<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: SEPTEMBER 30, 1998
------------------
[ ] 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.
---------------------
(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 October 31, 1998, the issuer had 11,064,710 shares of its common
stock, par value $.01 per share, outstanding.
Transitional Small Business Disclosure Format (check one). Yes No X
--- ---
<PAGE> 2
CROWN NORTHCORP, INC.
Form 10-QSB
Quarterly Period Ended September 30, 1998
<TABLE>
<CAPTION>
INDEX
Part I. Pages
-----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 ............................................... 1
Condensed Consolidated Statements of Operations for the
third quarter and the nine months ended September 30, 1998 and 1997.. 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997........................ 3
Notes to Condensed Consolidated Financial Statements-
September 30, 1998 and 1997.......................................... 4
Item 2. Management's Discussion and Analysis................................. 8
Part II.
Item 1. Legal Proceedings.................................................... 17
Item 2. Changes in Securities................................................ 17
Item 3. Defaults Upon Senior Securities...................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.................. 18
Item 5. Other Information.................................................... 18
Item 6. Exhibits and Reports on Form 8-K..................................... 18
(a) Exhibits ........................................................ 18
(b) Reports on Form 8-K.............................................. 18
Signature....................................................................... 19
Exhibit Index................................................................... 20
</TABLE>
<PAGE> 3
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,433,823 $ 735,940
Receivables-net 2,106,023 1,672,306
Prepaid expenses and other 301,370 275,283
------------ ------------
Total current assets 4,841,216 2,683,529
------------ ------------
PROPERTY AND EQUIPMENT-net 1,748,842 1,838,325
RESTRICTED CASH 5,227,268 4,550,766
OTHER ASSETS 5,313,014 2,347,993
------------ ------------
TOTAL $ 17,130,340 $ 11,420,613
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 2,897,603 $ 2,143,011
LONG-TERM OBLIGATIONS:
Notes and bonds payable-less current portion 3,218,325 2,563,550
Allowance for loan losses and other 744,207 1,385,721
------------ ------------
Total long-term obligations 3,962,532 3,949,271
REDEEMABLE PREFERRED STOCK 2,000,000 2,000,000
SHAREHOLDERS' EQUITY:
Common stock 110,543 108,310
Convertible preferred stock:
Series AA 1
Series BB 1
Additional paid-in capital 9,974,972 4,209,752
Retained earnings (accumulated deficit) (1,815,043) (976,367)
Treasury stock, at cost (269) (13,364)
------------ ------------
Total shareholders' equity 8,270,205 3,328,331
------------ ------------
TOTAL $ 17,130,340 $ 11,420,613
============ ============
</TABLE>
See notes to condensed consolidated financial statements
1
<PAGE> 4
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
THIRD QUARTER YEAR TO DATE
--------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Management fees $ 974,632 $ 835,382 $ 2,180,508 $ 2,810,345
Incentive and disposition fees 194,540 1,296,517 1,386,263 3,067,942
Income from partnerships and joint ventures 413,403 157,656 460,802 292,914
Origination fees, interest and other income 592,836 563,469 1,585,186 1,226,539
----------- ----------- ----------- -----------
Total revenues 2,175,411 2,853,024 5,612,759 7,397,740
----------- ----------- ----------- -----------
OPERATING AND ADMINISTRATIVE EXPENSES:
Personnel 1,551,605 1,832,134 4,356,434 5,568,098
Occupancy, insurance and other 548,552 591,783 1,443,935 2,037,590
Provision for loan losses (674,000)
Amortization and depreciation 96,081 89,625 277,386 266,458
----------- ----------- ----------- -----------
Total operating and administrative expenses 2,196,238 2,513,542 5,403,755 7,872,146
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (20,827) 339,482 209,004 (474,406)
OTHER EXPENSES:
Delayed offering costs - 851,452
Restructuring charge 570,000
Employment contract settlement and other 206,563
Interest 63,188 84,811 196,228 282,801
----------- ----------- ----------- -----------
Total other expenses 63,188 84,811 1,047,680 1,059,364
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (84,015) 254,671 (838,676) (1,533,770)
INCOME TAX EXPENSE (BENEFIT) - - - (192,183)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (84,015) $ 254,671 $ (838,676) $(1,341,587)
=========== =========== =========== ===========
INCOME (LOSS) PER SHARE -- Basic and Diluted $ (0.01) $ 0.02 $ (0.08) $ (0.13)
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE> 5
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (838,676) $(1,341,587)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 420,826 372,333
Decrease in reserve for loan losses (674,000)
Loss on delayed offering 851,453
Income from investments in joint ventures (460,802)
Other - net (100,541)
Change in operating assets and liabilities - net of effects from purchases and divestitures
of subsidiaries:
Accounts receivable 147,044 1,901,160
Prepaid expenses and other assets (26,087) (43,315)
Accounts payable and accrued expenses (174,823) 891,887
---------- ----------
Net cash provided (used) in operating activities (755,065) 1,679,937
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for corporate acquisitions and mergers (1,606,855)
Distributions from partnerships and joint ventures 230,894
Investment in partnerships (2,358,785) (162,500)
Increase in shareholder receivables (392,692)
Purchase of property and equipment (75,882) (172,433)
Increase in restricted cash (676,502)
Other - net (482,180) (146,729)
---------- ----------
Net cash provided (used) in investing activities (3,986,041) (1,857,623)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 3,161,392 4,793,286
Principal payments on notes payable (2,489,858) (5,044,323)
Proceeds from issuance of common stock 162,876 1,049,762
Proceeds from issuance of preferred stock 5,604,579
Other changes - (178,047)
---------- ----------
Net cash provided by financing activities 6,438,989 620,678
---------- ----------
NET INCREASE IN CASH DURING THE PERIOD 1,697,883 442,992
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 735,940 587,080
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $2,433,823 $1,030,072
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE> 6
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1. GENERAL AND BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Crown NorthCorp, Inc., and subsidiaries 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, 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 Crown's Form 10-KSB for the year ended December 31, 1997. Certain
reclassifications have been made to the 1997 amounts to conform to the
1998 presentation.
2. EARNINGS (LOSS) PER COMMON SHARE
The components of basic earnings per share for the quarter and nine
months ended September 30, 1998 are computed as follows:
<TABLE>
<CAPTION>
(LOSS) SHARES AMOUNT
---------- ---------- -------
<S> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30, 1998
BASIC EPS
Loss applicable to common shareholders $ (84,015) 11,051,681 $ (0.01)
NINE MONTHS ENDED SEPTEMBER 30, 1998
BASIC EPS
Loss applicable to common shareholders $ (838,676) 10,979,227 $ (0.08)
</TABLE>
Since there was a net loss for the quarter and nine months ended
September 30, there are no potential common shares to be included in a
computation of diluted per-share amounts. Crown has securities
outstanding which could potentially dilute basic EPS in the future that
were not included in the computation of EPS because of their
antidilutive impact. Potentially dilutive shares are issuable under the
terms of convertible preferred stock agreements, warrants and
contingent share agreements.
The earnings (loss) per share for the quarter and nine months ended
September 30, 1997 is computed based on the income or loss applicable
to Crown's common stock after deducting Series 4
<PAGE> 7
A Preferred stock dividends divided by the weighted average number of
common shares outstanding during the period. The weighted average
shares outstanding for basic earnings per share calculations for the
third quarter and nine months ended September 30, 1997 were 10,361,233
shares and 9,979,237 shares, respectively. The weighted average shares
outstanding for diluted earnings per share for the quarter ended
September 30, 1997 were 15,876,693 shares. Potentially dilutive shares
included in the weighted average number of shares for the quarter ended
September 30, 1997 were for stock warrants and options, convertible
preferred shares, and contingent share agreements. As the company had a
net loss for the nine months ended September 30, 1997 there are no
potential common shares to be included in the computation of diluted
per-share amount.
3. RECEIVABLES
Receivables consist of the following at September 30, 1998 and December
31, 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Trade $ 1,344,712 $ 1,702,306
Affiliates 475,619 -
Shareholders 395,692 -
----------- -----------
Total 2,216,023 1,702,306
Less: Allowance for doubtful accounts (110,000) (30,000)
----------- -----------
Receivables - net $ 2,106,023 $ 1,672,306
=========== ===========
</TABLE>
The affiliate receivable is for management fees due from a joint
venture in which the company has a 50% investment interest. Management
fees billed to the affiliate during the third quarter and for the nine
months ended September 30, 1998 were approximately $449,000 and
$512,000 respectively. The shareholder receivables reflect pro rata
offering costs due under the Strategic Realty Capital Corp.
cost-sharing arrangement (see Note 7).
4. PROPERTY & EQUIPMENT
Property and equipment consists of the following at September 30, 1998
and December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 271,845 $ 271,845
Building and improvements 1,137,112 1,137,112
Furniture and equipment 1,275,185 1,199,304
----------- -----------
Total property and equipment 2,684,142 2,608,261
Less accumulated depreciation (935,300) (769,936)
----------- -----------
Property and equipment - net $ 1,748,842 $ 1,838,325
=========== ===========
</TABLE>
5. STOCKHOLDERS' EQUITY
In March 1997, the company entered into a stock purchase agreement with
an affiliate of the Harbert Management Corporation to invest up to $5
million in the company's common stock. Harbert invested $1 million in
the company in March 1997 and additional sums in October and December
1997. On December 31, 1997 the company
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<PAGE> 8
and Harbert entered into an amendment to the agreement pursuant to
which Harbert purchased one share of the company's Series AA Non-Voting
Convertible Preferred Stock on the terms and conditions set forth in
the amendment. The shareholder is entitled to a non-cumulative dividend
at the rate of 5% per annum plus, in the event of liquidation, a 12%
cumulative dividend on the liquidation preference of $3,647,185, each
from January 26, 1998, the date the transaction was consummated. The
holder of the Series AA Preferred has the option to convert it into
3,473,510 shares of common stock at any time. Crown has the option to
convert the Series AA Preferred upon the occurrence of certain
stipulated events. The Series AA Preferred provides that if these
stipulated events did not occur as of June 30, 1998, then Harbert has
the right to designate a majority of Crown's Board of Directors until
such time that they do occur. The stipulated events have not yet
occurred and Harbert has not given notice of its intent to exercise its
right to designate a majority of the directors.
In March 1998, the company entered into a stock purchase agreement with
an affiliate of ContiFinancial Corporation whereby Conti invested $2
million in exchange for one share of the company's Non-Voting Series BB
Convertible Preferred Stock on the terms and conditions set forth in
the agreement, and a warrant to purchase up to 200,000 shares of
Crown's common stock. The liquidation preference is $2,000,000, plus a
12% cumulative dividend from the issuance date. The holder of the
Series BB Preferred has the option to convert it into 1,000,000 shares
of the common stock at any time. The company has the option to convert
the Series BB Preferred upon the occurrence of certain stipulated
events. The company has the right to redeem the Series BB Preferred
upon thirty days' written notice for the liquidation preference
provided, however, that upon receipt of a redemption notice, the holder
of the Series BB Preferred has the right to convert the Series BB
Preferred to 1,000,000 shares of common stock. Conti has the right to
designate one director of Crown's Board of Directors as long as it
holds the Series BB Preferred or at least 1,000,000 shares of common
stock and certain other conditions are met.
6. CONTINGENCIES
Crown 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 statements of the company.
7. SRCC OFFERING CHARGE
The company cosponsored Strategic Realty Capital Corp. ("SRCC") which
on March 24, 1998 filed with the SEC a registration statement for an
initial public offering. SRCC was intended to be a real estate
investment trust making high-yield commercial and multifamily real
estate loans and investments. Crown was to manage the operations of
SRCC, subject to the supervision of SRCC's board of directors.
Concurrent with the initial public offering, Crown would have purchased
an additional 133,333 shares (2% of the aggregate common stock) of SRCC
at the initial public offering price, which was estimated to be $15 per
share. Upon the closing of the offering of common stock of SRCC, Crown
would have issued a warrant to SRCC for the purchase of 2,000,000
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<PAGE> 9
shares of common stock at $2.50 per share. Crown would also have
invested cash of $2,000,000 in SRCC. The company owns all 100 issued
shares of SRCC.
Due to presently unfavorable market conditions for publicly traded
REITs, Crown does not anticipate that SRCC's public offering will
proceed now or in the foreseeable future. The charge of $851,452
reflects the company's portion of expenses related to SRCC's planned
public offering pursuant to a cost-sharing arrangement with the
co-sponsors.
8. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board (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." 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. Crown will implement the provisions of this
statement, as required, for the year ended December 31, 1998.
9. SUPPLEMENTAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Cash paid for interest $ 134,497 $ 207,720
========= ==========
Non-cash investing and financing activities:
Corporate acquisitions:
Accounts Receivable $ 16,983
Restricted cash 1,358,735
Other assets 591,137
Loan loss reserve (360,000)
----------
Net cash paid for corporate acquisitions $1,606,855
==========
</TABLE>
7
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ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COMPANY'S BUSINESSES
Crown NorthCorp derives its primary revenues from the financial services it
offers to owners and operators of commercial real estate interests. These
services include third-party asset management, loan servicing, mortgage loan
originations and European operations. Fees the company receives include asset
management and disposition fees, incentive fees based on the overall performance
of a contract or pool of assets, loan servicing fees and fees associated with
the origination of mortgage loans. 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 to augment its core businesses.
FORWARD LOOKING STATEMENTS
The statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 21E of the Exchange
Act, including statements regarding the company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include terminology such as "anticipate," "believe," "has the opportunity,"
"seeking to," "attempting," "would," "contemplated," "believes" or comparable
terminology. All forward-looking statements included in this document are based
on information available to the company on the date hereof, and Crown assumes no
obligation to update any such forward-looking statements. It is important to
note that the company's actual results could differ materially from those in
such forward-looking statements. The factors listed below are among those that
could cause actual result to differ materially from those in forward-looking
statements. Additional risk factors are listed from time to time in the
company's reports on Forms 10-QSB, 8-K and 10-KSB.
Among the risk factors that could materially and adversely affect the future
operating results of the company are:
- - The company continues to experience operating deficits or marginally
profitable results. Management anticipates that marginal operating
results, including operating deficits, will continue until the company
is able to increase its revenues by securing additional asset
management and servicing contracts or by other means, including the
origination of mortgage loans.
- - The company has been a correspondent in the loan conduit program of
ContiTrade, L.L.C., an affiliate of Conti. Conti has advised the
company and its other correspondents that it is indefinitely suspending
this conduit program due to uncertainties in the markets for commercial
mortgage backed securities ("CMBS"). There can be no assurance that the
company will resume operations under this conduit program. Crown
continues its efforts to develop and expand its mortgage loan
capability by actively pursuing additional lending sources, strategic
acquisitions and
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alliances and expanded product lines. These efforts may be unsuccessful
which, in turn, may adversely affect the company's revenue and
profitability.
- - The company does not anticipate that the public offering contemplated
by SRCC's registration statement will proceed now or in the foreseeable
future. Until such time, if ever, as this offering or a similar fund
opportunity does close and become effective, Crown will be unable to
derive benefits it had anticipated from a management agreement with and
an investment in such an opportunity.
- - Under the terms of the Series AA Preferred, since June 30, 1998,
Harbert has had the right to designate a majority of Crown's Board of
Directors until certain specified events occur. The company does not
anticipate being able to cause the events to occur in the near future.
- - Most of the company's asset management contracts are for an indefinite
term, cancelable upon thirty days' notice. If a significant number of
these contracts are terminated or modified, this may adversely affect
the company's revenues and profitability.
- - Crown currently operates as a rated servicer. If the company no longer
received ratings, or if its ratings were downgraded, its ability to
retain existing business and to obtain new business in many commercial
real estate markets could be limited.
- - Crown may be unable to develop sufficient capital resources through
profitable operations, strategic alliances or acquisitions or otherwise
to more successfully compete with larger and better capitalized
competitors in the acquisition of new business.
- - The Year 2000 problem has not presented significant issues for the
company. Crown does not anticipate that costs associated with resolving
remaining issues will have a material financial impact. If, however,
the company and the parties with which it does business are not
successful in resolving remaining issues, Crown may have service
interruptions or material expenditures related to the Year 2000
problem.
OUTLOOK
BUSINESS ENVIRONMENT. Crown provides comprehensive financial services to owners
and operators of commercial real estate interests. In recent years, investments
in commercial real estate have, to an increasing degree, been made through
capital markets transactions, including CMBS transactions. During the third
quarter of 1998, major portions of these capital markets, in particular the
below-investment-grade components of CMBS, became substantially illiquid. Crown
believes that changing capital markets present opportunities to expand its asset
management and servicing businesses to investors seeking high yields through
commercial real estate. At the same time, Crown recognizes that these recent
capital markets developments have adversely affected the company's ability to
originate commercial mortgage loans in the near future. Crown has been
originating mortgage loans primarily through Conti's loan conduit program. Such
programs generally depend on an active CMBS market to provide an
9
<PAGE> 12
outlet for loan production. Conti has indefinitely suspended its conduit program
because of market uncertainty. Until Crown resumes conduit lending or develops
alternative lending programs, mortgage loan originations will not be a primary
source of revenue.
THIRD-PARTY ASSET MANAGEMENT. The company?s primary revenues continue to be
derived from management, disposition and incentive fees associated with
third-party asset management contracts with various clients, including
investment banking firms and partnerships. Assets under management include large
single assets, such as loans secured by hotels and office buildings, as well as
portfolios of commercial real estate assets and interests. Crown's principal
asset management client continues to place additional assets under the company's
management. The company is actively seeking to expand asset management revenues
through several means including development of new and existing client
relationships and European operations. Third-party asset management will
continue to be a primary source of the company's revenues.
One of the ways in which the company is seeking to expand its asset management
operations is through the management of high-yielding investment opportunities
including but not limited to the below investment grade portions of CMBS. The
planned public offering of SRCC presented one such opportunity. The company now
does not anticipate that this offering will proceed now or in the foreseeable
future. Crown continues to actively pursue opportunities in commercial and
multifamily real-property related assets including participation in high-yield
investment funds and alternative fund opportunities. There can be no assurance
that any fund will occur at any particular time or on any particular terms.
MORTGAGE LOAN ORIGINATION. Recent developments in the capital markets have
adversely affected Crown's mortgage loan origination program. Conti has
indefinitely suspended the loan conduit program that has been Crown's primary
means of originating loans. Additionally, when Conti sold loans of Crown and
other program correspondents into a securitization in August 1998, the company
recognized a pro rata loss of approximately $107,000 due to unfavorable market
conditions at that time. Management is presently exploring alternative means of
meeting the loan needs of its clients and otherwise expanding its commercial
lending program. There can be no assurance that any of these efforts will be
successful. Until such time as they are, mortgage loan origination will not be a
material source of income.
EUROPEAN OPERATIONS. In Europe, Catella/Crown NorthCorp Joint Venture AB, in
which the company has a 50% ownership interest, has entered into an agreement to
manage for Telereit Holding AB a portfolio of assets in Sweden valued at
approximately $614 million. Under this asset management agreement, Catella/Crown
has received a success fee for placing the transaction and will receive ongoing
management, disposition and incentive fees. With the commencement of work under
this agreement, the company's European Operations are based in Stockholm.
In conjunction with placing the Telereit transaction and entering into the asset
management agreement, the company agreed to make an equity investment in
Telereit. Crown did this by investing approximately $2.4 million in exchange for
a 14.23% ownership interest in HMR Sweden, LLC, an affiliate of Harbert. HMR
Sweden, in turn, invested approximately $16.8
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<PAGE> 13
million in Telereit and received a 13.09% ownership interest. Crown funded its
investment through a combination of cash on hand and a loan of approximately $1
million from MarRay Investment, LLC, another affiliate of Harbert. In
consideration of Harbert's investment in Telereit and the loan from MarRay,
Crown has agreed to pay Harbert 12.5% of the management and disposition fees and
37.5% of the incentive fees it receives under the asset management agreement,
net of Crown's expenses. Through February 28, 1999, Crown has the option, under
certain terms and conditions, to have another party acquire Harbert's investment
in Telereit provided that Harbert receives a 25% return on its investment. As
security for the loan from MarRay, Crown has pledged to it a 5.94% ownership
interest in HMR Sweden. Additionally, a bank, on behalf of Crown, has issued
letters of credit aggregating approximately $625,000 to partially secure
Telereit's obligations under a credit facility.
LOAN SERVICING AND INFORMATION TECHNOLOGY. Loan servicing is a core business of
the company and an important source of revenue. The company has recently
acquired the servicing rights to additional assets and is actively seeking
further acquisitions. Standard & Poors and Fitch IBCA, Inc. both rate Crown
"above average" as a special servicer of assets. Rated special servicers manage
non-performing loans and foreclosed properties in securitized transactions. S&P
rates the company "average" as a commercial servicer; Fitch rates Crown
"acceptable" as a master servicer. These latter two ratings allow the company to
seek to expand its operations as a rated servicer to service performing as well
as non-performing portions of securitizations. Crown believes its capabilities
as a rated servicer to be a significant component of the company's business
development activities.
YEAR 2000 READINESS. The Year 2000 issue arises from computer programs
and equipment that use a two-digit rather than a four-digit format to
indicate a year. Such components may incorrectly interpret dates beyond
1999, which could cause computer system failures or errors. The company
has substantially completed the assessment of its Year 2000 issues. It
has purchased and will continue to purchase computer hardware and
software to help insure compliance. Finally, Crown has been testing and
will continue to test its systems for Year 2000 compliance.
Substantial portions of Crown's strategic computer systems and
applications are proprietary in nature. The company's assessment is
that these are Year 2000 compliant. The principal third-party system
the company uses is the McCracken Loan Servicing System. McCracken has
written software to correct Year 2000 issues, which is presently in
testing with Crown and other users of the system. Crown anticipates
this testing will be completed by the first quarter of 1999.
Additionally, Crown makes some use of standard commercial software
products. To the extent that present versions of these products
manifest Year 2000 problems, Crown will acquire Year 2000-compliant
versions of these products or substitute alternative products that do
comply.
To date, the costs the company has incurred specifically to address
Year 2000 issues have not been material. These expenditures have
included upgraded hardware for the McCracken system as well as enhanced
telephone and building security systems. Over
11
<PAGE> 14
and above regularly scheduled purchases to keep pace with continuing
technological advances, the company will purchase from operating funds
extra supplies of key computer hardware to insure its availability as
the Year 2000 approaches. The company also has in place a disaster
recovery plan should it need to resume operations for a temporary or
extended period in an alternative location.
While Crown believes it is taking all appropriate steps to achieve Year
2000 compliance, the Year 2000 problem is pervasive and complex, as
virtually every computer operation will be affected in some way. Crown
believes that its testing of hardware and software components will
reveal any significant Year 2000 problems, that such problems will be
capable of remediation and that Crown's software and hardware will
perform substantially as planned when Year 2000 processing begins.
There can be no assurance, however, that Crown can achieve Year 2000
compliance without significant additional costs.
PREFERRED STOCK ISSUANCES. The company has issued one share of Series AA
Preferred to Harbert in exchange for $3,647,185 in cash. The Series AA Preferred
provides that, since certain trigger events did not occur by June 30, 1998,
Harbert has the right to designate a majority of the company's Board of
Directors until such time as the trigger events do occur. These trigger events
are, first, the closing of the public offering contemplated by the registration
statement filed by SRCC (or the closing of a comparable fund opportunity) and,
second, the company achieving certain specified commercial loan origination
volumes. The trigger events have not yet occurred and the company does not
anticipate being able to cause these events to occur in the near future. Harbert
has not given notice of its intent to exercise its right to designate a majority
of the company's Board of Directors.
Additionally, the company has issued one share of Series BB Preferred and
warrants to purchase up to 200,000 shares of common stock to an affiliate of
Conti in exchange for $2 million cash. Conti may convert the Series BB Preferred
into 1,000,000 shares of common stock at any time. Crown has the option to
convert the Series BB Preferred upon the occurrence of the trigger events. Given
present conditions in the financial markets, the company does not anticipate
being able to exercise a conversion option based on the trigger events.
Crown must continue to develop and enhance revenues from its core businesses to
overcome operating deficits and to sustain profitability. Recent changes in the
capital markets provide particular opportunities to expand the company's asset
management and servicing businesses. There can be no assurance that the company
will be successful in increasing its revenues or that any level of revenues will
produce any particular financial results.
RESULTS OF OPERATIONS FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO
THE THIRD QUARTER ENDED SEPTEMBER 30, 1997
Total revenues decreased $677,613 to $2,175,411 in the third quarter of 1998
from $2,853,024 during the same period in 1997. Revenue components changed
significantly, with incentive and disposition fees decreasing by $1,101,977 in
1998. Asset management contracts with
12
<PAGE> 15
various clients, including investment banking firms and partnerships, continue
to provide a significant portion of the company's revenue through management,
disposition and incentive fees. Pursuant to its strategic business plan, the
company is continuing to take steps to reposition Crown's core business to grow
both those businesses and new, related activities. Corporate acquisitions and
European development activities have been primarily responsible for new revenue
sources from equity investments in partnerships and joint ventures and from loan
servicing. Also, pursuant to the strategic business plan, loan origination
activities have generated new revenues during the year, although those revenues
have substantially declined recently because of illiquid CMBS market conditions.
The company anticipates that, at least in the near term, revenues from asset
management and servicing activities will be the largest components of total
revenues while revenues from lending activities will increase only as selected
opportunities develop.
Management fees are recorded as services required under a contract are
performed, and may be based on a percentage applied to the aggregate value of
the assets managed under a contract, a fixed fee or a cost-plus agreement.
Management fee revenues increased $139,250, or 16.7%, to $974,632 in the third
quarter of 1998 from $835,382 for the comparable period in 1997. The increase in
management fee revenues for the third quarter of 1998 versus the same period in
1997 is generally attributable to billings of approximately $449,000 to
Catella/Crown for asset management services on the Telereit transaction in
Sweden.
Certain contracts provide incentive fees if the company achieves net cash
collections in excess of contractually established thresholds. 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 fixed amount per disposition.
Incentive and disposition fee revenues decreased to $194,540 in the third
quarter of 1998 from $1,296,517 during the corresponding period in 1997. The
1997 amount primarily reflects the resolution of assets under one contract and
fees on a large number of assets under the company's management that an
investment banking client placed into a securitized transaction.
Income from partnerships and joint ventures increased to $413,403 in the third
quarter of 1998 from $157,656 in the third quarter of 1997. The increase was
primarily from one-time success fees due to Catella/Crown for the placement of
the Telereit transaction.
Origination fees, interest and other fees reflect the generation of fees from
mortgage origination, loan servicing, accounting, and interest income net of
losses from the sale of certain loans into a securitization. Other fees
increased $29,367, or 5.2%, to $592,836, in the third quarter of 1998 from
$563,469 in the same period in 1997.
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses, and professional development expenses. Personnel expenses
decreased $280,529 or 15.3%, to $1,551,605 for the third quarter of 1998 from
$1,832,134 for the same period in 1997. The decreases were primarily caused by
the implementation of its strategic business plan whereby staffing was reduced
significantly in 1997, with resultant decreases in salaries, payroll taxes and
benefits expenses.
13
<PAGE> 16
Occupancy, insurance and other operating income expenses decreased $43,231, or
7.3%, to $548,552 for the third quarter of 1998 from $591,783 for the third
quarter of 1997. Corresponding with the corporate restructuring addressed above,
other occupancy, insurance and other expense components, including equipment
leases and other services, were restructured to reduce overall expenses.
The provision for loan losses reflects credit experience with the company's loan
servicing portfolio under the FNMA-DUS Program. There was no change in the
provision during the third quarter of 1998 or the corresponding period in 1997.
Amortization and depreciation increased $6,456 to $96,081 for the third quarter
of 1998 from $89,625 for the corresponding period in 1997.
Interest expense is generally incurred on the company's notes and bonds payable
and decreased $21,623 to $63,188 for the third quarter of 1998 from $84,811 for
the same period in 1997. The decrease primarily reflects the reduction in
short-term borrowings during 1997 utilizing proceeds from tax loss carryforwards
and cash generated from operations.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Total revenues decreased $1,784,981 to $5,612,759 in the first nine months of
1998 from $7,397,740 during the same period in 1997. Asset management contracts
with various clients, including investment banking firms and partnerships,
continue to provide a significant portion of the company's revenue through
management, disposition and incentive fees. Pursuant to its strategic business
plan, the company is continuing to take steps to reposition Crown's core
business to grow both those businesses and new, related activities. Corporate
acquisitions and European development activities have been primarily responsible
for new revenue sources from equity investments in partnerships and joint
ventures and from loan servicing. Also, pursuant to the strategic business plan,
loan origination activities have generated new revenues during the year,
although those revenues have substantially declined recently because of illiquid
CMBS market conditions. The company anticipates that, least in the near term,
revenues from asset management and servicing activities will be the largest
components of total revenues while revenues from lending activities will
increase only as selected opportunities develop.
Management fee revenues decreased $629,837, or 22.4%, to $2,180,508 in the first
nine months of 1998 from $2,810,345 for the comparable period in 1997.
Management fee revenues for the nine months of 1998 include billings of
approximately $512,000 to Catella/Crown for management services on the Telereit
transaction in Sweden. The decrease in management fee revenues for the first
nine months of 1998 versus the same period in 1997 is generally attributable to
the loss of a large number of assets under the company's management that an
investment banking client placed into a securitized transaction during 1997.
Additionally, management fees have decreased because of higher-fee contracts
being resolved and replaced with lower-fee contracts.
14
<PAGE> 17
Incentive and disposition fee revenues decreased to $1,386,263 in the first nine
months of 1998 from $3,067,942 during the corresponding period in 1997. The 1998
fees were primarily due to the progressive resolution of one contract. The 1997
amount primarily reflects the resolution of assets under one contract and fees
on a large number of assets under the company's management that an investment
banking client placed into a securitized transaction.
Income from partnerships and joint ventures increased to $460,802 in the first
nine months of 1998 from $292,914 in the first nine months of 1997. The increase
was primarily from one-time success fees due to Catella/Crown for the placement
of the Telereit transaction.
Origination fees, interest and other income increased $358,647, or 29.2%, to
$1,585,186 in the first nine months of 1998 from $1,226,539 for the same period
in 1997. The increase is primarily attributable to origination income resulting
from the commencement of loan origination activities in the second half of 1997.
Personnel expenses decreased $1,211,664, or 21.8%, to $4,356,434 for the first
nine months of 1998 from $5,568,098 for the same period in 1997. The decreases
were primarily caused by the implementation of its strategic business plan
whereby staffing was reduced significantly from 1997 levels, with resultant
decreases in salaries, payroll taxes and benefits expenses.
Occupancy, insurance and other operating expenses decreased $593,655, or 29.1%,
to $1,443,935 for the first nine months of 1998 from $2,037,590 for the first
nine months of 1997. During the first half of 1997, the company incurred charges
of approximately $311,000 for expenses relating to abandoned business
development activities. Corresponding with the corporate restructuring addressed
above, other occupancy, insurance and other expense components, including
equipment leases and other services, were restructured to reduce overall
expenses.
The recovery of the provision for loan losses of $674,000 reflects favorable
credit experience with the company's loan servicing portfolio under the FNMA-DUS
Program.
On March 24, 1998, the company, as a co-sponsor, filed with the SEC to register
shares of SRCC, a REIT, in an initial public offering. Due to the presently
unfavorable market conditions for publicly traded REITs, the offering has been
deferred. The company now does not anticipate that the offering will proceed now
or in the foreseeable future. The charge of $851,452 reflects the company's
portion of expenses related to SRCC's planned public offering pursuant to a
cost-sharing arrangement with the co-sponsors. The company is funding the costs
from cash reserves and amounts due from the co-sponsors.
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. All restructuring charges were
recorded in the second quarter of 1997.
15
<PAGE> 18
The employment contract settlement of $206,563 in the first 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.
Interest expense decreased $86,573 to $196,228 for the first three quarters of
1998 from $282,801 for the same period in 1997. The decrease primarily reflects
the reduction in short-term borrowings during 1997 utilizing proceeds from tax
loss carry forwards and cash generated from operations.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Cash and cash equivalents increased to $2,433,823 at September 30, 1998 from
$735,940 at December 31, 1997. The company had aggregate bank credit facilities
of $600,000 of which $-0- was outstanding at September 30, 1998.
In March 1997, the company entered into a stock purchase agreement with an
affiliate of Harbert whereby Harbert agreed to invest up to $5 million in the
common stock. Harbert invested $1 million in the company in March 1997 and
additional sums in October and December 1997. On December 31, 1997, the company
and Harbert entered into and amendment to the agreement pursuant to which
Harbert purchased one share of the Series AA Preferred in exchange for cash of
$3,647,185. The company has utilized all proceeds received under this agreement,
as amended.
In March 1998, the company entered into a stock purchase agreement with an
affiliate of Conti whereby Conti invested $2,000,000 in exchange for one share
of the Series BB Preferred and a warrant for 200,000 shares of the common stock.
The agreement presently calls for the company to use the proceeds received to
invest in SRCC (or a comparable fund opportunity) and to expand mortgage loan
origination operations.
The company has invested approximately $2.4 million in HMR Sweden, LLC, an
affiliate of Harbert, and received a 14.23% interest therein. HMR Sweden, in
turn, has a 13.09% ownership in Telereit, which holds a portfolio of assets in
Sweden valued at approximately $614 million. Crown funded its investment from
cash on hand and a loan of approximately $1 million from an affiliate of
Harbert.
The company had anticipated that, if the public offering of SRCC proceeded, it
would have invested $2 million in SRCC in exchange for common stock of SRCC. The
company would have funded this investment with proceeds from private investment
capital infusions. Also, in conjunction with a public offerings, the company
would have issued SRCC a five-year warrant to purchase up to $ 2 million of the
common stock at $2.50 per share. The company now does not anticipate this public
offering will proceed now or in the foreseeable future.
Crown expects to fund current operations with cash provided by operations,
proceeds provided from private investment capital infusions, strategic alliances
and from draws on bank credit
16
<PAGE> 19
facilities. Through the implementation of the strategic business 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 sources to fund those
deficits.
Crown is actively seeking credit facilities to expand existing facilities, to
establish an advancing line for operations as a master servicer 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.
HISTORICAL CASH FLOWS
Cash flows provided in operating activities changed to a $755,065 use of cash
for the first nine months of 1998 from a $1,679,937 source of cash in the
corresponding period of 1997. The company's net loss for the first nine months
of 1998 includes a non-recurring charge for costs associated with the delayed
offering of SRCC and a non-cash credit for a reduction in the reserve for loan
losses. During the first nine months of 1997, the company incurred an operating
loss that was offset by increases in cash provided from changes in working
capital components, primarily from the collection of a tax refund receivable.
Cash flows used by investing activities increased to $3,986,041 for the first
nine months of 1998 from $1,857,623 for the same period in 1997. The additional
cash flows used in 1998 primarily reflects the company's co-investment in the
Telereit transaction, related increases in restricted cash associated with the
transaction, and an increase in shareholder receivables associated with the SRCC
offering.
Cash flows provided by financing activities increased to $6,438,989 for the
first nine months of 1998 from $620,678 for the respective time period in 1997.
The increase is generally attributable to the issuance of the Series AA
Preferred and the Series BB Preferred in 1998 and the company having net
borrowings in 1998 as opposed to net loan payments in 1997.
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
None
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<PAGE> 20
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. - OTHER INFORMATION
The parties that sold Eastern Realty Corporation and its affiliates to the
company in 1996 have made a demand upon the company to register the 568,046
shares of common stock they hold as a result of that transaction. The company is
responding to this demand in accordance with the terms of the applicable
registration rights agreements.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
NUMBERS
-------
10.75 Payment of Fees Agreement between Crown NorthCorp Euro A/S and
Harbert Management Corporation
10.76 Purchase Option Agreement among Crown NorthCorp, Inc., Harbert
Management Corporation and MarRay Investment, LLC
10.77 Convertible Secured Promissory Note executed by Crown
NorthCorp, Inc., payable to the order of MarRay Investment,
LLC.
10.78 Pledge Agreement between Crown NorthCorp, Inc. and MarRay
Investment, LLC.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
18
<PAGE> 21
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 12, 1998 By: /s/ Richard A. Brock
-----------------------------
Richard A. Brock, Senior Vice
President, Treasurer and
Chief Financial Officer
By: /s/ Ray L. Druseikis
-----------------------------
Ray L. Druseikis, Controller
and Chief Accounting Officer
19
<PAGE> 22
INDEX TO EXHIBITS
-----------------
10.75 Payment of Fees Agreement between Crown NorthCorp Euro A/S and
Harbert Management Corporation (1)
10.76 Purchase Option Agreement among Crown NorthCorp, Inc., Harbert
Management Corporation and MarRay Investment, LLC (1)
10.77 Convertible Secured Promissory Note executed by Crown
NorthCorp, Inc., payable to the order of MarRay Investment,
LLC. (1)
10.78 Pledge Agreement between Crown NorthCorp, Inc. and MarRay
Investment, LLC. (1)
27 Financial Data Schedule (1)
(1) Filed herewith
20
<PAGE> 1
Exhibit 10.75
PAYMENT OF FEES AGREEMENT
THIS ASSIGNMENT is made as of August 27, 1998 by Crown
NorthCorp EURO A/S ("Crown Euro") and Harbert Management Corporation
("Harbert").
BACKGROUND:
1. Crown NorthCorp, Inc. ("Crown"), the parent of Crown EURO, and Harbert have
agreed pursuant to a certain letter agreement dated July 17, 1998, for
Harbert and MarRay Investment, LLC ("MarRay"), to form and contribute the
U.S. dollar equivalent of approximately 115,648,804 Swedish kroner ("SK")
to the capital of HMR Sweden, LLC, a Delaware limited liability company
("HMRS"), enabling HMRS to acquire an interest in Telereit Holding AB,
pursuant to a certain Shareholders' Agreement referenced in the Asset
Management Agreement (the formation and contribution to capital caused by
Harbert and MarRay is hereinafter referred to as the "MarRay Investment").
Crown has agreed to contribute, or cause an affiliate to contribute, the
U.S. dollar equivalent of approximately SK19,187,157 to the capital of
HMRS.
2. In consideration of the MarRay Investment, Crown has agreed to enter into
appropriate documentation causing Harbert or its designee to be paid an
amount equivalent to a certain percentage of certain fees received by
Catella/Crown NorthCorp Joint Venture AB (the "Asset Manager") under a
certain Asset Management Agreement made the 21st day of July, 1998, between
Telereit Holding AB and the Asset Manager (the "Asset Management
Agreement").
3. Crown EURO is a member of the Asset Manager.
4. This Agreement is the documentation causing such payment of fees to Harbert
or its designee.
STATEMENT OF AGREEMENT:
1. AMOUNT. Crown EURO shall pay, as provided in ss.2, to Harbert (or any
other person designated by notice of Harbert to Crown EURO) an amount
equal to the following percentage of the following fees received by the
Asset Manager pursuant to the Asset Management Agreement during the
term of this Agreement (the "Assigned Fees"):
(a) Until the effective date of the Management Fee (referred to
herein as the "Renegotiated Management Fee") to be negotiated
by the parties as contemplated by second sentence of section
8.2 of the Asset Management Agreement, an amount equal to
12.5% of the Management Fee received by the Asset Manager
pursuant to the first sentence of section 8.2 of the Asset
Management Agreement. Crown EURO and Harbert understand and
agree that, during this initial period, the Asset Management
Agreement is a "cost plus" contract and that the payment set
forth in this subsection ((a)) shall be net of all direct
costs and expenses of Crown EURO and the Asset Manager.
(b) Upon and after the effective date of the Renegotiated
Management Fee, an amount equal to the excess of (i) 12.5% of
the Management Fee received by the Asset Manager pursuant to
section 8.2 of the Asset Management Agreement over (ii) 12.5%
of the direct costs and expenses of the Asset Manager and
Crown EURO (A) in performing the
<PAGE> 2
services under the Asset Management Agreement for which the
Management Fee is compensation, and (B) in collecting the
Management Fee (including any court cost and attorney fees).
(c) An amount equal to the excess of (i) 12.5% of the Disposition
Fee received by the Asset Manager pursuant to section 8.3 of
the Asset Management Agreement over (ii) 12.5% of the direct
costs and expenses of the Asset Manager and Crown EURO (A) in
performing the services under the Asset Management Agreement
for which the Disposition Fee is compensation and (B) in
collecting the Disposition Fee (including any court cost and
attorney fees).
(d) An amount equal to the excess of (i) 37.5% of the Promote Fee
received by the Asset Manager pursuant section 8.4 of the
Asset Management Agreement over (ii) 37.5% of the direct costs
and expenses of the Asset Manager and Crown EURO in collecting
the Promote Fee (including any court costs and attorney fees).
(e) An amount equal to the excess of (i) the sum of (A) 12.5% of
the termination fee received by the Asset Manager pursuant to
section 13.2(a) of the Asset Management Agreement and (B)
37.5% of the Promote Fee received by the Asset Manager
pursuant to section 13.2(c) of the Asset Management Agreement
over (ii) the sum of (A) 12.5% of the direct costs and
expenses of the Asset Manager and Crown EURO in collecting the
termination fee (including any court costs and attorney fees)
and (B) 37.5% of the direct costs and expenses of the Asset
Manager and Crown EURO in collecting the Promote Fee
(including any court costs and attorney fees).
Crown EURO covenants and agrees not to amend, modify, or waive any
provision of the Asset Management Agreement which relates to any of the
Assigned Fees payable thereunder except for negotiating, finalizing,
and effecting the Renegotiated Management Fee.
2. PAYMENT. Payment of any amount due under ss.1 shall be due and payable
by Crown EURO within 30 calendar days after receipt by the Asset
Manager of the Assigned Fee giving rise to such payment under ss.1.
Payment shall be to the order of Harbert or it designee in the same
currency as the Assigned Fee is received by the Asset Manager.
3. DIRECT COSTS AND EXPENSES. For purpose of determining the amounts due
under ss.1, direct costs and expenses shall mean those expenses
properly reportable by the Asset Manager and Crown EURO as a direct
cost or expense consistent with the provisions of the operations under
the Asset Management Agreement with respect to the preparation of
statements of its income and expenses for the period in which the
applicable Assigned Fee is received.
4. TERM. The term of this Agreement shall be for the period commencing
July 17, 1998, and ending on the earliest of:
(a) Termination of the Asset Management Agreement;
(b) Cessation of Crown EURO's interest, directly or indirectly
through any affiliate, in the Asset Manager or any other event
resulting in Crown EURO and its affiliates having no interest
in, or right to receive payment of, any of the Assigned Fees;
or
2
<PAGE> 3
(c) Closing of the purchase of all right, title, and interest of
the Harbert Parties in and to HMRS within the meaning and as
provided by a certain Purchase Option Agreement made
contemporaneously with this Agreement.
Notwithstanding ss.4((b)), Crown EURO shall not, without Harbert's
consent, engage, or permit any affiliate of it to engage voluntarily in
any sale or other disposition of Crown EURO's interest, directly or
indirectly, in the Asset Manager or in any of the Assigned Fees to a
party that is not controlled by, under common control with or
controlling Crown EURO.
5. MISCELLANEOUS.
(a) AMENDMENT/WAIVER. No amendment or waiver of any provision of
this Agreement shall be effective against any party hereto
unless in writing signed by that party.
(b) HEADINGS. The captions or headings in this Agreement are not
part of the context of this Agreement, are only labels to
assist in the locating and reading of portions of this
Agreement, and in no way define, limit, or describe the scope
or intent of any of the provisions of this Agreement.
(c) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original and all of
which shall constitute one and the same document.
(d) SEVERABILITY. If any provision of this Agreement is or becomes
invalid, illegal, or unenforceable in any jurisdiction for any
reason, such invalidity, illegality, or unenforceability shall
not affect the remainder of this Agreement, and the remainder
of this Agreement shall be construed and enforced as if such
invalid, illegal, or unenforceable portion were not contained
herein.
(e) NOTICE. Any notice to be given to a party hereunder shall be
given by United States certified mail or by personal delivery,
with return receipt by the addressee requested, and addressed
to such party at the address designated below or at any other
address most recently designated by that party for this
purpose:
(1) To Crown EURO:
c/o Crown NorthCorp, Inc.
1251 Dublin Road
Columbus, Ohio 43215
Attention: Stephen W. Brown, Esq.
(2) To Harbert:
Harbert Management Corporation
One Riverchase Parkway South
Birmingham, Alabama 35244
Attention: Michael D. Luce
Any notice shall be deemed given upon the date of receipt
stated in the returned receipt or, if the address most
recently specified by the addressee as provided above is not a
valid address, the date of a returned receipt or other
certification of the United States
3
<PAGE> 4
post office for such address certifying that the same is not a
valid mailing address and that no forwarding address is known
to such post office.
(f) SUCCESSORS. This Agreement shall inure to the benefit of, and
be binding upon, each party and that party's respective
successors and assigns.
(g) COMPLETE AGREEMENT. This Agreement contains the entire
agreement between the parties and supersedes any prior
understanding or agreements between them respecting any matter
covered by this Agreement.
(h) GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Ohio, United States
of America.
Crown NorthCorp EURO A/S Harbert Management Corporation
By: /s/ Stephen W. Brown By: /s/ Michael D. Luce
------------------------------------ --------------------------------
Its: Authorized Signatory Its: EVP and CFO
------------------------------------ --------------------------------
4
<PAGE> 1
Exhibit 10.76
PURCHASE OPTION AGREEMENT
THIS ASSIGNMENT is made as of August 27, 1998 by Crown
NorthCorp, Inc., ("Crown"), on one part, and Harbert Management Corporation
("Harbert"), and MarRay Investment, LLC ("MarRay"), on the other part (the
"Harbert Parties").
BACKGROUND:
1. Crown and Harbert have agreed pursuant to a certain letter agreement dated
July 17, 1998, for Harbert Parties to form, and contribute the U.S. dollar
equivalent of approximately 115,648,804 Swedish kroner ("SK") to the
capital of HMR Sweden, LLC, a Delaware limited liability company ("HMRS"),
enabling HMRS to acquire an interest in Telereit Holding AB, pursuant to a
certain Shareholders' Agreement referenced in the Asset Management
Agreement (the formation and contribution to capital caused by Harbert
Parties is hereinafter referred to as the "Harbert Investment"). Crown has
agreed to contribute the U.S. dollar equivalent of approximately
SK19,187,157 to the capital of HMRS.
2. In consideration of the Harbert Investment, Crown NorthCorp EURO A/S, a
subsidiary of Crown ("Crown EURO"), has entered into a certain Payment of
Fees Agreement ("Payment of Fees Agreement") with Harbert, made
contemporaneously with this Agreement, providing for payment of certain
fees to Harbert or its designee.
3. In consideration of Crown EURO's entering into the Payment of Fees
Agreement, Harbert has agreed to cause the Harbert Parties to grant the
option to purchase described in this Agreement.
STATEMENT OF AGREEMENT:
1. OPTION. Subject to conditions set forth in ss.2, the Harbert Parties
hereby grant to Crown the option (the "Option") exercisable during the
Exercise Period and as otherwise provided in ss.3 to purchase the
entire right, title, and interest of the Harbert Parties in and to HMRS
as provided in ss.4 for the purchase price as provided in ss.5 payable
upon delivery of documents of transfer at a closing as provided in
ss.7.
2. CONDITIONS. The Option may be exercised only:
(a) For the benefit of (i) Strategic Reality Capital Corp.
("SRCC") or (ii) a similar fund or vehicle (a "Similar
Vehicle"), provided that SRCC or the Similar Vehicle,
whichever is applicable, (A) is managed by Harbert and Crown
(either directly or through respective affiliates), (B) has
initially total equity of at least U.S. $75,000,000, and
(C)Harbert is given the opportunity to invest on terms similar
to other investors in any Similar Vehicle.
(b) If the exercise is duly authorized by the Board of Directors
of SRCC or the applicable Similar Vehicle, as necessary or
appropriate.
The exercise of the option shall be conclusively deemed for the benefit
of a fund or vehicle if that fund or vehicle receives the right, title,
and interest of the Harbert Parties in and to HMRS.
<PAGE> 2
3. EXERCISE. The Option shall be exercised only by Crown's giving written
notice of such exercise to Harbert during the period ending February
28, 1999 (the "Exercise Period"). The notice of exercise shall specify
(i) the fund or vehicle to receive the right, title, and interest of
the Harbert Parties in and to HMRS, and (ii) the closing date and time.
4. PROPERTY. The property being purchased upon exercise of the Option
shall be all right, title, and interest of each and all of the Harbert
Parties in and to HMRS, including all right, title, and interest in and
to (i) profits or losses accruing, and distributions of cash or
property occurring, from and after the date of closing, and (ii)
governance, management, and operations.
5. PURCHASE PRICE. The purchase price shall be equal to that amount which
as of the date of closing pursuant to ss.7 would yield to the Harbert
Parties an rate of return at the rate of 25% percent per annum on their
Total Investment. For purposes hereof, the "Total Investment" of the
Harbert Parties means the sum of (i) all capital contributions made by
the Harbert Parties to HMRS, (ii) the original principal amount of
SK8,000,000 as evidenced by that certain Convertible Secured Promissory
Note dated August 27, 1998, payable by Crown to MarRay, (iii) all
payments by MarRay pursuant to that certain Risk Participation
Agreement dated August 27, 1998, between MarRay and Bankers Trust and
that certain Risk Participation Agreement dated August 27, 1998,
between MarRay and Deutsche Bank AG, London Branch (collectively, the
"Risk Participation Agreements"), (iv) all draws made under those
certain Letters of Credit issued by Bank of America for the account of
MarRay and in favor of Bankers Trust and Deutsche Bank AG, London
Branch, in respect of MarRay's obligations under the Risk Participation
Agreements (the "B of A Letters of Credit"); provided, however, the
Total Investment shall be reduced by any payments or repayments to the
Harbert Parties for the credit of Crown with respect to the items set
forth in clauses (i) through (iv). The calculation of the rate of
return for purpose of this Agreement shall measure the cash on cash
return on the Total Investment on a calendar monthly basis treating all
contributions and payments made during any calendar month through and
including the date of closing pursuant to ss.7 as if made on the last
day of that calendar month.
6. ASSUMPTION AND SUBSTITUTION. As a condition to the obligation of the
Harbert Parties to convey their interests in HMRS at the closing
pursuant to ss.7, the fund or vehicle shall (i) assume the obligations
of MarRay under the Risk Participation Agreements and obtain from
Bankers Trust and Deutsche Bank AG, London Branch, a release of MarRay
from such obligations, and (ii) provide a letter or letters of credit
in substitution of the B of A Letters of Credit, which shall be
canceled and returned to Bank of America at the closing.
7. CLOSING. The closing of the purchase upon exercise of the Option
pursuant to this Agreement shall be the date and time specified in the
notice of exercise given pursuant to ss.3, or such other date or time
as Harbert may agree on behalf of the Harbert Parties with Crown,
provided that such date occurs on or before the expiration of the
Exercise Period. At the closing, documentation satisfactory to Crown
evidencing the transfer of the property being purchased shall be
delivered to the order of Crown subject to the conditions of ss.2 and
ss.6, and the purchase price shall be paid in U.S. dollars, based upon
the exchange rate for Swedish krona as listed in the currency traded
exchange rates report of The Wall Street Journal (Midwest Edition)
published for the day prior to the date of the notice of exercise (or
if no edition is published for such day, the most recent day prior to
the date of such notice for which an edition was published).
2
<PAGE> 3
8. PAYMENT OF FEES AGREEMENT. Simultaneously with closing pursuant to this
Agreement, all obligations of Crown under the Payment of Fees Agreement
shall terminate; provided, however, that at the closing Crown shall pay
to Harbert or its designee all accrued but unpaid fees.
9. TERM. The term of this Agreement shall end upon expiration of the
Exercise Period pursuant to ss.3.
10. MISCELLANEOUS.
(a) AMENDMENT/WAIVER. No amendment or waiver of any provision of
this Agreement shall be effective against any party hereto
unless in writing signed by that party.
(b) HEADINGS. The captions or headings in this Agreement are not
part of the context of this Agreement, are only labels to
assist in the locating and reading of portions of this
Agreement, and in no way define, limit or describe the scope
or intent of any of the provisions of this Agreement.
(c) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original and all of
which shall constitute one and the same document.
(d) SEVERABILITY. If any provision of this Agreement is or becomes
invalid, illegal, or unenforceable in any jurisdiction for any
reason, such invalidity, illegality, or unenforceability shall
not affect the remainder of this Agreement, and the remainder
of this Agreement shall be construed and enforced as if such
invalid, illegal, or unenforceable portion were not contained
herein.
(e) NOTICE. Any notice to be given to a party hereunder shall be
given by United States certified mail or by personal delivery,
with return receipt by the addressee requested, and addressed
to such party at the address designated below or at any other
address most recently designated by that party for this
purpose:
(1) To Crown:
Crown NorthCorp, Inc.
1251 Dublin Road
Columbus, Ohio 43215
Attention: Stephen W. Brown, Esq.
(2) To the Harbert Parties:
Harbert Management Corporation
One Riverchase Parkway South
Birmingham, Alabama 35244
Attention: Michael D. Luce
Any notice shall be deemed given upon the date of receipt
stated in the returned receipt or, if the address most
recently specified by the addressee as provided above is not a
valid address, the date of a returned receipt or other
certification of the United States post office for such
address certifying that the same is not a valid mailing
address and that no forwarding address is known to such post
office.
3
<PAGE> 4
(f) SUCCESSORS. This Agreement shall inure to the benefit of, and
be binding upon, each party and that party's respective
successors and assigns.
(g) COMPLETE AGREEMENT. This Agreement contains the entire
agreement between the parties and supersedes any prior
understanding or agreements between them respecting any matter
covered by this Agreement.
(h) GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Ohio, United States
of America.
Crown NorthCorp, Inc. Harbert Management Corporation
By: /s/ Stephen W. Brown By: /s/ Michael D. Luce
------------------------------------ --------------------------------
Its: Secretary Its: EVP and CFO
------------------------------------ --------------------------------
MarRay Investment, LLC
By Harbert Management Corporation,
its Manager
By: /s/ Michael D. Luce
--------------------------------
Its: EVP and CFO
--------------------------------
4
<PAGE> 1
Exhibit 10.77
CONVERTIBLE SECURED PROMISSORY NOTE
SEK 8,000,000.00 August 27, 1998
For value received, the undersigned Crown NorthCorp, Inc., a Delaware
corporation (the "Borrower"), promises to pay to the order of MarRay Investment,
LLC, a Delaware limited liability company ("MarRay"), at the office of MarRay
located at One Riverchase Parkway South, Birmingham, Alabama 35244, in
immediately available funds, in lawful currency of the Kingdom of Sweden, the
principal sum of Eight Million Swedish Kronor (SEK 8,000,000.00) and all other
amounts owed by Borrower to MarRay hereunder.
Borrower shall pay as interest on the unpaid principal balance
outstanding hereunder on each Interest Payment Date an amount equal to the
greater of (i) the Minimum Rate Amount and (ii) the Cash Flow Rate Amount.
Borrower shall make principal payments hereunder on each Distribution
Date in an amount equal to the Required Principal Repayment Amount.
All principal, interest and Collection Expenses accrued and owing
hereunder shall be due and payable in full upon the Maturity Date or the earlier
occurrence of any one or more of the following events (each a "Trigger Event"):
i) HMR Sweden, L.L.C. sells, liquidates, transfers, pledges,
encumbers, assigns or otherwise disposes of its interest in
Telereit Holding AB;
ii) Borrower acquires MarRay's membership interest in HMR Sweden,
L.L.C. pursuant to that certain Purchase Option Agreement
dated as of August 27, 1998 by and among Borrower, MarRay and
Harbert Management Corporation; and
iii) Borrower's beneficial interest in Telereit Holding AB is
redeemed or otherwise acquired in connection with the
termination of the Asset Management Agreement between Borrower
and Telereit Holding AB dated as of July 21, 1998.
As used in this Note, the following terms shall have the following
meanings:
"ACCRUAL PERIOD" shall mean any of the periods beginning, as
applicable, on the date hereof or the most recent Distribution Date,
and ending, as applicable, on the day prior to the next succeeding
Distribution Date or the date of a Trigger Event or the Conversion Date
or the Maturity Date.
<PAGE> 2
"ACQUISITION BOOK VALUE" shall mean the value reflected on the books of
Telereit AB of any or all assets of Telereit AB at the time of its or
their acquisition.
"CASH DISTRIBUTIONS" shall mean all amounts distributed to Borrower
with respect to its total membership interest in HMR Sweden, L.L.C.,
for a particular period.
"CASH FLOW RATE AMOUNT" shall mean with respect to the applicable
Interest Payment Date, an amount equal to the portion of Cash
Distributions made since the last Interest Payment Date which is
attributable to Crown's Financed Interest, minus the Required Principal
Repayment Amount, if any, calculated as of such Interest Payment Date.
"CONVERSION DATE" shall mean the date, if any, this Note is converted
and exchanged for Crown's Financed Interest as provided herein.
"CROWN'S FINANCED INTEREST" shall mean a 5.94% membership interest in
HMR Sweden, L.L.C.
"DISTRIBUTION DATE" shall mean any date upon which Cash Distributions
are made to the Borrower.
"INTEREST PAYMENT DATE" shall mean any date which is a Distribution
Date or which is a date upon which a Trigger Event occurs or which is
the Conversion Date or the Maturity Date.
"MATURITY DATE" shall mean August 31, 2008 or such earlier date on
which the entire outstanding principal balance of this Note becomes due
and payable hereunder.
"MINIMUM RATE AMOUNT" shall mean an amount equal to the Stated Rate
Amount for an applicable Accrual Period plus the excess, if any, of the
cumulative amount of all Stated Rate Amounts for all prior Accrual
Periods over the cumulative amount of all interest payments paid to
MarRay hereunder.
"NOTE" shall mean this Convertible Secured Promissory Note.
"PLEDGE AGREEMENT" shall mean that certain Pledge Agreement dated as of
even date herewith by and between Borrower and MarRay.
"PRINCIPAL PAYMENTS" shall mean, at any given time, the aggregate
amount of all amounts paid to MarRay hereunder in satisfaction of
Borrower's obligations to make Required Principal Payments hereunder.
"REQUIRED PRINCIPAL REPAYMENT AMOUNT" shall mean an amount equal to the
CONVERTIBLE SECURED PROMISSORY NOTE 2
<PAGE> 3
excess, if any, of (i) SEK 8,000,000.00 multiplied by the cumulative
Acquisition Book Value of all Telereit Assets sold during the term of
this Note divided by the Acquisition Book Value of all Telereit Assets
on the date hereof over (ii) the cumulative amount of principal
payments previously made in satisfaction of Borrower's obligations to
make Required Principal Payments hereunder; provided however, that no
Required Principal Payment amount shall exceed the excess of (i) Cash
Distributions during the applicable Accrual Period attributable to
Crown's Financed Interest over (ii) the Minimum Rate Amount for the
applicable Interest Payment Date.
"SEK" or ""SWEDISH KRONOR" shall have the meaning for "SEK" set forth
in the Shareholders' Agreement dated as of July 22, 1998 by and among
HMR Sweden, L.L.C., Pyramid Acquisitions, B.V., Deutsche Bank, AG,
Ohman Real Estate Fund No. I AB and Forsakringsbolaget SPP, omsesidigt.
"STATED RATE AMOUNT" shall mean with respect to the applicable Interest
Payment Date, an amount equal to 6.5% per annum on the principal amount
outstanding hereunder from time to time during the Accrual Period just
ended, calculated on the basis of a 360 day year. To the extent the
Stated Rate Amount exceeds Cash Distributions during the applicable
Accrual Period which are attributable to Crown's Financed Interest,
such excess will be payable on the next Interest Payment Date.
"TELEREIT ASSETS" shall mean any assets owned by Telereit AB or any
direct or indirect subsidiary thereof while the indebtedness evidenced
by this Note is outstanding.
Other than as provided herein, the principal amount hereof may not be
prepaid in whole or in part. This Note is not a revolving note and Borrower may
not reborrow any amount that is paid under this Note.
In addition to MarRay's rights under the Pledge Agreement, MarRay shall
have a right at any time while this Note shall remain unpaid to convert the
outstanding principal balance hereunder into and exchange this Note for Crown's
Financed Interest. Borrower hereby appoints MarRay as its attorney-in-fact for
the purpose of effecting such conversion and exchange and to execute any and all
documents and take any and all actions with HMR Sweden, L.L.C. and/or the other
members of HMR Sweden, L.L.C. to register or otherwise effect such conversion
and exchange, said appointment hereby being agreed to be coupled with an
interest and irrevocable. MarRay shall give Borrower ten (10) days prior written
notice before effecting such conversion and exchange.
This Note is secured by the provisions of the Pledge Agreement.
Reference is
CONVERTIBLE SECURED PROMISSORY NOTE 3
<PAGE> 4
hereby made to the Pledge Agreement for the provisions, among others, with
respect to the custody and application of the collateral described therein, the
nature and extent of the security provided thereunder, the rights, duties and
obligations of Borrower and the rights of MarRay.
Borrower agrees that if (i) Borrower fails to pay, in accordance with
the terms of this Note, any principal or interest within five (5) days after
written notice from MarRay that such amount remains unpaid following the date
that such sum is due, (ii) Borrower fails to pay or perform any obligation under
and in accordance with the terms of the Pledge Agreement, (iii) Borrower fails
to pay its debts generally as they become due; or (iv) Borrower shall make or
take any action to make an assignment for the benefit of creditors, petition or
take any action to petition any tribunal for the appointment of a custodian,
receiver or any trustee for it or a substantial part of its assets, or shall
commence or take any action to commence any proceeding under any bankruptcy,
reorganization, arrangement, readjustment of debt, dissolution, liquidation or
debtor relief law or statute of any jurisdiction, whether now or hereafter in
effect including, without limitation, the Bankruptcy Code, or, if there shall
have been filed any such petition or application, or any such proceeding shall
have been commenced against it, in which an order for relief is entered, or
Borrower by any act or omission shall indicate its consent to, approval of or
acquiescence in any such petition, application or proceeding or order for relief
or the appointment of a custodian, receiver or any trustee for it or any
substantial part of any of its properties, or shall suffer to exist any such
custodianship, receivership or trusteeship; then in any such event (each an
"Event of Default") all amounts then remaining unpaid hereunder shall, at the
option of MarRay, be declared to be immediately due and payable.
Upon the occurrence of an Event of Default and acceleration of the Note
as provided above, MarRay may pursue any remedy available under this Note or
available at law or in equity. No right or remedy conferred upon MarRay in this
Note or the Pledge Agreement is intended to be exclusive of any other right or
remedy contained in this Note or the Pledge Agreement and every such right or
remedy shall be cumulative in addition to every other right or remedy contained
herein or therein or now or hereafter available to MarRay at law, in equity or
otherwise.
All amounts payable by Borrower hereunder shall be due and payable
without notice of default, presentment or demand for payment, protest or further
notice of nonpayment or dishonor, or notices or demands of any kind, all of
which are expressly waived by Borrower.
Notwithstanding anything to the contrary in this Note, Borrower shall
have no personal liability under this Note and MarRay's sole recourse for
satisfaction of the indebtedness evidenced hereby shall be against the
Collateral described and defined in the Pledge Agreement; provided however, that
this provision shall not prohibit
CONVERTIBLE SECURED PROMISSORY NOTE 4
<PAGE> 5
MarRay from naming Borrower as a party in any action to pursue its rights
against such Collateral.
Borrower agrees to pay all costs and expenses, including without
limitation attorneys' fees and other legal expenses, incurred in connection with
the enforcement of this Note or the Pledge Agreement (collectively, "Collection
Expenses").
The invalidity, illegality or unenforceability of any provision of this
Note will not affect any other provision of this Note, all of which shall remain
in full force and effect, nor will the invalidity, illegality, or
unenforceability of a portion of any provision of this Note affect the balance
of such provision. In the event that any one or more of the provisions contained
in this Note or any portion thereof shall for any reason be held to be invalid,
illegal or unenforceable in any respect, this Note shall be reformed, construed
and enforced as if such invalid, illegal or unenforceable provision had never
been contained herein.
No failure of MarRay in any one or more instances to insist upon strict
compliance by Borrower with the terms and conditions of this Note or to enforce
any right hereunder shall be deemed a waiver of any obligation of Borrower or
right of MarRay hereunder with respect to any failure of Borrower to comply with
the terms and conditions hereof.
This Note has been delivered to and accepted by MarRay in the State of
Alabama and shall be construed and interpreted in accordance with and governed
by the laws of the State of Alabama without reference to conflicts of law rules.
Witness or Attest: CROWN NORTHCORP, INC.
By: /s/ Stephen W. Brown By: /s/ Richard A. Brock
------------------------------ ---------------------------
Its: Secretary Its: CFO
CONVERTIBLE SECURED PROMISSORY NOTE 5
<PAGE> 1
Exhibit 10.78
PLEDGE AGREEMENT
CROWN NORTHCORP, INC., a Delaware corporation (hereinafter called
"Owner"), and MARRAY INVESTMENT, LLC (the "Pledgee") agree as follows:
1. PLEDGE AND CREATION OF SECURITY INTEREST. In consideration of an
extension of credit evidenced by that certain Convertible Secured Promissory
Note from Owner to Pledgee dated as of even date herewith (together with any and
all renewals, extensions, replacements, substitutions, amendments and
modifications thereof, the "Note") and as security for the payment of all debts,
obligations or liabilities now or hereafter existing, absolute or contingent, of
Owner to Pledgee under the Note (hereinafter called "Indebtedness"), including
without limitation, the payment of all principal, interest, charges, expenses
and other amounts, Owner hereby assigns, transfers, grants to and pledges with
Pledgee title to and a security interest in the collateral described in
paragraph 2 hereof.
2. COLLATERAL. As security for the Indebtedness, Owner hereby assigns,
transfers, grants to and pledges with Pledgee title to and a security interest
in a 5.94% membership interest in HMR Sweden, L.L.C., and all money and property
heretofore delivered or which shall hereafter be delivered to or come into the
possession, custody or control of Pledgee in any manner or for any purpose
whatsoever in connection with such 5.94% membership interest during the
existence of this Agreement, together with all membership rights, rights to
subscribe, liquidating and all other distributions, new membership interests
and/or units or securities, or other property which Owner is now or may
hereafter become entitled to receive on account of such collateral or accessions
thereto and all proceeds of, accessions and additions to and substitutions for
all of the foregoing, whether now owned or existing or hereafter created,
acquired or arising. All interests, money and property assigned, transferred and
pledged to Pledgee pursuant to this paragraph are hereinafter referred to as the
"Collateral".
3. OBLIGATIONS OF OWNER.
3.1 Owner shall pay to Pledgee all expenses and expenditures, including
but not limited to reasonable attorneys' fees and other legal expenses, incurred
or paid by Pledgee incidental to holding, collecting, exchanging, preserving,
exercising rights in respect of or realizing upon any of the Collateral or the
Indebtedness.
3.2 Owner shall, at its expense, make, do, execute, deliver or file any
act, thing, statement, instrument, document, or other paper in such form and
substance as Pledgee may request in order to create, preserve, perfect, or
validate any security interest or to enable Pledgee to exercise or enforce its
rights with respect to such security interest.
PLEDGE AGREEMENT PAGE 1
<PAGE> 2
4. PLEDGEE'S OBLIGATIONS. Pledgee's duty with respect to the Collateral
shall be solely one of reasonable care and shall not include any obligation to
collect any sums due in respect thereof or to preserve rights against other
parties or any other rights relative thereto, nor the duty to send notices,
perform services, or take any action in connection with the Collateral.
5. DEFAULT.
5.1 The occurrence or existence of any default or Event of Default
under the Note shall constitute a default ("Default")
hereunder.
5.2 Upon the occurrence of any Default and at any time thereafter,
without notice, and at Owner's expense, Pledgee may, but shall not be obligated
to:
5.2.1 collect by legal proceedings or otherwise all
distributions, interest, principal payments, income, and other sums now or
hereafter payable upon or on account of the Collateral, and hold the same as
Collateral or apply the same to any Indebtedness, the manner, distribution and
application to be in Pledgee's sole discretion;
5.2.2 demand, sue for, collect or make any compromise or
settlement with reference to the Collateral as Pledgee, in its sole discretion,
chooses;
5.2.3 transfer the Collateral to Pledgee's name or the name of
its nominee and/or exercise as to the Collateral all the rights, powers and
remedies of an owner;
5.2.4 sell, assign and deliver all or any part of the
Collateral at public or private sale;
5.2.5 apply the proceeds of any sale or other disposition of
the Collateral first to the payment of expenses incurred by Pledgee in making
such sale or disposition, together with reasonable attorneys' fees if incurred;
and
5.2.6 exercise all rights and remedies provided for a secured
party in the Uniform Commercial Code as enacted in Alabama at the date of this
Agreement and other rights and remedies available at law or in equity.
6. ADDITIONAL AGREEMENTS, REPRESENTATIONS AND WARRANTIES.
6.1 Owner hereby represents, warrants and agrees that:
6.1.1 demand, notice, protest and all demands and notices of
any action taken by Pledgee except those expressly required herein are hereby
waived;
6.1.2 Owner has full power and authority to execute and
deliver this Agreement and the Note and to pledge the Collateral hereunder, that
the Collateral is not subject to the interest of any person other than Owner,
and that Owner will defend the Collateral and its proceeds or accessions against
the claims and demands of all third persons; and
6.1.3 demands or notices may be given personally, by telegram,
telecopy, or by mailing the same to Owner's address as indicated on the records
of HMR Sweden, L.L.C.
PLEDGE AGREEMENT PAGE 2
<PAGE> 3
6.2 Owner and Pledgee agree that:
6.2.1 "Pledgee" and "Owner" as used herein shall include the
successors, receivers, trustees and assigns of those parties.
6.2.2 the laws of Alabama shall govern the construction of and
the interests, rights and duties of the parties to this Agreement.
This Agreement is executed effective as of August 27, 1998.
OWNER:
WITNESS OR ATTEST: CROWN NORTHCORP, INC.
By: /s/ Stephen W. Brown By: /s/ Richard A. Brock
------------------------------ --------------------------------
Its: Secretary Its: CFO
------------------- ------------------------
PLEDGE AGREEMENT PAGE 3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CROWN
NORTHCORP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS
OF SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,433,823
<SECURITIES> 0
<RECEIVABLES> 1,344,712
<ALLOWANCES> (110,000)
<INVENTORY> 0
<CURRENT-ASSETS> 4,841,216
<PP&E> 2,684,142
<DEPRECIATION> 935,300
<TOTAL-ASSETS> 17,130,340
<CURRENT-LIABILITIES> 2,897,603
<BONDS> 3,962,532
110,543
2,000,000
<COMMON> 2
<OTHER-SE> 8,159,660
<TOTAL-LIABILITY-AND-EQUITY> 17,130,340
<SALES> 5,612,759
<TOTAL-REVENUES> 5,612,759
<CGS> 0
<TOTAL-COSTS> 5,323,755
<OTHER-EXPENSES> 851,452
<LOSS-PROVISION> 80,000
<INTEREST-EXPENSE> 196,228
<INCOME-PRETAX> (838,676)
<INCOME-TAX> 0
<INCOME-CONTINUING> (838,676)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (838,676)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
