The accompanying notes are an integral part of these
consolidated financial statements.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
--------------------------------------------------------------------------------
CROWN ENERGY CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0368981
--------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
215 South State Street, 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 June 30, 2002.
CROWN ENERGY CORPORATION
INDEX
PAGE(S)
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2002
(unaudited) and December 31, 2001 3
Condensed Consolidated Statement of Operations for the
Three Months ended June 30, 2002 and 2001 (unaudited) 5
Condensed Consolidated Statement of Operations for the
Six Months ended June 30, 2002 and 2001 (unaudited) 6
Condensed Consolidated Statement of Cash Flows for the
Six Months ended June 30, 2002 and 2001 (unaudited) 7
Notes to Condensed Consolidated Financial Statements
(unaudited) 9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 17
PART II. Other Information
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities 19
ITEM 3. Defaults upon Senior Securities 19
ITEM 4. Submission of Matters to a Vote of Security Holders 19
ITEM 5. Other Information 19
ITEM 6. Exhibits and Report on Form 8-K 20
PART III. Signatures 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2002 December 31,
[unaudited] 2001
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 538,469 $ 2,652,858
Accounts receivable, net of allowance for uncollectible
accounts of 874,736 and $1,722,482 respectively 4,142,048 1,378,610
Inventory 1,986,182 1,358,022
Prepaid and other current assets 341,573 87,652
Deposits on Settlement Option 300,000 0
Related Party Receivable 25,700 25,700
-------------- --------------
Total Current Assets 7,333,972 5,502,842
PROPERTY PLANT, AND EQUIPMENT, Net 9,778,032 9,590,787
OTHER INTANGIBLE ASSETS, Net 315,430 340,430
OTHER ASSETS 306,036 283,206
-------------- --------------
TOTAL $ 17,733,470 $ 15,717,265
============== ==============
3
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
June 30, 2002 December 31,
[unaudited] 2001
-------------- --------------
CURRENT LIABILITIES
Accounts payable $ 3,554,623 $ 410,564
Preferred stock dividends payable 1,200,000 1,200,000
Accrued expenses 55,298 175,794
Accrued Arbitration costs 2,609,519 2,609,519
Accrued interest 8,810,229 7,473.512
Long-term debt - current portion 380,040 347,153
Line-of-credit to related party 14,935,222 14,935,222
------------ ------------
Total current liabilities 31,544,931 27,151,764
------------- -------------
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 490,326 476,793
CAPITALIZATION:
Long-term debt principally due to related party 7,959,483 11,130,056
Redeemable preferred stock 4,981,133 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 4,611,206 4,915,370
Stock subscription receivable from officers (549,166) (549,166)
Stock warrants 243,574 243,574
Accumulated deficit (32,096,590) (32,876,668)
-------------- --------------
Stockholders' deficit (27,242,403) (27,994,179)
-------------- --------------
TOTAL $ 17,733,470 $ 15,717,265
============== ==============
4
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
[Unaudited]
For the Three Months Ended
June 30,
----------------------------------
2002 2001
------------- -------------
SALES, Net of demerits $ 6,184,136 $ 7,362,337
COST OF SALES 5,685,865 6,497,765
------------- -------------
GROSS PROFIT (LOSS) 498,271 864,572
GENERAL AND ADMINISTRATIVE EXPENSES (654,438) (848,638)
Bad debt recovery on accounts previously allowed for 847,746 0
------------- -------------
INCOME FROM OPERATIONS 691,579 15,934
------------- -------------
OTHER INCOME (EXPENSES):
Interest income and other income 1,379 21,573
Interest and other expense (694,408) (624,780)
Gain on Divestiture of Affiliate 2,998,176 0
------------- -------------
Total other income (expense), net 2,305,147 (603,207)
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTERESTS 2,996,726 (587,273)
------------- -------------
DEFERRED INCOME TAX BENEFIT --- ---
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 12,135 3,982
------------- -------------
NET INCOME (LOSS) 3,008,861 $ (583,291)
------------- -------------
NET INCOME (LOSS) PER COMMON SHARE-
Basic and diluted $ 0.11 $ (0.04)
============= =============
5
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
[Unaudited]
For the Six Months Ended
June 30,
----------------------------------
2002 2001
------------- -------------
SALES, Net of demerits $ 6,652,457 $ 7,645,590
COST OF SALES 6,998,165 7,573,662
------------- -------------
GROSS PROFIT (LOSS) (345,708) 71,928
GENERAL AND ADMINISTRATIVE EXPENSES (1,277,340) (1,592,061)
Gain on bad debt recovery 847,746 0
------------- -------------
INCOME (LOSS) FROM OPERATIONS (775,302) (1,520,133)
------------- -------------
OTHER INCOME (EXPENSES):
Interest income and other income 3,534 62,918
Gain on Insurance Settlement 0 278,492
Interest and other expense (1,466,832) (1,278,036)
Gain on Divestiture of Affiliate 2,998,176 0
------------- -------------
Total other income (expense), net 1,534,878 (936,626)
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTERESTS 759,576 (2,456,759)
------------- -------------
DEFERRED INCOME TAX BENEFIT --- ---
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 20,502 11,202
------------- -------------
NET INCOME (LOSS) 780,078 $ (2,445,557)
------------- -------------
NET INCOME (LOSS) PER COMMON SHARE-
Basic and diluted $ 0.02 $ (0.20)
============= =============
6
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited]
For the Six Months Ended
June 30,
----------------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net income (loss) 780,078 $ (2,445,557)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Amortization, depreciation and depletion 385,839 370,132
Provision for doubtful accounts receivable (847,746) (1,183)
Gain on divestiture of affiliate (2,998,176) 0
Minority interest (20,502) (11,202)
Change in assets and liabilities:
Accounts receivable (1,915,692) (3,054,752)
Inventory (628,160) 24,326
Prepaid and other assets (276,751) (71,539)
Deposits on settlement option (300,000) 0
Accounts payable 3,144,059 3,162,616
Accrued expenses and interest 1,216,221 1,149,847
------------- -------------
Total adjustments (2,240,908) 1,568,245
------------- -------------
Net cash used in operating activities (1,460,830) (877,312)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (524,457) (447,341)
------------- -------------
Net cash used by investing activities (524,457) (447,341)
------------- -------------
Cash flows from financing activities:
Capital contributions from partners 34,035 47,649
Payments on long-term debt (163,137) (128,108)
------------- -------------
Net cash used in financing activities (129,102) (80,459)
------------- -------------
7
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited]
[Continued]
For the Six Months Ended
June 30,
----------------------------------
2002 2001
------------- -------------
Net Increase (Decrease) in Cash: $ (2,114,389) $ (1,405,112)
============= =============
Cash at Beginning of Period $ 2,652,858 $ 2,878,141
============= =============
Cash at End of Period $ 538,469 $ 1,473,029
============= =============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $ 108,957 $ 293,864
============= =============
Income taxes --- ---
============= =============
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended June 30, 2002:
The Company acquired $23,627 of equipment through term financing.
The Company issued 13,793,103 shares of its common stock as payment for
$200,000 of preferred stock dividends.
The Company accrued preferred stock dividends payable of $200,000 and
accretion of $28,302.
For the period ended June 30, 2001:
The Company acquired $187,038 of equipment in exchange for capital
leases
The Company accrued preferred stock dividends payable of $200,000 and
accretion of $28,302.
8
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared
by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and
changes in stockholders' equity and cash flows at June 30, 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 June 30, 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 or before April 30, May 31, June 30, and July 31, 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 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 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 Cowboy 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, 2001, 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 June 30, 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
9
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
principal amounts, together with accrued interest of $5,808,012 as of
June 30, 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.
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
10
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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.
NOTE 4 - COMMON STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
At June 30, 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
$28,302 and $56,604 for the periods ended June 30, 2002 and December 31,
2001, respectively, toward the stated value of $5,000,000 $ 4,981,133 $ 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 June 30, 2002 and December 31, 2001, respectively $548,573 $ 272,711
Additional paid-in capital 4,611,206 4,915,370
Stock warrants outstanding; 683,750 at
June 30, 2002 and December 31, 2001, respectively 243,574 243,574
Common stock subscription receivable from officers (549,166) (549,166)
Retained deficit (32,096,590) (32,876,668)
------------ ------------
Total $(27,242,403) $(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 June
30, 2002 and June 30, 2001:
2002 2001
------------------------------ ----------------------------
Profit (Loss) Per Share Loss Per Share
Net Profit (Loss) $ 780,078 $(2,445,557)
Redeemable preferred
stock dividends and accretion (228,302) (228,302)
---------- ----------
11
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 5 - LOSS PER SHARE (continued)
2002 2001
------------------------------ ----------------------------
Profit (Loss) Per Share Loss Per Share
Net profit (loss) attributable to
common stockholders $ 551,776 $0.02 $(2,673,859) $(0.20)
========== ===== =========== ======
Weighted average common
shares outstanding -
basic and diluted 22,932,590 13,635,581
========== ===========
The Company had at June 30, 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
June 30, 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. As of June 30, 2002, there were dividend
arrearages in the amount of $1,200,000 on the Company's preferred
stock. Pursuant to the designations and preferences of the preferred
stock, the foregoing arrearages could be satisfied by the issuance of
shares of the Company's common stock in lieu of cash payments at the
"fair market value" of the common stock as defined in the designations
and preferences. As of June 30, 2002, approximately 52,173,913 shares
of common stock could have been issued at the then "fair market value"
in satisfaction of the preferred stock dividend arrearages.
NOTE 6 - BAD DEBT RECOVERY ON ACCOUNTS PREVIOUSLY ALLOWED FOR
During the three months ended June 30, 2002 the Company collected on
significant receivables it had provided an allowance for in a prior
year in the amount of $847,746. The Company has recognized this
collection through operations as a bad debt recovery.
NOTE 7 - GAIN ON DIVESTITURE OF INTEREST IN AFFILIATE
Pursuant to the settlement agreement with MCNIC the Company assigned to
MCNIC all of its interest in Crown Ridge. In return, the Company's
wholly owned subsidiary, CAC, received certain overriding royalty
interests in Crown Ridge's properties and MCNIC relieved CAC of its
promissory note obligation of $2,998,176 which the Company has
recognized as a gain in the statement of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial
condition, results of operations and related matters includes a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include, by way of illustration and not limitation,
statements containing the words "anticipates", "believes", "expects", "intends",
"future" and words of similar import which express, either directly or by
implication, management's beliefs, expectations or intentions regarding the
Company's future performance or future events or trends which may affect the
Company or its results of operations.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors, including but not limited to changes in
economic conditions generally or with respect to the Company's asphalt products
market in particular, new or increased governmental regulation, increased
competition, shortages in labor or materials, delays or other difficulties in
shipping or transporting the Company's products, continued or additional
technical or operational uncertainties and difficulties at the facility of Crown
Asphalt Ridge, L.L.C. ("Crown Ridge"), difficulties in integrating the Company's
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 June 30, 2002, the Company had cash and other current assets of
$7,333,972 as compared to cash and other current assets of $5,502,842 at
December 31, 2001. The increase of $1,831,130 was generally due to the increase
in accounts receivable attributable to asphalt sales in the second quarter of
2002. However, on June 30, 2002, the Company's working capital deficit (the
excess of current liabilities over current assets) increased to $24,210,959, as
compared to $21,648,922 on December 31, 2001. 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 Company's cash and other
current assets. As of June 30, 2002, CAPCO and Crown Distribution had cash and
other current assets of approximately $6,893,639, consisting primarily of
$466,007 in cash, $1,986,182 in inventory and $4,138,187 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 June 30,
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 were 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, 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 June 30,
2002, with respect to the preferential capital contribution (the "Preferential
Capital Contribution") that funded Crown Distribution's acquisition of the
assets of PSAC. The Preferential Capital Contribution requires payment solely
from 50% of the cash flow from Crown Distribution's operations, if any, until
repayment of the face amount plus a 15% rate of return.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
On March 8, 2002, the Company and MCNIC entered into an agreement
("Settlement Agreement") in which the execution of the Damages 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 Damages 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 extensions through August 2002 have 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 Damages 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 six months ended June 30, 2002, $1,319,756 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 which has been recognized as a gain on divestiture of
affiliate in the statement of operations; and (iv) the payment by MCNIC of a
judgment obtained by Morrison Knudsen (the "MK Judgment") against CAC in its
capacity as operator of Crown Ridge and indemnification of the Company against
the MK Judgment. The Company will have no further costs in Crown Ridge. See Part
II, Item 1. 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Accounting Policies
Inventory consists principally of refined products and chemical
supplies, which are valued at the lower of cost (computed on a first in, first
out basis) or market.
Revenue recognition for sales of product is recognized when a contract
is executed or a valid purchase order has been received, product has been
shipped, the selling price is fixed or determinable, and collectibility is
reasonably assured.
Property, plant and equipment are recorded at cost and are depreciated
over the estimated useful lives of the related assets. Depreciation is computed
using the straight - line method for financial reporting purposes. The estimated
useful lives of property, plant, and equipment are as follows:
Plant and improvements and tankage 10-30 years
Equipment 7 years
Vehicles 5 years
Computer equipment, furniture and fixtures 3 years
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of receivables. In the normal
course of business, the Company performs ongoing credit evaluations of its
customers and maintains allowances for possible losses which, when realized,
have been within the range of management's expectations.
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Results of Operations
For the three month period ending June 30, 2002 compared to the three
month period ending June 30, 2001
Total revenue decreased from $7,362,337 for the three month period
ended June 30, 2001 to $6,184,136 for the three month period ended June 30,
2002, a decrease of $1,178,201. Cost of sales decreased from $6,497,765 for the
same period in 2001 to $5,685,865 for the same period in 2002, a decrease of
$811,900. The decrease in revenues was primarily the result of a decrease in
sales volume of approximately 7,490 tons. This was partially offset by increased
revenue per ton on the sales volume. The decrease in cost of sales is primarily
the result of the reduced volume of asphalt sold.
General and administrative expenses decreased from $848,638 for the
three month period ended June 30, 2001 to $654,438 for the three month period
ended June 30, 2002, a decrease of $194,200. This decrease is primarily due to
two factors: (i) decreased legal expenses; and (ii) efficiencies in reducing
labor costs. $847,746 of bad debt recovery was recorded as described in Note 6.
Net other income/expenses decreased from an expense of $603,207 for the
three month period ended June 30, 2001 to income of $2,305,147 for the three
month period ended June 30, 2002, an expense decrease of $2,908,354. This
increase is primarily made up of $2,998,176 gain on divestiture of the Crown
Ridge interest to MCNIC as described in Note 7 . Interest included in other
income/expense that is related to the Company's Credit Facility and Preferred
Contribution for its asphalt distribution business is $663,524 for the three
months ending June 30, 2002. This amount is partially offset by interest income
and other income of $1,379.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Minority interest of $12,135 represents Foreland's approximate 33%
interest in the loss of CAT, LLC.
For the six month period ended June 30, 2001, compared to the six
months ended June 30, 2000
Total revenue decreased from $7,645,590 for the period ended June 30,
2001 to $6,652,457 for the period ended June 30, 2002, a decrease of $993,133.
Cost of sales also decreased from $7,573,662 for the period ended June 30, 2001
to $6,998,165 for the period ended June 30, 2002, a decrease of $575,497. The
decrease in revenues was primarily due to a reduction in sales volume of
approximately 5,980 tons offset partially by increased revenue per ton. The
decrease in cost of sales is primarily the result of lower asphalt sales volume.
General and administrative expenses decreased from $1,592,061 for the
period ended June 30, 2001 to $1,277,340 for the period ended June 30, 2002, a
decrease of $314,721. This decrease is primarily due to decreased legal expenses
and labor efficiencies. $847,746 of bad debt recovery was recorded as described
in Note 6.
Net other income/expenses decreased from an expense of $936,626 for the
period ended June 30, 2001 to income of $1,534,878 for the period ended June 30,
2002, an expense decrease of $2,471,504. The 2002 total was comprised of
$1,319,756 interest related to the Company's credit facility and the
Preferential Capital Contribution for its asphalt distribution business, and
other interest costs of $147,076. This amount is offset by a gain on divestiture
of the Crown Ridge interest to MCNIC as described in Note 7 of $2,998,176, and
interest income and other income of $3,534.
Minority interest of $ 20,502 represents Foreland's approximate 33%
interest in the loss of CAT, LLC.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company does not believe it is subject to the material risks of
loss related to certain market risks, such as interest rate risks, foreign
currency exchange rate risks or similar risks, and therefore the Company does
not engage in transactions, such as hedging or similar transactions in
derivative financial instruments, intended to reduce its exposure to such risks.
However, the Company is subject to general market fluctuations related to the
purchase of its basestock asphalt and may suffer reduced operating margins to
the extent its increased costs are not passed through to its customers. Such
prices generally fluctuate with the price of crude oil. The Company is prevented
in certain contracts with MCNIC from utilizing any hedging strategies to
minimize any market price changes. The Company believes the inability to protect
itself from market fluctuations may negatively impact its profit margins.
The Company is also subject to certain price escalation and
de-escalation clauses in its asphalt distribution sales contracts. The Company
supplies asphalt to projects in certain states where regulations provide for
escalation and de-escalation of the price for such asphalt relative to the price
difference from the time the project is awarded to the successful bidding
company and the time the project is completed. The Company includes such
de-escalation risk into its bid process and does not believe it has material
exposure to risk resulting from these regulations.
17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
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 damages award (the
"Damages 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 Damages 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 Damages Award as of June
30, 2002, is $20,743,231.22, 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 Damages 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
18
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 Company has 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 or before the last day of April, May, June and July 2002, the
Company did in fact pay the $100,000 payment to extend the option for a
additional 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 Damages 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.
On June 13, 2002, Geneva Rock Products, Inc. ("Geneva") filed an
action, Civ.# 020904488, against CAPCO in the Third Judicial District Court in
and for Salt Lake County - State of Utah. In its Complaint, Geneva seeks
monetary damages stated to be in excess of $1,600,000 allegedly caused by
defects in asphalt binder purchased by Geneva from CAPCO.
On August 2, 2002, CAPCO filed its Answer to Geneva's Complaint. In
addition to answering Geneva's allegations, CAPCO counterclaimed $57,000 in
unpaid invoices. Although CAPCO intends to vigorously contest Geneva's claims,
and believes that they are without merit, due to the inherent uncertainty in
litigation and the fact that the proceedings are in such an early stage, CAPCO
cannot predict with any certainty whether CAPCO will prevail in this litigation.
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.
As noted elsewhere in this Report, As of June 30, 2002, there were
arrearages in the amount of $1,200,000 on the Company's preferred stock.
Pursuant to the designations and preferences of the preferred stock, the
foregoing arrearages could be satisfied by the issuance of shares of the
Company's common stock in lieu of cash payments at the "fair market value" of
the common stock as defined in the designations and preferences. As of June 30,
2002, approximately 52,173,913 shares of common stock could have been issued at
the then "fair market value" in satisfaction of the preferred stock dividend
arrearages.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
19
ITEM 6. Exhibits and Report on Form 8-K
A. Exhibits:
Exhibit A Certification of Jay A. Mealey the President and
Chief Executive Officer of Crown Energy Corporation.
Exhbiit B Certification of Alan L. Parker the Controller of
Crown Energy Corporation.
B. Report on Form 8-K
None.
20
PART III - SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN ENERGY CORPORATION
(Registrant)
Date: August 14, 2002 By: /s/ Jay Mealey
---------------------
Jay Mealey,
Chief Executive Officer
Date: August 14, 2002 By: /s/ Alan Parker
---------------------
Alan Parker, Controller
21
Exhibit A
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
IN COMPLIANCE WITH
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Jay A. Mealey, President and Chief Executive Officer of Crown Energy
Corporation, hereby certify that the accompanying Form 10-Q of Crown Energy
Corporation fully complies with the requirements of section 13(a) or section
15(d) of the Securities and Exchange Act of 1934 and that the information
contained in the accompanying Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of Crown Energy
Corporation.
/s/ Jay Mealey
------------------------------------
Name: Jay Mealey
Title: President and Chief Executive
Officer of Crown Energy Corporation
22
Exhibit B
CERTIFICATION OF CHIEF FINANCIAL OFFICER
IN COMPLIANCE WITH
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Alan L. Parker, Controller of Crown Energy Corporation, hereby
certify that the accompanying Form 10-Q of Crown Energy Corporation fully
complies with the requirements of section 13(a) or section 15(d) of the
Securities and Exchange Act of 1934 and that the information contained in the
accompanying Form 10-Q fairly presents, in all material respects, the financial
condition and results of operations of Crown Energy Corporation.
/s/ Alan Parker
------------------------------------
Name: Alan Parker
Title: Controller of Crown Energy Corporation
23