, (ii) recording interest income on the note receivable from CMN, (iii) eliminating interest income on the cash used in the acquisitions, (iv) amortizing the CMN related agreements and equipment, (v) amortizing goodwill resulting from the acquisitions, (vi) adjusting depreciation expense and interest income resulting from purchase accounting entries, and (vii) adjusting income tax expense to reflect the elimination of an S-corporation in the case of Precision and to take into account the above described adjustments.
Years Ended April 30, 1998 1997 ---- ---- Revenue $63,514 $38,127 Net income 120 10,340 Earnings per share $ .01 $ .90
The unaudited pro forma results of operations are not necessarily indicative of future results or the results that would have occurred had the acquisitions taken place on the dates indicated. 12 D - SALE OF SCGC On June 9, 1995 the Company sold a 50% interest in SCGC to Louisiana Riverboat Gaming Partnership ("LRGP"), a joint venture then owned 50% by Casino America, Inc. ("Casino America") and 50% by Louisiana Downs, Inc. The purchase price consisted of (i) a five-year $20 million non-recourse note with interest payable monthly at 11.5% per annum (the "LRGP Note"), (ii) $1 million cash, and (iii) a non-detachable five-year warrant to purchase 416,667 shares of Casino America common stock at $12 per share. In connection with this transaction, in June 1995, the Company recorded a gain before income taxes of approximately $21.5 million. On May 3, 1996 the Company sold its remaining 50% interest in SCGC to Casino America for (i) 1,850,000 shares of Casino America common stock, which the Company valued at $6.50 per share, (ii) the exchange of the $20 million LRGP Note for LRGP Note A ("Note A") and LRGP Note B ("Note B"), each in the principal amount of $10 million and bearing interest at 11.5% per annum, and (iii) an additional non-detachable five-year warrant to purchase up to another 416,667 shares of Casino America common stock at an exercise price of $12 per share. In connection with this transaction, in May 1996, the Company recorded a gain before income taxes of approximately $14.9 million. In August 1996 LRGP paid off Note A in full and in October 1996 the Company sold Note B at a discount of $800,000. In November 1996 the Company sold the 1,850,000 shares of Casino America common stock it had received in the sale of its remaining 50% interest in SCGC for net proceeds of $7,363,003, resulting in a loss before income taxes of $4,661,997. The Company has included 100% of SCGC's operating results in its consolidated results of operations through June 8, 1995. From and after June 9, 1995 (the date of sale of the first 50% interest in SCGC), the Company has accounted for its investment in SCGC on the equity method, and accordingly has included its proportionate share of SCGC's operating results in its consolidated results of operations. The Company's gain before income taxes on the sale of SCGC is calculated as follows (in thousands):
Sale of Sale of First 50% Second 50% (June 1995) (May 1996) ----------- ---------- Consideration received in sale $ 21,000 $ 12,025 The Company's negative basis in stock sold 889 3,297 Transaction and other costs (376) (388) -------- -------- Gain before income taxes on sale of SCGC $ 21,513 $ 14,934 ======== ========
Upon closing of the sale of its remaining 50% interest in SCGC on May 3, 1996, the Company's investment in SCGC was eliminated. Other than a guarantee of certain leases, for which the Company has been indemnified by LRGP, the Company is not liable for any obligations of SCGC. For the year ended April 30, 1996 SCGC had revenues and a net loss of $57.3 million and $6.3 million, respectively. During such year the Company included approximately $3.4 million of net costs and expenses, or approximately $.28 per share, attributable to SCGC in its consolidated results of operations. 13 E - FINANCE RECEIVABLES The Company originates installment sales contracts from the sale of used vehicles at its dealerships. These installment sales contracts typically include interest rates ranging from 18-26% per annum and provide for payments over periods ranging from 24 to 36 months. A summary of finance receivables at April 30, 1998 is as follows: Finance receivables $ 51,417,981 Unearned finance charges (9,930,356) Allowance for credit losses (4,727,679) Valuation discount (710,421) ------------ $ 36,049,525 ============
In accordance with APB Opinion No. 16, as of the acquisition date the Company valued Paaco's finance receivables at market value and determined a valuation discount of $963,186 was appropriate. This discount is being amortized over the life of the finance receivable portfolio that existed on the purchase date using the interest method. A summary of the finance receivables allowance for credit losses for the period from February 1, 1998 (acquisition date) to April 30, 1998 is as follows: Balance at February 1, 1998 $ 4,248,643 Provision for credit losses 1,704,623 Net charge offs (1,225,587) ----------- Balance at April 30, 1998 $ 4,727,679 ===========
In addition to the finance receivables allowance for credit losses the Company also has an allowance for credit losses on mortgage loans held for sale and trade accounts receivable aggregating $55,069 as of April 30, 1998. F - PROPERTY AND EQUIPMENT A summary of property and equipment as of April 30, 1998 and 1997 is as follows:
April 30, 1998 1997 ----------- ----------- Land and buildings $ 2,332,750 Rental equipment 4,749,652 Furniture, fixtures and equipment 1,904,536 $ 1,811,581 Leasehold improvements 920,583 Less accumulated depreciation and amortization (741,818) (226,404) ----------- ----------- $ 9,165,703 $ 1,585,177 =========== ===========
For the years ended April 30, 1998, 1997 and 1996 depreciation expense amounted to $362,904, $168,443 and $130,556, respectively. G - LAND HELD FOR SALE In April 1997 the Company entered into an agreement to sell its 18.6 acre tract of land in Las Vegas, Nevada for $15.25 million cash. As a result of this agreement, the Company wrote down the value of such land to $15.15 million, which represents the contract selling price of the land less the estimated transaction costs. In September 1997 the sale was consummated. 14 H - DEBT A summary of debt at April 30, 1998 is as follows:
Revolving Credit Facilities - ------------------------------------------------------------------------------------------------------------ Facility Interest Primary Balance at Borrower Lender Amount Rate Maturity Collateral April 30, 1998 - -------- ----------- ----------- ------------- -------- -------------- -------------- Paaco Finova $35 million Prime + 3.00% Apr 2000 Finance rec. $ 26,049,875 Concorde Bank One $20 million Libor + 2.25% Dec 1998 Mortgage loans 11,096,224 Precision Wells Fargo $ 5 million Prime June 2000 IBC's and rec. 3,518,425 Paaco Comerica $ 500,000 Prime + 2.00% Demand Vehicle inv. 500,000 ------------ $ 41,164,524 ============
Other Notes Payable - ----------------------------------------------------------------------------------------------------------- Principal Interest Primary Balance at Borrower Lender Payments Rate Maturity Collateral April 30, 1998 - ----------- ---------------- ------------- ------------- ------------ ------------ -------------- Paaco Heller Financial $ 2,197 month Prime + 2.25% Dec 2015 Real estate $ 630,556 Paaco Various None Various 1998 to 1999 None 4,239,518 ----------- $ 4,870,074 ===========
Interest is payable monthly on all of the Company's debt. The loan agreements relating to certain of the above described debt contain various reporting and performance covenants including (i) maintenance of certain financial ratios and tests, (ii) limitations on borrowings from other sources, (iii) restrictions on certain operating activities, and (iv) restrictions on the payment of dividends. The amount of restricted net assets of the Company's subsidiaries as of April 30, 1998 was approximately $15 million. The Company was in compliance with the loan agreements as of April 30, 1998. A summary of future minimum principal payments required under the aforementioned debt as of April 30, 1998 is as follows:
Years Ended April 30, Amount ------------- --------------- 1999 $15,208,144 2000 26,508,515 2001 3,707,093 2002 38,723 2003 18,842 Thereafter 553,281 ----------- $46,034,598 ===========
15 I - INCOME TAXES The Company files a consolidated federal income tax return with its subsidiaries, with the exception of Paaco which files a separate tax return. The provision (benefit) for income taxes for the fiscal years ended April 30, 1998, 1997 and 1996 was as follows:
Years Ended April 30, 1998 1997 1996 ----------- ----------- ----------- Provision (benefit) for income taxes Current $(1,121,871) $ 335,000 Deferred 990,592 (2,275,000) $ 3,500,000 ----------- ----------- ----------- $ (131,279) $(1,940,000) $ 3,500,000 =========== =========== ===========
The provision (benefit) for income taxes is different from the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes for the following reasons:
Years Ended April 30, 1998 1997 1996 ----------- ----------- ----------- Tax provision at 34% statutory rate $ 188,931 $ 2,352,761 $ 5,371,530 Equity in earnings of CMN (315,043) Equity in loss of SCGC 818,792 Basis difference in SCGC stock (4,254,558) (3,459,015) Goodwill amortization 46,726 Other, net (51,893) (38,203) 768,693 ----------- ----------- ----------- $ (131,279) $(1,940,000) $ 3,500,000 =========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of April 30, 1998 and 1997 were as follows:
April 30, 1998 1997 ---------- ---------- Deferred tax liabilities: Unrealized gain on securities $ 994,500 Allowance for loan losses 1,634,165 Tax over book depreciation 884,132 Land held for sale $1,445,553 Other 443,034 395,332 ---------- ---------- Total 3,955,831 1,840,885 ---------- ---------- Deferred tax assets: Finance receivable valuation discount 241,543 Reserves 239,290 Net operating loss 464,016 Other 49,255 115,885 ---------- ---------- Total 994,104 115,885 ---------- ---------- Net deferred tax liability $2,961,727 $1,725,000 ========== ==========
In fiscal 1997 the Company utilized approximately $1.4 million of net operating loss carryforwards in determining its federal income tax provision. At April 30, 1998 Paaco had a net operating loss carryforward of $1,364,753 available to offset future taxable income. The net operating loss carryforward expires in 2012. 16 J - CAPITAL STOCK In March 1996 the Company's Board of Directors approved a program, as amended, to repurchase up to 3,000,000 shares of the Company's common stock from time to time in the open market. At April 30, 1998 the Company had repurchased 2,383,739 shares pursuant to this program. The timing and amount of future share repurchases, if any, will depend on various factors including market conditions, available alternative investments and the Company's financial position. The Company is authorized to issue up to one million shares of $.01 par value preferred stock in one or more series having such respective terms, rights and preferences as are designated by the Board of Directors. No preferred stock has been issued. K - EARNINGS PER SHARE A summary of the reconciliation from basic earnings per share to diluted earnings per share for the years ended April 30, 1998, 1997 and 1996 is as follows:
Years Ended April 30, 1998 1997 1996 ----------- ----------- ----------- Net income $ 348,095 $ 8,859,885 $12,298,617 =========== =========== =========== Average shares outstanding-basic 9,829,392 10,868,119 11,716,462 Dilutive options 76,427 158,958 195,148 Dilutive warrants 70,147 ----------- ----------- ----------- Average shares outstanding-diluted 9,905,819 11,027,077 11,981,757 =========== =========== =========== Earnings per share: Basic $ 0.04 $ 0.82 $ 1.05 Diluted $ 0.04 $ 0.80 $ 1.03 Antidilutive securities not included: Options 516,068 547,000 382,224 =========== =========== =========== Warrants 899,612 1,184,246 675,832 =========== =========== ===========
L - STOCK OPTIONS AND WARRANTS Options Since inception, the shareholders of the Company have approved three stock option plans including the 1986 Incentive Stock Option Plan ("1986 Plan"), the 1991 Non-Qualified Stock Option Plan ("1991 Plan") and the 1997 Stock Option Plan ("1997 Plan"). While previously granted options remain effective, the provisions of the 1986 and 1991 Plans permitting additional option grants have expired. The 1997 Plan sets aside 1,000,000 shares of the Company's common stock to be granted to employees, directors and certain advisors of the Company at a price not less than the fair market value of the stock on the date of grant. At April 30, 1998 and 1997 there were 915,000 and zero shares of common stock available for grant under the Company's stock option plans, respectively. Options granted under the Company's stock option plans expire in the years 1998 through 2007. 17 The following is an aggregate summary of the activity in the Company's stock option plans since April 30, 1995:
Number Exercise Price Proceeds of Shares per Share on Exercise --------- -------------- ----------- Outstanding at April 30, 1995 797,643 $0.41 to $7.38 $ 2,359,219 Exercised (18,000) $1.41 to $3.31 (53,906) Canceled (25,000) $7.31 (182,813) --------- ----------- Outstanding at April 30, 1996 754,643 $0.41 to $7.38 2,122,500 Granted 60,000 $2.81 168,750 --------- ----------- Outstanding at April 30, 1997 814,643 $0.41 to $7.38 2,291,250 Granted 85,000 $2.44 207,188 Exercised (142,143) $0.66 (93,282) --------- ----------- Outstanding at April 30, 1998 757,500 $0.41 to $7.38 $ 2,405,156 ========= ===========
A summary of stock options outstanding as of April 30, 1998 is as follows:
Weighted Average Range of Remaining Weighted Exercise Number Contractual Life Average Prices of Shares (in years) Exercise Price ------------------ ---------- ----------------- ----------------- $0.41 to $1.55 112,500 3.87 $ 1.34 $2.44 to $4.03 610,000 7.25 3.27 $7.31 to $7.38 35,000 5.94 7.33 ---------- $0.41 to $7.38 757,500 6.68 $ 3.18 ==========
All of the above options were exercisable at April 30, 1998 with the exception of options to purchase 75,000 shares at prices ranging from $3.31 to $3.88 which become exercisable in 1999 and expire in 2005. The Company applies APB Opinion No. 25 in accounting for the issuance of stock options and, accordingly, no compensation cost has been recognized in the consolidated financial statements. Had the Company determined compensation cost on the date of grant based upon the fair value of its stock options under SFAS No. 123, the Company's pro forma income and earnings per share would have been as follows using the Black-Scholes pricing model with the assumptions detailed below:
Years Ended April 30, 1998 1997 1996 ---- ---- ---- Net income $ 262,320 $ 8,800,827 $ 12,298,617 Earnings per share: Basic $ 0.03 $ 0.81 $ 1.05 Diluted $ 0.03 $ 0.80 $ 1.03 Assumptions: Dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 6.5% 6.5% 6.5% Expected volatility 52.5% 52.5% 52.5% Expected life 5 years 5 years 5 years
18 Warrants The Company issued common stock purchase warrants to a variety of parties in connection with financing activities, the development of SCGC's riverboat gaming project and certain other matters. The warrants issued were valued based upon a composite of commonly accepted warrant valuation models. The following is an aggregate summary of warrants outstanding as of April 30, 1998:
Number of Underlying Exercise Price Proceeds Shares per Share on Exercise ---------------- -------------- -------------- 899,612 $3.00 to $12.00 $4,053,021
All of the warrants are presently exercisable. The warrants expire in 1999, contain certain anti-dilution provisions and provide the holders with certain registration rights relative to the underlying shares. M - FAIR VALUE OF FINANCIAL INSTRUMENTS The table below summarizes information about the fair value of financial instruments included in the Company's financial statements at April 30, 1998 and 1997:
April 30, 1998 April 30, 1997 ---------------------------- ----------------------------- Carrying Fair Carrying Fair Value Value Value Value ----------- ----------- ------------ ------------ Cash and cash equivalents $ 6,481,706 $ 6,481,706 $ 21,117,960 $ 21,117,960 Marketable equity securities 4,742,180 4,742,180 Mortgage loans held for sale 14,350,437 15,067,959 Finance receivables 36,049,525 36,049,525 Revolving credit facilities 41,164,524 41,164,524 Other notes payable 4,870,074 4,870,074
Because no market exists for certain of the Company's financial instruments, fair value estimates are based on judgments and estimates regarding yield expectations of investors, credit risk, normal cost of administration of mortgage loans and finance receivables and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates. The methodology and assumptions utilized to estimate the fair value of the Company's financial instruments are as follows:
Financial Instrument Valuation Methodology -------------------- --------------------- Cash and cash equivalents The carrying amount is considered to be a reasonable estimate of fair value. Marketable equity securities The fair value was based on stock prices as quoted on stock exchanges or over-the-counter markets (see Note B). Mortgage loans held for sale The fair value was estimated based on recent sales. Finance receivables The fair value approximates carrying value based upon yields of similar instruments and considering the relatively short maturity of the portfolio. Revolving credit facilities The fair value approximates carrying value due to the short-term nature of the borrowings and the variable interest rates charged on the borrowings. Other notes payable The fair value approximates carrying value as the interest rates charged on such debt approximates market.
19 N - LEASES The Company has certain operating leases for equipment and its office facilities. As of April 30, 1998 the aggregate rentals due under such leases were as follows:
Years Ended April 30, Amount --------- ------------ 1999 $ 1,193,125 2000 857,439 2001 621,050 2002 81,832 2003 26,555
Rent expense for all operating leases was approximately $467,000, $136,000, and $115,000, during fiscal 1998, 1997 and 1996, respectively. O - RELATED PARTY TRANSACTIONS In February 1998 the Company paid an outside director $90,834 as a fee in connection with the Company's purchase of Paaco (see Note C). During fiscal 1998, in exchange for a fee, Paaco sold approximately $608,000 of 90-day service contracts to its customers on behalf of Medallia de Oro LLC ("Medallia"), a company owned by the minority shareholders of Paaco. In addition, Paaco sends the majority of its vehicle trade-ins to an auction company that is partially owned by its minority shareholders. From time to time the minority shareholders of Paaco, and certain of their family members, have loaned money to Paaco at interest rates ranging from 10 to 15%. At April 30, 1998 the aggregate amount of such loans totaled $2,317,350. In June 1996 the Company entered into a definitive asset purchase agreement to acquire a riverboat casino in Clinton, Iowa. This casino is principally owned by the adult children of an outside director of the Company. In November 1996 the Company determined to abandon the proposed transaction, and, as a result, forfeited a $500,000 deposit (see Note C). The Company incurred legal fees of approximately $121,000 during fiscal 1996 from a law firm of which a director of the Company was a partner. In July 1995 this director left such law firm and became a full-time executive officer of the Company. P - COMMITMENTS AND CONTINGENCIES Mortgage Loan Sales In connection with the Company's sale of mortgage loans in the ordinary course of business, in certain circumstances such loan sales involve limited recourse to the Company for up to the first twelve months following the sale. Generally, the events which could give rise to these recourse provisions involve the prepayment or foreclosure of a loan, and violations of customary representations and warranties. If the recourse provisions are triggered the Company may be required to refund all or part of the premium received on the sale of such loan, and in some cases the Company may be required to repurchase the loan. Periodically the Company estimates the potential exposure related to such recourse provisions and accrues a percentage of the total potential liability. Severance Agreements The Company has entered into severance agreements with its three executive officers which provide for payments to the executives in the event of their termination after a change in control, as defined, of the Company. The agreements provide, among other things, for a compensation payment equal to 2.99 times the annual compensation paid to the executive, as well as accelerated vesting of any unvested options under the Company's stock option plans, in the event of such executive's termination in connection with a change in control. 20 Paaco Purchase Contingent Consideration In connection with the Company's purchase of an additional 12% interest in Paaco effective May 1, 1998, the Company agreed to pay the sellers as additional consideration an amount equal to 60% of the excess of Paaco's pretax income in excess of $2.5 million for the twelve months ended January 31, 1999. Such additional consideration, if any, is to be paid in Company common stock valued at $4.00 per share. Q - SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow disclosures for the fiscal years ended April 30, 1998, 1997 and 1996 are as follows:
Years Ended April 30, 1998 1997 1996 ---- ---- ---- Note received for sale of first 50% interest in SCGC $ 20,000,000 Stock received for sale of second 50% interest in SCGC $ 12,025,000 Interest paid, net of amount capitalized $ 1,356,075 68,757 922,801 Income taxes paid 925,000 Inventory acquired in repossession 1,710,220 Conversion of a portion of CMN note to equity 2,516,493
In connection with the Company's purchase of Paaco and Precision, assumed liabilities were as follows:
Paaco Precision ------------ ------------ Fair value of assets acquired $ 48,077,386 $ 8,258,112 Cash paid for capital stock (9,174,212) (4,032,389) Minority interests (2,980,180) (128,461) ------------ ------------ Liabilities assumed $ 35,922,994 $ 4,097,262 ============ ============
R - SUBSEQUENT EVENTS Paaco and Precision Purchases Effective May 1, 1998 the Company purchased the remaining 20% interest in Precision it did not previously own by issuing 288,027 shares of the Company's common stock. Also effective May 1, 1998 the Company purchased an additional 12% interest in Paaco, bringing its ownership interest to 65%, by issuing 375,000 shares of the Company's common stock. Bengal Acquisition In August 1998 the Company reached a preliminary agreement, subject to certain conditions, to acquire 100% of the outstanding common stock Bengal Chemical, Inc. ("Bengal") for approximately $8.3 million. Bengal specializes in the distribution of pesticide products in the southeastern United States. For the year ended December 31, 1997 Bengal had unaudited revenues of approximately $12 million. 21 S - BUSINESS SEGMENTS Operating results and other financial data are presented for the four principal business segments of the Company for the year ended April 30, 1998. These segments are categorized by legal entity, which also corresponds to their line of business and how they are operated. The segments include (i) Paaco, which sells and finances used vehicles, (ii) Precision, which rents and sells intermediate bulk containers, (iii) Concorde, which originates and sells sub-prime mortgage loans, and (iv) other, which includes corporate operations, activities of relatively inactive subsidiaries and the Company's equity investment in CMN. For the years ended April 30, 1997 and 1996 the Company operated in a single business segment, and, accordingly, no separate segment disclosures are necessary. The Company's business segment data for the year ended April 30, 1998 is as follows (in thousands):
Year Ended April 30, 1998 ------------------------------------------------------------------------------ Paaco Precision Concorde Other Eliminations Consolidated -------- --------- -------- -------- ------------ ------------ (in thousands) Revenues: Sales and other $ 14,241 $ 1,351 $ 1,100 $ 1,105 $ 17,797 Interest income 1,519 815 1,472 $ (388) 3,418 -------- -------- -------- -------- -------- -------- Total 15,760 1,351 1,915 2,577 (388) 21,215 -------- -------- -------- -------- -------- -------- Costs and expenses: Interest expense 942 81 586 14 (388) 1,235 Depreciation and amortization 64 122 42 557 785 Other 13,715 867 2,094 2,928 19,604 -------- -------- -------- -------- -------- -------- Total 14,721 1,070 2,722 3,499 (388) 21,624 -------- -------- -------- -------- -------- -------- CMN earnings and other 965 965 -------- -------- -------- -------- -------- -------- Income (loss) before taxes and minority interests $ 1,039 $ 281 $ (807) $ 43 $ -- $ 556 ======== ======== ======== ======== ======== ======== Capital expenditures $ 1,648 $ 1,057 $ 568 $ 788 $ -- $ 4,061 ======== ======== ======== ======== ======== ======== Total assets $ 45,427 $ 9,337 $ 16,211 $ 43,358 $(20,656) $ 93,677 ======== ======== ======== ======== ======== ========
22 T - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) A summary of the Company's quarterly results of operations for the years ended April 30, 1998 and 1997 is as follows (in thousands):
Year Ended April 30, 1998 --------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- Revenue (a) $ 494 $ 556 $ 1,165 $19,000 $21,215 Net income (loss) (309) (51) 14 694 348 Diluted earnings (loss) per share (0.03) (0.01) -- 0.07 0.04
Year Ended April 30, 1997 ----------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- Revenue $ 601 $ 854 $ 298 $ 277 $ 2,030 Net income (loss) (b) 13,621 (468) (3,531) (762) 8,860 Diluted earnings (loss) per share (b) 1.16 (0.04) (0.34) (0.07) 0.80
a - During the fourth quarter in the year ended April 30, 1998 revenues increased significantly as a result of the Company's acquisitions of Paaco and Precision. b - During the first quarter in the year ended April 30, 1997 the Company recognized a $14.9 million gain on the sale of its remaining 50% interest in SCGC. During the third quarter of the year ended April 30, 1997 the Company recognized a loss of $4.7 million from the sale of 1,850,000 shares of Casino America common stock it had received in the sale of its remaining 50% interest in SCGC. 23 REPORT OF INDEPENDENT ACCOUNTANTS Stockholders and Board of Directors Crown Group, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Crown Group, Inc. and its subsidiaries at April 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Dallas, Texas August 1, 1998 24 COMMON STOCK INFORMATION, DIVIDENDS AND CROWN GROUP, INC. RELATED STOCKHOLDER MATTERS The Company's common stock is authorized for quotation on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") Small Cap Market under the NASDAQ symbol CNGR. The following table sets forth, by fiscal quarter, the high and low sale prices reported by NASDAQ for the Company's common stock for the periods indicated.
Fiscal 1998 Fiscal 1997 High Low High Low ---- --- ---- --- First quarter $ 2.56 $ 2.00 $ 3.63 $1.69 Second quarter 4.00 2.38 3.06 2.00 Third quarter 3.56 3.00 3.25 2.00 Fourth quarter 4.31 3.00 2.94 2.00
As of July 31, 1998 there were approximately 1,590 stockholders of record. This number excludes individual stockholders holding stock under nominee security position listings. Since its inception the Company has paid no dividends on its common stock. The Company currently intends to follow a policy of retaining earnings to finance future growth. Payment of dividends in the future will be determined by the Company's Board of Directors and will depend upon, among other things, the Company's future earnings, operations, capital requirements and surplus, general financial condition, and contractual restrictions that may exist, and such other factors as the Board of Directors may deem relevant. SELECTED FINANCIAL DATA The financial data set forth below was derived from the audited consolidated financial statements of the Company and should be read in conjunction with the consolidated financial statements and related notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere herein. (In thousands, except per share amounts.)
Years Ended April 30, 1998 1997 1996 1995 1994 -------- -------- -------- -------- ------------ Revenues from: Continuing operations $ 21,215 $ 2,030 $ 2,293 $ 177 $ 197 Discontinued operations 604 Net income (loss) from: Continuing operations $ 348 $ 8,860 $ 12,298 $(20,325) $ (2,052) Discontinued operations (177) -------- -------- -------- -------- -------- $ 348 $ 8,860 $ 12,298 $(20,325) $ (2,229) ======== ======== ======== ======== ======== Earnings (loss) per share (diluted): Continuing operations $ 0.04 $ 0.80 $ 1.03 $ (2.01) $ (0.34) Discontinued operations (0.03) -------- -------- -------- -------- -------- $ 0.04 $ 0.80 $ 1.03 $ (2.01) $ (0.37) ======== ======== ======== ======== ======== Total assets $ 93,677 $ 38,237 $ 39,329 $ 54,507 $ 30,974 Total debt 46,035 987 31,660 Stockholders' equity 35,032 35,713 30,153 17,930 23,837 Shares outstanding 9,434 10,395 11,650 11,678 8,999
25 CORPORATE INFORMATION CROWN GROUP, INC. DIRECTORS Edward R. McMurphy Chairman of the Board, Chief Executive Officer and President Crown Group, Inc. John David Simmons President Simmons & Associates, Inc. David J. Douglas Managing Director Tuesday Afternoon, Inc. T. J. Falgout, III Executive Vice President and General Counsel Crown Group, Inc. Gerald L. Adams President River Development, Inc. Gerard M. Jacobs Chief Executive Officer Metal Management, Inc. Robert J. Kehl President Kehl River Boats, Inc. OFFICERS Edward R. McMurphy Chairman of the Board, Chief Executive Officer and President T. J. Falgout, III Executive Vice President and General Counsel Mark D. Slusser Chief Financial Officer, Vice President Finance and Secretary Edward J. Preuss, Jr. Vice President Project Development Michael B. Cloud Controller and Assistant Secretary Investor Communications Inquiries and requests regarding the Annual Report or other materials should be directed to: Edward J. Preuss, Jr. 4040 N. MacArthur Blvd., Suite 100 Irving, Texas 75038-6424 (972) 717-3423 Form 10-K Additional information is included in the Company's report to the Securities and Exchange Commission on Form 10-K. Copies of the Form 10-K are available at no charge to stockholders upon written request. See Investor Communications. Corporate Offices 4040 N. MacArthur Blvd., Suite 100 Irving, Texas 75038-6424 (972) 717-3423 Internet address: http://www.thecrowngroup.com Annual Meeting The annual meeting of stockholders of Crown Group, Inc. will be held at the Four Seasons Hotel and Resort, 4150 N. MacArthur Blvd., Irving, Texas at 9:30 a.m. on Thursday, October 15, 1998. Transfer Agent and Registrar Securities Transfer Corporation Dallas, Texas (972) 447-9890 Independent Accountants PricewaterhouseCoopers LLP Dallas, Texas General Counsel Smith, Gambrell & Russell Atlanta, Georgia EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF CROWN GROUP, INC. Crown Group of Nevada, Inc. Crown Delaware Investments Corp. Paaco Automotive Group, Inc. Premium Auto Acceptance Corporation Precision IBC, Inc. Concorde Acceptance Corporation Home Stay Lodge I, Ltd. Home Stay Lodge, Inc. EX-23.1 6 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Crown Group, Inc. and subsidiaries on Form S-8 (File Nos. 33-59519, 33-59527 and 333-38475) of our report dated August 1, 1998, on our audits of the consolidated financial statements and financial statement schedule of Crown Group, Inc. and subsidiaries as of April 30, 1998 and 1997, and for the years ended April 30, 1998, 1997 and 1996, which report is incorporated by reference in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Dallas, Texas August 12, 1998 EX-23.2 7 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.2 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE Board of Directors Crown Group, Inc. Our audits of the consolidated financial statements referred to in our report dated August 1, 1998 of Crown Group, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Dallas, Texas August 1, 1998 EX-24.1 8 POWER OF ATTORNEY - EDWARD R. MCMURPHY 1 Exhibit 24.1 STATE OF TEXAS ) ) COUNTY OF DALLAS ) POWER OF ATTORNEY Know all men by these presents, that I, EDWARD R. MCMURPHY, a Director of CROWN GROUP, INC., a Texas corporation, do constitute and appoint MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to file the same with the Securities and Exchange Commission and the National Association of Security Dealers, Inc., together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as said attorney-in-fact deems appropriate, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. In witness whereof, I have hereunto set my hand and seal this 5th day of August, 1998. /s/ Edward R. McMurphy --------------------------- Edward R. McMurphy ACKNOWLEDGEMENT Before me this 5th day of August, 1998, came EDWARD R. MCMURPHY, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ April May --------------------------- NOTARY PUBLIC EX-24.2 9 POWER OF ATTORNEY - TILMAN J. FALGOUT, III 1 EXHIBIT 24.2 STATE OF TEXAS ) ) COUNTY OF DALLAS ) POWER OF ATTORNEY Know all men by these presents, that I, T.J. FALGOUT, III, a Director of CROWN GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to file the same with the Securities and Exchange Commission and the National Association of Security Dealers, Inc., together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as said attorney-in-fact deems appropriate, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. In witness whereof, I have hereunto set my hand and seal this 3rd day of August, 1998. /s/ T. J. Falgout, III ------------------------------ T. J. FALGOUT, III ACKNOWLEDGEMENT Before me this 3rd day of August, 1998, came T. J. FALGOUT, III, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ April May ------------------------------ NOTARY PUBLIC EX-24.3 10 POWER OF ATTORNEY - DAVID J. DOUGLAS 1 EXHIBIT 24.3 STATE OF TEXAS ) ) COUNTY OF DALLAS ) POWER OF ATTORNEY Know all men by these presents, that I, DAVID J. DOUGLAS, a Director of CROWN GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to file the same with the Securities and Exchange Commission and the National Association of Security Dealers, Inc., together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as said attorney-in-fact deems appropriate, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. In witness whereof, I have hereunto set my hand and seal this 11th day of August, 1998. /s/ David J. Douglas ------------------------------ DAVID J. DOUGLAS ACKNOWLEDGEMENT Before me this 11th day of August, 1998, came DAVID J. DOUGLAS, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Rhonda H. Bigsby ------------------------------ NOTARY PUBLIC EX-24.4 11 POWER OF ATTORNEY - J. DAVID SIMMONS 1 EXHIBIT 24.4 STATE OF TEXAS } ) COUNTY OF DALLAS ) POWER OF ATTORNEY Know all men by these presents, that I, J. DAVID SIMMONS, a Director of CROWN GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to file the same with the Securities and Exchange Commission and the National Association of Security Dealers, Inc., together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as said attorney-in-fact deems appropriate, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. In witness whereof, I have hereunto set my hand and seal this 7th day of August, 1998. /s/ J. David Simmons ------------------------------ J. DAVID SIMMONS ACKNOWLEDGEMENT Before me this 7th day of August, 1998, came J. DAVID SIMMONS, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Debra B. Smith ------------------------------ NOTARY PUBLIC EX-24.5 12 POWER OF ATTORNEY - GERALD L. ADAMS 1 EXHIBIT 24.5 STATE OF TEXAS ) ) COUNTY OF DALLAS ) POWER OF ATTORNEY Know all men by these presents, that I, GERALD L. ADAMS, a Director of CROWN GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to file the same with the Securities and Exchange Commission and the National Association of Security Dealers, Inc., together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as said attorney-in-fact deems appropriate, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. In witness whereof, I have hereunto set my hand and seal this 10th day of August, 1998. /s/ Gerald L.Adams ------------------------------ GERALD L. ADAMS ACKNOWLEDGEMENT Before me this 10th day of August, 1998, came GERALD L. ADAMS, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Michelle Ann Dilda ------------------------------ NOTARY PUBLIC EX-24.6 13 POWER OF ATTORNEY - GERARD M. JACOBS 1 EXHIBIT 24.6 STATE OF TEXAS ) ) COUNTY OF DALLAS ) POWER OF ATTORNEY Know all men by these presents, that I, GERARD M. JACOBS, a Director of CROWN GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to file the same with the Securities and Exchange Commission and the National Association of Security Dealers, Inc., together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as said attorney-in-fact deems appropriate, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. In witness whereof, I have hereunto set my hand and seal this 7th day of August, 1998. /s/ Gerard M.Jacobs ------------------------------ GERARD M. JACOBS ACKNOWLEDGEMENT Before me this 7th day of August, 1998, came GERARD M. JACOBS, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ April May ------------------------------ NOTARY PUBLIC EX-24.7 14 POWER OF ATTORNEY - ROBERT J. KEHL 1 EXHIBIT 24.7 STATE OF TEXAS ) ) COUNTY OF DALLAS ) POWER OF ATTORNEY Know all men by these presents, that I, ROBERT J. KEHL, a Director of CROWN GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of substitution, for me in any and all capacities, to sign, pursuant to the requirements of the Securities Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to file the same with the Securities and Exchange Commission and the National Association of Security Dealers, Inc., together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as said attorney-in-fact deems appropriate, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. In witness whereof, I have hereunto set my hand and seal this 11th day of August, 1998. /s/ Robert J. Kehl ------------------------------ ROBERT J. KEHL ACKNOWLEDGEMENT Before me this 11th day of August, 1998, came ROBERT J. KEHL, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Michelle Ann Dilda ------------------------------ NOTARY PUBLIC EX-27.1 15 FINANCIAL DATA SCHEDULE
5 12-MOS APR-30-1998 APR-30-1998 6,481,706 4,742,180 57,439,309 (4,727,679) 3,783,290 0 9,907,521 (741,818) 93,676,684 0 0 0 0 94,340 34,937,913 93,676,684 14,938,617 21,215,389 9,275,055 0 9,352,683 1,761,469 1,235,358 555,680 (131,279) 348,095 0 0 0 348,095 0.04 0.04
-----END PRIVACY-ENHANCED MESSAGE-----