<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, 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 October 31, 1999, the issuer had 11,260,323 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 SEPTEMBER 30, 1999
INDEX
<CAPTION>
PART I PAGES
-----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 .................................................. 1
Condensed Consolidated Statements of Operations for the
third quarter and the nine months ended September 30, 1999 and 1998 .... 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998........................... 3
Notes to Condensed Consolidated Financial Statements-
September 30, 1999 and 1998............................................. 4
Item 2. Management's Discussion and Analysis.................................... 8
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........................................ 17
(a) Exhibits ........................................................ 17
(b) Reports on Form 8-K.............................................. 17
Signature.......................................................................... 18
Exhibit Index...................................................................... 19
</TABLE>
<PAGE> 3
CROWN NORTHCORP, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
- ------------------------------------------------------------------------------
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,123,574 $ 1,942,068
Accounts receivable - net 999,197 1,570,392
Prepaid expenses and other assets 135,974 123,792
----------- -----------
Total current assets 4,258,745 3,636,252
PROPERTY AND EQUIPMENT - Net 309,358 1,696,210
RESTRICTED CASH 2,650,319 4,206,106
OTHER ASSETS - net 2,133,017 4,910,425
----------- -----------
TOTAL $ 9,351,439 $14,448,993
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES 562,070 1,594,832
LONG-TERM OBLIGATIONS:
Notes and bonds payable - less current portion - 2,935,950
Allowance for loan losses & other 769,640 610,000
----------- -----------
Total long-term obligations 769,640 3,545,950
REDEEMABLE PREFERRED STOCK 1,400,000 1,400,000
SHAREHOLDERS' EQUITY:
Common stock 111,953 110,651
Convertible preferred stock:
Series AA -
Series BB -
Additional paid-in capital 10,081,636 9,993,864
Accumulated deficit (3,573,533) (2,195,977)
Treasury stock, at cost (327) (327)
----------- -----------
Total shareholders' equity 6,619,729 7,908,211
----------- ------------
TOTAL $ 9,351,439 $ 14,448,993
=========== ============
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
CROWN NORTHCORP, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
THIRD QUARTER YEAR TO DATE
------------- ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Management fees $ 560,008 $ 525,909 $ 1,880,801 $ 1,668,670
Disposition and incentive fees 631,796 194,540 697,978 1,386,263
Income (loss) from partnerships and joint ventures (25,508) 17,110 39,152 64,506
Other 352,586 601,399 815,022 1,587,571
----------- ----------- ------------ -----------
Total revenues 1,518,882 1,338,958 3,432,953 4,707,010
----------- ----------- ------------ -----------
EXPENSES:
Personnel 1,074,918 1,329,233 3,181,343 3,774,125
Occupancy, insurance and other 492,724 514,318 1,369,926 1,357,223
Provision for loan losses (674,000)
Depreciation and amortization 93,988 96,025 273,439 276,994
----------- ----------- ------------ -----------
Total expenses 1,661,630 1,939,576 4,824,708 4,734,342
----------- ----------- ------------ -----------
Income (Loss) from operations before non-recurring items (142,748) (600,618) (1,391,755) (27,332)
----------- ----------- ------------ -----------
Non-recurring income (expenses):
Gain on sale of building - 260,616
Delayed offering costs - - - (851,452)
----------- ----------- ------------ -----------
Total other non-recurring income (expenses) - - 260,616 (851,452)
----------- ----------- ------------ -----------
INCOME (LOSS) FROM OPERATIONS (142,748) (600,618) (1,131,139) (878,784)
INTEREST EXPENSE 41,207 63,188 141,988 196,228
----------- ----------- ------------ -----------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (183,955) (663,806) (1,273,127) (1,075,012)
INCOME TAX EXPENSE - - - -
----------- ----------- ------------ -----------
NET LOSS FROM CONTINUING OPERATIONS (183,955) (663,806) (1,273,127) (1,075,012)
DISCONTINUED OPERATIONS:
Income (loss) from operations of discontinued operations (101,219) 579,791 (11,606) 236,333
Loss on disposal of European interests, including provision
of $35,000 for operating losses during phase-out period (141,280) - (141,280) -
----------- ----------- ------------ -----------
NET LOSS (426,454) (84,015) (1,426,013) (838,679)
=========== =========== ============ ===========
LOSS PER SHARE - BASIC AND DILUTED:
Continuing operations $ (0.02) $ (0.06) $ (0.11) $ (0.33)
Discontinued operations (0.01) 0.05 - 0.02
Loss on disposition of European operations (0.01) - (0.01) -
----------- ----------- ------------ -----------
Total loss per share $ (0.04) $ (0.01) $ (0.12) $ (0.31)
=========== =========== ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 11,176,951 11,051,681 11,120,400 10,979,227
----------- ----------- ----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
CROWN NORTHCORP, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,426,013) $ (838,676)
Foreign currency translation adjustment 48,457 -
----------- -----------
Total comprehensive net loss $(1,377,556) $ (838,676)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 444,791 420,826
Gain on sale of corporate office building (260,616)
Decrease in reserve for loan losses (674,000)
Accrued abandonment cost settlement 851,453
Income from investments in joint ventures (460,802)
Other - net 84,939
Change in operating assets and liabilities:
Accounts receivable 571,195 147,044
Prepaid expenses and other assets (12,182) (26,087)
Accounts payable and accrued expenses (402,474) (174,823)
----------- -----------
Net cash used in operating activities (951,903) (755,065)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of corporate office building 1,545,876
Net proceeds from sale of European investment 2,744,000
Decrease in restricted cash 1,555,787
Investment in partnerships (2,358,785)
Increase in shareholder receivables (392,692)
Increase in restricted cash (676,502)
Purchase of property and equipment (42,399) (75,882)
Other (103,619) (482,180)
----------- -----------
Net cash provided (used) in investing activities 5,699,645 (3,986,041)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 125,000 3,161,392
Principal payments on notes payable (3,691,236) (2,489,858)
Proceeds from issuance of common stock 162,876
Proceeds from issuance of preferred stock - 5,604,579
----------- -----------
Net cash provided (used) by financing activities (3,566,236) 6,438,989
----------- -----------
NET INCREASE IN CASH DURING THE PERIOD 1,181,506 1,697,883
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,942,068 735,940
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,123,574 $ 2,433,823
=========== ===========
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
SEPTEMBER 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 third quarter and nine months ended
September 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 third quarter and nine months ended
September 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 of $.23
per common share. Including this dividend, the net loss available to
common shareholders for the nine months ended September 30, 1998 was
$3,335,944 ($0.31 per share).
4
<PAGE> 7
3. Receivables
-----------
Receivables consist of the following at September 30, 1999 and December
31, 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Trade $1,038,203 $1,252,534
Affiliates 6,994 408,026
Officers and Employees 57,000 9,832
---------- ----------
Total 1,102,197 1,670,392
Less: Allowance for doubtful accounts (103,000) (100,000)
---------- ----------
Receivables-net $ 999,197 $1,570,392
========== ==========
</TABLE>
The affiliate receivable at December 31, 1998 was for management fees
and expense reimbursements from a venture in which the company had a
50% investment interest.
4. Property and Equipment
----------------------
Property and equipment consists of the following at September 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 $ 1,319,296 1,276,877
----------- -----------
Total property and equipment 1,319,296 2,685,834
Less accumulated depreciation (1,009,918) (989,624)
----------- -----------
Property and equipment - net $ 309,358 $ 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. Disposition of European Operations
----------------------------------
On August 20, 1999, the company sold its interests in HMR Sweden,
L.L.C., Catella/Crown NorthCorp Joint Venture AB and a related asset
management contract for total consideration of approximately
$3,500,000. The selling price was payable in cash and the cancellation
of indebtedness to an affiliate of a shareholder-director of
approximately $980,000. From the sale proceeds, the company also paid
$726,000 to a shareholder-director in satisfaction of the company's
obligations under a certain payment of fees agreement. Revenues for the
European segment were approximately $5,000 and $836,000 for the third
quarter 1999 and 1998, respectively, and $451,000 and $906,000 for the
nine months ended 1999 and 1998, respectively.
7
<PAGE> 10
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, fees for due diligence
reviews, incentive fees based on the overall performance of a contract or pool
of assets, loan servicing fees and interest income. Crown has utilized strategic
acquisitions and alliances to expand and diversify its core asset management and
servicing businesses. The company actively seeks a merger transaction or similar
strategic alliance to provide capital and financial stability to support and
expand its operations. Crown has retained an investment banker to assist the
company 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.
8
<PAGE> 11
o While Crown has sold selected assets to improve liquidity, it may not be
successful in maintaining sufficient liquidity through profitable
operations, increased revenues, reduced expenses or other means.
Insufficient liquidity would impair the company's ability to operate at
current levels.
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 Crown has successfully tested its computer systems for Year 2000
readiness. If, however, the complexities of the Year 2000 issue, including
business dealings with other parties, cause unanticipated problems to
arise, 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 contracts. The company has had asset management and servicing
operations in both the United States and Europe. During the third quarter, Crown
sold substantially all of its European Operations. At the end of 1998, the
company ceased originating mortgage loans for a conduit program. The company is
now focusing on enhancing revenues from its domestic management and servicing
businesses. Crown is also working with some of its clients to develop interim
and secondary financing programs secured by commercial real estate.
The company continues to receive new third-party asset management assignments.
The company's principal investment banking client continues to place assets with
Crown for management. This year, the company undertook significant asset
management work for a shareholder. The company's third-party asset management
activities typically include work on large commercial real estate assets such as
loans secured by hotels, office buildings or multifamily projects. In many
cases, these assets are not performing in accordance with their terms at the
time they are assigned to Crown. For the foreseeable future, the company
anticipates that it will derive its primary revenues from third-party
9
<PAGE> 12
asset management contracts. Crown is actively seeking ways to increase revenues
in this area.
Loan servicing is and will remain a core business line. Generally, Crown
services the assets placed under the company's management. Additional sources of
servicing business include negotiated transactions, competitive bidding and
recurring business from existing clients. In many instances, particularly
involving securitized assets, servicers must invest in assets or portfolios they
will service. Crown's capital resources are relatively limited compared to those
of many of its competitors. The company is thus precluded from many servicing
opportunities unless it aligns itself with a source of capital or a strategic
partner.
Crown continues to maintain favorable servicing ratings with both Standard and
Poor's Corporation and Fitch IBCA. The company believes that its ability to
operate as a rated servicer is of significant marketing value as Crown seeks to
secure additional management and servicing business. The company intends to
continue to devote significant resources to maintaining its capabilities as a
rated servicer.
As alluded to above, during the third quarter, the company completed the sale of
substantially all of its European Operations. The sale was undertaken to
increase liquidity, reduce operating costs and focus Crown's financial and human
resources on asset management and servicing opportunities in the United States.
Crown is attempting to return to profitability by increasing its revenues from
its core asset management and servicing businesses and developing specialized
mortgage financing programs. The company has increased its liquidity through the
sale of selected assets; management continues to review operations for
opportunities to reduce expenses. At the same time, the company recognizes that
these efforts may not be sufficient to overcome operating deficits. Therefore,
Crown is seeking a merger partner or strategic alliance that could provide
necessary capital and financial stability. There can be no assurance that any of
the foregoing actions will produce the intended results or lead to profitable
operations.
RESULTS OF OPERATIONS FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO
THE THIRD QUARTER ENDED SEPTEMBER 30, 1998
Total revenues from continuing operations increased $179,924 to $1,518,882 for
the third quarter of 1999 from $1,338,958 during the same period in 1998. Of the
net increase in total revenues, disposition and incentive fees increased by
$437,256 reflecting the payment of a large disposition fee by a shareholder for
asset management services. Other Revenue decreased by $248,813 of which
approximately $225,000 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 an engagement. Revenues from continuing operations
for the third quarter of 1999
10
<PAGE> 13
include approximately $572,000 for asset management services and disposition
fees for a shareholder at market prices.
Management fees are recorded as services required under a contract are performed
and, as defined in the applicable contracts, are derived either from percentages
of the aggregate value of assets under management or from original base monthly
amounts. Management fee revenues increased to $560,008 in the third quarter of
1999 from $525,909 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 increased to $631,796 in the
third quarter of 1999 from $194,540 during the corresponding period in 1998.
Fees for 1999 primarily reflect a disposition fee paid by a shareholder for
asset management services. 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 primarily include interest income and net servicing revenues. Other
fees for 1998 also include mortgage origination income of approximately
$225,000. The company ceased commercial lending operations through a conduit
program at December 31, 1998. Other fees decreased $248,813, to $352,586 in the
third quarter of 1999 from $601,399 in the same period in 1998.
Expenses from continuing operations decreased $277,946 to $1,661,630 in the
third quarter of 1999 from $1,939,576 during the same period in 1998. The
decrease primarily reflects staff reductions due to the cessation of mortgage
lending activities in December 1998, staff attrition without replacement and a
reduction in short- and long-term incentive compensation provisions. Third
quarter expenses also include a $50,000 charge for professional fees associated
with the engagement of an investment banker to assist the company in pursuing a
merger transaction or other strategic initiative.
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses and professional development expenses. Personnel expenses
decreased $254,315 to $1,074,918 for the third quarter of 1999 from $1,329,233
for the same period in 1998. The decreases were primarily caused by lower
staffing levels from the termination of mortgage lending activities and from
lower administrative staffing levels.
Occupancy, insurance and other operating expenses decreased to $492,724 for the
third quarter of 1999 from $514,318 for the third quarter of 1998.
11
<PAGE> 14
Depreciation and amortization decreased to $93,988 for the third quarter of 1999
from $96,025 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 decreased to $41,207 for the third quarter of 1999 from $63,188
for the same period in 1998. The decrease primarily reflects the elimination of
debt incurred in conjunction with the company's investment in HMR Sweden, L.L.C.
and the debt associated with the sale of the company's headquarters building.
The loss from continuing operations decreased $479,851, to a loss of $183,955 in
the third quarter of 1999 from a loss of $663,806 in the same quarter of 1998.
The loss decreased primarily because of the net increase in revenues, primarily
attributable to the receipt of a large disposition fee during the quarter,
combined with a significant reduction in personnel expenses.
The income (loss) from discontinued operations changed to a loss of $101,219 in
the third quarter of 1999 from income of $579,791 in 1998. During 1998, revenues
from discontinued operations included billings to an affiliated entity of
approximately $449,000 and equity in earnings of an affiliated entity of
approximately $396,000. The increases were primarily attributable to one-time
success fees for the placement of a large transaction. Expenses from
discontinued operations decreased primarily through the implementation of an
expense sharing agreement with a joint venture partner.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Total revenues from continuing operations decreased $1,274,057 to $3,432,953 in
the first nine months of 1999 from $4,707,010 during the same period in 1998.
Revenue components changed significantly, with disposition and incentive fees
decreasing by $688,285 and other revenue decreasing by $772,549 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
nine months of 1999 include approximately $988,050 for asset management services
and disposition fees for a shareholder.
Management fee revenues increased $212,131 to $1,880,801 in the first nine
months of 1999 from $1,668,670 for the comparable period in 1998. The increase
in management fee revenues for the first nine months of 1999 versus the same
period in 1998 is generally attributable to an increase in the number of assets
under Crown's management.
12
<PAGE> 15
Disposition and incentive fee revenues decreased $688,285 to $697,978 in the
first nine months of 1999 from $1,386,263 during the corresponding period in
1998. The 1998 amount includes approximately $600,000 for the progressive
resolution of one private-sector contract and a disposition fee of approximately
$375,000 under one contract with an investment banking client.
Other fees decreased $772,549 to $815,022 in the first nine months of 1999 from
$1,587,571 for the same period in 1998. Of the decrease, approximately $616,000
was caused by the cessation of mortgage lending activities in 1998.
Expenses from continuing operations increased $90,366, to $4,824,708, in the
first nine months from $4,734,342 during the same period in 1998. Expenses for
1998 include a reduction in the provision for loan losses of $674,000. Excluding
the reduction in the provision for loan losses, the decrease in operating
expenses primarily reflects staff reduction due to the cessation of mortgage
lending activities in December 1998, staff attrition without replacement and a
reduction in short- and long-term incentive compensation provisions. Third
quarter expenses also include a $50,000 charge for professional fees associated
with the engagement of an investment banker to assist the company in pursuing a
merger transaction or other strategic initiative.
Personnel expenses decreased $592,782 to $3,181,343 for the first nine months of
1999 from $3,774,125 for the same period in 1998. As discussed previously, the
decreases were primarily caused by lower staffing levels from the termination of
mortgage lending activities as well as lower administrative staffing levels.
Occupancy, insurance and other operating expenses increased $12,703 to
$1,369,926 for the first nine months of 1999 from $1,357,223 for the first nine
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 reflects the gain
on sale of the company's headquarters in May 1999.
The charge of $851,452 in 1998 reflects Crown'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 costs from cash
reserves and amounts due from the co-sponsors.
The loss from continuing operations increased $198,115, to a loss of $1,273,127
in the nine months of 1999 from a loss of $1,075,012 during the same period in
1998. The 1998 loss includes a non-recurring loss of approximately $851,000
resulting from the write-off of delayed offering costs, while the 1999 amount
includes a gain on the sale of the
13
<PAGE> 16
corporate office facility of approximately $260,000. Excluding the impact of
non-recurring items, the loss from operations increased $1,364,443, to
$1,391,775 for the nine months of 1999 from $27,332 for the same period of 1998.
Operating losses increased primarily because of lower revenues, largely because
of lower disposition fees and the cessation of mortgage lending activities.
The income (loss) from discontinued operations changed to a loss of $11,606 in
the first nine months of 1999 from income of $236,333 during the same period in
1998. During 1998, revenues from discontinued operations totaled approximately
$906,000 and included billings to an affiliated entity of approximately $449,000
and equity in earnings of an affiliated entity of approximately $396,000. The
increases were primarily attributable to one-time success fees for the placement
of a large transaction. During 1999, revenues for the nine months decreased to
approximately $451,000 and were generally to the affiliated entity. During the
third quarter, the company disposed of substantially all of its European
Operations, including the affiliated entity. Expenses from discontinued
operations decreased primarily through the implementation of an expense sharing
agreement with a joint venture partner.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Cash and cash equivalents increased to $3,123,574 at September 30, 1999 from
$1,942,068 at December 31, 1998. The company presently has no bank credit
facilities. The company intends to pursue such facilities and to attempt 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. The company has sold its headquarters building in a sale and
leaseback transaction. Crown has also sold all of its investment in European
Operations (see Note 8 to the financial statements). 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 $951,903 during the first nine months of
1999 compared to $755,065 in the corresponding period of 1998. The 1999 amount
increased because of the company's greater net loss for the nine-month period
ending September 30, 1999 and the impact of non-recurring charges in 1998.
14
<PAGE> 17
Investing activities provided cash flows of $5,699,645 during the first nine
months of 1999, compared to using funds of $3,986,041 during the comparable time
period in 1998. Cash provided from the disposition of European Operations and
the sale of the corporate headquarters building were the primary sources of cash
in 1999. The investment associated with the acquisition of business in Europe
was the primary use of cash in 1998.
Financing activities used cash flows of $3,566,236 during the first nine months
of 1999 while providing funds of $6,438,989 for the respective time period in
1998. In May 1999, the company extinguished debt collateralizing its corporate
headquarters when the facility was sold and also extinguished debt associated
with the European Operations upon the disposition of those operations. 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 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 systems. Over and above regularly scheduled purchases to
keep pace with continuing technological advances, Crown has purchased from
operating funds extra supplies of key computer hardware to insure availability
as 2000 approaches. Crown also has in place a disaster 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 has taken 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
15
<PAGE> 18
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
- -------------------------------------------------------------
None
Item 5. - Other Information
- ---------------------------
None
Item 6. - Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
Exhibit
Numbers
-------
10.79 Purchase and sale agreement between Crown NorthCorp, Inc. and
Catella Boardroom Consulting AB.
10.80 Purchase and sale agreement between Crown NorthCorp, Inc. and
Catella Holding AB.
27 Financial Data Schedule
(b) Reports on Form 8-K
On September 7, 1999, the company filed a current report on Form 8-K
reporting the company's sale of substantially all of its European
Operations. On November 5, 1999, the company filed Form 8-K/A reporting
pro forma financial information reflecting the sale transaction.
17
<PAGE> 20
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 22, 1999 By: /s/ Ray L. Druseikis
---------------------------------
Ray L. Druseikis, Treasurer,
Controller and Chief
Financial Officer
By: /s/ Stephen W. Brown
---------------------------------
Stephen W. Brown,
Secretary
18
<PAGE> 21
INDEX TO EXHIBITS
-----------------
10.79 Purchase and sale agreement between Crown NorthCorp, Inc. and
Catella Boardroom Consulting AB. (1)
10.80 Purchase and sale agreement between Crown NorthCorp, Inc. and
Catella Holding AB. (1)
27 Financial Data Schedule (2)
----------
(1) Incorporated by reference to Crown NorthCorp, Inc.'s
Form 8-K filed September 7, 1999.
(2) Filed herewith.
19
<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,123,574
<SECURITIES> 0
<RECEIVABLES> 1,102,197
<ALLOWANCES> (103,000)
<INVENTORY> 0
<CURRENT-ASSETS> 4,258,745
<PP&E> 1,319,276
<DEPRECIATION> 1,009,918
<TOTAL-ASSETS> 9,351,439
<CURRENT-LIABILITIES> 562,070
<BONDS> 0
1,400,000
2
<COMMON> 111,953
<OTHER-SE> 6,507,776
<TOTAL-LIABILITY-AND-EQUITY> 9,351,439
<SALES> 0
<TOTAL-REVENUES> 3,432,953
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,564,092
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 141,988
<INCOME-PRETAX> (1,273,127)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,273,127)
<DISCONTINUED> (152,886)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,426,013)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
