<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(AMENDMENT NO. 1)
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 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
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 April 30, 1998, the issuer had 10,990,899 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/A
(AMENDMENT NO. 1)
QUARTERLY PERIOD ENDED MARCH 31, 1998
<TABLE>
INDEX
<CAPTION>
PART I. PAGES
-----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997........................................... 1
Condensed Consolidated Statements of Income for the
three months ended March 31, 1998 (as restated) and 1997........ 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997...................... 3
Notes to Consolidated Financial Statements-
March 31, 1998 (as restated) and 1997........................... 5
Item 2. Management's Discussion and Analysis............................ 9
PART II.
Item 1. Legal Proceedings............................................... 14
Item 2. Changes in Securities........................................... 14
Item 3. Defaults Upon Senior Securities................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............. 15
Item 5. Other Information............................................... 15
Item 6. Exhibits and Reports on Form 8-K................................ 15
(a) Exhibits .............................................. 15
(b) Reports on Form 8-K.................................... 15
Signature.................................................................... 16
Exhibit Index................................................................ 17
</TABLE>
<PAGE> 3
CROWN NORTHCORP, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,374,170 $ 735,940
Accounts receivable - net of allowance of $30,000 1,716,063 1,672,306
Prepaid expenses and other assets 246,972 275,283
----------- -----------
Total current assets 7,337,205 2,683,529
PROPERTY AND EQUIPMENT - Net 2,048,400 2,014,746
RESTRICTED CASH 4,570,893 4,550,766
OTHER ASSETS - net 2,866,233 2,171,572
----------- -----------
TOTAL $16,822,731 $11,420,613
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES 1,983,179 2,143,011
LONG-TERM OBLIGATIONS:
Notes and bonds payable - less current portion 2,426,061 2,563,550
Allowance for loan losses & other 1,350,811 1,385,721
----------- -----------
Total long-term obligations 3,776,872 3,949,271
REDEEMABLE PREFERRED STOCK 2,000,000 2,000,000
SHAREHOLDERS' EQUITY:
Common stock 110,310 108,310
Convertible preferred stock:
Series AA - -
Series BB - -
Additional paid-in capital 9,938,331 4,209,752
Accumulated deficit (972,597) (976,367)
Treasury stock, at cost (13,364) (13,364)
----------- -----------
Total shareholders' equity 9,062,680 3,328,331
----------- -----------
TOTAL $16,822,731 $11,420,613
=========== ===========
</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 THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<CAPTION>
1998 1997
---- ----
(As restated--
See Note 7)
<S> <C> <C>
REVENUES:
Management fees $ 507,143 $ 1,047,814
Disposition fees 446,662 174,140
Incentive fees 608,625 159,082
Other 329,820 298,675
----------- -----------
Total revenues 1,892,250 1,679,711
----------- -----------
EXPENSES:
Personnel 1,539,426 1,730,671
Occupancy, insurance and other 169,301 627,748
Interest 71,657 78,170
Depreciation and amortization 88,696 118,961
Employment contract settlement - 206,563
----------- -----------
Total expenses 1,869,080 2,762,113
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 23,170 (1,082,402)
INCOME TAX (BENEFIT) 19,400 (182,563)
----------- -----------
NET INCOME (LOSS) 3,770 (899,839)
SERIES AA and BB CONVERTIBLE PREFERRED
STOCK DIVIDENDS AT ISSUANCE 2,497,268 -
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK $(2,493,498) $ (899,839)
=========== ===========
LOSS PER SHARE - BASIC AND DILUTED $ (0.23) $ (0.10)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 10,855,333 9,054,481
=========== ===========
</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 THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,770 $ (899,839)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 112,688 118,961
Decrease in reserve for loan losses (200,000)
Accrued abandonment cost settlement (100,000)
Other - net (39,965)
Change in operating assets and liabilities - net of effects from purchases
and divestitures of subsidiaries:
Accounts receivable (43,757) 275,420
Prepaid expenses and other assets 28,311 (45,518)
Accounts payable and accrued expenses (432,590) 129,092
----------- -----------
Net cash used in operating activities (631,578) (461,849)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for corporate acquisitions and mergers (1,606,855)
Purchase of property and equipment (99,841) (49,735)
Other 3,800 (222,590)
----------- -----------
Net cash used in investing activities (96,041) (1,879,180)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,031,000 3,581,286
Principal payments on notes payable (795,730) (1,971,173)
Proceeds from issuance of common stock 126,000 954,569
Proceeds from issuance of preferred stock 5,604,579
Increase in long term contract receivable (600,000) (72,793)
----------- -----------
Net cash provided by financing activities 5,365,849 2,491,889
----------- -----------
NET INCREASE IN CASH DURING THE QUARTER 4,638,230 150,860
CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER 735,940 587,080
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 5,374,170 $ 737,940
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
CROWN NORTHCORP, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- ------------------------------------------------------------------------------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
SUPPLEMENTAL INFORMATION
CASH PAID FOR INTEREST $63,163 $ 69,729
======= ==========
NONCASH 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 assets acquired, net of acquired cash 1,606,855
==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 7
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(UNAUDITED)
1. General and Basis of Presentation
- -- ---------------------------------
The accompanying unaudited condensed consolidated financial statements
of Crown NorthCorp, Inc., and subsidiaries (the "Company") reflect all
material adjustments consisting of only normal recurring adjustments
which, in the opinion of management, are necessary for a fair
presentation of results for the interim periods. Certain information
and footnote disclosures required under generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"), although
the Company believes that the disclosures are adequate to make the
information presented not misleading. These financial statements should
be read in conjunction with the year-end financial statements and notes
thereto included in the Company's Form 10-KSB for the year ended
December 31, 1997. Certain reclassifications have been made to the 1997
amounts to conform to the 1998 presentation.
2. Loss Per Common Share
- -- ---------------------
The loss per share for the three months ended March 31, 1998 and 1997
is computed based on the loss applicable to common stock divided by the
weighted average number of common shares outstanding during the period.
As the Company had a net loss applicable to common stock for the three
months ended March 31, 1998 and 1997, there are no potential common
shares to be included in the computation of the diluted per-share
amount.
5
<PAGE> 8
3. Property and Equipment
- -- ----------------------
Property and equipment consists of the following at March 31, 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 1,497,600 1,397,760
---------- ----------
Total property and equipment 2,906,557 2,806,717
Less accumulated depreciation (858,157) (791,971)
---------- ----------
Property and equipment - net $2,048,400 $2,014,746
========== ==========
</TABLE>
4. Stockholders' Equity
- -- --------------------
In March 1997, the Company entered into a stock purchase agreement (the
"Harbert SPA") with Harbert Equity Fund I, L.L.C. ("Harbert Fund") to
invest up to $5 million in Common Stock. The Harbert Fund invested $1
million in the Company in March 1997 and additional sums in October and
December 1997. On December 31, 1997 the Company and the Harbert Fund
entered into Amendment No. 2 to the Harbert SPA (the "SPA Amendment")
pursuant to which the Harbert Fund would purchase one share of the
Company's Series AA Non-Voting Convertible Preferred Stock, par value
$.01 per share (the "Series AA Preferred") in exchange for $3,647,185
cash on the terms and conditions set forth in the SPA Amendment.
Harbert Fund is entitled to a non-cumulative dividend at the rate of 5%
per annum on the liquidation preference. The liquidation preference is
$3,647,185, plus a 12% cumulative dividend from January 26, 1998, the
date the transaction was consummated. The holders of the Series AA
Preferred have the option to convert the Series AA Preferred into
3,473,510 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 AA
Preferred was $1.625, resulting in an effective dividend upon issuance
of $1,997,268. The Company has the option to convert the Series AA
Preferred upon the occurrence of certain stipulated events. Provided
that the Harbert Fund continues to hold all of the Series AA Preferred,
if the stipulated events have not occurred by June 30, 1998, then the
Harbert Fund shall have the right to designate a majority of the
Company's Board of Directors. The Company has the right to redeem the
Series AA Preferred upon thirty days' written notice for the
liquidation preference provided, however, that upon receipt of a
redemption notice, the holders of the Series AA Preferred have the
right to convert the Series AA Preferred into 3,473,510 shares of
Common Stock.
In March 1998, the Company entered into a stock purchase agreement (the
"Conti SPA")with an affiliate of ContiFinancial Corporation ("Conti")
whereby Conti invested $2 million in exchange for one share of the
Company's Non-Voting Series BB Convertible Preferred Stock, par value
$.01 per share (the "Series BB Preferred") on the terms and conditions
set forth in the Conti SPA,
6
<PAGE> 9
and a warrant to purchase up to 200,000 shares of the Company'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 holders of the Series
BB Preferred have the option to convert the Series BB Preferred 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 the 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 holders of the Series BB
Preferred have 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 the Company's Board of Directors as long as they hold the
Series BB Preferred or at least 1,000,000 shares of Common Stock and
certain other conditions are met.
5. 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.
The Company is a co-sponsor of Strategic Realty Capital Corp. ("SRCC")
which on March 24, 1998 filed with the Securities and Exchange
Commission to register shares in an initial public offering. SRCC is a
real estate investment trust and will make high-yield commercial and
multi-family real estate loans and investments. The Company will manage
the operations of SRCC, subject to the supervision of SRCC's Board of
Directors. Concurrent with the initial public offering, the Company is
committed to purchase an additional 133,333 shares (2% of the aggregate
common stock) of SRCC at the initial public offering price, estimated
to be $15 per share. Upon the closing of the offering of common stock
of SRCC, the Company will issue a warrant to SRCC for the purchase of
2,000,000 shares of Common Stock at $2.50 per share. The Company will
also invest cash of $2,000,000 in SRCC. At the time of the filing, the
Company owned all 100 issued shares of SRCC.
6. Statements of Financial Accounting Standards
- -- --------------------------------------------
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". The Company will, as required, implement the
provisions of the statement in the quarter ending March 31, 1999. The
Company's current disclosures are in compliance with the requirements
of the statement.
FASB has issued SFAS 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 report on the basis
that is used internally for evaluating segment performance and deciding
how to allocate resources. The Company will implement the provisions of
this statement, as required, for the year ended December 31, 1998.
In June 1998, FASB issued SFAS 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, 2000. The Company does not
anticipate that adoption of this statement will materially impact its
financial position, results of operations or cash flows.
7
<PAGE> 10
7. Restated Earnings per Share
- -- ---------------------------
Subsequent to the issuance of the Company's financial statements for
the three-month period ended March 31, 1998, management determined that
the Series AA and Series BB Preferred Stock issuances contained
beneficial conversion features of $1,997,268 and $500,000 respectively.
The resulting discount of $2,497,268 is 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. There is no effect on net
income as originally reported. As a result of the restatement, the
accompanying financial statements for the three-month period ended
March 31, 1998 have been restated. The net loss available to common
shareholders has been increased to $2,493,498 ($0.23 per share) from
previously reported net income of $3,770 ($0.00 per share).
8
<PAGE> 11
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
- ----------------------------------------------
GENERAL
The Company derives its primary revenues from the financial services it offers
to owners and operators of commercial real estate interests. These services
include 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 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.
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 the Company
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 which could materially and adversely affect the future
operating results of the Company are:
o The Company has experienced 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 originating mortgage loans and securing
additional asset management and servicing contracts.
o Many 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.
o The Company 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.
9
<PAGE> 12
o The Company may not be successful in its efforts to continue to develop
and expand its mortgage loan origination capability for a number of
reasons. Currently, the commercial mortgage lending industry has
numerous competitors with large amounts of capital available for
mortgage lending. The Company is a correspondent in the loan conduit
program of ContiTrade L.L.C. ("ContiTrade"), an affiliate of Conti. The
conduit program and its related funding facility may at some point be
unavailable to the Company or may be available only on terms less
favorable than those currently available to the Company. In addition to
attempting to continue the internal growth of its mortgage loan
origination capability, the Company intends to augment its lending
capability through strategic acquisitions and alliances, expanded
product lines and participation in additional lending programs. The
Company may be unsuccessful in some or all of these efforts which, in
turn, may adversely affect the Company's revenues and profitability.
o The Company 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.
o Until such time, if ever, as the public offering contemplated by the
registration statement filed by SRCC closes and becomes effective, the
Company will be unable to derive benefits either from a management
agreement with SRCC or from any investment in SRCC.
BUSINESS OUTLOOK
The Company continues to derive its primary revenues from management,
disposition and incentive fees associated with third-party asset management
contracts with various clients, including investment banking firms and
partnerships. Asset 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. Third-party asset management will continue to be an
important source of revenue for the Company. The Company is seeking to expand
asset management revenues through several means including the development of new
and existing client relationships, dealings with SRCC and European Operations.
If the public offering contemplated by the registration statement filed by SRCC
does not become effective and close, management will seek to expand its asset
management business through other means.
In the area of loan servicing, Standard & Poor's Corporation ("S&P") and Fitch
IBCA, Inc. ("Fitch") have both recently reaffirmed their "above average" ratings
of the Company as a special servicer of assets. Rated special servicers manage
non-performing loans and foreclosed properties in securitized transactions. S&P
recently rated the Company "average" as a commercial servicer; the Company also
received an "acceptable" rating as a master servicer from Fitch. 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 components of
securitizations. Loan servicing has been a core business of the Company and an
important source of revenue. The Company is actively seeking to acquire the
servicing rights to additional assets. Continued enhancement of its capabilities
as a rated servicer is a significant component of the Company's business
development activities.
10
<PAGE> 13
The Company continues to develop its mortgage loan origination business begun in
1997. As a loan correspondent for the conduit program of ContiTrade, the Company
originates qualifying multifamily and commercial loans which ContiTrade
purchases at closing under a funding facility ContiTrade is providing to the
Company. The Company intends to continue to devote significant resources to the
expansion of its mortgage loan origination capabilities through acquisitions,
the development of correspondent relationships and internal growth. Management
anticipates that mortgage loan origination will become a primary source of the
Company's revenue.
In addition to managing assets and interests throughout the United States, the
Company has commenced business operations in Europe. Since 1997, a Danish
subsidiary of the Company has been part of a joint venture providing asset
management, financial and advisory services to an investment group which
acquired an interest in a large portfolio of assets from the Swedish government.
The Company is actively seeking to expand its asset management and servicing
activities in Europe. Much of the Company's initial business development
activities has been conducted through offices in Copenhagen and London. These
offices are in the process of being reduced in size. In the future, management
anticipates that a greater portion of business development activities in Europe
will be conducted from the United States.
To overcome operating deficits and to sustain profitability, the Company must
continue to develop and enhance its revenues from both new and existing business
lines. 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 THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1997
As discussed in notes to the financial statements, the Company restated its
March 31, 1998 financial statements to account for the beneficial conversion
features related to issuances of Series AA and Series BB Preferred Stock (see
Note 7). As a result, the financial statements and related disclosures contained
in this amended filing reflect, where appropriate, changes to conform to the
restatement.
Total revenues increased $212,541 to $1,892,250 in the first three months of
1998 from $1,679,711 during the same period in 1997. Revenue components changed
significantly, with management fees decreasing by approximately $540,671 in
1998. Asset management contracts with various clients, including investment
banking firms and partnerships, continues to provide a significant portion of
the Company's revenue. The change in the management fee revenue components
reflects the Company's continuing transition from its traditional public-sector
contract orientation and their replacement with private-sector contracts that
generally provide for lower ongoing fees with the opportunity for additional,
incentive-based compensation at the end of an engagement. Pursuant to its
strategic business plan, the Company is continuing to take steps to reposition
the Company's core businesses, to grow both those businesses and new, related
activities. Increased fees from these other sources almost entirely offset the
decrease in management fees. Attributable to corporate acquisitions and European
development activities, new revenue sources developed from equity investments in
partnerships and joint ventures, and loan servicing. Also, pursuant to the
strategic business plan, new related business development through loan
11
<PAGE> 14
origination activities generated new revenues during the year. The Company
operates in the real estate industry, which is a cyclical business environment.
Commensurate with the change in the real estate business cycle, management
expects the change in revenue components to continue, with asset management
revenues decreasing as a percentage of total revenues and being replaced with
increased revenues from lending and servicing activities.
Management fees are recorded as services required under a contract are
performed, and are based on a percentage applied to the aggregate value of the
assets managed, as assigned in the contracts, or on original base monthly
amounts, as defined in the contracts. Management fee revenues decreased
$540,671, or 51.6% to $507,143 in the first three months of 1998 from $1,047,814
for the comparable period in 1997 and reflects the general cyclical recovery of
the commercial real estate sector of the economy. The decrease in management fee
revenues for three month period in 1998 versus the same period in 1997 was
generally attributed to the loss of a large number of assets under the Company's
management that were placed into a securitized transaction by an
investment-banking client during 1997. Additionally, management fees have
decreased because of contracts being resolved and replaced with lower fee
contracts.
Disposition fees are recorded as revenue when the disposition of an asset has
been consummated and the asset owner has received the gross proceeds from the
disposition. Disposition fees are generally based on a percentage of the
proceeds of an asset disposition, as defined by the contracts, or a fixed amount
per disposition. Disposition fee revenues increased to $446,662 in the first
three months of 1998 from $174,140 during the corresponding period in 1997. Of
the 1998 amount, approximately 84% reflects the resolution of assets under one
contract with an investment-banking client.
Certain contracts provide for incentive fees if the Company achieves net cash
collections in excess of thresholds established in the contracts. Incentive fees
increased to $608,625 in the first three months of 1998 from $159,082 in the
first three months of 1997. The 1998 fees were generally due to the progressive
resolution of one private-sector contract.
Other fees reflect the generation of fees from mortgage origination, loan
servicing, accounting, asset management and consulting services, and interest
income. Other fees increased $31,145, or 10.4%, to $329,820, in the first three
months of 1998 from $298,675 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 $191,245 or 11.1%, to $1,539,426 for the first three months of 1998
from $1,730,671 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, with resultant decreases in salaries, payroll
taxes and benefits expenses.
Occupancy, insurance and other operating expenses decreased to $169,301 for the
first three months of 1998 from $627,748 for the first three months of 1997. The
decrease includes expense credits of $200,000, made to the provision for loan
losses reflecting favorable credit experience with the Company's loan portfolio
under the Federal National Mortgage Association's Delegated Underwriting and
Servicing
12
<PAGE> 15
Program; and $100,000, to due diligence expenses reflecting a negotiated
settlement of contractual expenses accrued under an expense reimbursement
agreement. 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.
Interest expense decreased $6,513 to $71,657 for the first three months of 1998
from $78,170 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.
Depreciation and amortization decreased $30,265 to $88,696 for the first three
months of 1998 from $118,961 for the corresponding period in 1997. The decrease
in depreciation and amortization expenses for 1998 primarily reflects the
closure and downsizing of offices, including related write-off of depreciable
assets, resulting from implementation of the strategic business plan.
The employment contract settlement of $206,563 in the first three 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.
Income tax expense of $19,400 for the first three months of 1997 reflects the
impact of deferred tax items for deferred loan servicing and amortization after
eliminating non-deductible foreign losses and utilization of a portion of the
Company's net operating loss carryforward. The tax benefit for the comparable
period of 1997 primarily reflects the receipt of miscellaneous tax refunds and
credits.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Cash and cash equivalents increased to $5,374,170 at March 31, 1998 from
$735,940 at December 31, 1997. The Company had aggregate bank credit facilities
of $600,000 of which $356,000 was outstanding at March 31, 1998.
In March 1997, the Company entered into the Harbert SPA with the Harbert Fund
whereby the Harbert Fund agreed to invest up to $5 million in the Common Stock.
The Harbert Fund invested $1 million in the Company in March 1997 and additional
sums in October and December 1997. On December 31, 1997 the Company and the
Harbert Fund entered into the SPA Amendment pursuant to which the Harbert Fund
would purchase one share of the Series AA Preferred in exchange for cash of
$3,647,185. (See Financial Statements - Notes 4 and 7).
In March 1998, the Company entered into the Conti SPA 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. (See Financial
Statements - Notes 4 and 7).
The Company anticipates that, during 1998, it will invest $2 million in SRCC, a
newly organized entity,
13
<PAGE> 16
in exchange for common stock in connection with an initial public offering of
that entity. Additionally, plans to issue a five-year warrant to purchase up to
$2 million shares of the Common Stock at $2.50 per common share. The Company
intends to fund the initial investment with proceeds provided from private
investment capital infusions.
The Company expects to fund current operations with cash provided by operations,
proceeds provided from private investment capital infusions, and from draws on
bank credit 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 funding sources to
fund those deficits.
The Company is actively seeking credit facilities to expand existing facilities
and to fund acquisitions. The Company is also actively pursuing private equity
capital infusions. The Company expects to fund strategic acquisitions of
entities and asset portfolios by cash provided from debt or equity financing.
HISTORICAL CASH FLOWS
Cash flows used for operating activities decreased to $631,578 for the first
three months of 1998 from $461,849 in the corresponding period of 1997. The
Company's net income for the first three months of 1998 includes non-cash
credits for reductions in loan losses and accrued abandonment costs. During the
first three months of 1997 the Company incurred an operating loss which was
partially offset by increases in cash provided from changes in working capital
components.
Cash flows used by investing activities decreased to $96,041 for the first three
months of 1998, from $1,879,180 for the same time period in 1997. The decrease
primarily relates to the use of funds for corporate acquisitions in 1997.
Cash flows from financing activities increased to $5,365,849 for the first three
months of 1998 from $2,491,889 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.
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
14
<PAGE> 17
Item 3. - Defaults Upon Senior Securities
- -----------------------------------------
None
Item 4. - Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
None
Item 5. - Other Information
- ---------------------------
On April 13, 1998, Harold E. Cooke, President and Chief Operating Officer of the
Company, was appointed to the Company's Board of Directors.
Item 6. - Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
Exhibit
Numbers
- -------
10.73 Stock Purchase Agreement dated March 21, 1998 between Strategic Realty
Capital Corp. and CNC Holding Corp.
10.74 Registration Rights Agreement dated as of March 22, 1998 by and among
CNC Holding Corp., ContiWest Corporation, MarRay Investment, L.L.C. and
Strategic Realty Capital Corp.
27 Financial Data Schedule
(b) Reports on Form 8-K
On February 20, 1998, the Company filed a Current Report on Form 8-K
reporting on the purchase by Harbert Equity Fund I, L.L.C. of the
Company's Series AA Convertible Preferred Stock.
15
<PAGE> 18
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: April 7, 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
16
<PAGE> 19
INDEX TO EXHIBITS
-----------------
10.73 Stock Purchase Agreement dated March 21, 1998 between Strategic Realty
Capital Corp. and CNC Holding Corp.(1)
10.74 Registration Rights Agreement dated as of March 22, 1998 by and among
CNC Holding Corp., ContiWest Corporation, MarRay Investment, L.L.C. and
Strategic Realty Capital Corp.(1)
27 Financial Data Schedule (2)
- ----------
(1) Incorporated by reference to Crown NorthCorp, Inc.'s Form 10-QSB filed
May 14, 1998.
(2) Filed herewith.
17
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED, AS AMENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,374,170
<SECURITIES> 0
<RECEIVABLES> 1,746,063
<ALLOWANCES> 30,000
<INVENTORY> 0
<CURRENT-ASSETS> 7,337,205
<PP&E> 2,906,557
<DEPRECIATION> 858,157
<TOTAL-ASSETS> 16,822,731
<CURRENT-LIABILITIES> 1,983,179
<BONDS> 2,426,061
2,000,000
0
<COMMON> 110,310
<OTHER-SE> 8,952,370
<TOTAL-LIABILITY-AND-EQUITY> 16,822,731
<SALES> 0
<TOTAL-REVENUES> 1,892,250
<CGS> 0
<TOTAL-COSTS> 1,797,423
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,657
<INCOME-PRETAX> 0
<INCOME-TAX> 19,400
<INCOME-CONTINUING> 3,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,770
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
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