UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 0-19365
CROWN ENERGY CORPORATION
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(Exact name of registrant as specified in its charter)
Utah 87-0368981
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
215 South State Street, Suite 650, Salt Lake City, Utah 84111
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(Address of principal executive offices, zip code)
(801) 537-5610
(Registrant's telephone number, including area code)
Not applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
There were 13,635,581 shares of $0.02 par value common stock
outstanding as of July 31, 2001.
CROWN ENERGY CORPORATION
INDEX
PAGE(S)
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at June
30, 2001 (unaudited) and December 31, 2000 3
Condensed Consolidated Statement of Operations
for the Three Months ended June 30, 2001 and
2000 (unaudited) 5
Condensed Consolidated Statement of Operations
for the Six Months ended June 30, 2001 and
2000 (unaudited) 6
Condensed Consolidated Statement of Cash Flows
for the Six Months ended June 30, 2001 and
2000 (unaudited) 7
Notes to Condensed Consolidated Financial
Statements (unaudited) 9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 17
PART II. Other Information
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities 19
ITEM 3. Defaults upon Senior Securities 19
ITEM 4. Submission of Matters to a Vote of Security Holders 19
ITEM 5. Other Information 19
ITEM 6. Exhibits and Reports on Form 8-K 19
PART III. Signatures 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2001 December 31,
[unaudited] 2000
------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,473,029 $ 2,878,141
Accounts receivable, net of allowance for uncollectible
accounts of $1,826,713 and $1,827,896 at June 30, 2001
and December 31, 2000, respectively 4,475,196 1,419,260
Inventory 2,346,561 2,370,887
Prepaid and other current assets 161,976 93,307
------------- --------------
Total Current Assets 8,456,762 6,761,595
PROPERTY PLANT, AND EQUIPMENT, Net 9,958,041 9,661,174
OTHER INTANGIBLE ASSETS, Net 371,780 404,400
OTHER ASSETS 227,878 225,009
------------- --------------
TOTAL $ 19,014,461 $ 17,052,178
============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
3
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 2001 December 31,
[unaudited] 2000
------------- --------------
CURRENT LIABILITIES
Accounts payable $ 4,479,838 $ 1,317,222
Preferred stock dividends payable 1,000,000 800,000
Accrued expenses 224,409 127,366
Accrued interest 5,040,060 3,987,256
Long-term debt - estimated current portion 339,381 273,633
Line-of-credit to related party 14,935,222 14,935,222
Other current liabilities 0 0
------------- --------------
Total current liabilities 26,018,910 21,440,699
------------- --------------
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 464,432 427,985
CAPITALIZATION:
Long-term debt 11,330,043 11,336,861
Redeemable preferred stock 4,924,529 4,896,227
Common stockholders' equity (23,723,453) (21,049,594)
------------- --------------
Total capitalization (7,468,881) (4,816,506)
------------- --------------
TOTAL $ 19,014,461 $ 17,052,178
============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
4
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended
June 30,
2001 2000
------------- --------------
SALES, Net of demerits $ 7,362,337 $ 6,872,696
COST OF SALES 6,497,765 7,051,635
------------- --------------
GROSS PROFIT 864,572 (178,939)
GENERAL AND ADMINISTRATIVE EXPENSES 848,638 457,942
------------- --------------
INCOME (LOSS) FROM OPERATIONS 15,934 (636,881)
------------- --------------
OTHER INCOME (EXPENSES):
Interest income and other income 21,573 284,461
Interest expense (624,780) (644,565)
Equity in losses of unconsolidated equity affiliate 0 (167,088)
------------- --------------
Total other expense, net (603,207) (527,192)
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (587,273) (1,164,073)
------------- --------------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 3,982 10,039
------------- --------------
NET LOSS $ (583,291) $ (1,154,034)
------------- --------------
NET LOSS PER COMMON SHARE -
Basic and diluted $ (0.04) $ (0.09)
============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
5
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended
June 30,
2001 2000
------------- --------------
SALES, Net of demerits $ 7,645,590 $ 8,189,105
COST OF SALES 7,573,662 9,016,473
------------- --------------
GROSS PROFIT 71,928 (827,368)
GENERAL AND ADMINISTRATIVE EXPENSES 1,592,061 1,093,857
---------- --------------
INCOME (LOSS) FROM OPERATIONS (1,520,133) (1,921,225)
----------- -------------
OTHER INCOME (EXPENSES):
Interest income and other income 62,918 587,827
Gain on Insurance Settlement 278,492 0
Interest expense (1,278,036) (1,266,453)
Equity in losses of unconsolidated equity affiliate 0 (434,013)
------------- --------------
Total other expense, net (936,626) (1,112,639)
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (2,456,759) (3,033,864)
------------- --------------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 11,202 17,214
------------- --------------
NET LOSS $ (2,445,557) $ (3,016,650)
------------- --------------
NET LOSS PER COMMON SHARE-
Basic and diluted $ (0.20) $ (0.24)
============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
6
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
2001 2000
------------- --------------
Cash Flows From Operating Activities:
Net income (loss) $ (2,445,557) $ (3,016,650)
------------- --------------
Adjustments to reconcile net loss to net cash used by operating
activities:
Amortization, depreciation and depletion 370,132 433,749
Provision for doubtful accounts receivable (1,183)
Equity in losses of unconsolidated affiliate 0 434,013
Minority interest (11,202) (17,214)
Change in assets and liabilities:
Accounts receivable (3,054,752) (470,810)
Inventory 24,326 (2,655,389)
Other assets (71,539) (158,363)
Accounts payable 3,162,616 474,230
Accrued expenses 1,149,847 1,531,030
------------- --------------
Total adjustments 1,568,245 (428,754)
------------- --------------
Net Cash Used in Operating Activities (877,312) (3,445,404)
----------- -------------
Cash Flows From Investing Activities:
Investment in and advances to Crown Asphalt Ridge, LLC 0 76,808
Purchase of property and equipment (447,341) (647,400)
------------- --------------
Net Cash Used by Investing Activities (447,341) (570,592)
------------- -------------
Cash Flows From Financing Activities:
Capital contributions from partners 47,649 47,653
Payments on long-term debt (128,108) (73,089)
------------- --------------
Net Cash Used in Financing Activities (80,459) (25,436)
------------- --------------
The accompanying notes are an integral part of these consolidated
financial statements.
7
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Continued]
For the Six Months Ended
June 30,
2001 2000
------------- --------------
Net Increase (Decrease) in Cash: $ (1,405,112) $ (4,041,432)
============= ==============
Cash at Beginning of Period $ 2,878,141 $ 4,978,977
============= ==============
Cash at End of Period $ 1,473,029 $ 937,545
============= ==============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $ 293,864 $ 285,229
============= ==============
Income taxes --- ---
============= ==============
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended June 30, 2001:
The Company acquired $187,038 of equipment in exchange for
capital leases.
For the period ended June 30, 2000:
None
The accompanying notes are an integral part of these consolidated
financial statements.
8
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared
by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and
changes in stockholders' equity and cash flows at June 30, 2001 and for
all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's
December 31, 2000 Annual Report on Form 10-K. The results of operations
for the period ended June 30, 2001 are not necessarily indicative of
the operating results for the full year.
Summary of Disputes - The Company and its joint venture partner in
Crown Asphalt Distribution, L.L.C. ("Crown Distribution") and Crown
Asphalt Ridge, L.L.C. ("Crown Ridge"), MCNIC Pipeline and Processing
Company ("MCNIC"), are currently involved in an extensive dispute and
claims have been made by each party against the other. Binding
arbitration of these disputes began on July 23, 2001 before Judge John
G. Davies (ret.) in Salt Lake City, Utah. These disputes are discussed
in detail in the Company's December 31, 2000 Annual Report on Form
10-K. There can be no assurance that the Company will be able to
resolve these issues with MCNIC on mutually acceptable terms, or that
the Company will ultimately prevail in binding arbitration. Interested
persons should note the significant and material risks facing the
Company, and the negative impacts the Company would experience in the
event the Company does not prevail in its view of the actions taken.
Organization - Crown Energy Corporation ("CEC") and its wholly-owned
subsidiaries, Crown Asphalt Corporation ("CAC") and Crown Asphalt
Products Company ("Capco") and Crown Distribution, an entity in which
Capco owns a majority interest (collectively referred to as the
"Company"), are engaged in the mining, production, manufacturing,
distribution and selling of asphalt products.
Majority Owned Subsidiaries - Capco is the majority-owner of Crown
Distribution, Crown Distribution is a joint venture limited liability
company formed on July 2, 1998 between Capco and MCNIC for the purpose
of acquiring certain assets of Petro Source Asphalt Company ("Petro
Source"). Capco owns 50.01% and MCNIC owns 49.99% of Crown
Distribution. Capco is the general manager and operating agent of Crown
Distribution. Crown Distribution owns a majority interest in Cowboy
Asphalt Terminal, L.L.C. ("CAT, L.L.C."). CAT LLC is a joint venture
formed on June 16, 1998 between Capco and Foreland Asphalt Corporation
("Foreland"), which owns an asphalt terminal and storage facility.
Crown Distribution owns 66.67% and Foreland owns 33.33% of CAT LLC.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly or majority-owned
subsidiaries. All significant inter-company transactions have been
eliminated in consolidation.
NOTE 2 - WORKING CAPITAL CREDIT FACILITY
As described in detail in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, the Company maintains that MCNIC,
pursuant to its rights granted under the Crown Distribution Operating
Agreement, elected to extend the credit facility, a revolving working
capital credit facility (the "Credit Facility"), to Crown Distribution
to cover its working capital requirements for Crown Distribution's
operations in lieu of the Company obtaining a line of credit from a
third party financial institution jointly and severally guaranteed by
9
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MCNIC and Capco. The Company further maintains that MCNIC agreed to
"roll" the balance from an existing working capital loan (the "Working
Capital Loan"), provided by MCNIC in conjunction with the purchase of
the Petro Source Asphalt Company assets on July 2, 1998, into the
Credit Facility. As of June 30, 2001, the Company believes that the
Credit Facility had a balance of approximately $14,935,222 and the
Company has accrued interest on the Credit Facility at 8% interest as
agreed by MCNIC. Through the period ended June 30, 2001, $2,949,210 in
interest had been accrued. The Company maintains that this Credit
Facility is to be repaid solely out of the cash flow from Crown
Distribution. As disclosed elsewhere, MCNIC notified the Company in
March of 2000, that it believes the Working Capital Loan is in default
and due, and sued Crown Distribution for collection.
NOTE 3 - CAPITAL TRANSACTIONS
Preferred Stock - The Company is authorized to issue 1,000,000
preferred shares, par value $.005 per share. The Company issued and has
outstanding 500,000 shares of its Series A Cumulative Convertible
Preferred Stock ("Series A Preferred"). Each share of Series A
Preferred is convertible at the option of its holder, at any time, into
8.57 shares of common stock of the Company. Dividends accrue on the
outstanding Series A Preferred at the rate of 8% per annum and may be
paid through cash or common shares of the Company at the option of the
holder. Subject to the holder's right to convert the Series A
Preferred, the Company may redeem the Series A Preferred at any time
from the date on which it is issued at a percentage of the Series A
Preferred's stated value of $10 per share, 130% of stated value if
redemption occurs within thirty-six months of the date of issuance;
115% of stated value if redemption occurs between thirty-six and
forty-eight months after the date of issuance; 110% of stated value if
redemption occurs between forty-eight and sixty months after the date
of issuance; and 100% if redemption occurs thereafter. The holder of
the Series A Preferred may also require the Company to redeem the
Series A Preferred after the eighth anniversary of the Series A
Preferred's issuance. The holders of the Series A Preferred shall have
the right, but shall not be obligated, to appoint 20% of the Company's
Board of Directors. The Company may not alter the rights and
preferences of the Series A Preferred, authorize any security having
liquidation preference, redemption, voting or dividend rights senior to
the Series A Preferred, increase the number of Series A Preferred,
reclassify its securities or enter into specified extraordinary events
without obtaining written consent or an affirmative vote of at least
75% of the holders of the outstanding shares of the Series A Preferred
stock. All voting rights of the Series A Preferred expire upon the
issuance by the Company of its notice to redeem such shares. The shares
of common stock issuable upon conversion of the Series A Preferred are
subject to adjustment upon the issuance of additional shares of the
Company's common stock resulting from stock splits, share dividends,
and other similar events as well as upon the issuance of additional
shares or options which are issued in connection with the Company's
equity investment or as compensation to any employee, director,
consultant, or other service provider of the Company or any subsidiary,
other than options to acquire up to 5% of the Company's common stock at
or less than fair market value.
Common Stock Warrant - In conjunction with the issuance of the
preferred stock described above, the Company issued a warrant to the
holders of the preferred stock. The fair value of the warrant at the
date of issuance was estimated to be $283,019 and was recorded to
additional paid-in capital and as a reduction to the stated value of
the preferred stock. The reduction in preferred stock is being accreted
over the five-year period from the date of issuance to the earliest
exercise date of the warrant. Upon the fifth anniversary of the
issuance of the preferred stock, the warrant becomes exercisable, at
$.002 per share, into the number of common shares of the Company equal
to (a) [$5,000,000 plus the product of (i) $5,000,000 multiplied by
(ii) 39% (internal rate of return) multiplied by (iii) 5 years]
(14,750,000), minus (b) the sum of (i) all dividends and other
distributions paid by the Company on the preferred stock or on the
common stock received upon conversion of the preferred stock plus (ii)
the greater of the proceeds from the sale of any common stock received
by the holder upon the conversion of the preferred stock prior to the
fifth anniversary date or the Terminal Value (as defined) of such
common stock sold before the fifth anniversary plus (iii) the terminal
value of the preferred stock and common stock received upon conversion
of the preferred stock then held, divided by (c) the fair market value
of the
10
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Company's common stock on a weighted average basis for the 90 days
immediately preceding the fifth anniversary date of the issuance of the
preferred stock. Terminal Value is defined as the sum of (i) the shares
of common stock into which the preferred stock then held is
convertible, plus (ii) shares of common stock received upon conversion
of preferred stock, multiplied by the fair market value of the
Company's common stock on a weighted average basis for the 90 days
immediately preceding the fifth anniversary date of the issuance of the
preferred stock. The warrants will expire in 2007.
NOTE 4 - COMMON STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
At June 30, 2001 and December 31, 2000, common stockholders' equity and
redeemable preferred stock consists of the following:
2001 2000
----------- -----------
Redeemable preferred stock - $.005 par value; 1,000,000 shares
authorized; $10.00 stated value; 500,000 Series A cumulative
convertible shares issued and outstanding; original estimated fair
value of $4,716,981, accretion of $28,302 and $56,604 for the periods
ended June 30, 2001 and December 31, 2000, respectively, toward the
stated value of $5,000,000 $ 4,924,529 $ 4,896,227
============= =============
Common stockholders' equity:
Common stock, $.02 par value; 50,000,000 shares
authorized; 13,635,581 and 13,635,581 shares issued
and outstanding at June 30, 2001and December 31, 2000, respectively $ 272,711 $ 272,711
Additional paid-in capital 5,143,672 5,371,974
Stock warrants outstanding; 683,750 at
June 30, 2001 and December 31, 2000, respectively 243,574 243,574
Common stock subscription receivable from officers (549,166) (549,166)
Retained deficit (28,834,244) (26,388,687)
------------- -------------
Total $ (23,723,453) $ (21,049,594)
============= =============
NOTE 5 - LOSS PER SHARE
The following table is a reconciliation of the net loss numerator of
basic and diluted net loss per common share for the years ended June
30, 2001 and June 30, 2000:
2001 2000
------------------------ --------------------------
Loss Per Share Loss Per Share
------------ --------- -------------- ---------
Net Loss $ (2,445,557) $ (3,016,650)
Redeemable preferred
stock dividends and accretion (228,302) (228,302)
------------ ------------
11
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
2001 2000
------------------------ --------------------------
Loss Per Share Loss Per Share
------------ --------- -------------- ---------
Net loss attributable to
common stockholders $ (2,673,859) $ (0.20) $ (3,244,952) $ (0.24)
============ ======== ============ =======
Weighted average common
shares outstanding -
basic and diluted 13,635,581 13,285,581
============ ============
The Company had at June 30, 2001 and December 31, 2000, incremental
options and warrants to purchase, computed under the treasury stock
method, 3,463,148 shares of common stock that were not included in the
computation of diluted earnings (loss) per share because their effect
was anti-dilutive. The Company also has preferred stock outstanding at
June 30, 2001 and December 31, 2000 which is convertible into
approximately 4,300,000 shares of common stock that was not included in
the computation of diluted earnings per share as its effect was
anti-dilutive. Accordingly, diluted earnings per share does not differ
from basic earnings.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial
condition, results of operations and related matters includes a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include, by way of illustration and not limitation,
statements containing the words "anticipates", "believes", "expects", "intends",
"future" and words of similar import which express, either directly or by
implication, management's beliefs, expectations or intentions regarding the
Company's future performance or future events or trends which may affect the
Company or its results of operations.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors, including but not limited to changes in
economic conditions generally or with respect to the Company's asphalt products
market in particular, new or increased governmental regulation, increased
competition, shortages in labor or materials, delays or other difficulties in
shipping or transporting the Company's products, continued or additional
technical or operational uncertainties and difficulties at the facility of Crown
Asphalt Ridge, L.L.C. ("Crown Ridge"), difficulties in integrating the Company's
recent joint venture and acquisition related businesses and other similar risks
inherent in the Company's operations or in business operations generally. Any
such risks or uncertainties, either alone or in combination with other factors,
may cause the actual results, performance or achievements of the Company to
differ materially from its anticipated future results, performance or
achievements (which may be expressed or implied by such forward looking
statements). Consequently, the following management's discussion and analysis,
including all forward-looking statements contained therein, is qualified and
limited by the foregoing cautionary factors. Interested persons are advised to
consider all forward-looking statements within the context of such cautionary
factors.
Liquidity and Capital Resources
At June 30, 2001, the Company had cash and other current assets of
$8,456,762 as compared to cash and other current assets of $6,761,595 at
December 31, 2000. The increase of $1,695,167 was primarily due to the increase
in accounts receivable attributable to asphalt sales in the second quarter of
2001. The Company's wholly-owned subsidiary, Capco, is the majority owner of
Crown Asphalt Distribution, L.L.C. ("Crown Distribution") and also conducts
asphalt distribution independent of Crown Distribution. Together Capco and Crown
Distribution accounted for most of the Company's cash and other current assets.
As of June 30, 2001, Capco and Crown Distribution had cash and other current
assets of approximately $ 8,263,393 million, consisting of roughly $1,418,078
million of cash, $2,346,561 million in inventory and $4,434,918 million in
accounts receivable, excluding related party balances. Capco's and Crown
Distribution's businesses are capital intensive and require working capital or
some type of a working capital credit facility. The Company maintains that MCNIC
Pipeline & Processing Company ("MCNIC"), the minority joint venture partner of
Crown Distribution, elected to provide the Credit Facility in lieu of the
Company's pursuing proposals which it had obtained from banks and to replace a
prior loan (the "Working Capital Loan") with this Credit Facility. The Company
has accrued interest on the Credit Facility at an average interest rate of 8.0%.
As of June 30, 2001, the Company asserts that the Credit Facility had an
outstanding principal balance of $14,935,222.
In March of 2000, MCNIC notified Crown Distribution that it considered
the Working Capital Loan to be in default and denied that it had agreed to
"roll" such loan into the Credit Facility as the Company maintains. On June 20,
2000, MCNIC filed a complaint in the Third Judicial District Court, Salt Lake
County, Utah, against Crown Distribution which it sought to foreclose on an
alleged mortgage and security interest in, and to, certain assets of Crown
Distribution. The Company and Crown Distribution have vigorously denied MCNIC's
assertions and filed claims and counterclaims in both state and federal court.
Such claims and counterclaims allege breach of fiduciary duties, use of economic
duress, breach of implied covenants of good faith and fair dealing, estoppel,
intentional interference, trade liable and slander of title resulting in damages
in amount exceeding $100,000,000 against MCNIC, its parent, MCN Energy Group,
Inc. ("MCN") and certain of MCN's officers. On January 29, 2001, the Company
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
agreed that binding arbitration of all claims between it, MCNIC, MCN and their
related parties before a single retired federal judge would be in the Company's
best interest. The arbitration (the "Arbitration") began on July 23, 2001 before
Judge John G. Davies (ret.) in Salt Lake City, Utah, and is currently in
progress.
The Company believes that it has a strong case on the claims and
counterclaims in the Arbitration. However, because arbitration proceedings are
inherently uncertain, the Company cannot predict the outcome of any such
proceedings. Management of the Company is keenly aware of the importance of the
Arbitration to the Company. If MCNIC prevails in the Arbitration, or depending
upon the extent or nature of any relief granted by the arbitrator, the Company
may be severely and adversely impacted and may lose possession of some or all of
its primary assets and sources of revenues.
In the event MCNIC is legally able to demand immediate repayment of the
Working Capital Loan, the Company could, and likely would, suffer a material
adverse impact upon its financial liquidity and working capital. For instance,
the Company may have to seek replacement financing on terms and conditions,
which are less favorable than it might obtain under other circumstances.
Otherwise, it is conceivable that MCNIC might obtain possession and legal
control over critical Company assets, such as the operating assets of Crown
Distribution. Interested persons should note the significant and material risks
facing the Company, as well as the related material, negative impacts the
Company would experience in the event the Company does not prevail in its
dispute with MCNIC, MCN and their related parties.
On the other hand, interested persons should note that, subject of
course to available equitable and other creditor remedies, neither the Working
Capital Loan or the Credit Facility contain cross-default provisions giving
MCNIC any right to declare a default or to seek control or possession over the
assets or operations of Crown Ridge or the Company's interest in Crown Ridge.
Crown Distribution also owed MCNIC an additional $5,325,723 at June 30,
2001 with respect to the preferential capital contribution (the "Preferred
Contribution") that funded Crown Distribution's acquisition of the assets of
Petro Source Asphalt Company on July 2, 1998. The Preferred Contribution accrues
a 15% annual rate of return and is payable solely from 50% of the cash flow, if
any, from Crown Distribution's operations.
The asphalt distribution business is seasonal in nature and
necessitates working capital financing for inventory purchases, receivables and
operations. It is capital intensive and requires substantial investments to
acquire terminal storage, blending, and raw material assets. MCNIC has advised
the Company it will no longer provide funding under the Credit Facility, as the
Company asserts it previously agreed, and has refused to guaranty a third party
financed Credit Facility on behalf of Crown Distribution, as the Company
believes MCNIC has also previously agreed. The Company relies on the Credit
Facility to purchase inventory and fund other working capital requirements for
operations. The Company is seeking other ways to finance its working capital
requirements, but there is no assurance that such working capital financing can
be secured by the Company.
In the event that the Company is unable to collect its current accounts
receivables, or the Company is unable to secure the necessary working capital
financing for its operations from third party sources or if the Company's
operating losses and working capital deficits continue, or if the Company is
unable to recoup the losses, the Company may not have sufficient capital to
operate through 2001. Thus, the risk exists that the Company may not be able to
continue as a going concern.
The Company remains open to other asphalt related business
opportunities to complement its existing asphalt distribution capabilities.
There can be no assurance, however, that the Company can obtain the additional
capital financing required for such transactions on acceptable terms and
conditions.
As has been previously disclosed by the Company in its periodic
filings, the tar sands processing facility owned by Crown Ridge has not
commenced commercial operations due to mechanical and process difficulties
experienced during start-up of the facilities. A pilot study to develop a
solution to these problems was conducted during fiscal
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
year 2000. The ramifications of the pilot study for the Company are uncertain in
that (i) the cost of the engineering modifications which need to be made to the
Crown Ridge facility have not been determined, and (ii) Crown has been denied
access by MCNIC to vital information concerning the pilot study and the Crown
Ridge facility, generally.
Based on the lack of information provided by MCNIC, the inherent risk
of litigation and arbitration involved in the Company's disputes with MCNIC and
the lack of a firm business plan for Asphalt Ridge from MCNIC, the Company
determined that its investment in, and advances to, Crown Ridge are potentially
impaired. Should delays continue, or should the Crown Ridge facility be unable
to ever operate economically, the Company believes that this would significantly
impact Crown Ridge's ability to continue as a going concern and would adversely
impact the Company's operations and financial conditions resulting in an
impairment of the remainder of the asset. Further, although the pilot study may
demonstrate that the mechanical process difficulties experienced by the Crown
Ridge facility can be resolved, there can be no assurance that the Company will
be able to make the proportionate capital contribution which would be necessary
to finance its approximate 24% of the costs involved. Accordingly, it is
possible that the Company's sharing ratio in Crown Ridge may be further diluted
if it agrees to proceed with further expenditures.
Results of Operations
For the three month period ending June 30, 2001 compared to the three
month period ending June 30, 2000
Total revenue increased from $6,872,696 for the three month period
ended June 30, 2000 to $7,362,337 for the three month period ended June 30,
2001, an increase of $489,641. Cost of sales decreased from $7,051,635 for the
same period in 2000 to $6,497,765 for the same period in 2001, a decrease of
$553,870. The increase in revenues is primarily due to increased asphalt
activity in the second quarter of 2001. The decrease in cost of sales is
primarily the result of lower asphalt purchase prices and operating efficiencies
at the distribution facilities.
General and administrative expenses increased from $457,942 for the
three month period ended June 30, 2000 to $848,638 for the three month period
ended June 30, 2001, an increase of $390,696. This increase is primarily due to
two factors: (i) the prior year's amount was reduced by $320,000 which
represented a receivable collection that had previously been written off as a
bad debt; and (ii) increased legal expenses.
Other income/expenses increased from $527,192 for the three month
period ended June 30, 2000 to $603,207 for the three month period ended June 30,
2001, an increase of $76,015. The 2001 total is comprised of $497,053 interest
related to the Company's Credit Facility and Preferred Contribution for its
asphalt distribution business, and other interest costs of $127,727. This amount
is partially offset by interest income and other income of $21,573.
Minority interest of $3,982 represents Foreland's approximate 33%
interest in the loss of CAT, LLC.
For the six month period ended June 30, 2001, compared to the six
months ended June 30, 2000
Total revenue decreased from $8,189,105 for the period ended June 30,
2000 to $7,645,590 for the period ended June 30, 2001, a decrease of $543,515.
Cost of sales also decreased from $9,016,473 for the period ended June 30, 2000
to $7,573,662 for the period ended June 30, 2001, a decrease of $1,442,811. The
decrease in revenues was primarily due to the lack of asphalt activity due to
unfavorable weather conditions in the first quarter of 2001 as compared to the
prior year. The decrease in cost of sales is primarily the result of lower
asphalt purchase prices and operating efficiencies at the distribution
facilities.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
General and administrative expenses increased from $1,093,857 for the
period ended June 30, 2000 to $1,592,061 for the period ended June 30, 2001, an
increase of $498,204. This increase is primarily due to two factors; (i) the
prior year's amount was reduced by $320,000, which represented a receivable
collection that had previously been written off as a bad debt, and (ii)
increased legal expenses.
Other income/expenses decreased from $1,112,639 for the period ended
June 30, 2000 to $936,626 for the period ended June 30, 2001, a decrease of
$176,013. The 2001 total was comprised of $988,645 interest related to the
Company's Credit Facility and Preferred Contribution for its asphalt
distribution business, and other interest costs of $289,391. This amount is
partially offset by an insurance settlement gain of $278,492 and interest income
and other income of $62,918.
Minority interest of $ 11,202 represents Foreland's approximate 33%
interest in the loss of CAT, LLC.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company does not believe it is subject to the material risks of
loss related to certain market risks, such as interest rate risks, foreign
currency exchange rate risks or similar risks, and therefore the Company does
not engage in transactions, such as hedging or similar transactions in
derivative financial instruments, intended to reduce its exposure to such risks.
However, the Company is subject to general market fluctuations related to the
purchase of its basestock asphalt and may suffer reduced operating margins to
the extent its increased costs are not passed through to its customers. Such
prices generally fluctuate with the price of crude oil. The Company is prevented
in certain contracts with MCNIC from utilizing any hedging strategies to
minimize any market price changes. The Company believes the inability to protect
itself from market fluctuations may negatively impact its profit margins.
The Company is also subject to certain price escalation and
de-escalation clauses in its asphalt distribution sales contracts. The Company
supplies asphalt to projects in certain states where regulations provide for
escalation and de-escalation of the price for such asphalt relative to the price
difference from the time the project is awarded to the successful bidding
company and the time the project is completed. The Company includes such
de-escalation risk into its bid process and does not believe it has material
exposure to risk resulting from these regulations.
17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
As discussed within the Company's Report on Form 10-K for the fiscal
year ended December 31, 2000, the Company is currently engaged in an extensive
dispute with MCNIC, MCN and related parties.
On January 29, 2001, the Company determined that binding arbitration of
all of the claims set forth above before a single retired federal judge would be
in the Company's best interest. Accordingly, an Arbitration Agreement was signed
between all of the parties on January 29, 2001. The Arbitration is currently
being arbitrated before Judge John G. Davies (ret.) in Salt Lake City, Utah.
Commencing March 5, 2001, the Company, MCNIC, MCN and various officers
exchanged claims and counterclaims relating to the Arbitration. The claims
contained therein substantially restate the parties' prior positions within the
litigation described above. However, in its claims in arbitration, MCNIC
asserted claims against CAC and Capco and also included the Company's chief
executive officer, president and treasurer, Jay Mealey, as a party. The Company
denies MCNIC's claims. In May 2001, Mr. Mealey was removed as a party to the
Arbitration.
The Company believes that it has a strong case on the claims and
counterclaims in the Arbitration. However, because arbitration proceedings are
inherently uncertain, the Company cannot predict the outcome of any such
proceedings. Management of the Company is keenly aware of the importance of the
Arbitration to the Company. If MCNIC prevails in the Arbitration, and depending
upon the extent in nature of any relief granted by the Arbitrator, the Company
may be severely and adversely impacted and may lose possession of some or all of
its primary assets and sources of revenues.
On July 12, 1999, Morrison Knudsen Corporation ("MK") filed a Complaint
in the Eighth Judicial District Court, Uintah County, State of Utah, alleging
that CAC had breached an agreement whereby MK would provide certain mining
services for CAC at Crown Ridge's Facility in Uintah County, Utah (the
"Project"). Judgment in favor of MK was entered on January 30, 2001 in the
principal amount of $303,873.39, $49,062.33 of pre-judgment interest and
$2,033.14 of costs, which totals $354,968.86. A Notice of Appeal was filed by
CAC on March 1, 2001. The appeal has been assigned to the Utah Court of Appeals.
Although CAC will attempt to set aside the trial courts judgment, there can be
no assurance that CAC will prevail on its appeal. In addition, CAC has made a
demand on Crown Ridge for payment of the judgment amount and indemnity from any
liability in this matter because CAC was acting as operator for and on behalf of
Crown Ridge in the contractual relationship with MK that was the subject of the
litigation.
On July 14, 1999, Crown Distribution and Capco filed an action in the
United States District Court for the Central District of California, Southern
Division, against Santa Maria Refining Company ("SMRC"), SABA Petroleum Company
("SABA") and Greka Energy Corporation ("Greka"). The claims include causes of
action for breach of contract, breach of the covenant of good faith and fair
dealing, conversion, fraud, claim and delivery, unjust enrichment and
constructive trust, unfair competition, declaratory relief and specific
performance. These claims arise out of the alleged termination of the Processing
Agreement and subsequent refusal to deliver asphalt to Crown Distribution by
SMRC, SABA, and Greka. Discovery of facts and testimony related to issues
arising in the lawsuit has been completed. Trial has been scheduled to begin
October 2, 2001. It is anticipated that the damages caused by the actions of
SMRC, SABA, and Greka could be substantial. Although Crown Distribution will
attempt to recoup those damages from SMRC, SABA and Greka, due to the
uncertainties inherent in any litigation proceeding, there can be no assurance
that Crown Distribution or Capco will ultimately prevail.
On January 25, 2000, Oriental New Investments, Ltd. ("Oriental") filed
a Complaint against the Company in the Third Judicial District Court, Salt Lake
County, Utah. The action relates to a 1997 convertible debenture and replacement
convertible debenture issued by the Company to Oriental. The action seeks to
recover from the Company $50,000 liquidated damages, plus interest, and
attorneys fees and costs, for alleged breaches of certain terms of the
convertible debentures. The Company answered the Complaint on March 1, 2000,
denying any and all liability, and
18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings (Continued)
believes that Oriental's claims are meritless. The Company will vigorously
defend its position that Oriental's claims are meritless. However, due to the
uncertainties inherent in any litigation proceeding, there can be no assurance
that the Company will ultimately prevail.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults upon Senior Securities
On March 27, 2000, MCNIC delivered to the Company a notice of default
with respect to the Working Capital Loan, and demanded payment of the
outstanding principal balance plus all interest accrued thereon. Management of
the Company believes that the Working Capital Loan was fully satisfied and
replaced by the Credit Facility and that no default has occurred under the
Working Capital Loan or Credit Facility. As of June 30, 2001, the Company
asserts that the Credit Facility had an outstanding principal balance of
$14,935,222. The matter is actively being resolved as part of the Arbitration.
See "Part I - Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations; Part II - Item 1: Legal Proceedings."
ITEM 4. Submission of Matters to a Vote of Security Holders
On June 26, 2001, the Company held an annual meeting of its
shareholders to elect members of the Company's Board of Directors and to affirm
the appointment of Tanner + Co. as independent auditors for the Company. Proxies
for the meeting were solicited pursuant to Regulation 14A under the Securities
and Exchange Act of 1934. At the meeting, 8,578,983 shares of common stock of
the Company were represented in person or by proxy out of a total of 13,635,581
shares issued and outstanding as of the record date established with respect to
such meeting.
All three of the Company's directors were re-elected to successive
terms as directors of the Company. With respect to the election of James A.
Middleton, 8,354,712 shares were voted in favor of his election, 7,300 shares
were voted against and 216,971 shares either abstained from voting or were
broker non-votes.
With respect to the election of Jay Mealey, 8,301,146 shares were voted
in favor of his election, 60,866 shares were voted against and 216,971 shares
either abstained from voting or were broker non-votes.
With respect to the election of Andrew W. Buffmire, 8,354,712 shares
were voted in favor of his election, 7,300 shares were voted against and 216,971
shares either abstained from voting or were broker non-votes.
The Company's shareholders also voted in favor of affirming the
appointment of the accounting firm of Tanner + Co. as the Company's independent
auditors for the fiscal year ended 2001, with 8,452,862 shares voting in favor
of the appointment, 40,302 shares voting against, with 85,819 shares abstaining
or being broker non-votes.
No other matters were presented to the Company's shareholders for their
approval in the second quarter of the Company's 2001 fiscal year.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
None.
19
PART III - SIGNATURES
Pursuant to the requirements 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.
CROWN ENERGY CORPORATION
(Registrant)
Date: August 14, 2001 By: /s/ Jay Mealey
---------------------------
Jay Mealey,
Chief Executive Officer
Date: August 14, 2001 By: /s/ Alan Parker
---------------------------
Alan Parker, Controller
20