<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, 2000
--------------
[ ] 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, 2000, the issuer had 10,579,060 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, 2000
INDEX
PART I PAGES
-----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 ................................................1
Condensed Consolidated Statements of Operations for the
first quarter and the three months ended March 31, 2000 and 1999......2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999............................3
Notes to Condensed Consolidated Financial Statements-
March 31, 2000 and 1999...............................................4
Item 2. Management's Discussion and Analysis..................................7
PART II
Item 1. Legal Proceedings....................................................12
Item 2. Changes in Securities................................................12
Item 3. Defaults Upon Senior Securities......................................12
Item 4. Submission of Matters to a Vote of Security Holders..................12
Item 5. Other Information....................................................12
Item 6. Exhibits and Reports on Form 8-K.....................................12
(a) Exhibits .....................................................12
(b) Reports on Form 8-K...........................................12
Signature....................................................................13
Exhibit Index................................................................14
<PAGE> 3
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2000 AND DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 207,220 $2,210,451
Accounts receivable - net 282,806 454,036
Prepaid expenses and other assets 70,354 125,989
----------- ----------
Total current assets 560,380 2,790,476
PROPERTY AND EQUIPMENT - Net 250,797 268,794
RESTRICTED CASH 500,000 500,000
OTHER ASSETS - net 1,388,225 1,135,704
----------- ----------
TOTAL $ 2,699,402 $4,694,974
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 735,587 $ 894,917
LONG-TERM OBLIGATIONS:
Notes and bonds payable - less current portion 115,000 1,680,000
Allowance for loan losses & other 880,059 729,146
----------- ----------
Total long-term obligations 995,059 2,409,146
REDEEMABLE PREFERRED STOCK 0 500,000
SHAREHOLDERS' EQUITY:
Common stock 112,609 112,609
Convertible preferred stock:
Series AA
Series BB
Additional paid-in capital 6,518,208 6,068,208
Accumulated deficit (5,595,008) 5,222,853)
Treasury stock, at cost (67,053) (67,053)
----------- ----------
Total shareholders' equity 968,756 890,911
----------- ----------
TOTAL $ 2,699,402 $4,694,974
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
REVENUES:
Management fees $ 525,218 $ 854,395
Disposition and incentive fees 200,000 32,373
Other 303,388 487,444
----------- -----------
Total revenues 1,028,606 1,374,212
----------- -----------
EXPENSES:
Personnel 958,934 1,169,844
Occupancy, insurance and other 357,404 469,122
Interest 5,734 66,781
Depreciation and amortization 58,997 91,467
----------- -----------
Total expenses 1,381,069 1,797,214
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (352,463) (423,002)
INCOME TAX (BENEFIT) 400 19,400
----------- -----------
NET INCOME (LOSS) $ (352,863) $ (442,402)
=========== ===========
LOSS PER SHARE - BASIC AND DILUTED $ (0.03) $ (0.04)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 11,200,022 11,084,396
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (352,863) $ (423,002)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 87,497 135,582
Decrease in reserve for loan losses 0 0
Accrued abandonment cost settlement 0
Other - net 0 (100,570)
Change in operating assets and liabilities:
Accounts receivable 203,497 62,616
Prepaid expenses and other assets 73,687 (22,268)
Accounts payable and accrued expenses (209,710) (214,377)
-------------------------------
Net cash used in operating activities (197,892) (562,019)
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (16,711) (28,502)
Increase in goodwill (225,000) 0
Other 3,666 (24,757)
-------------------------------
Net cash used in investing activities (238,045) (53,259)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 245,000 125,000
Principal payments on notes payable (1,745,000) (259,065)
Redemption of preferred stock (500,000) 0
Increase in additional paid-in capital 450,000 0
Decrease in long term contract receivable (17,294) 0
-------------------------------
Net cash provided (used) by financing activities (1,567,294) (134,065)
-------------------------------
NET INCREASE (DECREASE) IN CASH DURING THE QUARTER (2,003,231) (749,343)
CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER 2,210,451 1,942,068
-------------------------------
CASH AND CASH EQUIVALENTS AT END OF QUARTER 207,220 1,192,725
-------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID FOR INTEREST 5,734 52,299
-------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(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, 1999. Certain
reclassifications of prior year amounts have been made to conform with
the current year presentation.
2. Loss Per Common Share
The loss per share for the three months ended March 31, 2000 and 1999
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 Series AA and Series BB Preferred Stock issuances which
were redeemed in December 1999 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. As the company had a net loss applicable to common stock
for the three months ended March 31, 1999, there were no potential
common shares included in the computation of the diluted per-share
amount.
3. Receivables
Receivables consist of the following at March 31, 2000 and December 31,
1999:
4
<PAGE> 7
2000 1999
---- ----
Trade $343,921 $556,906
Affiliates 32,130 32,130
Shareholders 6,279 0
Employees 0 0
-------- --------
Total 382,330 589,036
Less: Allowance for doubtful accounts 99,524 135,000
-------- --------
Receivables-net $282,806 $454,036
======== ========
The affiliate receivable is for management fees and expense
reimbursements from a venture in which the company had a 50% investment
interest but which was sold in the third quarter of 1999. The
shareholders receivable is for contractual asset management services
performed under standard terms and is due currently.
4. Property and Equipment
Property and equipment consists of the following at March 31, 2000 and
December 31, 1999:
2000 1999
---- ----
Land $ 0 $ 0
Building and improvements 0 0
Furniture and equipment 1,331,995 1,323,742
Total property and equipment 1,331,995 1,323,742
Less accumulated depreciation (1,081,198) (1,054,948
----------- -----------
Property and equipment - net $ 250,797 $ 268,794
=========== ===========
5
<PAGE> 8
5. Stockholders' Equity; Redemption of Series C Preferred
At March 31, 2000, the company has 1,000,000 authorized shares of
preferred stock.
On March 31, 2000, the company redeemed the outstanding 500 shares of
Series C Non-Voting, Convertible Redeemable Preferred Stock with a
payment of $50,000 cash. In December 1999, Crown redeemed its Series AA
Non-Voting Convertible Preferred Stock, Series BB Non-Voting Convertible
Preferred Stock and Series B Non-Voting, Non-Convertible Redeemable
Preferred Stock. As a result of these redemptions, the company presently
has no preferred stock outstanding.
6. Contingencies
The company has certain contingent liabilities resulting from
litigation and claims incident to the ordinary course of business.
Management believes that the probable resolution of such contingencies
will not materially affect the financial statements of the company.
7. Statements of Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The company has implemented 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
In 1999, the company sold its European operations and curtailed its
mortgage origination businesses, each of which had constituted a
business segment. Crown presently operates in one business segment as
determined in accordance with SFAS No. 131 "Disclosures about Segment of
an Enterprise and Related Information."
6
<PAGE> 9
Item 2. - Management's Discussion and Analysis
THE COMPANY'S BUSINESSES
The company's primary revenues are from the financial services it provides to
owners and operators of commercial real estate interests. Revenues include
third-party asset management and disposition fees, fees for due diligence or
underwriting revenues, incentive fees based on the overall performance of a
contract or pool of assets, loan servicing fees and interest income. Crown
curtailed mortgage lending operations in 1999 but is now seeking to engage in
mortgage lending for correspondents. Management is actively pursuing strategic
alliances and other transactions that would expand and diversify its core
businesses and provide access to capital resources.
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's largest customer has advised the company that it intends to
transfer substantially all of its servicing to another servicer later this
year. If the company is not successful in replacing this business, its
ability to operate will be impaired.
o The company's ability to operate will also be impaired if it cannot improve
its liquidity through profitable operations, increased revenues, reduced
expenses or other means.
o Crown is currently operating at a loss. These losses will continue until
the company is able to realize additional revenues in some or all of its
business lines.
o The company may not develop sufficient capital resources through profitable
operations, the raising of additional capital or other means to more
successfully compete with larger and better capitalized competitors.
7
<PAGE> 10
o Crown currently operates as a rated servicer. If the company no longer were
to receive ratings, or if its ratings were downgraded, its ability to
obtain new business in certain commercial real estate markets could be
limited.
OUTLOOK
The company offers the commercial real estate industry comprehensive financial
services including third-party asset management, loan servicing, financial
advisory services and mortgage banking. Crown has reduced its size and
simplified its capital structure to better position its business units to
deliver these services. The company, though, presently has very limited
liquidity and capital resources. To continue to operate, Crown must increase its
liquid assets and capital through revenues from new businesses, investments in
the company by strategic partners or both.
Loan servicing has been and will continue to be a core business. The company's
largest servicing client has advised that it intends later this year to
consolidate servicing activities it has placed with multiple companies,
including Crown, into another servicer. Crown is aggressively working to develop
new servicing business through negotiated transactions, competitive bidding and
recurring business from other clients. In those instances where market
conditions dictate that a servicer invest in assets or portfolios, Crown must
align itself with a strategic partner or source of capital to pursue the
business, given the company's limited liquidity and capital resources.
Crown is actively seeking ways to increase the revenues it receives from
third-party asset management assignments. Activities in this area typically
involve work on large commercial real estate assets such as loans secured by
hotels, office buildings or multifamily projects. Many of these loans have
complex financing terms. Additional asset management assignments may lead to
increased servicing business, as the company often services assets placed under
its management.
During the first quarter of 2000, the company did not earn material revenues
from its mortgage banking or financial advisory services. Management believes
these services are complementary to Crown's asset management and loan servicing
activities and is thus taking steps to develop mortgage banking and financial
advisory business and revenues.
While moving to increase revenues in its business lines, Crown has taken and
will continue to take steps to lower its operating expenses. In this regard, the
company has reduced staff and is seeking means of reducing occupancy expenses.
Crown intends to achieve profitability by replenishing revenues in its core
business lines, developing new sources of revenue and aggressively controlling
operating costs. Given the company's presently limited liquidity and capital
resources, these efforts alone will likely not be sufficient to overcome
deficits and then sustain profitable operations. The company therefore actively
seeks a merger partner or strategic alliance that could enhance
8
<PAGE> 11
Crown's capital, revenues or liquidity. There can be no assurance that Crown's
actions will produce the intended results or lead to profitable operations.
RESULTS OF OPERATIONS FOR THE FIRST QUARTER ENDED MARCH 31, 2000 COMPARED TO THE
FIRST QUARTER ENDED MARCH 31, 1999
Total revenues decreased $345,606 to $1,028,606 for the first three months of
2000 from $1,374,212 during the same period in 1999. This was primarily due to a
decrease in asset management fees of $329,177 in 2000. 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.
Management fees are recorded as services required under a contract are performed
and, as defined in the applicable contracts, are derived either from percentages
of the aggregate value of the assets under management or from original base
monthly amounts. Management fee revenues decreased $329,177, or 38%, to $525,218
in the first three months of 2000 from $854,395 for the comparable period in
1999. The lower management fee revenues for the three-month period in 2000
versus the same period in 1999 were primarily attributable to a decrease 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
transaction. Disposition fees are generally based on a percentage of the
proceeds of an asset disposition, as defined by the contracts, or a fixed amount
per disposition. Certain contracts provide for incentive fees if the company
achieves net cash collections in excess of thresholds established in the
contracts. Disposition and incentive fee revenues increased to $200,000 in the
first three months of 2000 from $32,373 during the corresponding period in 1999.
Other fees decreased $184,056, to $303,388 in the first three months of 2000
from $487,444 in the same period in 1999. Other fees for 2000 primarily includes
interest income, income from joint ventures and net servicing revenues. Interest
income increased to by $111,739 to $231,739 in 2000 from $120,000 for the same
period in 1999. However, other fees decreased by a net of $295,795 in the first
quarter of 2000 as compared to the same period in 1999, primarily as a result of
the company's sale of European operations in August 1999 and the sale of its
FNMA DUS servicing portfolio in December 1999.
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses and professional development expenses. Personnel expenses
decreased $210,910, or 18%, to $958,394 for the first three months of 2000 from
$1,169,844 for the
9
<PAGE> 12
same period in 1999. 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 decreased to $357,404 for the
first three months of 2000 from $469,122 for the first three months of 1999. The
decrease is due primarily to the sale of the corporate headquarters in May 1999.
Interest expense decreased to $61,047 for the first three months of 2000 from
$66,781 for the same period in 1999. The decrease primarily reflects reduced
short-term borrowings.
Depreciation and amortization decreased to $58,997 for the first three months of
2000 from $91,467 for the corresponding period in 1999. The decrease primarily
reflects the impact of the sale of the company's headquarters in May 1999.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Cash and cash equivalents decreased by $2,003,321 to $207,220 at March 31, 2000
from $2,210,451 at December 31, 1999. The decrease in cash is due primarily to
the payment of $1,680,000 in short-term debt in January 2000. This repayment
substantially reduced the company's liquidity. The company presently has no bank
credit facilities. Crown is actively pursuing such facilities to enhance its
liquidity and operating capacity. The company is also seeking to improve its
liquidity by generating new business revenues, raising additional capital or
entering into strategic alliances with capital partners.
Crown is incurring operating cash deficits and is funding those deficits using
cash resources on hand. For the foreseeable future, the company expects to fund
current operations with cash provided by operations and the establishment of
bank credit facilities. In the past, the company has improved its liquidity
through the sale of certain assets. The company does not anticipate being able
to employ similar strategies for the foreseeable future. Crown continues to
attempt to develop new sources of revenue and to reduce operating expenses. The
company also is actively seeking additional capital resources as a means of
funding or eliminating operating deficits.
HISTORICAL CASH FLOWS
Cash flows from operating activities required the use of $197,892 for the first
three months of 2000. Operating activities used $562,019 in the corresponding
period of 1999. The majority of the change was caused by a reduction of $209,710
in accounts payable and accrued liabilities.
Investing activities used $238,045 during for the first three months of 2000.
Similar activities used $53,259 for the same time period in 1999. The increase
was primarily
10
<PAGE> 13
caused by assumption of $225,000 of debt in accordance with the restructure
approved by the Board in December 1999.
Financing activities used $1,567,294 in the first three months of 2000.
Financing activities used $134,065 during the same time period in 1999. The
change is primarily attributable to repayment of $1,745,000 in short-term debt
incurred in consumption with the December 1999 restructuring.
11
<PAGE> 14
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
12
<PAGE> 15
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 15, 2000 By: /s/ Sam Stern
-------------------
Sam Stern, Executive Vice President,
Treasurer and Chief
Financial Officer
By: /s/ Stephen W. Brown
--------------------------
Stephen W. Brown,
Secretary
13
<PAGE> 16
INDEX TO EXHIBITS
27 Financial Data Schedule (1)
-----------------
(1) Filed herewith.
14
<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, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 193,153
<SECURITIES> 0
<RECEIVABLES> 382,330
<ALLOWANCES> (99,524)
<INVENTORY> 0
<CURRENT-ASSETS> 609,313
<PP&E> 1,331,995
<DEPRECIATION> 1,081,198
<TOTAL-ASSETS> 2,748,335
<CURRENT-LIABILITIES> 800,353
<BONDS> 0
0
0
<COMMON> 112,609
<OTHER-SE> 830,991
<TOTAL-LIABILITY-AND-EQUITY> 2,748,335
<SALES> 0
<TOTAL-REVENUES> 1,025,066
<CGS> 0
<TOTAL-COSTS> 1,332,900
<OTHER-EXPENSES> 51,760
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 5,734
<INCOME-PRETAX> (359,594)
<INCOME-TAX> 400
<INCOME-CONTINUING> (359,594)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (359,994)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
