U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to
Commission File No.: 0-22936
Crown NorthCorp, Inc.
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(Name of small business issuer in its charter)
Delaware 22-3172740
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 613, Cheyenne, Wyoming 82001
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(Address of principal executive offices)(Zip Code)
(614) 488-1169
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
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NONE
Securities registered under Section 12(g) of the Exchange Act:
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Common Stock, par value $.01 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended December 31, 2004 were
$10,375,516.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant cannot be determined at this time as the
company's common equity has not been quoted within the past sixty days on the
OTC Bulletin Board pursuant to Rule 6530 of the National Association of
Securities Dealers.
As of March 25, 2005 the issuer had 15,940,116 shares of its common stock
outstanding.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
CROWN NORTHCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 2004
INDEX
PAGES
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PART I.
Item 1. Description of Business................................................ 1
Item 2. Description of Property................................................ 3
Item 3. Legal Proceedings...................................................... 4
Item 4. Submission of Matters to a Vote of Security Holders.................... 4
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters............... 4
Item 6. Management's Discussion and Analysis................................... 5
Item 7. Financial Statements................................................... F-1 thru F-24
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................... 12
Item 8a. Procedures and Controls................................................ 12
Item 8b. Other Information...................................................... 12
PART III.
Item 9. Directors and Executive Officers of the Registrant..................... 12
Item 10. Executive Compensation................................................. 15
Item 11. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters......................... 16
Item 12. Certain Relationships and Related Transactions......................... 17
Item 13. Exhibits............................................................... 19
Item 14. Principal Accountant Fees and Services................................. 20
PART I
ITEM 1. - DESCRIPTION OF BUSINESS
BUSINESS OVERVIEW
Crown NorthCorp, Inc. provides an array of financial services to the real estate
industry, including third-party asset management, mortgage banking and loan
servicing. Crown conducts business in the United States through offices in
Columbus, Ohio and Austin, Texas. In Europe, the company operates through
offices in London, Ipswich and Farnham in the United Kingdom, Frankfurt, Germany
and Stockholm, Sweden; an affiliated entity operates in Belgium. The company,
formed in 1994, is a Delaware corporation. At December 31, 2004, Crown and its
operating subsidiaries employed 58 people. Affiliates engaged in asset
management overseen by Crown employed an additional 14 people.
At the end of 2003, the company acquired Crown NorthCorp Limited ("CNL"), a
corporation under the laws of the United Kingdom, at its operating subsidiaries,
including Crown Mortgage Management ("CMM"). See "Item 12 - Certain
Relationships and Related Transactions" below. This acquisition of European
operations allowed the company to significantly expand its business in 2004.
Also in 2004, Crown realized very significant value from its residual interest
in a securitization of four tax-exempt bonds when the company, in its capacity
as asset manager for the securitization, administered sales of the properties
collateralizing the bonds. Crown is using the proceeds of these dispositions to
fund operations and to make strategic investments to develop business.
Crown derives revenues from several sources: third-party asset management
agreements covering commercial, multifamily and residential real estate and loan
assets for the accounts of others; contracts to service on an active or standby
basis individual loans, loan portfolios and assets in securitized transactions;
fees associated with the origination of sub-prime residential loans in the
United Kingdom; risk management and financial advisory services; and the
administration of the interests of various corporations, partnerships, trusts
and special-purpose entities. In particular cases, these management and
servicing contracts may provide for Crown to receive recurring management, loan
origination or servicing fees; disposition fees associated with transactions;
and incentive fees or profit-participations based on the overall performance of
particular portfolios.
Third-Party Asset Management. The company offers to holders of real estate and
financial assets comprehensive management services including fund or portfolio
management, advice on asset acquisition or disposition, due diligence reviews
and development of portfolio strategies. Third-party asset management clients
include partnerships, investment consortiums, financial institutions and
governmental entities. Asset management contracts are generally for indefinite
terms. In certain cases, in addition to a management contract, Crown or one of
its affiliates
1
may have a residual equity interest in a client's asset-holding entity, which
interest may be realized upon resolution of managed assets within certain
parameters. The company focuses on asset management opportunities in emerging or
niche market sectors that offer opportunities for growth as well as recurring
loan servicing revenues. Managed assets frequently present multifaceted
financing structures or other complex issues.
Crown's management activities in Europe encompass several portfolios of
commercial and residential real estate assets. Assets under management are
presently concentrated in the United Kingdom, Sweden and the United States.
Asset management activities in the U.S. have significantly contracted in
recent years. This trend continued in 2004 with the successful disposition
mentioned above of properties collateralizing tax-exempt bonds. Managed assets
in the U.S. currently include multifamily housing projects impacted by U.S.
government subsidies.
Loan Servicing and Mortgage Management. Crown provides comprehensive loan
servicing and mortgage management. The company's services include primary
servicing of loans performing according to their contractual terms, special
servicing of distressed loans and standby servicing relationships calling for
Crown to step in if a primary servicer fails. In Europe, Fortis Bank and Crown
jointly own and operate a company that offers master servicing capability to
supervise and administer the activities of multiple primary servicers involved
in a common transaction.
Crown's services residential, commercial and consumer loan portfolios in Europe.
Customers include individual clients, investors in securitized transactions and
portfolio managers and advisors. Many of these client relationships directly
relate to Crown's asset management and loan origination activities. U.S.
servicing operations are concentrated on commercial loans.
The company's highly developed servicing systems and procedures are regularly
reviewed by internationally recognized rating agencies. In Europe, Fitch
Ratings, Standard & Poor's Corporation and Moody's Investors Service have rated
CMM's commercial and residential servicing: Crown is the first entity operating
in Europe to achieve these multiple ratings. Fitch has also rated Crown's
commercial servicing operations in the U.S.
Loan Origination and Mortgage Banking. Rooftop Mortgage Limited, in which the
company has a minority interest originates sub-prime residential loans in the
United Kingdom. These loans are immediately sold into conduit or correspondent
programs that accumulate loans for further disposition in capital markets
transactions.
In 2004, the company began development of systems and procedures to originate
commercial loans in European markets. Crown anticipates implementing this
program in 2005.
Rooftop's loan origination programs generate loan fees as well as recurring loan
servicing revenue for the company.
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COMPETITIVE ENVIRONMENT
In operating as an independent provider of asset management, mortgage management
and mortgage banking services, Crown faces a large number of competing providers
in each of these business lines. The great majority of these competitors operate
as significant operating units of companies that are much larger and better
capitalized than Crown. In pursuing opportunities in the financial markets,
Crown typically attempts to maximize its relatively limited capital resources by
developing business alliances or capital partnerships. At the same time,
management believes that Crown's smaller size, independent status and
comprehensive servicer ratings facilitate the prompt delivery of highly tailored
financial services to many emerging or niche markets.
ITEM 2. - DESCRIPTION OF PROPERTY
OFFICES
Crown leases office space in three locations in the United Kingdom and in
additional locations in Germany and Sweden. In the U.S., the company leases
offices space in Columbus, Ohio and Austin, Texas. See "Note 6 - Leases - to the
Consolidated Financial Statements."
INVESTMENT POLICIES
Real Estate; Securities of or Interests Entities Primarily Engaged in Real
Estate Activities. As a third-party asset manager, the company manages real
estate and interests in real estate for the accounts of others. While the
company is not investing in real estate for its own account, in certain
circumstances Crown does make investments in entities engaged in real estate
activities as part of an overall client relationship through which Crown secures
or retains asset management, mortgage management or mortgage banking business.
Investments typically take the form of equity or partnership positions or
subordinate debt. Crown's relatively limited liquidity and capital resources
affect its ability to make these types of investments at any particular time.
Real Estate Mortgages. Crown is not originating or investing in mortgage loans
for its own account. Rooftop, in which Crown has a minority interest, originates
sub-prime residential real estate loans for sale at closing and delivery into
securitizations or whole loan sale programs. These mortgage banking activities
complement and support the company's third-party asset management and loan
servicing businesses.
The company from time to time has acquired the rights to service mortgage loan
assets through the negotiated purchases of or successful bids for the servicing
rights themselves. Here again, Crown's liquidity and capital resources may limit
its ability to pursue purchases of servicing rights.
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ITEM 3. - LEGAL PROCEEDINGS
Crown is not a party to any legal proceedings involving itself or its property.
An arbitration proceeding involving the company was recently resolved. The
company licenses from Midland Loan Services, Inc. software to operate its loan
servicing system in the United States. As a result of Crown's contributions to
the development of the software, the company has the use of the present system
at no cost. In October 2003, Crown filed an arbitration demand against Midland
to resolve a dispute over the terms and conditions of Crown's free use of
future improvements to the system. Based upon the arbitration panel's ruling
following a hearing, Crown will now install the latest version of the software.
Thereafter, Midland and Crown would need to agree on the terms and conditions
under which Crown would purchase any subsequent versions.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
Records maintained by the National Quotation Bureau show that, for the quarter
ended March 31, 2001, the high and low bid prices for the company's common stock
we $.02 and $.005 respectively. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions. In periods subsequent to March 31, 2001, there has generally been
no active public trading market for the common stock.
At March 25, 2005, there were approximately 2,600 holders of record of shares of
the common stock.
During its 2004 and 2003 fiscal years, the company neither declared nor paid
cash dividends or returns of capital on common shares. The company may consider
paying dividends in the future.
As of March 25, 2005, Crown had 30,000,000 authorized shares of common stock and
1,000,000 authorized shares of preferred stock.
As part of a series of transactions to effect the merger of Royal into the
company, Crown is proceeding with a 1:100 reverse and 10:1 forward stock split
effective December 31, 2003 to
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reduce the number of shareholders with extremely small holdings of the company's
stock. Following the stock splits and the conversion of all outstanding
preferred stock to common (but before giving effect to the merger transaction)
Crown had approximately 3,250,116 shares of common stock outstanding. In
exchange for all of the issued and outstanding stock of Royal, Mr. Roark,
Crown's chairman and chief executive officer, received 12,000,000 shares of
Crown common stock. The common stock of Crown held by Royal became treasury
stock of Crown.
ITEM 6. - MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COMPANY'S BUSINESSES
Crown offers comprehensive financial services to the holders of real estate
interests in Europe and the United States. The acquisition of the
well-established operations of CNL and CMM effective December 31, 2003 (see Note
2 to the Consolidated Financial Statements) allowed the company to significantly
expand its third-party asset management and loan servicing businesses to Europe.
Rooftop originates sub-prime residential real estate loans in the United
Kingdom. Crown's business lines in Europe and the United States generate
revenues in several ways: agreements to manage commercial, multifamily and
residential real estate and loan assets for the account of others; loan
servicing and mortgage management on an active or standby basis of individual
loans, loan portfolios and assets in securitized transactions; fees and other
income associated with loan origination and the securitization of those loans;
risk management, financial advisory and due diligence services; and
administration of the interests of various corporations, partnerships,
investments consortiums and special-purpose entities.
Crown generated net income in 2004 primarily from asset sales that resulted in
very significant returns from the residual interest the company held in a
securitization of tax-exempt bonds. The company continues to sustain losses from
certain of its operations. Crown is actively deploying its resources primarily
in Europe to replace expiring or terminating contracts, expand its businesses
and attempt to return to operating profitability. These efforts may include the
formation of partnerships, business combinations or other arrangements or
transactions to leverage the company's liquidity and capital resources, maximize
the value of its core businesses and improve operating results. Additionally,
the company projects that, in 2005, it may achieve significant financial
benefits from the disposition or refinancing of certain assets managed under
contracts.
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," "appear," "would," "contemplated," "believes,"
5
"in the future" or comparable language. All forward-looking statements included
in this document are based on information available to the company on the date
hereof, and the company assumes no obligation to update any such forward-looking
statements. It is important to note that the company's actual results could
differ materially from those in such forward-looking statements. The factors
listed below are among those that could cause actual result to differ materially
from those in forward-looking statements. Additional risk factors are listed
from time to time in the company's reports on Forms 10-QSB, 8-K and 10-KSB.
Among the risk factors that could materially and adversely affect the future
operating results of the company are:
- In 2004, Crown realized very substantial, one-time gains from its
investment in the residual interest of a securitization of tax-exempt
bonds. However, Crown sustained losses from operations for the year. The
company continues to believe that its acquisition of established asset
management and servicing operations in Europe provides the foundation for
growth that will lead to operating profitability, but there can be no
assurance of this result.
- Crown is attempting to utilize the proceeds of asset sales to maintain and
expand business volumes, primarily in Europe. Business in the U.S.
presently continues to decrease as assets subject to management or
servicing contracts are resolved. There can be no assurance that the
company will be able to successfully redeploy these sale proceeds to
generate new business that results in operating profitability.
- Crown's capital resources remain limited when compared to virtually all of
its competitors. To successfully complete for many business opportunities,
the company will need to form partnerships, alliances or other
combinations if it cannot increase its capital through profitable
operations or other means.
- Crown and certain of its subsidiaries operate as rated servicers. If these
entities were to no longer be rated, or if those ratings were lowered,
there would be an adverse effect on the company's operations. Crown's
business volumes may affect its servicer ratings.
OUTLOOK
The company seeks to build upon and expand European operations. With increasing
frequency in recent years, holders of real estate interests in Europe have been
utilizing asset securitizations and other complex capital markets transactions
to realize value from their investments. Management believes this trend will
continue and that Crown is well positioned to benefit from it. The company
provides comprehensive, integrated services addressing all phases of the life
cycle of an asset from acquisition to disposition. The structuring of these
transactions typically requires the involvement of a rated servicer; Crown is
the first servicer in Europe to receive multiple ratings for both commercial and
residential servicing from three
6
rating agencies. Additionally, the market knowledge Crown has obtained from
operations in several countries is an aid in identifying and pursuing emerging
opportunities.
Crown's European asset management activities cover a variety of real estate and
loan interests including, by way of example, a golf course in the United
Kingdom, a chain of grocery stores in Sweden and numerous parcels of residential
real estate. Negotiations continue on possible transactions involving the
managed asset portfolio in Sweden. While the resolution of this portfolio has
been delayed, Crown anticipates that contracts will be entered into and that a
transaction will occur in 2005 that will yield very substantial cash returns to
Crown and may provide a platform for expanded management opportunities in
Scandinavia.
The company's loan servicing and mortgage management business in Europe includes
a wide range of commercial, multifamily and residential loans. Crown provides
servicing on both an active and standby basis. Loan servicing volumes will
decline in the near term as the result of the termination of one contract (see
below Item 8B - Other Information). At the same time, the residential servicing
portfolio continues to grow at a rapid rate as a result of loan origination
activity. The company, in conjunction with it joint venture partner, is also
implementing plans to expand its master servicing business.
Management has been pleased with the progress of its loan origination business
and is seeking to expand origination activity. The company holds a minority
interest in Rooftop Mortgages Limited, which is originating a steadily
increasing volume of sub-prime residential loans in the United Kingdom. The
company anticipates a continued strong volume of residential originations,
although growth may be tempered by a moderation in the increase in housing
prices in the United Kingdom. Crown is also actively developing the capability
to begin originating commercial mortgage loans in the U.K. later this year.
Similar to the residential activity, these commercial originations should also
increase loan servicing and mortgage management portfolios.
Operations in the United States are in transition. During 2004, the company
capitalized on prevailing economic and regulatory factors to realize very
significant cash and non-recurring income from the sale of a substantial portion
of assets under management in the U.S. The company is using the proceeds from
these dispositions to meet operational needs, primarily in Europe. Efforts are
under way to resolve the small number of assets remaining under management in
the United States. The company is also in discussions with potential strategic
partners regarding ongoing operations in the U.S.
Loan servicing volumes in the U.S. continue to decline as loans in the portfolio
pay off in the normal course. Management is evaluating opportunities to possibly
increase this servicing portfolio through participation in a loan origination
program or other means. Crown continues to operate as a rated servicer in the
U.S. but will relinquish that rating if additional U.S. business does not
develop.
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Going forward, Crown is primarily focused on realizing value from its existing
business activities in Europe and in further expanding its presence in European
markets. The company anticipates this expansion may include further development
of business platforms in Germany, Scandinavia and the United Kingdom. The
company is also exploring partnerships and other business structures with
existing or new clients to develop business both in Europe and the United
States. The company would be prepared to provide investment capital to such
entities to advance growth opportunities that maximize the value of Crown's
comprehensive financial services and provide recurring revenue to its business
lines. Crown believes that proceeding in this manner is the most effective way
of expanding the company's revenues and returning it to operating profitability.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2003.
As set forth in Note 1 to the Consolidated Financial Statements, the acquisition
of CNL and CMM effective December 31, 2003 was accounted for using the purchase
method of accounting. Beginning January 1, 2004, the company's results of
operations reflect the combined entities. Therefore, most of the large variances
in operating results between 2004 and 2003 are attributable to 2004 being the
initial reporting period for the consolidated entity.
Total revenues from continuing operations increased $9,360,076 to $10,375,516 in
2004 from $1,015,440 in 2003, with the largest increases being attributable to
loan servicing fees and interest income.
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 assets under management or from original base monthly
amounts. Management fees decreased $77,656 to $559,702 in 2004 from $637,358 in
2003. The majority of this decrease is attributable to a fee of approximately
$172,500 collected in 2003 for the management and disposition of an asset in a
securitization. Also, due to this and other dispositions, monthly fees collected
in conjunction with management of assets declined by approximately $161,000 for
the twelve months ending December 31, 2004 compared to the same period in 2003.
Offsetting these two reductions are fees earned from European operations of
approximately $263,000.
Loan servicing fees increased $2,886,508 to $2,997,764 in 2004 from $111,256 in
2003. This increase is due almost entirely from servicing fees earned in Europe.
Interest income increased $5,984,048 to $6,239,933 in 2004 from $255,885 in
2003. The majority of the increase is attributable to the receipt of cash from a
residual interest in a securitization of tax-exempt housing bonds owned by one
of Crown's subsidiaries. The receipt of cash came as the result of the sale of
the remaining underlying collateral properties of the bonds during 2004.
8
Income from partnerships and joint ventures increased to $131,282 for the year
ended December 31, 2004 from $6,222 for the year of 2003. This increase was
primarily the result of income from a European partnership interest.
Other income increased $442,116 to $446,835 in 2004 from $4,719 in 2003. The
majority of the increase was attributable to an accrual of amounts due from the
recapture of the prior year's income tax payments in Europe.
Operating and administrative expense changes were as follows:
2004 2003 $ Change
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Personnel $4,591,726 $ 607,170 $3,984,556
Insurance, Professional and $2,851,931 $ 424,262 $2,427,669
Other
Occupancy $1,040,128 $ 119,072 $ 921,056
Amortization and $ 825,722 $ 58,023 $ 767,699
Depreciation
Total $9,309,507 $1,208,527 $8,100,980
Personnel expenses include salaries, related payroll taxes and benefits, travel
and living expenses and professional development expenses. Personnel expenses
increased $3,984,556 to $4,591,726 in 2004 from $607,170 for the same period in
2003. The increase was due to European payroll costs of $3,083,700 as well as
travel expenditures of approximately $459,000 associated with European
operations. Also contributing to the increase were salary increases and staff
additions in the U.S., which totaled approximately $346,000 for the period, as
well as an increase in contract labor of $45,000 and travel of approximately
$47,000.
Insurance, professional and other costs increased by $2,427,669 to $2,851,931 in
2004 from $424,262 in 2003. This increase is attributable in part to office
overheads and professional services incurred in Europe of approximately
$1,495,000 and to the write-off of mortgage servicing rights in the U.S. of
approximately $300,000. This write-off was necessitated by the disposition of a
servicing contract. The remainder of the increase is attributable to operations
in the U.S. and is the result of an increase in legal expenses of approximately
$750,000, an increase in accounting fees of approximately $70,000, an increase
in professional services of some $95,000 and an increase in advertising expense
of approximately $34,000. Offsetting these increases is the lowering of the loss
reserve in one of the European subsidiaries of approximately $315,000. The
increase in legal expense is primarily attributable to arbitration proceedings
involving the company's U.S. loan servicing system. The increase in accounting
and professional services is related to the acquisitions of CNL and CMM.
Occupancy costs increased $921,056 to $1,040,128 in 2004 from $119,072 in 2003.
The increase was attributable in part to European office rent and computer
expense of $262,138 and $631,917 respectively. The remainder of the increase is
attributable to increases in office rent and computer expense in the U.S. of
$13,000 and $14,000, respectively.
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Interest expense increased to $90,635 in 2004 from $20,042 in 2003. The increase
is due primarily to the accrual of interest expense on borrowings for the
European operations.
Depreciation and amortization increased to $825,722 in 2004 from $58,023 in
2003. The majority of the $767,699 increase is the result of depreciation
expense of $310,073 attributable to European operations as well as amortization
of capitalized servicing and software costs associated with European operations
totaling approximately $446,000.
Other comprehensive income increased from $926 in 2003 to $536,241 in 2004. The
majority of the increase is the result of foreign currency translation
adjustments.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1,235,039 to $3,287,104 in 2004 from
$2,052,065 in 2003. The majority of the cash increase came from the disposition
of a residual interest in a tax-exempt bond securitization. The company believes
it has opportunities to improve its liquidity and access to cash resources by
completing the resolution of certain managed assets in accordance with
contractual terms, generating new business revenues, raising additional capital
and, in selected instances, entering into strategic alliances. The company
presently has no bank credit facilities.
Crown anticipates continuing to fund operations for the foreseeable future with
cash provided by operations and funds received from its subsidiaries. Crown will
continue to attempt to develop new sources of revenue, to expand revenues from
its existing client base and to reduce operating expenses. The company continues
to seek new capital resources as additional means of funding operations.
HISTORICAL CASH FLOWS
Cash flows from operating activities provided cash of $3,223,792 in 2004.
Operating activities used $68,448 in 2003.
Investing activities used cash of $16,823 in 2004. Similar activities provided
$1,801,663 in 2003. The 2003 increase was the result of the cash acquired in the
corporate acquisition in December 2003 reduced by the purchase of new computer
network as well as the purchase of a minority interest in a partnership
associated with the tax-exempt bond securitization. The 2004 decrease was the
result of increases in the purchases of office equipment and computer equipment
offset by the disposition of a residual interest in the bond securitization.
Financing activities used $1,929,767 in cash in 2004. In 2003, financing
activities provided $301,518 of cash. The use in 2004 was the result of
repayment of debt to a related entity. The increase in 2003 was the result of a
net increase in notes payable from a related entity.
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ITEM 7. - FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
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Independent Auditors' Report................................................... F-1
Consolidated Balance Sheets, December 31, 2004 and 2003........................ F-2
Consolidated Statements of Operations for the years ended
December 31, 2004 and 2003.................................................... F-3
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2004 and 2003.............................................. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003.................................................... F-5
Notes to Consolidated Financial Statements for the years
ended December 31, 2004 and 2003.............................................. F-6
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INDEPENDENT AUDITORS' REPORT
To The Shareholders
Crown NorthCorp, Inc. and Subsidiaries
Cheyenne, Wyoming
We have audited the accompanying consolidated balance sheets of Crown NorthCorp,
Inc. and subsidiaries as of December 31, 2004 and 2003 and the related
consolidated statements of operations and comprehensive income, shareholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of Crown NorthCorp, Inc. and subsidiaries' management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the consolidated financial statements of Crown
NorthCorp Limited, a wholly owned subsidiary operating principally in the United
Kingdom, which statements reflect total assets constituting 37% and 54% of
consolidated assets as of December 31, 2004 and 2003 respectively, and revenues
constituting 35% and 0%, respectively of consolidated revenues for the years
then ended of the related consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Crown NorthCorp Limited and
subsidiaries, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our report and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Crown NorthCorp, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
SCHOONOVER BOYER + ASSOCIATES
/s/_______________________
Columbus, Ohio
March 30, 2005
F-1
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,287,104 $ 2,052,065
Accounts receivable 1,756,639 2,405,456
Prepaid expenses and other assets 734,219 368,588
------------ ------------
Total current assets 5,777,962 4,826,109
PROPERTY AND EQUIPMENT - Net 283,236 111,747
RESTRICTED CASH 351,131 257,490
OTHER ASSETS
Investment in partnerships and joint ventures 889,449 392,985
Other investments
Mortgage loans, net of reserves 937,678 1,245,690
Other 36,974 693,899
Loan servicing rights-net of accumulated amortization of $248,445 in 2004 6,548,653 7,017,674
and $190,597 in 2003
Capitalized software cost - net of accumulated amortization of $749,331 775,974 1,026,196
in 2004 and $300,126 in 2003
Acquisition costs 2,091 2,091
Deposits 42,059 42,585
------------ ------------
Total other assets 9,232,878 10,421,120
------------ ------------
TOTAL $ 15,645,207 $ 15,616,466
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term obligation - 1,294,202
Accounts payable 993,236 638,133
Accrued expenses:
Interest - 10,688
Other 778,125 884,875
------------ ------------
Total current liabilities 1,771,361 2,827,898
LONG-TERM OBLIGATIONS:
Notes and bonds payable - less current portion - 505,979
Allowance for loan losses & other 235,979 235,979
------------ ------------
Total long-term obligations 235,979 741,958
SHAREHOLDERS' EQUITY:
Common stock 159,401 152,501
Additional paid-in capital 20,117,522 20,058,116
Accumulated comprehensive income 536,241 114,231
Accumulated deficit (6,998,239) (8,101,180)
Treasury stock, at cost (177,058) (177,058)
------------ ------------
Total shareholders' equity 13,637,867 12,046,610
------------ ------------
TOTAL $ 15,645,207 $ 15,616,466
============ ============
See notes to consolidated financial statements.
F-2
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
REVENUES:
Management fees $ 559,702 $ 637,358
Loan servicing fees, net 2,997,764 111,256
Interest income 6,239,933 255,885
Income from partnerships and joint ventures 131,282 6,222
Other 446,835 4,719
------------ ------------
Total revenues 10,375,516 1,015,440
------------ ------------
OPERATING AND ADMINISTRATIVE EXPENSES:
Personnel 4,591,726 607,170
Insurance, professional and other 2,851,931 424,262
Occupancy 1,040,128 119,072
Depreciation and amortization 825,722 58,023
------------ ------------
Total operating and administrative expenses 9,309,507 1,208,527
------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INTEREST EXPENSE 1,066,009 (193,087)
INTEREST EXPENSE 90,635 20,042
------------ ------------
NET INCOME (LOSS) BEFORE TAX 975,374 (213,129)
INCOME TAX (BENEFIT) 0 -
------------ ------------
NET INCOME (LOSS) 975,374 (213,129)
OTHER COMPREHENSIVE INCOME
Unrealized Gain (Loss) - 926
Foreign currency translation adjustment 536,241 -
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 1,511,615 $ (212,203)
============ ============
EARNINGS (LOSS) PER SHARE $ 0.04 $ (0.02)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 14,209,229 12,164,480
============ ============
See notes to consolidated financial statements.
F-3
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Convertible Preferred Stock
-------------------------------------------------
Series CC Series DD Series EE
Common Stock --------------- --------------- ---------------
Shares Shares Shares Shares
Issued Amount Issued Amount Issued Amount Issued Amount
------------ ------- ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 2002 12,742,851 40,948 1 1 1
Net loss
Purchase accounting and audit adjustments (12,397)
Purchase of Royal 12,000,000 120,000 - (1)
Dividends paid
Accumulated comprehensive income
Purchase of minority interest
Issuance of common stock 395,000 3,950
Net effect of reverse stock split/conversion (9,887,735) (1) (1)
------------ ------- ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 2003 15,250,116 152,501 - - - - - -
Net income
Audit adjustments -
Reclassification adjustment
Comprehensive Income
Issuance of common stock 690,000 6,900 - -
------------ ------- ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 2004 15,940,116 159,401 - - - - - -
============ ======= ====== ====== ====== ====== ====== ======
Convertible Preferred Stock
------------------------------------------------------------------
Series FF Series GG Series HH Series II
--------------- --------------- --------------- --------------- Additional
Shares Shares Shares Shares Paid-In
Issued Amount Issued Amount Issued Amount Issued Amount Capital
------ ------ ------ ------ ------ ------ ------ ------ ----------
BALANCE, DECEMBER 31, 2002 1 1 15 12 8,924,279
Net loss -
Purchase accounting and audit adjustments 12,397
Purchase of Royal (1) (15) (12) 11,074,196
Dividends paid
Accumulated comprehensive income
Purchase of minority interest 11,694
Issuance of common stock 35,550
Net effect of reverse stock split/conversion (1) -
------ ------ ------ ------ ------ ------ ------ ------ ----------
BALANCE, DECEMBER 31, 2003 - - - - - - - - 20,058,116
Net income -
Audit adjustments (11,694)
Reclassification adjustment
Comprehensive Income
Issuance of common stock - 71,100
------ ------ ------ ------ ------ ------ ------ ------ ----------
BALANCE, DECEMBER 31, 2004 - - - - - - - - 20,117,522
====== ====== ====== ====== ====== ====== ====== ====== ==========
Accumulated Total
Accumulated Comprehensive Treasury Stock Shareholders'
Deficit Income Shares Amount Equity
----------- ------------- -------------- -------- -------------
BALANCE, DECEMBER 31, 2002 (7,862,162) 113,305 (682,073) (67,053) 1,149,317
-
Net loss (213,129) (213,129)
Purchase accounting and audit adjustments - -
Purchase of Royal - (1,125,803) (110,005) 11,084,191
Dividends paid -
Accumulated comprehensive income - 926 926
Purchase of minority interest (25,889) (14,195)
Issuance of common stock - - 39,500
Net effect of reverse stock split/conversion 613,866 -
---------- -------- ---------- -------- ----------
BALANCE, DECEMBER 31, 2003 (8,101,180) 114,231 (1,194,010) (177,058) 12,046,610
Net income 975,374 1,071,959
Audit adjustments 13,336 1,642
Reclassification adjustment 114,231 (114,231) -
Comprehensive Income - 536,241 439,656
Issuance of common stock - 78,000
---------- -------- ---------- -------- ----------
BALANCE, DECEMBER 31, 2004 (6,998,239) 536,241 (1,194,010) (177,058) 13,637,867
========== ======== ========== ======== ==========
F-4
CROWN NORTHCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 975,374 $ (213,129)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 1,467,930 92,687
Equity in income from investment in partnerships and joint ventures (138,154) -
Write off unamortized cost of disposed asset 300,544 13,411
Payment of board of directors' fees by the issuance of common stock 78,001 39,500
Change in operating assets and liabilities: net of effects from purchase of subsidiary
Accounts receivable 310,990 (1,492)
Prepaid expenses and other assets (48,459) (7,502)
Accounts payable and accrued expenses 277,566 8,077
------------ ------------
Net cash provided by (used in) operating activities 3,223,792 (68,448)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (366,352) (124,945)
Purchase of minority interest - (111,694)
Decrease (increase) in other investments 443,170
Increase in additional paid in capital - 11,694
Net cash acquired in (paid for) corporate acquisition - 1,984,480
Distribution from D-Certificate - 45,062
Decrease (increase) in restricted cash (93,641) -
Deposits - (2,934)
------------ ------------
Net cash provided by (used in) investing activities (16,823) 1,801,663
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 238,472 337,877
Principal payments on notes payable (2,168,239) (36,359)
Issuance of common stock - -
------------ ------------
Net cash provided by (used in) financing activities (1,929,767) 301,518
------------ ------------
NET INCREASE (DECREASE) IN CASH DURING THE PERIOD 1,277,202 2,034,733
EFFECT OF EXCHANGE RATE ON CASH (42,163) -
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,052,065 17,332
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,287,104 $ 2,052,065
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 60,635 $ 13,607
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Corporate acquisition:
Accounts receivable $ - $ 2,369,382
Prepaid expenses 287,369
Property and equipment - net 38,362
Investments 2,554,485
Loan servicing rights capitalized 6,482,041
Other Assets 917,836
Accounts payable and accrued expenses (1,361,992)
Other long term debt - (1,271,963)
------------ ------------
Net assets acquired net of cash acquired 10,015,520
Amount financed
Common stock - net of treasury shares (12,000,000)
------------ ------------
Net cash (acquired in) paid for acquisition $ - $ (1,984,480)
============ ============
See notes to consolidated financial statements.
F-5
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements included the accounts
of Crown NorthCorp and its majority-owned subsidiaries (collectively, the
Company). Investments in majority-owned affiliates where the Company does
not have a majority voting interest and non-majority owned affiliates are
accounted for on the equity method. All significant intercompany balances
and transactions have been eliminated.
Business Description
The Company is a financial services company providing comprehensive asset
management and risk management services to owners and operators of
commercial real estate interests. Assets managed are located throughout
the United States and Europe and include commercial and residential real
estate, performing and non-performing real estate and commercial loans,
partnership investments and other miscellaneous assets.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect
from outstanding balances. Management provides for probable uncollectible
amounts through a charge to earnings and a credit to a reserve for
uncollectible accounts, based upon its assessment of the current status of
individual accounts. Balances that are still outstanding after management
has used reasonable collection efforts are written off through a charge to
the reserve account. Changes in the reserve have not been material to the
financial statements.
Property and Equipment
Property and equipment are recorded at cost. Repairs, maintenance and
minor replacements are expensed as incurred. Depreciation is computed
using the straight-line method over estimated useful lives of three to
five years. Upon retirement, sale or disposition of property and
equipment, the cost and accumulated depreciation are eliminated from the
accounts, and a gain or loss is included in operations.
F-6
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
Capitalized Software Costs
The Company follows the accounting guidance as specified in Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". The Company capitalizes
significant costs in the acquisition or development of software for
internal use, including the costs of the software, materials, consultants,
interest and payroll and payroll-related costs for employees incurred in
developing internal-use computer software once final selection of the
software is made. Costs incurred prior to the final selection of software
and costs not qualifying for capitalization are charged to expense.
Long-Lived Assets
The Company evaluates long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
discounted future cash flows will not be sufficient to recover an asset's
carrying amount, the asset is written down to its fair value. The discount
rate reflects the risk that is specific to that asset. Long-lived assets
to be disposed of other than by sale are classified as held and used until
they are disposed of. Long-lived assets to be disposed by sale are
classified as held for sale and are reported at the lower of carrying
amount or fair value less cost to sell, and depreciation is ceased.
Loan Servicing Rights
The Company records an asset upon the sale of a loan with servicing
retained and allocates the cost of the loan to the servicing rights and to
the loans based on their relative fair values. Fair values are estimated
using discounted cash flows based on a current market interest rate. The
resulting gain on sale of loans is included in mortgage origination. The
Company also purchases mortgage servicing rights and records such rights
at the cost to purchase.
The cost of loan servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of loan
servicing rights is assessed based on the fair value of those rights. The
carrying amount of loan servicing rights approximates the fair value.
Investments in Partnerships and Joint Ventures
Certain of the Company's general partner and joint venture investments
(ranging from 1% to 50%) are carried at cost, adjusted for the Company's
proportionate share of undistributed earnings and losses because the
Company exercises significant influence over their operating and financial
activities.
F-7
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
Other Investments
In 2003, two wholly owned subsidiaries of the Company, CRS Bond Portfolio,
L.P. ("CRS I") and CRS Bond Portfolio II, L.P. ("CRS II"), had as their
sole asset a residual interest in a securitization of tax-exempt bonds
collateralized by multifamily projects. During 2004, all remaining
projects were sold, thus disposing of the residual interest. The sale of
the collateral generated approximately $6.1 million in interest income.
The remainder of Other Investments in 2003, as well as 2004, were mortgage
contracts held by one of the Company's European subsidiaries.
Reserve for Loan Losses
The Company established an allowance for loan losses to provide for
estimated losses in acquired mortgage portfolios serviced. The Company
sold the mortgage portfolio in December 1999 (See Note 4). At the time, a
reserve balance was established to offset losses incurred or sustained by
the purchaser by reason of or associated with the mortgage loans. There
were no charges against the reserve in 2004 or 2003.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in the
tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
Loan Servicing Fees
Loan servicing fees are recognized as earned under the terms of the
related servicing contract.
Management Fees
Management fees are recorded as services required under the contracts are
performed, and are based on a percentage applied to the aggregate value of
assets managed, as assigned in the contracts, or on original base monthly
amounts, as defined in the contracts. Upon each disposition, withdrawal or
addition of an asset or asset group, the management fee is adjusted to
reflect the change in aggregate value of the assets. Management fees are
calculated on a daily basis as set forth in the contracts.
F-8
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
Disposition Fees
Disposition and bonus fees, less retainages, are recorded as revenue when
the disposition of an asset has been consummated and the gross proceeds
from the disposition have been received by the asset owner. Disposition
fees are generally based on a percentage of the proceeds of an asset
disposition, as defined by the contracts, or a fixed amount per
disposition.
Incentive Fees
Certain contracts provide for incentive fees if the Company achieves net
cash collections in excess of thresholds established in the contracts.
Upon substantial achievement of related thresholds, long-term contract
revenues are recognized on the percentage-of-completion method based on
assets realized relative to total contract assets, net of any anticipated
losses. Billings for long-term contracts are rendered periodically, as
permitted by contract terms.
Foreign Currency Translation
Results of operations for the Company's non-U.S. subsidiaries and
affiliates are translated from the designated functional currency to the
U.S. dollar using average exchange rates during the period, while assets
and liabilities are translated at the average monthly exchange rate in
effect at the reporting date. Resulting gains or losses from translating
foreign currency financial statements are reported as other comprehensive
income (loss). The effect of changes in exchanges rates between the
designated functional currency and the currency in which a transaction is
denominated are recorded as foreign currency transaction gains (losses).
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
F-9
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
Credit Risk
The Company maintains several cash accounts in the United States. The
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 2004 and 2003, the Company's uninsured cash
balances total $2,458,611 and $157,490, respectively. Management believes
that the risk is limited because the institutions are large national
institutions with strong financial positions.
The Company also maintains several cash accounts in the United Kingdom.
The balances are insured by the Financial Services Compensation Scheme
established under the Financial Services and Markets Act of 2000 up to
approximately $61,000. At December 31, 2004 and 2003, the Company's
uninsured cash balances total approximately $465,000 and $1,818,356,
respectively Management believes that the risk is limited because the
institution is a large national institution with a strong financial
position.
Recently Issued Accounting Standards
SFAS No. 149 "Amendment to Statement 133 on Derivative Instruments and
Hedging Activities" was issued by the Financial Accounting Standards Board
in April 2003. SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
SFAS No. 133. SFAS No. 149 is generally effective for contracts entered
into or modified after June 30, 2003. The adoption of SFAS No. 149 on July
1, 2003 did not have any impact on the results of operations or financial
position of the Company.
SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets" were issued by the Financial Accounting Standards Board
in July 2001. SFAS No. 141 requires that purchase method of accounting be
used for all business combinations entered into after June 30, 2001. SFAS
No. 142 changes the accounting for goodwill from an amortization method to
an impairment only approach. Thus, amortization of goodwill, including
goodwill recorded in past business combinations ceased upon SFAS No. 142,
which for Company was January 1, 2002. The adoption of this standard did
not materially impact the Company's financial position, results of
operations or cash flows.
SFAS No. 123 (revised 2004) "Share-Based Payment" (SFAS No 123R), was
issued December 2004. SFAS No 123R amends SFAS No. 123 and supersedes
Accounting Principles Board Opinion NO. 23, "Accounting for Stock Issued
to Employees," and its related implementation guidance. SFAS No. 123R
establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services.
F-10
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
Recently Issued Accounting Standards - Continued
SFAS No. 123R also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of such equity instruments. SFAS No. 123R requires a public
entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the
award. That cost is to be recognized over the period during which an
employee is required to provide services in exchange for the award. SFAS
No. 123R is effective as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. The Company does not
anticipate that the adoption of this statement will have a material effect
on the financial position or results of operations.
SFAS No. 153 "Exchanges of Nonmonetary Assets, an amendment of Accounting
Principles Board Opinion No. 29" SFAS No. 153 eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception of exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly
as a result of the exchange. SFAS No. 153 is effective for nonmonetary
asset exchanges occurring in the fiscal period beginning after June 15,
2005. The Company does not anticipate that the adoption of this statement
will have a material effect on the financial position or results of
operations.
FAS No. 150 "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued by the
Financial Accounting Standards Board in May 2003. SFAS No. 150 establishes
standards for the classification and measurement of certain freestanding
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Further, SFAS No. 150,
requires disclosures regarding the terms of those instruments and
settlement alternatives. As originally issued, the guidance in SFAS No.
150, was generally effective for financial instruments entered into or
modified after May 31, 2003, and otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. The adoption of
SFAS No. 150 on July 1, 2003 did not have any impact on the Company's
results of operation or financial position.
FIN No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees - an interpretation of FASB Statements No. 5, 57 and 107 and
rescission of FASB Interpretation No. 34" was issued by the Financial
Accounting Standards Board in November 2002. FIN 45 requires a guarantor
to provide more detailed interim and annual financial statement
disclosures about obligations under certain guarantees it has issued. It
also requires a guarantor to recognize, at the inception of new guarantees
or modified after December 31,
F-11
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
Recently Issued Accounting Standards - Continued
2002, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The adoption of FIN 45 as of January 1, 2003 did
not have a material impact on the financial position or results of
operations of the Company.
In December 2003, the FASB issued a revision to Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51", ("FIN 46R"), which was issued in January 2003. FIN 46R clarifies the
application of ARB No. 51, "Consolidated Financial Statements," to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support. FIN 46R requires the consolidation of these entities,
known as variable interest entities ("VIEs"), by the primary beneficiary
of the entity. The primary beneficiary is the entity, if any, that will
absorb a majority of the entity's expected losses, receive a majority of
the entity's expected residual returns, or both. Among other changes, the
revisions of FIN 46R (a) clarified some requirements of the original FIN
46, which had been issued in January 2003, (b) eased some implementation
problems, and (c) added new scope exceptions. FIN 46R deferred the
effective date of the Interpretation for public companies, to the end of
the first reporting period after March 15, 2004, except that all public
companies must at minimum apply the provisions of the Interpretation to
entities that were previously considered "special-purpose entities" under
the FASB literature prior to the issuance of FIN 46R by the end of the
first reporting period ending after December 15, 2003. During the year
ended December 31, 2003, adoption of FIN 46R did not have a material
impact on the Company's financial statements. (See Note 13).
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with current year presentation.
Acquisitions
Effective December 31, 2003, the Company acquired 100% of the issued and
outstanding stock of Royal Investments Corp ("Royal") for 12,000,000
shares of common stock of the Company. Through this acquisition the
Company acquired Crown NorthCorp LTD, ("CNL") and Crown Mortgage
Management, ("CMM"). The acquisition was accounted for using the purchase
method of accounting, and accordingly, the results of operations are
reflected in the
F-12
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
financial statements beginning January 1, 2004. Royal was a Delaware
corporation whose sole shareholder was the Company's chairman and chief
executive officer.
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisition had occurred at the beginning of 2003.
2003
------------
Revenue $ 11,875,202
Expenses 8,885,669
------------
Net income $ 2,989,533
============
Earnings per share $ 0.21
============
The pro forma consolidated results do not purport to be indicative of
results that would have occurred had the transactions been in effect for
the periods presented, nor do they purport to be indicative of the results
that will be obtained in the future.
NOTE 2 - PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE COSTS
Property and equipment consists of the following at December 31:
2004 2003
----------- -----------
Furniture and equipment $ 1,365,133 $ 1,142,689
Less accumulated depreciation (1,081,897) (1,030,942)
----------- -----------
Property and equipment - net $ 283,236 $ 111,747
=========== ===========
F-13
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 2 - PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE COSTS - Continued
During 2003, the Company acquired $38,362 of furniture and equipment due
to the merger with Royal. The book value assigned to the furniture and
equipment approximated the net carrying value of the fixed assets at the
date of the acquisition. Accordingly, these costs have been included in
Property and Equipment - net on the balance sheet.
Capitalized software amortization expense was $388,095 and $165,033 for
2004 and 2003, respectively. Capitalized software costs of $883,560 were
acquired in the merger of Royal. The book value assigned to the
capitalized software costs approximated the net carrying value of the
capitalized software cots at the date of the acquisition. Accordingly,
these costs have been included in Capitalized Software Costs on the
balance sheet.
NOTE 3 - INVESTMENTS IN AFFILIATES AND JOINT VENTURES
The Company has investments in affiliates that are accounted for using the
equity method of accounting. The investments were acquired in the merger
with Royal, effective December 31, 2003.
TITRISATION BELGE-BELGISCHE EFFECTISERING SA/NV
In October 2003, CMM acquired 75% of the shares in Titrisation
Belge-Belgische Effectisering SA/NV "TBE" for 110% of the net asset value
at September 30, 2003, approximately $532,300. Fortis Bank owned the other
25% share. CMM and Fortis agreed to jointly own TBE with a view of
developing its master servicing business. Within a few days of the
original transaction, CMM sold 25% of its share to Fortis for $177,434
thereby creating a 50/50 joint venture.
Summarized condensed financial information of TBE, a 50% owned corporate
joint venture accounted for by the equity method follows:
2004 2003
Balance sheet at December 31,
Assets:
Current assets $767,820 $845,165
Fixed Assets $119,010 -
Liabilities:
Current liabilities $127,828 $170,757
Income statement
Revenue $638,566 $674,565
Expense 607,602 524,340
-------- --------
Net income before tax 30,964 25,966
Tax 10,543 10,750
-------- --------
Net income $ 20,421 $ 21,079
F-14
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 4 - DISCOUNTED OPERATIONS AND DISPOSITIONS
In December 1999, the Company sold its portfolio of loans serviced under
the Fannie Mae Delegated Underwriting and Servicing Program. Pursuant to
the sale agreement, $500,000 was retained as a cash reserve, to offset
losses incurred or sustained by the purchaser by reason of or associated
with the mortgage loans. These funds are to be held in an escrow account
until all of the mortgage loans have been paid off or refinanced by third
parties. During 2004 and 2003, the purchaser incurred no losses in the
portfolio. Cumulative charges to date Against the reserve are $264,021.
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following at December 31:
2004 2003
--------- -----------
U.S. Promissory Note to majority shareholder, interest at 6% payable
quarterly, principal and accrued interest payable December 31, 2004.
Paid in full July 2004. $ - $ 500,000
U.K. Promissory Note to majority shareholder, interest at 6% principal
and accrued interest payable December 31, 2004, if funds available.
Paid in full November 2004. - 1,271,964
U.S. Promissory Note, 6% interest, payable in monthly installments of
$1,514 including interest until April 1, 2005. Paid in full July 2004. - 23,217
U.S. Promissory Note, 6% interest, payable in quarterly installments of
$5,000 including interest until September 30, 2003. Paid in full April 2004. - 5,000
--------- -----------
1,800,181
Less: current maturities - (1,294,202)
--------- -----------
$ - $ 505,979
========= ===========
F-15
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 6 - LEASES
The Company, in its operations, leases office facilities located in
Columbus, Ohio; Austin, Texas; and London, Ipswich and Farnham, England.
All leases in effect at December 31, 2004, which expire on various dates
through February 2010, have been classified as operating leases. Rent
expense for the years ending December 31, 2004 and 2003 was approximately
$ 224,000 and $57,000 respectively.
Minimum future rentals under these non-cancelable lease agreements are as
follows:
Commitments Sublease Net
----------- ---------- ---------
2005 $ 217,553 $ (65,188) $ 152,365
2006 216,965 (65,188) 151,777
2007 103,905 (16,297) 87,608
2008 71,360 - 71,360
Thereafter 71,360 - 71,360
--------- --------- ---------
$ 681,143 $(146,673) $ 533,470
========= ========= =========
The Company has entered into agreements to sublease office spaces that are
included above. These sublease agreements were acquired as part of the
merger with Royal and accordingly no rental income was recognized in the
income statements during 2003.
NOTE 7 - RELATED PARTY TRANSACTIONS
MERGER TRANSACTION WITH ROYAL AND RELATED TRANSACTIONS
Effective December 31, 2003, the Company acquired all of the issued and
outstanding stock of Royal, of which Mr. Roark was the sole shareholder.
Mr. Roark recused himself from all deliberations and votes of the
Company's board of directors on the merger transaction. Royal operated
through subsidiaries and affiliates, including but not limited to CNL and
CMM, providing loan servicing and third-party asset management services
for real estate-related assets in Europe. Through the merger transaction,
the Company acquired these European operations.
In conjunction with the merger transaction, the Company's board of
directors has also authorized a 1:100 reverse and 10:1 forward stock
split effective December 31, 2003 to reduce the number of shareholders
with extremely small holdings.
In exchange for all of the issued and outstanding stock of Royal, Mr.
Roark received 12,000,000 shares of the Company's common stock. The
principle followed in determining the
F-16
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 7 - RELATED PARTY TRANSACTIONS - Continued
amount of consideration was arm's length negotiation. The approximately
1,125,803 shares of the Company's common stock held by Royal became
treasury stock of the Company.
Prior to the merger transaction, Royal distributed to Mr. Roark, as its
sole shareholder, all of Royal's assets other than the Company's common
stock held by Royal and Royal's ownership of all of the stock of CNL,
which subsidiary conducts the European operations acquired by the company.
Simultaneously, Mr. Roark assumed all of Royal's liabilities and
indemnified the Company from any losses arising from Royal's operations.
At the time of the merger transaction, the Company owed Royal $500,000
plus interest under an unsecured promissory note, representing operating
funds Royal has advanced to the Company from time to time. Royal
distributed this promissory note to Mr. Roark as described above so that
the Company owed this indebtedness to Mr. Roark personally. The
indebtedness was repaid during 2004.
Also at the time of the merger transaction, CMM owed Royal $1,271,964.
Royal distributed this promissory note to Mr. Roark so that CMM now owed
this indebtedness to Mr. Roark personally. (See Note 5). This indebtedness
was also repaid during 2004.
Royal owned one "B" preference share in Crown Properties Holding AB
("CPH"), entitling it to approximately 27% of the profit distribution from
CPH. This preference share was another one of the assets distributed from
Royal to Mr. Roark at the time of the merger. CMM has an asset management
contract to manage the assets held by CPH. The incentive fee attainable
under this contract may not exceed profits distributed to holders of
preference shares, including Mr. Roark. (See Note 13).
Mr. Roark and the Company, following arm's length negotiations, entered
into an employment contract calling for Mr. Roark to continue to serve as
Crown's chairman and chief executive officer. The agreement, which was for
a term expiring December 31, 2004, provides for a base salary of $100,000
plus incentive compensation.
PREFERRED STOCK
The company issued the following series of convertible preferred stock to
affiliates of Mr. Roark: one share of Series CC Convertible Preferred
Stock in September 2000 in exchange for $500,000 cash; one share of Series
DD Convertible Preferred Stock in May 2001 in exchange for $200,000 cash;
one share of Series FF Convertible Preferred Stock in September 2001 in
exchange for $335,803.70 cash; one share of Series GG Convertible
Preferred Stock in September 2001 in exchange for $140,000; pursuant to an
agreement effective September 20, 2001, a total of 15 shares of Series HH
Convertible Preferred Stock in exchange for $150,000 cash; and, pursuant
to an agreement effective March 27, 2002, a total of 12 shares of Series
II Convertible Preferred Stock in exchange for $120,000 cash.
F-17
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 7 - RELATED PARTY TRANSACTIONS - Continued
(See Note 8). Each of these issuances has been converted to common stock
in accordance with the terms of the respective issuances.
OTHER TRANSACTIONS AND RELATIONSHIPS
In conjunction with his election as Chairman of the Company's Board of
Directors effective January 1, 2005, the company and Mr. Lennhammer have
entered into a retainer agreement calling for him to receive quarterly
compensation of 2,500 Euros (approximately $3,200) during 2005 for his
service as Chairman. Effective September 1, 2004, the company entered into
an advisory services agreement with REEDA Management AB, of which Mr.
Lennhammer is Managing Director, for a term expiring December 31, 2005.
Under this agreement REEDA received a monthly fee of 17,500 Euros through
December 31, 2004 and will receive a quarterly fee of 50,000 Euros
(approximately $65,000) through the expiration of the agreement.
In 2003, the Company's management asked Grace Jenkins, a member of the
Company's board of directors, to perform certain tasks, including
overseeing of an upgrade of the company's computer system and assisting in
dealings with Midland Loan Services. During 2004 and 2003, the Company
paid Ms. Jenkins $120,000 and $70,000, respectively.
Since January 2001, the Company has performed asset management activities
for parties holding ownership interests in several multifamily projects
that receive subsidies from the U.S. Department of Housing and Urban
Development. Mr. Roark, or an affiliate of his, has partnership interests
in substantially all of the projects for which Crown presently performs
services. The rates and fees the company charges for its services are in
accordance with HUD's guidelines and regulations where applicable.
Unregulated rates and fees are at market levels.
The Company conducts some of its operations through joint ventures and
partnerships and provides certain services to those entities.
NOTE 8 - SHAREHOLDERS' EQUITY
At December 31, 2004 and 2003, the Company has 30,000,000 authorized
shares of its $.01 par value common stock ("Common Stock") and 1,000,000
authorized share of its preferred stock.
On December 31, 2003, the holders of all seven outstanding issuances of
the Company's preferred stock (Series CC, DD, EE, FF, GG, HH and II
Convertible Preferred Stock) converted those issuances to Common Stock.
The company has no preferred stock outstanding.
F-18
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 8 - SHAREHOLDERS' EQUITY-Continued
During 2000 the Company entered into an employee termination agreement
with various executive employees. As a result of that agreement the
Company issued warrants entitling the holders to purchase, after
accounting for the splits of the Company's Common Stock effective December
31, 2003, up to 49,000 shares of common stock at $.70 per share. All of
these warrants are exercisable through 2010 and are anti-dilutive.
A stock option plan for the outside directors of the Company was approved
by the Company's shareholders in 1995. Under the plan, each outside
director may be granted options for 10,000 shares of the Company's common
stock at an option price equal to the common stock's market value on the
date of the grant. The options vest over a four-year period if the Company
achieves certain stock price thresholds. No options have been granted as
of December 31, 2004.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its stock options. Application
of this accounting policy would have had a negligible effect on the
accompanying financial statements for 2004 and 2003.
NOTE 9 - BENEFIT PLANS
The Company sponsors a defined contribution retirement plan for certain of
its U.S. employees who had attained the age of 21 and had provided six
months of service. The Company matches 25% of the first 4% of the
employees' contributions and employer contributions were $1,490 and $2,425
in 2004 and 2003, respectively.
The Company subsidiary in the United Kingdom sponsors a defined
contribution retirement plan for its employees. The Company will match the
employee's contributions to the plan up to a maximum of 5% per year. The
plan is available to all full time employees. The Company contributed
$78,648 and $53,253 during 2004 and 2003, respectively.
NOTE 10 - INCOME TAXES
For the years ended December 31, 2004 and 2003, the components of income
tax expense consisted of the following:
2004 2003
---- ----
Current $ - $ -
Deferred $ - $ -
The income tax (benefit) expense differs from the amount computed by
applying the statutory federal income tax rate of 34% to pretax earnings
(loss) from continuing operations as follows:
F-19
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 10 - INCOME TAXES-Continued
2004 2003
--------- ----------
Income tax benefit at statutory rate $ 331,628 $ (72,149)
Amortization of loan servicing rights 84,447 (9,757)
Amortization of software 0 (8,891)
Foreign losses 808,836 0
Tax-exempt income (2,046,834) (74,955)
Other, net 205,431 48
Comprehensive income 0 (315)
Increase in valuation allowance 616,492 166,021
----------- ---------
Total income tax benefit $ - $ -
=========== =========
At December 31, 2003 and 2002, the Company had recorded a net deferred tax asset
as follows:
2004 2003
----------- -----------
Assets
Operating loss carry-forward $ 3,143,090 $ 2,800,398
Valuation allowance (3,361,394) (2,739,042)
----------- -----------
Total assets 51,696 61,534
----------- -----------
Liabilities:
Deferred loan servicing (35,706) (55,405)
Software amortization (15,990) (5,949)
----------- -----------
Total liabilities (51,696) (61,354)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
NOTE 11 - CONTINGENCIES
The Company has certain contingent liabilities resulting from claims
incident to the ordinary course of business. Management believes that the
probable resolution of such contingencies will not materially affect the
consolidated financial statements of the Company.
The Company has certain contingent liabilities resulting from contractual
requirements in the United Kingdom in regards to employment contracts
acquired in the merger with Royal. Upon termination (but only in the event
of redundancy, as defined under the employment laws of the United
Kingdom), 11 employees may be entitled to receive severances based upon a
formula taking into account years and weekly pay. The total payout is
capped at a maximum two years of pay. At December 31, 2004, this liability
is approximately $647,000.
F-20
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 12 - MORTGAGE SERVICING FOR OTHERS
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage
loans serviced for others were approximately $5.0 billion and $3.9 billion
at December 31, 2004 and 2003, respectively. As of December 31, 2004 the
Company was also the standby servicer for loans with an aggregate unpaid
principal balance of $6.4 billion.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, excluded from the accompanying consolidated balance sheet, were
approximately $2 million and $2 million at December 31, 2004 and 2003,
respectively.
Mortgage servicing rights of $6.5 million and $7.0 million were
capitalized as of December 31, 2004 and 2003, respectively. Mortgage
servicing rights are recorded at fair value. Such value is determined by
the discounted cash flow method using a 22% discount rate over the average
remaining contractual life of the mortgages adjusted for estimated
delinquencies and estimated prepayments.
The servicing assets are grouped by servicing type when evaluating such
assets for impairment. During 2004, adjustments to the value of the
servicing rights totaling $83,404 were charged to expense due to deemed
impairment.
One of the company's European subsidiaries, Crown Mortgage Management
Inc."CMM" has been notified by Morgan Stanley Mortgage Servicing ("MSMS")
that it is terminating the sub-servicing agreement it has with CMM
effective March 31, 2005. This agreement currently represents
approximately 30% of CMM's commercial servicing portfolio. (See Note 15)
NOTE 13 - VARIABLE INTEREST ENTITIES
As of December 31, 2003, the Company has relationships with two variable
interest entities where the Company is deemed not to be the primary
beneficiary. During 2004, the Company transferred its interest in one of
these entities ,Rooftop Mortgage Limited, and as a result, the Company, as
of December 31, 2004, has a relationship with only one variable interest
entity. In accordance with FIN 46, the remaining entity is not included in
the consolidated financial statements.
CROWN EUROPEAN HOLDINGS LIMITED
In May 2003, Crown Properties Holding AB ("CPH"), Crown Fastighter AB, HVB
Real Estate Investment Banking Limited, Bayerische Hypo-und Vereinsbank
Aktiengesellschaft, Real Estate Scandinavia, Stockholm Branch, and certain
other parties entered into a $79,000,000 facilities agreement.
F-21
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 13 - VARIABLE INTEREST ENTITIES - Continued
Royal and CNL used the above funds to purchase the entire issued share
capital of Axfood Fastigheter AB from Axfood AB, a Swedish company that
operates supermarket properties throughout Sweden. CNL contributed an
additional $5,834,000 by way of $3,500,000 in equity in CPH and a
subordinated loan of $2,300,000, originally advanced by Royal to CNL.
In September 2003, CNL refinanced the majority of their investment in CPH
by using $4,200,000 advanced from Kenmore Scandinavian, a Kenmore
Properties Group company (a third party Scottish based property investment
company). Crown European Holdings Limited ("CEH") used the funds to
purchase the entire issued share capital of CPH and to acquire the
subordinated loan by CNL to CPH. Kenmore's loan was secured by a debenture
and they received 3 "A" preference shares carrying rights to the profit
distribution from CPH in the proportion of their loans, approximately 73%.
Royal received one "B" preference share with carrying rights to the profit
distribution from CPH, approximately 27%. This share was transferred to
Ronald E. Roark, the Company's Chairman, as part of the merger of Royal.
In addition, CNL pledged its ordinary stock in CEH as additional security.
Thus, Kenmore has the voting control of the ordinary share of CEH via the
security agreement.
The Crown group can earn income under an Asset Manager agreement in four
ways:
1. Annual management fee based as a percentage of the asset value
2. Approximately $13,600 per month to cover management costs
3. Subject to board approval, 1% of the gross sales price of any
assets sold
4. Promote fee as a percentage of net distributions if Return on
Capital Employeed (ROCE) exceeds 20% per annum. However, the
promote fee will not exceed the amounts paid out in
distributions to Kenmore and Mr. Roark.
The Asset Manager Agreement is deemed to be a variable interest. The Crown
group has only its equity investment at risk in the CEH venture. The
equity investment is one Pound Sterling. CMM is not deemed to be the
primary beneficiary because of the significant rights and risks assumed by
Kenmore pursuant to the transaction documents. Due to Kenmore's voting
rights via the security agreement, Kenmore can terminate the Asset Manager
agreement at any time. In addition, Kenmore must approve the operating
budget, any capital expenditure, any disposals of assets, any borrowings,
and any factoring or discounting of debt. Also, there is no financial
recourse to CNL. And Kenmore, through the 73% preferred share dividend
would absorb a majority of CEH's expected losses/residual returns.
F-22
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 13 - VARIABLE INTEREST ENTITIES - Continued
ROOFTOP MORTGAGES LIMITED
In September 2003, Crown Asset Management Limited ("CAM") formed a 100%
owned corporation known as Rooftop Mortgages Limited ("Rooftop"). Rooftop
had 1,000 ordinary shares authorized at one Pound Sterling per share. At
December 31, 2003 there was 1 share issued and outstanding.
Rooftop operated as a sub-prime residential lender in England, Wales,
Scotland and Northern Ireland and as such was a party to agreements for
the origination and sale of loans. Pursuant to the terms of a Mortgage
Sale Agreement and related transaction documents Rooftop agreed to forgo
certain rights and transfer certain risks normally belonging to a
stockholder to its funder, such that it would not be appropriate to fully
consolidate Rooftop into the Crown group. CAM was not deemed to be the
primary beneficiary because of the significant rights and risks
transferred pursuant to the transaction documents.
In September 2004, CAM transferred its ownership in Rooftop to Rooftop
Holdings LTD in exchange for 20 Ordinary Shares of Rooftop Holdings LTD.
Each share is valued a 1 Pound Sterling. CAM's ownership interest in
Rooftop holdings is effectively 20%. CAM uses the equity method to account
for this investment.
NOTE 14 - FAIR VALUE
The Company is required to disclose the estimated fair value of its
financial instruments in accordance with SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." These disclosures do not attempt to
estimate or represent the Company's fair value as a whole. The disclosure
excludes assets and liabilities that are not financial instruments. The
fair value amounts disclosed represent point-in-time estimates that may
change in subsequent reporting periods due to market conditions and other
factors. Estimated fair value amounts in theory represent the amounts for
which financial instruments could be exchanged in transactions between
willing parties.
F-23
CROWN NORTHCORP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 14 - FAIR VALUE-Continued
Estimated Fair values:
2004 2003
-------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ------------- -----------
Financial assets:
Cash and other short term
financial instruments $ 3,638,235 $ 3,638,235 $ 2,309,554 $ 2,309,544
Investments - - 693,899 693,899
Loans 2,728,187 2,728,187 3,650,851 3,650,851
Allowance for losses (1,790,509) (1,790,509) (2,405,160) (2,405,160)
Servicing Rights 6,548,653 6,548,653 7,017,674 7,017,674
Financial liabilities:
Short term financial instruments 1,294,202 1,294,202
Long term debt 505,977 505,977
NOTE 15 - SUBSEQUENT EVENTS
Morgan Stanley Mortgage Servicing ("MSMS") has advised CMM that it is
terminating the subservicing agreement it has with CMM effective March 31, 2005.
This agreement currently represents approximately 30% of CMM's commercial
servicing portfolio. The remaining balances in this portfolio are approximately
$747 million. MSMS advises that the termination is without cause and represents
MSMS' business decision to perform this servicing itself.
The company is due fees under the MSMS subservicing contract through September
2005. MSMS and Crown are currently in negotiations on the financial settlement
Crown will receive by reason of the contract termination. The amount of this
settlement cannot be predicted until these negotiations conclude.
Crown, in accordance with SFAS No.5 "Accounting for Contingencies", as of March
31, 2005 will make a charge to earnings of approximately $1.1 million,
representing a downward adjustment in the value of the company's servicing
rights as a result of this contract termination.
F-24
ITEM 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. - CONTROLS AND PROCEDURES
Crown's principal executive and financial officers have evaluated the company's
disclosure controls and procedures in place on December 31, 2004 and have
concluded that they are effective. There have been no significant changes in
Crown's internal controls or in other factors since that date that could
significantly affect these controls.
ITEM 8B. - OTHER INFORMATION
Morgan Stanley Mortgage Servicing ("MSMS") has advised CMM that it is
terminating the subservicing agreement it has with CMM effective March 31, 2005.
This agreement currently represents approximately 30% of CMM's commercial
servicing portfolio and approximately 7% of the overall servicing portfolio.
MSMS advises that the termination is without cause and represents MSMS' business
decision to perform this servicing itself.
The company is due fees under the MSMS subservicing contract through September
2005. MSMS and Crown are currently in negotiations on the financial settlement
Crown will receive by reason of the contract termination. The amount of this
settlement cannot be predicted until these negotiations conclude.
Crown, as of March 31, 2005, will make a charge to earnings of approximately
$1.1 million, representing a downward adjustment in the value of the company's
servicing rights as a result of this contract termination. See "Note 15 -
Subsequent Events - to the Consolidated Financial Statements."
PART III
ITEM 9. - DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The company currently has seven directors. All directors of the company hold
office until the next annual meeting of the stockholders and until their
successors have been duly elected and qualified. All officers of Crown do not
serve a term of years but serve at the pleasure of the Board of Directors. The
chairman serves under a one-year retainer agreement. The company and the vice
chairman and chief executive officer have an agreement to pay him base plus
incentive compensation in 2005.
The directors and executive officers of the company as of March 25, 2005 are as
follows:
12
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
Stefan Lennhammer 42 Chairman
Ronald E. Roark 54 Vice Chairman, Chief Executive Officer and Director
Gordon V. Smith 72 Director
David K. Conrad 49 Director
Grace Jenkins 53 Director
John S. Koczela 53 Director
Peter Walker 41 Director and Managing Director, United Kingdom
Clarence Dixon 44 Managing Director, Continental Europe
David Scrivener 43 Assistant Secretary and Controller
Rick Lewis 51 Vice President, Treasurer and Chief Financial Officer of Crown
Stephen W. Brown 54 Secretary and Corporate Counsel
Set forth below are the principal occupations and affiliations during at least
the last five years of the directors and executive officers. All information is
as of March 25, 2005.
STEFAN LENNHAMMER became Chairman of the Board of Directors of the company
January 1, 2005. Since April 2004, he has served as Managing Director of REEDA
Management AB. From 1997 to 2004, he served as Group Chief Executive Officer of
Catella Property AB and as a director of that firm.
RONALD E. ROARK has served as Vice Chairman and Chief Executive Officer of the
company since January 1, 2005. He served as Chairman from August 4, 1994 through
December 31, 2004 and has served as Chief Executive Officer since September 1,
2000. He served as President of Royal Investments Corp. prior to its merger into
Crown and as Managing Member of Tucker Holding Company, Ltd. from 1995 to
December 31, 2003. Since 1979, he has been President of Brookville Associates,
Inc.
GORDON V. SMITH has served as a director of Crown since October 1, 1996. He has
been Chairman of the Board of Miller and Smith Holding, Inc. since 1964. From
1996 to 2000, he served as Chairman of Bank Plus. He has been a director of OMB
Bank of the Philippines since 2001.
DAVID K. CONRAD has served as a director of Crown since January 5, 2000. Mr.
Conrad is a partner in the law firm of Bricker & Eckler LLP and has been
affiliated with that firm since 1980. The firm provides some legal services to
the company.
GRACE JENKINS has served as a director of Crown since October 30, 2000. From
February 2001 to April 2003, she served as IT Process Group Leader and Senior IT
Leader of American Electric Power. From March 6, 1997 until September 1, 2000,
she served as Executive Vice President of Crown. She served as a Vice President
of the company from September 13, 1994 to that date.
13
JOHN S. KOCZELA has served as a director of Crown since January 1, 2005 and as a
director of its European subsidiaries since 2000. From 1996 through 2001, he
served as Executive Vice President and Managing Director of European operations
for Crown. He has also served as President of Falcon Management Group, Inc.
since 1989.
PETER WALKER has served as a director of Crown since January 1, 2005. He became
Finance Director of CNL in March 1999 and Managing Director, United Kingdom in
November 2004. Prior to his service with the company, he served in the Corporate
Recovery Department of Ernst & Young.
CLARENCE DIXON has served as Managing Director, Continental Europe, since August
2004. Prior to joining Crown, he served as Executive Vice-President of Aareal
Bank.
DAVID SCRIVENER has managed corporate and client reporting functions for CNL for
approximately twenty years and, since September 1999, has served as finance
manager. He became Crown's Assistant Secretary and Controller in November 2004.
RICK LEWIS has served as the company's Treasurer and Chief Financial Officer
since September 1, 2000 and as Vice President since February 22, 2000. Since
1994, he has administered the company's U.S. loan servicing operations.
STEPHEN W. BROWN has served as Secretary of Crown since September 13, 1994 and
as Corporate Counsel since August 1996. Since March 1992, he has served Crown in
various asset management capacities and as a legal counsel.
Audit Committee Financial Expert
The company's Board of Directors has determined that Mr. Smith, an independent
director, serves as the Audit Committee financial expert.
Code of Ethics
Crown has adopted a code of ethics applicable to its principal executive,
financial and accounting officers. A copy of the code is available without
charge, upon request, by writing to Secretary, Crown NorthCorp, Inc., 1251
Dublin Road, Columbus, Ohio 43215.
14
ITEM 10. - EXECUTIVE COMPENSATION
The following table sets forth information for the year ended December 31, 2004
with respect to Crown's Chief Executive Officer and the next four most highly
compensated executive officers other than the Chief Executive Officer.
YEAR ENDED ALL OTHER
NAME DECEMBER 31 SALARY BONUS COMPENSATION
---- ----------- -------- -------- ------------
Ronald E. Roark, 2004 $100,000 $ 0 $ 0
Vice Chairman and 2003 $ 0 $ 0 $ 10,000
CEO (1) 2002 $ 0 $ 0 $ 10,000
Peter Walker, Finance 2004 $149,281 $ 40,219 $ 0
Managing Director, 2003 $125,867 $ 49,039 $ 0
United Kingdom 2002 $114,002 $ 75,125 $ 0
Rick Lewis, Vice 2004 $ 85,500 $ 25,000 $ 0
President, Treasurer and 2003 $ 85,500 $ 0 $ 0
Chief Financial Officer 2002 $ 85,500 $ 0 $ 0
Stephen W. Brown, 2004 $ 80,000 $ 25,000 $ 0
Secretary and Corporate 2003 $ 80,000 $ 0 $ 0
Counsel 2002 $ 80,000 $ 0 $ 0
David Scrivener, 2004 $ 74,002 $ 13,406 $ 0
Assistant Secretary and 2003 $ 83,366 $ 20,433 $ 0
Controller 2002 $ 68,364 $ 30,050 $ 0
(1) Mr. Roark served as Chairman of the company from August 4, 1994 through
December 31, 2004 and as Vice Chairman since January 1, 2005. He as served
as Chief Executive Officer from September 13, 1994 through March 28, 2000
and again since September 1, 2000. The company pays family medical
coverage premiums and disability insurance premiums on his behalf. In
conjunction with the Royal merger transaction, Mr. Roark entered into a
one-year employment agreement with the company that provided for an annual
salary in 2004 of $100,000 plus incentive compensation based on Crown's
earnings, with total compensation not to exceed $1 million. Mr. Roark
elected not to receive incentive compensation in 2004. During 2005, Mr.
Roark will also receive base compensation of $100,000 with the opportunity
for incentive compensation based on Crown's earnings, with total
compensation not to exceed $1 million.
15
Each non-management director is paid an annual retainer of $12,000, payable
quarterly, $500 for each meeting of the Board of Directors and $500 for each
committee meeting attended except the Audit Committee, where the fee is $1,000
per meeting, plus expenses. The company makes retainer and attendance payments
to directors quarterly. In 2004, compensation was paid in stock of the
company. Beginning January 1,2005, compensation is paid half in cash and half in
stock of the company, with the stock issued at the higher of book value or
market price.
ITEM 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth security ownership information regarding the
common stock as of March 25, 2005 by: (i) each person known by the company to
own beneficially more than 5% of the shares of the common stock; (ii) each
director of the company; (iii) each of the executive officers of the company
named in Item 10 above and (iv) all directors and executive officers of the
company as a group. Except as otherwise noted below, each of the shareholders
identified in the table has sole voting and investment power over the shares
beneficially owned by each such shareholder. Also, unless otherwise indicated,
the address of each beneficial owner is in care of the company, 1251 Dublin
Road, Columbus, Ohio 43215.
NUMBER OF SHARES APPROXIMATE
NAME OF COMMON STOCK PERCENT OF CLASS
--------------------- --------------- ----------------
Stefan Lennhammer (1) 0 n/a
Ronald E. Roark 10,931,157 77.1%
Gordon V. Smith(2) 430,606 3.0%
Grace Jenkins(3) 84,000 (7)
David K. Conrad (4) 69,700 (7)
Peter Walker (5) 350,000 2.5%
John S. Koczela 0 n/a
David Scrivener (5) 0 n/a
Rick Lewis 70,000 (7)
Stephen W. Brown (6) 78,500 (7)
All directors and executive officers as a group 12,013,963 84.8%
(10 persons)
(1) The mailing address for Mr. Lennhammer is c/o REEDA Management AB,
Skeppargartan 7, SE-114 52, Stockholm, Sweden.
(2) Represents 376,739 shares held by Mr. Smith and 53,867 shares held by The
Gordon V. and Helen C. Smith Foundation. The mailing address for both Mr.
Smith and the Smith Foundation is c/o Miller and Smith Holding, Inc., 1568
Springhill Road,
16
McLean, Virginia 22102. Mr. Smith, as president of the Smith Foundation,
may be deemed the beneficial owner of such shares. Mr. Smith disclaims
such beneficial ownership.
(3) Represents ownership of 57,500 shares of common stock and warrants to
acquire 26,500 shares of common stock at $.70 per share.
(4) The mailing address for Mr. Conrad is c/o Bricker & Eckler LLP, 100 South
Third Street, Columbus, Ohio 43215. The shares are owned by Bricker &
Eckler.
(5) The mailing address for Messrs. Walker and Scrivener is c/o CNL, Crown
House, Crown Street, Ipswich, IP1, 3HS UK.
(6) Represents ownership of 70,000 shares of common stock and warrants to
acquire 8,500 shares at $.70 per share.
(7) Less than 1%.
ITEM 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MERGER TRANSACTION WITH ROYAL AND RELATED TRANSACTIONS
Effective December 31, 2003, Crown acquired all of the issued and outstanding
stock of Royal Investments Corp, a Delaware corporation of which Mr. Roark was
the sole shareholder. Mr. Roark recused himself from all deliberations and votes
of Crown's board of directors on the merger transaction. Royal operated through
subsidiaries and affiliates, including but not limited to CNL and CMM, providing
loan servicing and third-party asset management services for real estate-related
assets in Europe. Through the merger transaction, Crown acquired these European
operations.
In conjunction with the merger transaction, Crown's board of directors
authorized stock split transactions. See Item "Item 5 - Market for Common Equity
and Related Stockholder Matters" above.
In exchange for all of the issued and outstanding stock of Royal, Mr. Roark
received 12,000,000 shares of Crown's common stock. The principle followed in
determining the amount of consideration was arm's length negotiation. The
approximately 1,125,803 shares of Crown common stock held by Royal became
treasury stock of Crown.
Prior to the merger transaction, Royal distributed to Mr. Roark, as its sole
shareholder, all of Royal's assets other than the Crown common stock held by
Royal and Royal's ownership of all of the stock of CNL, which subsidiary
conducts the European operations acquired by the company. Simultaneously, Mr.
Roark assumed all of Royal's liabilities and indemnified Crown from any losses
arising from Royal's operations.
17
At the time of the merger transaction, Crown owed Royal $500,000 plus interest
under an unsecured promissory note, representing operating funds Royal has
advanced to Crown from time to time. Royal distributed this promissory note to
Mr. Roark as described above so that Crown owed this indebtedness to Mr. Roark
personally. Crown and Mr. Roark, through arm's length negotiations, revised the
repayment terms. The indebtedness was repaid during 2004.
Also at the time of the merger transaction, CMM owned Royal $1,271,964. Royal
distributed this promissory note to Mr. Roark so that CMM owed this indebtedness
to Mr. Roark personally. See "Note 5 - Long-Term Debt - to the Consolidated
Financial Statements." This indebtedness was also repaid during 2004.
Royal owned one "B" preference share in Crown Properties Holding AB ("CPH"),
entitling it to approximately 27% of the profit distribution from CPH. This
preference share was another one of the assets distributed from Royal to Mr.
Roark at the time of the merger. CMM has an asset management contract to manage
the assets held by CPH. See "Note 13 - Variable Interest Entities - to the
Consolidated Financial Statements."
PREFERRED STOCK
The company issued the following series of convertible preferred stock to
affiliates of Mr. Roark: one share of Series CC Convertible Preferred Stock in
September 2000 in exchange for $500,000 cash; one share of Series DD Convertible
Preferred Stock in May 2001 in exchange for $200,000 cash; one share of Series
FF Convertible Preferred Stock in September 2001 in exchange for $335,803.70
cash; one share of Series GG Convertible Preferred Stock in September 2001 in
exchange for $140,000; pursuant to an agreement effective September 20, 2001, a
total of 15 shares of Series HH Convertible Preferred Stock in exchange for
$150,000 cash; and, pursuant to an agreement effective March 27, 2002, a total
of 12 shares of Series II Convertible Preferred Stock in exchange for $120,000
cash. See "Note 8 - Shareholders' Equity - to the Consolidated Financial
Statements." Each of these issuances has been converted to common stock in
accordance with the terms of the respective issuances.
CHAIRMAN AND VICE CHAIRMAN
In conjunction with his election as Chairman of Crown's Board of Directors
effective January 1, 2005, the company and Mr. Lennhammer have entered into a
retainer agreement calling for him to receive compensation of 90,000 Swedish
Kronor (approximately $12,800) during 2005 for his service as Chairman.
Effective September 1, 2004, the company entered into an advisory services
agreement with REEDA Management AB, of which Mr. Lennhammer is Managing
Director, for a term expiring December 31, 2005. REEDA receives a quarterly fee
of 50,000 Euros (approximately $65,000) under this agreement.
18
During 2004, Mr. Roark received $100,000 under his employment agreement while
serving as the company's Chairman and Chief Executive Officer. During 2005, Mr.
Roark will receive a salary of $100,000 for his service as Vice Chairman and
Chief Executive Officer and will have the opportunity to receive certain
incentive compensation.
OTHER TRANSACTIONS AND RELATIONSHIPS
In 2003 and 2004, Crown's management asked Ms. Jenkins to perform certain tasks,
including overseeing of an upgrade of the company's computer system and
assisting in dealings with Midland Loan Services. See Item "Item 3 - Legal
Proceedings" above. Crown paid Ms. Jenkins $120,000 for services rendered during
2004 and $70,000 for services in 2003.
Since January 2001, Crown has performed asset management activities for parties
holding ownership interests in several multifamily projects that receive
subsidies from the U.S. Department of Housing and Urban Development. Mr. Roark,
or an affiliate of his, has partnership interests in substantially all of the
projects for which Crown presently performs services. The rates and fees the
company charges for its services are in accordance with HUD's guidelines and
regulations where applicable. Unregulated rates and fees are at market levels.
The company conducts some of its operations through joint ventures and
partnerships and provides certain services to those entities.
ITEM 13. - EXHIBITS
The following exhibits are filed as part of this report:
Exhibit
Number Exhibit Method of Filing
------ ----------------------------------------- -----------------------------------
3.3 Restated Certificate of Incorporation Incorporated by reference to
Crown NorthCorp,
Inc.'s Form 10-KSB
filed March 31,
2000.
3.4 Bylaws Incorporated by reference to
Crown NorthCorp, Inc.'s Form 10-KSB
filed March 31, 2000.
14.1 Code of Ethics Incorporated by reference to
Crown NorthCorp, Inc.'s Form 10-KSB
filed April 14, 2004.
20.2 Audited consolidated financial statements Filed herewith.
of Crown NorthCorp Limited and
subsidiaries as of December 31, 2004 and
2003
19
21.9 Subsidiaries of Crown NorthCorp, Inc. Filed herewith.
31.7 Certification of officers of Crown Filed herewith.
32.6 Certification of officers of Crown Filed herewith.
ITEM 14. - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The firm of Schoonover Boyer + Associates has served as Crown's principal
accountant for each of the past two fiscal years. The Audit Committee of Crown's
Board of Directors approved the engagement of the firm prior to the commencement
of work. Fees billed by the firm for those periods are as follows:
AUDIT FEES AUDIT-RELATED FEES TAX FEES ALL OTHER FEES
---------- ------------------ -------- --------------
2003 $ 62,113 0 $ 3,964 0
2004 $ 83,251 0 $ 8,965 0
Additionally, CNL has engaged Deloitte & Touche LLP during each of the past two
fiscal years. Fees billed by the firm to CNL for those periods are as follows:
AUDIT FEES AUDIT-RELATED FEES TAX FEES ALL OTHER FEES
---------- ------------------ -------- --------------
2003 $ 46,303 0 $ 73,777 0
2004 $101,105 0 $ 42,343 0
20
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2005 Crown NorthCorp, Inc.
By: /s/ Ronald E. Roark
--------------------------------
Ronald E. Roark, Vice Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 30, 2005 By: /s/ Stefan Lennhammer
-----------------------------
Stefan Lennhammer, Chairman
Date: March 30, 2005 By: /s/ Ronald E. Roark
-------------------------------------
Ronald E. Roark, Vice Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 2005 By: /s/ Rick L. Lewis
--------------------------------
Rick L. Lewis, Vice President,
Treasurer and Chief Financial
Officer
(Principal Accounting Officer)
Date: March 30, 2005 By: /s/ Stephen W. Brown
------------------------------
Stephen W. Brown, Secretary
Date: March 30, 2005 By: /s/ David K. Conrad
---------------------------
David K. Conrad, Director
21
Date: March 30, 2005 By: /s/ Gordon V. Smith
---------------------------
Gordon V. Smith, Director
Date: March 30, 2005 By: /s/ Grace Jenkins
-------------------------
Grace Jenkins, Director
Date: March 30, 2005 By: /s/ John S. Koczela
---------------------------
John S. Koczela, Director
Date: March 30, 2005 By: /s/ Peter Walker
------------------------
Peter Walker, Director
22
INDEX TO EXHIBITS
3.3 Restated Certificate of Incorporation.(1)
3.4 Bylaws.(1)
14.1 Code of Ethics(2)
20.2 Audited, consolidated financial statements of
Crown NorthCorp Limited and subsidiaries as of
December 31, 2004 and 2003.(3)
21.9 Subsidiaries of Crown NorthCorp, Inc.(3)
31.7 Certification of officers of Crown(3)
32.6 Certification of officers of Crown(3)
-----------------
(1) Incorporated by reference to Crown NorthCorp, Inc.'s Form 10-KSB filed
March 31, 2000.
(2) Incorporated by reference to Crown NorthCorp, Inc.'s Form 10-KSB filed
April 14, 2004.
(3) Filed herewith.