<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No.: 0-22936
Crown NorthCorp, Inc.
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(Name of small business issuer in its charter)
Delaware 22-3172740
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(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) (Zip Code)
(614) 488-1169
---------------------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
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NONE
Securities registered under Section 12(g) of the Exchange Act:
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Common Stock, par value $.01 per share
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
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
---
Issuer's revenues for the fiscal year ended December 31, 1998 were
$6,982,716.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant as of March 16, 1999 was $4,936,282.
As of March 16, 1999 the issuer had 11,090,210 shares of its common
stock outstanding.
Transitional Small Business Disclosure Format. Yes No X
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CROWN NORTHCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I. PAGES
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<S> <C> <C>
Item 1. Description of Business..................................................... 1
Item 2. Description of Property..................................................... 4
Item 3. Legal Proceedings........................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders......................... 5
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters.................... 5
Item 6. Management's Discussion and Analysis........................................ 7
Item 7. Financial Statements........................................................ F-1 thru F-18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................... 17
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act........................... 17
Item 10. Executive Compensation...................................................... 19
Item 11. Security Ownership of Certain Beneficial Owners
and Management.............................................................. 21
Item 12. Certain Relationships and Related Transactions.............................. 24
Item 13. Exhibits and Reports on Form 8-K............................................ 24
</TABLE>
<PAGE> 3
PART I
ITEM 1. - DESCRIPTION OF BUSINESS
BUSINESS OVERVIEW
Crown NorthCorp, Inc. is an international specialty financial services company
providing comprehensive asset management and risk management services to owners
and operators of commercial real estate interests in the United States and
Europe. The services the company offers to the commercial real estate markets
are primarily third-party asset management and loan servicing.
The company was formed in August 1994 through the combination of Crown Revenue
Services, Inc. and NorthCorp Realty Advisors, Inc. Crown and NorthCorp were both
formed in 1990. Crown is incorporated under the laws of the state of Delaware.
In May 1995, the company officially changed its name to Crown NorthCorp, Inc.
Corporate headquarters for the company is in Columbus, Ohio. Crown also has
offices in Atlanta, Georgia; Dallas, Texas; Bethesda, Maryland; and Stockholm,
Sweden. At December 31, 1998, Crown had 56 full-time employees.
Recent Developments. Historically, Crown has derived its primary revenues from
servicing contracts that provide for the management and disposition of real
estate and loan assets, the servicing of individual loans and loan portfolios,
due diligence reviews, loan underwriting, risk management and the management of
various corporate and partnership interests. In this regard, Crown's revenues
have included regular, periodic management fees, disposition fees associated
with transactions and incentive fees based on the overall performance of a
contract or pool of assets.
Much of Crown's asset management and disposition business has traditionally
involved distressed assets. Strong conditions in recent years in both the
general economy and commercial real estate markets in the United States caused
the supply of such assets available for management to decline. In response, in
1997, Crown adopted a strategic business plan to restructure operations and
reduce costs. One of the objectives of the plan was to better position the
company to provide a wider range of services to the commercial real estate
industry.
Instability in the capital markets has affected the implementation of Crown's
business plan in several ways. For example, the company, in 1998, sought to
expand its asset management business through co-sponsorship of an initial public
offering of Strategic Realty Capital Corp. ("SRCC"), which was to operate as a
real estate investment trust ("REIT"). The public offering of SRCC did not
proceed because of adverse market conditions. Also in 1998, Crown expanded its
mortgage loan origination capability, serving as a correspondent in the loan
conduit program of ContiTrade Services L.L.C., which purchased loans Crown
originated and delivered them into commercial mortgage backed securities
("CMBS") transactions. ContiTrade's conduit program terminated operations in
late 1998 in response to uncertainties in the CMBS market. As a result, Crown
has curtailed loan origination operations.
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Some of the same adverse market conditions that impaired Crown's efforts to
diversify and expand its services have benefited the company's core asset
management and servicing businesses. Many investors that had planned to dispose
of assets through REIT, CMBS or other capital markets transactions are now in
the market for management services as they continue to hold those assets. This
circumstance, coupled with a general increase in assets available for
management, has allowed the company to place renewed emphasis on its core asset
management and servicing businesses both in the United States and Europe.
Third-Party Asset Management. Over the past several years, the company has
derived its primary revenues from asset management and disposition contracts
with various clients. In the early 1990s, Crown's asset management business came
primarily from public-sector contracts with the Federal Deposit Insurance
Corporation and the Resolution Trust Corporation. In recent years, asset
management business has come almost exclusively from private-sector clients such
as investment banking firms, partnerships or investment consortiums. Crown
anticipates that new asset management business will come predominately from the
private sector.
In conducting its third-party asset management business, Crown manages both loan
and real estate assets. Its services include due diligence reviews, asset
underwriting, risk management and land management. The company has under
management large single assets, such as loans secured by hotels, office
buildings and multifamily properties, as well as portfolios of commercial real
estate assets and interests. A client often retains Crown to manage and
reposition an asset in the marketplace pending disposition or securitization.
Crown's asset management contracts generally have no expiration dates and
provide for additions of assets by addenda, each with its own compensation
structure. Compensation usually includes ongoing management and disposition fees
and, in some cases, incentive compensation based upon stipulated return
criteria. Contracts with one customer, an investment banking firm, accounted for
25% of 1998 revenues.
Loan Servicing. Crown has devoted substantial financial and human resources to
developing and maintaining information systems for the delivery of financial
services. The company uses these systems to service loans and other real estate
interests for both individual investors and securitized transactions. Rated
special servicers manage non-performing loans and foreclosed properties in
securitized transactions. Standard and Poor's Corporation and Fitch IBCA
currently rate the company "above average" as a special servicer. Additionally,
S&P rates Crown "average" as a commercial servicer and Fitch rates the company
"acceptable" as a master servicer. These latter two ratings allow Crown to seek
to expand its operations as a rated servicer to service performing as well as
non-performing components of securitizations. The company is committed to
continued enhancement and development of its capabilities as a rated servicer
since it believes that those capabilities are important to the continued
development and retention of management and servicing business.
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European Operations. In 1997 and 1998, Crown established asset management and
servicing operations in Europe. Crown conducts this business through
Catella/Crown NorthCorp JV AB, in which Crown has a 50% interest, in association
with Catella AB, a leading property advisory firm in Sweden. Catella/Crown
operates from Catella's offices in Stockholm and provides asset management and
financial advisory services for two of Sweden's largest real estate investment
consortiums. European Operations have provided opportunities to grow Crown's
core asset management and servicing businesses during a period of relatively
limited growth in those businesses in the United States.
STRATEGIC ALLIANCES AND ACQUISITIONS
Harbert. Between March 1997 and January 1998, an affiliate of Harbert Management
Corporation, a privately held diversified investment management company,
invested $5 million in Crown in exchange for common and convertible preferred
stock. Other affiliates of Harbert have invested in European Operations managed
by Catella/Crown and financed a portion of Crown's investment in those
operations. Two senior executives of Harbert serve on Crown's Board of
Directors.
Conti. In 1998, an affiliate of ContiFinancial Corporation, a financial services
company ("Conti"), invested $2 million in Crown in exchange for convertible
preferred stock and warrants. These proceeds, which were originally earmarked
for Crown's loan origination program as well as an investment in SRCC, are now
available for general corporate purposes. A senior executive of Conti serves on
Crown's Board of Directors.
Pursuant to voting agreements executed in conjunction with the Harbert and Conti
investments, Harbert and Conti, and their respective affiliates, may be deemed
to control Crown. See "Item 5 - Market for Common Equity and Related Shareholder
Matters" and "Item 11 - Security Ownership of Certain Beneficial Owners and
Management."
In addition to strategic alliances such as those with Harbert and Conti, Crown
has also utilized acquisitions as a means to expand its business. Included among
these are the acquisitions in 1996 and 1997 of Eastern Realty Corporation and
its affiliates, which expanded Crown's capabilities in asset management and land
management, and of Merchants Mortgage Corporation and Reinlein/Lieser/McGee,
which provided the company limited authority to refinance multifamily loans
under the Delegated Underwriting and Servicing ("DUS") Program administered by
Fannie Mae.
Crown is actively seeking additional strategic alliances and acquisitions,
including possible merger transactions, as the primary means of providing
capital to support and expand its operations.
COMPETITIVE ENVIRONMENT
The financial services industry has undergone significant consolidation in
recent years. Many of the company's competitors have been and continue to be
significantly larger and better capitalized than Crown. Crown expects continued
consolidation of the industry into increasingly larger organizations with
significant capital bases.
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Access to capital resources and the ability to attract capital have significant
effects on Crown's business prospects and potential profitability. For example,
servicing opportunities associated with securitizations are generally awarded to
servicers willing to invest in the below-investment-grade portions of those
securitizations. Crown's limited capital resources presently prevent it from
investing in such portfolios. The large number of better capitalized competitors
in the marketplace also tend to increase the prices bid for servicing
opportunities, thereby narrowing profit margins. Crown has attempted to maintain
and enhance its competitive position by aggressively pursuing strategic
alliances that would increase its capital base. It is also actively seeking to
acquire new business through means other than competitive bidding.
Crown's efforts in 1998 to diversify its product lines were impaired by adverse
changes in the capital markets. As a result, Crown and its co-sponsors abandoned
efforts to form SRCC. The company also curtailed mortgage lending operations. At
the same time, Crown has intensified its efforts to expand and develop its
domestic asset management and servicing business. It has also established an
asset management and servicing capability in Europe. While the company will
continue to examine means to reduce costs, enhanced revenues and capital
resources will be key elements in restoring profitable operations in an
increasingly competitive marketplace.
ITEM 2. - DESCRIPTION OF PROPERTY
OFFICES
The company owns a building in Columbus, Ohio which serves as its corporate
headquarters. The headquarters is subject to the lien of a six-month,
adjustable-rate industrial revenue bond. See "Note 5 - Notes and Bonds Payable -
to the Consolidated Financial Statements." The Company also leases office space
in Atlanta, Georgia, Dallas, Texas and Bethesda, Maryland and maintains an
office in Stockholm, Sweden. See "Note 6 - Leases - to the Consolidated
Financial Statements."
INVESTMENT POLICIES
Real Estate and Real Estate Related Investments. Third-party asset management is
the principal business of the company. In conducting this business, the company
manages interests in real estate, including real estate mortgages, for the
account of others. While the company generally does not invest in real estate,
interests in real estate and real estate mortgages for its own account, it will
make investments that it believes are necessary and appropriate to secure new
asset management business. In 1998, in conjunction with entering into an asset
management agreement for the Telereit transaction in Sweden, Crown agreed to
make an equity investment in Telereit Holding AB. Crown did this by investing
approximately $2.5 million in exchange for a 14.23% ownership interest in HMR
Sweden, LLC, an affiliate of Harbert. HMR Sweden, in turn, invested
approximately $16.8 million in Telereit and received a 13.09% ownership
interest. Crown funded its investment through a combination of cash on hand and
a loan of approximately $1 million from MarRay Investment, LLC, another
affiliate of Harbert. In consideration of Harbert's investment in Telereit,
Crown has agreed to pay
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Harbert 12.5% of the management and disposition fees and 37.5% of the incentive
fees Catella/Crown receives under the asset management agreement, net of Crown's
expenses. As security for the loan from MarRay, Crown has pledged to it a 5.94%
ownership interest in HMR Sweden. Additionally, a bank, on behalf of Crown, has
issued letters of credit aggregating approximately $625,000 to secure Crown's
obligations under a credit facility associated with the Telereit transaction.
To expand its loan servicing business, Crown regularly seeks to acquire the
right to service real estate assets. In certain cases, this involves the
negotiated purchase of or successful bid for the servicing rights themselves.
Real Estate Mortgages. The company has a limited license to refinance certain
loans for sale to Fannie Mae under the DUS Program. The company retains a
portion of the credit risk on loans originated under the DUS Program. See "Note
11 - Contingencies - to the Consolidated Financial Statements." Crown was for a
time a loan correspondent for ContiTrade's conduit program, originating
qualifying multifamily and commercial loans which ContiTrade purchased at
closing. Generally, the company does not originate or invest in commercial
mortgage loans for its own account.
Partnerships and Joint Ventures. From time to time, as part of its program of
strategic acquisitions, the company makes equity investments in entities which
hold interests in partnerships or joint ventures.
ITEM 3. - 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 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The company's common stock trades under the symbol "ASET" on the OTC Bulletin
Board administered by the National Association of Securities Dealers, Inc.
Records maintained by the National Quotation Bureau show the following high and
low bid prices for the common stock:
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<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
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<S> <C> <C>
March 31, 1997 $ .95 $ .63
June 30, 1997 $2.4375 $ .85
September 30, 1997 $3.875 $2.875
December 31, 1997 $3.25 $1.75
March 31, 1998 $3.25 $1.625
June 30, 1998 $3.25 $1.75
September 30, 1998 $2.375 $1.50
December 31, 1998 $1.75 $1.00
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
At March 16, 1999, there were approximately 2,700 holders of record of shares of
the common stock.
During its 1998 and 1997 fiscal years, the company made no payments of cash
dividends or returns of capital on common shares.
The company does not anticipate paying dividends on the common stock in the
foreseeable future. Instead, management anticipates that any earnings will be
used in the operations of the company.
At December 31, 1998, Crown had 30,000,000 authorized shares of common stock and
1,000,000 authorized shares of preferred stock.
SERIES AA PREFERRED
The company has issued one share of Series AA Convertible Preferred Stock to
Harbert Equity Fund I, L.L.C. ("Harbert Fund"), an affiliate of Harbert, in
exchange for $3,647,185 in cash. The Series AA Preferred provides that, since
certain trigger events did not occur by June 30, 1998, Harbert has the right to
designate a majority of the company's Board of Directors until such time as the
trigger events do occur. These trigger events are, first, the closing of the
public offering contemplated by the registration statement filed by SRCC (or the
closing of a comparable fund opportunity) and, second, the company achieving
certain specified commercial loan origination volumes. The trigger events have
not yet occurred and the company does not anticipate being able to cause these
events to occur in the foreseeable future. Harbert has not given notice of its
intent to exercise its right to designate a majority of the company's Board of
Directors. See "Item 11 - Security Ownership of Certain Beneficial Owners and
Management" and "Note 8 - Shareholders' Equity - to the Consolidated Financial
Statements."
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SERIES BB PREFERRED
Crown has issued one share of Series BB Convertible Preferred Stock and warrants
to purchase up to 200,000 shares of common stock to ContiWest Corporation, an
affiliate of Conti, in exchange for $2 million cash. Conti may convert the
Series BB Preferred into 1,000,000 shares of common stock at any time. Crown has
the option to convert the Series BB Preferred upon the occurrence of the trigger
events. The company does not anticipate being able to exercise its conversion
option based upon the trigger events. See "Item 11 - Security Ownership of
Certain Beneficial Owners and Management" and "Note 8 - Shareholders' Equity -
to the Consolidated Financial Statements."
ITEM 6. - 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 services include
third-party asset management, loan servicing 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 loan
servicing fees. While, in 1998, the company originated commercial mortgage
loans, it is presently not actively engaged in that business. Crown has
historically utilized strategic acquisitions and alliances as the primary means
of expanding and diversifying its core businesses and developing and entering
new businesses. Management continues to actively pursue strategic alliances and
other transactions that would maximize the value of the company's core
businesses.
FORWARD LOOKING STATEMENTS
The statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 21E of the Exchange
Act, including statements regarding the company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include terminology such as "anticipate," "believe," "has the opportunity,"
"seeking to," "attempting," "would," "contemplated," "believes" or comparable
language. 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 that could materially and adversely affect the future
operating results of the company are:
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o Crown is currently operating at a loss. Management anticipates that
these 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, strategic alliances or otherwise to more
successfully compete with larger and better capitalized competitors in
obtaining new business.
o Crown may be unable to improve its liquidity through sales of assets,
profitable operations, increased revenues, reduced expenses or other
means. If Crown cannot improve its liquidity, its ability to operate at
current levels may be impaired.
o Under the terms of the Series AA Preferred and voting agreements
related to that investment, since June 30, 1998, Harbert has had the
right to designate a majority of Crown's Board of Directors until
certain specified events occur. The company does not anticipate being
able to cause the events to occur in the foreseeable future.
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, liquidity and profitability.
o The company 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 has historically derived its revenues from its core third-party asset
management and servicing businesses. The company anticipates this will continue
to be the case for the foreseeable future. In addition to domestic asset
management and servicing contracts, the company is also deriving revenues from
European management and servicing operations established in the past two years.
Crown developed a mortgage loan origination capability as part of the
implementation of its 1997 business plan and anticipated that mortgage loan
origination would become a primary source of the company's revenues. While Crown
derived revenues in 1997 and 1998 from lending operations, the loan conduit
program under which the company operated ceased at the end of the year. At this
time, Crown does not anticipate mortgage lending income will be significant in
the foreseeable future.
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The company's third-party asset management business continues to develop. During
1998, Crown's principal investment banking client continued to place additional
assets with the company for management. Also, the company recently commenced
significant asset management work for a new client. Crown's asset management
engagements typically include work on large individual or groups of commercial
real estate assets, such as loans secured by hotels, office buildings or
multifamily projects, which a client is holding pending securitization or
disposition. Many of these assets are not performing in accordance with their
terms at the time they are assigned to Crown. The company will also continue to
aggressively seek to expand those components of the third-party asset management
business that have been core businesses of the company. Crown had hoped, through
a public offering of SRCC, to expand its asset management business to include
the management of below-investment-grade tranches of CMBS. With the abandonment
of SRCC's public offering, Crown will seek to expand into this area of asset
management by other means.
Loan servicing has been and will continue to be a core business of the company.
Crown continues to seek out less capital intensive means of acquiring the
servicing rights to additional assets. The company may acquire servicing rights
through negotiated transactions, competitive bidding or recurring business from
existing clients. Many servicing opportunities, especially those connected with
securitizations, require the servicer to invest in the asset or portfolio.
Crown's relatively limited capital resources, when compared to those of many of
its competitors, preclude it from pursuing many servicing opportunities unless
it aligns itself with a source of capital.
As it pursues additional management and servicing opportunities, the company
believes that its ability to operate as a rated servicer is of significant
marketing value. Rated servicers are subject to annual reviews; the rating
agencies are presently conducting such reviews of the company. Crown's principal
objectives are to maintain and expand its capability to act as a rated servicer.
In Europe, through Catella/Crown, Crown has established an asset management and
servicing business based in Stockholm. Catella/Crown provides management and
advisory services for two large real estate consortiums in Sweden. While Crown
believes that European Operations have become profitable, the company is
considering selling those operations as 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 in the United
States.
A key to returning to operating profitability will be Crown's ability to
increase the revenues it derives from its core asset management and servicing
businesses. There can be no assurance that the company will be able to secure
such increased revenues, that increases will occur at any particular time or
that revenue increases will lead to profitable operations.
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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997
Total revenues decreased approximately $3.5 million to $7.0 million in 1998 from
$10.5 million in 1997, with the largest decreases being in disposition and
incentive fees. Private-sector asset management contracts with various clients,
including investment banking firms and partnerships, continue to provide a
significant portion of the company's revenue. In 1998 the company had no
public-sector revenues, while in 1997 it had public-sector contract revenues of
approximately $1.1 million, or 9% of total revenues. Crown is continuing to take
steps to expand its core asset management business and related 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. The book values of assets under management
were $993 million and $770 million at December 31, 1998 and 1997, respectively.
Management fee revenues decreased $247,448 to $3,167,265 in 1998 from $3,414,713
in 1997. Management fees have decreased as completed contracts have been
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 decreased $2,759,508 to $691,015 in
1998 from $3,450,523 in 1997. During 1997 Crown received disposition fees of
$1,150,000 as a result of a large number of assets under the company's
management being placed into a securitized transaction by an investment banking
client. Additionally, there were no public-sector disposition fees in 1998,
while approximately 26% of such fees were from public-sector contracts in 1997.
Certain contracts provide for incentive fees if the company achieves net cash
collections in excess of thresholds established in the contracts. Incentive fees
decreased $827,816 to $841,875 in 1998 from $1,669,691 in 1997. The decrease
results from the substantial completion of one large private-sector,
incentive-based contract in 1997. Generally all of the 1998 fees and
approximately 70% of the 1997 fees were due to the company attaining a
contractual threshold on one private-sector contract.
Loan servicing fees primarily reflect loan servicing fees generated from Fannie
Mae and Ginnie Mae loan portfolios. The decrease in 1998 from 1997 primarily
reflects the write-off of capitalized acquired servicing cost for the early
payoff of loans in the servicing portfolio. The book balance of loans serviced
was $242 million and $203 million at December 31, 1998 and 1997, respectively.
Mortgage origination fees increased $107,230 to $630,215 in 1998 from $522,985
in 1997, reflecting fees from loan conduit program originations and from
servicing rights associated with the commencement of commercial loan origination
activities. During 1998, because of adverse changes in the CMBS capital markets,
ContiTrade suspended and later terminated its conduit program because of market
conditions. Effective December 31, 1998 the company and ContiTrade terminated
the company's correspondent lending relationship and settled all financial
issues under the conduit program, which had been Crown's primary means of
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originating loans. Because of this, mortgage origination will not be a material
source of revenue in the foreseeable future.
The income from partnerships and joint ventures was primarily from a joint
venture performing asset management, financial and advisory services for
Telereit Holding AB, a portfolio of assets in Sweden valued at approximately
$614 million. Under this asset management agreement Crown, through
Catella/Crown, earned a success fee for placing the transaction and will receive
ongoing management and other fees. Catella/Crown received half of the success
fee (approximately $750,000) in cash in 1998; Catella/Crown will receive the
remainder of the success fee in 1999 either in cash or securities of Telereit,
depending upon certain conditions. The company also recorded equity earnings
from the Eastern Realty entities acquired in October 1996. In 1997, income from
partnerships and joint ventures was primarily attributable to fees received by a
joint venture performing services to an investment group that acquired an
interest in a portfolio of real estate assets from the Swedish government.
Interest income increased $378,509 to $796,524 in 1998 from $418,015 in 1997.
The increase primarily occurred because of the increase in cash provided by the
Series AA Preferred and the Series BB Preferred in 1998.
Other revenues generally consist of fees for accounting, due diligence and
consulting services. The decrease from 1997 reflects the company's exit from
non-core businesses in July 1997 and the planned elimination of certain
non-recurring, miscellaneous revenues.
Recurring operating and administrative expense changes were as follows:
<TABLE>
<CAPTION>
1998 1997 $ CHANGE % CHANGE
---- ---- -------- --------
<S> <C> <C> <C> <C>
Personnel $5,320,696 $6,958,227 ($1,637,531) (24)
Insurance, professional and
other $ 731,467 $1,064,087 ($332,620) (31)
Occupancy $ 797,272 $ 862,155 ($64,883) (8)
Amortization and depreciation $ 359,379 $ 346,754 $12,625 4
Total $7,208,814 $9,231,223 ($2,022,409) (22)
</TABLE>
Recurring operating and administrative expenses decreased $2.0 million to $7.2
million in 1998 from $9.2 million in 1997. The decreases were primarily caused
by the implementation of the Company's business plan in 1997 whereby the company
exited certain non-core businesses and closed offices. Accordingly, staffing was
significantly reduced and other expense components were restructured to reduce
overall expenses. Also contributing to the decrease, as reflected in the
insurance, professional and other expense category, were favorable adjustments
of $674,000 and $371,484 in 1998 and 1997, respectively, to the provision for
loan losses. These
11
<PAGE> 14
non-cash adjustments reflect favorable credit experience with the company's loan
servicing portfolio under the Fannie Mae DUS Program. Crown made corresponding
reductions in restricted cash collateralizing its obligations under the DUS
Program. The company does not anticipate being able to continue to decrease
operating and administrative expense at the same rate in the future.
Amortization and depreciation expenses increased to $359,379 in 1998 from
$346,754 for 1997 because of depreciation on computer equipment.
The Company was a co-sponsor of SRCC, which was to operate as a REIT, which on
March 24, 1998 filed with the Securities and Exchange Commission to register
shares in an initial public offering. Due to the unfavorable market conditions
for publicly traded REITs, the offering did not proceed. The charge of $819,061
reflects the company's portion of expenses related to SRCC's planned public
offering pursuant to a cost-sharing arrangement with the co-sponsors. The
company funded the costs from cash reserves.
Abandoned acquisition expenses primarily reflect legal, accounting and other
professional fees incurred by the company, directly or through contractual
commitments, for due diligence conducted in conjunction with abandoned corporate
acquisitions. During 1998 the company recognized a $100,000 credit, which
reflected a negotiated settlement of contractual expenses accrued under an
expense reimbursement agreement.
In June 1997, management implemented a restructuring plan for the company's
operations which, among other items, encompassed consolidating offices and
exiting certain lines of business. Crown incurred total restructuring charges of
$494,409, which were recorded in 1997. The restructuring plan was completed
during the first quarter 1998 with losses being less than anticipated. As a
result, the company recognized a restructuring credit of $60,075 in 1998.
The employment contract settlement of $206,563 in 1997 reflects a non-recurring
charge representing the lump sum, final settlement of incentive compensation
payments otherwise due over time to a former employee.
Loss from operations increased $667,349 to $885,084 in 1998 from a loss of
$217,735 in 1997 because of the inability to offset the decrease in disposition
fees and incentive fees with new revenue sources or sufficient additional
reductions in operating and administrative expenses and because of the effects
of other non-recurring expenses. Because of the turmoil in the capital markets
in general, and the CMBS markets in particular, the company was unable to
execute its plan to increase revenues through conduit commercial mortgage
origination and related securitization and fund management activities.
Management is re-focusing on Crown's core asset management business segment to
capitalize on the current CMBS market instability and expects to offset the
operating shortfall through a combination of additional asset management
revenues and selective reductions in operating and administrative expenses.
Interest expense decreased $57,955 to $286,069 in 1998 from $344,024 for 1997.
The overall decrease was primarily caused by reduced line of credit borrowings
because of additional cash resources available from the issuance of the Series
AA Preferred and the Series BB Preferred.
12
<PAGE> 15
The income tax benefit of $217,170 for the year ended December 31, 1997
generally reflects taxes on book income at the statutory Federal income tax rate
giving effect to non-deductible capital losses, non-deductible foreign losses
and amortization. The company has made no provision for income tax benefits for
1998 as the company recorded a full valuation reserve related to such benefit
based on the company's assessment as to the future utilization of such tax
benefits.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $1,206,128, to $1,942,068 at December 31,
1998 from $735,940 at December 31, 1997. Crown had a revolving credit facility
of $600,000, which had no outstanding balance at December 31, 1998.
In April 1998 the company extended a bank letter of credit securing its
obligations under an adjustable-rate industrial revenue bond for a building
which serves as the company's headquarters. Crown is in compliance with all
covenants of the letter of credit.
In March 1997, the company entered into a stock purchase agreement with an
affiliate of Harbert whereby Harbert agreed to invest up to $5 million in common
stock. Harbert invested $1 million in the company in March 1997 and additional
sums in October and December 1997. On December 31, 1997, the company and Harbert
entered into and amendment to the agreement pursuant to which Harbert purchased
one share of the Series AA Preferred in exchange for cash of $3,647,185 received
in January 1998. The company has utilized all proceeds received under this
agreement, as amended.
In March 1998, the company entered into a stock purchase agreement with an
affiliate of Conti whereby Conti invested $2,000,000 in exchange for one share
of the Series BB Preferred and a warrant for up to 200,000 shares of common
stock.
The company has invested approximately $2.5 million in HMR Sweden and received a
14.23% interest therein. HMR Sweden, in turn, has a 13.09% ownership in
Telereit, which holds a portfolio of assets in Sweden valued at approximately
$614 million. Crown funded its investment from cash on hand and a loan of
approximately $1 million from another affiliate of Harbert.
Crown is seeking to maintain existing credit facilities and to establish an
advancing line for operations as a master servicer. The company is also actively
pursuing private equity capital infusions. The company expects to fund
acquisitions of asset and servicing portfolios by cash provided from debt or
equity financing.
The company expects to fund current operations from cash provided by operations,
sales of assets, draws on bank credit facilities and proceeds provided from
private investment capital infusions. In this regard, Crown is considering
selling its investments in European Operations and in the building that serves
as its corporate headquarters. Additionally, the company will continue its
efforts to reduce operating expenses.
13
<PAGE> 16
HISTORICAL CASH FLOWS
Cash increased by $1.2 million in 1998 compared to increasing $0.1 million in
1997. During 1998, net cash proceeds from the issuance of preferred stock was
generally used to reduce debt and to fund operations, investments in
partnerships and the loss on the abandoned SRCC offering. In 1997, net cash
provided by the issuance of common stock and operating activities was primarily
used for debt reduction and corporate acquisitions.
Cash flows from operating activities required the use of funds of $1,215,260 in
1998. Operating activities provided a source of funds of $1,092,638 in 1997. As
discussed above, during 1998 Crown incurred a significantly larger net operating
loss than in 1997. In 1998, cash was used primarily to reduce accounts payable
and accrued expense working capital components. In contrast, in 1997, cash was
provided primarily through the collection of a tax refund receivable and
increases in current liabilities.
Cash flows used in investing activities decreased to $1,465,878 in 1998 from
$1,520,871 in 1997. The change was due primarily to a decrease in cash paid for
corporate mergers of $1,606,855 and a decrease in distributions received from
partnerships and joint ventures of $303,319 versus an increase in investment in
partnerships and joint ventures of $1,206,364.
Cash flows from financing activities changed to a $3,935,723 source of cash for
1998 from a $577,093 source of cash for 1997. The increase is generally
attributable to net cash proceeds of $5,576,048 obtained through the issuance of
the Series AA Preferred and Series BB Preferred. This amount was reduced through
an increase in abandoned offering costs of $819,061, a decrease in debt proceeds
and a scheduled, partial redemption of the Series B Preferred Stock.
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's assessment of its Year 2000 issues is substantially
complete. It has purchased and will continue to purchase hardware and software
to help insure compliance. Finally, Crown has completed testing its 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.
Substantial portions of the company's strategic computer systems and
applications are proprietary in nature. Crown's assessment is that these are
Year 2000 compliant. The principal third-party system the company uses is the
McCracken Loan Servicing System. McCracken has written software addressing its
Year 2000 issues. Crown has completed installation and testing of this software
and believes the McCracken system now presents no Year 2000 issues for Crown.
Additionally, Crown makes some use of standard commercial software products. To
the extent that present versions of these products manifest Year 2000 problems,
Crown will acquire Year 2000-compliant versions of these products or substitute
alternative products that do comply.
14
<PAGE> 17
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 McCracken system as well as enhanced telephone and
building security 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 a disaster recovery plan should it need to
resume operations for a temporary or extended period in an alternative location.
While Crown believes it is taking all appropriate steps to achieve Year 2000
compliance, the Year 2000 problem is pervasive and complex, as virtually every
computer operation will be affected in some way. Crown believes that its ongoing
testing of new hardware and software components will reveal any significant Year
2000 problems, that such problems will be capable of remediation and that
Crown's software and hardware will perform substantially as planned when Year
2000 processing begins. There can be no assurance, however, that Crown can
achieve Year 2000 compliance without significant additional costs.
15
<PAGE> 18
ITEM 7. - FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................................................. F-1
Consolidated Balance Sheets, December 31, 1998 and 1997................................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997.............................................................................. F-3
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998 and 1997....................................................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997............................................................................. F-5
Notes to Consolidated Financial Statements for the years
ended December 31, 1998 and 1997....................................................................... F-7
</TABLE>
16
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Crown NorthCorp, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Crown NorthCorp,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Crown NorthCorp, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1998 the Company changed
its method of accounting for costs of computer software developed or obtained
for internal use to conform with Statement of Position 98-1.
/s/ Deloitte & Touche LLP
March 19, 1999
F-1
<PAGE> 20
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,942,068 $ 735,940
Receivables:
Accounts receivable trade - net of allowance of
$100,000 in 1998 and $30,000 in 1997 1,162,366 1,672,306
Affiliated entities 408,026
Income tax refund receivable 96,345
Prepaid expenses and other assets 123,792 178,938
---------- -----------
Total current assets 3,636,252 2,683,529
PROPERTY AND EQUIPMENT - Net 1,696,210 1,838,325
RESTRICTED CASH 4,206,106 4,550,766
GOODWILL - Net of accumulated amortization of $253,976
in 1998 and $183,945 in 1997 433,802 503,833
OTHER ASSETS:
Investments in partnerships and joint ventures 3,011,549 383,094
Loan servicing rights - net of accumulated amortization
of $316,848 in 1998 and $81,555 in 1997 972,078 963,981
Capitalized software cost - net of accumulated amortization of
$72,932 in 1998 and $22,031 in 1997 400,837 176,421
Contract incentive fee receivable 188,069
Other 92,209 132,595
---------- -----------
Total other assets 4,476,623 1,844,160
---------- -----------
TOTAL $14,448,993 $11,420,613
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued compensation, benefits and payroll taxes $ 510,500 $ 608,738
Current portion of long-term obligations 630,286 394,500
Accrued abandoned acquisition expenses 307,054
Accounts payable 190,999 229,002
Application and commitment fee deposits 27,877 218,032
Accrued profit sharing plan contribution 120,000
Accrued expenses - other 235,170 265,685
---------- ----------
Total current liabilities 1,594,832 2,143,011
LONG-TERM OBLIGATIONS:
Notes and bonds payable - less current portion 2,170,225 2,563,550
Notes payable - affiliates 765,725
Allowance for loan losses 576,000 1,250,000
Other 34,000 135,721
---------- ----------
Total long-term obligations 3,545,950 3,949,271
REDEEMABLE PREFERRED STOCK 1,400,000 2,000,000
SHAREHOLDERS' EQUITY:
Common stock 110,651 108,310
Convertible preferred stock:
Series AA
Series BB
Additional paid-in capital 9,993,864 4,209,752
Accumulated deficit (2,147,520) (976,367)
Accumulated other comprehensive income (48,457)
Treasury stock, at cost (327) (13,364)
----------- -----------
Total shareholders' equity 7,908,211 3,328,331
----------- -----------
TOTAL $14,448,993 $11,420,613
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 21
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
REVENUES:
Management fees $ 3,167,265 $ 3,414,713
Disposition fees 691,015 3,450,523
Incentive fees 841,875 1,669,691
Loan servicing fees 436,016 501,945
Mortgage origination 630,215 522,985
Interest income 796,524 418,015
Income from partnerships and joint ventures 371,292 212,468
Other 48,514 349,977
----------- -----------
Total revenues 6,982,716 10,540,317
----------- -----------
OPERATING AND ADMINISTRATIVE EXPENSES:
Personnel 5,320,696 6,958,227
Insurance, professional and other 731,467 1,064,087
Occupancy 797,272 862,155
Amortization and depreciation 359,379 346,754
----------- -----------
Subtotal 7,208,814 9,231,223
----------- -----------
Other non-recurring expenses:
Abandoned offering expense 819,061
Abandoned acquisition expenses (credit) (100,000) 758,881
Restructuring expenses (credit) (60,075) 494,409
Employment contract settlement 206,563
Loss on sale of subsidiary 66,976
----------- -----------
Total other non-recurring expenses 658,986 1,526,829
----------- -----------
Total operating and administrative expenses 7,867,800 10,758,052
----------- -----------
LOSS FROM OPERATIONS (885,084) (217,735)
----------- -----------
INTEREST EXPENSE 286,069 344,024
----------- -----------
LOSS BEFORE INCOME TAXES (1,171,153) (561,759)
INCOME TAX BENEFIT (217,170)
----------- -----------
NET LOSS $(1,171,153) $ (344,589)
----------- -----------
LOSS PER SHARE, BASIC AND DILUTED $ (0.33) $ (0.04)
----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING 11,000,743 9,991,330
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 22
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------------------
SERIES AA SERIES BB SERIES A
COMMON STOCK ------------- --------------- ---------------- ADDITIONAL
SHARES SHARES SHARES SHARES PAID-IN
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT CAPITAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 8,826,924 $ 88,269 450 $ 5 $2,793,125
Issuance of common stock 1,436,012 14,360 1,382,835
Conversion of preferred stock 560,135 5,602 (450) (5) (5,597)
Dividends paid -
Series A Preferred 7,911 79 14,762
Issuance of treasury shares 24,627
Net loss for the year ended
December 31, 1997
---------- ------- ----- ----- ---------
BALANCE, DECEMBER 31, 1997 10,830,982 108,310 0 $ 0 4,209,752
----- -----
Comprehensive loss:
Net loss
Foreign currency translation
adjustment
Total comprehensive loss
Issuance of common stock 234,138 2,341 196,159
Issuance of preferred stock 1 1 $5,576,048
Issuance of treasury shares 11,905
---------- -------- ----- ----- ----- ----- ----------
BALANCE, DECEMBER 31, 1998 11,065,120 $110,651 1 $ 0 1 $ 0 $9,993,864
========== ======== ===== ===== ===== ===== ==========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE REASURY STOCK SHAREHOLDERS'
DEFICIT INCOME SHARES AMOUNT EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ (616,937) (50,221) $(16,736) 2,247,736
Issuance of common stock 1,397,195
Conversion of preferred stock
Dividends paid -
Series A Preferred (14,841)
Issuance of treasury shares 10,128 3,372 27,999
Net loss for the year ended
December 31, 1997 (344,589) (344,589)
---------- -------- --------- ----------
BALANCE, DECEMBER 31, 1997 (976,367) (40,093) (13,364) 3,328,331
Comprehensive loss:
Net loss (1,171,153) (1,171,153)
Foreign currency translation
adjustment (48,457) (48,457)
-------- ----------
Total comprehensive loss (1,171,153) (48,457) (1,219,610)
Issuance of common stock 198,500
Issuance of preferred
stock 5,576,048
Issuance of treasury shares 39,683 13,037 24,942
----------- ----------- -------- --------- ----------
BALANCE, DECEMBER 31, 1998 $(2,187,520) $(48,457) (410) $ (327) $7,908,211
=========== =========== ======== ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 23
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,171,153) $ (344,589)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 594,678 428,309
Decrease in reserve for loan losses (674,000) (371,485)
Equity in income from investment in partnerships
and joint ventures (276,588) (212,468)
Loss on abandoned offering 819,061
Loss on disposal of property and equipment 71,731
Loss on sale of subsidiary 66,976
Deferred income taxes 10,394 8,358
Payment of board of directors fees by issuance
of common stock 72,500 27,999
Change in operating assets and liabilities - net of
effects from purchases and divestitures
of subsidiaries:
Accounts receivable 289,983 (446,167)
Income tax refund receivable 96,345 1,114,784
Loan servicing rights (135,546) (328,865)
Prepaid expenses and other assets 4,235 (84,636)
Accounts payable and accrued expenses (845,169) 1,162,691
----------- ----------
Net cash provided by (used in)
operating activities (1,215,260) 1,092,638
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash 344,660 476,573
Distributions from partnerships and joint ventures 53,989 357,308
Investment in partnerships and joint ventures (1,425,464) (219,100)
Increase in other assets (253,696)
Purchase of property and equipment (77,573) (334,257)
Net cash paid for corporate acquisitions and mergers (1,606,855)
Net cash disposed in corporate divestitures (36,056)
Purchase of loan servicing rights (107,794) (158,484)
----------- ----------
Net cash used in investing activities (1,465,878) (1,520,871)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock - net 5,576,048
Issuance of common stock 150,942 1,397,195
Principal payments on notes payable (2,553,206) (5,213,388)
Proceeds from notes payable 2,181,000 4,893,286
Redemption of Series B preferred stock (600,000) (500,000)
Loss on abandoned offering (819,061)
----------- ----------
Net cash provided by financing activities 3,935,723 577,093
----------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (48,457)
----------- ----------
NET INCREASE IN CASH DURING THE YEAR 1,206,128 148,860
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 735,940 587,080
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,942,068 $ 735,940
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 24
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
SUPPLEMENTAL INFORMATION
CASH PAID FOR INTEREST $219,083 $ 271,858
======== ==========
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
==========
CORPORATE DIVESTITURE:
Accounts receivable $ 25,853
Property and equipment, net 7,926
Other assets 321
Accounts payable (3,180)
----------
Net assets disposed, excluding cash 30,920
Disposed cash 36,056
----------
Loss on sale of subsidiary $ 66,976
==========
PAYMENT OF PREFERRED DIVIDENDS BY ISSUANCE
OF COMMON STOCK $ 14,841
==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 25
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
_______________________________________________________________________________
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Crown NorthCorp and its majority owned
subsidiaries (collectively, the Company). All significant intercompany
balances and transactions have been eliminated.
BUSINESS DESCRIPTION - The Company is a specialty financial services
company providing comprehensive asset management and risk management
services to owners and operators of commercial real estate interests.
Assets managed are located throughout the United States and Europe and
include commercial and residential real estate, performing and
nonperforming real estate and commercial loans, partnership investments and
other miscellaneous assets.
CONCENTRATIONS - Private-sector contracts with one customer accounted for
25% and 34% of revenues for 1998 and 1997, respectively, and approximately
15% and 19% of total accounts receivable at December 31, 1998 and 1997,
respectively. Certain private-sector contracts are generally cancelable by
the contractor with 30 days notice.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
instruments with an original maturity of three months or less to be cash
equivalents.
DEPRECIATION - Property and equipment are recorded at cost. Depreciation
is computed using the straight-line method over estimated useful lives of
five to forty years.
GOODWILL - The excess purchase price over the fair value of identifiable
assets acquired is recorded as goodwill in the accompanying financial
statements. Goodwill is being amortized over its estimated life of 4 to 10
years using the straight-line method. At each balance sheet date, a
determination is made by management to ascertain whether the goodwill has
been impaired based on several criteria, including, but not limited to,
sales trends, undiscounted operating cash flows and other operating
factors.
LOAN SERVICING RIGHTS - The Company records an asset upon the sale of a
loan with servicing retained and allocates the cost of the loan to the
servicing rights and to the loans based on their relative fair values.
Fair values are estimated using discounted cash flows based on a current
market interest rate. The resulting gain on sale of loans is included in
mortgage origination. The Company also purchases mortgage servicing rights
and records such rights at the cost to purchase.
The cost of loan servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of loan
servicing rights is assessed based on the fair value of those rights. The
carrying amount of loan servicing rights approximate the fair value.
LOAN SERVICING FEES - Loan servicing fees are recognized as earned under
the terms of the related servicing contract.
F-7
<PAGE> 26
INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES - Certain of the Company's
general partner and joint venture investments (ranging from 1% to 50%) are
carried at cost, adjusted for the Company's proportionate share of
undistributed earnings and losses because the Company exercises significant
influence over their operating and financial activities. The Company's
14.23% investment in HMR Sweden, LLC ("HMR") is accounted for under the
cost method as the Company does not exercise significant influence over its
operating and financial activities (see Note 7).
ALLOWANCE FOR LOAN LOSSES - The Company established an allowance for loan
losses to provide for estimated losses in the acquired mortgage portfolios
serviced (see Note 11). The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries). The
factors utilized by management in its periodic evaluation of the adequacy
of the allowance include, but are not limited to, the following: the
present and prospective financial condition of the borrowers and the values
of any underlying collateral, evaluation of the loan portfolio in
conjunction with historical loss experience, portfolio composition, and
current and projected economic conditions. Changes in economic conditions
and economic prospects of borrowers can occur quickly and, as a result,
impact the estimates made by management.
MANAGEMENT FEES - Management fees are recorded as services required under
the contracts 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. Upon each
disposition, withdrawal or addition of an asset or asset group, the
management fee is adjusted to reflect the change in aggregate value of the
assets. Management fees are calculated on a daily basis as set forth in
the contracts.
DISPOSITION FEES - Disposition and bonus fees, less retainages, are
recorded as revenue when the disposition of an asset has been consummated
and the gross proceeds from the disposition have been received by the asset
owner. 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.
INCENTIVE FEES - Certain contracts provide for incentive fees if the
Company achieves net cash collections in excess of thresholds established
in the contracts. Upon substantial achievement of related thresholds,
long-term contract revenues are recognized on the percentage-of-completion
method based on assets realized relative to total contract assets, net of
any anticipated losses. Billings for long-term contracts are rendered
periodically, as permitted by contract terms.
MORTGAGE ORIGINATION FEES - The Company receives fees to originate and
process certain loans. Upon closing the loan, the Company immediately
sells the loan and recognizes origination fees as income.
ABANDONED OFFERING COSTS - The Company was a cosponsor of Strategic Realty
Capital Corp. (SRCC), a real estate investment trust (REIT). On March 24,
1998 SRCC filed with the Securities Exchange Commission to register shares
in an initial public offering. Due to the unfavorable market conditions
for publicly traded REITs, the offering has been cancelled. The charge of
$819,061 reflects the Company's portion of expenses related to SRCC's
planned public offering pursuant to a cost-sharing arrangement with the
co-sponsors. The Company funded the costs from cash reserves and amounts
due from the co-sponsors.
ABANDONED ACQUISITIONS - Abandoned acquisition expenses primarily reflect
legal, accounting, and other professional fees incurred in 1997 by the
Company, directly or through contractual commitments, for due diligence
conducted in conjunction with four abandoned corporate acquisitions.
During 1998
F-8
<PAGE> 27
the Company recognized a $100,000 credit which reflected a negotiated
settlement of contractual expenses accrued under an expense reimbursement
agreement.
INCOME TAXES - Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled.
As changes in the tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
LOSS PER COMMON SHARE - Loss per share for 1998 and 1997 is computed as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss $(1,171,153) $ (344,589)
Series AA convertible preferred stock
dividends at issuance 1,997,268
Series BB convertible preferred stock
dividends at issuance 500,000
Series A preferred stock dividends 14,841
----------- ----------
Net loss applicable to common stock (3,668,421) (359,430)
Weighted average shares outstanding 11,000,743 9,991,330
----------- ----------
Loss per share $ (0.33) $ (0.04)
=========== ==========
</TABLE>
As the Company had net losses in 1998 and 1997 there are no potential
common shares to be included in the computation of diluted per-share
amounts, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings per Share", issued in February 1997.
EMPLOYMENT CONTRACT SETTLEMENT - During 1997 the Company settled the
employment contract with an individual. The entire agreed upon settlement
of $206,563, including benefits and the Company's share of taxes, was paid
during 1997.
MANAGEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARD - SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information", issued in June 1997,
amended Financial Accounting Standards Board ("FASB") Statement No. 14
"Financial Reporting for Segments of a Business Enterprise" to require
financial information to be reported on the basis that is used internally
for evaluating segment performance and deciding how to allocate resources
to segments. The Company, as required, adopted this statement on a
retroactive basis in 1998. Adoption of this statement did not impact the
financial position, results of operations or cash flows of the Company.
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
was issued in June 1998 and will require adoption no later than the
Company's quarter ended March 31, 2000. This new statement establishes
accounting and reporting standards for derivative instruments and for
hedging activities, and requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and to measure such
instruments at fair value. The Company does not anticipate the statement
materially impacting its financial position, results of operations or cash
flows.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" which the Company adopted
in 1998. This statement provides guidance on accounting for costs of
computer software developed or obtained for internal use. Capitalized
software costs are amortized using a straight line basis over 4 to 5 years.
During 1998, the Company capitalized costs of approximately $275,000 for
computer software developed for internal use. Net of amortization,
adoption of this statement reduced net loss and net loss per share by
approximately $250,000 and $.02, respectively, in 1998.
F-9
<PAGE> 28
RECLASSIFICATIONS - Certain reclassifications of prior year amounts have
been made to conform with current year presentation.
2. ACQUISITIONS AND DISPOSITIONS
In January 1997, the Company acquired the stock of Reinlein/Lieser/McGee
Holding Corporation (R/L/M) and R/L/M Employee Benefit Corporation for
approximately $1,129,000, financed primarily through two bank loans (with
scheduled monthly payments of principal and interest through February 1,
2002). A portion of the purchase price, $200,000, has been placed in
escrow and is recoverable by the Company if subsequent R/L/M losses exceed
a stipulated amount. The acquisition was accounted for using the purchase
method of accounting, and the excess purchase price over net identifiable
assets acquired, approximately $240,000, was allocated to goodwill and is
being amortized over 10 years. The results of operations have been
reflected in the financial statements since January 1997. R/L/M is a
servicer of multifamily loans for the Delegated Underwriting and Servicing
Program ("DUS") administered by the Federal National Mortgage Association
("FNMA").
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998 and
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 1,276,877 1,199,304
---------- ----------
Total property and equipment 2,685,834 2,608,261
Less accumulated depreciation (989,624) (769,936)
---------- ----------
Property and equipment - net $1,696,210 $1,838,325
========== ==========
</TABLE>
4. RESTRUCTURING EXPENSE
In June 1997, management implemented a restructuring plan for the Company's
operations which, among other items, encompassed consolidating offices and
exiting certain lines of business. The Company incurred total
restructuring charges of $494,409, which was recorded in 1997. The
restructuring plan was completed during the first quarter 1998 with losses
being less than anticipated. As a result the Company recognized a
restructuring credit of $60,075 in 1998.
5. NOTES AND BONDS PAYABLE
At December 31, 1998, the Company has available a $600,000 line of credit
under a commercial revolving note, expiring April 1999, bearing interest at
the bank's prime rate of interest plus .25% (8% at December 31, 1998).
There were no borrowings outstanding on the line.
F-10
<PAGE> 29
Long-term debt consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
Six-Month Adjustable Rate Industrial Development Revenue
Bonds, annual principal payments and semi-annual interest
payments, 3.65% and 3.7% interest rate at December 31, 1998
and 1997, respectively, based on terms of the indenture,
due April 2015. $1,295,000 $1,330,000
Convertible Secured Promissory Note - affiliate, interest
based upon cash flow with a floor rate of 6.5%, periodic
payments of principal and interest, due on August 31, 2008. 979,754
Installment Note payable, prime plus 0.5% (8.25% and 8.5% at
December 31, 1998 and 1997), monthly payments of $23,021 plus
interest, remaining principal and interest due February 1, 2002. 874,815 1,128,050
Installment Note payable, prime (7.75% and 8% at December 31, 1998
and 1997, respectively), monthly interest only payments through
February 1998, monthly payments of $8,333 principal plus interest
from March 1998 through January 2002, remaining principal
and interest due February 2002. 416,667 500,000
---------- ----------
Total 3,566,236 2,958,050
Less current portion 630,286 394,500
---------- ----------
Long-term debt $2,935,950 $2,563,550
========== ==========
</TABLE>
The Six-Month Adjustable Rate Industrial Revenue Bonds are secured by a
$1,498,500 letter of credit collateralized by a first mortgage on the land
and building (which serves as corporate headquarters) and a restricted cash
escrow account ($331,229 and $335,686 at December 31, 1998 and 1997,
respectively) required under the bond indenture.
The installment notes payable and line of credit are collateralized by
substantially all assets of the Company not collateralizing the Six-Month
Adjustable Rate Industrial Revenue Bonds or the Convertible Secured
Promissory Note (see Note 7).
The scheduled sinking fund redemption and principal repayments related to
the notes and bonds are as follows:
Year ending December 31:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 630,286
2000 634,818
2001 968,409
2002 212,723
Thereafter 1,120,000
----------
Total 3,566,236
Less current portion 630,286
----------
Total long-term portion $2,935,950
==========
</TABLE>
F-11
<PAGE> 30
At December 31, 1998 and 1997, the fair value of the Company's long-term
debt approximates its recorded value, based on current market interest
rates and remaining maturities.
6. LEASES
The Company, in its operations, leases office facilities and equipment. All
leases in effect at December 31, 1998, which expire on various dates
through 2000, have been classified as operating leases. Rent expense was
approximately $412,000 and $501,000 in 1998 and 1997, respectively.
The future minimum operating lease payments as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
EQUIPMENT OFFICES
<S> <C> <C>
Year ending December 31:
1999 $102,230 $89,859
2000 64,542
-------- -------
Total $166,772 $89,859
======== =======
</TABLE>
7. RELATED PARTY TRANSACTIONS
In 1998, the Company made an equity investment of approximately $2.5
million in exchange for a 14.23% ownership interest in HMR, an affiliate
controlled by a director-shareholder of the Company. The Company funded its
investment through a combination of cash on hand and a loan ($980,392) from
another affiliate controlled by the director-shareholder. HMR has 13.09%
ownership in Telereit Holding AB ("Telereit") a swedish real estate
investment trust which holds approximately $614 million in a portfolio of
assets in Sweden. Crown entered in an asset management agreement with
Telereit. In consideration of the director-shareholder's investment in
Telereit and the loan from the affiliate controlled by the
director-shareholder, the Company has agreed to pay 25% of its management
and disposition fees and 75% of its incentive fees received under the asset
management agreement, net of the Company's expenses, to the
director-shareholder. During 1998, the Company paid no amount to the
director-shareholder under the agreement. During 1998, the Company
recorded income from its investment in the partnership of $94,704.
At December 31, 1998 the Company owed $979,754 on a Convertible Secured
Promissory Note payable to an affiliate controlled by the
director-shareholder. The note bears interest in an amount equal to the
greater of 6.5% per annum on the outstanding principal amount or an amount
based on cash distributions. During 1998, the Company paid interest of
$38,893, for an effective rate of interest of 11.9%. The note calls for
periodic principal payments, as cash distributions are made to the Company,
in an amount based upon the percentage of the acquisition book value of
Telereit assets sold during the term of the note to the acquisition book
value of all Telereit assets. Under the terms of a pledge agreement the
note is secured by a portion of the Company's interest in the affiliate. A
bank, on behalf of the Company, has issued letters of credit aggregating
approximately $625,000 to partially secure Telereit's obligations under a
credit facility. The Company maintains a restricted cash account,
approximately $640,000 at December 31, 1998, related to the letters of
credit.
The Company conducts some of its operations through various joint ventures
and other partnership forms that are principally accounted for using the
equity method. Included in the Company's revenues for 1998 and 1997 are
equity in income (loss) of related companies of approximately $276,600 and
F-12
<PAGE> 31
$212,500, respectively. The Company also provides services for the
ventures and included in revenues for 1998 and 1997 are management,
incentive, retainer and disposition fees of approximately $902,000 and
$1,141,000, respectively, related thereto.
8. SHAREHOLDERS' EQUITY
At December 31, 1998 and 1997, the Company has 30,000,000 authorized shares
of its $.01 par value common stock ("Common Stock") and 1,000,000
authorized shares of preferred stock.
In June 1997, all of the 450 outstanding shares of the Series A Preferred,
par value of $.01 per share, were converted into 560,315 newly issued
shares of Common Stock. Additionally, 7,911 newly issued shares of Common
Stock were issued as payment for the cumulative dividend due on the Series
A Preferred.
In March 1997, the Company entered into a stock purchase agreement (the
"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 SPA (the "SPA Amendment") pursuant to which the Harbert Fund
agreed to purchase one share of the Company's Series AA Non-Voting
Convertible Preferred Stock, par value $.01 per share (the "Series AA
Preferred") 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 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.
Since the stipulated events did not occur by June 30, 1998, the Harbert
Fund, for so long as it continues to hold the Series AA Preferred, has the
right to designate a majority of the Company's Board of Directors until
such time as the stipulated events do occur. 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. The Harbert
Fund currently designates two members of the Company's Board of Directors.
The Company received $3,647,185 for the sale of the series AA Preferred and
incurred costs of $34,837.
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, 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. 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 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 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 member 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
F-13
<PAGE> 32
Stock and certain other conditions are met. The Company received $2,000,000
for the sale of the Series BB Preferred and incurred costs of $36,300.
In December 1996, in connection with an acquisition, the Company issued
2,000 shares of Series B Non-Voting, Non-Convertible Preferred Stock (the
"Series B Preferred"), with a par value of $.01 per share. No dividends of
any type are to be paid on the shares. The liquidation value of each
Series B Preferred share is $1,000. During 1997 the Company redeemed 500
shares for $500,000. During 1998 the Company redeemed 600 shares for
$600,000. The Company is obligated to redeem the remaining 900 shares for
$900,000 on December 31, 1999.
The Company is required to maintain a restricted cash balance ($900,000 at
December 31, 1998) in a non-interest bearing account, which is controlled
by the Series B Preferred shareholder, used to secure the Company's
obligation to redeem the shares. The Company has also pledged to the
shareholder certain additional funds in the event that funds in the deposit
account are not maintained at certain designated levels. All or part of the
outstanding shares of Series B Preferred stock are subject to redemption at
the option of the Company at a price equal to the redemption price.
In December 1996, also in connection with an acquisition, the Company
issued 500 shares of Series C Non-Voting, Convertible Preferred Stock (the
"Series C Preferred"), with a par value of $.01 per share. The shareholder
is entitled to non-cumulative quarterly cash dividends at the rate of 8%
per annum on the liquidation preference. The liquidation preference is
$1,000 per Series C Preferred share. Each Series C Preferred share is
convertible into 666.67 fully paid shares of Common Stock. The shares can
be converted, at the option of the holder, during a 45-day conversion
period after the 30-day period in which the average Common Stock closing
share price equals or exceeds $1.50. The shares can be redeemed, at the
option of the Company, following the expiration of the conversion period at
a conversion price equal to the liquidation preference plus the full amount
of any unpaid, declared dividends. The Company is required to redeem the
Series C Preferred shares as follows:
<TABLE>
SHARES TO BE REDEEMED AMOUNT REDEMPTION DATE
<S> <C> <C>
250 $250,000 December 31, 2001
250 250,000 December 31, 2002
--- --------
Total 500 $500,000
=== ========
</TABLE>
During 1996, primarily in connection with certain business acquisitions,
the Company issued warrants entitling the holders to purchase 403,983
shares of Common Stock at prices ranging from $0.63 to $1.00 per share over
periods ranging from 18 months to 5 years after issuance. During 1998,
39,683 warrants were exercised at $0.63 per share and at December 31, 1998,
364,500 warrants are exercisable. The weighted average exercise price was
$0.83 and $0.81 on December 31, 1998 and 1997, respectively.
During 1998, the Company issued warrants to an employee entitling the
holder to purchase up to 25,000 shares of common stock at $1.44 per share.
As of December 31, 1998 there are 25,000 exercisable warrants which expire
November 30, 2003.
During 1998, the Company issued warrants to an employee entitling the
holder to purchase up to 50,000 shares of Common Stock at $2 per share.
The warrants vest annually, and expire December 1, 2003. Any unvested
shares at the date of a change in control of the Company vest immediately.
As of December 31, 1998 there are 10,000 exercisable warrants.
During 1997 the Company issued warrants to an employee entitling the holder
to purchase up to 1,000,000 shares of Common Stock at $1.05 per share. The
warrants may vest and expire annually through 2003 pursuant to a schedule
based on the anniversary dates of an employment agreement and the Company
achieving annual plan goals. During 1997, 100,000 shares were exercised at
$1.05 per share. As of December 31, 1998, there are 200,000 exercisable
warrants.
A stock option plan for the outside directors of the Company was approved
by the Company's shareholders in 1995. Under the plan, each outside
director may be granted options for 100,000 shares of the Company's Common
Stock at an option price equal to the Common Stock's market value on the
F-14
<PAGE> 33
date of the grant. The options vest over a four-year period if the Company
achieves certain stock price thresholds. No options have been granted
under this plan as of December 31, 1998.
The Company applies Accounting Principals Board ("APB") Opinion No. 25 and
related interpretations in accounting for its stock options. Based on an
estimated volatility of 75%, a weighted average life of 4.9 years (one year
in 1997), and a discount rate of 6%, compensation cost, under the method of
determination per SFAS 123, would have been approximately $40,000 and
$25,000 higher than reported in the consolidated statement of operations,
resulting in a net loss of $1,127,000 and $361,000 (net of taxes) and a
loss per share, basic and diluted, of $0.34 and $0.04, for the years ended
December 31, 1998 and 1997, respectively.
9. BENEFIT PLANS
The Company sponsors a defined contribution retirement plan for certain of
its employees who had attained the age of 21 and had provided six months of
service. The Company matches 25% of the first 4% of the employees'
contributions and employer contributions were $28,561 and $36,248 in 1998
and 1997, respectively.
The Company has a profit sharing stock retirement plan (the "Plan")
covering U.S. employees. The Plan is designed to provide employees with
increased ownership of the Company's stock. The number of shares allocated
to the Plan is discretionary. During 1997, the Company accrued $120,000
for its contribution to the Plan, which represented 200,000 shares of
common stock. No amounts were awarded under the Plan in 1998.
10. INCOME TAXES
For the years ended December 31, 1997 and 1996, the components of income
tax (benefit) expense are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current $ (10,394) $(225,528)
Deferred 10,394 8,358
--------- ---------
Total income tax (benefit) expense $ 0 $(217,170)
========= =========
</TABLE>
The income tax (benefit) expense differs from the amount computed by
applying the statutory Federal income tax rate of 34% to pretax earnings as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Income tax benefit at statutory rate $(398,192) $(190,999)
Non-deductible foreign losses 51,963 76,177
Non-deductible amortization 15,980 15,854
Non-deductible meals and entertainment 15,161 12,391
Adjustment to non-deductible capital loss
on sale of subsidiary (106,350)
Valuation allowance 269,900
Other - net 45,188 (24,243)
--------- ---------
Total income tax benefit $ 0 $(217,170)
========= =========
</TABLE>
F-15
<PAGE> 34
The Company has approximately $1,240,000 of operating loss carryforwards
available at December 31, 1998. The carryforwards expire beginning in
2002.
Included in loss before taxes are losses of $153,000 and $224,000 in 1998
and 1997, respectively, from a subsidiary with operations in Europe.
At December 31, 1998 and 1997 the Company had recorded a net deferred tax
asset as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets:
Current:
Collection allowance $ 34,000 $ 10,200
Items not currently deductible and other 74,711
Long-term:
Loss carryforward 421,000 72,447
Other 8,600 18,449
Valuation allowance (269,900)
--------- ---------
Total assets 193,700 175,807
--------- ---------
Liabilities - long-term:
Depreciation and amortization (52,700) (55,946)
Deferred loan servicing (141,000) (109,467)
--------- ---------
Total liabilities (193,700) (165,413)
--------- ---------
Net deferred tax asset $ 0 $ 10,394
========= =========
</TABLE>
11. 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.
LOAN LOSSES - The Company has a loss sharing agreement related to the DUS
program administered by FNMA. Losses from FNMA DUS program mortgage loan
defaults are shared between the Company and FNMA. The Company's maximum
loss exposure under the FNMA DUS program was approximately $19 million and
$27 million at December 31, 1998 and 1997, respectively. The Company's
FNMA DUS program loan servicing portfolio was approximately $95 million and
$129 million at December 31, 1998 and 1997, respectively, for loans on
properties located primarily in the Midwest which mature between 1999 and
2006. Under the terms of the program, the Company is responsible for the
first portion of loss on any co-insured loan, with the percentage
determined by the loan program. Individual loans have letters of credit in
favor of FNMA, which may be drawn upon to cover collateral deficiencies. At
December 31, 1998 and 1997, approximately $2.5 million and $3.1 million in
letters of credit were available. The Company maintains restricted cash
accounts, all approximately $2.3 million and $2.7 million at December 31,
1998 and 1997, respectively, related to the letters of credit. The Company
has recorded an allowance for loan losses for
F-16
<PAGE> 35
its anticipated losses from its FNMA DUS program mortgage loans of $576,000
and $1,250,000 at December 31, 1998 and 1997, respectively.
12. MORTGAGE SERVICING FOR OTHERS
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage
loans serviced for others was approximately $1,234 million and $973 million
at December 31, 1998 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, excluded from the accompanying consolidated balance sheet, were
approximately $102 million and $145 million at December 31, 1998 and 1997,
respectively.
Mortgage servicing rights of $243,340 and $800,749 were capitalized in 1998
and 1997, respectively. Amortization of mortgage servicing rights was
$235,293 and $81,555 in 1998 and 1997, respectively.
13. SEGMENT INFORMATION
The Company's management has recognized three primary business segments,
domestic asset management, domestic mortgage origination, and European
operations. The segments were created in July 1997 in connection with a
restructuring of the Company. They are managed separately because each
requires different marketing and operating strategies. The domestic asset
management segment provides special servicing and loan servicing for
private sector clients. The domestic mortgage origination sector originated
commercial loans through its conduit funding arrangement. During 1998,
because of adverse changes in the commercial mortgage backed securities
capital markets, the Company's conduit program funding sponsor gave notice
that it was indefinitely suspending its conduit program. Effective
December 31, 1998 the Company and the conduit program funding sponsor
terminated the Company's correspondent lending relationship and the Company
ceased its commercial lending operations. The European operation segment
provides asset management and consulting services through its joint venture
affiliate. Prior to July 1997, the Company did not prepare internal
financial records on a segment basis, and therefore, segment information
for 1997 is not available.
The accounting policies for the business segments are the same as those
described in the summary of significant accounting policies. There are no
intersegment sales. The Company evaluates performance based on operating
earnings of the respective business units.
Summarized financial information concerning the Company's reportable
segments for 1998 is shown in the following table:
<TABLE>
DOMESTIC DOMESTIC
ASSET MORTGAGE EUROPEAN
MANAGEMENT ORIGINATION OPERATIONS OTHER TOTAL
<S> <C> <C> <C> <C> <C>
Revenues $ 5,294,608 $ 622,715 $1,065,393 $ 6,982,716
(Loss) earnings
before income tax 225,668 (629,653) (108,182) $(658,986) (1,171,153)
Interest income 783,376 10,062 3,086 796,524
Interest expense 185,626 46,017 54,426 286,069
Equity in earnings
of partnerships
and joint ventures 33,688 242,900 276,588
Amortization and
depreciation 478,421 86,625 29,632 594,678
Assets 10,703,444 3,718,579 14,448,993
</TABLE>
F-17
<PAGE> 36
The amount in "Other" in the table above represents the net abandoned
offering expense, abandoned acquisition credit and the restructuring credit
which could not be allocated to any identified business segment.
F-18
<PAGE> 37
ITEM 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The company currently has seven directors, two of which are also executive
officers of the company. All directors of the company hold office until the next
annual meeting of the stockholders and until their successors have been duly
elected and qualified.
Harold E. Cooke and Jay N. Rollins have entered into employment contracts with
the company. All other officers of Crown do not serve a term of years but serve
at the pleasure of the Board of Directors. In addition, Crown has entered into
agreements with John S. Koczela and Grace Jenkins calling for payments to those
individuals under certain circumstances in the event of a change of control of
the company.
The directors and executive officers of the company as of March 16, 1999 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
<S> <C> <C>
Ronald E. Roark 48 Chairman, Chief Executive Officer and Director
Harold E. Cooke 48 President, Chief Operating Officer and Director
John Everets 52 Director
Gordon V. Smith 66 Director
Raymond J. Harbert 40 Director
Michael D. Luce 46 Director
Scott Mannes 40 Director
Grace Jenkins 46 Executive Vice President
Jay N. Rollins 38 Executive Vice President
John S. Koczela 47 Executive Vice President
Richard A. Brock 49 Senior Vice President, Treasurer and
Chief Financial Officer
Stephen W. Brown 48 Secretary
</TABLE>
Set forth below are the principal occupations and affiliations during at least
the last five years of the directors and executive officers. All information is
as of March 16, 1999.
RONALD E. ROARK has served as Chairman of the Board of Directors of the company
since August 4, 1994 and as Chief Executive Officer of the Company since
September 13, 1994. He served as Acting President and Chief Operating Officer
from August 31, 1996 to April 21, 1997. Since, June, 1991, he has served as
President of Crown. Since 1979, he has been
17
<PAGE> 38
President of REE, Inc. and R.E. Roark Companies. In May 1993, an affiliate of
his acquired control of a majority interest in Ohio Financial Service
Corporation and he became Chairman of its Board of Directors.
HAROLD E. COOKE has served as President and Chief Operating Officer of Crown
since April 22, 1997 and as a director since April 13, 1998. Prior to joining
Crown, he served as a senior vice president of the Real Estate Financing Group
of the investment banking firm of Donaldson, Lufkin & Jenrette from January 1996
to April 21, 1997. From 1980 until December 1995, he worked for the investment
banking firm of Credit Suisse First Boston as Director of Public Finance, Chief
Financial Officer and Director of Commercial Mortgage Corporation as well as
Vice President of the Mortgage Finance Department.
JOHN EVERETS has served as a director of the company since September 13, 1994.
He has been Chairman of the Board and Chief Executive Officer of HPSC, Inc.
since July 1993 and a director of the company since 1983. From January 1990 to
July 1993, he was Chairman of the Board of T.O. Richardson Co., Inc. Mr. Everets
also served as Chairman of the Connecticut Development Authority from 1991 to
July 1994. Mr. Everets is a director of Dairy Mart Convenience Stores, Inc. and
the Eastern Company.
GORDON V. SMITH has served as a director of Crown since October 1, 1996. He has
been Chairman of the Board of Miller and Smith Holding, Inc. since 1964. From
1985 to 1994, he served as Chairman and Chief Executive Officer of Providence
Savings and Loan Association, F.A. He served as Chairman of Eastern from 1993
until October 1, 1996. Mr. Smith has served as a director of Bank Plus since
1996.
RAYMOND J. HARBERT has served as a director of Crown since March 7, 1997,
serving as one of Harbert's designees on the Board of Directors. Mr. Harbert has
been President and Chief Executive Officer of Harbert Corporation and Harbert
since July 1990. Prior to that time, he served as Vice President of Harbert
Corporation and as President of Harbert Properties Corporation.
MICHAEL D. LUCE has served as a director of Crown since March 7, 1997, serving
as one of Harbert's designees on the Board of Directors. Since 1995, Mr. Luce
has served as Executive Vice President and Chief Financial Officer of Harbert
Corporation and Harbert. Mr. Luce also serves as President of The Seque Group,
Inc. Until 1995, he served as Senior Managing Director of the Investment Banking
Department of Bear, Stearns & Co.
SCOTT MANNES has served as a director of the company since March 3, 1998,
serving as Conti's designee on the Board of Directors. Mr. Mannes has been
Executive Vice President of Conti since July 1997, prior to which he had been
Senior Vice President since October 1995. He joined ContiFinancial Services
Corporation in September 1990 and was appointed Managing Director in August
1992. He was appointed Co-President of ContiFinancial Services in July 1997.
GRACE JENKINS has served as Executive Vice President of Crown since March 6,
1997. She served as a Vice President of the Company from September 13, 1994 to
that date. She has
18
<PAGE> 39
been a Vice President of Crown since September 1993. Since November 1991, she
has served Crown in various capacities related to administration and management
information systems.
JAY N. ROLLINS has served as Executive Vice President of Crown since October 1,
1996. Mr. Rollins has served as President of Eastern since 1993. From 1989 until
1993, he was Director of Finance at NVR, L.P.
JOHN S. KOCZELA has served as Executive Vice President of the company since
March 6, 1997 and as Managing Director of Crown NorthCorp Euro A/S since its
founding in July 1996. From November 1990 until February 1996, he served as
Principal and Managing Director, New Business Development, for JCF Partners.
RICHARD A. BROCK has served as Senior Vice President and Chief Financial Officer
since March 6, 1997. He as served as Treasurer since September 13, 1994, from
which date he also served as Vice President and Acting Chief Financial Officer.
Since January 1991, he has served as Acting Chief Financial Officer of Crown
Revenue and, since January 1992, has been a vice president. From 1984 to January
1991, Mr. Brock was corporate director of investment management for Cardinal
Industries, Inc.
STEPHEN W. BROWN has served as Secretary of Crown since September 13, 1994 and
as Corporate Counsel since August 1996. Since March 1992, he has served Crown in
various asset management capacities and as a legal counsel. From December 1990
until February 1992, he worked for the RTC in resolving the affairs of
Mid-America Federal Savings and Loan Association.
ITEM 10. - EXECUTIVE COMPENSATION
The following table sets forth information with respect to the Chief Executive
Officer and each of the four most highly compensated executive officers other
than the Chief Executive Officer.
<TABLE>
<CAPTION>
YEAR ENDED ALL OTHER
NAME DECEMBER 31 SALARY BONUS COMPENSATION
---- ----------- ------ ----- ------------
<S> <C> <C> <C> <C>
Ronald E. Roark, 1998 $300,000 $0 $10,000
Chairman and 1997 $300,000 $0 $10,000
CEO (1) 1996 $300,000 $200,000 $10,000
Harold E. Cooke, 1998 $227,400 $150,000 $10,000
President and 1997 $196,324 $0 $10,000
COO (2) 1996 $0 $0 $0
Jay N. Rollins, 1998 $116,265 $65,625 $10,000
Executive Vice 1997 $125,000 $27,228 $10,000
President (3) 1996 $100,744 $93,299 $10,000
</TABLE>
19
<PAGE> 40
<TABLE>
<CAPTION>
YEAR ENDED ALL OTHER
NAME DECEMBER 31 SALARY BONUS COMPENSATION
---- ----------- ------ ----- ------------
<S> <C> <C> <C> <C>
John S. Koczela, 1998 $184,807 $20,000 $61,701
Executive Vice 1997 $125,000 $30,000 $44,411
President (4) 1996 $65,924 $15,821 $0
Dean W. Melchi, 1998 $109,999 $20,000 $2,799
Vice President (5) 1997 $110,000 $11,028 $0
1996 $86,852 $0 $0
William R. Stanley (6) 1998 $80,868 $41,622 $1,153
1997 $115,341 $0 $1,164
1996 $102,333 $0 $0
</TABLE>
(1) Mr. Roark has served as Chairman and CEO of the company since August 4,
1994 and September 13, 1994 respectively. The company pays family
medical coverage premiums, an automobile allowance and disability
insurance premiums on his behalf.
(2) Mr. Cooke has served as President and COO of the company since April
22, 1997. The company and Mr. Cooke have entered into an employment
agreement effective April 22, 1997 and terminating April 21, 2002
providing for an annual salary of $250,000 plus additional,
performance-based bonuses. The agreement grants Mr. Cooke warrants to
purchase up to 1,000,000 shares of common stock at $1.05 per share.
These warrants vest and expire annually through April 21, 2003 pursuant
to a schedule based upon anniversary dates of the employment agreement
and the company achieving annual plan goals. The company pays family
medical coverage premiums on his behalf.
(3) Mr. Rollins was elected Executive Vice President of Crown upon the
Eastern acquisition October 1, 1996. The information for Mr. Rollins
prior to that date is for Eastern. The company and Mr. Rollins have
entered into an employment agreement effective October 1, 1996 that, as
amended, terminates December 31, 1999. The agreement provides for an
annual salary of $125,000, additional performance-based bonuses and
warrants to purchase up to 125,000 shares of common stock at $1.00 per
share. A $500 monthly car allowance and family medical coverage
premiums are paid on his behalf by the company.
(4) Mr. Koczela has served as Executive Vice President of Crown since March
6, 1997 and administers the company's European Operations. In that
capacity, for an approximately two-year period ending in July 1998, Mr.
Koczela resided in Copenhagen, Denmark. The company and Mr. Koczela
have entered into an agreement effective December 18, 1998 providing
for an annual salary to Mr. Koczela of $200,000, certain
performance-based bonuses, warrants to purchase 25,000 shares of common
stock at $1.4375 per share and for continued salary payments for up to
one year in the event of a change of control of Crown.
20
<PAGE> 41
(5) Mr. Melchi served as Vice President of Crown from March 6, 1997 until
his resignation January 31, 1999.
(6) Mr. Stanley served as Vice President of the company effective November
8, 1996 and as Senior Vice President, effective March 6, 1997, until
his resignation September 4, 1998.
Each director who is not an employee of Crown is paid an annual retainer of
$12,000, payable quarterly, $500 for each meeting of the Board of Directors and
$500 for each committee meeting attended, plus expenses. The company makes
retainer and attendance payments to directors quarterly in the form of common
stock based on the closing price of the common stock on the last day of a
quarter.
ITEM 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth security ownership information regarding the
common stock as of March 16, 1999 by: (i) each person known by the company to
own beneficially more than 5% of the shares of the common stock; (ii) each
director of the company; (iii) each of the executive officers of the company
named in Item 10 above and (iv) all directors and executive officers of the
company as a group. Except as otherwise noted below, each of the shareholders
identified in the table has sole voting and investment power over the shares
beneficially owned by each such shareholder. Also, unless otherwise indicated,
the address of each beneficial owner is in care of the company, 1251 Dublin
Road, Columbus, Ohio 43215.
<TABLE>
<CAPTION>
NUMBER OF SHARES APPROXIMATE
NAME OF COMMON STOCK PERCENT OF CLASS
---- --------------- ----------------
<S> <C> <C>
Harbert Equity Fund I, L.L.C.(1) 4,839,256 30.0%
Ronald E. Roark (2)(3) 4,229,300 26.2%
Tucker Holding Company, Ltd. (2) 4,207,500 26.0%
ContiWest Corporation (4) 1,009,632 6.2%
Asdale Limited (5) 1,176,924 7.3%
The Gordon V. and Helen C. Smith Foundation (6) 948,055 5.9%
Gordon V. Smith (6) 948,055 5.9%
John Everets (7) 15,248 (15)
Raymond J. Harbert (1)(8) 4,839,256 30.0%
Michael D. Luce (1)(8) 4,839,256 30.0%
Scott Mannes (4)(9) 1,009,632 6.2%
Harold E. Cooke (10) 400,000 2.5%
Jay N. Rollins (11) 251,326 1.6%
John S. Koczela (12) 58,000 (15)
Dean W. Melchi (13) 7,075 (15)
William R. Stanley (14) ---- (15)
All directors and executive officers as a group 11,750,817 72.8%
(11 persons)
</TABLE>
21
<PAGE> 42
(1) The mailing address for the Harbert Fund is c/o Harbert, One Riverchase
Parkway South, Birmingham, Alabama 35244. The Harbert Fund holds
1,365,746 shares of common stock and one share of Series AA Preferred,
which is convertible into 3,473,510 shares of common stock. The Series
AA Preferred provides that, since certain trigger events did not occur
by June 30, 1998, Harbert has the right to designate a majority of the
company's Board of Directors until such time as the trigger events do
occur. The trigger events have not yet occurred and the company does
not anticipate being able to cause these events to occur in the
foreseeable future. Under these circumstances, Harbert may be deemed to
control the company.
(2) Tucker Holding Company, Ltd. holds 4,207,500 shares of common stock.
Until January 27, 1997, Mr. Roark held an 80% ownership interest in
Tucker and Louis J. Castelli, formerly the President and Chief
Operating Officer of the company, held a 20% ownership interest. On
that date, Messrs. Roark and Castelli entered into a securities
purchase agreement whereby Mr. Roark agreed to purchase Mr. Castelli's
remaining ownership interest in Tucker for a total of $400,000. The
remaining balance of $125,000 is due in two equal annual installments
on or before September 1, 2000. Tucker has pledged 260,864 shares of
common stock to secure the remaining obligations under this agreement.
(3) Includes (a) 4,207,500 shares held by Tucker, (b) 4,600 shares held by
his wife and 17,200 shares held by Trident Air services, Inc., of which
Mr. Roark is president.
(4) The mailing address for ContiWest is c/o Conti, 277 Park Ave., 38th
Floor, New York, New York 10172. ContiWest holds 9,632 shares of common
stock and one share of the Series BB Preferred, which is convertible
into 1,000,000 shares of common stock.
(5) The mailing address for Asdale Limited is 44 Lowndes Street, London
SW1X 9HX, England.
(6) The mailing address for The Gordon V. and Helen C. Smith Foundation and
Mr. Smith is c/o Miller and Smith Holding, Inc., 1568 Springhill Road,
McLean, Virginia 22102. Mr. Smith holds 327,290 shares of common stock
and warrants to acquire 82,088 shares of common stock at an exercise
price of $.75 per share on or before October 1, 1999. The Smith
Foundation holds 538,677 shares of common stock. Mr. Smith, as
President of the Smith Foundation, may be deemed the beneficial owner
of such shares. Mr. Smith disclaims such beneficial ownership.
(7) The mailing address for Mr. Everets is c/o HPSC, Inc., 60 State Street,
35th Floor, Boston, Massachusetts 02109.
(8) The mailing address for Messrs. Harbert and Luce is c/o Harbert, One
Riverchase Parkway South, Birmingham, Alabama 35244. Messrs. Harbert
and Luce, as executive officers of Harbert, Manager of Harbert Fund,
may be deemed the beneficial owners of such shares. Messrs. Harbert and
Luce disclaim such beneficial ownership.
22
<PAGE> 43
(9) The mailing address for Mr. Mannes is c/o Conti, 277 Park Avenue, 38th
Floor, New York, New York 10172. Mr. Mannes, as an executive officer of
Conti, may be deemed the beneficial owner of such shares. Mr. Mannes
disclaims such beneficial ownership.
(10) Mr. Cooke holds 100,000 shares of common stock, warrants to acquire
200,000 shares of common stock at an exercise price of $1.05 and, after
April 22, 1999, warrants to acquire an additional 100,000 shares of
common stock at the same price. Warrants with respect to 200,000 shares
expire on April 22, 2002; warrants with respect to 100,000 shares
expire on April 22, 2003.
(11) Mr. Rollins holds 93,510 shares of common stock, warrants to acquire
22,816.08 shares of common stock at an exercise price of $.75 per share
on or before October 1, 1999, warrants to acquire 10,000 shares of
common stock at an exercise price of $.63 per share on or before
December 31, 2003 and warrants to acquire 125,000 shares of the common
stock at an exercise price of $1 per share. These latter warrants
expire ratably over a three-year period ending September 30, 2001.
(12) Mr. Koczela holds 23,000 shares of common stock, warrants to acquire
10,000 shares of common stock at an exercise price of $.63 per share on
or before December 31, 2003 and warrants to acquire 25,000 shares of
common stock at a price of $1.4375 per share on or before November 30,
2003.
(13) The mailing address for Mr. Melchi is 1667 Oakhill Road, Columbus, Ohio
43220.
(14) The mailing address for Mr. Stanley is 2875 Factor Walk Boulevard,
Suwanee, Georgia 30024.
(15) Less than 1%.
VOTING AGREEMENTS
Mr. Roark and Tucker (collectively, the "Tucker Parties") and the Harbert Fund
have entered into a voting agreement dated as of March 7, 1997, as amended (the
"Harbert Voting Agreement"). For a period of up to five years, the Tucker
Parties agree to vote all shares of common stock beneficially owned by them for
such nominees for election as directors of the company as the Harbert Fund is
entitled to designate for nomination. Similarly, the Harbert Fund agrees to vote
all shares of common stock beneficially owned by it for the election of Mr.
Roark as a director of the company. Since certain trigger events did not occur
on or before June 30, 1998, the Tucker Parties have agreed to vote all shares of
common stock beneficially owned by them as the Harbert Fund directs on any
matters submitted to the stockholders of the company until such time as the
trigger events occur. The trigger events have not yet occurred and the company
does not anticipate being able to cause these events to occur in the foreseeable
future. Also pursuant to the Harbert Voting Agreement, for so long as the Series
AA Preferred is outstanding, the Tucker Parties have agreed to certain voting
and disposition restrictions on the common stock they hold. Under these
restrictions, the Tucker Parties will
23
<PAGE> 44
not vote their common stock in favor of a transaction which would lead to a
person who is not a Permitted Control Person acquiring control of the company.
The Tucker Parties also will not sell their common stock to a person who is not
a Permitted Control Person. A "Permitted Control Person," as defined in the
Harbert Voting Agreement, includes the Tucker Parties and their affiliates, the
Harbert Fund and its affiliates and such other parties as the Tucker Parties and
the Harbert Fund may designate from time to time. The Tucker Parties and the
Harbert Fund have designated Conti and its affiliates as a Permitted Control
Person. Under the terms of the Harbert Voting Agreement, the Harbert Fund, Conti
and their respective affiliates may be deemed to control the company.
ContiWest, the Tucker Parties and the Harbert Fund have entered into a voting
agreement whereby, for so long as ContiWest is entitle to designate a nominee
for election as a director of the company, each of ContiWest, the Tucker Parties
and the Harbert Fund agrees to vote all shares of common stock beneficially
owned by them for the election of each other's nominees for election as
directors.
ITEM 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998, Crown invested approximately $2.5 million in exchange for a 14.23%
ownership interest in HMR Sweden, an affiliate of Harbert. Crown funded its
investment through a combination of cash on hand and a loan of approximately $1
million from another affiliate of Harbert. See "Item 2 - Description of
Property."
The company conducts some of its operations through joint ventures and
partnerships and provides services to certain of those entities.
See "Note 7 - Related Party Transactions - to Consolidated Financial
Statements."
During 1997, the company performed servicing, consulting and accounting services
for various companies affiliated with Mr. Roark. The company generated revenues
of approximately $7,000 in 1997 from these services. Also during 1997, the
company paid approximately $27,000 to affiliates of Mr. Roark for miscellaneous
services.
ITEM 13. - EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Method of Filing
- ------ ------- ----------------
<S> <C> <C>
3.3 Restated Certificate of Incorporation Incorporated by reference to Crown
NorthCorp, Inc.'s Form 8-K filed
June 6, 1995.
</TABLE>
24
<PAGE> 45
<TABLE>
<CAPTION>
<S> <C> <C>
3.4 Bylaws Incorporated by reference to Crown
NorthCorp, Inc.'s Form 10-KSB filed
March 29, 1996.
4.1 Certificate of Designation for Series A Incorporated by reference to Crown
Convertible Preferred Stock, par value NorthCorp, Inc.'s Form 10-QSB filed
$.01 per share, of Crown NorthCorp, Inc. November 14, 1996.
4.2 Certificate of Designation for Series B Incorporated by reference to Crown
Preferred Stock, par value $.01 per share, NorthCorp, Inc.'s Form 8-K filed of
Crown NorthCorp, Inc. January 24, 1997.
4.3 Certificate of Designation for Series C Incorporated by reference to Crown
Convertible Preferred Stock, par value NorthCorp, Inc.'s Form 8-K filed
$.01 per share, of Crown NorthCorp, Inc. January 24, 1997.
4.4 Certificate of Designation for Series AA Incorporated by reference to Crown
Convertible Stock, par value $.01 per NorthCorp, Inc.'s Form 8-K filed
share, of Crown NorthCorp, Inc. February 20, 1998.
4.5 Certificate of Designation for Series BB Incorporated by reference to Crown
Convertible Preferred Stock, par value NorthCorp, Inc.'s Form 10-KSB filed
$.01 per share, of Crown NorthCorp, Inc. March 30, 1998.
10.73 Stock Purchase Agreement dated March Incorporated by reference to Crown
21, 1998 between Strategic Realty NorthCorp, Inc.'s Form 10-QSB filed
Capital Corp. and CNC Holding Corp. May 14, 1998.
10.74 Registration Rights Agreement dated Incorporated by reference to Crown
March 22, 1998 by and among CNC NorthCorp, Inc.'s Form 10-QSB filed
Holding Corp., ContiWest Corporation, May 14, 1998.
MarRay Investment, LLC and Strategic
Realty Capital Corp.
10.75 Payment of Fees Agreement dated August Incorporated by reference to Crown
27, 1998 between Crown NorthCorp Euro NorthCorp, Inc.'s Form 10-QSB filed
A/S and Harbert Management November 16, 1998.
Corporation.
10.76 Purchase Option Agreement dated August Incorporated by reference to Crown
27, 1998 among Crown NorthCorp, Inc., NorthCorp, Inc.'s Form 10-QSB filed
Harbert Management Corporation and November 16, 1998.
MarRay Investment, LLC.
</TABLE>
25
<PAGE> 46
<TABLE>
<CAPTION>
<S> <C> <C>
10.77 Convertible Secured Promissory Note Incorporated by reference to Crown
dated August 27, 1998 executed by NorthCorp, Inc.'s Form 10-QSB filed
Crown NorthCorp, Inc., payable to the November 16, 1998.
order of MarRay Investment, LLC.
10.78 Pledge Agreement dated August 27, Incorporated by reference to Crown
1998 between Crown NorthCorp, Inc. NorthCorp, Inc.'s Form 10-QSB filed
and MarRay Investment, LLC. November 16, 1998.
21.3 Subsidiaries of Crown NorthCorp, Inc. Filed herewith.
27 Financial Data Schedule Filed herewith.
b) Reports on Form 8-K
None
</TABLE>
26
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registration has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Crown NorthCorp, Inc.
Date: March 25, 1999 By: /s/ Ronald E. Roark
--------------------------------------
Ronald E. Roark
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 25, 1999 By: /s/ Ronald E. Roark
--------------------------------------
Ronald E. Roark
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: March 25, 1999 By: /s/ Harold E. Cooke
--------------------------------------
Harold E. Cooke
President, Chief Operating Officer
and Director
Date: March 25, 1999 By: /s/ Richard A. Brock
--------------------------------------
Richard A. Brock
Senior Vice President, Treasurer
and Chief Financial Officer
(Principal Accounting Officer)
Date: March 25, 1999 By: /s/ Ray L. Druseikis
--------------------------------------
Ray L. Druseikis
Controller
(Principal Accounting Officer)
S-1
<PAGE> 48
Date: March 25, 1999 By: /s/ Stephen W. Brown
--------------------------------------
Stephen W. Brown
Secretary
Date: March 29, 1999 By: /s/ John Everets
--------------------------------------
John Everets
Director
Date: March 25, 1999 By: /s/ Gordon V. Smith
--------------------------------------
Gordon V. Smith
Director
Date: March 25, 1999 By: /s/ Raymond J. Harbert
--------------------------------------
Raymond J. Harbert
Director
Date: March 25, 1999 By: /s/ Michael D. Luce
--------------------------------------
Michael D. Luce
Director
Date: March 26, 1999 By: /s/ Scott Mannes
Scott Mannes
--------------------------------------
Director
S-2
<PAGE> 49
INDEX TO EXHIBITS
3.3 Restated Certificate of Incorporation. (1)
3.4 Bylaws. (2)
4.1 Certificate of Designation for Series A Convertible Preferred Stock,
par value $.01 per share, of Crown NorthCorp, Inc. (3)
4.2 Certificate of Designation for Series B Preferred Stock, par value $.01
per share, of Crown NorthCorp, Inc. (4)
4.3 Certificate of Designation for Series C Convertible Preferred Stock,
par value $.01 per share, of Crown NorthCorp, Inc. (4)
4.4 Certificate of Designation for Series AA Convertible Preferred Stock,
par value $.01 per share, of Crown NorthCorp, Inc. (5)
4.5 Certificate of Designation for Series BB Convertible Preferred Stock,
par value $.01 per share, of Crown NorthCorp, Inc. (6)
10.73 Stock Purchase Agreement dated March 21, 1998 between Strategic Realty
Capital Corp. and CNC Holding Corp. (7)
10.74 Registration Rights Agreement dated as of March 22, 1998 by and among
CNC Holding Corp., ContiWest Corporation, MarRay Investment, LLC and
Strategic Realty Capital Corp. (7)
10.75 Payment of Fees Agreement dated August 27, 1998 between Crown NorthCorp
Euro A/S and Harbert Management Corporation. (8)
10.76 Purchase Option Agreement dated August 27, 1998 among Crown NorthCorp,
Inc., Harbert Management Corporation and MarRay Investment, LLC. (8)
10.77 Convertible Secured Promissory Note dated August 27, 1998 executed by
Crown NorthCorp, Inc., payable to the order of MarRay Investment, LLC.
(8)
10.78 Pledge Agreement dated August 27, 1998 between Crown NorthCorp, Inc.
and MarRay Investment, LLC. (8)
21.3 Subsidiaries of Crown NorthCorp, Inc. (9)
27 Financial Data Schedule (9)
- ---------------------------
(1) Incorporated by reference to Crown NorthCorp, Inc.'s Form 8-K filed
June 6, 1995.
(2) Incorporated by reference to Crown NorthCorp, Inc.'s Form 10-KSB filed
March 29, 1996.
(3) Incorporated by reference to Crown NorthCorp, Inc.'s Form 10-QSB filed
November 14, 1996.
(4) Incorporated by reference to Crown NorthCorp, Inc.'s Form 8-K filed
January 24, 1997.
(5) Incorporated by reference to Crown NorthCorp, Inc.'s Form 8-K filed
February 20, 1998.
(6) Incorporated by reference to Crown NorthCorp, Inc.'s Form 10-KSB filed
March 30, 1998.
(7) Incorporated by reference to Crown NorthCorp, Inc.'s Form 10-QSB filed
May 14, 1998.
(8) Incorporated by reference to Crown NorthCorp, Inc.'s Form 10-QSB filed
November 16, 1998.
(9) Filed herewith.
<PAGE> 1
Exhibit 21.3
SUBSIDIARIES OF CROWN NORTHCORP, INC.
-------------------------------------
Crown Revenue Services, Inc., an Ohio corporation, is wholly owned subsidiary of
Crown NorthCorp, Inc.
Crown Properties, Inc., an Ohio corporation, is a wholly owned subsidiary of
Crown Revenue Services, Inc.
CNC Holding Corp., a Delaware corporation, is a wholly owned subsidiary of Crown
NorthCorp, Inc.
Eastern Realty, L.L.C., a Virginia limited company, with 99% of the membership
interests owned by CNC Holding Corp., and 1% owned by Crown Revenue Services,
Inc.
Crown NorthCorp Euro A/S. a Danish corporation, is a wholly owned subsidiary of
CNC Holding Corp.
Crown NorthCorp Limited, a corporation organized under the laws of England and
Wales, is a wholly owned subsidiary of CNC Holding Corp.
Eastern Realty Corporation, a Virginia corporation, is a wholly owned subsidiary
of CNC Holding Corp.
Eastern Baltimore, Inc., a Virginia corporation, is a wholly owned subsidiary of
CNC Holding Corp.
<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 DECEMBER 31, 1998 AND THE YEAR ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,942,068
<SECURITIES> 0
<RECEIVABLES> 1,262,366
<ALLOWANCES> 100,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,636,252
<PP&E> 2,685,834
<DEPRECIATION> 989,624
<TOTAL-ASSETS> 14,448,993
<CURRENT-LIABILITIES> 1,594,832
<BONDS> 2,935,950
1,400,000
0
<COMMON> 110,651
<OTHER-SE> 7,797,560
<TOTAL-LIABILITY-AND-EQUITY> 14,448,991
<SALES> 0
<TOTAL-REVENUES> 6,982,716
<CGS> 0
<TOTAL-COSTS> 7,089,935
<OTHER-EXPENSES> 658,986
<LOSS-PROVISION> 118,879
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