<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For transition period from to
---------- ----------
Commission File No.: 0-22936
Crown NorthCorp, Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 22-3172740
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1251 Dublin Road, Columbus, Ohio 43215
--------------------------------------
(Address of principal executive offices)
(614) 488-1169
---------------------------
(Issuer's telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS.
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
As of June 30, 1997, the issuer had 10,344,749 shares of its common
stock, par value $.01 per share, outstanding.
Transitional Small Business Disclosure Format (check one). Yes No X
--- ---
<PAGE> 2
CROWN NORTHCORP, INC.
FORM 10-QSB
QUARTERLY PERIOD ENDED JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION. PAGES
-----
<S> <C> <C>
Item 1. Financial Statements (Unaudited) 1 - 4
Condensed Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 1
Condensed Consolidated Statements of Operations for the
Second Quarter and six months ended June 30, 1997 and 1996 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996 3 - 4
Notes to Condensed Consolidated Financial Statements-
June 30, 1997 and 1996 5 - 7
Item 2. Management's Discussion and Analysis or Plan of
Operation 7 - 14
PART II - OTHER INFORMATION.
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
Signature 17
Exhibit Index 18
</TABLE>
<PAGE> 3
PART I - FINANCIAL STATEMENTS
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
---- -----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 210,041 $ 587,080
Trade accounts receivable-net of allowance of $50,000 in 1997 and $20,000 in 1996 1,567,294 1,235,010
Income tax refund receivable 1,211,129
Prepaid expenses and other 197,170 153,989
------------ ------------
Total current assets 1,974,505 3,187,208
------------ ------------
PROPERTY AND EQUIPMENT-net 1,935,087 2,007,642
RESTRICTED CASH 5,043,495 3,668,604
GOODWILL - net of accumulated amortization of $148,300 in 1997 and $262,665 in 1996 539,473 353,613
OTHER ASSETS 1,330,244 717,522
------------ ------------
TOTAL $ 10,822,804 $ 9,934,589
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 775,590 $ 1,097,458
Accounts payable and accrued expenses 1,497,058 647,226
------------ ------------
Total current liabilities 2,272,648 1,744,684
------------ ------------
LONG-TERM OBLIGATIONS:
Notes and bonds payable 2,776,589 2,180,694
Loan loss reserve 1,621,484 1,261,485
------------ ------------
Total long term obligations 4,398,073 3,442,179
------------ ------------
SERIES B REDEEMABLE PREFERRED STOCK 2,000,000 2,000,000
SHAREHOLDERS' EQUITY:
Common stock 103,950 88,269
Convertible preferred stock:
Series A (liquidation preference- $450,000 plus unpaid dividends) 5
Series C (liquidation preference- $500,000) 5 5
Additional paid-in capital 4,242,895 3,293,120
Retained earnings (accumulated deficit) (2,178,031) (616,937)
Treasury stock, at cost (16,736) (16,736)
------------ ------------
Total shareholders' equity 2,152,083 2,747,726
------------ ------------
TOTAL $ 10,822,804 $ 9,934,589
============ ============
</TABLE>
See notes to condensed consolidated financial statements
1
<PAGE> 4
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNAUDITED
---------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,596,258) $(1,179,875)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization and depreciation 236,639 1,667,050
Other - net 158,083 71,347
Change in working capital components - net of effects from acquisition of
subsidiaries:
Accounts receivable 870,914 1,749,372
Prepaid expenses and other assets (44,120) (32,431)
Accounts payable and accrued expenses 853,013 (2,221,223)
----------- -----------
Net cash provided by operating activities 478,271 54,240
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (131,221) (228,445)
Corporate acquisitions 274,431
Investment in partnerships (137,500)
Distributions to minority interest (527,611)
Other (30,878) (186,000)
----------- -----------
Net cash used by investing activities (25,168) (942,056)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,996,000 1,650,000
Principal payments on notes and bonds payable (3,603,259) (730,000)
Proceeds from issuance of common stock-net 950,609
Other (173,492) (36,705)
----------- -----------
Net cash provided (used) by financing activities (830,142) 883,295
----------- -----------
NET DECREASE IN CASH DURING THE PERIOD (377,039) (4,521)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 587,080 275,538
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 210,041 $ 271,017
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE> 5
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNAUDITED
---------
1997 1996
---- ----
<S> <C> <C>
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 161,276 $ 99,483
=========== ===========
Cash paid for income taxes $ -- $ 1,565,475
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
CORPORATE ACQUISITIONS:
Accounts receivable - trade $ 16,983
Restricted cash 1,358,735
Other assets 591,137
Loan loss reserve (360,000)
-----------
Net assets acquired, net of acquired cash $ 1,606,855
Amount financed - debt 1,881,286
-----------
Net cash (acquired in) paid for corporate acquisitions $ (274,431)
===========
</TABLE>
3
<PAGE> 6
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
-------------- ----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Management fees $ 1,038,111 $ 1,563,485 $ 2,226,159 $ 3,306,012
Disposition and bonus fees 1,376,204 916,086 1,550,343 1,696,122
Incentive fees and other 450,694 251,379 768,216 1,469,355
----------- ----------- ----------- -----------
Total revenues 2,865,009 2,730,950 4,544,718 6,471,489
----------- ----------- ----------- -----------
OPERATING AND ADMINISTRATIVE EXPENSES:
Personnel expenses 2,005,713 2,355,600 3,735,965 5,131,103
Occupancy, insurance and other expenses 818,063 775,515 1,445,809 1,523,418
Interest expense 119,819 66,451 197,989 93,618
Amortization, depreciation, and loss on disposals 57,450 203,494 176,413 544,644
Minority interest in loss of subsidiary (161,069) (175,837)
Restructuring expense 570,000 570,000
Employment contract settlement 206,983
Asset impairment expense -- 1,170,000 -- 1,170,000
----------- ----------- ----------- -----------
Total operating and administrative expenses 3,571,045 4,409,991 6,333,159 8,286,946
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (706,036) (1,679,041) (1,788,441) (1,815,457)
INCOME TAX BENEFIT (9,620) (604,216) (192,183) (635,582)
----------- ----------- ----------- -----------
NET LOSS $ (696,416) $(1,074,825) $(1,596,258) $(1,179,875)
=========== =========== =========== ===========
LOSS PER SHARE $ (0.07) $ (0.13) $ (0.17) $ (0.14)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 9,914,033 8,199,779 9,486,631 8,199,779
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(UNAUDITED)
1. General and Basis of Presentation
---------------------------------
The accompanying unaudited condensed consolidated financial statements
of Crown NorthCorp, Inc., and subsidiaries (the "Company") reflect all
material adjustments consisting of only normal recurring adjustments
which, in the opinion of management, are necessary for a fair
presentation of results for the interim periods. Certain information
and footnote disclosures required under generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"), although
the Company believes that the disclosures are adequate to make the
information presented not misleading. These financial statements should
be read in conjunction with the year-end financial statements and notes
thereto included in the Company's Form 10-KSB for the year ended
December 31, 1996. Certain reclassifications have been made to the 1996
amounts to conform to the 1997 presentation.
2. Restructuring
-------------
During the second quarter of 1997, management began implementing a
restructuring plan for the Company's operations which, among other
items, will encompass consolidating offices and exiting certain lines
of business. The Company expects to incur total restructuring charges
of approximately $570,000, all of which have been recorded in the
second quarter of 1997. Management expects to complete the
restructuring plan over the second half of 1997. The Company intends to
use available cash to fund these expenditures.
3. Acquisitions
------------
In January 1997, the Company acquired the stock of
Reinlein/Lieser/McGee Holding Corporation and R/L/M Employee Benefit
Corporation (collectively "R/L/M") for approximately $1,129,000. Two
hundred thousand dollars of this amount has been placed in escrow and
is recoverable by the Company if subsequent R/L/M losses exceed a
stipulated amount. The acquisition was accounted for using the purchase
method of accounting, and the excess purchase price over net
identifiable assets acquired, approximately $240,000, was allocated to
goodwill and will be amortized over ten years. The acquisition was
financed primarily through two bank loans which call for scheduled
monthly payments of principal and interest through February 1, 2002.
5
<PAGE> 8
4. Property & Equipment
--------------------
Property and equipment consists of the following at June 30, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 271,845 $ 271,845
Building and improvements 1,137,112 1,132,473
Furniture and equipment 1,364,734 1,696,313
---------- ----------
Total property and equipment 2,773,691 3,100,631
Less accumulated depreciation 838,604 1,092,989
---------- ----------
Property and equipment-net $1,935,087 $2,007,642
========== ==========
</TABLE>
5. Stockholders' Equity
--------------------
In March 1997, the Company entered into a stock purchase agreement (the
"SPA") with Harbert Equity Fund I, L.L.C. ("Harbert Fund") providing
for a significant minority ownership interest in the Company of up to
approximately 30% of the common stock of the Company, par value $.01
per share (the "Common Stock"). Under the terms of the SPA, the Company
sold one million shares of Common Stock to the Harbert Fund for a price
of $1 million dollars. During the twelve months following the initial
investment, the Harbert Fund may invest up to $2 million to assist with
strategic acquisitions, with an additional $2 million earmarked for
investment in subordinate tranches of commercial mortgage backed
securitizations. In any of these additional investments, the Harbert
Fund would receive Common Stock at a rate of one share for each $1.05
investment.
In June 1997, all of the 450 outstanding shares of the Company's Series
A Convertible Preferred Stock (the "Series A Preferred") were converted
into 560,135 newly issued shares of the Common Stock. Additionally,
7,911 newly issued shares of the Common Stock were issued as payment
for the cumulative dividend due on the Series A Preferred.
In April 1997, a grant of warrants to acquire 100,000 shares of the
Common Stock was made by the Company to an officer under the terms of
an employment contract.
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings per Share," which will require the retroactive adoption in
the Company's 1997 fiscal year. The new standard simplifies the
computation of earnings per share and requires the presentation of
basic and diluted earnings per share. Due to the Company's net losses
in the second quarter and six months ended June 30, 1997 and 1996, SFAS
No.128 had no impact on the Company's earnings per share for such
periods.
6
<PAGE> 9
6. Income Tax Benefit
------------------
The income tax benefit of $192,183 for the six months ended June 30,
1997 primarily reflects the change in
book estimates relating to the tax refund receivable for 1996. As the
Company expects to have in 1997 a net operating loss carry forward
available for income tax reporting purposes, no tax benefit provision
was made for the net losses for the second quarter and six months
ended June 30, 1997.
7. Employment Contract Settlement
------------------------------
The employment contract settlement of $206,983 reflects a non-recurring
charge for the lump-sum, final settlement of incentive compensation
payments otherwise due over time to a former employee.
8. Contingencies
-------------
The Company has certain contingent liabilities resulting from
litigation and claims incident to the ordinary course of business.
Management believes that the probable resolution of such contingencies
will not materially affect the financial position or results of
operations of the Company.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
- --------------------------------------------------------------------
GENERAL
The Company has historically derived its primary revenues from financial
services provided under contracts or agreements to provide primary and special
loan servicing, asset management and disposition, asset securitization and land
management for clients or partners. Under these arrangements, the Company
manages and disposes of real estate and loan assets, services individual loans
and loan portfolios, manages tax-exempt bond financings and manages various
corporate and partnership interests throughout the United States. The Company is
repositioning these business lines to both grow its existing businesses and
pursue new, related activities such as loan origination and securitization and
fund management. The Company utilizes strategic acquisitions and alliances as
the primary means of expanding and diversifying its core businesses and
developing and entering new businesses. Management is actively pursuing
additional acquisitions and alliances.
FORWARD LOOKING STATEMENTS
Statements in this report, to the extent they are not based on historical
events, constitute "forward-looking statements" within the meaning of Section
21E of the Exchange Act. Forward-looking statements include, without limitation,
statements regarding the outlook for future operations, forecasts of future
costs and expenditures, evaluation of market conditions, the outcome of legal
proceedings, the adequacy of reserves, the Company's efforts to complete
acquisitions and strategic alliances or other business plans. Investors are
cautioned that forward-looking statements are subject to an inherent risk that
actual results may vary materially from those described herein. Factors that may
result in such variance, in addition to those accompanying the forward-looking
statements, include changes in interest rates, prices, and other economic
conditions; actions by competitors; natural phenomena; actions by government
authorities; uncertainties associated with legal proceedings; pending
acquisitions and pending alliances; technological development; future decisions
by management in response to changing
7
<PAGE> 10
conditions; and misjudgments in the course of preparing forward-looking
statements.
BUSINESS OUTLOOK
The Company has adopted a strategic business plan designed to streamline the
Company's operations, complete the repositioning of its core businesses and grow
both the Company's existing businesses and to engage in new, related activities.
Implementation of this plan represents the culmination of the Company's efforts
to transform the Company from its historic roots as an asset management
contractor into a vertically integrated financial services firm.
The strategic plan calls for Crown to reorganize into five business units:
Mortgage Loan Origination and Securitization, Loan Servicing and Information
Technology, Third Party Asset Management, Fund Management and European
Activities. The plan also calls for each of these units to use the combined
resources of the Company to expand and diversify the Company through internal
growth, acquisitions and strategic alliance. Also, pursuant to the plan, Crown
is exiting non-core businesses. As part of this process, on June 30, 1997 the
Company sold all of the stock of Prime Tempus, Inc., which serviced insurance
company receiverships, to an officer of that former subsidiary. Also on that
date, the Company disbanded its operations which performed residential loan loss
mitigation services for the Federal Home Loan Mortgage Corporation. During the
second half of 1997, the Company will take additional steps to restructure its
operations. Accordingly, the Company's financial results reflect a provision of
$570,000 for the charges associated with restructuring.
Prior to 1996, the Company derived most of its revenues from public-sector
contracts, primarily with the Federal Deposit Insurance Corporation ("FDIC") and
the Resolution Trust Corporation ("RTC"). Business from these agencies declined
substantially in recent years as issues related to the massive failures of banks
and thrifts were resolved. As these contracts have expired or reduced in size,
management has reduced staff, consolidated offices and otherwise restructured
operations to more competitively pursue other opportunities. In June 1997, the
Company and the FDIC, as successor to the RTC, entered into a settlement
agreement resolving all remaining issues pertaining to these contracts.
Including this settlement, the percentage of revenues derived from public-sector
contracts for the six month period in 1997 was 24% of total revenues compared to
65% for the comparable period in 1996. The Company, however, currently does not
have any public-sector contracts and does not believe that such contracts will
be a primary source of revenue in the foreseeable future.
Currently, the Company operates under contracts with various clients including
investment banking firms and partnerships. Generally, these private-sector
contracts provide for lower ongoing management fees than did the expired
public-sector contracts. While these current contracts offer greater
opportunities for additional, incentive-based compensation at the end of an
engagement, the lower ongoing fees have been a material factor in the decline in
the Company's revenue in recent periods. The Company's principal investment
banking client has placed into a securitized transaction a large number of the
assets it had under the Company's management. The Company and the client have
settled compensation issues related to this transaction. Additionally, the
Company anticipates it
8
<PAGE> 11
will enter into subservicing agreements with respect to the assets involved.
The Company continues to actively pursue strategic acquisitions of entities and
portfolios to expand its core businesses, such as loan servicing and asset
management, and to continue to develop new, related businesses, such as loan
origination, fund management and European operations. The Company continues to
develop the loan servicing and mortgage banking relationship with the Federal
National Mortgage Association begun with the acquisitions of Merchants Mortgage
Corporation in December 1996 and R/L/M in January 1997. In July 1997, the
Company entered into a correspondent program agreement with a financial services
firm whereby the Company will originate commercial loans for that firm's
securitization and whole loan sale programs. As contemplated by the SPA, the
Company and the Harbert Fund continue work on the development of a fund meeting
the criteria set forth in the SPA. In Europe, the Company is a partner in a
joint venture performing due diligence, asset management, financial and advisory
for an entity which is acquiring a substantial portfolio of assets from the
Swedish government. The Company continues to pursue acquisitions of overseas
asset portfolios and operating entities.
Until the Company can expand its revenue base and complete the restructuring of
its operations, management anticipates that operating losses will continue,
albeit at a lesser rate than during the first six months of 1997. There can be
no assurance, however, that the Company will successfully implement its
strategic business plan or that implementation will produce any particular
financial results.
RESULTS OF OPERATIONS FOR THE SECOND QUARTER ENDED JUNE 30, 1997 COMPARED TO
THE SECOND QUARTER ENDED JUNE 30, 1996
Total revenues increased $.2 million to $2.9 million for the second quarter of
1997 from $2.7 million for the second quarter of 1996. As previously discussed,
the Company's revenues have been significantly impacted by the expiration of
public-sector contracts and the replacement with lower-fee, private-sector
contracts in 1997. For the second quarter of 1997, the Company had public-sector
contract revenue of approximately $1.0 million, or 35% of total revenue,
compared to approximately $1.6 million, or 61% of total revenue for the
comparable period of 1996.
Management expects public-sector contract revenue to not be a material
percentage of the Company's total revenue in the foreseeable future.
Management fees are recorded as services required under the contract are
performed, and are based on a percentage applied to the aggregate value of the
assets managed, as assigned in the contracts, or on original base monthly
amounts, as defined in the contracts. Management fee revenues decreased $525,374
to $1,038,111 for the second quarter of 1997 from $1,563,485 for the second
quarter of 1996. The decrease in management fee revenues for the second quarter
of 1997 versus the second quarter of 1996 reflects the expiration of
public-sector contracts. Although the gross contract value of private-sector
contracts increased, the contracts are at generally lower fees than those in the
public sector.
9
<PAGE> 12
Disposition and bonus fees, less retainages, are recorded as revenue when the
disposition of an asset has been consummated and the gross proceeds from the
disposition have been received by the asset owner. Disposition fees are
generally based on a percentage of the proceeds of an asset disposition, as
defined by the contracts, or a fixed amount per disposition. Bonus fees are
earned and recorded if cumulative net proceeds exceed contract thresholds within
a specified period of time. Disposition and bonus fee revenues increased
$460,118 to $1,376,204 for the second quarter of 1997 from $916,086 for the
second quarter of 1996. Approximately 67% of the 1997 fees were from
public-sector contracts compared to 92% in 1996.
Certain management contracts provide for incentive fees if the Company achieves
in excess of thresholds established in the contracts. Other revenues consist of
fees for accounting, asset management and consulting services, interest income
and equity in earnings of partnerships and joint ventures. Incentive fee and
other revenues increased $199,315 to $450,694 for the second quarter of 1997
from $251,379 for the second quarter of 1996. As with management and other fees,
the increase was primarily due to interest being paid on and amounts due from
the settlement of certain public-sector contracts. Incentive fees on the more
recent private-sector contracts generally will not be realized until the
completion of these contracts.
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses, and professional development expenses. Personnel expenses
decreased $349,887, or 15%, to $2,005,713 for the second quarter of 1997 from
$2,355,600 for the second quarter of 1996. The decreases were primarily caused
by the disposition of the Company's controlling interest in CSW Associates, Inc.
("CSW") in July 1996 and the operational restructuring resulting from the
expiration of the Company's public-sector contracts. Because of these factors,
staffing was reduced significantly from 1996, with resultant decreases in
salaries, payroll taxes and benefits expenses.
Occupancy, insurance and other expenses increased $42,548 or 6%, to $818,063
for the second quarter of 1997 from $775,515 for the second quarter of 1996.
During the second quarter of 1997 the Company incurred a charge of approximately
$228,000 to account for acquisition expenses relating to abandoned business
development activities. Partially offsetting the increase, the Company's
restructuring efforts resulted in reductions in other occupancy, insurance and
other expense components, including equipment leases and other services.
Interest expense increased $53,368 to $119,819 for the second quarter of 1997
from $66,451 for the second quarter of 1996. The increase primarily results from
debt incurred for the R/L/M acquisition.
Amortization, depreciation and loss on disposal expenses primarily reflect the
amortization of the excess of cost over net assets of companies acquired through
the Company's acquisition program and the depreciation of the Company's fixed
assets. Amortization, depreciation and loss on disposition expenses decreased
$146,044 to $57,450 for the second quarter of 1997 from $203,494 for the second
quarter of 1996. The decrease for the second quarter of 1997 primarily reflects
the impact of charging off approximately $1,226,000 of unamortized goodwill of
consolidated subsidiaries and a loss on the disposal of equipment of
approximately $48,000 in 1996.
10
<PAGE> 13
The minority interest in loss of subsidiary reflects the 20% of CSW's operations
not owned by the Company.
During the second quarter of 1997, management began implementing a restructuring
plan for the Company's operations which, among other items, will encompass
consolidating offices and exiting certain lines of business. The Company expects
to incur total restructuring charges of approximately $570,000, all of which
have been recorded in the second quarter of 1997. Management expects to complete
the restructuring plan over the second half of 1997. The Company intends to use
available cash to fund these expenditures.
The asset impairment expense incurred in 1996 reflects the charge off of
unamortized goodwill associated with the CSW acquisition.
As the Company expects to have in 1997 a net operating loss carry forward
available for income tax reporting purposes, no tax benefit provision has been
made for the net loss for the second quarter.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1996
Total revenues decreased $2.0 million to $4.5 million for the first six months
of 1997 from $6.5 million for the comparable period of 1996. As previously
discussed, the decrease in revenue is caused by the expiration of public-sector
contracts and the replacement with lower-fee, private-sector contracts in 1997.
For the first six months of 1997, the Company had public-sector contract
revenues of approximately $1.1 million, or 24% of total revenues compared to
approximately $4.2 million, or 65% of total revenues for the comparable period
of 1996. Management expects public-sector contract revenue to not be a material
percentage of the Company's total revenue in the foreseeable future.
Management fee revenues decreased $1,079,853, to $2,226,159 for the first six
months of 1997 from $3,306,012 for the first six months of 1996. The decrease in
management fee revenues for the first half of 1997 versus the first half of 1996
reflects the expiration of public-sector contracts at the end of 1995. Although
the gross contract value of private-sector contracts increased, the contracts
are at generally lower fees than those in the public sector.
Disposition and bonus fee revenues decreased $145,779 to $1,550,343 for the
first six months of 1997 from $1,696,122 for the first six months of 1996.
Approximately 60% of the fees were from public-sector contracts in 1997 compared
to approximately 91% in 1996. Although partially offset by increases in private
contract fees, the expiration of RTC contracts and the reduction in disposition
activity of FDIC contracts primarily resulted in the decrease in 1997.
Incentive fee and other revenues decreased $701,139 to $768,216 for the first
six months of 1997 from $1,469,355 for the first six months of 1996. The
decrease was primarily due to certain
11
<PAGE> 14
public-sector contract thresholds being settled in 1996. The incentive levels on
the more recent private-sector contracts generally will not be realized until
the completion of these contracts.
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses, and professional development expenses. Personnel expenses
decreased $1,395,138, or 27%, to $3,735,965 for the first six months of 1997
from $5,131,103 for the first six months of 1996. The decreases were primarily
caused by the disposition of CSW in July 1996 and by operational restructuring
as a result of the expiration of the Company's public-sector contracts. Because
of these factors, staffing was reduced significantly from 1996, with resultant
decreases in salaries, payroll taxes and benefits expenses.
Occupancy, insurance and other expenses decreased $77,609 or 5%, to $1,445,809
for the first six months of 1997 from $1,523,418 for the first six months of
1996. Corresponding with the corporate restructuring addressed above, other
occupancy, insurance and other expense components, including equipment leases
and other services, were restructured to reduce overall expenses.
Interest expense increased $104,371 to $197,989 for the first six months of 1997
from $93,618 for the first six months of 1996. The increase primarily results
from debt incurred for the R/L/M acquisition.
Amortization, depreciation and loss on disposition expense decreased $368,231 to
$176,413 for the first six months of 1997 from $544,644 for the first six months
of 1996. The decrease in amortization and depreciation expenses for the first
six months of 1997 reflects the impact of charging off approximately $1,226,000
of unamortized goodwill of consolidated subsidiaries and a loss on disposal of
equipment of approximately $48,000 in 1996.
The minority interest in loss of subsidiary reflects the 20% of CSW's operations
not owned by the Company.
During the second quarter of 1997, management began implementing a restructuring
plan for the Company's operations which, among other items, will encompass
consolidating offices and exiting certain lines of business. The Company expects
to incur total restructuring charges of approximately $570,000, all of which
have been recorded in the second quarter of 1997. Management expects to complete
the restructuring plan over the second half of 1997. The Company intends to use
available cash to fund these expenditures.
The employment contract settlement of $206,983 in the first six months of 1997
reflects a non-recurring charge representing the lump-sum, final settlement of
incentive compensation payments otherwise due over time to a former employee.
The asset impairment expense represents the write-off of unamortized goodwill
relating to the CSW acquisition.
12
<PAGE> 15
The income tax benefit of $192,183 for the six months ended June 30, 1997
primarily reflects the change in book estimates relating to the tax refund
receivable for 1996. As the Company expects to have in 1997 a net operating
loss carry forward available for income tax reporting purposes, no tax benefit
provision has been made for the net loss as of June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
- -------
Cash and cash equivalents decreased $337,039 to $210,041 at June 30, 1997 from
$587,080 at December 31, 1996. The Company had aggregate bank credit facilities
of $875,000, of which $456,000 was outstanding at June 30, 1997.
In April 1997, the Company repaid bank borrowings of $950,000 outstanding at
March 31, 1997 with a portion of the funds from the collection of the federal
tax refund due the Company for the year ending December 31, 1996. Also, in April
1997, the Company obtained a new bank letter of credit to secure its obligations
under a Six Month Adjustable Rate Industrial Revenue Bond for a building which
serves as the Company's headquarters. The Company is in compliance with all
covenants of the letter of credit.
In March 1997, the Company entered into the SPA with the Harbert Fund providing
for a significant minority ownership interest in the Company of up to
approximately 30% of the Common Stock. Under the terms of this agreement, the
Company sold one million shares of Common Stock to the Harbert Fund for a price
of $1 million dollars. During the twelve months following the initial
investment, the Harbert Fund may invest up to $2 million to assist with
strategic acquisitions, with an additional $2 million earmarked for investment
in subordinate tranches of commercial mortgage backed securitizations. In any of
these additions investments, the Harbert Fund would receive Common Stock at a
purchase price of $1.05 per share.
The Company expects to fund current operations with cash provided by operations
and from proceeds provided from private investment capital infusions. Management
anticipates that its cash flows will improve during the third quarter with the
receipt of the contract settlement with the FDIC. The proceeds of the settlement
will be primarily used to retire short-term debt with the balance used for
working capital. Through the implementation of the restructuring plan discussed
above, the Company will continue its efforts to reduce operating expenses.
Moreover, the Company is developing both new sources of revenue in an effort to
eliminate operating deficits as well as alternative funding sources to fund
those deficits. If the Company cannot expand its revenue base or secure new
means of financing its operations, however, its working capital position will
deteriorate.
The Company is actively seeking credit facilities to expand existing facilities
and to fund acquisitions. The Company is also actively pursuing private equity
capital infusions. The Company expects to fund strategic acquisitions of
entities and asset portfolios by cash provided from debt or equity financing.
13
<PAGE> 16
HISTORICAL CASH FLOWS
Cash flows from operating activities increased to $478,271 for the first six
months of 1997 from $54,240 for the same time period in 1996. Although the
Company incurred an increased net loss in the first half of 1997, the impact of
the greater net loss was partially reduced by the net change in the components
of its working capital. Working capital component changes for the first six
months of 1997 primarily consist of the collection of a tax refund receivable
and increases in current liabilities. As previously discussed, during the first
six months of 1996, the Company incurred a non-cash amortization charge to
charge off unamortized goodwill for CSW. This charge was offset by a net
decrease in cash provided from the net change in working capital components
primarily relating to the payment of 1995 tax liabilities.
Cash flows used in investing activities decreased to $25,168 for the first six
months of 1997, from $942,056 for the first six months of 1996. The change was
primarily caused by the elimination of distributions to minority interest
holders due to the sale of CSW, cash acquired from corporate acquisitions, and
reduced property and equipment purchases.
Cash flows from financing activities changed to a $830,142 use of cash for the
first six months of 1997 from a $883,295 source of cash for the respective time
period in 1996. The decrease is generally attributable to the change in net
borrowings, with the Company reducing debt during the first six months of 1997
while incurring debt during the same period in 1996. Partially offsetting the
decrease were proceeds from the issuance of Common Stock to the Harbert Fund.
14
<PAGE> 17
PART II - OTHER INFORMATION
- ---------------------------
Item 1. - Legal Proceedings
- ---------------------------
The Company is a party to routine litigation incidental to its business.
Management does not believe that the resolution of this litigation will
materially affect the financial position or liquidity of the Company.
Item 2. - Changes in Securities
- -------------------------------
In June 1997, all 450 shares of the Company's Series A Preferred automatically
converted into 560,135 newly issued shares of the Common Stock when the closing
share price of the Common Stock reached $1.75 per share. Also in June 1997,
pursuant to the terms of the Series A Preferred, the Company distributed its
holders 7,911 newly issued shares of the Company's common stock in payment of
the accrued dividend of $14,840. As a result of the conversion and the dividend
payment, Gordon V. Smith, a Director of the Company, received 312,327 shares of
the Common Stock and Jay N. Rollins, an Executive Vice President of the Company,
received 86,810 shares of the Common Stock.
On April 22, 1997, pursuant to the employment agreement between the Company and
Harold E. Cooke, President and Chief Operating Officer, the Company issued to
Mr. Cooke warrants to purchase 100,000 shares of the Company's common stock at
$1.05 per share. Pursuant to the agreement, the Company is to grant Mr. Cooke
warrants to purchase additional Common Stock upon the four succeeding
anniversaries of the agreement and upon the achievement of certain business plan
goals.
Item 3. - Defaults Upon Senior Securities
- -----------------------------------------
None
15
<PAGE> 18
Item 4. - Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
The Company held its Annual Meeting of Stockholders on May 14, 1997. At the
meeting, stockholders voted to reelect five directors for the ensuing year. The
results of the election were:
Votes for all nominees: 8,786,238
Votes to withhold authority from the following nominees:
Ronald E. Roark 10,601
John Everets 10,930
Gordon V. Smith 13,124
Raymond J. Harbert 10,601
Michael D. Luce 13,351
Item 5. - Other Information
- ---------------------------
None
Item 6. - Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
Exhibit
Numbers
- -------
10.66 Employment Agreement between Crown NorthCorp, Inc. and Harold E. Cooke
27 Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CROWN NORTHCORP, INC.
Dated: August 14, 1997 By: /s/ Richard A. Brock
------------------------------------
Richard A. Brock
Senior Vice President, Treasurer and
Chief Financial Officer
By: /s/ Ray L. Druseikis
------------------------------------
Ray L. Druseikis
Controller and Chief Accounting
Officer
17
<PAGE> 20
INDEX TO EXHIBITS
10.66 Employment Agreement between Crown NorthCorp, Inc. and Harold E.
Cooke (1)
27 Financial Data Schedule (1)
- ----------
(1) Filed herewith.
18
<PAGE> 1
EXHIBIT 10.66
<PAGE> 2
April 21, 1997
Mr. Harold Cooke
22 Bonnie Briar Lane
Larchmont, New York 10538
Dear Hal:
This letter is intended to set forth the terms of your employment with Crown
NorthCorp, Inc. ("Crown" or the "Company").
1. POSITIONS/DUTIES. During the term of this Agreement, you shall serve
as President and Chief Operating Officer of Crown. In that capacity, you will be
responsible for the day-to-day operations of Crown, with all functional areas
reporting to you. You will also serve on various Crown management committees and
serve as an officer and director of certain subsidiaries of Crown. After the
first anniversary of this Agreement, you will be considered for nomination to
Crown's board of directors.
2. TERM. Unless sooner terminated as set forth herein, this Agreement
shall be for a five-year term commencing April 22,(1) 1997 (the "Inception
Date") and ending April 21,(2) 2002 (the "Expiration Date").
3. COMPENSATION. The Company will compensate you for services
rendered as follows:
(a) BASE COMPENSATION. You shall receive a base salary at the annual
rate of Two Hundred Fifty Thousand Dollars ($250,000) payable in accordance with
the Company's standard payroll schedule, PROVIDED HOWEVER that, only during the
first year of this Agreement, the Base Salary shall be payable $33,333 per month
for the three-month period commencing with the Inception Date and $16,666 per
month for the succeeding nine months. The Base Salary shall be reviewed
annually, and may be adjusted to reflect merit or cost-of-living increases as
deemed appropriate.
(b) BONUS COMPENSATION. You will have the opportunity to earn the
following bonus compensation:
- --------
1 Change initialed by both parties on original document.
2 Change initialed by both parties on original document.
<PAGE> 3
Mr. Harold Cooke
April 21, 1997
Page 2
(1) INCENTIVE BONUS. Throughout the term of this Agreement, you will be
entitled to receive annual incentive bonuses of up to 100% of your Base Salary.
The actual percentage bonus you will be entitled to receive will be based upon
the degree to which the Annual Plan Goals, as defined below, are achieved.
Annually, senior management of the Company, in consultation with the Board of
Directors, will set business plan goals and budget financial performance for the
Company (collectively, the "Annual Plan Goals"). Incentive bonuses shall be
based upon Crown's success in achieving Annual Plan Goals and shall be
determined as of Crown's December 31 fiscal year end. Unless otherwise provided
herein, any Incentive Bonus shall be prorated based upon the number of months
you were employed by the Company during the year and shall be payable regardless
of whether you are employed by the Company at the time of payment.
(2) EXTRAORDINARY BONUS. Throughout the term of this Agreement, you
will be eligible to receive one or more Extraordinary Bonuses for exceptional
contributions to the Company's profitability over and above those standards set
forth in the Annual Plan Goals. Any such Extraordinary Bonus shall be payable
upon the approval and recommendation of the Chief Executive Officer and the
Board of Directors.
(3) PAYMENT OF BONUS. Any bonus payable shall be paid on upon
completion of Crown's audited financial statements for the preceding year.
4. BENEFITS. Throughout the term of this Agreement, you shall be
entitled to participate in and receive benefits under any program, plan, policy
or arrangement made available by the Company presently or in the future to
senior management personnel at the same level and to the same degree as such
benefits are made available to them. For the purpose of this paragraph 4, the
term "benefits" shall mean all benefits provided now or in the future by the
Company, including but not limited to medical and hospitalization insurance,
life insurance, disability insurance, deferred compensation and/or retirement
plans, profit-sharing plans, any stock-based compensation plan and vacation and
sick leave The Company's present benefits are detailed in its Employee Handbook,
a copy of which has been furnished to you.
Notwithstanding the foregoing, the Company shall furnish medical and
hospitalization insurance for you and your dependents, at no charge to you. The
Company will reimburse you for your reasonable travel expenses between your
present residence in Larchmont, New York and the Company's headquarters in
Columbus, Ohio for a period beginning with the
<PAGE> 4
Mr. Harold Cooke
April 21, 1997
Page 3
inception of this Agreement and ending with your relocation to Columbus (but in
no event later than August 31, 1998). The Company will also pay your reasonable
moving expenses for relocation to Columbus.
5. WARRANTS. Throughout the term of this Agreement, you will receive
warrants to purchase up to 1,000,000 shares of the common stock of Crown, $.01
par value (the "Common Stock") at $1.05 per share (the "Exercise Price"). Up to
500,000 of these warrants will be based upon years of service; up to 500,000 of
these warrants will be based upon achievement of the Annual Plan Goals. Unless
otherwise provided herein, you will be entitled to exercise any warrants granted
to you until their expiration dates even if your employment with the Company
terminates.
(a) YEARS OF SERVICE. Upon the execution of this Agreement, you will
receive warrants to purchase 100,000 shares of the Common Stock at the Exercise
Price. Thereafter, throughout the term of this Agreement, on each anniversary of
this Agreement, you will receive warrants to purchase an additional 100,000
shares of the Common Stock at the Exercise Price. All unexercised warrants
granted for years of service will expire on the fifth anniversary of this
Agreement.
(b) BUSINESS PLAN ACHIEVEMENT. You will be eligible to receive warrants
to purchase 100,000 shares of the Common Stock at the Exercise Price based upon
Crown achieving Annual Plan Goals. If, as of December 31 of each year, the
Company has achieved its Annual Plan Goals, then you will receive warrants to
purchase 100,000 shares of the Common Stock at the Exercise Price prorated based
upon the number of months you were employed during the year and exercisable
regardless of whether you are employed by the Company at the time of exercise.
If, as of December 31 of a particular year, the Company has not achieved its
Annual Plan Goals, then you will not receive warrants at that time. Rather, the
amount by which the Annual Plan Goals were not met will be quantified (the "Plan
Shortfall") and consideration of the issuance of warrants will be deferred until
the subsequent year or years of this Agreement. If, in any subsequent year of
this Agreement, the Annual Plan Goals for such year are achieved and, in
addition thereto, the Plan Shortfall is recouped, then you will receive warrants
to purchase 100,000 shares of the Common Stock at the Exercise Price
(representing recoupment of the Plan Shortfall) in addition to any warrants to
which you would be entitled for that subsequent year (representing achievement
of Annual Plan Goals) . All warrants granted for business plan achievement will
expire on the sixth anniversary of this Agreement.
<PAGE> 5
Mr. Harold Cooke
April 21, 1997
Page 4
The following table illustrates the implementation of this
subparagraph (b).
<TABLE>
<CAPTION>
Period Objectives Achieved Warrants Issued
------ ------------------- ---------------
<S> <C> <C> <C>
Year 1 Yes 100,000
Year 2 No 0
Year 3 Plan Shortfall recouped
for Year 2; Year 3, yes 200,000
</TABLE>
6. TERMINATION. Prior to the Expiration Date, this Agreement may be
terminated as follows:
(a) FOR CAUSE. The Company may terminate you for cause at any time
during the course of this Agreement. "For cause," for the purposes of this
Agreement, shall mean (i) gross incompetence, gross negligence or breach of
fiduciary duty (ii) committing fraud or embezzlement against the Company or
(iii) your conviction or plea of guilty to the commission of a felony. If you
are terminated for cause, you shall have no right to (i) any Incentive Bonus,
(ii) any Extraordinary Bonus or (iii) any future grants of warrants.
(b) OTHER THAN FOR CAUSE. If your employment is terminated other than
for cause, you shall receive (i) the Base Salary due you for the shorter of (A)
2.9 years from the date of termination or (B) the remainder of the term of the
Agreement, (ii) any Incentive Bonus or Extraordinary Bonus which would have been
earned by you as of December 31 of the year of termination, adjusted to reflect
the degree to which Annual Plan Goals had been achieved at the time of
termination and (iii) any remaining warrants not yet awarded to you pursuant to
Paragraph 5(a) and (b) above:(3) any such warrants must be exercised within
one year from the date of termination. The parties understand and agree
that a termination other than for cause shall include but not be limited
circumstances in which there is a change in control of Crown. For the purposes
of this Agreement, the term "change of control" shall mean a change of the
controlling ownership of Crown by merger, acquisition or otherwise which
results in you no longer serving either as President and Chief Operating
Officer or in a position of equal or greater title, authority, responsibility,
compensation and benefits. If, upon the occurrence of a change of control, you
are terminated or you elect to resign by reason of the circumstances described
in the preceding sentence, you will receive the compensation set forth in
this Paragraph 6(b).
- --------
3 Strikeout initialed by both parties on original document.
<PAGE> 6
Mr. Harold Cooke
April 21, 1997
Page 5
(c) RESIGNATION. If you resign your employment during the term of this
Agreement, you will receive (i) the Base Salary due you as of the date of your
resignation and (ii) any Incentive Bonus which would have been earned by you as
of December 31 of the year of termination, adjusted to reflect the degree to
which Annual Plan Goals had been achieved at the time of resignation. You shall
be entitled to no further warrants other than those which had been granted to
you at the time of your resignation. You shall, however, be entitled to exercise
any warrants granted to as of the date of your resignation pursuant to
Paragraphs 5(a) and 5(b), as applicable.
(d) DEATH. In the event of your death during the term of this
Agreement, the Company shall pay to your estate any unpaid Base Salary,
Incentive Bonus or Extraordinary Bonus earned by your prior to the date of
death, prorated to reflect the number of months you were employed by the Company
during the year through your date of death. Your estate will be entitled to
exercise any warrants granted to you in accordance with their terms.
7. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Ohio, without giving effect to conflicts of law.
(b) ENTIRE AGREEMENT. This Agreement constitutes our entire
understanding with respect to your employment by Crown. Other communications,
whether written or oral, not incorporated into this Agreement, are of no force
or effect.
If the foregoing is an accurate reflection of our understanding, please so
indicate by signing and dating the acknowledgment below and returning it to me.
I look forward to you assuming your responsibilities and trust that your
association with the
<PAGE> 7
Mr. Harold Cooke
April 21, 1997
Page 6
Company will be a long and profitable one.
Very truly yours,
/s/
- -------------------------
Ronald E. Roark
Chairman and Chief
Executive Officer
ACKNOWLEDGED AND ACCEPTED:
/s/
- --------------------------
Harold Cooke
April 21 , 1997
------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 210,041
<SECURITIES> 0
<RECEIVABLES> 1,617,294
<ALLOWANCES> 50,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,974,505
<PP&E> 2,773,691
<DEPRECIATION> 838,604
<TOTAL-ASSETS> 10,822,804
<CURRENT-LIABILITIES> 2,272,648
<BONDS> 2,776,589
<COMMON> 103,950
2,000,000
5,000
<OTHER-SE> 2,048,128
<TOTAL-LIABILITY-AND-EQUITY> 2,152,083
<SALES> 4,544,718
<TOTAL-REVENUES> 4,544,718
<CGS> 5,358,187
<TOTAL-COSTS> 5,358,187
<OTHER-EXPENSES> 776,983
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 197,989
<INCOME-PRETAX> (1,788,441)
<INCOME-TAX> (192,183)
<INCOME-CONTINUING> (1,596,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,596,258)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
