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, 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
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(State or other (I.R.S. Employer
jurisdiction of incorporation Identification No.)
or organization)
215 South State, Suite 650, Salt Lake City, Utah, 84111
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(Address of principal executive offices, zip code)
(801) 537-5610
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(Registrant's telephone number, including area code)
Not applicable
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(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 $.02 par value common stock outstanding
as of April 30, 2001.
CROWN ENERGY CORPORATION
INDEX
PAGE(S)
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31,
2001 (unaudited) and December 31, 2000 3
Condensed Consolidated Statement of Operations for
the Three Months ended March 31, 2001 and 2000 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for the
Three Months ended March 31, 2001 and 2000 (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
The accompanying notes are an integral part of these consolidated
financial statements.
2
CROWN ENERGY CORPORATION
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
ITEM 1. FINANCIAL STATEMENTS
March 31,
2001 December 31,
[unaudited] 2000
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 2,334,760 $ 2,878,141
Accounts receivable, net of allowance for uncollectible
accounts of $1,826,713 and $1,827,896 at March 31, 2001
and December 31, 2000, respectively 677,514 1,419,260
Inventory 2,643,406 2,370,887
Prepaid and other current assets 234,366 93,307
----------- -----------
Total Current Assets 5,890,046 6,761,595
PROPERTY PLANT, AND EQUIPMENT, Net 9,640,955 9,661,174
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 0 0
INVESTMENT IN AND ADVANCES
TO AN EQUITY AFFILIATE 0 0
GOODWILL, Net 0 0
OTHER INTANGIBLE ASSETS, Net 388,090 404,400
OTHER ASSETS 222,523 225,009
----------- -----------
TOTAL $16,141,614 $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
March 31,
2001 December 31,
[unaudited] 2000
----------- -----------
CURRENT LIABILITIES
Accounts payable $ 1,796,441 $ 1,317,222
Preferred stock dividends payable 900,000 800,000
Accrued expenses 88,896 127,366
Accrued interest 4,528,951 3,987,256
Long-term debt - estimated current portion 185,847 273,633
Line-of-credit to related party 14,935,222 14,935,222
Other current liabilities 0 0
----------- -----------
Total current liabilities 22,435,357 21,440,699
----------- -----------
MINORITY INTEREST IN CONSOLIDATED JOINT VENTURES 441,186 427,985
CAPITALIZATION:
Long-term debt 11,380,704 11,336,861
Redeemable preferred stock 4,910,378 4,896,227
Common stockholders' equity (23,026,011) (21,049,594)
----------- -----------
Total capitalization (6,734,929) (4,816,506)
----------- -----------
TOTAL $16,141,614 $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
March 31,
----------------------------------
2001 2000
------------- -------------
SALES, Net of demerits $ 283,253 $ 1,316,409
COST OF SALES 1,075,897 1,964,838
------------- -------------
GROSS PROFIT (792,644) (648,429)
GENERAL AND ADMINISTRATIVE EXPENSES 743,423 635,915
------------- -------------
INCOME (LOSS) FROM OPERATIONS (1,536,067) (1,284,345)
------------- -------------
OTHER INCOME (EXPENSES):
Interest income and other income 41,345 303,366
Gain on Insurance Settlement 278,492 0
Interest and other expense (653,256) (621,888)
Equity in losses of unconsolidated equity affiliate 0 (266,925)
------------- -------------
Total other expense, net (333,419) (585,446)
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (1,869,486) (1,869,791)
------------- -------------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 7,220 768,473
------------- -------------
NET LOSS ($1,862,266) ($1,101,318)
------------- -------------
NET LOSS PER COMMON SHARE-
Basic ($0.14) ($0.09)
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
5
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
March 31,
----------------------------------
2001 2000
------------- -------------
Cash Flows From Operating Activities:
Net income (loss) ($1,862,266) ($1,101,318)
------------- ------------
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization, depreciation and depletion 177,725 218,426
Equity in losses of unconsolidated affiliate 0 266,925
Minority interest (7,220) (768,473)
Change in assets and liabilities:
Accounts receivable 741,746 2,109,324
Inventory (272,519) (3,011,718)
Other assets (138,573) (191,975)
Accounts payable 479,219 (4,208)
Accrued expenses 503,224 715,917
------------- ------------
Total adjustments 1,483,602 (665,782)
------------- ------------
Net Cash Used in Operating Activities (378,664) (1,767,100)
------------- ------------
Cash Flows From Investing Activities:
Investment in and advances to Crown Asphalt Ridge, LLC 0 (39,000)
Acquisition of Cowboy Asphalt Terminal 0 0
Purchase of property and equipment (141,195) (146,318)
------------- ------------
Net Cash Used by Investing Activities (141,195) (185,318)
------------- ------------
Cash Flows From Financing Activities:
Net change in line of credit from related party 0 0
Sale of equity interest in subsidiary to a minority shareholder 0 0
Capital contributions from partners 20,421 20,425
Net changes in long-term debt (43,943) (36,135)
------------- ------------
Net Cash Used in Financing Activities (23,522) (15,710)
------------- ------------
The accompanying notes are an integral part of these consolidated
financial statements.
6
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Continued]
For the Three Months Ended
March 31,
----------------------------------
2001 2000
------------- -------------
Net Increase (Decrease) in Cash: ($543,381) ($1,968,128)
============= ============
Cash at Beginning of Period $ 2,878,141 $ 4,978,977
============= ============
Cash at End of Period $ 2,334,760 $ 3,010,849
============= ============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $ 150,270 $ 138,841
============= ============
Income taxes --- ---
============= ============
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended March 31, 2001:
None
For the period ended March 31, 2000:
None
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, 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
March 31, 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. These disputes are currently
scheduled to go into binding arbitration 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, 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 general manager and
operating agent of Crown Distribution. Crown Distribution owns a majority
interest in Crown 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 MCNIC and CAPCO. The
Company further maintains that MCNIC agreed to "roll" the balance from an
existing working capital loan (the "Working Capital Loan") into the Credit
Facility. As of March 31, 2001, the Company
8
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 March 31, 2001,
$2,651,323 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 Company's common stock on a weighted
average basis for the 90 days immediately
9
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 March 31, 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
$14,151 and $56,604 for the periods ended March 31, 2001 and December 31,
2000, respectively, toward the stated value of $5,000,000 $ 4,910,378 $ 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 March 31, 2001and December 31, 2000, respectively $ 272,711 $ 272,711
Additional paid-in capital 5,257,823 5,371,974
Stock warrants outstanding; 683,750 at
March 31, 2001 and December 31, 2000, respectively 243,574 243,574
Common stock subscription receivable from officers (549,166) (549,166)
Retained deficit (28,250,953) (26,388,687)
------------ ------------
Total $(23,026,011) $(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 March 31, 2001
and March 31, 2000:
2001 2000
------------------------------ ----------------------------------
Loss Per Share Loss Per Share
Net Loss ($1,862,266) ($1,101,318)
Redeemable preferred
stock dividends (100,000) (100,000)
-------------- ------------
Net loss attributable to
common stockholders ($1,962,266) ($0.14) ($1,201,318) ($0.09)
10
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 6 - LOSS PER SHARE (continued)
Weighted average common
shares outstanding -
basic and diluted 13,635,581 13,285,581
============ ============
The Company had at March 31, 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 March 31, 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSISOF 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 March 31, 2001, the Company had cash and other current assets of
$5,890,046 as compared to cash and other current assets of $6,761,595 at
December 31, 2000. The decrease of $871,549 was primarily due to the Company's
asphalt inventory winterfill program whereby the Company purchases asphalt
during the winter months, when prices are lower, for storage and subsequent sale
during the asphalt season, typically during the months from April through
October. The Company's majority owned subsidiary, Crown Asphalt Distribution,
L.L.C. ("Crown Distribution") accounted for most of the Company's cash and other
current assets. As of March 31, 2001, Crown Distribution had cash and other
current assets of approximately $4.8 million, consisting of roughly $ 1.8
million of cash, $2.4 million in inventory and $0.6 million in accounts
receivable, excluding related party balances. Crown Distribution's business
requires a revolving working capital credit facility (the "Credit Facility").
The Company maintains that MCNIC Pipeline & Processing Company ("MCNIC"), the
minority joint venture partner in the joint venture, elected to provide such
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 March 31, 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
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, estopple, 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 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") is scheduled to occur on July 23, 2001
through August 10, 2001 before Judge John G. Davies (ret.) in Salt Lake City,
Utah with extensive pre-hearing discovery to occur prior to that time.
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 in March 31,
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. The Preferred Contribution accrues a 15% annual
rate of return and is payable solely from 50% of the cash flow 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 it had 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
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
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 financing 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 construction. A pilot study to develop a solution to these problems was
conducted during fiscal 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
2000 vs. 1999
Total revenue decreased from $1,316,409 for the period ended March 31, 2000
to $283,253 for the period ended March 31, 2001, a decrease of $1,033,156. Cost
of sales also decreased from $1,964,838 for the period ended March 31,2000 to
$1,075,897 for the period ended March 31, 2001, a decrease of $888,941. The
decreases in both revenues and costs of sales were primarily due to unfavorable
weather conditions and the lack of early asphalt activity as compared to the
prior year. 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 increased from $635,915 for the period
ended March 31, 2000 to $743,423 for the period ended March 31, 2001, an
increase of $107,508. The increase is primarily due to increased legal expenses
offset partially by reduced overhead.
Interest and other income/expenses decreased from net other expense of
$585,446 for the period ended March 31, 2000 to net other expenses of $333,419
for the period ended March 31, 2001, a decrease of $252,027. The 2001 total was
comprised of interest costs related to the Company's Credit Facility and
Preferred Contribution for its asphalt distribution business of $491,591, and
other interest of $161,665. This amount is partially offset by an insurance
settlement gain of $278,492, and interest income and other income of $41,345.
Minority interest of $7,220 represents Foreland's approximate 33% interest
in the loss of CAT, LLC.
14
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.
15
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, 2000, 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 26, 2001. The Arbitration is being
arbitrated before Judge John G. Davies (ret.) in Salt Lake City, Utah. The
arbitration hearing is scheduled for July 23, 2001 through August 10, 2001, with
extensive pre-hearing discovery to occur prior to that time.
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. Mr. Mealey believes that his inclusion at this point is
highly improper due to the fact that he had not been a party to the pending
actions nor to the Arbitration Agreement pursuant to which the actions were
submitted to the Arbitration. Accordingly, Mr. Mealey has filed a motion with
the arbitrator to be removed from 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 Defendant's alleged termination of
the Processing Agreement and subsequent refusal to deliver asphalt to Crown
Distribution. 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 Defendant's actions 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.
16
PART II - OTHER INFORMATION
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 March 31, 2001, the Company
asserts that the Credit Facility had an outstanding principal balance of
$14,935,222. The matter is now subject to 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
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
Report on Form 8-K dated March 5, 2001 discussing the status of the
Arbitration.
17
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, 2001 By: /s/ JAY MEALEY
------------------------------
Jay Mealey, Chief Executive Officer
Date: May 15, 2001 By: /s/ ALAN PARKER
------------------------------
Alan Parker, Controller
18