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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from __________ to __________
Commission File No.: 0-22936
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Crown NorthCorp, Inc.
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(Name of small business issuer 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) (Zip Code)
(614) 488-1169
---------------------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
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NONE
Securities registered under Section 12(g) of the Exchange Act:
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Common Stock, par value $.01 per share
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
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. X
-----
Issuer's revenues for the fiscal year ended December 31, 1996 were
$10,638,758.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 7, 1997 was $2,091,714.
As of December 31, 1996 the issuer had 8,826,924 shares of its common
stock outstanding.
Transitional Small Business Disclosure Format. Yes No X
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CROWN NORTHCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1996
INDEX
PART I. PAGES
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Item 1. Description of Business........................ 1
Item 2. Description of Property........................ 4
Item 3. Legal Proceedings.............................. 4
Item 4. Submission of Matters to a Vote of Security-
Holders........................................ 4
PART II.
Item 5. Market for Common Equity and Related Stockholder
Matters........................................ 4
Item 6. Management's Discussion and Analysis or Plan of
Operation...................................... 7
Item 7. Financial Statements........................... F-1 thru F-17
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......... 15
PART III.
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
Of the Exchange Act............................ 15
Item 10. Executive Compensation......................... 18
Item 11. Security Ownership of Certain Beneficial Owners
and Management................................. 20
Item 12. Certain Relationships and Related Transactions. 22
Item 13. Exhibits, List and Reports on Form 8-K......... 22
<PAGE> 3
PART I
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ITEM 1. - DESCRIPTION OF BUSINESS
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INTRODUCTION
Crown NorthCorp, Inc. (the "Company") provides financial services to clients and
partners nationwide. These services include primary and special servicing, asset
management and disposition, loss mitigation, portfolio acquisition, underwriting
and due diligence reviews. The assets under management include commercial and
residential real estate, performing and non-performing loans, interests in
tax-exempt bond issuances, partnership investments and various other assets. The
Company has recently expanded its services to include the origination of
commercial mortgage loans.
The Company was formed in August 1994 through the combination of Crown Revenue
Services, Inc. ("Crown") and NorthCorp Realty Advisors, Inc. ("NorthCorp").
Crown and NorthCorp were both formed in 1990. The Company is incorporated under
the laws of the state of Delaware. In May 1995, stockholders of the Company
approved a proposal to officially change the name of the Company to Crown
NorthCorp, Inc.
BUSINESS OVERVIEW
Corporate headquarters for the Company is in Columbus, Ohio. The Company also
has offices in Atlanta, Georgia; Austin, Texas; Dallas, Texas; Hoboken, New
Jersey; McLean, Virginia; and Copenhagen, Denmark. At December 31, 1996, the
Company had 94 full-time employees.
Since its inception, the Company has derived its revenues primarily from
contracts to provide financial services. The services the Company has provided
under these contracts have included the management and disposition of real
estate and loan assets, the servicing of individual loans and loan portfolios,
the management of tax-exempt bond financings, receivership administration, due
diligence reviews, underwriting and the management of various corporate and
partnership interests. The fees the Company receives are primarily comprised of
ongoing management fees, disposition fees associated with transactions and
incentive fees based on the overall performance of a contract or pool. Assets
and interests managed by the Company are located throughout the United States.
The Company holds "above average" ratings from Standard and Poor's Corporation
("S&P") and Fitch Investors Service, L.P. ("Fitch"), the second highest rating
available from these two nationally recognized rating agencies. Pursuant to
their standard procedures, these agencies reviewed their ratings of the Company
during the fourth
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quarter of 1996. Fitch recently affirmed its rating. S&P's renewed
rating is pending.
Many holders of securitized portfolios of assets are required to award asset
management and loan servicing contracts only to rated servicers.
Prior to 1996, the revenues of the Company and its predecessors came primarily
from contracts with the Federal Deposit Insurance Corporation ("FDIC") and the
Resolution Trust Corporation ("RTC"). Work available from the FDIC and RTC has
declined significantly over the past three years. Consequently, since its
formation, the Company has devoted significant resources to the development of
private-sector business. In 1996, as the Company's remaining FDIC and RTC
contracts expired, assets with gross contract value of $1,235 million were
added to the Company's private-sector contracts.
At December 31, 1996, the Company was providing services under private-sector
contracts with various clients. Assets under management in these contracts had a
gross contract value of $1,111 million at the end of 1996. Contracts with one
customer, an investment banking firm, accounted for 24% of 1996 revenues. These
contracts typically have no set expiation dates and provide for additions of
assets by addenda, each with its own compensation structure. The Company has
additional private-sector contracts with another investment banking firm and
contracts to service several tax-exempt bond issuances on behalf of
partnerships.The Company is also under contract with the Federal Home Loan
Mortgage Corporation ("Freddie Mac") to provide loss mitigation services on
certain residential loans.
The Company continues to devote significant resources to expanding and
supporting its core asset management and servicing business. The Company
actively seeks to acquire the servicing rights to additional assets. Crown
NorthCorp Euro A/S, a Danish subsidiary of the Company formed in 1996, is
pursuing opportunities to acquire overseas asset portfolios and operating
entities. During the year, the Company also installed enhanced loan servicing
systems to provide more comprehensive full and primary servicing. In many cases,
acquisitions can be accomplished at relatively low marginal costs given the
Company's technical and human resources.
While pursuing additions to its existing asset management contracts, the Company
in 1996 continued to implement its strategy, begun in 1995, of expanding its
businesses through strategic acquisitions (See Note 2 to the Consolidated
Financial Statements). In 1995, the Company acquired CSW Associates, Inc.
("CSW"), an RTC and FDIC contractor, and Prime Tempus, Inc., which provides
liquidation and recovery services for the insurance industry. Effective October
1, 1996, the Company acquired Eastern Realty Corporation ("Eastern")and
affiliated entities (the "Eastern Acquisition"). In addition to
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augmenting the Company's core asset management capabilities, the Eastern
Acquisition expanded the Company's capabilities in land management and
development. On December 31, 1996, the Company acquired Merchants Mortgage
Corporation ("Merchants"), a servicer of multifamily loans, primarily for the
Delegated Underwriting and Servicing Program (the "DUS Program") administered by
the Federal National Mortgage Association ("FNMA"). The Merchants acquisition
provides the Company the opportunity to originate new loans to existing
borrowers in the Merchants portfolio. Management intends to continue to pursue
strategic acquisitions both to broaden the Company's revenue base and to enter
new businesses or markets. In January 1997, the Company acquired
Reinlein/Leiser/McGee ("R/L/M"), another servicer of loans in the DUS Program.
Primarily in response to the expiration of remaining FDIC and RTC contracts, the
Company significantly restructured its operations in 1996 to more effectively
position itself for the development of other businesses. Throughout the year,
the Company consolidated and realigned several management positions and effected
staff reductions to eliminate certain levels of management and to enhance its
capabilities to service its clients.
Effective July 31, 1996, the Company closed its Miami, Florida office in
conjunction with the disposition of CSW (See Note 2 to Consolidated Financial
Statements). In conjunction with the Eastern Acquisition, the Company relocated
its Washington, D.C. office to Eastern's offices in McLean, Virginia.
The markets in which the Company competes to provide financial services are
highly competitive. Assets of the type which have historically been the subject
of the Company's financial service contracts have become less available in the
United States markets in recent years. Management anticipates that this trend
will continue and that, to expand its revenue base, the Company will need to
continue to develop new core businesses, such as loan originations and fund
advisory services, and to develop opportunities overseas. The asset management
industry continued to undergo substantial consolidation in 1996. Many of the
Company's competitors are significantly larger and better capitalized than the
Company. These firms may have competitive advantages by reason of these
financial resources.
1996 was a transitional year for the Company. Multiple strategies were
implemented to expand the Company's businesses and to address the declines in
revenue associated with expiring public-sector contracts. Management has been
encouraged by the continued development of the Company's core businesses and
opportunities presented by new business segments. There can be no assurance,
however, that these trends will continue or that the Company will be successful
in these efforts.
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4
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ITEM 2. - DESCRIPTION OF PROPERTY
- ---------------------------------
The following table summarizes the Company's mortgage and lease obligations for
its office locations at December 31, 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Annual Debt/
Office Location Rental Payments Square Footage Lease Term
--------------- --------------- -------------- ----------
<S> <C> <C> <C>
Columbus, Ohio See Note 5 to 20,000 N/A
the Consolidated
Financial
Statements
Dallas, Texas $117,000 8,444 01/01/95-12/31/99
Atlanta, Georgia $ 58,000 4,546 03/01/95-02/28/98
Hoboken, New $121,000 5,985 11/01/94-10/31/99
Jersey
McLean, Virginia $ 33,000 1,992 10/01/96-09/30/97
Austin, Texas $ 35,000 2,820 05/01/93-06/30/97
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</TABLE>
ITEM 3. - 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 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ----------------------------------------------------------------
None.
PART II
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ITEM 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ---------------------------------------------------------------------
The common stock of the Company, par value $.01 per share (the "Common Stock")
trades under the symbol "ASET" on the OTC Bulletin Board administered by the
National Association of Securities Dealers, Inc. ("NASD").
Records maintained by the NASD's Research Department show the
following
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with respect to high and low bid prices for the Common Stock:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
March 31, 1995 $.94 $.56
June 30, 1995 $.81 $.38
September 30, 1995 $.63 $.46
December 31, 1995 $.53 $.29
March 31, 1996 $.50 $.37
June 30, 1996 $.63 $.49
September 30, 1996 $.63 $.63
December 31, 1996 $.64 $.63
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
At March 7, 1997, there were approximately 3,000 holders of record of shares
of the Common Stock.
During its 1996 and 1995 fiscal years, the Company made no payments of cash
dividends or returns of capital on common shares other than dividends of
$581,491 to the holder of the minority interest in CSW.
The Company does not anticipate paying dividends on the Common Stock in the
foreseeable future. Instead, management anticipates that earnings will be used
in the operations of the Company. The agreement by which Crown and NorthCorp
were combined restricted, until August 4, 1996, the Company from making
distributions, including dividends, without the unanimous written consent of the
Board of Directors.
At December 31, 1996, the Company has 30,000,000 authorized shares of the Common
Stock and 1,000,000 shares of preferred stock.
Effective December 30, 1996, the Company issued 576,924 shares of Common Stock
to Asdale Limited without registration under the Securities Act of 1933 (the
"Securities Act") pursuant to exemptions contained in Section 4(2) of the
Securities Act and Rule 506 thereunder based upon the accredidation of the
purchaser and the size of the offering, among other things. The shares were
issued in exchange for $375,000 ($138,607 in cash and $236,393 to extinguish
unsecured debt).
Effective October 1, 1996, pursuant to a stock purchase agreement
entered into in connection with the Eastern Acquisition (the
"Eastern Purchase Agreement"), the Company issued 450 shares of
Series A Convertible Preferred Stock (the "Series A Preferred
Stock") in exchange for all of the issued and outstanding capital
stock or membership interests, as the case may be, of each of
Eastern, Eastern Baltimore, Inc. and Eastern Realty, LLC. The
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Series A Preferred Stock was issued to Miller and Smith Holding, Inc., Gordon V.
Smith, Alvin D. Hall, Spencer R. Stouffer, Richard J. North, Jay N. Rollins and
Charles F. Stuart, Jr. (collectively, the "Series A Purchasers") without
registration under the Securities Act pursuant to exemptions contained in
Section 4(2) of the Securities Act and Rule 506 thereunder based upon the size
of the offering, the limited number of Series A Purchasers, the accredidation of
certain of the Series A Purchasers, information provided by the Company to the
unaccredited Series A Purchasers, among other things. Each of the 450 shares of
the Series A Preferred Stock has a liquidation price of $1,000, carries a
cumulative dividend of 7.467% of the liquidation price per annum, payable
semiannually either in cash or the common stock of the Company (priced at the
time of payment), has a five-year term, is redeemable by the Company upon ten
days' written notice, subject to the right of each Stockholder to convert to the
Common Stock upon receipt of such a notice. Each share of the Series A Preferred
Stock is convertible into 1,244.75 shares of the Common Stock. Conversion may
occur at the option of a Stockholder if, prior to October 1, 1998, the closing
price of the Common Stock equals or exceeds $1.00 or if, prior to October 1,
2001, the closing price of the Common Stock equals or exceeds $1.25 or if a
Stockholder receives a redemption notice from the Company. Conversion shall
occur automatically without action by the Company or a Stockholder if, prior to
October 1, 1998, the closing price of the Common Stock equals or exceeds $1.75
or if, prior to October 1, 2001 the closing price of the Common Stock equals or
exceeds $2.50 or at the end of the five-year term.
Effective December 31, 1996, pursuant to a stock purchase agreement entered into
in connection with the Merchants acquisition (the "Merchants Purchase
Agreement"), the Company issued 2,000 shares of Series B Preferred Stock (the
"Series B Preferred Stock") and other consideration in exchange for all of the
issued and outstanding capital stock of Merchants. The Series B Preferred Stock
was issued to National City Corporation ("NCC") without registration pursuant to
exemptions contained in Section 4(2) of the Securities Act and Rule 506
thereunder based upon the accredidation of the purchaser and the size of the
offering, among other things. Each of the 2,000 shares of the Series B Preferred
Stock has a liquidation preference of $1,000. Five hundred of these shares are
to be redeemed on December 31, 1997, 600 shares on December 31, 1998 and 900
shares on December 31, 1999 provided that the Company shall not be required to
redeem any shares of Series B Preferred Stock to the extent that, as a result of
the redemption, the Company would fail to satisfy the net worth requirements
FNMA has set for the Company in conjunction with the DUS Program. The Company
has deposited $2,000,000 in a non-interest bearing account at National City Bank
of Indiana to secure the Company's obligations to redeem the Series B Preferred
Stock. Tucker Holding Company, Ltd. ("Tucker"), an Ohio limited
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liability company, has pledged stock of the Company owned by Tucker to further
secure the redemption of the Series B Preferred Stock. No dividends are payable
on the Series B Preferred Stock.
Also pursuant to the Merchants Purchase Agreement, effective December 31, 1996,
the Company issued 500 shares of Series C Convertible Preferred Stock (the
"Series C Preferred Stock") and other consideration in exchange for all of the
issued and outstanding capital stock of Merchants. The Series C Preferred Stock
was issued to NCC without registration pursuant to exemptions contained in
Section 4(2) of the Securities Act and Rule 506 thereunder based upon the
accredidation of the purchaser and the size of the offering, among other things.
Each of the 500 shares of the Series B Preferred Stock has a liquidation
preference of $1,000 and carries a non-cumulative dividend of 8% of the
liquidation preference per annum. Each share of the Series C Preferred Stock is
convertible into 666.67 shares of the Common Stock at such time as the average
price of the Common Stock over a thirty-day period equals or exceeds $1.50 per
share. If the holder does not so convert to the Common Stock, the Company may
redeem shares of the Series C Preferred Stock at a redemption price equal to the
liquidation preference plus any unpaid dividends thereon. If not previously
redeemed, one-half of the outstanding shares of the Series C Preferred Stock is
redeemable on December 31, 2001; the remainder is redeemable on December 31,
2002.
During 1996, the Company issued warrants entitling the holders to purchase
403,983 shares of common stock at prices ranging from $0.63 to $1.00 per share
over periods ranging from eighteen months to five years after issuance.
ITEM 6. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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GENERAL
The Company derives its primary revenues from financial services provided under
asset management, disposition, servicing, securitization and land management
contracts or agreements 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, coordinates the
development of real estate, administers receiverships and manages various
corporate and partnership interests throughout the United States. The Company
has utilized strategic acquisitions and alliances as primary means of expanding
and diversifying its core businesses and developing and entering new businesses.
Management continues to pursue such acquisitions and alliances.
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Currently, the Company operates under contracts with various clients including
investment banking firms, partnerships and Freddie Mac. At December 31, 1996,
the assets under management pursuant to these contracts had an aggregate gross
contract value of $1,111 million, as compared to $924 million of assets under
management at December 31, 1995. Assets are added to most of these contracts by
addenda, each with its own compensation structure. During 1996, assets with an
aggregate book value of $276 million were added to the contract with Freddie Mac
to provide loss mitigation and loan workout services. Management believes that,
to operate profitably, the Company must continue to significantly expand and
develop the revenues it derives from these contracts and arrangements.
Prior to 1996, the Company derived most of its revenues from public-sector
contracts, primarily with the FDIC and the RTC. Business from these agencies
declined substantially in recent years as issues related to the massive failures
of banks and thrifts were resolved. During 1996, the Company concluded work
under its remaining FDIC contracts. The Company does not believe that
public-sector contracts will be a primary source of revenue in the foreseeable
future. Therefore, as public-sector contracts have expired or reduced in size,
management has reduced staff, consolidated offices and otherwise restructured
operations to more competitively pursue other opportunities. While management
believes this restructuring is now substantially complete, the reduction in
revenues from public-sector contracts and the administrative costs of winding up
those contracts have materially contributed to the Company's operating losses in
1996.
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, 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; technological
development; future decisions by management in response to changing conditions;
and misjudgments in the course of preparing forward-looking statements.
BUSINESS OUTLOOK
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During 1996, the Company continued to restructure its operations to place itself
in a better competitive position in the markets in which it now operates.
Concurrent with the sale of CSW (see Note 2 to Consolidated Financial
Statements), the Company closed its Miami, Florida office. As is further
discussed in Note 2 to the Consolidated Financial Statements, the Eastern
Acquisition and the acquisition of Merchants were effective October 1, 1996 and
December 31, 1996, respectively. During 1996, the Company also consolidated and
realigned several management positions and effected staff reductions which have
resulted in annual payroll reductions of approximately $1,300,000.
Historically, the Company has managed numerous, relatively small assets of
public-sector clients. It now manages predominately larger assets held by
private concerns. As the table set forth below indicates, during this
transition, the value of assets under management has increased from the
comparable period in 1995.
<TABLE>
<CAPTION>
Assets Under Management
1996 1995
---- ----
<S> <C> <C>
Number of Assets
-Public Sector 0 1,155
Gross Contract Value
-Public Sector $0 $113 million
Number of Assets
-Private Sector 1,601 456
Gross Book Value
-Private Sector $1,111 million $811 million
Total Number of Assets 1,601 1,611
Total Gross Contract Value $1,111 million $924 million
</TABLE>
While the gross contract value of assets under management has increased, the
Company's revenues for 1996 declined from 1995. The private-sector contracts
provide for generally lower ongoing management fees than did the expired
public-sector contracts. While these present 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. Management is concentrating the Company's financial and
human resources on efforts to increase the Company's revenues through the
expansion of its core asset management, disposition and servicing businesses and
the development of new, related businesses. Until the Company can expand its
revenue base, management anticipates that operating losses will continue, albeit
at a lesser rate than during 1996.
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The Company continues to pursue strategic acquisitions of entities and
portfolios to expand its core asset management, disposition and servicing
businesses. Management is placing particular emphasis on the acquisition of
asset servicing rights since, given the Company's human and technical resources,
such acquisitions can be accomplished at relatively low marginal costs. The
Eastern Acquisition brings to the Company additional capabilities in asset
management, real estate development and structured financings. The Company has
also begun, through the acquisitions of Merchants in December 1996 and R/L/M in
January 1997 (See Note 14 to Consolidated Financial Statements), new loan
servicing and mortgage banking relationships with the FNMA. During the fourth
quarter of 1996, FNMA approved the Company as a loan seller and servicer. In
Europe, a newly formed Danish subsidiary of the Company is pursing opportunities
to acquire overseas asset portfolios and operating entities. Into 1997,
management anticipates that additional acquisition opportunities will arise as a
result of ongoing consolidations in the industries in which the Company
operates.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO
THE YEAR ENDED DECEMBER 31, 1995
Total revenues decreased $7.5 million to $10.6 million in 1996 from $18.1
million in 1995. As previously discussed, the decrease in revenue is primarily
caused by the expiration, at the end of 1995, of public-sector contracts and
the replacement with lower-fee, private-sector contracts in 1996. During 1996,
public sector contract revenue was approximately $5.3 million, or 50% of
revenue, compared to approximately $13.9 million, or 77% of revenue in 1995.
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 $1.7 million, to $5.8 million in 1996 from
$7.5 million in 1995. The expiration of public-sector contracts at the end of
1995 resulted in a decrease of approximately $4.0 million in management fee
revenues versus 1995, while private-sector management fee revenues increased
approximately $2.3 million versus the comparable time period. Although the gross
contract value of private sector contracts increased, the contracts are at
generally lower fees than those in the public sector.
Disposition, liquidation and bonus fee revenues decreased $3.7 million to $3.2
million in 1996 from $6.9 million in 1995. The expiration of RTC contracts and
the reduction in disposition activity of FDIC contracts primarily resulted in
the decrease in 1996.
Incentive fee revenues decreased $2.0 million to $1.3 million in 1996 from $3.3
million in 1995. As with management and other fees, the
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decrease was due to certain public-sector contract levels being settled in 1995,
while the more recent private-sector contracts will not be realized until their
completion.
Other revenues consist of fees for accounting, asset management and consulting
services, interest income and equity in earnings of partnerships and joint
ventures.
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses, and professional development expenses. Personnel expenses
decreased $1.6 million, or 15%, to $8.9 million in 1996 from $10.5 million in
1995. Acquired company operations initially increased staffing and related
personnel costs in 1996, however the increases were offset by operational
restructuring caused by the expiration of the Company's public sector contracts
and the disposition of CSW. As a result of these factors, staffing was reduced
approximately 40% from that at the beginning of the year, with resultant
decreases in salaries, payroll taxes and benefits expenses.
Occupancy expenses include rents, telephone expense, equipment leases and
related expenses, and utility expenses. Occupancy expenses decreased $73,100, or
6%, to $1,107,726 in 1996 from $1,180,826 in 1995. During the year, the Company
closed its Miami, Florida office and consolidated its Washington, D.C.
operations with those of Eastern in conjunction with the Eastern Acquisition.
Although office rental expenses increased, other occupancy expense components,
including equipment leases and other services, were restructured to offset, and
ultimately reduce, the overall occupancy expenses.
Other expenses primarily consist of information system expenses, legal and
professional fees, postage and courier expenses, repairs and maintenance
expenses, and office supplies expenses. Other expenses decreased approximately
$44,427, or 3%, to $1,436,943 in 1996, from $1,481,370 in 1995, primarily from
the reversal of a provision for uncollectible accounts.
Amortization and depreciation expenses primarily reflect the amortization of the
excess of cost over net assets of companies acquired through the Company's
acquisition program and depreciation of the Company's fixed assets. Reflecting
goodwill impairment, during the fourth quarter the Company recognized a charge
of $56,250 representing the write-off of unamortized goodwill of a consolidated
subsidiary.
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Interest expense increased $75,087, to $241,124 in 1996 from $166,037 in 1995,
primarily from increased bank borrowings to fund Company operations.
The Company incurred a loss on disposal of $2,104,567 from the sale of its 80%
interest in CSW (See Note 2 to the Consolidated Financial Statements). Of the
total loss, approximately $1,170,000 of the loss is attributable to the
write-off of unamortized goodwill related to the CSW acquisition.
Because of losses from operations and the loss from the disposal of CSW, the
Company recognized income tax benefit of $1.2 million in 1996 compared to $1.3
million expense for 1995. See Note 10 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
- -------
Cash and cash equivalents increased $311,542 to $587,080 at December 31, 1996
from $275,538 at December 31, 1995. The Company had a $750,000 revolving bank
line of credit facility, all of which was outstanding at December 31, 1996. In
March 1997, this facility was refinanced to a one year revolving bank line of
credit, with monthly interest payments at the bank's prime rate plus .25%, and
principal due at maturity.
The Company also had borrowings of $1,163,152 outstanding at December 31, 1996
under a bank installment note. In March 1997, the Company refinanced the
remaining $950,000 with a 45-day term bank loan at the bank's prime rate plus
.50%. The Company anticipates the repayment of this note primarily from the
proceeds of an anticipated federal tax refund due the Company for the year
ending December 31, 1996.
In March 1997, the Company completed a stock purchase transaction with an
affiliate of the Harbert Management Corporation ("Harbert") 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 affiliate for a price of one
million dollars. Over the course of the next year, Harbert 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 affiliate
would receive Common Stock at a purchase price of $1.05 per
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<PAGE> 16
share (See Item 11 - Security Ownership of Certain Beneficial Owners
and Management).
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 1997 with the receipt of
contract retainage from the FDIC, as successor to the RTC. Retainage will be
used to retire short term debt. Additionally, while the Company continues its
efforts to reduce operating expenses, it will be necessary to develop new
sources of revenue to eliminate operating deficits or to develop alternative
funding sources to fund those deficits. If the Company can not expand its
revenue base or secure new means of financing its operations, its working
capital position and ability to operate will deteriorate.
The Company is actively seeking credit facilities to expand existing facilities
and to fund acquisitions. The Company expects to fund strategic acquisitions of
entities and asset portfolios by cash provided from debt or equity financing. In
December 1996 and January 1997, the Company announced the acquisitions of
Merchants and R/L/M, respectively. In connection with the acquisitions, in
January 1997 the Company incurred additional bank indebtedness of $1,881,286.
HISTORICAL CASH FLOWS
- ---------------------
Cash provided by operations decreased $1,199,202, to $329,700 in 1996, from
$1,528,903 in 1995. The decrease was primarily caused by the net loss incurred
in 1996, as discussed earlier, from the expiration of public sector contracts
and related reduction in contract revenues. The decrease in cash provided by
operations caused by the loss was offset, in part, by the non-cash loss on the
disposal of CSW and the net change in working capital components. Working
capital component changes reflect the realization of contract receivables,
funding of 1995 tax liabilities, and the recognition of the 1996 income tax
refund receivable.
Cash flows used in investing activities decreased $1,328,969 to $315,147 in
1996, from $1,644,116 in 1995. The decrease was generally caused by the
reduction in cash used for corporate acquisitions. Although the Company's
corporate acquisition program proceeded at an accelerated pace in 1996,
acquisitions were funded primarily through the issuance of the Company's
preferred stock.
Cash flows from financing activities increased $507,434, to a cash
source of $290,698 in 1996 from a cash use of $216,736 in 1995. The
14
<PAGE> 17
increase was caused from a higher level of net borrowings, and the issuance of
the Company's common stock. These increases were offset by distributions made to
minority shareholders' in connection with the disposal of CSW.
15
<PAGE> 18
ITEM 7 - FINANCIAL STATEMENTS
- -----------------------------
The consolidated financial statements filed with this item are listed below:
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE
----
Independent Auditors' Report . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, December 31, 1996 and 1995. . . F-3
Consolidated Statements of Earnings for years ended
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996 and 1995 . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . F-6 to F-7
Notes to Consolidated Financial Statements for the years
ended December 31, 1996 and 1995 . . . . . . . . . . . . . . F-8 to F-17
F-1
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Crown NorthCorp, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Crown NorthCorp,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Crown NorthCorp, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE, LLP
- --------------------------
March 14, 1997 (except for Note 5
as to which the date is March 26, 1997)
F-2
<PAGE> 20
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 587,080 $ 275,538
Trade accounts receivable - net of allowance
of $20,000 in 1996 and $193,384 in 1995 1,235,009 5,685,914
Income tax refund receivable 1,211,129
Prepaid expenses and other assets 153,990 167,183
---------- -----------
Total current assets 3,187,208 6,128,635
PROPERTY AND EQUIPMENT - Net 2,007,642 2,317,532
RESTRICTED CASH 3,668,604 446,870
GOODWILL - Net of accumulated amortization of 353,613 1,894,045
$262,665 in 1996 and $456,497 in 1995
OTHER ASSETS:
Investments 308,834 130,287
Acquired servicing rights and other 408,688 163,791
---------- -----------
Total other assets 717,522 294,178
---------- -----------
TOTAL $9,934,589 $11,081,260
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $1,097,458 $ 1,330,000
Accounts payable 247,157 444,899
Accrued expenses 400,069 992,230
Income taxes payable 1,570,722
---------- -----------
Total current liabilities 1,744,684 4,337,851
LONG-TERM OBLIGATIONS:
Notes and bonds payable -
less current portion 2,180,694 1,365,000
Loan loss reserve 1,261,485
---------- -----------
Total long-term obligations 3,442,179 1,365,000
MINORITY INTEREST IN SUBSIDIARIES 515,154
SERIES B REDEEMABLE PREFERRED STOCK 2,000,000
SHAREHOLDERS' EQUITY:
Common stock 88,269 82,500
Convertible preferred stock:
Series A (liquidation preference -
$450,000 plus unpaid dividends) 5
Series C (liquidation preference -
$500,000) 5
Additional paid-in capital 3,293,120 2,192,772
Retained earnings (accumulated deficit) (615,937) 2,658,461
Excess purchase price of subsidiary (53,742)
Treasury stock, at cost (16,736) (16,736)
---------- -----------
Total shareholders' equity 2,747,726 4,863,255
---------- -----------
TOTAL $9,934,589 $11,081,260
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 21
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
REVENUES:
Management fees $ 5,791,760 $ 7,459,832
Disposition, liquidation and bonus fees 3,218,290 6,943,795
Incentive fees 1,305,212 3,297,964
Other 323,496 381,591
----------- -----------
Total revenues 10,638,758 18,083,182
----------- -----------
OPERATING AND ADMINISTRATIVE EXPENSES:
Personnel 8,948,211 10,451,878
Occupancy 1,107,726 1,180,827
Insurance 269,598 303,894
Depreciation and amortization 809,990 1,040,656
Other 1,436,943 1,481,370
----------- -----------
Total operating and
administrative expenses 12,572,468 14,458,625
----------- -----------
(LOSS) EARNINGS FROM OPERATIONS (1,933,710) 3,624,557
----------- -----------
OTHER EXPENSES:
Minority interest 177,171 397,222
Interest 241,124 166,037
Loss on disposal of property and equipment 47,779 19,884
Loss on sale of subsidiary 2,104,567
----------- -----------
Total other expenses 2,570,641 583,143
----------- -----------
(LOSS) EARNINGS BEFORE INCOME TAXES (4,504,351) 3,041,414
----------- -----------
INCOME TAX (BENEFIT) EXPENSE (1,237,422) 1,348,668
----------- -----------
NET (LOSS) EARNINGS $(3,266,929) $ 1,692,746
=========== ===========
(LOSS) EARNINGS PER SHARE $ (0.40) $ 0.21
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 8,202,932 8,244,381
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 22
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Convertible Preferred Stock
Series A Series C
Common Stock --------------- --------------
Shares Shares Shares
Issued Amount Issued Amount Issued Amount
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 8,250,000 $82,500
Amortization of excess purchase price of subsidiary
Treasury stock purchased, at cost
Net earnings for the year ended December 31, 1995
---------- -------
BALANCE, DECEMBER 31, 1995 8,250,000 $82,500
Amortization of excess purchase of subsidiary
Issuance of common stock 576,924 5,769
Issuance of preferred stock 450 $5 500 $5
Dividends paid - Series A Preferred
Net loss for the year ended December 31, 1996
---------- ------- --- -- --- --
BALANCE, DECEMBER 31, 1996 $8,826,924 $88,269 450 $5 500 4%
========== ======= === == === ==
</TABLE>
<TABLE>
<CAPTION>
Retained Excess
Additional Earnings Purchase Total
Paid-In (Accumulated Price of Treasury Stock Shareholders'
Capital Deficit) Subsidiary Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $2,192,772 $ 965,715 $(107,500) $3,133,487
Amortization of excess purchase price of subsidiary 53,758 53,758
Treasury stock purchased, at cost (50,221) $(16,736) (16,736)
Net earnings for the year ended December 31, 1995 1,692,746 1,692,746
---------- ---------- --------- -------- -------- ----------
BALANCE, DECEMBER 31, 1995 2,192,772 2,658,461 (53,742) (50,221) (16,736) 4,863,255
Amortization of excess purchase of subsidiary 53,742 53,742
Issuance of common stock 369,231 375,000
Issuance of preferred stock 731,117 731,127
Dividends paid - Series A Preferred (8,469) (8,469)
Net loss for the year ended December 31, 1996 (3,266,929) (3,266,929)
---------- ---------- --------- -------- -------- ----------
BALANCE, DECEMBER 31, 1996 $3,293,120 $ (616,937) $ 0 (50,221) $(16,736) $2,747,726
========== ========== ========= ======= ======== ==========
</TABLE>
(See notes to consolidated financial statements.
F-5
<PAGE> 23
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $(3,266,929) $ 1,692,746
Adjustments to reconcile net (loss)
earnings to net cash provided by
operating activities:
Depreciation and amortization 809,990 1,040,656
Deferred income tax credit (40,525) (220,851)
Loss on disposal of property
and equipment 47,779 19,884
Loss on sale of subsidiary 2,104,567
Minority interest 177,171 397,222
Equity loss (income) from
investment in partnerships 3,173 (108,812)
Bond interest paid from escrow fund 76,919 54,802
Change in operating assets and liabilities -
net of effects from purchases and
divestitures of subsidiaries:
Accounts receivable 3,885,174 (3,160,889)
Income tax refund receivable (1,211,129)
Prepaid expenses and other assets 13,193 105,895
Accounts payable and accrued expenses (2,269,682) 1,708,250
----------- -----------
Net cash provided by
operating activities 329,701 1,528,903
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (283,996) (490,367)
Proceeds from sale of property and equipment 8,740
Investment in partnerships and joint ventures (156,010) (9,900)
Distributions from partnerships and
joint ventures 82,146 101,896
Net cash acquired in (paid for) corporate
acquisitions and mergers 168,776 (1,126,133)
Net cash disposed in corporate divestitures (71,674)
Increase in other assets (54,389) (128,352)
----------- -----------
Net cash used in investing activities (315,147) (1,644,116
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in borrowings on line of credit 150,000 400,000
Principal payments on notes payable (1,716,848) (1,300,000)
Proceeds from notes payable 2,386,393 700,000
Payment of loan fees (77,494)
Issuance of common stock 138,607
Distributions to minority interest (581,491)
Preferred stock dividends paid (8,469)
Purchase of treasury stock (16,736)
----------- -----------
Net cash provided by (used in)
financing activities 290,698 (216,736)
----------- -----------
NET INCREASE (DECREASE) IN CASH
DURING THE YEAR 311,542 (331,949)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 275,538 607,487
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 587,080 $ 275,548
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 24
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
SUPPLEMENTAL INFORMATION
CASH PAID FOR INTEREST $ 261,117 $ 132,601
=========== ===========
CASH PAID FOR INCOME TAXES $ 1,350,000 $ 189,628
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
CORPORATE ACQUISITIONS:
Accounts receivable $ 40,592 $ 830,769
Prepaid expenses 17,283
Property and equipment - net 2,368 114,501
Restricted cash 3,298,653
Goodwill 1,884,264
Other assets 508,553 16,150
Accounts payable and accrued expenses (26,330) (62,845)
Loan loss reserve (1,261,485)
Deferred tax liability (282,000)
Minority interest (121,989)
----------- -----------
Net assets acquired,
net of acquired cash 2,562,351 2,396,133
Amount financed:
Debt (1,270,000)
Preferred stock (2,731,127)
----------- -----------
Net cash (acquired in)
paid for corporate acquisitions $ (168,776) $ 1,126,133
=========== ===========
CORPORATE DIVESTITURE:
Account receivable $ 606,323
Property and equipment, net 204,267
Goodwill 1,170,000
Other assets 258,137
Accounts payable (95,000)
Minority interest (110,834)
-----------
Net assets disposed, excluding cash 2,032,893
Disposed cash 71,674
-----------
Loss on sale of subsidiary $ 2,104,567
===========
PAYMENT OF NOTE PAYABLE BY ISSUANCE OF
COMMON STOCK $ 236,393
===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 25
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION - Crown NorthCorp, Inc. and subsidiaries (the
"Company") is a financial services provider primarily involved in
commercial asset portfolio management providing both special and master
servicing under public and private sector contracts. Assets managed are
located throughout the United States and include commercial and
residential real estate, performing and nonperforming real estate and
commercial loans, partnership investments and other miscellaneous assets.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Crown NorthCorp and its majority owned
subsidiaries (collectively, the Company). All significant intercompany
balances and transactions have been eliminated.
CONCENTRATIONS - Public sector contracts accounted for approximately 50%
and 77% of revenues for 1996 and 1995, respectively, and approximately 50%
and 75% of total accounts receivable at December 31, 1996 and 1995,
respectively. Private sector contracts with one customer accounted for 24%
and 15% of revenues for 1996 and 1995, respectively, and approximately 15%
and 1% of total accounts receivable at December 31, 1996 and 1995,
respectively.
The Company's private sector management, disposition, and incentive fee
based contracts have no defined terms and are generally cancellable by the
contractor with 30 days notice.
MANAGEMENT FEES - Management fees are recorded as services required under
the contracts 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. Upon each
disposition, withdrawal or addition of an asset or asset group, the
management fee is adjusted to reflect the change in aggregate value of the
assets. Management fees are calculated on a daily basis as set forth in
the contracts.
DISPOSITION, LIQUIDATION AND BONUS FEES - 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. For certain contracts
(primarily Resolution Trust Corp. (RTC)) disposition fees can be adjusted
upward (to 150%) or downward (to 25%) from the contracted percentage
depending on the percentage of net proceeds to values assigned in the
contracts.
The Company may also be entitled to bonus fees. For certain contracts
(primarily RTC), when an asset is disposed during its first or second year
under contract the Company is entitled to receive bonus fees of 20% and
10%, respectively, of the disposition fee. For other contracts, bonus fees
are earned and recorded if cumulative net proceeds exceed contract
thresholds within a specified period of time.
F-8
<PAGE> 26
The RTC retains a portion of all disposition and bonus fees earned. The
Company records retainage receivable as revenue, net of questioned costs
and unsold asset recovery costs, when the contract has expired and the
final contract audit is complete and questioned costs and unsold asset
recovery costs can be reasonably estimated. Retainage receivable was
$680,533 and $636,959 at December 31, 1996 and 1995, respectively.
Liquidation fees are recorded when subsidiary entities of lending
institutions under conservatorship/ receivership of the RTC are liquidated
and are based on a fixed amount per liquidation.
INCENTIVE FEES - The Federal Deposit Insurance Corporation (FDIC)
contracts provide for incentive fees if the Company achieves net cash
collections in excess of thresholds established in the contracts. Fifty
percent of the contractual incentive fee is deferred until the Company
achieves minimum book value liquidation thresholds. Incentive fee revenue
is recorded as the Company achieves the cash collections and book value
liquidations required by the contracts.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
instruments with an original maturity of three months or less to be cash
equivalents.
DEPRECIATION - Property and equipment are recorded at cost. Depreciation
is computed using the straight-line method over estimated useful lives of
five to forty years.
GOODWILL - The excess purchase price over the fair value of identifiable
assets acquired is recorded as goodwill in the accompanying financial
statements. Goodwill is being amortized over its estimated life of 4 to 10
years using the straight-line method. At each balance sheet date, a
determination is made by management to ascertain whether the goodwill has
been impaired based on several criteria, including, but not limited to,
sales trends, undiscounted operating cash flows and other operating
factors.
ACQUIRED SERVICING RIGHTS - Acquired servicing rights represent the
present value of estimated future cash flows to be received from mortgage
servicing operations and are amortized over the weighted average maturity
of the mortgage loans being serviced.
ALLOWANCE FOR LOAN LOSSES - Prior to the December 31, 1996 acquisition of
Merchants Mortgage Corporation (Merchants) (see Note 2), the Company did
not engage in activities requiring loan loss reserves. In connection with
the acquisition of Merchants, the Company established a $1,261,485 loan
loss reserve to provide for estimated losses in the mortgage portfolio
serviced by Merchants for which the Company is responsible (see Note 13).
Commencing in 1997, a provision for loan losses will be added to the
allowance and charged to expense and loan charge-offs, net of recoveries,
will be deducted from the allowance. The factors utilized by management in
determining the adequacy of the allowance include, but are not limited to,
the following: the present and prospective financial condition of the
borrowers and the values of any underlying collateral, evaluation of the
loan portfolio in conjunction with historical loss experience, portfolio
composition, and current and projected economic conditions. Changes in
economic conditions and economic prospects of borrowers can occur quickly
and, as a result, impact the estimates made by management.
INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES - The Company's general
partner and Joint Venture investments (ranging from 1% to 50%) are carried
at cost, adjusted for the Company's proportionate share of undistributed
earnings and losses because the Company exercises significant influence
over their operating and financial activities.
F-9
<PAGE> 27
INCOME TAXES - Income taxes are recorded using the liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No.
109. 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.
EARNINGS PER SHARE OF COMMON STOCK - Earnings per share is computed based
on earnings applicable to common stock after deducting Series A preferred
stock dividends by the weighted average number of common shares
outstanding during the period.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
RECLASSIFICATIONS - Certain reclassifications of prior year amounts have
been made to conform with current year presentation.
2. ACQUISITIONS
The Company acquired 80% of CSW Associates, Inc. (CSW), in June 1995 for
approximately $953,000 cash and $1,270,000 in notes payable to the former
shareholders. The CSW acquisition was accounted for using the purchase
method which resulted in the Company recording goodwill of approximately
$1,730,000. Effective July 31, 1996, the Company sold its 80% interest in
CSW for a nominal amount to a shareholder and recorded a loss on the sale
of approximately $2,104,600 which includes the write-off of approximately
$1,170,000 of goodwill.
Effective October 1996, the Company acquired 100% of the stock and
membership interests in Eastern Realty Corporation and affiliates
(Eastern) for $168,776 cash, 450 shares of Series A Convertible Preferred
Stock, and warrants for the issuance of 149,300 shares of common stock of
the Company. The acquisition was accounted for using the purchase method
of accounting and the results of operations have been reflected in the
financial statements since that date.
On December 31, 1996 the Company acquired 100% of the stock of Merchants
Mortgage Corporation (Merchants) for approximately 2,000 shares of the
Company's Series B Preferred Stock, and 500 shares of the Company's Series
C Convertible Preferred Stock. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of operations
will be reflected in the financial statements from January 1, 1997
forward.
Effective October 1, 1995, the Company acquired 100% of the outstanding
capital stock of Prime Tempus, Inc. for $173,911 cash (net of cash
acquired).
F-10
<PAGE> 28
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisitions and dispositions had occurred at the
beginning of 1996 and 1995:
<TABLE>
1996 1995
<S> <C> <C>
Revenues $11,212,000 $16,728,000
Expenses 11,900,000 13,654,000
----------- -----------
Earnings (loss) before taxes (688,000) 3,074,000
Income tax (credit) (189,000) 1,362,000
----------- -----------
Net Income (loss) $ (499,000) $ 1,712,000
=========== ===========
Earnings (loss) per share $ (0.06) $ 0.20
=========== ===========
</TABLE>
The pro forma consolidated results do not purport to be indicative of
results that would have occurred had the transactions been in effect for
the periods presented, nor do they purport to be indicative of the results
that will be obtained in the future.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consists of the following at December 31, 1996 and 1995:
1996 1995
<S> <C> <C>
Land $ 271,845 $ 271,845
Building and improvemnts 1,132,473 1,132,473
Furniture and equipment 1,696,313 1,960,762
--------- ---------
Total property and equipment 3,100,631 3,365,080
Less accumulated depreciation 1,092,989 1,047,548
--------- ---------
Property and equipment - net $2,007,642 $2,317,532
========== ==========
</TABLE>
4. OTHER ASSETS
<TABLE>
<CAPTION>
Other assets consist of the following at December 31, 1996 and 1995:
1996 1995
<S> <C> <C>
Acquired servicing rights $244,787
Other 163,901 $163,791
------- --------
Total other assets $408,688 $163,791
======== ========
</TABLE>
F-11
<PAGE> 29
5. NOTES AND BONDS PAYABLE
At December 31, 1996, the Company is obligated under two bank notes
payable aggregating $1,913,152 covered by a secured borrowing agreement.
The first note, in the amount of $750,000, bears interest at the bank's
prime rate plus .25% (total of 8.5% at December 31, 1996). The second
note, in the amount of $1,163,152, bears interest at the bank's prime rate
plus .50% (total of 8.75% at December 31, 1996). Both borrowings are
secured by the assets of the Company and require monthly payments of
interest only and mature in May 1997 and March 1997, respectively. The
notes are payable before maturity upon conversion into cash of certain
stipulated operating assets.
On March 27, 1997, the Company extinguished the above bank notes and
refinanced a total of $1,825,000 of the above borrowings into three new
notes. The first note is a one year revolving line of credit in the amount
of $750,000 with interest at the bank's prime rate plus .25% with monthly
interest payments and principal due at maturity. The second note is a 45
day term loan in the amount of $950,000 with interest at the bank's prime
rate plus .50% with monthly interest payments and principal due at
maturity. The third note is a three month draw note in the amount of
$125,000 with interest at the bank's prime rate plus .25% with monthly
payments of interest. On May 31, the outstanding principal on the third
note will convert to a 36 month term loan with equal monthly principal
payments plus interest at the bank's prime rate plus .50%. All of the
notes are secured by all assets of the Company, and the Company is
required to maintain certain minimum financial ratios. Long-term debt on
the accompanying balance sheet and summary of principal payments (below)
reflect the impact of the bank notes refinancing.
The Company is obligated under Six Month Adjustable Rate Industrial
Development Revenue Bond for a building which serves as its corporate
headquarters. As of December 31, 1996 and 1995, the principal amount due
was $1,365,000 and $1,395,000, respectively. The Company is required to
make annual principal payments and semi-annual interest payments. The
interest rate is determined semi-annually according to the terms of the
indenture, and at December 31, 1996 the interest rate was 3.9%. The bond
is secured by a $1,600,000 letter of credit collateralized by a first
mortgage on the land and building and a restricted cash escrow account
($369,951 and $361,394 at December 31, 1996 and 1995, respectively)
required under the bond indenture. At December 31, 1996, the Company was
not in compliance with one of the covenants related to the letter of
credit. The Company has received a waiver of such covenant through June
30, 1997, and management feels that the Company will be able to maintain
compliance after such waiver expires.
<TABLE>
<CAPTION>
The scheduled sinking fund redemption and principal repayments related to
the notes and bonds are as follows:
<S> <C>
Year ending December 31:
1997 $1,097,458
1998 826,664
1999 81,664
2000 57,366
2001 45,000
Therafter 1,170,000
---------
Total 3,278,152
Less current portion 1,097,458
---------
Total long-term portion $2,180,694
==========
</TABLE>
F-12
<PAGE> 30
At December 31, 1996, the fair value of the Company's long-term debt
approximates its recorded value.
6. LEASES
The Company, in its operations, leases office facilities and equipment. All
leases in effect at December 31, 1996, which expire on various dates
through 1999, have been classified as operating leases.
<TABLE>
<CAPTION>
The following is a schedule of future minimum operating lease payments as
of December 31, 1996:
EQUIPMENT OFFICEES
<S> <C> <C>
Year ending December 31:
1997 $222,012 $ 564,889
1998 176,111 424,397
1999 38,748 256,694
------ -------
Total $436,871 $1,245,980
======== ==========
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company conducts some of its operations through various joint ventures
and other partnership forms which are principally accounted for using the
equity method. Included in the Company's revenues for 1996 and 1995 are
equity in (loss) income of related companies of approximately ($3,200) and
$109,300, respectively. The Company also provides services for the
ventures and included in revenues for 1996 and 1995 are management and
disposition fees of approximately $47,700 and $196,500, respectively,
related thereto.
During 1996 and 1995, the Company performed servicing, consulting and
accounting services for various companies affiliated with the Controlling
Shareholder. The Company generated revenues of approximately $86,000 in
1996 and $88,000 in 1995 from these services.
During 1996 the Company paid approximately $28,000 to affiliates of the
Controlling Shareholder for miscellaneous services.
During 1995, the Company earned revenues of $88,281 by performing
servicing, consulting and accounting services for various companies
affiliated with the Controlling Shareholder.
8. SHAREHOLDERS' EQUITY
At December 31, 1996 and 1995, the Company has 30,000,000 authorized
shares of its $.01 par value common stock (Common Stock) and 1,000,000
authorized shares of preferred stock.
In December 1996 the Company issued 576,924 shares of its common stock to
an unaffiliated entity for $138,607 cash and the extinguishment of
$236,393 of unsecured debt.
In October 1996, in connection with the Eastern acquisition, the Company
issued 450 shares of Series A Convertible preferred stock (the "Series A
Preferred"), with a par value of $.01 per share. Holders of Series A
Preferred are entitled to receive semi-annual dividends on each share
during the term at the rate of 7.467% per annum of the Liquidation Price.
The Liquidation Price of each Series A Preferred
F-13
<PAGE> 31
share is $1,000 plus unpaid dividends. The Company has the option of
paying dividends in cash or in shares of common stock. Each Series A
Preferred share is convertible into 1,244.75 fully paid shares of Common
Stock. The shares can be converted at the option of the holder when the
closing share price equals or exceeds $1.00 during the first two years
after issuance, or when the closing share price equals or exceeds $1.25
per share two years through five years after issuance. The shares are
subject to mandatory conversion when the closing share price equals or
exceeds the option of the Company when the closing share price equals or
exceeds $1.75 per share during the first two years after issuance, or when
the closing share price equals or exceeds $2.50 per share two years
through five years after issuance. Holders of Series A Preferred shares
have no voting rights.
In December 1996, in connection with the Merchants acquisition, the
Company issued 2,000 shares of Series B Non-Voting, Non-Convertible
Preferred Stock ( the "Series B Preferred"), with a par value of $.01 per
share. No dividends of any type are to be paid on the shares. The
liquidation value of each Series B Preferred share is $1,000. The Company
is obligated to redeem the following number of shares on each date as
follows:
<TABLE>
<CAPTION>
SHARES TO BE REDEEMED AMOUNT REDEMPTION DATE
<S> <C> <C>
500 $ 500,000 December 31, 1997
600 600,000 December 31, 1998
900 900,000 December 31, 1999
----- ----------
Total 2,000 $2,000,000
===== ==========
</TABLE>
The Company is required to maintain a restricted cash balance ($2,000,000
at December 31, 1996) in a non-interest bearing account, which is
controlled by the Series B Preferred shareholder, used to secure the
Company's obligation to redeem the shares. The Company has also pledged to
the shareholder certain additional funds in the event that funds in the
Deposit Account are not maintained at certain designated levels. All or
part of the outstanding shares of Series B Preferred stock are subject to
redemption at the option of the Corporation at a price equal to the
redemption price.
In December 1996, also in connection with the Merchants acquisition, the
Company issued 500 shares of Series C Non-Voting, Convertible Preferred
Stock ( the "Series C Preferred"), with a par value of $.01 per share. The
shareholder is entitled to non-cumulative quarterly cash dividends at the
rate of 8% per annum on the liquidation preference. The liquidation
preference is $1,000 per Series C Preferred share. Each Series C Preferred
share is convertible into 666.67 fully paid shares of Common Stock. The
shares can be converted, at the option of the holder, during a 45 day
conversion period after the 30 day average Common Stock closing share
price equals or exceeds $1.50. The shares can be redeemed, at the option
of the Company, following the expiration of the conversion period at a
conversion price equal to the liquidation preference plus the full amount
of unpaid declared dividends. The Company has the option to redeem the
Series C Preferred Shares as follows:
<TABLE>
<CAPTION>
SHARES TO BE REDEEMED AMOUNT REDEMPTION DATE
<S> <C> <C>
250 $250,000 December 31, 2001
250 250,000 December 31, 2002
--- --------
Total 500 $500,000
=== ========
</TABLE>
F-14
<PAGE> 32
During 1996 the Company issued Warrants entitling the holders to purchase
403,983 shares of Common Stock at prices ranging from $0.63 to $1.00 per
share over periods ranging from 18 months to 5 years after issuance.
A stock option plan for the outside directors of the Company was approved
by the Company's shareholders in 1995. Under the plan, each outside
director may be granted options for 100,000 shares of the Company's Common
Stock at an option price equal to the Common Stock's market value on the
date of the grant. The options vest over a four-year period if the Company
achieves certain stock price thresholds. No options have been granted
under this plan as of December 31, 1996.
At December 31, 1996, the Board of Directors approved the allocation of a
total of 300,000 shares of Common Stock for a profit-sharing stock plan
for employees and an incentive compensation plan for management. Details
of these plans are presently being finalized and are subject to approval
by the Company's shareholders.
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." This new standard defines a fair value based
method of accounting for an employee stock option or similar equity
instrument. This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to continue
to measure compensation using the intrinsic value approach under
Accounting Principals Board (APB) Opinion No. 25, the former standard. If
the former standard for measurement is elected, SFAS No. 123 requires
supplemental disclosure to show the effects of using the new measurement
criteria. The Company intends to use the measurement prescribed by APB
Opinion No. 25, and accordingly, this pronouncement will not affect the
Company's financial position or results of operations.
9. BENEFIT PLAN
Previously the Company sponsored a defined contribution retirement plan
for certain of its employees who had attained the age of 21 and had
provided six months of service. Employees could make contributions up to
15% of their compensation. The Company could make discretionary
contributions to the plan as determined by the Board of Directors. The
Company made no contributions to the plan since the plan's inception. In
1996, the old plan was replaced with a new plan whereby the Company
matches 25% of the first 4% of the employees' contributions. Employer
contributions were $53,094 in 1996.
10. INCOME TAXES
<TABLE>
<CAPTION>
For the years ended December 31, 1996 and 1995, the components of income
tax (benefit) expense are as follows:
1996 1995
<S> <C> <C>
Current $(1,196,897) $1,569,519
Deferred (40,525) (220,851)
------- --------
Total income tax (benefit)expense $(1,237,422) $1,348,668
=========== ==========
</TABLE>
F-15
<PAGE> 33
The income tax (benefit) expense differs from the amount computed by
applying the statutory Federal income tax rate of 34% to pretax earnings
as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Income tax (benefit) expense at statutory rate $(1,531,479) $1,034,079
State and local taxes, net of Federal benefit 149,160
Non-deductible amortization 102,069 46,716
Minority interest in income of subsidiary 60,238 135,055
Non-deductible capital loss on sale of subsidiary 160,178
Other-Net (28,428) (16,342)
----------- ----------
Total income tax (benefit) expense $(1,237,422) $1,348,668
=========== ==========
</TABLE>
At December 31, 1996 and 1995, the Company had recorded a net deferred tax
asset (liability) as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets:
Curent:
Collection allowance $ 6,790 $ 65,700
Items not currently deductible and other 5,300
Long term - depreciation and amortization 11,962 118,727
----------- ----------
Total assets 18,752 189,727
----------- ----------
Liabilities:
Current - conversion from cash to accrual method
of tax reporting for CSW (70,500)
Long-term:
Conversion from cash to accural method of tax
reporting for CSW (141,000)
----------- ----------
Total liabilities (211,500)
----------- ----------
Net deferred tax asset (liability) $18,752 $ (21,773)
=========== =========
</TABLE>
11. 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.
12. MORTGAGE SERVICING FOR OTHERS
The balance sheets at December 31, 1996 and 1995 do not include
approximately $1,002 million and $413 million, respectively, of principal
balances of permanent mortgage loans owned by and serviced for
unaffiliated investors.
F-16
<PAGE> 34
The servicing of mortgage loans includes collection of loan and escrow
payments from individual mortgagors, deposit of these collections into
restricted trust accounts, periodic remittance of principal and interest
to investors, payment of property taxes and insurance premiums, and
periodic inspection of certain properties. At December 31, 1996 and 1995,
the Company held escrow, agency and fiduciary funds of approximately $12
million and $8 million, respectively. These trust funds and the
corresponding fiduciary trust liability are not included in the
accompanying balance sheet as they do not represent assets or liabilities
of the Company.
13. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company is a party to off-balance sheet financial instruments in the
normal course of business to meet the financing needs of customers. These
agreements involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the balance sheet. The contract amounts of
these instruments, which are not included in the financial statements,
indicate the Company's activities in particular classes of financial
instruments.
The Company's off-balance sheet financial instruments, for which the
contract amounts exceed the amount of potential credit risk, relates to
the Federal National Mortgage Association - Delegated Underwriting and
Servicing ("FNMA-DUS") program. The Company was insuring approximately
$114 million under the program at December 31, 1996 for loans on
properties located primarily in the Midwest which mature between 1997 and
2006. Under the terms of the program, the Company is responsible for the
first portion of loss on any co-insured loan, with the percentage
determined by the loan program. The Company's total exposure under
FNMA-DUS program, should the borrowers default and the collateral prove to
be of no value, was approximately $24 million at December 31, 1996.
Individual co-insured loans have letters of credit in favor of FNMA which
may be drawn upon to cover collateral deficiencies. At December 31, 1996,
approximately $4.6 million in letters of credit were available.
14. SUBSEQUENT EVENTS
In January 1997 the Company acquired the stock of Reinlein/Lieser/McGee
Holding Corporation (R/L/M) and R/L/M Employee Benefit Corporation for
approximately $1,129,000, financed primarily through two bank loans (with
scheduled monthly payments of principal and interest through February 1,
2002). Two hundred thousand dollars of this amount has been placed in
escrow and is recoverable by the Company if subsequent R/L/M losses
exceeding 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 10 years. Combined unaudited revenues
and net income for the acquired companies were approximately $600,000 and
$300,000, respectively, in 1996.
On March 7, 1997, the Company completed a Stock Purchase transaction with
an affiliate of Harbert Management Corporation (Harbert) providing for a
significant minority ownership interest in the Company up to approximately
30%. Under the terms of the agreement, the Company sold one million shares
of its Common Stock to Harbert for $1,000,000. Over the course of the next
year, Harbert will invest up to $2 million to assist with strategic
acquisitions, and an additional $2 million earmarked for investment in
subordinate tranches of commercial mortgage backed securitizations.
Harbert will receive Common Stock for its additional investments at the
rate of one share for each $1.05 of investment.
******
F-17
<PAGE> 35
ITEM 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ----------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
- -----------------------------------
None
PART III
--------
ITEM 9. - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
- ----------------------------------------------------------------
PERSONS; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
- -----------------------------------------------------------
The Company currently has five Directors, one of which is also an executive
officer of the Company. All Directors of the Company hold office until the next
annual meeting of the stockholders and until their successors have been duly
elected and qualified.
Officers of the Company, with the exeception of Jay N. Rollins, do not serve a
term of years but serve at the pleasure of the Board of Directors.
The directors and executive officers of the Company as of March 7, 1997 are as
follows.
Name Age Position with Company
- ---- --- ---------------------
Ronald E. Roark 46 Chairman, Chief Executive
Officer, Acting President
and Chief Operating Officer
and Director
John Everets 50 Director
Gordon V. Smith 64 Director
Raymond J. Harbert 38 Director
Michael D. Luce 44 Director
Grace Jenkins 44 Executive Vice President
Jay N. Rollins 36 Executive Vice President
Jack Koczela 42 Executive Vice President
Richard A. Brock 47 Senior Vice President,
Treasurer and Chief
Financial Officer
William R. Stanley 43 Senior Vice President
Dean Melchi 44 Vice President
Stephen W. Brown 46 Secretary
17
<PAGE> 36
Set forth below are the principal occupations and affiliations during
the last five years of the directors and executive officers. All information
is as of March 7, 1997.
RONALD E. ROARK has served as Chairman of the Board of Directors of the Company
since August 4, 1994 and as Chief Executive Officer of the Company since
September 13, 1994 and as Acting President and Chief Operating Officer since
August 31, 1996. Since June, 1991, he has served as President of Crown. He has
been President of REE, Inc. since 1979 and Culloden of Ohio, Inc., formerly
known as R.E. Roark Companies. In May, 1993, an affiliate of his acquired
control of a majority interest in Ohio Financial Service Corporation ("OFSC")and
he became Chairman of the Board of Directors.
JOHN EVERETS has served as a Director of the Company since September
13, 1994. He has been Chairman of the Board and Chief Executive
Officer of HPSC, Inc. since July 1993 and a Director of that company
since 1983. From January, 1990 to July, 1993, he was Chairman of the
Board of T.O. Richardson Co., Inc. Mr. Everets also served as Chairman
of the Connecticut Development Authority from 1991 to July, 1994. Mr.
Everest is a Director of Dairy Mart Convenience Stores, Inc. and the
Eastern Company.
GORDON V. SMITH has served as a Director of the Company since October
1, 1996. He has been Chairman of the Board of Miller and Smith
Holding, Inc. since 1964. From 1985 to 1994, he served as Chairman and
Chief Executive Officer of Providence Savings and Loan Association,
F.A. He served as Chairman of Eastern Realty Corporation from 1993
until October 1, 1996. Mr. Smith has served as a Director of Bank Plus
since 1996.
RAYMOND J. HARBERT has served as a Director of the Company since March
7, 1997. Mr. Harbert has been President and Chief Executive Officer
of Harbert Corporation since July 1990. Prior to that time, he served
as Vice President of the Harbert Corporation and as President of
Harbert Properties Corporation.
MICHAEL D. LUCE has served as a Director of the Company since March 7, 1997.
Since 1995, Mr. Luce has served as Executive Vice President and Chief Financial
Officer of Harbert Corporation and Harbert Management Corporation. Until 1995,
he served as Senior Managing Director of the Investment Banking Department of
Bear, Stearns & Co.
GRACE JENKINS has served as Executive Vice President of the Company since March
6, 1997. She served as a Vice President of the Company
18
<PAGE> 37
from September 13, 1994 to that date. She has been a Vice President of Crown
since September, 1993. Since November 1991, she has served Crown in various
capacities related to administration and management information systems.
JAY N. ROLLINS has served as Executive Vice President of the Company
since October 1, 1996. Mr. Rollins has served as President of Eastern
Realty Corporation since 1993. From 1989 until 1995, he was Director
of Finance at NVR, L.P.
JACK KOCZELA has served as Executive Vice President of the Company since March
6, 1997 and as Managing Director of Crown Euro since its founding in July 1996.
From November 1990 until February 1996, he served as Principal and Managing
Director, New Business Development, for JCF Partners.
RICHARD A. BROCK has served Senior Vice President and Chief Financial Officer
since March 6, 1997. He has served as Treasurer since September 13, 1994, from
which date he also served as Vice President and Acting Chief Financial Officer.
Since January, 1991, he has served as Acting Chief Financial Officer of Crown
and, since January, 1992, has been a Vice President. From 1984 to January, 1991,
Mr. Brock was corporate director of investment management for Cardinal
Industries, Inc.
WILLIAM R. STANLEY has served as Senior Vice President of the Company since
March 6, 1997. He was elected Vice President of the Company in November 1996.
Mr. Stanley serves as Managing Director of Portfolio Operations and was
responsible for establishing the Company's Atlanta office in 1991.
DEAN MELCHI has served as Vice President of the Company since March 6, 1997.
Prior to that time, he served as Director of Special Projects for the Company
from April 1995. Mr. Melchi has been a Vice President of OFSC since August 1994.
From 1992 until August 1994, he was Manager of Real Estate Properties for
Textron Financial Corporation. From 1985 until 1992, he was the Vice President
of Ward Financial.
STEPHEN W. BROWN has served as Secretary of the Company since September 13, 1994
and as Corporate Counsel since August 1996. Since March, 1992, he has served
Crown in various asset management capacities and as a legal counsel. From
December, 1990 until February, 1992, he worked for the RTC in resolving the
affairs of Mid-America Federal Savings and Loan Association.
19
<PAGE> 38
ITEM 10. - EXECUTIVE COMPENSATION
- ---------------------------------
The following table sets forth information with respect to the Chief Executive
Officer, each of the four most highly compensated executive officers and two
former executive officers for the three years ended December 31, 1994, 1995 and
1996.
<TABLE>
<CAPTION>
Year Ended All Other
Name and Title December 31 Salary Bonus Compensation
- -------------- ----------- ------ ----- ------------
<S> <C> <C> <C> <C>
Ronald E. Roark, (1) 1996 $300,000 $0 $0
CEO, Chairman 1995 $300,000 $200,000 $0
1994 $125,000 $ 52,300 $0
Louis J. Castelli (2) 1996 $ 83,333 $ 0 $36,000
1995 $125,000 $ 75,000 $0
1994 $ 98,750 $ 13,000 $0
Jay N. Rollins (3) 1996 $100,774 $ 93,299 $0
Executive Vice 1995 $ 90,000 $ 71,765 $0
President 1994 $ 85,000 $ 44,481 $0
Richard A. Brock (4) 1996 $ 92,700 $ 30,000 $0
Vice President, 1995 $ 93,000 $ 25,000 $0
Treasurer, Acting CFO 1994 $ 90,000 $ 27,500 $0
Craig Koenig (5) 1996 $115,000 $ 0 $0
Vice President 1995 $115,000 $ 5,000 $0
1994 $115,000 $ 5,000 $0
Tacie J. Fox(6) 1996 $125,000 $ 85,898 $0
1995 $ 95,000 $ 12,000 $0
William R. Stanley(7) 1996 $102,333 $ 0 $0
Vice President 1995 $ 95,000 $12,000 $0
</TABLE>
(1) Mr. Roark has served as Chairman and CEO of the Company
since August 4, 1994 and September 13, 1994 respectively
and as Acting President and Chief Operating Officer since
August 31, 1996.
A $500 monthly car allowance and family medical coverage
premiums are paid on his behalf by the Company.
20
<PAGE> 39
(2) Mr. Castelli resigned as President and COO of the Company
effective August 31, 1996. He had served in those
capacities since August 4, 1994 and September 13, 1994
respectively. Mr. Castelli resigned as a Director of the
Company effective January 27, 1997.
(3) Mr. Rollins was elected Executive Vice President of the
Company upon the Eastern Acquisition October 1, 1996. The
information for Mr. Rollins prior to that date is that of
Eastern. The Company and Mr. Rollins have entered into an
employment agreement effective October 1, 1996 and
terminating December 31, 1998 providing for an annual salary
of $125,000, additional performance-based bonuses and
warrants to purchase up to 125,000 shares of the Common
Stock at $1.00 per share. A $500 monthly car allowance and
family medical coverage premiums are paid on his behalf by
the Company.
(4) Mr. Brock has served Senior Vice President and Chief
Financial Officer since March 6, 1997. He has served as
Treasurer since September 13, 1994, from which date he also
served as Vice President and Acting Chief Financial
Officer.
(5) Mr. Koenig served as a Vice President of the Company from
September 13, 1994 until his resignation effective February
21, 1997.
(6) Ms. Fox served as an Executive Vice President of the
Company from September 13, 1994 until September 5, 1996.
(7) Mr. Stanley was elected a Vice President of the Company
effective November 8, 1996 and Senior Vice President,
effective March 6, 1997.
In 1994, prior to the acquisition of NorthCorp, each Director who was not an
employee of NorthCorp's parent company was paid $1,000 plus expenses for each
meeting of the Board of Directors and $500 for each committee meeting such
director attended.
For 1994 following the acquisition of NorthCorp, and in 1995 and 1996, each
Director who was not an employee of the Company was paid an annual retainer of
$12,000, payable quarterly; $500 for each meeting of the
21
<PAGE> 40
Board of Directors and $500 for each committee meeting such Director attended,
plus expenses.
ITEM 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- --------------------------------------------------------------
MANAGEMENT
- ----------
The following table sets forth certain information regarding the beneficial
ownership of the common stock of the Company as of March 7, 1997 by: (i) each
person known by the Company to own beneficially more than 5% of the shares of
the Company's common stock; (ii) each current Director of the Company; (iii) the
Chief Executive Officer and each other person listed in the Summary Compensation
Table (iv) all directors and officers of the Company as a group. Except as
otherwise noted below, each of the shareholders identified in the table has sole
voting and investment power over the shares beneficially owned by each such
shareholder.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Number of Shares Approximate
of Common Stock Percent
--------------- of Class
--------
<S> <C> <C>
Ronald E. Roark (1)(2)(3)(4) 4,229,300 43.0%
Harbert Equity Fund I,
L.L.C. (4) 1,000,000 10.2%
Asdale Limited (5) 976,524 9.9%
The Gordon V. and Helen
C. Smith Foundation (6) 538,677 5.5%
John Everets (7) --- ---
Gordon V. Smith (6)(8) 538,677 5.5%
Raymond J. Harbert (4)(9) 1,000,000 10.2%
Michael D. Luce (4)(9) 1,000,000 10.2%
Louis J. Castelli (2) --- ---
Jay N. Rollins (1) 26,700 .3%
Richard A. Brock (1) --- ---
Craig Koenig (10) 1,250 n/m
Tacie J. Fox (11) 33,000 .3%
William R. Stanley (11) 450 n/m
All directors and executive
officers as a group
(12 persons) 5,773,327 58.8%
</TABLE>
(1) Mailing address is c/o the Company, 1251 Dublin Road, Columbus, Ohio
43215.
(2) Tucker holds 4,207,500 shares of the Common Stock. Until January
27, 1997, Mr. Roark held an 80% ownership interest in Tucker and
Mr. Castelli held a 20% ownership interest. On that date, Messrs.
22
<PAGE> 41
Roark and Castelli entered into a securities purchase agreement
whereby Mr. Roark agreed to purchase Mr. Castelli's remaining ownership
interest in Tucker for a total of $400,000: $150,000 was paid at
closing; the remainder is due in four equal annual instllments of
$62,500, payable on or before September 1, 1997, 1998, 1999 and 2000,
respectively. Tucker has pledged 521,728 shares of the Common Stock to
secure the remaining obligations under this agreement.
(3) Includes (a) 4,207,500 shares held by Tucker, (b) 4,600 shares held by
his wife and (c) 17,200 shares held by Trident Air Services, Inc., of
which Mr. Roark is president.
(4) The mailing address for Harbert Equity Fund I, L.L.C. ("Harbert
Fund") is c/o Harbert Management Corporation, One Riverchase
Parkway South, Birmingham, Alabama 35244. The Harbert Fund has
entered into a Stock Purchase Agreement ("SPA") with the Company
whereby the Harbert Fund purchased one million shares of the
Common Stock for a price of one million dollars and may invest up
to an additional $4 million (See Item 6 - Management's Discussion
and Analysis or Plan of Operations - Liquidity and Capital
Resources). Pursuant to the agreement, Messrs. Harbert and Luce
have been elected to the Company's Board of Directors. The
Company and the Harbert Fund have entered into a registration
rights agreement with respect to the Common Stock acquired by the
Harbert Fund pursuant to the SPA granting the Harbert Fund one
demand registration and up to three incidental registrations. Mr.
Roark, Tucker and the Harbert Fund have entered into a voting
agreement whereby, for a period of up to five years as set forth
ing the SPA, Mr. Roark and Tucker agree to vote their shares of
the Common Stock for such nominees for election as a Director of
the Company as the Harbert Fund is entitled to desiginate for
nomination pursuant to the SPA and the Harbert Fund agrees to vote
all shares of the Common Stock benefically owned by it for the
election of Mr. Roark as a director of the Company.
(5) Mailing address is 44 Lowndes Street, London SW1X 9HX, England.
(6) The mailing address for The Gordon V. and Helen C. Smith
Foundation ("Smith Foundation") is c/o Miller and Smith Holding,
Inc., 1568 Springhill Road, McLean, Virginia 22102.
(7) The mailing address for Mr. Everets is c/o HPSC, Inc., 60 State
Street, 35th Floor, Boston, Massachusetts 02109.
23
<PAGE> 42
(8) Mr. Smith, as President of the Smith Foundation, may be deemed the
beneficial owner of such shares. Mr. Smith disclaims such
beneficial ownership.
(9) Messrs. Harbert and Luce, as executive officers of Harbert
Management Corporation, Manager of Harbert Fund, may be deemed the
beneficial owners of such shares. Messrs. Harbert and Luce
disclaim such beneficial ownership.
(10) The mailing address for Mr. Koenig is 600 E. Las Colinas Blvd.,
No. 1900, Irving, Texas 75039.
(11) The mailing address for Ms. Fox is 1703 Surrey Lane NW,
Washington, DC 20007.
ITEM 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
During 1996 and 1995, the Company performed servicing, consulting and accounting
services for various companies affiliated with Mr. Roark. The Company generated
revenues of approximately $86,000 in 1996 and $88,000 in 1995 from these
services.
During 1996, the Company paid approximately $28,000 to affiliates of Mr. Roark
for miscellaneous services.
ITEM 13. - EXHIBITS, LIST AND REPORTS ON FORM 8-K
- -------------------------------------------------
<TABLE>
<CAPTION>
a) The following exhibits are filed as part of this report:
Exhibit Method
Number Exhibit of Filing
- ------ ------- ---------
<S> <C> <C>
3.3 Restated Certificate of Incorporated by
Incorporation reference to Crown NorthCorp,
Inc. Form 8-K filed June
6, 1995.
3.4 Bylaws Incorporated by reference to
Crown NorthCorp, Inc. Form 10-
KSB filed March 29, 1996.
4.1 Certificate of Designation for Incorporated by reference
Series A Convertible Preferred to Crown NorthCorp, Inc. Form
Stock, par value $.01 per share, 10-QSB filed November 14,
Of Crown NorthCorp, Inc. 1996.
</TABLE>
24
<PAGE> 43
<TABLE>
<CAPTION>
<S> <C> <C>
4.2 Certificate of Designation for Incorporated by reference
Series B Preferred Stock, par to Crown NorthCorp, Inc. Form
value $.01 per share, of Crown 8-K filed January 24, 1997.
NorthCorp, Inc.
4.3 Certificate of Designation for Incorporated by reference
Series C Convertible Preferred to Crown NorthCorp, Inc. Form
Stock, par value $.01 per share, 8-K filed January 24, 1997.
of Crown NorthCorp, Inc.
10.37 Stock Purchase Agreement dated Incorporated by reference
as of July 31, 1996 by and among to Crown NorthCorp, Inc. Form
Crown NorthCorp, Inc., Tucker 10-QSB filed August 14, 1996.
Holding Company, Ltd., CSW
Acquisition Corp and Bradley S.
Weiss
10.38 Form of Registration Rights Incorporated by reference
Agreement between Crown NorthCorp, to Crown NorthCorp, Inc. Form
Inc. and various parties dated 10-QSB filed August 14, 1996.
July 30, 1996.
10.39 Stock Purchase Agreement dated Incorporated by reference
as of October 1, 1996 by and to Crown NorthCorp, Inc. Form
among Crown NorthCorp, Inc., CNC 10-QSB filed November 14,
Holding Corp., Miller and Smith 1996.
Holding, Inc., Gordon V. Smith,
Alvin D. Hall, Spencer R.
Stouffer, Richard J. North,
Jay N. Rollins, Charles F. Stuart,
Jr., Eastern Realty Corporation,
Eastern Baltimore, Inc., and
Eastern Realty, L.L.C.
10.40 Form of Registration Rights Incorporated by reference
Agreement, dated as of October 1, to Crown NorthCorp, Inc. Form
1996 among Crown NorthCorp, 10-QSB filed November 14, 1996
Inc. and Miller and Smith
Holding, Inc., Gordon V. Smith,
Alvin D. Hall, Spencer R.
Stouffer, Richard J. North,
Jay N. Rollins and Charles F.
Stuart, Jr.
</TABLE>
25
<PAGE> 44
<TABLE>
<S> <C> <C>
10.41 Form of Warrant, dated October 1, Incorporated by reference to
1996 to purchase the common stock Crown NorthCorp, Inc. Form
of Crown NorthCorp, Inc. 10-QSB filed November 14, 1996
10.42 Settlement and Release Agree- Incorporated by reference to
ment effective as of November 22, Crown NorthCorp, Inc. Form
1996 by and between the Federal 8-K filed December 16, 1996.
Deposit Insurance Corporation
(acting in various capacities
itemized in the Agreement) and
Crown Revenue Services Inc.
10.43 Settlement and Release Agreement Incorporated by reference to
effective as of November 15, Crown NorthCorp, Inc. Form
1996 by and among the Federal 8-K filed December 16, 1996.
Deposit Insurance Corporation
(acting in various capacities
itemized in the Agreement),
Greenthal/Harlan Realty Services,
Co. and Crown Revenue Services,
Inc.
10.44 Settlement and Distribution Incorporated by reference
Agreement by and among Crown to Crown NorthCorp, Inc. Form
Revenue Services, Inc. Culloden 8-K filed December 16, 1996.
of Ohio, Inc. and REE, Inc.
entered into as of November 30,
1996
10.45 Employment Agreement between Filed herewith
Crown NorthCorp, Inc. and Jay
N. Rollins
21.2 Subsidiaries of Crown NorthCorp, Filed herewith
Inc.
</TABLE>
b) Reports on Form 8-K
-------------------
On December 16, 1996, the Company filed a Current Report on Form 8-K
reporting that, effective November 30, 1996, reporting a settlement
with the Federal Deposit Insurance Corporation and a distribution of
retainage revenues under asset management and disposition contracts of
Crown Revenue Services, Inc.
26
<PAGE> 45
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 NorthCorp, Inc.
Date: 3/31/97 By: /s/
------------ ------------------------------
Ronald E. Roark
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: 3/31/97 By: /s/
------------ ------------------------------
Ronald E. Roark
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: 3/31/97 By: /s/
------------ ------------------------------
Richard A. Brock
Senior Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
Date: 3/31/97 By: /s/
------------ ------------------------------
Raymond L. Druseikis
Controller
(Principal Accounting Officer)
Date: 3/31/97 By: /s/
------------ ------------------------------
John Everets
Director
Date: 3/31/97 By: /s/
------------ ------------------------------
Gordon V. Smith
Director
Date: 3/31/97 By: /s/
------------ ------------------------------
Raymond J. Harbert
S-1
(Go to S-2)
<PAGE> 46
Date: 3/31/97 By: /s/
------------ ------------------------------
Michael D. Luce
Director
S-2
<PAGE> 1
[CROWN NORTHCORP LOGO]
October 1, 1996
Mr. Jay N.
Rollins
8901 Seneca
Lane
Bethesda, Maryland 20817
Dear Jay:
We are pleased that we have been able to reach a definitive
understanding regarding your employment with Crown NorthCorp,
Inc. ("Crown" or the "Company"). This letter will constitute
our agreement ("Agreement") and the terms of your employment
with Crown shall be as follows:
1. Positions/Duties.
-----------------
During the term of this Agreement, you shall serve as
Executive Vice President of Crown. You will also serve as the
President of the Eastern Realty divison of the Company. You
will serve on various Crown committees including the Credit
Committee and the New Business Committee, of which you will be
the chairman of the New Business Committee.
2. Term
----
This Agreement shall be for the term commencing with Crown's
acquisition of Eastern Realty (anticipated to take place on or
about October 1, 1996) and ending December 31, 1998. The
period beginning with the date of closing and ending December,
1996 shall be referred to as the "Stub Year". This initial
term ending December 31, 1998 may be extended, unless
terminated earlier pursuant to this Agreement, by the mutual
consent of the parties.
3. Compensation.
-------------
The Company will compensate you for your services rendered as follows:
(A) Base Compensation. You shall receive a base
salary at the annual rate of One Hundred Twenty-Five
Thousand Dollars ($125,000) (the "Base Salary")
during the Initial Term of this Agreement, with such
Base Salary payable in installments consistent with
the Company's normal payroll schedule. The Base
Salary shall be reviewed annually, and may be
adjusted to reflect merit or cost of living increases
as deemed appropriate.
1
<PAGE> 2
(B) Bonus Compensation
------------------
1
(2) STUB YEAR BONUS. The Stub Year will be defined as October 1, 1996
through December 31, 1996. You shall be eligible to be paid a bonus
of $31,250 for your ability to achieve certain goals during the Stub
Year. These goals will be attached as an Exhibit to this letter and
will be jointly determined between you and I. We will meet to
determine these goals prior to October 3 1, 1996.
(3) ANNUAL INCENTIVE BONUS. During your tenure at Crown/NorthCorp you
will be entitled to receive an annual incentive bonus of up to 100%
of your base salary, presently $125,000. Your annual incentive bonus
will begin after the Stub Year and will run from January 1 through
December 31. The specifics of the bonus structure will be reset each
year in an annual planning meeting with the Chairman, and will be
attached as an Exhibit to this contract. This meeting will take place
no later than February 15th of each year. That bonus opportunity
shall have four components as follows:
1. PERSONAL GOALS. A minimum of three and a maximum of five personal
goals will be set each year by you and the Chairman. This category
will represent 25% of your annual Incentive Bonus.
2. EASTERN PERFORMANCE. For the next two years, a portion of your
annual Incentive Bonus will be based upon actual financial results of
Eastern Realty, compared to Eastern budgeted financial results. The
budgeted results for Eastern will be those represented in the "Final
Merger Pricing Model." It is understood that the pricing model
expenses were based upon a liquidation of Eastern, therefore, it will
be necessary to allocate the actual expenses between Eastern
activities and Crown activities. You and I will meet every six
months, beginning January 1, 1997, to compute expense allocations
attributable to Eastern Realty activities. These allocations will be
performed on a "look back" basis. After two years, a portion of your
incentive compensation will be reallocated to another performance
category mutually agreeable to you and the Chairman. This category
will represent between 25% and 50% of your annual bonus compensation.
- --------
1 Strikeout initialed by both parties on original document.
<PAGE> 3
3. CROWN NORTHCORP PERFORMANCE. A portion of your annual
incentive bonus will be based on the financial results of
Crown NorthCorp as compared to Crown's budgeted financial
results. This portion of your annual incentive bonus is based
on the assumption that in your position as Executive Vice
President of Crown, you will have direct impact and influence
on corporate operations, including both existing and new
business platforms. If your duties become such where you do
not have direct influence and impact on corporate operations,
this bonus portion will be revised to reflect more
appropriate criteria (at the same compensation amounts) to
reflect your role and responsibilities. This category will
represent between 25% and 50% of your annual bonus
compensation .
4. NEW BUSINESS BONUS.
1 you shall also be entitled to a bonus based on new business
origination. These bonuses will include, but are not
limited to, the following:
(A) New Management Contracts.
-------------------------
(B) New Contract/Portfolio Acquisitions.
------------------------------------
(C) New Single Asset Acquisitions.
------------------------------
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 at
the same level and to the same degree as such benefits are made available to
them. For purposes of this Section 4, the term "benefits" shall mean all
benefits provided by the Company, including, without limitation, all medical
and hospitalization insurance, life insurance, disability insurance, deferred
compensation and/or retirement plans, profit sharing plans, automobile
allowance, parking privileges, club memberships, travel and entertainment
privileges, vacation and sick leave. Such benefits shall include, at a
minimum, any and all benefits outlined in the Company Employee Handbook.
Notwithstanding the above, as part of your compensation, the Company has
agreed to provide you with the following benefits:
(A) Company paid medical and hospitalization insurance for you and
your dependents, at no charge to you; and
3
- --------
1 Strikeout initialed by both parties on original document.
<PAGE> 4
(B) The Company has agreed to lease you a car at a monthly
cost not to exceed $500.00 per month.
5. STOCK WARRANTS. Within 30 days of your starting employment
date, you shall receive a grant of stock warrants for 125,000
shares of Crown at $1.00 per share, vesting in equal amounts over
three years. In the event Crown should be acquired by or merged
into a non- publicly traded third party at any time subsequent to a
date two years from the date hereof, the options described in this
Paragraph 5, to the extent unvested, shall be deemed to be fully
vested prior to such acquisition or merger. In the event Crown
should be acquired by or merged into a publicly-traded third party
prior to a date two years from the date hereof, any warrants not
yet vested under this Paragraph 5 shall be terminated provided you
are issued comparable warrants having an equivalent value and terms
with the acquiring entity. Such new warrants shall be issued
pursuant to any acquisition or merger agreement.
6. PERFORMANCE BASED STOCK OPTIONS. The company is presently
developing a senior management stock option plan. The purpose is to
provide senior executives in the company with incentives through stock
ownership. You will play an active role in establishing this program
and once established, you will be immediately eligible. Your
participation level in the stock option plan will be based on various
factors, including salary, title, responsibility and tenure.
7. CHANGE IN CONTROL. In the event at any time during the term of this
letter agreement there is a change I control of Crown by merger,
acquisition or otherwise such that Ronald Roark is no longer Chief
Executive Officer and you are not retained in a position of equal or
greater title, authority, responsibility, compensation and benefits of
comparable or greater value, you may, at your option, within six
months of such change in control, terminate your employment and in
such event you shall be paid your base compensation as described in
Paragraph 3 (A) for the balance of the Term of this Agreement.
8. TENURE. As part of the merger, the Company will recognize your
tenure at Eastern Realty as equal tenure in Crown.
9.TERMINATION FOR CAUSE.
(A) Notwithstanding anything to the contrary contained in
this Agreement, the Company may terminate your employment for
"Cause". For purposes of this Agreement, "Cause" shall mean
only (i) your willful and continuing refusal to perform a
material duty hereunder; (ii) your final, non appealable
conviction for or plea of guilty to engaging in fraud or
embezzlement against the Company; or (iii) your final, non
appealable conviction for or plea of guilty to the commission
of a felony.
4
<PAGE> 5
(B) PROCEDURE FOR TERMINATION.
(1) The Company shall provide you with written notice of any
intention to terminate your employment for Cause described
in Section 8(A)(i) and you shall have a period of thirty
(30) days in which to cure such violation.
(2) The Company may terminate your employment hereunder
immediately, and without notice or opportunity to cure, upon
the occurrence of any event described in Section 8(A)(ii) and
8(A)(iii).
(C) COMPENSATION UPON TERMINATION FOR CAUSE. In the event of any
termination of your employment pursuant to this Section 8,
the Company shall have no further obligations or liabilities
hereunder after that date of such discharge, other than for
payment of any unpaid Base Salary and Bonuses earned by you
prior to the date of such discharge and the reimbursement of
reasonable expenses incurred by you prior to the date of
such discharge.
10. DEATH. In the event of your death during the term of your employment, the
Company shall pay to your estate (i) any unpaid Base Salary and Bonuses earned
by you prior to the date of death and (ii) all unreimbused expenses reasonably
incurred by you prior to the date of death. Any unvested stock options described
in Sections 5 and 6 shall vest immediately. Any unvested stock options described
in Sections 5 and 6 shall vest immediately and be exercisable for five years
following your death.
11. VOLUNTARY TERMINATION. You shall have the right to terminate your employment
at any time upon sixty (60) days written notice to the Company. Upon your
resignation or other voluntary termination, the Company shall have no further
obligations or liabilities hereunder after the date of such termination, other
than for payment of any unpaid Base Salary and Bonuses earned by you prior to
the date of such termination.
12. TERMINATION WITHOUT CAUSE. Upon any termination of you by the Company
without Cause, the Company shall (i) pay to you any unpaid Base Salary earned by
you prior to the date of such termination, (ii) reimburse you for all reasonable
expenses incurred by you prior to the date of such termination and (iii) for the
longer of a period of twelve (12) months following the conclusion of the
Agreement or the remainder of the Term, as applicable, continue to pay to you
(A) the Base Salary and all Bonuses to which you would have been entitled in
accordance with the provisions of Section 3 and (B) continue to provide to you
all medical, hospitalization, disability and life insurance benefits to which
you were entitled immediately prior to such termination.
5
<PAGE> 6
13. MISCELLANEOUS
A. GOVERNING LAW. In the event of a dispute between you and the
Company, such dispute shall be governed by and construed in
accordance with the laws of the State of Delaware.
B. ATTORNEYS' FEES. In the event any suit or other legal proceeding
is brought for the enforcement of any of the provisions of this
Agreement, the parties hereto agree that the prevailing party shall
be entitled to recover from the other party upon final judgment on
the merits reasonable attorneys' fees, including attorneys' fees for
any appeal, and costs incurred in bringing such suit or proceeding.
C. NON-CIRCUMVENTION. For the term of this Agreement and for a period
of six (6) months from the termination date of this Agreement, or
until such earlier date as the Company may advise you in writing: (i)
you shall not appropriate for yourself, any business opportunity
which has been offered to the Company, or one for which the Company's
funds, facilities, or personnel have been used in developing such
business opportunity; (ii) where you, on behalf of the Company, enter
into or initiate any discussions, communications or negotiations in
connection with either existing or potential business opportunities
and/or clients, you shall preserve and protect the Company's
interests in such relationships; (iii) you shall promptly relay to
the Company all information obtained from such discussions,
communications or negotiations; and (iv) shall take no actions which
would have the purpose or effect of denying the Company of any and
all opportunities to participate in business, the nature of which the
Company, in its normal course, generally competes.
D. ENTIRE AGREEMENT. This letter Agreement constitutes our entire
agreement with respect to the subject matter hereof, and to the
extent of any conflict between the terms of this Agreement and any
other agreement, this Agreement then shall control.
6
<PAGE> 7
We are pleased to welcome you to the Crown NorthCorp organization.
Very truly yours,
CROWN NORTHCORP, INC.
By: /s/
-----------------------
Ronald E. Roark
Chairman and CEO
Acknowledged and agreed this 1 day of October, 1996.
By: /s/
------------------
Jay N. Rollins
7
<PAGE> 1
Exhibit 21.2
SUBSIDIARIES OF CROWN NORTHCORP, INC.
Crown Revenue Services, Inc., an Ohio corporation, is a wholly owned subsidiary
of Crown NorthCorp, Inc.
Crown Revenue Services Joint Venture I, an Ohio joint venture, is 75% owned by
Crown Revenue Services, Inc.
Crown Properties, Inc., an Ohio corporation, is a wholly owned subsidiary of
Crown Revenue Services, Inc.
Prime Tempus, Inc., a Texas corporation, is a wholly owned subsidiary of Crown
NorthCorp, Inc.
CNC Holding Corp., a Delaware corporation, is a wholly owned subsidiary of Crown
NorthCorp, Inc.
Eastern Realty, L.L.C., a Virginia limited liability company, with 99% of the
membership interests owned by CNC Holding Corp., and 1% owned by Crown Revenue
Services, Inc.
Crown NorthCorp Euro A/S, a Danish corporation, is a wholly owned subsidiary of
CNC Holding Corp.
Eastern Realty Corporation, a Virginia corporation, is a wholly owned subsidiary
of CNC Holding Corp.
Eastern Baltimore, Inc., a Virginia corporation, is a wholly owned subsidiary of
CNC Holding Corp.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000915338
<NAME> CROWN NORTHCORP
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 587,080
<SECURITIES> 0
<RECEIVABLES> 1,255,009
<ALLOWANCES> 20,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,187,208
<PP&E> 3,100,631
<DEPRECIATION> 1,092,989
<TOTAL-ASSETS> 9,934,589
<CURRENT-LIABILITIES> 1,744,684
<BONDS> 2,180,694
<COMMON> 88,269
2,000,000
10
<OTHER-SE> 2,659,447
<TOTAL-LIABILITY-AND-EQUITY> 9,934,589
<SALES> 0
<TOTAL-REVENUES> 10,638,758
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,971,772
<LOSS-PROVISION> (69,787)
<INTEREST-EXPENSE> 241,124
<INCOME-PRETAX> (4,504,351)
<INCOME-TAX> (1,237,422)
<INCOME-CONTINUING> (3,266,929)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,266,929)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
