<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For transition period from ____________ to ____________
Commission File No.: 0-22936
Crown NorthCorp, Inc.
---------------------
(Exact name of small business issuer as specified in its charter)
Delaware 22-3172740
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1251 Dublin Road, Columbus, Ohio 43215
--------------------------------------
(Address of principal executive offices)
(614) 488-1169
--------------
(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS.
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
As of July 31, 1999, the issuer had 11,195,123 shares of its common stock,
par value $.01 per share, outstanding.
Transitional Small Business Disclosure Format (check one). Yes No X
--- ---
<PAGE> 2
<TABLE>
CROWN NORTHCORP, INC.
FORM 10-QSB
QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX
<CAPTION>
PART I Pages
-----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 ............................................. 1
Condensed Consolidated Statements of Operations for the
second quarter and the six months ended June 30, 1999 and 1998 .... 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 ........................... 3
Notes to Condensed Consolidated Financial Statements-
June 30, 1999 and 1998 ............................................ 4
Item 2. Management's Discussion and Analysis .............................. 9
PART II
Item 1. Legal Proceeding .................................................. 17
Item 2. Changes in Securities ............................................. 17
Item 3. Defaults Upon Senior Securities ................................... 17
Item 4. Submission of Matters to a Vote of Security Holders ............... 17
Item 5. Other Information ................................................. 17
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
<TABLE>
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1999 AND DECEMBER 31, 1998
- ----------------------------------------------------------------------------------
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,298,053 $ 1,942,068
Accounts receivable - net 1,173,129 1,570,392
Prepaid expenses and other assets 189,477 123,792
----------- -----------
Total current assets 2,660,659 3,636,252
PROPERTY AND EQUIPMENT - Net 363,899 1,696,210
RESTRICTED CASH 3,834,610 4,206,106
OTHER ASSETS - net 5,056,372 4,910,425
----------- -----------
TOTAL $11,915,540 $14,448,993
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES 1,064,826 1,594,832
LONG-TERM OBLIGATIONS:
Notes and bonds payable - less current portion 1,706,850 2,935,950
Allowance for loan losses & other 769,640 610,000
----------- -----------
Total long-term obligations 2,476,490 3,545,950
REDEEMABLE PREFERRED STOCK 1,400,000 1,400,000
SHAREHOLDERS' EQUITY:
Common stock 111,201 110,651
Convertible preferred stock:
Series AA --
Series BB --
Additional paid-in capital 10,058,888 9,993,864
Accumulated deficit (3,195,538) (2,195,977)
Treasury stock, at cost (327) (327)
----------- -----------
Total shareholders' equity 6,974,224 7,908,211
----------- -----------
TOTAL $11,915,540 $14,448,993
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
<TABLE>
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECOND QUARTER YEAR TO DATE
----------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Management fees $ 687,729 $ 698,733 $ 1,542,124 $ 1,205,868
Disposition and incentive fees 33,809 136,436 66,182 1,191,723
Other 263,722 709,930 751,166 1,039,752
----------- ----------- ----------- -----------
Total revenues 985,260 1,545,099 2,359,472 3,437,343
----------- ----------- ----------- -----------
EXPENSES:
Personnel 1,237,614 1,265,401 2,407,458 2,804,827
Occupancy, insurance and other 430,822 526,081 899,944 895,381
Provision for loan losses (474,000) (674,000)
Depreciation and amortization 87,984 92,609 179,451 181,306
----------- ----------- ----------- -----------
Total expenses 1,756,420 1,410,091 3,486,853 3,207,514
----------- ----------- ----------- -----------
Income (Loss) from operations before non-recurring items (771,160) 135,008 (1,127,381) 229,829
----------- ----------- ----------- -----------
Non-recurring income (expenses):
Gain on sale of building 260,616 260,616
Delayed offering costs -- (851,453) -- (851,453)
----------- ----------- ----------- -----------
Total non-recurring income (expenses) 260,616 (851,453) 260,616 (851,453)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (510,544) (716,445) (866,765) (621,624)
INTEREST EXPENSE 66,015 61,383 132,796 133,040
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (576,559) (777,828) (999,561) (754,664)
INCOME TAX BENEFIT -- 19,400 -- --
----------- ----------- ----------- -----------
NET LOSS $ (576,559) $ (758,428) $ (999,561) $ (754,664)
=========== =========== =========== ===========
LOSS PER SHARE - BASIC AND DILUTED $ (0.05) $ (0.07) $ (0.09) $ (0.30)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 11,098,836 11,030,863 11,091,656 10,942,399
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
<TABLE>
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (999,561) $ (754,664)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 275,885 293,818
Gain on sale of corporate office building (260,616)
Decrease in reserve for loan losses (674,000)
Accrued abandonment cost settlement 851,453
Other - net (37,983)
Change in operating assets and liabilities:
Accounts receivable 397,263 (120,328)
Prepaid expenses and other assets (65,685) (2,962)
Accounts payable and accrued expenses (275,975) (164,275)
---------- ----------
Net cash used in operating activities (966,672) (570,958)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of corporate office building 1,545,876
Increase in shareholder receivables (862,669)
Payment of deferred offering costs 266,381
Purchase of property and equipment (39,642) (83,597)
Other 299,552 (285,891)
---------- ----------
Net cash provided by (used in) investing activities 1,805,786 (965,776)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 125,000 1,896,000
Principal payments on notes payable (1,608,129) (2,110,795)
Proceeds from issuance of common stock 175,972
Proceeds from issuance of preferred stock 5,604,579
Increase in long term contract receivable -- --
---------- ----------
Net cash provided by (used in) financing activities (1,483,129) 5,565,756
---------- ----------
NET INCREASE (DECREASE) IN CASH DURING THE PERIOD (644,015) 4,029,022
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,942,068 735,940
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,298,053 $4,764,962
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 85,860 $ 63,163
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(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 company's Form 10-KSB for the
year ended December 31, 1998. Certain reclassifications have been made to
the 1998 amounts to conform to the 1999 presentation.
2. Loss Per Common Share
---------------------
The losses per share for the second quarter and six months ended June 30,
1999 and 1998 are computed based on the loss applicable to common stock
divided by the weighted average number of common shares outstanding during
each period. As the company had net losses applicable to common stock for
the second quarter and six months ended June 30, 1999 and 1998, there are
no potential common shares to be included in the computation of the diluted
per-share amount. The company's Series AA and Series BB Preferred Stock
issuances in 1998 contained beneficial conversion features of $1,997,268
and $500,000 respectively. The resulting discounts totaling $2,497,268 were
recognized as preferred stock dividends at the date of issuance since they
were immediately convertible into common shares, resulting in a reduction
of net income (loss) available to common shareholders. Including this
dividend, the net loss available to common shareholders for the six months
ended June 30, 1998 was $3,251,932 ($0.30 per share).
4
<PAGE> 7
3. Receivables
-----------
Receivables consist of the following at June 30, 1999 and December 31,
1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Trade $1,013,089 $1,252,534
Affiliates 229,472 408,026
Shareholders 30,568
Employees 9,832
---------- ----------
Total 1,273,129 1,670,392
Less: Allowance for doubtful accounts (100,000) (100,000)
---------- ----------
Receivables-net $1,173,129 $1,570,392
========== ==========
</TABLE>
The affiliate receivable is for management fees and expense reimbursements
from a venture in which the company has a 50% investment interest.
Management fees billed to the affiliate during the second quarter and six
months ended June 30, 1999 were approximately $92,900 and $425,000,
respectively. The shareholders receivable is for contracted asset
management services performed under standard terms and due currently.
Management fees billed to the shareholder during the second quarter and six
months ended June 30, 1999 were approximately $108,600 and $229,900,
respectively.
4. Property and Equipment
----------------------
Property and equipment consists of the following at June 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 271,845
Building and improvements 1,137,112
Furniture and equipment $1,316,519 1,276,877
---------- ----------
Total property and equipment 1,316,519 2,685,834
Less accumulated depreciation (952,620) (989,624)
---------- ----------
Property and equipment - net $ 363,899 $1,696,210
========== ==========
</TABLE>
On May 27, 1999, the company sold its corporate headquarters for $1,605,000
cash. On that same date, the company entered into a lease of a portion of
the space in the building. Pursuant to the lease, the company makes annual
rental payments of approximately $160,000 for an initial term of five
years, provided however, that the company may terminate the lease upon six
months' notice under certain terms and conditions.
5
<PAGE> 8
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 and Harbert entered into an amendment to the agreement
pursuant to which Harbert agreed to purchase one share of the company's
Series AA Non-Voting Convertible Preferred Stock on the terms and
conditions set forth in the amendment. Harbert 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. The quoted
price per common share of the company at the date of issuance of the Series
AA Preferred was $1.625, resulting in an effective dividend upon issuance
of $1,997,268. 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 at $2
per share. The warrant vests and expires based upon the occurrence of
certain stipulated events and was determined to have an immaterial value.
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 quoted price per common share of the company at the date of issuance of
the Series BB Preferred was $2.50, resulting in an effective dividend upon
issuance of $500,000. 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 into 1,000,000 shares of common stock.
6
<PAGE> 9
6. Contingencies
-------------
The company has certain contingent liabilities resulting from litigation
and claims incident to the ordinary course of business. Management believes
that the probable resolution of such contingencies will not materially
affect the financial statements of the company.
7. Statements of Financial Accounting Standards
--------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The company will be required to implement the provisions of
this statement beginning January 1, 2001. The company does not anticipate
that adoption of this statement will materially impact its financial
position, results of operations or cash flows.
8. Segment Information
-------------------
There have been no changes in the basis of segmentation or in the basis of
measurement of segment profit or loss from that reported at December 31,
1998.
Segment information for the second quarter and six months ended June 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Second Quarter ending June 30: 1999 1998
------------------------------ ---- ----
<S> <C> <C>
Revenues:
Asset management $ 829,178 $1,214,439
Mortgage origination 276,998
European operations 156,082 53,662
--------- ----------
Total $ 985,260 $1,545,099
========= ==========
Income (loss) before income tax:
Asset management $(728,896) $ (205,247)
Mortgage origination 2,405 (256,091)
European operations (110,684) (316,490)
Other (260,616)
--------- ----------
Total $(576,559) $ (777,828)
========= ==========
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
Six months ending June 30: 1999 1998
------------------------- ---- ----
<S> <C> <C>
Revenues:
Asset management $ 1,954,060 $2,977,087
Mortgage origination 390,963
European operations 405,412 69,293
----------- ----------
Total $ 2,359,472 $3,437,343
=========== ==========
Income (loss) before income tax:
Asset management $(1,037,854) $ 326,020
Mortgage origination (130,984) (420,321)
European operations (91,339) (660,363)
Other 260,616
----------- ----------
Total $ (999,561) $ (754,664)
=========== ==========
</TABLE>
There have been no material changes in each segment's total assets from the
amount disclosed at December 31, 1998.
9. Sale of European Operations
---------------------------
On May 13, 1999, the company entered into a purchase and sale agreement
calling for the sale of its interests in HMR Sweden, L.L.C., Catella/Crown
NorthCorp Joint Venture AB and a related management contract to affiliates
of a shareholder-director, subject to another party's right of first
refusal. The agreement calls for a selling price of $2,900,000, payable in
cash and the cancellation of indebtedness to an affiliate of a
shareholder-director of approximately $980,000. The carrying value of the
interests sold is approximately $2,800,000 at June 30, 1999. The agreement
now provides for the closing to occur no later than August 31, 1999.
10. Subsequent Event
----------------
On July 12, 1999, the company consummated the disposition of a substantial
portfolio of loan assets managed under contract for a shareholder at market
rates and fees. The company received a disposition fee of approximately
$560,000.
8
<PAGE> 11
Item 2. - Management's Discussion and Analysis
- ----------------------------------------------
THE COMPANY'S BUSINESSES
Crown derives its primary revenues from the financial services it offers to
owners and operators of commercial real estate interests. These revenues include
third-party asset management and disposition fees, incentive fees based on the
overall performance of a contract or pool of assets, loan servicing fees and
interest income. Strategic acquisitions and alliances have been principal
methods for Crown to expand and diversify its core businesses and to develop and
enter new businesses. Crown is actively seeking merger transactions or other
strategic alliances to provide capital to support and expand its operations. The
company has retained an investment banker to assist it in these efforts.
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:
o Crown continues to operate at a loss and to fund operating deficits
primarily from equity capital. Management anticipates that operating losses
will continue until the company is able to increase its revenues by
securing additional asset management and servicing contracts or by other
means.
o The company may be unable to develop sufficient capital resources through
profitable operations, merger transactions, strategic alliances or
otherwise to more successfully compete with larger and better capitalized
competitors in obtaining new business.
o Crown may not be successful in improving its liquidity through sales of
selected assets, profitable operations, increased revenues, reduced
expenses or other means. If Crown cannot improve its liquidity, its ability
to operate at current levels will be impaired.
9
<PAGE> 12
o Under the terms of the Series AA Preferred and voting agreements related to
that investment, Harbert has 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 these events to occur.
o 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, Crown's revenues, liquidity and
profitability may be adversely affected.
o Crown currently operates as a rated servicer. If the company no longer were
to receive 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.
o The Year 2000 problem has not presented significant issues for the company
and Crown does not anticipate that significant issues will arise. If,
however, the company and the parties with which it does business are not
successful in resolving any remaining issues, Crown may have service
interruptions or material expenditures related to the Year 2000 problem.
OUTLOOK
Crown derives its revenues from its core third-party asset management and
servicing businesses. In addition to its domestic asset management and servicing
contracts, the company also receives revenues from European management and
servicing operations. The company has entered into a contract to sell
substantially all of its European Operations to affiliates of a
shareholder-director, although another party has advised the company that it
intends to purchase these assets pursuant to its right of first refusal. The
company ceased originating commercial mortgage loans for a conduit program at
the end of 1998. As a result, Crown does not anticipate that mortgage lending
will be a significant source of income for the foreseeable future. The company's
efforts to enhance its revenues are focused on expansion of its domestic
management and servicing businesses. The company is also developing programs to
offer interim and secondary financing secured by commercial real estate.
In the area of third-party asset management, Crown's principal investment
banking client has continued to place additional assets with the company for
management. In 1999, Crown has also undertaken significant asset management work
for a shareholder. Crown's third-party asset management business typically
include work on large commercial real estate assets such as loans secured by
hotels, office buildings or multifamily projects. Many of these assets are not
performing in accordance with their terms at the time they are assigned to
Crown. The company anticipates that, for the foreseeable future, it will derive
its primary revenues from third-party asset management contracts and is actively
seeking to expand this business with both new and existing clients.
10
<PAGE> 13
Loan servicing continues to be a core business of the company. Crown generally
services the assets third parties place with the company for management.
Additionally, the company may acquire servicing rights through negotiated
transactions, competitive bidding or recurring business from existing clients.
Many transactions, particularly those involving securitized assets, require
servicers to invest in the assets or portfolios they will service. Crown has
relatively limited capital resources compared to those of many of its
competitors. This precludes the company from pursuing many servicing
opportunities unless it aligns itself with a source of capital.
Fitch IBCA recently upgraded its rating of Crown as a primary servicer of
assets. Fitch also reaffirmed Crown's special servicer rating and rated the
company as a master servicer. Crown continues to maintain favorable servicing
ratings with Standard and Poor's Corporation. The company believes that its
ability to operate as a rated servicer is of significant marketing value in
Crown's efforts to secure additional management and servicing business. The
company intends to maintain and develop capabilities as a rated servicer.
Crown is operating an asset management and servicing business in Europe through
Catella/Crown NorthCorp Joint Venture AB, in which Crown has a 50% interest.
Catella/Crown, which is based in Stockholm, provides management and advisory
services in Sweden. The company has entered into a contract to sell
substantially all of its European Operations to affiliates of a
shareholder-director, subject to another party's right of first refusal. This
sale, which is expected to close in August 1999, is part of a plan to increase
liquidity, reduce operating costs and focus Crown's financial and human
resources on the development of asset management and servicing opportunities and
specialized mortgage products in the United States.
To overcome operating deficits and return to profitability, Crown is attempting
to increase the revenues it derives from its core asset management and servicing
businesses, is developing specialized mortgage financing programs and is
continuing to review operations for means of realizing additional expense
savings. To increase liquidity and reduce expenses, the company is selling
selected assets. There can be no assurance that any of these actions will
produce the intended results or lead to profitable operations.
RESULTS OF OPERATIONS FOR THE SECOND QUARTER ENDED JUNE 30, 1999 COMPARED TO THE
SECOND QUARTER ENDED JUNE 30, 1998
Total revenues decreased $559,839 to $985,260 for the second quarter of 1999
from $1,545,099 during the same period in 1998. Of the decrease in total
revenues, the Other Revenue components changed significantly, decreasing by
$446,208 in 1999. Approximately $277,000 of the decrease was caused by the
termination of mortgage lending activities at the end of 1998. Asset management
contracts with various clients, including investment banking firms and
partnerships, continue to provide a significant portion of the company's
revenue. Management fee revenues generally include ongoing fees with the
opportunity for additional, incentive-based compensation at the end of any
11
<PAGE> 14
engagement. Revenues for the second quarter of 1999 include approximately
$92,900 for asset management services at market prices for a shareholder and
approximately $108,600 for services rendered to a joint venture in which the
company has a 50% interest.
Management fees are recorded as services required under a contract are performed
and, as defined in the contract, are derived either from percentages of the
aggregate value of assets under management or from original base monthly
amounts. Management fee revenues decreased to $687,729 in the second quarter of
1999 from $698,733 for the comparable period in 1998.
Disposition fees are recorded as revenue when the disposition has been
consummated and the asset owner has received the gross proceeds from the
transaction. 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. Certain contracts provide for incentive fees if the company
achieves net cash collections in excess of thresholds established in the
contracts. Disposition and incentive fee revenues decreased to $33,809 in the
second quarter of 1999 from $136,436 during the corresponding period in 1998. Of
the 1998 amount, a disposition fee of approximately $113,000 was from the
resolution of one contract. Contracts with the company's largest client
typically do not provide for disposition fees.
Other fees for 1999 primarily includes interest income, income from joint
ventures, and net servicing revenues. Included in the amount is income of
$76,854 from partnerships and joint ventures in which the company has investment
interests. Other fees for 1998 includes mortgage origination income of
approximately $277,000. The company ceased commercial lending operations through
a conduit program at December 31, 1998.
Other fees decreased $446,208, to $263,722 in the second quarter of 1999 from
$709,930 in the same period in 1998. In addition to the cessation of mortgage
origination operations mentioned above, the decrease is also attributable to a
reduction in interest income resulting from lower escrow cash balances on
deposit with depository institutions.
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses and professional development expenses. Personnel expenses
decreased $27,787 to $1,237,614 for the second quarter of 1999 from $1,265,401
for the same period in 1998. The decreases were primarily caused by lower
staffing levels from termination of mortgage lending activities, and lower
administrative staffing levels.
Occupancy, insurance and other operating expenses decreased to $430,822 for the
second quarter of 1999 from $526,081 for the second quarter of 1998. The
decrease was primarily a result of a lower provision for doubtful accounts and
the elimination of consulting fees from 1998.
12
<PAGE> 15
The 1998 amounts include an expense credit of $474,000 to the provision for loan
losses, reflecting favorable credit experience with the company's portfolio of
loans under the Federal National Mortgage Association's Delegated Underwriting
and Servicing Program.
Depreciation and amortization decreased to $87,984 for the second quarter of
1999 from $92,609 for the corresponding period in 1998. The decrease primarily
reflects the impact of the sale of the company's headquarters building in May
1999, which resulted in a non-recurring gain of approximately $260,600.
Interest expense increased to $66,015 for the second quarter of 1999 from
$61,383 for the same period in 1998. The increase primarily reflects interest on
debt incurred in conjunction with the company's investment in HMR Sweden, L.L.C.
The charge of $851,453 in the second quarter of 1998 reflects the company's
portion of expenses related to Strategic Realty Capital Corp.'s planned public
offering pursuant to a cost-sharing arrangement with the co-sponsors. In March
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 unfavorable market
conditions for publicly traded REITs, the offering was cancelled. Crown funded
offering expenses from cash reserves and amounts due from the co-sponsors.
Income tax benefit of $19,400 for the second quarter of 1998 reflects the impact
of the cumulative operating loss through June 1999.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1998
Total revenues decreased $1,077,871 to $2,359,472 in the first six months of
1999 from $3,437,343 during the same period in 1998. Revenue components changed
significantly, with disposition and bonus fees decreasing by $1,125,541 in 1999.
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. Management
fee revenues generally include ongoing fees with an opportunity for additional,
incentive-based compensation at the end of an engagement. Revenues for the first
six months of 1999 include approximately $425,000 for asset management services
for a shareholder and approximately $229,900 for services rendered to a joint
venture in which the company has a 50% interest.
Management fee revenues increased $336,256 to $1,542,124 in the first six months
of 1999 from $1,205,868 for the comparable period in 1998. The increase in
management fee revenues for the first six months of 1999 versus the same period
in 1998 is generally attributable to an increase in the number of assets under
Crown's management.
Disposition and incentive fee revenues decreased $1,125,541 to $66,182 in the
first half of 1999 from $1,191,723 during the corresponding period in 1998. The
1998 amount includes approximately $600,000 for the progressive resolution of
one private-sector
13
<PAGE> 16
contract and a disposition fee of approximately $375,000 under one contract with
an investment banking client.
Other fees decreased $288,586 to $751,166 in the first six months of 1999 from
$1,039,752 for the same period in 1998. Of the decrease, approximately $391,000
was caused by the cessation of mortgage lending activities in 1998. The decrease
was offset in part from fees from partnerships and joint ventures in which the
company has an interest.
Personnel expenses decreased $397,369 to $2,407,458 for the first half of 1998
from $2,804,827 for the same period in 1997. The decreases were primarily caused
by lower staffing levels from termination of mortgage lending activities as well
as and lower administrative staffing levels.
Occupancy, insurance and other operating expenses increased $4,563 to $899,944
for the first six months of 1999 from $895,381 for the first six months of 1998.
The 1998 decrease in provision for loan losses of $674,000, reflects favorable
credit experience of Crown's loan portfolio under the FNMA-DUS Program.
The net non-recurring gain of approximately $260,600 in 1999 primarily reflects
the gain on sale of the company's headquarters in May 1999.
The charge of $851,453 in 1998 reflects Crown's portion of expenses related to
SRCC's planned public offering pursuant to a cost-sharing arrangement with the
co-sponsors. In March 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
unfavorable market conditions for publicly traded REITs, the offering was
cancelled. Crown funded offering costs from cash reserves and amounts due from
the co-sponsors.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Cash and cash equivalents decreased to $1,298,053 at June 30, 1999 from
$1,942,068 at December 31, 1998. The company had aggregate bank credit
facilities of $600,000 of which none was outstanding at June 30, 1999. The
company continues to pursue credit facilities to establish an advancing line for
operations as a master servicer.
Crown is incurring operating cash deficits and is funding those deficits using
proceeds generated from equity capital raised in 1998. For the foreseeable
future, the company expects to fund current operations with cash provided by
operations, selective sales of company assets and draws on bank credit
facilities. In regard to selective sales of company assets, the company sold its
headquarters building in a sale and leaseback transaction. Crown has also
entered into an agreement to sell substantially all of its investment in
European Operations to affiliates of a shareholder-director, subject to another
party's right of first
14
<PAGE> 17
refusal. Additionally, the company is attempting to develop new sources of
revenue to reduce or eliminate operating deficits and is seeking other means of
funding those deficits.
HISTORICAL CASH FLOWS
Operating activities used cash flows of $966,672 during the first six months of
1999 compared to $570,958 in the corresponding period of 1998. The 1999 amount
approximates the company's net loss for the six-month period ending June 30,
1999. In addition to the net loss for the first six months of 1998, cash used
for operating activities in 1998 increased due to the impact of net non-cash
credits and changes to working capital components resulting primarily from
payment of accrued incentive compensation and abandonment costs.
Investing activities provided cash flows of $1,805,786 during the first six
months of 1999, compared to using funds of $965,776 during the comparable time
period in 1998. Cash provided by the sale of the corporate headquarters building
in May 1999 was the primary source of cash in 1999 while the payment of expenses
associated with the cancellation of the SRCC mortgage REIT was the primary use
of cash in 1998.
Financing activities used cash flows of $1,483,129 during the first six months
of 1999 while providing funds of $5,565,756 for the respective time period in
1998. In May 1999, the company extinguished debt collateralizing its corporate
headquarters when the facility was sold. In 1998, cash was provided by the
issuance of the Series AA Preferred and the Series BB Preferred.
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. Crown has completed its assessment of its Year 2000 issues
and has successfully tested its current operating systems for Year 2000
readiness. As Crown installs new hardware and software in the normal course of
business, it will continue testing to ensure that such installations do not give
rise to Year 2000 issues.
Crown's proprietary computer systems and applications are Year 2000 compliant.
Crown has installed and tested upgrades to its third-party loan servicing system
and believes this system now presents no Year 2000 issues for Crown. Crown makes
some use of standard commercial software products. To the extent that present
versions of these products manifest Year 2000 problems, Crown is acquiring Year
2000-compliant versions or is substituting alternative products that do comply.
The costs Crown has incurred specifically to address Year 2000 issues have been
immaterial and are expected to continue to be so. Expenditures have included
upgraded hardware for the loan servicing system as well as enhanced telephone
and building security
15
<PAGE> 18
systems. Over and above regularly scheduled purchases to keep pace with
continuing technological advances, Crown will purchase from operating funds
extra supplies of key computer hardware to insure availability as 2000
approaches. Crown also has in place adisaster recovery plan should it need to
resume operations for a temporary or extended period in an alternative location
due to computer processing failures.
Crown believes it is taking all appropriate steps to maintain Year 2000
compliance. Nevertheless, the Year 2000 problem is pervasive and complex, as
virtually every computer operation will be affected in some way. Crown believes
that its ongoing testing of new hardware and software components acquired in the
normal course of business 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.
16
<PAGE> 19
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
Item 3. - Defaults Upon Senior Securities
- -----------------------------------------
None
Item 4. - Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
The company held its Annual Meeting of Stockholders on May 14, 1999. At the
meeting, the stockholders voted to reelect seven directors for the ensuing year.
The results of the election were:
Votes for all nominees: 10,189,067
Votes to withhold authority from the following nominees:
Ronald E. Roark 10,510
John Everets 10,407
Gordon V. Smith 10,392
Raymond J. Harbert 33,533
Michael D. Luce 33,521
Scott M. Mannes 33,933
Harold E. Cooke 34,668
Item 5. - Other Information
- ---------------------------
None
17
<PAGE> 20
Item 6. - Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
Exhibit
Numbers
-------
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: August 11, 1999 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
-----------------
27 Financial Data Schedule (1)
(1) Filed herewith.
20
<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 JUNE 30, 1999 AND THE SIX MONTHS ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,298,053
<SECURITIES> 0
<RECEIVABLES> 1,273,129
<ALLOWANCES> (100,000)
<INVENTORY> 0
<CURRENT-ASSETS> 2,660,659
<PP&E> 1,316,519
<DEPRECIATION> (952,620)
<TOTAL-ASSETS> 11,915,540
<CURRENT-LIABILITIES> 1,064,826
<BONDS> 0
1,400,000
2
<COMMON> 111,201
<OTHER-SE> 6,863,023
<TOTAL-LIABILITY-AND-EQUITY> 11,915,540
<SALES> 0
<TOTAL-REVENUES> 2,359,472
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,226,237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132,796
<INCOME-PRETAX> (999,561)
<INCOME-TAX> 0
<INCOME-CONTINUING> (999,561)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (999,561)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
