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 March 31, 2002
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
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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, Suite 650, Salt Lake City, Utah, 84111
------------------------------------------------------
(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 27,428,684 shares of $.02 par value common stock outstanding
as of April 30, 2002.
1
CROWN ENERGY CORPORATION
INDEX
PAGE(S)
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2002
(unaudited) and December 31, 2001 3
Condensed Consolidated Statement of Operations for the
Three Months ended March 31, 2002 and 2001 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for the
Three Months ended March 31, 2002 and 2001 (unaudited) 6
Notes to Condensed Consolidated Financial Statements
(unaudited) 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 15
PART II. Other Information
ITEM 1. Legal Proceedings 16
ITEM 2. Changes in Securities 17
ITEM 3. Defaults upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
PART III. Signatures 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2002 December 31,
[unaudited] 2001
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,198,940 $ 2,652,858
Accounts receivable, net of allowance for uncollectible
accounts of $1,722,482 1,090,669 1,378,610
Inventory 1,776,247 1,358,022
Prepaid and other current assets 368,558 87,652
Related Party Receivable 25,700 25,700
------------- -------------
Total Current Assets 4,460,114 5,502,842
PROPERTY PLANT, AND EQUIPMENT, Net 9,439,501 9,590,787
OTHER INTANGIBLE ASSETS, Net 327,930 340,430
OTHER ASSETS 322,832 283,206
------------- -------------
TOTAL $ 14,550,377 $ 15,717,265
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
3
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
2002 December 31,
[unaudited] 2001
------------- -------------
CURRENT LIABILITIES
Accounts payable $ 800,229 $ 410,564
Preferred stock dividends payable 1,100,000 1,200,000
Accrued expenses 278,683 175,794
Accrued Arbitration costs 2,609,519 2,609,519
Accrued interest 8,124,706 7,473,512
Long-term debt - current portion 361,748 347,153
Line-of-credit to related party 14,935,222 14,935,222
------------- -------------
Total current liabilities 28,210,107 27,151,764
------------- -------------
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 482,040 476,793
CAPITALIZATION:
Long-term debt principally due to related party 11,028,361 11,130,056
Redeemable preferred stock 4,966,982 4,952,831
Stockholders' deficit:
Common Stock $0.02 per value 50,000,000 shares authorized 27,428,684
and 13,635,581 shares outstanding respectively. 548,573 272,711
Additional paid in Capital 4,725,357 4,915,370
Stock subscription receivable from officers (549,166) (549,166)
Stock warrants 243,574 243,574
Accumulated deficit (35,105,451) (32,076,668)
------------- -------------
Stockholders' deficit (30,137,113) (27,994,179)
------------- -------------
TOTAL $ 14,550,377 $ 15,717,265
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
4
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
[Unaudited]
For the Three Months Ended
March 31,
---------------------------------
2002 2001
------------ ------------
SALES, Net of demerits $ 468,321 $ 283,253
COST OF SALES 1,312,300 1,075,897
------------ ------------
GROSS PROFIT (LOSS) (843,979) (792,644)
GENERAL AND ADMINISTRATIVE EXPENSES 622,902 746,423
------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,466,881) (1,536,067)
------------ ------------
OTHER INCOME (EXPENSES):
Interest income and other income 2,155 41,345
Gain on Insurance Settlement --- 278,492
Interest and other expense (772,424) (653,256)
------------ ------------
Total other expense, net (770,269) (333,419)
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (2,237,150) (1,869,486)
------------ ------------
DEFERRED INCOME TAX BENEFIT --- ---
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 8,367 7,220
------------ ------------
NET LOSS $ (2,228,783) $ (1,862,266)
------------ ------------
NET LOSS PER COMMON SHARE-
Basic $ (0.13) $ (0.15)
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
5
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited]
For the Three Months Ended
March 31,
---------------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net (loss) $ (2,228,783) $ (1,862,266)
------------ ------------
Adjustments to reconcile net loss to net cash used by operating
activities:
Amortization, depreciation and depletion 192,016 177,725
Minority interest (8,367) (7,220)
Change in assets and liabilities:
Accounts receivable 287,941 741,746
Inventory (418,225) (272,519)
Prepaid and other assets (320,532) (138,573)
Accounts payable 389,665 479,219
Accrued expenses and interest 754,083 503,224
------------ ------------
Total adjustments 876,581 1,483,602
------------ ------------
Net cash used in operating activities (1,352,202) (378,664)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (28,230) (141,195)
------------ ------------
Cash flows from financing activities:
Capital contributions from partners 13,614 20,421
Payments on long-term debt (87,100) (43,943)
------------ ------------
Net cash used in financing activities (73,486) (23,522)
------------ ------------
The accompanying notes are an integral part of these consolidated financial statements.
6
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited]
[Continued]
For the Three Months Ended
March 31,
---------------------------------
2002 2001
------------ ------------
Net Increase (Decrease) in Cash: $ (1,453,918) $ (543,381)
============ ============
Cash at Beginning of Period $ 2,652,858 $ 2,878,141
============ ============
Cash at End of Period $ 1,198,940 $ 2,334,760
============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $ 93,649 $ 150,270
============ ============
Income taxes --- ---
============ ============
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended March 31, 2002:
On February 28, 2002, the Company issued 13,793,103 shares of common stock
to its preferred stockholders as a payment for preferred stock dividends payable
totaling $200,000.
During the period, the Company accrued dividends on preferred stock of
$100,000 and $14,151 of accretion on preferred stock.
For the period ended March 31, 2001:
During the period, the Company accrued dividends on preferred stock of
$100,000 and $14,151 of accretion on preferred stock.
The accompanying notes are an integral part of these consolidated financial statements.
7
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 March 31, 2002 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, 2001
Annual Report on Form 10-K. The results of operations for the period ended
March 31, 2002 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"), executed a Settlement Agreement ("the Settlement Agreement")
March 8, 2002. The Settlement Agreement is discussed in detail in the
Company's December 31, 2001 Annual Report on Form 10-K. On April 30, 2002
the Company paid the amount described in its Annual Report to extend the
option period. There can be no assurance that the Company will be able to
obtain the requisite financing to satisfy the Settlement Agreement on terms
which are acceptable to the Company. 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 or is not
able to exercise the settlement option.
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, and selling of asphalt products.
Majority Owned Subsidiaries - Capco is the majority-owner of Crown
Distribution, Crown Distribution is a joint venture 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 operator of Crown
Distribution. Crown Distribution owns a majority interest in Crown Asphalt
Terminal, L.L.C. ("CAT, LLC"). 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, MCNIC, pursuant to its rights granted under
the Crown Distribution Operating Agreement, elected to loan Crown
Distribution amounts to cover its working capital requirements in lieu of
it obtaining a line of credit from a third party financial institution. As
of March 31, 2002, MCNIC had loaned Crown Distribution approximately
$14,935,222. Pursuant to a decision rendered in final arbitration it was
concluded that all of the foregoing principal amounts, together with
accrued interest of $5,343,655 as of March 31, 2002 are now due and
payable. A judgment for this amount was entered in favor of MCNIC against
Crown Distribution which is secured by the majority of Crown Distribution's
assets. As noted elsewhere, significant and materially adverse impacts on
the Company would result from MCNIC's foreclosure on Crown Distribution's
assets.
8
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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. 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 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. As disclosed in the Company's Annual Report for the year
ended December 31, 2001, the Series A Preferred Stock was purchased in
November 2001 by Manhattan Goose, L.L.C. ("Manhattan Goose"), an entity in
which Messrs. Jay Mealey and Andrew W. Buffmire own interests. Mr. Mealey
is Chief Executive Officer and a director of the Company. Mr. Buffmire is a
director of the Company. Also, as disclosed in the Annual Report, Manhattan
Goose was issued $200,000 of accrued dividends in the form of share
dividends amounting to 13,793,103 shares of common stock.
9
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 4 - COMMON STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
At March 31, 2002 and December 31, 2001, common stockholders' equity and
redeemable preferred stock consists of the following:
2002 2001
----------- -----------
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
$14,151 and $56,604 for the periods ended March 31, 2002 and December 31,
2001, respectively, toward the stated value of $5,000,000 $ 4,966,982 $ 4,952,831
============ ============
Common stockholders' equity:
Common stock, $.02 par value; 50,000,000 shares
authorized; 27,428,684 and 13,635,581 shares issued
and outstanding at March 31, 2002 and December 31, 2001, respectively $ 548,573 $ 272,711
Additional paid-in capital 4,725,357 4,915,370
Stock warrants outstanding; 683,750 at
March 31, 2002 and December 31, 2001, respectively 243,574 243,574
Common stock subscription receivable from officers (549,166) (549,166)
Retained deficit (35,105,451) (32,876,668)
------------ ------------
Total $(30,137,113) $(27,994,179)
============ ============
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 March 31, 2002
and March 31, 2001:
2002 2001
------------------------------- -----------------------------------
Loss Per Share Loss Per Share
Net Loss ($2,228,783) ($1,862,266)
Redeemable preferred stock
dividends and accretion (114,151) (114,151)
Net loss attributable to
common stockholders ($2,342,934) ($0.13) ($1,976,417) ($0.15)
=========== ======== =========== ========
10
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 6 - LOSS PER SHARE (continued)
2002 2001
------------------------------- -----------------------------------
Loss Per Share Loss Per Share
Weighted average common
shares outstanding -
basic and diluted 18,386,539 13,635,581
========== ==========
The Company had at March 31, 2002 and December 31, 2001, incremental
options and warrants to purchase, computed under the treasury stock method,
3,163,148 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 March
31, 2002 and December 31, 2001 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION ANDRESULTS 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
On March 31, 2002, the Company had cash and other current assets of
$4,460,114 as compared to cash and other current assets of $5,502,842 at
December 31, 2001. The decrease of $1,042,728 was generally due to a reduction
in cash , cash equivalents and accounts receivable. It is generally anticipated
that the first quarter of the year will result in a draw of working capital.
This is expected because the weather in our service area generally will not
allow for asphalt distribution. The Company's wholly owned subsidiary, Capco, is
the majority owner of Crown Distribution, and also conducts asphalt distribution
independent of Crown Distribution. Together Capco and Crown Distribution
accounted for most of the companies cash and other current assets. As of March
31, 2002, Capco and Crown Distribution had cash and other current assets of
approximately $4,318,590, consisting primarily of $1,117,826 in cash, $1,776,247
in inventory and $1,087,734 in accounts receivable, excluding related party
balances. The Company's business is capital intensive and requires a working
capital credit facility to operate efficiently. The Company has not had such a
credit facility since 1999, which has resulted in lowered profitability. Until
1999, MCNIC provided loans to Crown Distribution for inventory purchases and
general working capital requirements. As of March 31, 2002, those loans had a
principal balance of $14,935,222.
As previously disclosed in the Company's public filings, the Company and
MCNIC and certain of its affiliated corporations and officers have been engaged
in litigation and/or arbitration concerning the collection of MCNIC's loans to
the Company and other matters since March of 2000. As previously disclosed in
the Company's Annual Report for the year ended December 31, 2001, the Company
received an adverse result October 2001 in binding arbitration where Crown
Distribution was found to owe MCNIC the amount of $14,953,222 plus accrued
interest (the "Damages Award") and the Company and its subsidiaries were found
to owe $2,609,519 (the "Fee Award").
Crown Distribution also owed MCNIC an additional $5,325,723 at March 31,
2002, with respect to the Preferential Capital Contribution that funded Crown
Distribution's acquisition of the assets of PSAC. See Part II Item 1. Legal
Proceedings. The Preferential Capital Contribution requires payment solely from
50% of the cash flow from Crown Distribution's operations until repayment of the
face amount plus a 15% rate of return.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS
On March 8, 2002, the Company and MCNIC entered into an agreement
("Settlement Agreement") in which the execution of the Damage Award judgment and
the proceedings to confirm the Fee Award in the Third Judicial Court, Salt Lake
County, Utah were both stayed. The terms of the Settlement Agreement also
provide that the Company will have the option to purchase all of MCNIC's
interest in Crown Distribution by the payment of certain amounts on or before
September 30, 2002, and that the stay of the execution of the Damage Award
judgment and the proceeding relating to the Fee Award will continue as long as
the option to purchase remains valid. After April 30, 2002, the Company is
required to pay $100,000 each month to renew the option for 30 days. The payment
for the first extension has been made. Upon execution of the option to purchase
and closing by the Company, both MCNIC and the Company will mutually release the
other party from and against all claims, obligations and liabilities (including
the Damage Award, Fee Award and Preferential Capital Contribution). See Part II
Item 1. Legal Proceedings. The Company will be required to raise substantial
additional capital to extend and to exercise the option to purchase MCNIC's
interest in Crown Distribution. This may require the Company to sell all or part
of its assets to finance the capital requirements. There is no assurance that
the Company will be able to raise the necessary capital or that the Company will
be able to complete the purchase of MCNIC's interest. This could result in the
foreclosure by MCNIC of substantially all of the assets of Crown Distribution.
Although the Company would vigorously defend against confirmation of the Fee
Award against Crown, Capco and CAC, there can be no assurance that the Company
would prevail due to the inherent risks of litigation. If MCNIC were to prevail
and receive a joint and several judgment for the Fee Award, substantially all of
the remaining assets of the Company would be at risk of loss to satisfy such a
judgment. This would place the Company at serious risk of insolvency and
interested parties are encouraged to note the significant risk of complete loss.
Crown Distribution has continued to accrue interest expense on the loans
owed to MCNIC and Preferred Contributions for its asphalt distribution business.
For the quarter ended March 31, 2002, $656,233 of interest expense has been
recorded. If the Company is able to complete the purchase of MCNIC's interest in
Crown Distribution this amount would no longer be an expense to the Company.
As part of the Settlement Agreement, the Company assigned to MCNIC all of
its interest in Crown Ridge. In return the Company received: (i) the assignment
to CAC of a one percent (1%) non-cost bearing overriding royalty interest in the
"A" tract at Asphalt Ridge; (ii) the assignment to CAC of a three percent (3%)
non-cost bearing overriding royalty interest in Crown Ridge's other properties
at Asphalt Ridge; (iii) the elimination of the promissory note from CAC to
MCNIC; and (iv) the payment by MCNIC of the MK judgment and indemnification of
the Company against the MK judgment. The Company will have no further costs in
Crown Ridge. See Item 3. Legal Proceedings.
The Company remains open to other asphalt related business opportunities to
complement its existing asphalt distribution capabilities. There can be no
assurance that the Company can obtain additional capital financing required to
finance such transactions on acceptable terms and conditions.
The Company has a portion of its accounts receivable subject to the risks
and uncertainties of litigation (see Part II Item 1. Legal Proceedings) and
subject to related collection risks. The Company is seeking other ways to
finance its working capital requirements, but there can be 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 line of credit 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 2002.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
2002 vs. 2001
Total revenue increased from $283,253 for the period ended March 31, 2001
to $468,321 for the period ended March 31, 2002, an increase of $185,068. Cost
of sales also increased from $1,075,897 for the period ended March 31,2001 to
$1,312,300 for the period ended March 31, 2002, an increase of $236,403. The
increase in revenues was primarily due to an increase in sales volume of
approximately 1500 tons resulting from a sales contract with an early season
start. The increase in cost of sales was primarily the result of the increased
sales volume and the applicable facility operating expenses to process those
tons for sale. Generally, the asphalt distribution operations are seasonal and
the Company does not expect significant revenues during this period. Company
management expects that the asphalt terminal distribution operations will be the
Company's primary means of future growth.
General and administrative expenses decreased from $746,423 for the period
ended March 31, 2001 to $622,902 for the period ended March 31, 2002, a decrease
of $123,521. The decrease is primarily due to decreased legal expenses.
Interest and other income/expenses increased from net other expense of
$333,419 for the period ended March 31, 2001 to net other expenses of $770,269
for the period ended March 31, 2002, a increase of $436,850. The 2002 total was
comprised of interest costs related to the Company's Credit Facility and
Preferred Contribution for its asphalt distribution business of $656,233, and
other interest of $114,036. The $656,233 of interest costs related to the
Company's Credit Facility and Preferred Contributions will be reversed if the
Company is able to complete the purchase of MCNIC's interest in Crown
Distribution.
Minority interest of $8,367 represents Foreland's approximate 33% interest
in the loss of CAT, LLC.
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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.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
In late July and August, 2001, the Company participated in a binding
arbitration proceeding (the "Arbitration") in Salt Lake City, Utah against
MCNIC, its related entities and certain of their officers. The Arbitration
addressed all claims previously asserted between the parties either in the Third
Judicial District Court of Salt Lake County in a proceeding entitled MCNIC
Pipeline & Processing Company v. Crown Asphalt Distribution Civil No. 00904867
(the "State Action") and the proceeding filed in the United States District
Court for the District of Utah Central Division entitled Crown Energy
Corporation, et al. v. MCN Energy Group, Inc. et al., Civil No. 2CV-0583ST (the
"Federal Action"). In summary, in the State Action, MCNIC alleged that funds
previously advanced by it to Crown Distribution in an amount in excess of $14
million, plus interest, were immediately due and payable. MCNIC also sought the
appointment of a receiver for Crown Distribution's assets and sought to
foreclose on security interests in the assets of Crown Distribution.
In contrast, the Company asserted that the funds previously advanced to
Crown Distribution by MCNIC were part of a revolving credit facility which was
not due and payable at that time and from which Crown Distribution should be
able to make additional draws. Further, the Company sought recovery against
MCNIC, its related entities and certain of its officers under other causes of
action, including breach of fiduciary duties, economic duress, breach of implied
covenants of good faith and fair dealing, breach of contracts and intentional
interference with business relations.
On October 31, 2001, the Arbitrator issued a damage award (the "Damage
Award") in which he held that MCNIC's loans were due and payable with interest
accruing on such loans from 8% to 18%, depending upon the particular loan
involved. The decision also failed to find for the Company on its claims against
MCNIC, its related entities and officers. The Damage Award was subsequently
confirmed by the Third Judicial District Court of Salt Lake County, State of
Utah on February 7, 2002. The amount of the Damage Award as of March 29, 2002,
is $20,266,822.71, with interest accruing daily in the amount of $5,102.84.
In addition, the Arbitrator awarded $2,609,518.69 in fees and costs (the
"Fee Award") to MCNIC against the Company and its related entities on a joint
and several basis. The Fee Award has yet to be confirmed by the appropriate Utah
state court and proceedings regarding it have been stayed as further explained
below.
On March 8, 2002, the Company and MCNIC, its related entities and certain
of its officers executed the Settlement Agreement. Pursuant to the Settlement
Agreement, the Company transferred all of its interests in Crown Ridge and the
leases relating to the Asphalt Ridge properties to MCNIC. In addition, the
Company and its officers agreed not to compete with Crown Ridge in the Western
United States and Western Canada in any way with regard to tar sands leasing,
mining, extraction or processing for a period of three years. However, the
Settlement Agreement provides that the Company may continue to conduct its
present business of buying, storing, blending and selling asphalt.
In exchange for the assignment of the Crown Ridge interest, the Company
received (i) MCNIC's commitment to pay the MK Judgment and its indemnification
of the Company from the MK Judgment, (ii) the assignment from Crown Ridge of a
1% non-cost bearing, overriding royalty interest in the sales proceeds received
by Crown Ridge or its successors and assigns from any products produced on the
assigned leases of "Tract A" at Asphalt Ridge and a 3% non-cost bearing,
overriding royalty interest in proceeds received by Crown Ridge or its
successors and assigns from any other lands which are currently leased by Crown
Ridge or the Company, and (iii) the mutual release between the parties of any
known or unknown claims between them relating to Crown Ridge, including the
obligation of the Company to pay the CAC Loan.
Pursuant to the Settlement Agreement, the Company also acquired an option
to purchase all of MCNIC's rights, title and interests in, or relating to, Crown
Distribution (including its right to receive the Damage Award and the Fee Award)
for an amount equal to $5,500,000 (the "Purchase Price"). The Settlement
Agreement provides that the Purchase Price shall be paid through the payment of
$200,000 at execution with the balance due upon the closing of the Option (if
such closing occurs on or before April 30, 2002). After April 30, 2002, the
16
Company shall have the right to extend the Option until September 30, 2002, by
making an additional $100,000 payment for each 30 days by which the Option is
extended. On April 30, 2002, the Company did in fact pay $100,000 to extend the
option for a period of 30 days. If the Company closes under the Option, then all
payments made to MCNIC shall be credited against the Purchase Price. If,
however, the Company does not exercise the Option, the initial $200,000 payment
shall be credited against the Company's ultimate liability under the Fee Award.
Promptly following the execution of the Settlement Agreement, the Company
and MCNIC stayed all pending litigation relating to the Arbitration or any
enforcement of its conclusion issued as a result of it. The Settlement Agreement
provides that if the Company does not exercise the Option, MCNIC may execute on
the Damage Award and that the parties may either move to confirm or appeal, as
the case may be, the Fee Award.
Management of the Company believes that under the severe legal and
financial constraints facing the Company as a result of the Arbitration's
outcome, the negotiation and execution of the Settlement Agreement were in the
best interests of the Company and its shareholders. Management of the Company is
presently taking actions intended to permit it to exercise the Option but cannot
assure that it will be successful in obtaining the requisite financing on terms
which are acceptable to the Company. Further, the Company cannot describe what
form future financing might take.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults upon Senior Securities
The Decision in the arbitration of the dispute between the Company and
MCNIC received on November 5, 2001 held that loans from MCNIC to Crown
Distribution were due and payable, along with accrued interest, and are in
default. As of September 30, 2001, the Company asserts that these loans had an
outstanding principal balance of $14,935,222 and accrued interest of $4,414,942.
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
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
Report on Form 8-K dated April 23, 2002 discussing the status of the
Settlement Agreement between MCNIC and Crown, and the issuance of common share
dividends to Manhattan Goose.
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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: May 15, 2002 By: /s/ Jay Mealey
-----------------------------------
Jay Mealey, Chief Executive Officer
Date: May 15, 2002 By: /s/ Alan Parker
-----------------------------------
Alan Parker, Controller
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