<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 1999
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For transition period from ____________ to ____________
Commission File No.: 0-22936
Crown NorthCorp, Inc.
---------------------
(Exact name of small business issuer as specified in its charter)
Delaware 22-3172740
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1251 Dublin Road, Columbus, Ohio 43215
--------------------------------------
(Address of principal executive offices)
(614) 488-1169
--------------
(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS.
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
As of April 30, 1999, the issuer had 11,090,210 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
QUARTERLY PERIOD ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I PAGES
-----
<C> <S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 ........................................................... 1
Condensed Consolidated Statements of Operations for the first quarter
and the three months ended March 31, 1999 and 1998............................... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998....................................... 3
Notes to Condensed Consolidated Financial Statements-
March 31, 1999 and 1998.......................................................... 4
Item 2. Management's Discussion and Analysis............................................. 9
PART II
Item 1. Legal Proceeding................................................................. 16
Item 2. Changes in Securities........................................................... 16
Item 3. Defaults Upon Senior Securities.................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders.............................. 16
Item 5. Other Information................................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................................. 16
(a) Exhibits ................................................................. 16
(b) Reports on Form 8-K....................................................... 16
Signature................................................................................... 17
Exhibit Index............................................................................... 18
</TABLE>
<PAGE> 3
CROWN NORTHCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1999 AND DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------
ASSETS 1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,192,725 $ 1,942,068
Accounts receivable - net 1,507,776 1,570,392
Prepaid expenses and other assets 146,060 123,792
------------ ------------
Total current assets 2,846,561 3,636,252
PROPERTY AND EQUIPMENT - Net 1,681,573 1,696,210
RESTRICTED CASH 4,153,488 4,206,106
OTHER ASSETS - net 5,182,141 4,910,425
------------ ------------
TOTAL $ 13,863,763 $ 14,448,993
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 1,166,424 $ 1,594,832
LONG-TERM OBLIGATIONS:
Notes and bonds payable - less current portion 3,015,914 2,935,950
Allowance for loan losses & other 769,640 610,000
------------ ------------
Total long-term obligations 3,785,554 3,545,950
REDEEMABLE PREFERRED STOCK 1,400,000 1,400,000
SHAREHOLDERS' EQUITY:
Common stock 110,904 110,651
Convertible preferred stock:
Series AA --
Series BB --
Additional paid-in capital 10,020,187 9,993,864
Accumulated deficit (2,618,979) (2,195,977)
Treasury stock, at cost (327) (327)
------------ ------------
Total shareholders' equity 7,511,785 7,908,211
------------ ------------
TOTAL $ 13,863,763 $ 14,448,993
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
CROWN NORTHCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Management fees $ 854,395 $ 533,516
Disposition and incentive fees 32,373 1,055,287
Other 487,444 303,447
------------ ------------
Total revenues 1,374,212 1,892,250
------------ ------------
EXPENSES:
Personnel 1,169,844 1,539,426
Occupancy, insurance and other 469,122 169,301
Interest 66,781 71,657
Depreciation and amortization 91,467 88,696
------------ ------------
Total expenses 1,797,214 1,869,080
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (423,002) 23,170
INCOME TAX (BENEFIT) -- 19,400
------------ ------------
NET INCOME (LOSS) $ (423,002) $ 3,770
============ ============
LOSS PER SHARE - BASIC AND DILUTED $ (0.04) $ (0.23)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 11,084,396 10,855,333
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
CROWN NORTHCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (423,002) $ 3,770
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 135,582 112,688
Decrease in reserve for loan losses (200,000)
Accrued abandonment cost settlement (100,000)
Other - net (100,570)
Change in operating assets and liabilities:
Accounts receivable 62,616 (43,757)
Prepaid expenses and other assets (22,268) 28,311
Accounts payable and accrued expenses (214,377) (432,590)
----------- -----------
Net cash used in operating activities (562,019) (631,578)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (28,502) (99,841)
Other (24,757) 3,800
----------- -----------
Net cash used in investing activities (53,259) (96,041)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 125,000 1,031,000
Principal payments on notes payable (259,065) (795,730)
Proceeds from issuance of common stock 126,000
Proceeds from issuance of preferred stock 5,604,579
Increase in long term contract receivable -- (600,000)
----------- -----------
Net cash provided (used) by financing activities (134,065) 5,365,849
----------- -----------
NET INCREASE (DECREASE) IN CASH DURING THE QUARTER (749,343) 4,638,230
CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER 1,942,068 735,940
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 1,192,725 $ 5,374,170
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 52,299 $ 63,163
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(UNAUDITED)
1. General and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Crown NorthCorp, Inc., and subsidiaries reflect all material
adjustments consisting of only normal recurring adjustments which, in
the opinion of management, are necessary for a fair presentation of
results for the interim periods. Certain information and footnote
disclosures required under generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission, although the company believes
that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction
with the year-end financial statements and notes thereto included in
the company's Form 10-KSB for the year ended December 31, 1998. Certain
reclassifications have been made to the 1998 amounts to conform to the
1999 presentation.
2. Loss Per Common Share
The loss per share for the three months ended March 31, 1999 and 1998
is computed based on the loss applicable to common stock divided by the
weighted average number of common shares outstanding during the period.
The company's 1998 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 was 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. The 1998 net loss
available to common shareholders was $2,493,498 ($0.23 per share). As
the company had a net loss applicable to common stock for the three
months ended March 31, 1999 and 1998, there are no potential common
shares to be included in the computation of the diluted per-share
amount.
4
<PAGE> 7
3. Receivables
Receivables consist of the following at March 31, 1999 and December 31,
1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Trade $ 968,960 $1,252,534
Affiliates 321,660 408,026
Shareholders 265,063
Employees 52,093 9,832
---------- ----------
Total 1,607,776 1,670,392
Less: Allowance for doubtful accounts 100,000 100,000
---------- ----------
Receivables-net $1,507,776 $1,570,392
========== ==========
</TABLE>
The affiliate receivable is for management fees and expense
reimbursements from a venture in which the company has a 50% investment
interest. Management fees billed to the affiliate during the first
quarter of 1999 were approximately $121,300. The shareholders
receivable is for contractual asset management services performed under
standard terms and due currently. Management fees billed to the
shareholder during the first quarter of 1999 were approximately
$332,100.
4. Property and Equipment
Property and equipment consists of the following at March 31, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 271,845 $ 271,845
Building and improvements 1,137,112 1,137,112
Furniture and equipment 1,305,379 1,276,877
----------- -----------
Total property and equipment 2,714,336 2,685,834
Less accumulated depreciation (1,032,763) (989,624)
----------- -----------
Property and equipment - net $ 1,681,573 $ 1,696,210
=========== ===========
</TABLE>
On April 19, 1999, the company entered into a contract calling for the
sale of the office building that serves as its headquarters and the
leaseback of space in that building (see Note 9).
5
<PAGE> 8
5. Stockholders' Equity
In March 1997, the company entered into a stock purchase agreement with
an affiliate of the Harbert Management Corporation to invest up to $5
million in the company's common stock. Harbert invested $1 million in
the company in March 1997 and additional sums in October and December
1997. On December 31, 1997 the company and Harbert entered into an
amendment to the agreement pursuant to which Harbert agreed to purchase
one share of the company's Series AA Non-Voting Convertible Preferred
Stock on the terms and conditions set forth in the amendment. Harbert
is entitled to a non-cumulative dividend at the rate of 5% per annum
plus, in the event of liquidation, a 12% cumulative dividend on the
liquidation preference of $3,647,185, each from January 26, 1998, the
date the transaction was consummated. The holder of the Series AA
Preferred has the option to convert it into 3,473,510 shares of common
stock at any time. The quoted price per common share of the company at
the date of issuance of the Series AA Preferred was $1.625, resulting
in an effective dividend upon issuance of $1,997,268. Crown has the
option to convert the Series AA Preferred upon the occurrence of
certain stipulated events. The Series AA Preferred provides that if
these stipulated events did not occur as of June 30, 1998, then Harbert
has the right to designate a majority of Crown's Board of Directors
until such time that they do occur. The stipulated events have not yet
occurred and Harbert has not given notice of its intent to exercise its
right to designate a majority of the directors.
In March 1998, the company entered into a stock purchase agreement with
an affiliate of ContiFinancial Corporation whereby Conti invested $2
million in exchange for one share of the company's Non-Voting Series BB
Convertible Preferred Stock on the terms and conditions set forth in
the agreement, and a warrant to purchase up to 200,000 shares of
Crown's common stock at $2 per share. The warrant vests and expires
based upon the occurrence of certain stipulated events and was
determined to have an immaterial value. The liquidation preference is
$2,000,000, plus a 12% cumulative dividend from the issuance date. The
holder of the Series BB Preferred has the option to convert it into
1,000,000 shares of the common stock at any time. The quoted price per
common share of the company at the date of issuance of the Series BB
Preferred was $2.50, resulting in an effective dividend upon issuance
of $500,000. The company has the option to convert the Series BB
Preferred upon the occurrence of certain stipulated events. The company
has the right to redeem the Series BB Preferred upon thirty days'
written notice for the liquidation preference provided, however, that
upon receipt of a redemption notice, the holder of the Series BB
Preferred has the right to convert the Series BB Preferred into
1,000,000 shares of common stock. Conti has the right to designate one
director of Crown's Board of Directors as long as it holds the Series
BB Preferred or at least 1,000,000 shares of common stock and certain
other conditions are met.
6
<PAGE> 9
6. Contingencies
The company has certain contingent liabilities resulting from
litigation and claims incident to the ordinary course of business.
Management believes that the probable resolution of such contingencies
will not materially affect the financial statements of the company.
7. Statements of Financial Accounting Standards
In June 1998, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The company will be required to implement the provisions of
this statement beginning January 1, 2000. The company does not
anticipate that adoption of this statement will materially impact its
financial position, results of operations or cash flows.
8. Segment Information
There have been no changes in the basis of segmentation or in the basis
of measurement of segment profit or loss from that reported at December
31, 1998.
Segment information at March 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues:
Asset management $ 1,124,882 $ 1,762,654
Mortgage origination 113,965
European operations 249,330 15,631
----------- -----------
Total $ 1,374,212 $ 1,892,250
=========== ===========
Income (loss) before income tax:
Asset management $ (308,958) $ 531,273
Mortgage origination (133,389) (164,230)
European operations 19,345 (343,873)
----------- -----------
Total $ (423,002) $ 23,170
=========== ===========
</TABLE>
There have been no material changes in each segment's total assets from
the amount disclosed at December 31, 1998.
7
<PAGE> 10
9. Subsequent Events
On April 19, 1999, the company entered into a contract calling for the
sale of its headquarters office building for approximately $1,600,000
cash. The contract is subject to satisfaction of contingencies and
calls for closing on or before June 1, 1999. The contract also calls
for execution of a lease of a portion of the space in the building with
the company paying to the buyer annual rental payments of approximately
$160,000 for an initial term of five years, provided however, that the
company may terminate the lease upon six months' notice under certain
terms and conditions.
On May 13, 1999, the company entered into a purchase and sale agreement
calling for the sale of its interest in HMR Sweden, L.L.C.,
Catella/Crown NorthCorp Joint Venture AB and a related management
contract to affiliates of Harbert. The agreement calls for a selling
price of $2,900,000, payable in cash and the cancellation of
indebtedness of approximately $980,000, and is subject to satisfaction
of certain contingencies. The carrying value of the interests sold is
approximately $2,790,000 at March 31, 1999. The agreement calls for the
closing to occur no later than July 31, 1999.
8
<PAGE> 11
Item 2. - Management's Discussion and Analysis
THE COMPANY'S BUSINESSES
Crown derives its primary revenues from the financial services it offers to
owners and operators of commercial real estate interests. These services include
third-party asset management and disposition fees, incentive fees based on the
overall performance of a contract or pool of assets and loan servicing fees. In
the past, Crown has used strategic acquisitions and alliances as a principal
method of expanding and diversifying its core businesses and developing and
entering new businesses. Crown is actively seeking additional strategic
alliances and acquisitions, including possible merger transactions, as a primary
means of providing capital to support and expand its operations. The company
has retained an investment banker to assist in these efforts.
FORWARD LOOKING STATEMENTS
The statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 21E of the Exchange
Act, including statements regarding the company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include terminology such as "anticipate," "believe," "has the opportunity,"
"seeking to," "attempting," "would," "contemplated," "believes" or comparable
terminology. All forward-looking statements included in this document are based
on information available to the company on the date hereof, and Crown assumes no
obligation to update any such forward-looking statements. It is important to
note that the company's actual results could differ materially from those in
such forward-looking statements. The factors listed below are among those that
could cause actual result to differ materially from those in forward-looking
statements. Additional risk factors are listed from time to time in the
company's reports on Forms 10-QSB, 8-K and 10-KSB.
Among the risk factors that could materially and adversely affect the future
operating results of the company are:
o Crown is currently operating at a loss and is funding operating deficits
primarily from equity capital. Management anticipates that operating losses
will continue until the company is able to increase its revenues by securing
additional asset management and servicing contracts or by other means.
o The company may be unable to develop sufficient capital resources through
profitable operations, strategic alliances (including possible merger
transactions) 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 will be impaired.
9
<PAGE> 12
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 these 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. Over and above its domestic asset
management and servicing contracts, the company also derives revenues from
European management and servicing operations established in 1997. The company
has entered into a contract to sell its European Operations to affiliates of
Harbert. The company ceased originating commercial mortgage loans for a conduit
program at the end of 1998. As a result, Crown does not anticipate that mortgage
lending will be a significant source of income for the foreseeable future. The
company's efforts to enhance its revenues are focused on expansion of its core
management and servicing businesses.
Crown continues to develop its third-party asset management business. In recent
months, there has been a general increase in the number of assets in the
marketplace available for management. Crown's principal investment banking
client has continued to place additional assets with the company for management.
Crown has also undertaken significant asset management work for a shareholder.
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. Many of these assets are not
performing in accordance with their terms at the time they are assigned to
Crown. The company anticipates that it will derive its primary revenues in 1999
from third-party asset management contracts and is actively seeking to expand
business with both new and existing clients.
10
<PAGE> 13
Loan servicing continues to be a core business of the company. Crown typically
services assets placed with the company for management. Additionally, the
company may acquire servicing rights through negotiated transactions,
competitive bidding or recurring business from existing clients. Many
transactions, particularly those involving securitized assets, require the
servicer to invest in the asset or portfolio. Crown has relatively limited
capital resources compared to those of many of its competitors. This precludes
the company from pursuing many servicing opportunities unless it aligns itself
with a source of capital.
The company believes that its ability to operate as a rated servicer is of
significant marketing value in Crown's efforts to secure additional management
and servicing opportunities. Fitch IBCA and Standard and Poor's Corporation
conduct annual reviews of rated servicers: the results of their annual reviews
of the company are pending. Crown intends to maintain and expand its capability
to act as a rated servicer.
Crown is operating an asset management and servicing business in Europe through
Catella/Crown NorthCorp Joint Venture AB, in which Crown has a 50% interest.
Catella/Crown, which is based in Stockholm, provides management and advisory
services in Sweden. While European Operations have become profitable, the
company has entered into a contract to sell European Operations to affiliates of
Harbert. This sale is part of a plan to increase liquidity, reduce operating
costs and focus Crown's financial and human resources on the development of
asset management and servicing opportunities in the United States.
To overcome operating deficits and return to profitability, Crown is attempting
to increase the revenues it derives from its core asset management and servicing
businesses and continues to review its operations for means of realizing
additional expense savings. To increase liquidity and reduce expenses, the
company is also actively pursuing the sale of selected assets. There can be no
assurance that any of these actions will produce the intended results or lead to
profitable operations.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1998
Total revenues decreased $518,038 to $1,374,212 for the first three months of
1999 from $1,892,250 during the same period in 1998. Of the decrease in total
revenues, the disposition and incentive fee revenue components changed
significantly, decreasing by approximately $1,022,914 in 1999. Asset management
contracts with various clients, including investment banking firms and
partnerships, continue to provide a significant portion of the company's
revenue. Management fee revenues generally include ongoing fees with the
opportunity for additional, incentive-based compensation at the end of any
engagement. Revenues for 1999 include approximately $332,100 for asset
management services for a shareholder at market prices and approximately
$121,300 for services rendered to a joint venture in which the company has a 50%
interest.
11
<PAGE> 14
Management fees are recorded as services required under a contract are
performed, and are based on a percentage applied to the aggregate value of the
assets managed, as assigned in the contracts, or on original base monthly
amounts, as defined in the contracts. Management fee revenues increased
$320,879, or 60%, to $854,395 in the first three months of 1999 from $533,516
for the comparable period in 1998. The increase in management fee revenues for
the three-month period in 1999 versus the same period in 1998 was generally
attributed to an increase in the number of assets under the company's
management.
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. Certain contracts provide for incentive fees if the company
achieves net cash collections in excess of thresholds established in the
contracts. Disposition and incentive fee revenues decreased to $32,373 in the
first three months of 1999 from $1,055,287 during the corresponding period in
1998. Of the 1998 amount, an incentive fee of approximately $600,000 was from
the progressive resolution of one contract while a disposition fee of
approximately $375,000 reflects the resolution of assets under one contract with
an investment banking client. Contracts with the company's largest client
typically do not provide for disposition fees.
Other fees for 1999 primarily includes interest income, income from joint
ventures and net servicing revenues. Included in the amount is equity in
earnings of approximately $128,000 from a joint venture in which the company has
a 50% investment interest. Also included in other fees for 1998 is mortgage
origination income of approximately $114,000. The company ceased commercial
lending operations at December 31, 1998.
Other fees increased $183,997, to $487,444 in the first three months of 1999
from $303,447 in the same period in 1998. Including the changes mentioned above,
the increase is primarily attributable to interest income resulting from a cash
escrow deposit fee arrangement reached with a depository institution.
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses and professional development expenses. Personnel expenses
decreased $369,582, or 24%, to $1,169,844 for the first three months of 1999
form $1,539,426 for the same period in 1998. The decreases were primarily caused
from lower staffing levels, with resultant decreases in salaries, payroll taxes
and benefits expenses.
Occupancy, insurance and other operating expenses increased to $469,122 for the
first three months of 1999 from $169,301 for the first three months of 1998. The
1998 amount includes expense credits of $200,000 to the provision for loan
losses, reflecting favorable credit experience with the company's loan portfolio
under the Federal National Mortgage Association's Delegated Underwriting and
Servicing Program; and $100,000 to due
12
<PAGE> 15
diligence expenses, reflecting a negotiated settlement of contractual expenses
accrued under an expense reimbursement agreement.
Interest expense decreased to $66,781 for the first three months of 1999 from
$71,657 for the same period in 1998. The decrease primarily reflects reduced
short-term borrowings.
Depreciation and amortization increased to $91,467 for the first three months of
1999 from $88,696 for the corresponding period in 1998.
Income tax expense of $19,400 for the first three months of 1998 reflects the
impact of deferred tax items for deferred loan servicing and amortization after
eliminating non-deductible foreign losses and utilization of a portion of the
company's net operating loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Cash and cash equivalents decreased to $1,192,725 at March 31, 1999 from
$1,942,068 at December 31, 1998. The company had aggregate bank credit
facilities of $600,000 of which none was outstanding at March 31, 1999.
Crown is incurring operating cash deficits and is funding those deficits using
proceeds generated from equity capital raised in 1998. For the foreseeable
future, the company expects to fund current operations with cash provided by
operations, selective sales of company assets, draws on bank credit facilities
and proceeds provided from private investment capital infusions. In this regard,
the company has entered into a contract to sell its headquarters building in a
sale and leaseback transaction. Crown has also entered into an agreement to sell
its investment in European Operations to affiliates of Harbert. Additionally,
the company is attempting to develop new sources of revenue to reduce or
eliminate operating deficits as well as other means of funding those deficits.
The company is seeking to maintain credit facilities to establish an advancing
line for operations as a master servicer. The company expects to fund strategic
acquisitions of entities and asset portfolios by cash provided from debt or
equity financing.
HISTORICAL CASH FLOWS
Cash flows used for operating activities decreased to $562,019 for the first
three months of 1999 from $631,578 in the corresponding period of 1998. A
non-cash credit, primarily from equity in earnings of a joint venture, increased
the company's use of cash originating from the net loss for the first three
months of 1999. Changes to working capital components additionally increased the
cash used by operations by approximately $100,000 in 1999. Although the company
had net income in the first quarter of 1998, the amount includes non-cash
credits for reductions in loan losses and accrued abandonment costs. Changes to
working capital components, primarily reflecting payment of accrued incentive
13
<PAGE> 16
compensation and abandonment costs, reduced cash from operations by
approximately $448,000 during the corresponding period of 1998.
Cash flows use by investing activities decreased to $53,259 for the first three
months of 1999, from $96,041 for the same time period in 1998. The decrease was
primarily caused by reduced capital expenditures in 1999.
Cash flows from financing activities changed to a $134,065 use of funds for the
first three months of 1999 from a $5,365,849 source of funds for the respective
time period in 1998. The change is primarily attributable to cash generated by
the issuance of the Series AA Preferred and the Series BB Preferred in 1998.
YEAR 2000 READINESS
The Year 2000 issue arises from computer programs and equipment that use a
two-digit rather than a four-digit format to indicate a year. Such components
may incorrectly interpret dates beyond 1999, which could cause computer system
failures or errors. Crown has completed its assessment of its Year 2000 issues.
It has purchased and will continue to purchase hardware and software to help
insure accurate processing. Crown has also completed testing its current
operating systems for Year 2000 readiness. As Crown installs new hardware and
software in the normal course of business, it will continue testing to ensure
that such installations do not give rise to Year 2000 issues.
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. Crown has installed and tested 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 is acquiring Year 2000-compliant versions of these products or is
substituting alternative products that do comply.
The costs Crown has incurred specifically to address Year 2000 issues have been
immaterial and are expected to continue to be so. Expenditures have included
upgraded hardware for the 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
due to computer processing failures.
Crown believes it is taking all appropriate steps to achieve Year 2000
compliance. Nevertheless, the Year 2000 problem is pervasive and complex, as
virtually every computer operation will be affected in some way. Crown believes
that its ongoing testing
14
<PAGE> 17
of new hardware and software components acquired in the normal course of
business will reveal any significant Year 2000 problems, that such problems will
be capable of remediation and that Crown's software and hardware will perform
substantially as planned when Year 2000 processing begins. There can be no
assurance, however, that Crown can achieve Year 2000 compliance without
significant additional costs.
15
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
The company is a party to routine litigation incidental to its business.
Management does not believe that the resolution of this litigation will
materially affect the financial position or liquidity of the company.
Item 2. - Changes in Securities
None
Item 3. - Defaults Upon Senior Securities
None
Item 4. - Submission of Matters to a Vote of Security Holders
None
Item 5. - Other Information
None
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Numbers
-------
27 Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE> 19
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: May 17, 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
17
<PAGE> 20
INDEX TO EXHIBITS
27 Financial Data Schedule (1)
(1) Filed herewith.
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CROWN
NORTHCORP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS
OF MARCH 31, 1999 AND THE THREE MONTHS ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,192,725
<SECURITIES> 0
<RECEIVABLES> 1,607,776
<ALLOWANCES> 100,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,846,561
<PP&E> 2,714,336
<DEPRECIATION> 1,032,763
<TOTAL-ASSETS> 13,863,763
<CURRENT-LIABILITIES> 1,166,424
<BONDS> 3,015,914
1,400,000
0
<COMMON> 110,904
<OTHER-SE> 7,400,881
<TOTAL-LIABILITY-AND-EQUITY> 13,863,763
<SALES> 0
<TOTAL-REVENUES> 1,374,212
<CGS> 0
<TOTAL-COSTS> 1,730,433
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,781
<INCOME-PRETAX> (423,002)
<INCOME-TAX> 0
<INCOME-CONTINUING> (423,002)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (423,002)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
