<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1997
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For transition period from to
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Commission File No.: 0-22936
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Crown NorthCorp, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 22-3172740
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1251 Dublin Road, Columbus, Ohio 43215
------------------------------------------------
(Address of principal executive offices)
(614) 488-1169
-------------------------
(Issuer's telephone number)
N/A
------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS.
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
As of September 30, 1997, the issuer had 10,444,749 shares of its common
stock, par value $.01 per share, outstanding.
Transitional Small Business Disclosure Format (check one). Yes No X
--- ---
<PAGE>
CROWN NORTHCORP, INC.
FORM 10-QSB
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
INDEX
PART I - FINANCIAL INFORMATION. PAGES
-----
Item 1. Financial Statements (Unaudited) 1 - 4
Condensed Consolidated Balance Sheets as of September 30,
1997 and December 31, 1996 1
Condensed Consolidated Statements of Operations for the
third quarter and nine months ended September 30, 1997
and 1996 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 3 - 4
Notes to Condensed Consolidated Financial Statements-
September 30, 1997 and 1996 5 - 8
Item 2. Management's Discussion and Analysis or Plan of
Operation 8 - 15
PART II - OTHER INFORMATION.
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
Signature 17
Exhibit Index 18
<PAGE>
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,030,072 $ 587,080
Trade accounts receivable-net of allowance of $60,000 in 1997 and $20,000 in 1996 537,048 1,235,010
Income tax refund receivable 1,211,129
Prepaid expenses and other 196,365 153,989
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Total current assets 1,763,485 3,187,208
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PROPERTY AND EQUIPMENT-net 1,911,474 2,007,642
RESTRICTED CASH 5,046,993 3,668,604
GOODWILL - net of accumulated amortization of $166,125 in 1997 and $262,665 in 1996 521,653 353,613
OTHER ASSETS 1,396,829 717,522
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TOTAL $ 10,640,434 $ 9,934,589
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 369,500 $ 1,097,458
Accounts payable and accrued expenses 1,535,933 647,226
------------- ------------
Total current liabilities 1,905,433 1,744,684
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LONG-TERM OBLIGATIONS:
Notes and bonds payable 2,657,615 2,180,694
Loan loss reserve 1,621,484 1,261,485
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Total long-term obligations 4,279,099 3,442,179
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SERIES B REDEEMABLE PREFERRED STOCK 2,000,000 2,000,000
SHAREHOLDERS' EQUITY:
Common stock 104,950 88,269
Convertible preferred stock:
Series A (liquidation preference- $450,000 plus unpaid dividends) 5
Series C (liquidation preference- $500,000) 5 5
Additional paid-in capital 4,341,048 3,293,120
Retained earnings (accumulated deficit) (1,973,365) (616,937)
Treasury stock, at cost (16,736) (16,736)
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Total shareholders' equity 2,455,902 2,747,726
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TOTAL $ 10,640,434 $ 9,934,589
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</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
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1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Management fees $ 982,522 $ 1,252,506 $ 3,208,682 $ 4,558,518
Disposition and bonus fees 1,275,745 152,012 2,826,089 1,848,134
Mortgage origination fees 223,899 223,899
Other 370,858 42,489 1,139,070 1,511,844
------------- ------------ ------------ ------------
Total revenues 2,853,024 1,447,007 7,397,740 7,918,496
------------- ------------ ------------ ------------
OPERATING AND ADMINISTRATIVE EXPENSES:
Personnel expenses 1,832,134 1,845,414 5,568,098 6,976,517
Occupancy, insurance and other expenses 591,783 656,050 2,037,590 2,179,468
Amortization, depreciation, and loss on disposals 89,625 131,152 266,458 675,796
Interest expense 84,811 63,009 282,801 156,627
Minority interest in loss of subsidiary (177,321) (353,158)
Restructuring expense 570,000
Employment contract settlement 206,563
Loss on sale of subsidiary - 1,406,724 - 2,576,724
------------- ------------ ------------ ------------
Total operating and administrative expenses 2,598,353 3,925,028 8,931,510 12,211,974
------------- ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 254,671 (2,478,021) (1,533,770) (4,293,478)
INCOME TAX BENEFIT - (613,396) (192,183) (1,248,978)
------------- ------------ ------------ ------------
NET INCOME (LOSS) $ 254,671 $ (1,864,625) $ (1,341,587) $ (3,044,500)
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
EARNINGS (LOSS) PER SHARE:
PRIMARY $ 0.02 $ (0.23) $ (0.13) $ (0.37)
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
FULLY DILUTED $ 0.02 $ (0.23) $ (0.13) $ (0.37)
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING AND COMMON SHARE
EQUIVALENTS:
PRIMARY 15,876,693 8,199,779 9,979,237 8,199,779
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
FULLY DILUTED 15,876,693 8,199,779 9,979,237 8,199,779
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNAUDITED
---------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,341,587) $ (3,044,500)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization and depreciation 372,333 628,017
Loss on sale of subsidiary 2,576,724
Other - net (100,541) (277,697)
Change in working capital components - net of effects from acquisition
of subsidiaries:
Accounts receivable 1,901,160 2,273,851
Prepaid expenses and other assets (43,315) (16,562)
Accounts payable and accrued expenses 891,887 (2,143,281)
------------ ------------
Net cash provided (used) by operating activities 1,679,937 (3,448)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (172,433) (260,447)
Corporate acquisitions 274,431 (156,000)
Investment in partnerships (162,500)
Disributions from partnerships and joint ventures 230,894
Distributions to minority interest (527,611)
Other-net (146,729) (31,062)
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Net cash provided (used) by investing activities 23,663 (975,120)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,912,000 2,000,000
Principal payments on notes and bonds payable (5,044,323) (866,848)
Proceeds from issuance of common stock-net 1,049,762
Other (178,047) (39,857)
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Net cash provided (used) by financing activities (1,260,608) 1,093,295
------------ ------------
NET INCREASE IN CASH DURING THE PERIOD 442,992 114,727
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 587,080 275,538
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,030,072 $ 390,265
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
UNAUDITED
---------
1997 1996
---- ----
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 207,720 $ 192,220
---------- ----------
---------- ----------
Cash paid for income taxes $ - $1,565,475
---------- ----------
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NONCASH INVESTING AND FINANCING ACTIVITIES:
CORPORATE ACQUISITIONS:
Accounts receivable - trade $ 16,983
Restricted cash 1,358,735
Other assets 591,137
Loan loss reserve (360,000)
----------
Net assets acquired, net of acquired cash $1,606,855
Amount financed - debt 1,881,286
----------
Net cash (acquired in) paid for corporate
acquisitions $ (274,431)
----------
----------
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1. GENERAL AND BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Crown NorthCorp, Inc., and subsidiaries (the "Company") reflect all
material adjustments consisting of only normal recurring adjustments which,
in the opinion of management, are necessary for a fair presentation of
results for the interim periods. Certain information and footnote
disclosures required under generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"), although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with
the year-end financial statements and notes thereto included in the
Company's Form 10-KSB for the year ended December 31, 1996. Certain
reclassifications have been made to the 1996 amounts to conform to the 1997
presentation.
2. RESTRUCTURING
During the second quarter of 1997, management implemented a restructuring
plan for the Company's operations which, among other items, encompassed
consolidating offices and exiting certain lines of business. The Company
expects to incur total restructuring charges of approximately $570,000, all
of which were recorded in the second quarter of 1997. Management expects to
complete the restructuring plan over the second half of 1997. The Company
intends to use available cash to fund these expenditures.
3. ACQUISITIONS
In January 1997, the Company acquired the stock of Reinlein/Lieser/McGee
Holding Corporation and R/L/M Employee Benefit Corporation (collectively
"R/L/M") for approximately $1,129,000. Two hundred thousand dollars of
this amount has been placed in escrow and is recoverable by the Company if
subsequent R/L/M losses exceed a stipulated amount. The acquisition was
accounted for using the purchase method of accounting, and the excess
purchase price over net identifiable assets acquired, approximately
$240,000, was allocated to goodwill and will be amortized over ten years.
The acquisition was financed primarily through two bank loans, which call
for scheduled monthly payments of principal and interest through February
1, 2002.
In August 1997, the Company announced its intention to acquire AMI Capital,
Inc. ("AMI"). The Company would acquire the stock of AMI in exchange for
cash, debt and common stock of the Company. Consummation of the
transaction is subject, among other things, to final
5
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approval of a definitive agreement by the boards of directors of both the
Company and the present owner of AMI, certain regulatory approvals and
other matters.
4. PROPERTY & EQUIPMENT
Property and equipment consists of the following at September 30, 1997 and
December 31, 1996:
1997 1996
---- ----
Land, building and improvements $1,408,957 $1,404,318
Furniture and equipment 1,405,945 1,696,313
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Total property and equipment 2,814,902 3,100,631
Less accumulated depreciation 903,428 1,092,989
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Property and equipment-net $1,911,474 $2,007,642
---------- ----------
---------- ----------
5. STOCKHOLDERS' EQUITY
In March 1997, the Company entered into a stock purchase agreement (the
"SPA") with Harbert Equity Fund I, L.L.C. ("Harbert Fund") providing for a
significant minority ownership interest in the Company of up to
approximately 30% of the common stock of the Company, par value $.01 per
share (the "Common Stock"). Under the terms of the SPA, the Company sold
one million shares of Common Stock to the Harbert Fund for a price of $1
million dollars. During the twelve months following the initial
investment, the Harbert Fund may invest up to $4 million. Of this amount,
at the discretion of Harbert, $2 million is earmarked to assist with
strategic acquisitions, with an additional $2 million earmarked for
investment in subordinate tranches of commercial mortgage backed
securitizations. In any of these additional investments, the Harbert Fund
would receive Common Stock at a rate of one share for each $1.05
investment.
In June 1997, all of the 450 outstanding shares of the Company's Series A
Convertible Preferred Stock (the "Series A Preferred") were converted into
560,135 newly issued shares of the Common Stock. Additionally, 7,911 newly
issued shares of the Common Stock were issued as payment for the cumulative
dividend due on the Series A Preferred.
In September 1997, an officer exercised warrants to acquire 100,000 shares
of Common Stock under the terms of an employment contract.
6. EARNINGS PER SHARE
Primary earnings (loss) per common share are computed by dividing net
income (loss) by the weighted average number of common shares and, as
appropriate, dilutive common stock
6
<PAGE>
equivalents for the period. The dilutive effects of shares issuable under
the SPA and Crown NorthCorp, Inc. Profit Sharing Stock Retirement Plan are
considered outstanding for earnings per share computations. Shares
outstanding are also adjusted for the possible conversion of the Company's
Series C Convertible Preferred Stock and the dilutive effects of warrants
and stock options. Shares contingently issuable under the Directors'
Option Plans are included as shares outstanding when criteria for vesting
have been met.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings per Share," which will require the retroactive adoption in the
Company's 1997 fiscal year. The new standard simplifies the computation of
earnings per share and requires the presentation of basic and diluted
earnings per share. Under SFAS No. 128, basic and diluted earnings per
share for the three and six months ended September 30, 1997 and 1996 would
be the same as primary and fully diluted earnings per share reported in the
condensed consolidated statements of operations.
7. INCOME TAX BENEFIT
The income tax benefit of $192,183 for the nine months ended September 30,
1997 primarily reflects the change in book estimates relating to the tax
refund receivable for 1996. As the Company expects to have in 1997 a net
operating loss carry forward available for income tax reporting purposes,
no tax benefit provision was made for the net losses for the nine months
ended September 30, 1997, and no tax provision was made for the third
quarter.
8. EMPLOYMENT CONTRACT SETTLEMENT
The employment contract settlement of $206,983 reflects a non-recurring
charge for the lump sum, final settlement of incentive compensation
payments otherwise due over time to a former employee.
9. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The FASB has issued Statement No. 129, "Disclosure of Information About
Capital Structure". This statement continues certain requirements to
disclose certain information about an enterprise's capital structure
prescribed by previous accounting standards. The Company's current
disclosures are in compliance with the requirements of the statement.
The FASB has issued Statement No. 130, "Reporting Comprehensive Income".
The Company will, as required, implement the provisions of the statement in
the quarter ending March 31, 1999. The Company's current disclosures are
in compliance with the requirements of the statement.
The FASB has issued Statement No. 131, "Disclosures About Segments of an
Enterprise and Related Information" which supersedes Statement No. 14,
"Financial Reporting For Segments of a Business Enterprise." The Company
will implement the provisions of this
7
<PAGE>
statement, as required, for the year ended December 31, 1999. Generally,
this statement requires financial information to be reported on the basis
that is used internally for evaluating segment performance and deciding how
to allocate resources to segments.
10. CONTINGENCIES
Management of the Company is not aware of any contingent liabilities
resulting from litigation or claims incident to the ordinary course of
business that would materially affect the financial position or results of
operations of the Company.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The Company derives its primary revenues from the financial services it offers
to owners and operators of commercial real estate interests. These services
include primary and special loan servicing, asset management and disposition,
commercial loan originations, asset securitization, underwriting, risk
management and land management for clients or partners. The Company is
continuing to reposition its business lines to grow both its historic, core
businesses, such as asset management and loan servicing, as well as newer,
related business lines, such as loan origination, securitization and fund
management. The Company utilizes strategic acquisitions and alliances as the
primary means of expanding and diversifying its core businesses and developing
and entering new businesses. Management is actively pursuing additional
acquisitions and alliances.
FORWARD LOOKING STATEMENTS
Statements in this report, to the extent they are not based on historical
events, constitute Aforward-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 and the Company's efforts to
complete acquisitions and strategic alliances or other business plans.
Investors are cautioned that forward-looking statements are subject to an
inherent risk that actual results may vary materially from those described
herein. Factors that may result in such variance, in addition to those
accompanying the forward-looking statements, include changes in interest rates,
prices, and other economic conditions; actions by competitors; natural
phenomena; actions by government authorities; uncertainties associated with
legal proceedings; pending acquisitions and pending alliances; technological
development; future decisions by management in response to changing conditions;
and misjudgments in the course of preparing forward-looking statements.
8
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BUSINESS OUTLOOK
Pursuant to its strategic business plan, the Company is continuing to take steps
to reposition the Company's core businesses, to grow both those businesses and
new, related activities and to streamline the Company's operations. Through the
implementation of this strategic plan, the Company intends to become a
vertically integrated financial services firm providing comprehensive services
to holders of interests in commercial real estate.
Asset management contracts with various clients, including investment banking
firms and partnerships, continue to provide a significant portion of the
Company's revenue. During the third quarter, the Company's principal investment
banking client placed into a securitized transaction a large number of the
assets under the Company's management. The Company received disposition fees of
$1,150,000 as a result of this transaction. Pursuant to a subservicing
agreement with a new client, the Company is now managing the affected assets in
the securitization. Asset management has historically been a core business of
the Company; management intends to continue to develop and expand the Company's
activities in this area.
The Company continues to develop programs to originate commercial mortgage
loans. Operating under the Federal National Mortgage Association's Delegated
Underwriting and Servicing, the Company has begun refinancing loans in acquired
portfolios. Operations have also commenced under a correspondent program
agreement with a financial services firm whereby the Company originates
commercial mortgage loans for that firm's securitization and whole loan sale
programs. The Company intends to significantly expand its loan origination
capabilities both through acquisitions and internal growth.
The Company continues to invest in the human and technological resources
necessary to maintain and develop its servicing systems. The Company holds
Aabove average" ratings from two nationally recognized rating agencies, Standard
and Poor's Corporation and Fitch Investors Service, L.P. These agencies
recently renewed these ratings, which are the second highest available.
Utilizing its capabilities as a rated servicer, the Company is actively seeking
to acquire the servicing rights to additional assets, including but not limited
to assets placed in securitized transactions.
Building upon its asset management and servicing businesses, the Company is
developing strategies to enter the fund management business. The Company may
operate in this business in various capacities including serving as an
investment advisor to or asset manager for a public or private investment fund
or real estate investment trust.
In Europe, during the third quarter, the Company entered into a joint venture to
provide asset management, financial and advisory services to an investment group
which acquired an interest in a large portfolio of real estate assets from an
agency of the Swedish government. The Company continues to pursue acquisitions
of asset portfolios and operating entities overseas.
9
<PAGE>
The Company continues to restructure its operations to better support its
existing businesses and expand into new, related activities. During the third
quarter, the Company effected certain reductions in staff, closed its Hoboken,
New Jersey office and took steps to reduce its office space in Dallas, Texas.
To sustain profitability, the Company must continue to expand its revenue base
and complete the restructuring of its operations. There can be no assurance,
however, that the Company will successfully implement acquisition strategies or
other elements of its strategic business plan, that implementation will occur at
any particular time or that implementation will produce any particular financial
results.
RESULTS OF OPERATIONS FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO
THE THIRD QUARTER ENDED SEPTEMBER 30, 1996
Total revenues increased $1.5 million to $2.9 million for the third quarter of
1997 from $1.4 million for the third quarter of 1996. The increase in revenue
was primarily attributable to disposition fees on a large number of assets under
the Company's management that were placed into a securitized transaction by its
principal investment-banking client. Contributing to the increase, to a lesser
extent, was the generation of fees from mortgage origination and related
servicing rights from the commencement of commercial mortgage loan origination
activities.
Management fees are recorded as services required under a contract are
performed, and are based on a percentage applied to the aggregate value of the
assets managed, as assigned in the contracts, or on original base monthly
amounts, as defined in the contracts. Management fee revenues decreased $269,984
to $982,522 for the third quarter of 1997 from $1,252,506 for the third quarter
of 1996. The decrease in management fee revenues primarily reflects the
termination of certain non-core businesses at the end of the second quarter of
1997. To a lesser extent, the decrease is also attributable to the disposition
of the Company's controlling interest in CSW Associates, Inc. ("CSW") in July
1996.
Disposition fees are recorded as revenue when the disposition of an asset has
been consummated and the asset owner has received the gross proceeds from the
disposition. 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. Disposition fee revenues increased $1,123,733 to $1,275,745 for
the third quarter of 1997 from $152,012 for the third quarter of 1996. The
increase in revenue was primarily attributable to fees of $1,150,000 on a large
number of assets under the Company's management which were placed into a
securitized transaction by an investment-banking client.
Mortgage origination fees of $223,899 reflect the generation of fees from
mortgage origination and related servicing rights from the commencement of
commercial loan origination activities.
Other revenues generally consist of equity in earnings of partnerships and joint
ventures, accounting, asset management and consulting services, and interest
income. Other revenues increased $328,369
10
<PAGE>
to $370,858 for the third quarter of 1997 from $42,489 for the third quarter of
1996 primarily from the equity in earnings of a joint venture performing asset
management, financial and advisory services to an investment group which
acquired an interest in a portfolio of real estate assets from the Swedish
government
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses, and professional development expenses. Personnel expenses
decreased $13,280, or 1%, to $1,832,134 for the third quarter of 1997 from
$1,845,414 for the third quarter of 1996. The third quarter of 1997 includes an
accrual of $200,000 for management incentives payable under the terms of
employment contracts. The decreases in 1997 were primarily caused by the
disposition of the Company's controlling interest in CSW in July 1996, the
operational restructuring resulting from the expiration of the Company's
public-sector contracts, and the implementation of the Company's strategic
business plan. Because of these factors, staffing was reduced significantly
from 1996, with resultant decreases in salaries, payroll taxes and benefits
expenses.
Occupancy, insurance and other expenses decreased $64,267 or 10%, to $591,783
for the third quarter of 1997 from $656,050 for the third quarter of 1996.
During the third quarter of 1997 the Company incurred a charge of approximately
$80,000 for acquisition expenses relating to abandoned business development
activities. Offsetting this charge, the disposition of CSW and the Company's
restructuring efforts resulted in reductions in other occupancy, insurance and
other expense components, including equipment leases and other services.
Amortization, depreciation and loss on disposal expenses primarily reflect the
amortization of the excess of cost over net assets of companies acquired through
the Company's acquisition program and the depreciation of the Company's fixed
assets. Amortization, depreciation and loss on disposition expenses decreased
$41,527 to $89,625 for the third quarter of 1997 from $131,152 for the third
quarter of 1996. The decrease for the third quarter of 1997 primarily reflects
the impacts of charging off in 1996 approximately $1,226,000 of unamortized
goodwill of consolidated subsidiaries and a loss on the disposal of equipment of
approximately $48,000.
Interest expense increased $21,802 to $84,811 for the third quarter of 1997 from
$63,009 for the third quarter of 1996. The increase primarily results from debt
obtained for the R/L/M acquisition.
As the Company expects to have in 1997 a net operating loss carry forward
available for income tax reporting purposes, no tax provision has been made for
the net income for the third quarter.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Total revenues decreased $.5 million to $7.4 million for the nine months of 1997
from $7.9 million for the comparable period of 1996. The composition of revenues
changed with management fees decreasing by approximately $1.3 million in 1997.
This was offset, in part, by increased disposition fees. This change in the
composition of revenues reflects the Company's transition from its traditional
public-sector contract orientation and their replacement with private-sector
contracts
11
<PAGE>
which generally provide for lower ongoing fees with the opportunity for
additional, incentive-based compensation at the end of an engagement. For the
nine months of 1997, the Company had public-sector contract revenues of
approximately $1.1 million, or 15% of total revenues compared to approximately
$4.5 million, or 57% of total revenues for the comparable period of 1996.
Management fee revenues decreased $1,349,836, to $3,208,682 for the nine months
of 1997 from $4,558,518 for the nine months of 1996. The decrease in management
fee revenues for the nine months of 1997 versus the nine months of 1996 reflects
the expiration of public-sector contracts at the end of 1995. Private-sector
contracts are at generally lower fees than those in the public sector.
Disposition fee revenues increased $977,955 to $2,826,089 for the nine months of
1997 from $1,848,134 for the nine months of 1996. Approximately 33% of the fees
were from public-sector contracts in 1997 compared to approximately 87% in 1996.
Private contract fees increased primarily from disposition fees on a large
number of assets under the Company's management that were placed into a
securitized transaction by an investment-banking client.
Mortgage origination fees of $223,899 reflect the generation of fees from
mortgage origination and related servicing rights from the commencement of
commercial loan origination activities.
Other revenues decreased $372,774 to $1,139,070 for the nine months of 1997 from
$1,511,844 for the nine months of 1996. Of the amount, incentive fees decreased
to $241,853 in 1997 from $1,302,219 in 1996. The decrease in incentive fees was
primarily due to certain public-sector contract thresholds being achieved in
1996 while the incentive levels on the more recent private-sector contracts
generally will not be realized until the completion of the contracts. The loss
in incentive fee revenue was offset with the equity in earnings from
partnerships and joint ventures, and interest income. The equity in earnings was
from entities acquired with the Eastern Realty Corporation acquisition in
October 1996. Additionally, the Company recorded equity earnings from a joint
venture performing asset management, financial and advisory services to an
investment group which acquired an interest in a portfolio of real estate assets
from the Swedish government.
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses, and professional development expenses. Personnel expenses
decreased $1,408,419, or 20%, to $5,568,098 for the nine months of 1997 from
$6,976,517 for the nine months of 1996. The decreases were primarily caused by
the disposition of CSW in July 1996 and by operational restructuring as a result
of the expiration of the Company's public-sector contracts and implementation of
its strategic business plan. Because of these factors, staffing was reduced
significantly from 1996, with resultant decreases in salaries, payroll taxes and
benefits expenses.
Occupancy, insurance and other expenses decreased $141,878 or 7%, to $2,037,590
for the nine months of 1997 from $2,179,468 for the nine months of 1996. During
the first nine months of 1997 the Company incurred charges of approximately
$311,000 representing acquisition expenses relating to abandoned business
development activities. Corresponding with the disposition of CSW and the
corporate restructuring addressed above, other occupancy, insurance and other
expense components, including equipment leases and other services, were
restructured to reduce overall expenses.
12
<PAGE>
Amortization, depreciation and loss on disposition expense decreased $409,338 to
$266,458 for the nine months of 1997 from $675,796 for the nine months of 1996.
The decrease in amortization and depreciation expenses for the nine months of
1997 reflects the impacts of 1996 transactions charging off approximately
$1,226,000 of unamortized goodwill of consolidated subsidiaries and recording
losses on the disposal of equipment of approximately $48,000 in 1996.
Interest expense increased $126,174 to $282,801 for the nine months of 1997 from
$156,627 for the nine months of 1996. The increase primarily results from debt
incurred for the R/L/M acquisition.
The minority interest in loss of subsidiary reflects the 20% of CSW's operations
not owned by the Company.
During the second quarter of 1997, management implemented a restructuring plan
for the Company's operations which, among other items, encompassed consolidating
offices and exiting certain lines of business. The Company expects to incur
total restructuring charges of approximately $570,000, all of which were
recorded in the second quarter of 1997. Management expects to complete the
restructuring plan by the end of 1997. The Company intends to use available
cash to fund these expenditures.
The employment contract settlement of $206,563 in the nine months of 1997
reflects a non-recurring charge representing the lump sum, final settlement of
incentive compensation payments otherwise due over time to a former employee.
The loss on sale of subsidiary in 1996 represents the loss on the sale of its
80% interest in CSW and the write-off of related unamortized goodwill from the
CSW acquisition.
13
<PAGE>
The income tax benefit of $192,183 for the nine months ended September 30, 1997
primarily reflects the change in book estimates relating to the tax refund
receivable for 1996. As the Company expects to have in 1997 a net operating loss
carry forward available for income tax reporting purposes, no tax benefit
provision has been made for the net loss as of September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Cash and cash equivalents increased $442,992 to $1,030,072 at September 30, 1997
from $587,080 at December 31, 1996. The Company had aggregate bank credit
facilities of $875,000, of which none was outstanding at September 30, 1997.
In April 1997, the Company repaid bank borrowings of $950,000 outstanding at
March 31, 1997 with a portion of the funds from the collection of the federal
tax refund due the Company for the year ending December 31, 1996. Also, in
April 1997, the Company obtained a new bank letter of credit to secure its
obligations under a Nine Month Adjustable Rate Industrial Revenue Bond for a
building which serves as the Company's headquarters. The Company is in
compliance with all covenants of the letter of credit.
In March 1997, the Company entered into the SPA with the Harbert Fund providing
for a significant minority ownership interest in the Company of up to
approximately 30% of the Common Stock. Under the terms of this agreement, the
Company sold one million shares of Common Stock to the Harbert Fund for a price
of $1 million dollars. During the twelve months following the initial
investment, the Harbert Fund may invest up to $4 million. Of this amount, at
the discretion of Harbert, $2 million is earmarked to assist with strategic
acquisitions, with an additional $2 million earmarked for investments in
subordinate tranches of commercial mortgage backed securitizations. In any of
these additional investments, the Harbert Fund would receive Common Stock at a
rate of one share for each $1.05 investment.
The Company expects to fund current operations with cash provided by operations,
draws on bank credit facilities, and from proceeds provided from private
investment capital infusions. Through the implementation of the restructuring
plan discussed above, the Company will continue its efforts to reduce operating
expenses. Moreover, the Company is developing both new sources of revenue in an
effort to eliminate operating deficits as well as alternative funding sources to
fund those deficits. If the Company cannot expand its revenue base or secure
new means of financing its operations, however, its working capital position
will deteriorate.
The Company is actively seeking credit facilities to expand existing facilities
and to fund acquisitions. The Company is also actively pursuing private equity
capital infusions. The Company expects to fund strategic acquisitions of
entities and asset portfolios by cash provided from debt or equity financing.
14
<PAGE>
HISTORICAL CASH FLOWS
Cash flows from operating activities changed to a $1,679,937 source of cash for
the nine months of 1997 from a $3,448 use of cash for the same time period in
1996. Although the Company incurred a net loss in the nine months of 1997, the
impact of the greater net loss was partially reduced by the net change in the
components of its working capital. Working capital component changes for the
nine months of 1997 primarily consist of the collection of a tax refund
receivable and increases in current liabilities. As previously discussed, during
the nine months of 1996, the Company incurred non-cash charges to write-off its
investment in CSW. The charges were offset by a net decrease in cash provided
from the net change in working capital components; primarily relating to the
payment in 1996 of 1995 tax liabilities.
Cash flows used in investing activities changed to a $23,663 source of cash
for the nine months of 1997, from a $975,120 use of cash for the comparable
period of 1996. The change was primarily caused by the elimination of
distributions to minority interest holders due to the sale of CSW, cash
acquired from corporate acquisitions, cash distribution received from
partnerships and joint ventures, and reduced property and equipment purchases.
The distributions from partnerships and joint ventures were from entities
acquired with the Eastern Realty Corporation acquisition in October 1996.
Additionally, the Company received a distribution from a joint venture
performing asset management, financial and advisory services to an investment
group which acquired an interest in a portfolio of real estate assets from
the Swedish government.
Cash flows from financing activities changed to a $1,260,608 use of cash for the
nine months of 1997 from a $1,083,295 source of cash for the respective time
period in 1996. The decrease is generally attributable to the change in net
borrowings, with the Company reducing debt during the
nine months of 1997 while incurring debt during the same period in 1996.
Partially offsetting the decrease were proceeds from the issuance of Common
Stock, primarily to the Harbert Fund.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its business.
Management does not believe that the resolution of this litigation will
materially affect the financial position or liquidity of the Company.
ITEM 2. - CHANGES IN SECURITIES
Pursuant to the employment agreement between the Company and Harold E. Cooke,
President and Chief Operating Officer, exercised warrants to purchase for cash
100,000 shares of the Company's common stock at $1.05 per share. The securities
were issued without registration pursuant to exemptions contained in Section
4(2) of the Securities Act of 1933.
15
<PAGE>
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. - OTHER INFORMATION
None
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBERS
27 Financial Data Schedule
(b) Reports on Form 8-K
On August 27, 1997, the Company filed a Current Report on Form 8-K
announcing plans to acquire all of the stock of AMI Capital, Inc. in
exchange for cash, debt and common stock of the Company.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CROWN NORTHCORP, INC.
Dated: November 6, 1997 By: /s/
-------------------------------------
Richard A. Brock
Senior Vice President, Treasurer and
Chief Financial Officer
By: /s/
-------------------------------------
Ray L. Druseikis
Controller and Chief Accounting
Officer
17
<PAGE>
INDEX TO EXHIBITS
27 Financial Data Schedule (1)
- ------------------------
(1) Filed herewith.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CROWN NORTHCORP, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,030,072
<SECURITIES> 0
<RECEIVABLES> 597,048
<ALLOWANCES> 60,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,763,485
<PP&E> 2,814,902
<DEPRECIATION> 903,428
<TOTAL-ASSETS> 10,640,434
<CURRENT-LIABILITIES> 1,905,433
<BONDS> 2,657,615
2,000,000
5
<COMMON> 104,950
<OTHER-SE> 2,350,947
<TOTAL-LIABILITY-AND-EQUITY> 10,640,434
<SALES> 7,397,740
<TOTAL-REVENUES> 7,397,740
<CGS> 0
<TOTAL-COSTS> 7,872,146
<OTHER-EXPENSES> 776,563
<LOSS-PROVISION> 13,839
<INTEREST-EXPENSE> 282,201
<INCOME-PRETAX> (1,533,770)
<INCOME-TAX> (192,183)
<INCOME-CONTINUING> (1,341,587)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,341,587)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
