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 September 30, 2001
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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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 $0.02 par value common stock outstanding as of
November 12, 2001.
CROWN ENERGY CORPORATION
INDEX
PAGE(S)
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 2001 (unaudited) and
December 31, 2000 3
Condensed Consolidated Statement of Operations
for the Three Months ended September 30, 2001
and 2000 (unaudited) 5
Condensed Consolidated Statement of Operations
for the Nine Months ended September 30, 2001
and 2000 (unaudited) 6
Condensed Consolidated Statement of Cash Flows
for the Nine Months ended September 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 16
PART II. Other Information
ITEM 1. Legal Proceedings 17
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 18
PART III. Signatures 19
2
PART I - FINANCIAL INFORMATION
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
ITEM 1. FINANCIAL STATEMENTS
Sept. 30, 2001 December 31,
[unaudited] 2000
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 284,790 $ 2,878,141
Accounts receivable, net of allowance for uncollectible
accounts of $1,826,713 and $1,827,896 at Sept. 30, 2001
and December 31, 2000, respectively 8,470,558 1,419,260
Inventory 2,338,742 2,370,887
Prepaid and other current assets 189,479 93,307
----------- -----------
Total Current Assets 11,283,569 6,761,595
PROPERTY PLANT, AND EQUIPMENT, Net 9,797,363 9,661,174
OTHER INTANGIBLE ASSETS, Net 355,470 404,400
OTHER ASSETS 227,503 225,009
----------- -----------
TOTAL $21,663,905 $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
Sept. 30, 2001 December 31,
[unaudited] 2000
----------- -----------
CURRENT LIABILITIES
Accounts payable $ 5,660,610 $ 1,317,222
Preferred stock dividends payable 1,100,000 800,000
Accrued expenses 105,828 127,366
Accrued interest 6,659,127 3,987,256
Long-term debt - estimated current portion 338,183 273,633
Line-of-credit to related party 14,935,222 14,935,222
----------- -----------
Total current liabilities 28,798,970 21,440,699
----------- -----------
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 475,116 427,985
CAPITALIZATION:
Long-term debt 11,243,039 11,336,861
Redeemable preferred stock 4,938,680 4,896,227
Common stockholders' equity (23,791,900) (21,049,594)
----------- -----------
Total capitalization (7,610,181) (4,816,506)
----------- -----------
TOTAL $21,663,905 $17,052,178
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended
September 30,
2001 2000
[unaudited]
----------- -----------
SALES, Net of demerits $15,539,700 $11,556,473
COST OF SALES 12,757,549 11,400,727
----------- -----------
GROSS PROFIT 2,782,151 155,746
GENERAL AND ADMINISTRATIVE EXPENSES 926,719 649,608
----------- -----------
INCOME (LOSS) FROM OPERATIONS 1,855,432 (493,862)
----------- -----------
OTHER INCOME (EXPENSES):
Interest income and other income 4,877 98,420
Interest expense (652,960) (635,170)
Interest expense from arbitration judgment (1,164,574) 0
Equity in losses of unconsolidated equity affiliate 0 (20,566)
----------- -----------
Total other expense, net (1,812,657) (557,316)
INCOME BEFORE INCOME TAXES
AND MINORITY INTERESTS 42,775 (1,051,178)
----------- -----------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 2,930 4,196
----------- -----------
NET INCOME $ 45,705 $(1,046,982)
----------- -----------
NET INCOME (LOSS) PER COMMON SHARE -
Basic and diluted $ 0.00 $ (0.08)
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended
September 30,
2001 2000
[unaudited]
----------- -----------
SALES, Net of demerits $23,185,290 $19,745,578
COST OF SALES 20,331,211 20,101,720
----------- -----------
GROSS PROFIT 2,854,079 (356,142)
GENERAL AND ADMINISTRATIVE EXPENSES 2,518,780 1,743,465
----------- -----------
INCOME (LOSS) FROM OPERATIONS 335,299 (2,099,607)
----------- -----------
OTHER INCOME (EXPENSES):
Interest income and other income 67,795 370,767
Gain on Insurance Settlement 278,492 0
Interest expense (1,930,996) (1,901,623)
Interest expense from arbitration judgment (1,164,574) 0
Equity in losses of unconsolidated equity affiliate 0 (454,579)
----------- -----------
Total other expense, net (2,749,283) (1,985,435)
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (2,413,984) (4,085,042)
----------- -----------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 14,132 21,410
----------- -----------
NET LOSS $(2,399,852) $(4,063,632)
----------- -----------
NET LOSS PER COMMON SHARE -
Basic and diluted $ (0.20) $ (0.33)
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
6
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
2001 2000
[unaudited]
----------- -----------
Cash Flows From Operating Activities:
Net income (loss) $(2,399,852) $(4,063,632)
----------- -----------
Adjustments to reconcile net loss to net cash used by operating
activities:
Amortization, depreciation and depletion 563,586 667,777
Provision for doubtful accounts receivable (1,183) 0
Stock issued for legal services 0 43,750
Equity in losses of unconsolidated affiliate 0 454,579
Minority interest (14,132) (21,410)
Change in assets and liabilities:
Accounts receivable (7,050,115) (1,591,046)
Inventory 32,145 (1,618,907)
Other assets (98,666) (228,387)
Accounts payable 4,321,850 2,774,692
Accrued expenses 2,671,870 1,454,804
----------- -----------
Total adjustments 425,355 1,935,852
----------- -----------
Net Cash Used in Operating Activities (1,974,497) (2,127,780)
----------- -----------
Cash Flows From Investing Activities:
Investment in and advances to Crown Asphalt Ridge, LLC 0 64,377
Purchase of property and equipment (463,807) (670,432)
----------- -----------
Net Cash Used by Investing Activities (463,807) (606,055)
----------- -----------
Cash Flows From Financing Activities:
Capital contributions from partners 61,263 61,267
Payments on long-term debt (216,310) (112,092)
----------- -----------
Net Cash Used in Financing Activities $ (155,047) $ (50,825)
----------- -----------
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 Nine Months Ended
September 30,
2001 2000
[unaudited]
----------- -----------
Net Increase (Decrease) in Cash: $(2,593,351) $(2,784,660)
=========== ===========
Cash at Beginning of Period $ 2,878,141 $ 4,978,977
=========== ===========
Cash at End of Period $ 284,790 $ 2,194,317
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $ 439,836 $ 404,998
=========== ===========
Income taxes --- ---
=========== ===========
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended September 30, 2001:
The Company acquired property and equipment of $187,038 with long term
debt or capital leases.
For the period ended September 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 September 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 September 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"), were involved in a dispute relating to Crown
Distribution where claims were made by each party against the other.
These disputes are discussed in detail in the Company's December 31,
2000 Annual Report on Form 10-K. Binding arbitration of these disputes
began on July 23, 2001 before Judge John G. Davies (ret.) in Salt Lake
City, Utah. On November 5, 2001, the Company received the decision of
the arbitrator in which he ruled that (i) no damages were awarded to
the Company for its claims against MCNIC; (ii) the loans made by MCNIC
to Crown Distribution are due and payable along with accrued interest;
and (iii) Crown Distribution is to pay MCNIC's legal fees and costs
associated with the collection of that portion of the loans that were
covered by the Promissory Note from MCNIC to Crown Distribution made as
part of the purchase of the asphalt assets of Petro Source Asphalt
Company in 1998 (the "Petro Source Acquisition"). Interested persons
should note the significant and material adverse impacts the Company
could experience in the event MCNIC elects to foreclose on the Crown
Distribution assets securing the loans.
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.
9
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
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 a credit facility for working capital
purposes (the "Credit Facility"). The Credit Facility, along with a
working capital loan (the "Working Capital Loan"), provided by MCNIC in
conjunction with the Petro Source Acquisition have a balance of
approximately $14,935,222 plus accrued interest of $4,414,942 through
the period ended September 30, 2001. The decision rendered in final
arbitration concluded that all of the foregoing principal amounts,
together with accrued interest are now due and payable. The Credit
Facility and the Working Capital Loan are 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.
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
10
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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.
NOTE 4 - COMMON STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
At September 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 $42,453 and $56,604 for the periods
ended September 30, 2001 and December 31, 2000, respectively, toward
the stated value of $5,000,000 $ 4,938,680 $ 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 Sept. 30, 2001and December 31, 2000, respectively $ 272,711 $ 272,711
Additional paid-in capital 5,029,521 5,371,974
Stock warrants outstanding; 683,750 at
September 30, 2001 and December 31, 2000, respectively 243,574 243,574
Common stock subscription receivable from officers (549,166) (549,166)
Retained deficit (28,788,540) (26,388,687)
------------ -----------
Total ($23,791,900) ($21,049,594)
============ ===========
11
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 nine months ended
September 30, 2001 and September 30, 2000:
2001 2000
-------------------------- -----------------------------------
Loss Per Share Loss Per Share
Net Loss ($2,399,852) ($4,063,632)
Redeemable preferred
stock dividends and accretion (342,453) (342,453)
----------- -----------
2001 2000
-------------------------- -----------------------------------
Loss Per Share Loss Per Share
Net loss attributable to
common stockholders ($2,742,305) ($0.20) ($4,406,085) ($0.33)
=========== ====== =========== =======
Weighted average common
shares outstanding -
basic and diluted 13,635,581 13,289,427
========== ==========
The Company had at September 30, 2001 and September 30, 2000,
incremental options and warrants to purchase, computed under the
treasury stock method, 3,463,148 and 3,277,148 respectively, shares of
common stock that were not included in the computation of diluted
earnings (loss) per share because their effect was anti-dilative. The
Company also has preferred stock outstanding at September 30, 2001 and
September 30, 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-dilative.
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"), a determination of what the recently
received adverse arbitration decision will mean for the Company and Crown
Distribution, 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 September 30, 2001, the Company had cash and other current assets of
$11,283,569 as compared to cash and other current assets of $6,761,595 at
December 31, 2000. The increase of $4,521,974 was primarily due to the increase
in accounts receivable attributable to asphalt sales in the second and third
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 September 30, 2001, Capco and Crown Distribution had cash
and other current assets of approximately $11,098,803 million, consisting
primarily of roughly $232,009 of cash, $2,338,742 million in inventory and
$8,411,068 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. MCNIC
Pipeline & Processing Company ("MCNIC"), the minority joint venture partner of
Crown Distribution, elected to provide the Credit Facility in addition to the
Working Capital Loan. 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.
On November 5, 2001, the Company received a decision of the arbitrator
in the dispute between the Company and MCNIC where it was ruled that the loans
made by MCNIC to Crown Distribution are currently due and payable along with
accrued interest. The Company may have to seek replacement financing on terms
and conditions, which are less favorable than it might obtain under other
circumstances. It is conceivable that MCNIC might obtain possession and legal
control over the operating assets of Crown Distribution. Interested persons
should note the significant and material risks facing the Company as a result of
this development. The Company and Crown Distribution are actively evaluating
appropriate courses of action which may be taken in response to this material
development.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Interested persons should also 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, or other
assets of the Company.
Crown Distribution also owed MCNIC an additional $5,325,723 at
September 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 and has
refused to jointly and severally guaranty working capital financing from a third
party on behalf of Crown Distribution, as the Company believes MCNIC has also
previously agreed. The Company relies on working capital financing 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
continue to operate its business. 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 year 2000. The
ramifications of the pilot study for the Company are uncertain in that the cost
of the modifications which need to be made to the Crown Ridge facility and its
commercial viability have not been determined.
Due to the inherent risks of 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 should it agree to proceed with further
expenditures.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations
For the three month period ending September 30, 2001 compared to the
three month period ending September 30, 2000
Total revenue increased from $11,556,473 for the three month period
ended September 30, 2000 to $15,539,700 for the three month period ended
September 30, 2001, an increase of $3,983,227. Cost of sales increased from
$11,400,727 for the same period in 2000 to $12,757,549 for the same period in
2001, a increase of $1,356,822. The increase in revenues is primarily due to an
increase in asphalt sales volume of approximately 38% in the third quarter of
2001. The increase in cost of sales is primarily the result of increased volume,
offset partially by reduced base asphalt purchase costs of approximately 16% and
operating efficiencies at the distribution facilities.
General and administrative expenses increased from $649,608 for the
three month period ended September 30, 2000 to $926,719 for the three month
period ended September 30, 2001, an increase of $277,111. This increase is
primarily due to increased legal expenses.
Other income/expenses increased from $557,316 for the three month
period ended September 30, 2000 to $1,812,657 for the three month period ended
September 30, 2001, an increase of $1,255,341. The 2001 total is comprised of
$502,514 interest related to the Company's Credit Facility, Working Capital Loan
and Preferred Contribution for its asphalt distribution business, $1,164,574 of
interest related to the arbitration judgment, and other interest costs of
$150,446. This amount is partially offset by interest income and other income of
$4,877.
Minority interest of $2,930 represents Foreland's approximate 33%
interest in the loss of CAT, LLC.
For the nine month period ending September 30, 2001 compared to the
nine month period ending September 30, 2000
Total revenue increased from $19,745,578 for the period ended September
30, 2000 to $23,185,290 for the period ended September 30, 2001, a increase of
$3,439,712. Cost of sales also increased from $20,101,720 for the period ended
September 30, 2000 to $20,331,211 for the period ended September 30, 2001, a
increase of $229,491. The increase in revenues was primarily due to an increase
in asphalt sales volume of approximately 18%. The increase in cost of sales is
primarily the result of increased volume, offset partially by lower asphalt
purchase prices of approximately 13% and operating efficiencies at the
distribution facilities.
General and administrative expenses increased from $1,743,465 for the
period ended September 30, 2000 to $2,518,780 for the period ended September 30,
2001, an increase of $775,315. 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 $1,985,435 for the period ended
September 30, 2000 to $2,749,283 for the period ended September 30, 2001, an
increase of $763,848. The 2001 total was comprised of $1,491,160 interest
related to the Company's Credit Facility, Working Capital Loan and Preferred
Contribution for its asphalt distribution business, $1,164,574 interest related
to the Arbitration Decision, and other interest costs of $439,836. This amount
is partially offset by an insurance settlement gain of $278,492 and interest
income and other income of $67,795.
Minority interest of $14,132 represents Foreland's approximate 33%
interest in the loss of CAT, LLC.
15
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.
16
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 was engaged in an extensive dispute
with MCNIC, MCN and related parties. On November 5, 2001, the Company received a
decision in the arbitration between the Company and MCNIC that was issued by the
Honorable John G. Davies, U.S. District Judge (ret.) (the "Decision"). The
Decision held that loans from MCNIC to Crown Distribution totaling $14,935,221
were now due and payable, with interest accruing on such loans from 8% to 18%,
depending upon the particular loan involved. The Company had not disputed the
existence of the loans, but had argued that they were part of a working capital
facility extended by MCNIC which was not due and payable at this time. The
foregoing loans are secured by a majority of the real and personal property of
Crown Distribution. The Decision also failed to find for the Company on its
claims against MCN and MCNIC on a number of causes of action. Crown Distribution
was also ordered to pay MCN and MCNIC attorneys fees and costs associated with
the collection of that portion of the loans that were covered by the Promissory
Note from MCNIC to Crown Distribution made as part of the Petro Source
Acquisition. The amount of such costs is unknown at the present time. The
Company is currently assessing the impact of the decision on Crown
Distribution's business and evaluating appropriate courses of action.
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. A final settlement was reached effective October 23, 2001
in the litigation between the Company and SMRC, SABA and Greka. The Settlement
Agreement between the parties requires that the terms of the settlement not be
disclosed, but the Company believes the matter was amicably resolved on terms
believed to be mutually beneficial to all of the parties.
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 believes that Oriental's claims are
meritless. On August 17, 2001 the Complaint was dismissed.
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.
17
PART II - OTHER INFORMATION (Continued)
ITEM 6. Exhibits and Reports on Form 8-K
The Company filed a Form 8-K on October 31, 2001 to report that on
October 23, 2001 a final settlement had been reached in the litigation between
the Company and Santa Maria Refining Company, Saba Petroleum Company and Greka
Energy Corporation.
The company also filed a Form 8-K on November 6, 2001 to report that a
decision had been reached in the arbitration between the Company and MCNIC.
18
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: November 14, 2001 By: /s/ Jay Mealey
--------------------------------
Jay Mealey, Chief Executive Officer
Date: November 14, 2001 By: /s/ Alan Parker
--------------------------------
Alan Parker, Controller
19