<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(AMENDMENT NO. 1)
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For transition period from to
-------------- --------------
Commission File No.: 0-22936
Crown NorthCorp, Inc.
---------------------
(Exact name of small business issuer as specified in its charter)
Delaware 22-3172740
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1251 Dublin Road, Columbus, Ohio 43215
----------------------------------------
(Address of principal executive offices)
(614) 488-1169
---------------------------
(Issuer's telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS.
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
As of July 31, 1998, the issuer had 11,053,855 shares of its common stock,
par value $.01 per share, outstanding.
Transitional Small Business Disclosure Format (check one). Yes No X
--- ---
<PAGE> 2
CROWN NORTHCORP, INC.
FORM 10-QSB/A
(AMENDMENT NO. 1)
QUARTERLY PERIOD ENDED JUNE 30, 1998
<TABLE>
INDEX
<CAPTION>
PART I. PAGES
-----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 .............................................. 1
Condensed Consolidated Statements of Operations for the
second quarter and the six months ended June 30, 1998 (as
restated) and 1997 ................................................. 2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 ....................................... 3
Notes to Condensed Consolidated Financial Statements-
June 30, 1998 (as restated) and 1997 ............................... 4
Item 2. Management's Discussion and Analysis ............................... 9
PART II.
Item 1. Legal Proceeding ................................................... 18
Item 2. Changes in Securities .............................................. 18
Item 3. Defaults Upon Senior Securities .................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ................ 18
Item 5. Other Information .................................................. 18
Item 6. Exhibits and Reports on Form 8-K ................................... 19
(a) Exhibits ....................................................... 19
(b) Reports on Form 8-K ............................................ 19
Signature ................................................................... 20
Exhibit Index ............................................................... 21
</TABLE>
<PAGE> 3
<TABLE>
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1998 AND DECEMBER 31, 1997
================================================================================
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,764,962 $ 735,940
Receivables 2,655,303 1,672,306
Prepaid expenses and other 278,245 275,283
----------- -----------
Total current assets 7,698,510 2,683,529
----------- -----------
PROPERTY AND EQUIPMENT-net 1,811,684 1,838,325
RESTRICTED CASH 4,593,667 4,550,766
OTHER ASSETS 2,439,887 2,347,993
----------- -----------
TOTAL $16,543,748 $11,420,613
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 3,069,328 $ 2,143,011
LONG-TERM OBLIGATIONS:
Notes and bonds payable- less current portion 2,375,998 2,563,550
Allowance for loan losses and other 744,207 1,385,721
----------- -----------
Total long term obligations 3,120,205 3,949,271
REDEEMABLE PREFERRED STOCK 2,000,000 2,000,000
SHAREHOLDERS' EQUITY:
Common stock 110,543 108,310
Convertible preferred stock:
Series AA 1
Series BB 1
Additional paid-in capital 9,974,972 4,209,752
Retained earnings (accumulated deficit) (1,731,033) (976,367)
Treasury stock, at cost (269) (13,364)
----------- -----------
Total shareholders' equity 8,354,215 3,328,331
----------- -----------
TOTAL $16,543,748 $11,420,613
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
1
<PAGE> 4
<TABLE>
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
===================================================================================================================
<CAPTION>
SECOND QUARTER YEAR TO DATE
-------------- ------------
1998 1997 1998 1997
---- ---- ---- ----
(AS RESTATED--
SEE NOTE 10)
<S> <C> <C> <C> <C>
REVENUES:
Management fees $ 698,733 $ 927,147 $ 1,205,868 $ 1,974,963
Disposition and bonus fees 121,436 1,376,204 568,098 1,550,343
Incentive fees 15,000 62,000 623,625 221,082
Origination fees, interest and other income 709,930 527,703 1,039,752 798,330
----------- ---------- ----------- -----------
Total revenues 1,545,099 2,893,054 3,437,343 4,544,718
----------- ---------- ----------- -----------
OPERATING AND ADMINISTRATIVE EXPENSES:
Personnel 1,265,401 2,005,713 2,804,827 3,735,965
Occupancy, insurance and other 526,081 818,063 895,381 1,445,809
Provision for loan losses (474,000) (674,000)
Amortization and depreciation 92,609 85,495 181,306 176,413
----------- ---------- ----------- -----------
Total operating and administrative expenses 1,410,091 2,909,271 3,207,514 5,358,187
----------- ---------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 135,008 (16,217) 229,829 (813,469)
OTHER EXPENSES:
Delayed offering costs 851,453 851,453
Restructuring charge 570,000 570,000
Employment contract settlement and other 206,983
Interest 61,383 119,819 133,040 197,989
----------- ---------- ----------- -----------
Total other expenses 912,836 689,819 984,493 974,972
----------- ---------- ----------- -----------
LOSS BEFORE INCOME TAXES (777,828) (706,036) (754,664) (1,788,441)
INCOME TAX BENEFIT 19,400 9,620 -- 192,183
----------- ---------- ----------- -----------
NET LOSS $ (758,428) $ (696,416) $ (754,664) $(1,596,258)
SERIES A PREFERRED STOCK DIVIDENDS 14,841 14,841
SERIES AA and BB CONVERTIBLE PREFERRED
STOCK DIVIDENDS AT ISSUANCE - - 2,497,268 -
----------- ---------- ----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK (758,428) (711,257) (3,251,932) (1,611,099)
LOSS PER SHARE $ (0.07) $ (0.07) $ (0.30) $ (0.17)
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 11,030,863 9,914,033 10,942,399 9,486,631
=========== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 5
<TABLE>
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
======================================================================================================
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (754,664) $(1,596,258)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 293,818 236,639
Decrease in reserve for loan losses (674,000)
Loss on delayed offering 851,453
Other - net 158,083
Change in operating assets and liabilities - net of effects from
purchases and divestitures of subsidiaries:
Accounts receivable (120,328) 870,914
Prepaid expenses and other assets (2,962) (44,120)
Accounts payable and accrued expenses (164,275) 853,013
----------- -----------
Net cash provided (used) in operating activities (570,958) 478,271
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for corporate acquisitions and mergers (1,606,855)
Investment in partnerships (137,500)
Increase in shareholder receivables (862,669)
Payment of deferred offering costs 266,381
Purchase of property and equipment (83,597) (131,221)
Other -net (285,891) (30,878)
----------- -----------
Net cash used in investing activities (965,776) (1,906,454)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,896,000 3,877,286
Principal payments on notes payable (2,110,795) (3,603,259)
Proceeds from issuance of common stock 175,972 950,609
Proceeds from issuance of preferred stock 5,604,579
Other changes -- (173,492)
----------- -----------
Net cash provided by financing activities 5,565,756 1,051,144
----------- -----------
NET INCREASE (DECREASE) IN CASH DURING THE PERIOD 4,029,022 (377,039)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 735,940 587,080
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 4,764,962 $ 210,041
=========== ===========
</TABLE>
3
<PAGE> 6
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(UNAUDITED)
1. General and Basis of Presentation
---------------------------------
The accompanying unaudited condensed consolidated financial statements of
Crown NorthCorp, Inc., and subsidiaries (the "Company") reflect all
material adjustments consisting of only normal recurring adjustments which,
in the opinion of management, are necessary for a fair presentation of
results for the interim periods. Certain information and footnote
disclosures required under generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"), although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with
the year-end financial statements and notes thereto included in the
Company's Form 10-KSB for the year ended December 31, 1997. Certain
reclassifications have been made to the 1997 amounts to conform to the 1998
presentation.
2. Loss Per Common Share
---------------------
The loss per share for the quarter and six months ended June 30, 1998 and
1997 is computed based on the loss applicable to common stock, par value
$.01 per share ("Common Stock") divided by the weighted average number of
common shares outstanding during the period. As the Company had a net loss
applicable to Common Stock for the quarter and six months ended June 30,
1998 and 1997, there are no potential shares to be included in the
computation of the diluted per share amount
4
<PAGE> 7
outstanding during the period. As the Company had a net loss for the
quarter and six months ended June 30, 1997 there are no potential common
shares to be included in the computation of the diluted per-share amount.
3. Receivables
-----------
Receivables consist of the following at June 30, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Trade $1,902,634 $1,702,306
Shareholders 862,669 --
---------- ----------
Total 2,765,303 1,702,306
Less: Allowance for doubtful accounts (110,000) (30,000)
---------- ----------
Receivables - net $2,655,303 $1,672,306
========== ==========
</TABLE>
The shareholder receivables reflect offering costs due under the Strategic
Realty Capital Corp. cost-sharing arrangement (see Note 7).
4. Property and Equipment
----------------------
Property and equipment consists of the following at June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 271,845 $ 271,845
Building and improvements 1,137,112 1,137,112
Furniture and equipment 1,282,900 1,199,304
---------- ----------
Total property and equipment 2,691,857 2,608,261
Less accumulated depreciation (880,173) (769,936)
---------- ----------
Property and equipment - net $1,811,684 $1,838,325
========== ==========
</TABLE>
5. Shareholders' Equity
--------------------
In March 1997, the Company entered into a stock purchase agreement (the
"Harbert SPA") with Harbert Equity Fund I, L.L.C. ("Harbert Fund") to
invest up to $5 million in Common Stock. The Harbert Fund invested $1
million in the Company in March 1997 and additional sums in October and
December 1997. On December 31, 1997 the Company and the Harbert Fund
entered into Amendment No. 2 to the Harbert SPA (the "SPA Amendment")
pursuant to which the Harbert Fund 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,
5
<PAGE> 8
plus a 12% cumulative dividend from January 26, 1998, the date the
transaction was consummated. The holders of the Series AA Preferred have
the option to convert the Series AA Preferred into 3,473,510 shares of the
Common Stock at any time. The quoted price per common share of the Company
at the date of issuance of the Series AA Preferred was $1.625, resulting in
an effective dividend upon issuance of $1,997,268. The Company has the
option to convert the Series AA Preferred upon the occurrence of certain
stipulated events. The Series AA Preferred provides that if these
stipulated events have not occurred as of June 30, 1998, then the Harbert
Fund has the right to designate a majority of the Company's Board of
Directors until such time that they do occur. The stipulated events have
not yet occurred; the Harbert Fund has not given notice of its intent to
exercise its right to designate a majority of the Company's Board of
Directors.
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
Common Stock at $2 per share. The warrant vests and expires based upon the
occurrence of certain stipulated events and was determined to have an
immaterial value. The liquidation preference is $2,000,000, plus a 12%
cumulative dividend from the issuance date. The holders of the Series BB
Preferred have the option to convert the Series BB Preferred into 1,000,000
shares of the Common Stock at any time. The quoted price per common share
of the Company at the date of 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 into 1,000,000 shares of Common Stock. Conti has
the right to designate one Director of the Company's Board of Directors as
long as they hold the Series BB Preferred or at least 1,000,000 shares of
Common Stock and certain other conditions are met.
6. Contingencies
-------------
The Company has certain contingent liabilities resulting from litigation
and claims incident to the ordinary course of business. Management believes
that the probable resolution of such contingencies will not materially
affect the financial statements of the Company.
7. Delayed Offering Costs
----------------------
The Company is a co-sponsor of Strategic Realty Capital Corp. ("SRCC")
which on March 24, 1998 filed with the SEC a registration statement for an
initial public offering. Due to presently unfavorable market conditions for
publicly traded REITs, the
6
<PAGE> 9
offering has been deferred. The charge of $851,453 reflects the Company's
portion of expenses related to SRCC's planned public offering pursuant to a
cost-sharing arrangement with the co-sponsors. If the offering occurs, SRCC
would be a real estate investment trust and would make high-yield
commercial and multifamily real estate loans and investments. The Company
would manage the operations of SRCC, subject to the supervision of SRCC's
board of directors. Concurrently with the initial public offering, the
Company would purchase an additional 133,333 shares (2% of the aggregate
common stock) of SRCC at the initial public offering price, estimated to be
$15 per share. Upon the closing of the offering of common stock of SRCC,
the Company would issue a warrant to SRCC for the purchase of 2,000,000
shares of Common Stock at $2.50 per share. The Company would also invest
cash of $2,000,000 in SRCC. The Company owns all 100 issued shares of SRCC.
8. Statements of Financial Accounting Standards
--------------------------------------------
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". The Company will, as required, implement the provisions of the
statement in the quarter ending March 31, 1999. The Company's current
disclosures are in compliance with the requirements of the statement.
FASB has issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" which supersedes Statement No. 14 "Financial
Reporting for Segments of a Business Enterprise". Generally, this statement
requires financial information to be report on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources. The Company will implement the provisions of this statement, as
required, for the year ended December 31, 1998.
In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company will be required to implement the provisions of
this statement beginning January 1, 2000. The Company does not anticipate
that adoption of this statement will materially impact its financial
position, results of operations or cash flows.
9. Supplemental Cash Flow Disclosures
----------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash paid for interest $100,537 $ 161,276
======== ==========
Non-Cash Investing and Financing Activities
Corporate Acquisitions:
Accounts Receivable $ 16,983
Restricted Cash 1,358,735
Other Assets 591,137
Loan Loss Reserve (360,000)
----------
Net cash paid for corporate acquisitions $1,605,855
==========
</TABLE>
7
<PAGE> 10
- --------------------------------------------------------------------------------
10. Restated Earnings per Share
---------------------------
Subsequent to the issuance of the Company's financial statements for the
six-month period ended June 30, 1998, management determined that the Series
AA and Series BB Preferred Stock issuances contained beneficial conversion
features of $1,997,268 and $500,000 respectively. The resulting discount of
$2,497,268 is recognized as preferred stock dividends at the date of
issuance since they were immediately convertible into common shares,
resulting in a reduction of net income (loss) available to common
shareholders. There is no effect on net income as originally reported. As a
result of the restatement, the accompanying financial statements for the
six-month period ended June 30, 1998 have been restated. The net loss
available to common shareholders has been increased to $3,251,932 ($0.30
per share) from the previously reported $754,664 ($0.07 per share).
8
<PAGE> 11
ITEM 2. - MANAGEMENT?S DISCUSSION AND ANALYSIS
- ----------------------------------------------
GENERAL
The Company derives its primary revenues from the financial services it offers
to owners and operators of commercial real estate interests. These services
include third-party asset management, loan servicing, mortgage loan originations
and European operations. Fees the Company receives include asset management and
disposition fees, incentive fees based on the overall performance of a contract
or pool of assets and fees associated with the origination of mortgage loans.
The Company utilizes strategic acquisitions and alliances as the primary means
of expanding and diversifying its core businesses and developing and entering
new businesses. Management is actively pursuing additional acquisitions and
alliances.
FORWARD LOOKING STATEMENTS
The statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 21E of the Exchange
Act, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include terminology such as "anticipate," "believe," "has the opportunity,"
"seeking to," "attempting," "would," "contemplated," "believes" or comparable
terminology. All forward-looking statements included in this document are based
on information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those in such forward-looking statements. The factors listed below are among
those that could cause actual result to differ materially from those in
forward-looking statements. Additional risk factors are listed from time to time
in the Company?s reports on Forms 10-QSB, 8-K and 10-KSB.
Among the risk factors which could materially and adversely affect the future
operating results of the Company are:
o The Company continues to experience operating deficits or marginally
profitable results. Management anticipates that marginal operating results,
including operating deficits, will continue until the Company is able to
increase its revenues by originating mortgage loans and securing additional
asset management and servicing contracts.
o The public offering contemplated by SRCC's registration statement has been
deferred. Until such time, if ever, as this offering or a similar
opportunity closes and becomes effective, the Company will be unable to
derive benefits it had anticipated from a management agreement with and an
investment in such an opportunity.
o Under the terms of the Series AA Preferred, the Harbert Fund has the right
after June 30, 1998 to designate a majority of the Company?s Board of
Directors until certain specified events occur. The Company may not be able
to cause the events to occur.
9
<PAGE> 12
o While the Company continues its efforts to develop and expand its mortgage
loan origination capability, it may be unsuccessful for a number of
reasons. The Company is actively pursuing strategic acquisitions and
alliances, expanded product lines and participation in additional lending
programs to augment the internal growth of its mortgage lending capability.
These efforts may be unsuccessful which, in turn, may adversely affect the
Company?s revenue and profitability. Additionally, the Company is a
correspondent in the loan conduit program of ContiTrade Services L.L.C.
("ContiTrade"), an affiliate of Conti. This conduit program and its related
funding facility may at some point be unavailable to the Company or may be
available only on terms less favorable than those currently in effect.
o Most of the Company?s asset management contracts are for an indefinite
term, cancelable upon thirty days' notice. If a significant number of these
contracts are terminated or modified, this may adversely affect the
Company?s revenues and profitability.
o The Company currently operates as a rated servicer. If the Company no
longer received ratings, or if its ratings were downgraded, its ability to
retain existing business and to obtain new business in many commercial real
estate markets could be limited.
o The Company may be unable to develop sufficient capital resources through
profitable operations, strategic alliances or acquisitions or otherwise to
more successfully compete with larger and better capitalized competitors in
the acquisition of new business.
BUSINESS OUTLOOK
The Company's primary revenues continue to be derived from management,
disposition and incentive fees associated with third-party asset management
contracts with various clients, including investment banking firms and
partnerships. Asset under management include large single assets, such as loans
secured by hotels and office buildings, as well as portfolios of commercial real
estate assets and interests. The Company's principal asset management client
continues to place additional assets under the Company's management. Third-party
asset management will continue to be an important source of revenue for the
Company. The Company is seeking to expand asset management revenues through
several means including development of new and existing client relationships and
European operations.
The Company continues to develop its mortgage loan origination business. Its
primary revenues in this area are from the Company's activities as a loan
correspondent for the conduit program of ContiTrade. The Company originates
qualifying multifamily and commercial loans which ContiTrade purchases at
closing under a funding facility ContiTrade is providing to the Company. The
Company intends to continue to devote significant resources to the expansion of
its mortgage loan origination capabilities through acquisitions, the development
of
10
<PAGE> 13
correspondent relationships and internal growth. Management anticipates that
mortgage loan origination will become a primary source of the Company's revenue.
Loan servicing has been a core business of the Company and an important source
of revenue. The Company has recently acquired the servicing rights to additional
assets and is actively seeking further acquisitions. Standard & Poor's ("S&P")
and Fitch IBCA, Inc. ("Fitch") both rate the Company "above average" as a
special servicer of assets. Rated special servicers manage non-performing loans
and foreclosed properties in securitized transactions. S&P rates the Company
"average" as a commercial servicer; Fitch rates the Company "acceptable" rating
as a master servicer. These latter two ratings allow the Company to seek to
expand its operations as a rated servicer to service performing as well as
non-performing portions of securitizations. Continued enhancement of its
capabilities as a rated servicer is a significant component of the Company's
business development activities.
On March 24, 1998, SRCC, a newly organized Maryland corporation formed to
operate as a REIT, filed a registration statement with the SEC for an
underwritten public offering. The Company is a co-sponsor of the offering
together with affiliates of both Conti and Harbert Management Corporation
("Harbert"). The business plan for SRCC is to invest in high-yielding lending
and investment opportunities in commercial and multifamily real property-related
assets, including interim loans and mezzanine interests. The Company would
manage SRCC's business and investment affairs under a management agreement. The
Company, Conti and Harbert have deferred SRCC's public offering due to the
presently unfavorable market conditions for publicly traded REITs. Consequently,
the Company is recognizing as of June 30, 1998 its portion of expenses related
to the SRCC's planned public offering pursuant to a cost-sharing arrangement
with the co-sponsors. The Company, Conti and Harbert continue to actively pursue
high-yielding lending and investment opportunities in commercial and multifamily
real-property related assets including a public offering by SRCC, the formation
of a REIT through a private placement and alternative fund opportunities. There
can be no assurance that any fund will occur at any particular time or on any
particular terms.
In Europe, Catella/Crown NorthCorp Joint Venture AB ("Catella/Crown"), in which
the Company has a 50% ownership interest, has entered into an agreement to
manage a large portfolio of assets in Sweden for an investment consortium. The
Company will also have an equity interest in the investment consortium through a
co-investment with an affiliate of Harbert and intends to fund its investment of
approximately $2.5 million through a combination of cash on hand and borrowings.
The Company anticipates assigning to Harbert or an affiliate of Harbert portions
of the distributions of management fees it receives from Catella/Crown. The
transaction, which would represent significant expansion of the Company's asset
management business in Europe, is scheduled to close at the end of August 1998,
subject to regulatory approval. Upon closing, the Company's European operations
would be based in Stockholm.
11
<PAGE> 14
The Company has issued one share of Series AA Preferred to the Harbert Fund in
exchange for $3,647,185 in cash (see Financial Statements -- Notes 5 and 10).
The Series AA Preferred provides that if certain Trigger Events have not
occurred by June 30, 1998, then the Harbert Fund 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; the Harbert Fund has not given notice of its intent to
exercise its right to designate a majority of the Company's Board of Directors.
To overcome operating deficits and to sustain profitability, the Company must
continue to develop and enhance its revenues from both new and existing business
lines. There can be no assurance that the Company will be successful in
increasing its revenues or that any level of revenues will produce any
particular financial results.
RESULTS OF OPERATIONS FOR THE SECOND QUARTER ENDED JUNE 30, 1998 COMPARED TO THE
SECOND QUARTER ENDED JUNE 30, 1997
Total revenues decreased $1,347,955 to $1,545,099 in the second quarter of 1998
from $2,893,054 during the same period in 1997. Revenue components changed
significantly, with disposition and bonus fees decreasing by $1,254,768 in 1998.
Asset management contracts with various clients, including investment banking
firms and partnerships, continue to provide a significant portion of the
Company's revenue through management, disposition and incentive fees. The change
in management fees and related revenue components reflects the Company's
transition from its historic public-sector contract orientation to a
private-sector contractor with contracts that generally provide for lower
ongoing fees with the opportunity for additional, incentive-based compensation
at the end of an engagement. Pursuant to its strategic business plan, the
Company is continuing to take steps to reposition the Company's core business to
grow both those businesses and new, related activities. Attributable to
corporate acquisitions and European development activities, new revenue sources
developed from equity investments in partnerships and joint ventures and from
loan servicing. Also, pursuant to the strategic business plan new, related
business development through loan origination activities generated new revenues
during the year. The Company operates in the real estate industry, which is a
cyclical business environment. Commensurate with the change in the real estate
business cycle, management expects the change in revenue components to continue,
with asset management revenues decreasing as a percent of total revenues while
revenues from lending and servicing activities increase.
Management fees are recorded as services required under a contract performed,
and are based on a percentage applied to the aggregate value of the assets
managed, as assigned in the contracts. Management fee revenues decreased
$228,414, or 24.6%, to $698,733 in the second quarter of 1998 from $927,147 for
the comparable period in 1997. The decrease in management fee revenues for the
second quarter of 1998 versus the same period in 1997 is
12
<PAGE> 15
generally attributable to the loss of a large number of assets under the
Company's management that an investment banking client placed into a securitized
transaction during 1997. Additionally, management fees have decreased because of
contracts being resolved and replaced with lower fee contracts.
Disposition fees are recorded as revenue when the deposition of an asset has
been consummated and the asset owner has received the gross proceeds from the
disposition. Disposition fees are generally based on a percentage of the
proceeds of an asset disposition, as defined by the contracts, or fixed amount
per disposition. Disposition fee revenues decreased to $121,436 in the second
quarter of 1998 from $1,376,204 during the corresponding period in 1997. Of the
1997 amount, approximately 67% reflects the resolution of assets under one
public-sector contract.
Certain contracts provide incentive fees if the Company achieves net cash
collections in excess of contractually established thresholds. Incentive fees
decreased to $15,000 in the second quarter of 1998 from $62,000 in the second
quarter of 1997.
Origination fees, interest and other fees reflect the generation of fees from
mortgage origination, loan servicing, accounting, asset management and
consulting services and interest income. Other fees increased $182,227, or
34.5%, to $709,930, in the second quarter of 1998 from $527,703 in the same
period in 1997. The increase is attributable to origination income resulting
from the commencement of loan origination activities in the second half of 1997.
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses, and professional development expenses. Personnel expenses
decreased $740,312 or 36.9%, to $1,265,401 for the second quarter of 1998 from
$2,005,713 for the same period in 1997. The decreases were primarily caused by
the implementation of its strategic business plan whereby staffing was reduced
significantly in 1997, with resultant decreases in salaries, payroll taxes and
benefits expenses.
Occupancy, insurance and other operating income expenses decreased to $526,081
for the second quarter of 1998 from $818,063 for the second quarter of 1997.
During the second quarter of 1997, the Company incurred a charge if
approximately $228,000 to account for acquisition expenses relating to abandoned
business development activities. Corresponding with the corporate restructuring
addressed above, other occupancy, insurance and other expense components,
including equipment leases and other services, were restructured to reduce
overall expenses.
Provision for loan losses decreased $474,000 reflecting favorable credit
experience with the Company's loan portfolio under the Federal National Mortgage
Association's Delegated Underwriting and Servicing Program ("FNMA-DUS Program").
13
<PAGE> 16
Depreciation and amortization increased $7,114 to $92,609 for the second quarter
of 1998 from $85,495 for the corresponding period in 1997.
On March 24, 1998, the Company, as a co-sponsor, filed with the SEC to register
shares of SRCC, a REIT, in an initial public offering. Due to the presently
unfavorable market conditions for publicly traded REITS, the offering has been
deferred. The charge of $851,453 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 expects to fund the costs from cash reserves
and amounts due from the co-sponsors.
During the second quarter of 1997, management implemented a restructuring plan
for the Company's operations which, among other items, encompassed consolidated
offices and exiting certain lines of business. All restructuring charges were
recorded in the second quarter of 1997.
Interest expense is generally incurred on the Company's notes and bonds payable
and decreased $58,436 to $61,383 for the second quarter of 1998 from $119,819
for the same period in 1997. The decrease primarily reflects the reduction in
short-term borrowings during 1997 utilizing proceeds from tax loss carry
forwards and cash generated from operations.
The income tax benefit of 19,400 for the second quarter of 1998 reflects the
impact of the Company's net loss. The tax benefit for the comparable period of
1997 primarily reflects the receipts of miscellaneous tax refunds and credits.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1997
Total revenues decreased $1,107,375 to $3,437,343 in the first six months of
1998 from $4,544,718 during the same period in 1997. As stated previously,
revenue components changed significantly, with disposition and bonus fees
decreasing by $982,245 in 1998. Asset management contracts with various clients,
including investment banking firms and partnerships, continue to provide a
significant portion of the Company's revenue through management, disposition and
incentive fees. The change in management fee revenue components reflects the
Company's transition from its historic public-sector contraction orientation to
a private-sector contractor with contracts that generally provide for lower
ongoing fees with the opportunity for additional, incentive-based compensation
at the end of an engagement. Pursuant to its strategic business plan, the
Company is continuing to take steps to reposition the Company's core businesses
to grow both those businesses and new, related activities. New related business
development through loan origination activities generated new revenues during
the year. The Company operates in the real estate industry, which is a cyclical
business environment. Commensurate with the change in the real estate business
cycle, management expects the change in revenue components to continue, with
asset
14
<PAGE> 17
management revenues decreasing as a percentage of total revenues while revenues
from lending and servicing activities increase.
Management fee revenues decreased $769,095, or 38.9%, to $1,205,868 in the first
six months of 1998 from $1,974,963 for the comparable period in 1997. The
decrease in management fee revenues for the first six months of 1998 versus the
same period in 1997 is generally attributable to the loss of a large number of
assets under the Company's management that an investment banking client placed
into a securitized transaction during 1997. Additionally, management fees have
decreased because of contracts being resolved and replaced with lower fee
contracts.
Disposition fee revenues decreased to $568,098 in the first half of 1998 from
$1,550,343 during the corresponding period in 1997. The 1997 amount primarily
reflects the resolution of assets under one public-sector contract.
Incentive fees increased to $623,625 in the first six months of 1998 from
$221,082 in the first six months of 1997. The 1998 fees were primarily due to
the progressive resolution of one private-sector contract.
Other fees increased $241,422, or 30.2%, to $1,039,752, in the first six months
of 1998 from $798,330 for the same period in 1997. The increase is primarily
attributable to origination income resulting from the commencement of loan
origination activities in the second half of 1997.
Personnel expenses decreased $931,138, or 24.9%, to $2,804,827 for the first
half of 1998 from $3,735,965 for the same period in 1997. The decreases were
primarily caused by the implementation of its strategic business plan whereby
staffing was reduced significantly from 1997 levels, with resultant decreases in
salaries, payroll taxes and benefits expenses.
Occupancy, insurance and other operating expenses decreased $895,381 for the
first six months of 1998 from $1,445,809 for the first six months of 1997.
During the first half of 1997, the Company incurred a charge of approximately
$228,000 to account for acquisition expenses relating to abandoned business
development activities. Corresponding with the corporate restructuring addressed
above, other occupancy, insurance and other expense components, including
equipment leases and other services, were restructured to reduce overall
expenses.
The decrease in provision for loan losses of $674,000 reflects favorable credit
experience with the Company's loan servicing portfolio under the FNMA-DUS
Program.
On March 24, 1998, the Company, as a co-sponsor, filed with the SEC to register
shares of SRCC, a REIT, in an initial public offering. Due to the presently
unfavorable market conditions for publicly traded REITs, the offering has been
deferred. The charge of $851,453
15
<PAGE> 18
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 expects to fund the costs from cash reserves and amounts due from the
co-sponsors.
During the second quarter of 1997, management implemented a restructuring plan
for the Company's operations which, among other items, encompassed consolidating
offices and exiting certain lines of business. All restructuring charges were
recorded in the second quarter of 1997.
The employment contract settlement of $206,983 in the first six months of 1997
reflects a non-recurring charge representing the lump-sum, final settlement of
incentive compensation payments otherwise due over time to a former employee.
Interest expense decreased $64,989 to $133,040 for the first half of 1998 from
$197,989 for the same period in 1997. The decrease primarily reflects the
reduction in short-term borrowings during 1997 utilizing proceeds from tax loss
carry forwards and cash generated from operations.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Cash and cash equivalents increased to $4,764,962 at June 30, 1998 from $735,940
at December 31, 1997. The Company had aggregate bank credit facilities of
$600,000 of which $-0- was outstanding at June 30, 1998.
In March 1997, the Company entered into the Harbert SPA with the Harbert Fund
whereby the Harbert Fund agreed to invest up to $5 million in the Common Stock.
The Harbert Fund invested $1 million in the Company in March 1997 and additional
sums in October and December 1997. On December 31, 1997, the Company and the
Harbert Fund entered into the SPA Amendment pursuant to which the Harbert Fund
purchased one share of the Series AA Preferred in exchange for cash of
$3,647,185. (See Financial Statements - Notes 5 and 10).
In March 1998, the Company entered into the Conti SPA with an affiliate of Conti
whereby Conti invested $2,000,000 in exchange for one share of the Series BB
Preferred and a warrant for 200,000 shares of the Common Stock. (See Financial
Statements Notes 5 and 10).
The Company will have an equity interest in an investment consortium that is
acquiring a large portfolio of assets in Sweden. This equity interest will be
through a co-investment with an affiliate of Harbert. The Company intends to
fund its investment of approximately $2.5 million through a combination of cash
on hand and borrowings.
16
<PAGE> 19
The Company anticipates that, if the public offering of SRCC proceeds, it would
invest $2 million in SRCC in exchange for common stock of SRCC. The Company
anticipates funding this investment with proceeds from private investment
capital infusions. Also, in conjunction with a public offering, the Company
plans to issue SRCC a five-year warrant to purchase up to $2 million of the
Common Stock at $2.50 per share.
The Company expects to fund current operations with cash provided by operations,
proceeds provided from private investment capital infusions and from draws on
bank credit facilities. Through the implementation of the strategic business
plan discussed above, the Company will continue its efforts to reduce operating
expenses. Moreover, the Company is developing both new sources of revenue in an
effort to eliminate operating deficits as well as alternative funding sources to
fund those deficits.
The Company is actively seeking credit facilities to expand existing facilities
and to fund acquisitions. The Company is also actively pursuing private equity
capital infusions. The Company expects to fund strategic acquisitions of
entities and asset portfolios by cash provided from debt or equity financing.
HISTORICAL CASH FLOWS
Cash flows used in operating activities changed to a $570,958 use of cash for
the first half of 1998 from a $478,271 source of cash in the corresponding
period of 1997. The Company's net loss for the first six months of 1998 includes
a non-cash charge for costs associated with the delayed offering of SRCC and a
non-cash credit for a reduction in the reserve for loan losses. During the first
six months of 1997, the Company incurred an operating loss which was partially
offset by increases in cash provided from changes in working capital components.
Cash flows used by investing activities decreased to $965,776 for the first half
of 1998 from $1,906,454 for the same period in 1997. The decrease primarily
relates to the use of funds for corporate acquisitions in 1997 while the 1998
amount includes charges attributable to costs associated with the delayed
offering.
Cash flows from financing activities increased to $5,565,756 for the first six
months of 1998 from $1,051,144 for the respective time period in 1997. The
increase is generally attributable to the issuance of the Series AA Preferred
and the Series BB Preferred.
17
<PAGE> 20
PART II - OTHER INFORMATION
- ---------------------------
Item 1. - Legal Proceedings
- ---------------------------
The Company is a party to routine litigation incidental to its business.
Management does not believe that the resolution of this litigation will
materially affect the financial position or liquidity of the Company.
Item 2. - Changes in Securities
- -------------------------------
None
Item 3. - Defaults Upon Senior Securities
- -----------------------------------------
None
Item 4. - Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
The Company held its Annual Meeting of Stockholders on May 21, 1998. At the
meeting, the stockholders voted to reelect seven directors for the ensuing year.
The results of the election were:
Votes for all nominees: 10,550,419
Votes to withhold authority from the following nominees:
Ronald E. Roark 16,848
John Everets 16,948
Gordon V. Smith 16,848
Raymond J. Harbert 16,848
Michael D. Luce 16,848
Scott M. Mannes 16,848
Harold E. Cooke 16,884
Item 5. - Other Information
- ---------------------------
None.
18
<PAGE> 21
Item 6. - Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
Exhibit
Numbers
-------
27 Financial Data Schedule
(b) Reports on Form 8-K
None
19
<PAGE> 22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CROWN NORTHCORP, INC.
Dated: April 7, 1999 By: /s/ Richard A. Brock
---------------------------------
Richard A. Brock, Senior Vice
President, Treasurer and
Chief Financial Officer
By: /s/ Ray L. Druseikis
---------------------------------
Ray L. Druseikis, Controller
and Chief Accounting Officer
20
<PAGE> 23
INDEX TO EXHIBITS
-----------------
27 Financial Data Schedule (2)
- --------------------------
(1) Filed herewith.
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CROWN
NORTHCORP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS
OF JUNE 30, 1998 AND THE SIX MONTHS ENDED, AS AMENDED, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 4,764,962
<SECURITIES> 0
<RECEIVABLES> 2,765,303
<ALLOWANCES> (110,000)
<INVENTORY> 0
<CURRENT-ASSETS> 7,698,510
<PP&E> 2,691,857
<DEPRECIATION> (880,173)
<TOTAL-ASSETS> 16,543,748
<CURRENT-LIABILITIES> 3,069,328
<BONDS> 2,375,998
2,000,000
2
<COMMON> 110,543
<OTHER-SE> 8,243,670
<TOTAL-LIABILITY-AND-EQUITY> 16,543,748
<SALES> 3,437,343
<TOTAL-REVENUES> 3,437,343
<CGS> 3,127,514
<TOTAL-COSTS> 3,127,514
<OTHER-EXPENSES> 851,453
<LOSS-PROVISION> 80,000
<INTEREST-EXPENSE> 133,040
<INCOME-PRETAX> (754,664)
<INCOME-TAX> 0
<INCOME-CONTINUING> (754,664)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (754,664)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
