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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year ended December 31, 1997
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 (I.R.S. Employer
incorporation or organization) Identification No.)
215 South State, Suite 550
Salt Lake City, Utah 84111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 537-5610
Securities registered pursuant to Section 12 (b) of the Act:
(None)
Securities registered pursuant to Section 12 (g) of the Act:
$0.02 PAR VALUE COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES (X) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock, Par Value $0.02 per share
held by non-affiliates of the Registrant on March 27, 1998, was $11,019,725
using the average bid and asked price for Registrant's Common Stock. As of March
24, 1998, Registrant had 11,680,549 shares of its $0.02 par value Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Definitive Proxy to be filed with the
Commission pursuant to Regulation 14A of the Securities Act of 1933 within 120
days after the close of the Company's most recent fiscal year are incorporated
by reference into Part III hereof.
Transitional Small Business Disclosure Format (check one)
YES [ ] NO [X]
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PART I.
ITEM 1. BUSINESS
General
Crown Energy Corporation ("Crown" or the "Company") is a Utah
corporation which specializes in the mining, production and marketing of premium
asphalt extracted from oil sands. The Company directs its activities from its
corporate offices in Salt Lake City, Utah. The Company was formed in 1981 as an
oil and gas production company. The Company changed its business focus to
concentrate on the mining, production and marketing of premium asphalt in 1995.
The Company believes it made significant advancements in this industry during
1997 by aligning itself with two major natural resource companies and by
commencing construction of an approximately $19 million asphalt processing
facility at Asphalt Ridge, near Vernal, Utah (the "Facility").
Effective August of 1997, the Company formed Crown Asphalt Ridge,
L.L.C., a Utah limited liability company ("Crown Ridge") with MCNIC Pipeline &
Processing Company, a Michigan corporation ("MCNIC") to develop the Asphalt
Ridge oil sand project in northeast Utah. MCNIC is a wholly owned subsidiary of
MCN Energy Group, Inc. ("MCN"), a large diversified energy holding company with
over $4 billion in assets and investments throughout North America and India.
MCN is involved in oil and gas exploration and production, natural gas
gathering, processing, transmission and storage, energy marketing, electric
power generation and distribution, and other energy-related businesses and
serves 1.2 million customers in more than 500 communities throughout Michigan.
Information about MCN Energy Group is available on the World Wide Web at
http://www.mcnenergy.com.
Contemporaneous with the MCNIC venture, the Company also closed on an
agreement for the private sale of $5 million of the Company's $10 Series A
Cumulative Convertible Preferred Stock to Enron Capital & Trade Resources Corp.
("ECT"), a subsidiary of Enron Corp. ("Enron"), a New York Stock Exchange
Company. Enron is a major buyer and seller of natural gas with assets of
approximately $20 billion. Enron also builds and manages worldwide natural gas
transportation, power generation, liquids, and clean fuels facilities. Proceeds
from the sale of stock to ECT have been and will be used for working capital and
to finance the Company's share of construction and start-up costs related to
Crown Ridge, which includes the construction of the Facility.
The Facility will process oil sands extracted from Crown Ridge's
estimated 100 million-barrel reserve. The Facility is designed to initially
process approximately 3,000 tons of oil sands daily for an average production of
1,700 barrels of asphalt per day. The estimated annual production of asphalt is
approximately 100,000 tons. The Company believes that the asphalt produced at
the Facility meets new stringent highway specifications and will have high
durability at lower cost. Further, the Company expects the Facility to be
operational in mid-1998. However, there can be no assurance that construction
will be completed on time or that when completed that premium asphalt will be
produced at lower cost than is presently available in the market.
As the Company prepares for commercial asphalt production in 1998, the
Company is also actively seeking other asphalt and oil sands related business
opportunities although no agreements have been reached. Further, there is no
guarantee that any agreement can or will be reached on terms and conditions
favorable to the Company.
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Crown Asphalt Ridge, L.L.C.
Formation. Effective August 1, 1997, the Company, through its
wholly-owned subsidiary, Crown Asphalt Corporation (hereafter collectively
referred to with Crown Energy Corporation as the "Company" unless indicated
otherwise) jointly formed Crown Ridge with MCNIC to develop substantial oil
sands reserves at Asphalt Ridge in Uintah County, Utah (the "Reserves") and to
continue to develop the Facility which is located on the Reserves. Utah contains
approximately 90 percent of the known U.S. oil sand deposits consisting of over
28 billion barrels of oil. The Company believes that the Reserves constitute one
of Utah's largest and most accessible deposits. Extensive studies estimate
surface minable reserves at Asphalt Ridge to be approximately 140 million
barrels, of which the Company believes Crown Ridge controls over 100 million
barrels.
MCNIC and the Company (sometimes referred to hereafter as the
"Members") will initially possess sharing ratios ("Sharing Ratios") of 75% and
25%, respectively, in the profits, losses and obligations of Crown Ridge. Once
the Facility is built by Crown Ridge and the economic operations of Crown Ridge
are successful to the extent of paying out to MCNIC an amount equal to 115% of
its cash investment in Crown Ridge, excluding tax benefits, the Company's
Sharing Ratio in Crown Ridge will increase to 50%. Thereafter the Members may
build other plants to further develop the oil sands reserves. These plants will
require additional capital contributions from the Members, which are described
in more detail below. The Company may participate up to 50% in the additional
facilities and up to 60% after payout. There are provisions for the Company to
retain an interest in these facilities after the recoupment of certain amounts
in the event the Company does not participate in the costs of such additional
facilities, as provided in the "Back-In Option."
Crown Ridge will proceed in phases in order to shepherd the risks and
resources of the Members. Each phase calls for the Members to contribute new
capital to move Crown Ridge through the next phase. The first phase called for
detailed engineering and verification of the oil sand reserves of the Company.
MCNIC and the Company have both contributed capital of $300,000 and $100,000
respectively, to Crown Ridge to cover the engineering and verification costs and
complete the first phase. With the completion of the first phase and as part of
the second phase, the Company has recently contributed, or will be required to
contribute, the following to Crown Ridge:
1. The Company's rights as lessee under certain equipment leases
on mining equipment with a fair market value of up to $3.5
million dollars (MCNIC has agreed that this contribution will
be accepted in lieu of $3.5 million in cash);
2. A sublicense of Crown's license of proprietary oil sands
refining technology from Park Guymon Enterprises, Inc.
("PGEI"), which is accorded only a nominal value under Crown
Ridge's Operating Agreement (the "Operating Agreement").
Following the commencement of operations, Crown Ridge shall be
responsible for paying the 2-5% royalty required by the
sublicense;
3. The Reserves (These properties are initially valued by Crown
Ridge at $500,000); and
4. An amount of cash needed to bring the Company's new capital
contributions up to 25% capital to construct the Facility,
giving full credit to the $3.5 million of equipment leases and
the $500,000 of property rights in 1 and 3 above.
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MCNIC has agreed to initially fund 75% of the amounts required by Crown
Ridge to construct the Facility and to operate Crown Ridge. Both Members may
make such additional contributions as may be required or agreed in the course of
building the Facility. To date, the Company has contributed approximately
$433,000 to Crown Ridge.
Subsequent Plants. Under the Crown Ridge Operating Agreement, the
Members may construct up to two subsequent plants (the "Subsequent Plants"),
similar to the Facility if the economics of Crown Ridge's oil sands processing
business so permit. In sum, a Subsequent Plant may be constructed if certain
economic returns (approximately 18% on 50% of its Capital Contributions to Crown
Ridge or any successor joint venture during any 12 month period) have been
experienced by MCNIC from the Facility and if the Members believe or are
independently advised that a sufficient market exists to allow for the operation
of the Subsequent Plants without damaging the competitive position or returns of
the earlier already built plants. The agreement of MCNIC and the Company is that
any Subsequent Plant will be held and operated by a separate legal entity (a
"Successor Entity") formed by the Members with similar provisions as Crown
Ridge. The Company may elect to participate in either of the Subsequent Plants
and may obtain, at its option, between 10% and 50% of the interests in the newly
formed entity. A portion of the Company's obligations to contribute to the
Successor Entity may be satisfied through the value of the contributed
properties which the Company may be credited with, as described below.
Following the determination by both Members or one Member to proceed
with the construction of a Subsequent Plant, Crown Ridge will convey to the
Successor Entity sufficient oil sand reserves or other property and water rights
to enable it to sustain operations in accordance with the applicable projections
and market study. If, during the twelve months prior to the sale of products
from the first Subsequent Plant, MCNIC has realized a return of approximately
30% on 50% of its Capital Contributions to Crown Ridge, the Company will be
credited with a value for these reserves and properties equal to $.10 per barrel
for the products estimated to be produced from the Subsequent Plant over a 20
year period.
If the Company elects not to proceed with any Subsequent Plant, and to
not make the needed capital contributions to build and operate the Subsequent
Plant, Crown will have a reduced interest in the Subsequent Plant (but will
still be credited with an interest equal to the value of the contributed
properties as described below, if the requisite return is achieved), subject to
an escalation under the Back-In Option described below.
Whether or not the Company elects to proceed with either Subsequent
Plant, if the Subsequent Plants reach certain levels of economic success
(approximately 115% of MCNIC's investment in plant 2 without giving effect to
any tax benefits), the Company will receive an increased interest of 10% in the
Subsequent Plant as a result of its oil sand properties and technology being
used by the Subsequent Plant(s).
Management of Crown Ridge; Major Decisions. Crown Ridge is governed by
a Management Committee consisting of five Managers. Initially, MCNIC is entitled
to appoint four Managers and the Company, one Manager. MCNIC's Manager
appointees are William Kraemer, Joseph Roberts, Jr., Martin Vucinaj, and Daniel
Schiffer. The Company's Manager appointee is Mr. Jay Mealey, the Company's
President. Joseph A. Roberts, Jr., was elected Chairman of the Management
Committee by a majority vote of the Managers. Managers may be removed or
replaced from time to time by the Member which appointed them.
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If any adjustment is made in the Members' respective Sharing Ratios
both the Company and MCNIC will be entitled to appoint one Manager for each 20%
of Crown Ridge interest held by that Member (rounded to the nearest 20% level),
provided, that MCNIC and the Company shall each be entitled to at least one
Manager at all times that they are Members of Crown Ridge. The size of the
Management Committee may be increased to six Managers if the foregoing
calculation requires it.
Management decisions shall generally be made through a majority vote of
the Managers. However, certain "Major Decisions" such as: (i) the approval of
the detailed engineering for the Facility; (ii) the approval of, or substantial
amendment to, the annual operating plan (the "Annual Operating Plan"); and (iii)
calls for additional Capital Contributions (except for calls contemplated by the
EPC Contract as defined in Crown Ridge's Operating Agreement and those required
to maintain Crown Ridge in emergencies); most distributions to the Members
require unanimous approval of the Managers.
Crown Ridge's operations shall be conducted each year pursuant to an
annual operating plan (the "Annual Operating Plan"). The Annual Operating Plan
shall address all aspects of Crown Ridge's operations for the coming year,
including budgeting for operations, the mining of oil sands products and the
marketing of those products. In the event the Management Committee is unable to
unanimously approve an Annual Operating Plan for any given calendar year, a
majority of the Managers shall have the authority to continue to maintain Crown
Ridge's operations at levels comparable to those approved under the last Annual
Operating Plan.
Additional Opportunities Within the Project Area and Area of Mutual
Interest. Crown Ridge may elect to pursue additional opportunities ("Additional
Opportunities") within the Asphalt Ridge project area ("Project Area") which are
brought to its attention by one of its Members. Should Crown Ridge elect to
pursue such an Additional Opportunity, it may do so either through Crown Ridge
or by forming a new company containing terms and provisions substantially
similar to those of Crown Ridge. In the event that Crown Ridge does proceed with
any Additional Opportunity, the Company shall have the right, but not the
obligation, to obtain an equity interest in each such Additional Opportunity of
no less than 10% and no greater than 50% (with MCNIC obtaining the remaining
interest). If the Management Committee determines not to proceed with the
Additional Opportu nity, any Member of Crown Ridge may then do so alone, subject
to the Back-In Option, discussed below, of the nonparticipating Member.
If either Member desires to develop any interests in real property,
fixtures or improvements within the State of Utah relating to the processing of
oil sands, bitumen, asphaltum or other minerals or mineral resources into
asphalt, performance grade asphalt, synthetic crude oil, diesel fuel, or any
other product produced using the intellectual property covered by the Company
Sublicense or any derivation thereof (an "AMI Opportunity"), the AMI Opportunity
must first be offered to Crown Ridge. The Company, shall then have the option,
but not the obligation, of acquiring (i) up to a 50% equity interest if the AMI
Opportunity relates to, or is designed for, the production and sale of asphalt
or performance grade asphalt; or, (ii) up to a 662/3% equity interest if the AMI
Opportunity relates to the production of synthetic crude oil, diesel fuel or any
other similar products.
If Crown Ridge elects not to proceed with the AMI Opportunity, the
Member who brought the opportunity to Crown Ridge may proceed alone and the
nonparticipating Member shall have no further interest in the activity covered
by such opportunity. Except as limited in the discussion above, each Member of
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Crown Ridge shall have the right to independently engage in any business
activities except that MCNIC shall not be entitled to use the Company's
technology provided to Crown Ridge in connection with such activities.
The Back-In Option. The Back-in Option is a means by which the Member
which initially elects not to participate in a plant may subsequently
participate at a later date upon favorable terms. The Back-in Option shall apply
if:
(i) The Company elects not to proceed with construction of the
Facility following the completion of the detailed engineering
(and MCNIC elects to proceed);
(ii) either Member elects not to participate in the construction of
a Subsequent Plant; or
(iii) either Member elects not to participate in an Additional
Opportunity.
In the case of the Company's election not to participate in Subsequent Plants or
Additional Opportunities, the Company shall be entitled to a 60% interest in the
particular plant or opportunity if it is the non-participating Member, and MCNIC
shall be entitled to a 40% interest if it is the non-participating Member, after
the participating Member has achieved a 200% payout of the costs of the
respective facility.
Distributions; Allocations of Profits and Losses. The Management
Committee shall cause Crown Ridge to distribute Available Cash, as defined
within the Operating Agreement, to the Members quarterly, within 30 days
following the end of each quarter. Distributions will be made in connection with
the respective capital account balances after taking into account all
allocations for profits and losses.
Management Agreement. Pursuant to an Operation and Management Agreement
(the "Management Agreement"), the Company will act as the "Operator" of the
Facility upon commencement of operations. Under the Management Agreement, the
Company will act as an independent contractor to Crown Ridge and will (i)
manage, supervise and conduct the operations of Crown Ridge; (ii) carry out the
terms of the Annual Operating Plan adopted and approved by the Management
Committee of Crown Ridge; (iii) implement the decisions made and instructions
given from time to time by the Management Committee. As compensation for the
services rendered under the Management Agreement, the Company will receive (i) a
monthly fee of $3,000; (ii) the payment of all out-of-pocket expenses incurred
through the performance of its duties; (iii) the payment of the reasonable
salaries, wages, overtime and other similar compensation paid to employees who
are employed full time in connection with the operations of Crown Ridge; and
(iv) a monthly home office overhead charge of $10,000.
During the first two years, the Company may be removed as Operator only
for "good cause" as defined within the Management Agreement. After this initial
term, the agreement will automatically renew for unlimited succeeding one year
terms unless either party indicates its desire to not renew within 90 days of
the expiration of the term. Also following the expiration of the initial term,
Crown Ridge may challenge the Company's status as Operator on economic grounds
by serving written notice to the Company that it believes that the operations of
the Facility may be conducted more efficiently and cheaply and that it is
willing to become the Operator (or has a bona fide commitment from a third party
to do so) on a reduced charge basis. Following the receipt of the economic
challenge, the Company will have 30 days to notify Crown Ridge that it elects to
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(i) allow Crown Ridge, or its designee, to become the Operator under the
proposed terms, or (ii) continue as the Operator under the proposed terms.
Asphalt Resources and Production
Asphalt Ridge Resource. The Asphalt Ridge oil sand deposit is located
in the Uintah Basin in eastern Utah near the town of Vernal. It is situated on
the east flank of the Uintah Basin incline dipping to the southwest at 3(degree)
to 8(degree). Numerous faults of differing size occur along Asphalt Ridge, which
help define the saturated areas.
Extensive reserve studies, including core drilling performed by Bechtel
and Sohio between the late 1950's and mid-1980's, estimate surface minable
reserves to be approximately 140 million barrels. The deposit is comprised of an
unconsolidated oil-wet sandstone up to 300 feet in thickness with overburden
thickness ranging from 0 to 500 feet. There are three "pit" areas along Asphalt
Ridge where the recoverable reserves are principally located. These areas are
referred to as the "A", "D", and "South" tracts. Crown Ridge controls
approximately 7,000 acres of private and state land encompassing these tracts,
which the Company believes contain an estimated 100 million barrels of surface
minable reserves.
Crown Ridge's first production facility will be located at the "A"
tract. The "A" tract contains in excess of 18 million barrels of surface minable
reserves with an average oil saturation of 11% by weight. This pit is partially
opened and is currently being mined on a small scale for use as local asphalt
road base. The pit has been mined since the 1940's and provides a natural site
to commence operations as overburden has been removed and an open pit area
exists for waste sand storage.
Production Technology. The hydrocarbon potential of oil sands is widely
recognized. North America contains the largest known oil sands deposit in the
world, located in the Athabasca region in Alberta, Canada. Utah contains about
90 percent of the known U.S. oil sands deposits consisting of over 28 billion
barrels of oil in place in about 50 deposits. Asphalt Ridge is one of Utah's
largest deposits containing over a billion barrels of oil in place. Numerous
research efforts have focused on applying the hot water processes used in Canada
to Utah oil sands with no commercial success. The fact that the Utah sands are
"oil-wet" - unlike the Canadian sands which are "water-wet" - and the fact that
the Utah oil is substantially more viscous dictates that a different process be
used. The Company and Dr. E. Park Guymon of Weber State University developed a
solvent/surfactant wash production process which was patented in 1990 and is now
sublicensed to Crown Ridge. The production process will enable Crown Ridge to
successfully produce premium asphalt from mined oil sands.
Production Process. There are three major steps in the production
process: (1) mining, (2) extraction - separation of the oil from the sand, (3)
distillation - recovery of the solvent and separation of light fractions from
the asphalt.
Mining. The oil sands ore will be mined using conventional surface
mining techniques and equipment. The ore will be transported by haul trucks to a
stockpile and loading facility near the extraction unit.
Extraction. The ore will be loaded from the stockpile into a feed
chute. Starting in the feed chute, the sands are mixed with a readily available,
organic diesel solvent using spray nozzles, mixing paddles, and countercurrent
washers. The oil-solvent mix is decanted to the oil processing stage and the
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sand is then washed with water and a de-emulsifying surfactant to release the
remaining oil. The oil-solvent mix is processed using three-phase decanting
centrifuges to remove any solids and water and is transported to the solvent
recovery/distillation process. The water and surfactant are recycled through the
process. The residual sand and clay will contain no hazardous materials and will
meet regulatory standards for "clean" soil. It will be moved to a backfill pile
located in the previously mined pit where it will be graded and compacted.
Distillation. Solvent - about 60% of the oil-solvent solution - will be
recovered using an atmospheric distillation unit and returned for re-use in the
closed-loop extraction unit. The remaining oil will be fractionated through
vacuum distillation into a light distillate fraction and a premium asphalt.
The Asphalt Industry
The Company anticipates that the asphalt produced from Asphalt Ridge
will initially be marketed as a high quality base stock asphalt to make modified
and performance grade asphalt cements. The Company also expects Crown Ridge to
begin to develop a market for the product as a performance grade asphalt and a
specialty asphalt modifier.
The federal government recently completed the Strategic Highway
Research Program (SHRP) which established uniform performance and quality
standards which states must follow for federal and state highways. As states
implement the SHRP standards, polymer modified asphalts will begin to be
replaced by performance grade-modified (PG-modified) asphalts.
As a result of these more stringent performance standards, asphalt
suppliers throughout the U.S. are having to rework their asphalt formulations
because, for the most part, existing conventional petroleum based asphalt cannot
meet these standards without some form of modification. Asphalt modification
typically requires the blending of a solid polymer (plastic) or other additive
with a base stock asphalt. The main problem suppliers and manufacturers face
with asphalt modification is keeping the polymer/additive stable in the asphalt
after blending. Without a homogeneous dispersion of the polymer/additive in the
asphalt, the improvement of performance of the material cannot be achieved.
State highway departments have begun to impose significant quality
control/assurance penalties to contractors and suppliers for modified asphalt
which does not meet the project specifications. These penalties have forced
suppliers to seek good, consistent base stock supplies which provide product
stability after blending. Regional petroleum asphalt base stock supplies are
often very poor quality which make them difficult or impossible to modify to
meet many of the SHRP specifications. As a result, virtually all of the base
stock asphalt used to make PG-modified asphalt in this market is imported from
outside the region.
The asphalt produced from Asphalt Ridge is expected by the Company to
be a high quality base stock asphalt. It should be a very stable material with
consistent, natural performance qualities. However, until the Facility is
completed and the asphalt produced there can be no assurance of its quality or
performance. The naturally occurring qualities of the asphalt are expected to
make it very versatile which the Company believes will enable it to meet a broad
range of SHRP specifications.
Competition. The Company, through Crown Ridge, will be competing with
several large, better financed companies in the regional asphalt supply
business. The three main regional suppliers of PG-modified asphalt and polymer
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modified are Koch Materials Company/Conoco, Petro Source Oil Company and
Sinclair Oil Company.
Light distillate. Light distillate is a by-product of the asphalt
refining process. The light distillate can be sold directly into the local
off-road diesel market or as a primary feedstock for motor fuels to refineries
in Salt Lake City. The Company believes there is a ready market for the
distillate production from the project and competition is not a factor because
of the relatively insignificant volume of production. Prices for distillate vary
with market conditions and the price of crude oil.
The Company believes Crown Ridge will benefit from an abatement of the
$10.00 per barrel Utah motor fuels tax for that portion of its production which
is sold as motor fuels. The tax abatement amount is either paid directly to the
producer from the State in the form of a rebate or paid by the refiner directly
to the producer from the tax proceeds collected at the retail level. This
abatement is not applicable to fuels not subject to the motor fuels tax such as
off-road diesel.
Seasonality. The asphalt industry is seasonal. Demand for asphalt
decreases significantly during the winter months when cold weather and snow
interferes with highway construction and repair. Notwithstanding the decrease in
demand for asphalt and asphalt related products during the winter months, the
Company believes that it can continue mining the oil sands and producing asphalt
to meet the peak demands of spring and summer.
Environment
The Company and its subsidiaries are subject to federal, state and
local requirements regulating the discharge of materials into the environment,
the handling and disposal of solid and hazardous wastes, and protection of
health and the environment generally (collectively "Environmental Laws").
Governmental authorities have the power to require compliance with these
Environmental Laws, and violators may be subject to civil or criminal penalties,
injunctions or both. Third parties may also have the right to sue for damages
and/or enforce compliance and to require remediation of contamination.
The Company and its subsidiaries are also subject to Environmental Laws
that impose liability for costs of cleaning up contamination resulting from past
spills, disposal and other releases of substances. In particular, an entity may
be subject to liability under the Federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund") and similar state laws
that impose liability - without a showing of fault, negligence, or regulatory
violations - for the generation, transportation or disposal of hazardous
substances that have caused or may cause, environmental contamination. In
addition, an entity could be liable for cleanup of property it owns or operates
even if it did not contribute to contamination of such property.
The Company expects that it may be required to expend funds to comply
with federal, state and local provisions and orders which relate to the
environment. Based upon information available to the Company at this time, the
Company believes that compliance with such provisions will not have a material
affect on the capital expenditures, earnings and competitive position of the
Company.
Sale of Preferred Stock to Enron Capital & Trade Resources Corp
On November 4, 1997, the Company completed the sale of 500,000 shares
of its $10 Series A Cumulative Convertible Preferred Stock ("Series A
9
Preferred") to ECT pursuant to a Stock Purchase Agreement dated September 25,
1997 for an aggregate sales price of $5 million. Proceeds of the transaction
have and will be used for working capital and to finance the Company's share of
Crown Ridge's construction and start-up costs. ECT is a subsidiary of Enron, one
of the world's largest integrated natural gas and electricity companies with
approximately $20 billion in assets.
The Series A Preferred shares are convertible at the option of its
holder(s) into 24% of the common stock of the Company. Dividends accrue on the
outstanding Series A Preferred shares at the rate of 8% per annum and may be
paid through cash or comon shares of the Company at the option of the holder(s)
of such stock. Subject to the holder(s)' right to convert the Series A
Preferred, the Company may redeem such stock at any time from the date on which
it was issued at a percentage of the Series A Preferred's stated value ($10)
which will vary depending on when the Company exercises such right. The
holder(s) of the Series A Preferred may also require the Company to redeem its
Series A Preferred under certain circumstances after the eighth anniversary of
the issuance of such stock.
The holder(s) of the Series A Preferred have the right, but not the
obligation, to appoint 20% of the Company's Board of Directors. To date, the
holders(s) have not appointed any Directors. In addition, the holder(s) of the
Series A Preferred have certain voting rights upon any attempt by the Company to
alter the rights and preferences, redemption, voting or dividend rights senior
to the Series A Preferred, increase the number of Series A Preferred, reclassify
the Company's securities or enter into specified extraordinary events. All
voting rights of the Series A Preferred expire upon the issuance by the Company
of a notice to redeem such shares.
The shares of common stock issuable upon conversion of the Series A
Preferred is 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 portions
which are issued (i) in connection with the Company's venture with MCNIC in
Crown Ridge, or (ii) 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 the then fair
market value).
Subsidiaries of the Company
Crown Asphalt Corporation ("Crown Asphalt") was formerly known as Buena
Ventura Resourcs Corporation, a Utah Corporation.
Crown Asphalt was organized October 24, 1985 and was acquired by the
Company on September 30, 1992. Crown Asphalt is a Member of Crown Ridge.
Crown Asphalt Products Company ("Crown Products") was formerly known as
Energy Technologies Corporation. Crown Products was formed in 1991, but until
recently has been a dormant entity. The Company recently activated Crown
Products for the purpose of developing an asphalt marketing and distribution
business.
Applied Enviro Systems, Inc., is a dormant Oregon corporation.
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Gavilan Petroleum, Inc
In order to focus more completely on its core business of asphalt
mining and production, the Company sold 100% of its interest in its wholly-owned
subsidiary, Gavilan Petroleum, Inc. ("Gavilan") to Road Runner Oil, Inc. ("Road
Runner") pursuant to the terms and conditions of a Stock Purchase Agreement,
dated July 2, 1997 (the "Stock Agreement"). Gavilan operated oil and natural gas
properties. Under the Stock Agreement, the Company transferred all of the issued
and outstanding shares of Gavilan stock to Road Runner in exchange for $25,000
at closing and a $125,000 promissory note (the "Note"). The Note is secured by a
pledge of the Gavilan stock. The Company maintains that Road Runner is presently
in default under the terms of the Note and Stock Agreement and the Company is
currently evaluating its options concerning this matter. See "Item 3. Legal
Proceedings."
Employees
As of March 24, 1998, the Company had 9 full and part-time employees,
including 5 employees of its wholly-owned subsidiaries. None of the Company's
employees of the Company are represented by a union or other collective
bargaining group. Management believes that its relations with its employees are
good.
ITEM 2. PROPERTIES
The Company conducts its business operations at 215 South State, Suite
550, Salt Lake City, Utah, where it has approximately 3,423 square feet of
office space under lease until September 30, 2001. Under the terms of the lease,
the Company pays $4,400 per month through September 30, 1998; $4,638 per month
through September 30, 1999; $4,877 per month through September 30, 2000; and
$5,118 per month through the lease expiration date of September 30, 2001. There
is no renewal option under the terms of this lease. Management of the Company
believes that its current office lease is sufficient for its needs and believes
that it will either be able to negotiate a new lease on its existing space or
obtain suitable other space in the Salt Lake City area upon the expiration of
the existing lease.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings presently pending against the Company.
However, the Company maintains that Road Runner Oil, Inc. ("Road Runner") is in
default on the payment of $75,000 together with accrued interest from November
5, 1997 at the rate of 21% per annum under a certain Promissory Note and thus in
default under a Stock Purchase Agreement dated July 2, 1997. Road Runner
contends that the foregoing amount is offset by an overriding royalty in the
amount of $90,000 it claims the Company owes a third party. The Company
vigorously disputes Road Runner's claims. The Company has not yet taken any
legal action against Road Runner and is evaluating its options concerning this
matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 21, 1997, the Company held an annual meeting of its
shareholders to elect members of the Company's Board of Directors; to approve
the appointment of Pritchett, Siler and Hardy as independent accountants for the
11
Company; to approve the Crown Energy Corporation 1997 Long-Term Incentive
Compensation Plan (the "Plan"); and to approve the transfer of the Company's oil
sands reserves and related technology to an entity jointly organized with MCNIC.
Proxies for the meeting were solicited pursuant to Regulation 14A under the
Securities and Exchange Act of 1934. Approximately 7,832,767 shares of Common
Stock of the Company were represented in person or by proxy at the Meeting out
of a total of 11,572,141 shares. All four of the Company's directors were
re-elected to successive terms as directors of the Company with approximately
7,588,317 votes in favor of James A. Middleton, 7,471,067 in favor of Thomas W.
Bachtell and 7,179,578 votes in favor of both Jay Mealey and Rich Rawdin.
However, following the annual meeting, on or about November 26, 1997, Thomas W.
Bachtell resigned as a director of the Company. The Company has not yet filled
the vacant seat on the Board. The Company's shareholders also voted in favor of
appointing the accounting firm of Pritchett, Siler & Hardy as the Company's
independent auditors for the next fiscal year with 7,827,781 shares voting in
favor of the appointment, 1,750 shares voting against and 3,236 shares
abstaining.
The next proposal was to approve the Plan. The purpose of the Plan is
to assist the Company in attracting, retaining and motivating executive officers
and other key employees essential to the success of the Company through
performance-related incentives linked to long-range performance goals. The Plan
provides for discretionary awards (the "Awards") of nonqualified stock options.
All Awards will be made in, or based on the value of, the Company's common stock
at the date of grant. The Plan is administered by the Company's Board of
Directors. Under the Plan, the maximum number of shares of common stock for
which Awards may be granted is 2,000,000 subject to adjustment in the event of a
merger, consolidation, reorganization, recapitalization, stock dividend, stock
split or other similar event. The shares to be issued under the Plan may consist
of authorized but unissued shares or shares purchased in the open market.
Regular, full-time employees of the Company and its subsidiaries or affiliates
who are designated by the Board of Directors are eligible to participate in, and
receive Awards under the Plan. All of the executive officers of the Company are
eligible to participate in the Plan. The Plan was approved by the affirmative
vote of 6,748,188 shares of the Company voting in favor of the Plan, 838,758
voting against the Plan and 245,821 abstaining from voting.
The final proposal presented to the shareholders of the Company at the
Meeting was approval of the transfer of the Company's Reserves and related
technology to Crown Ridge. The transfer of the Reserves and technology was
approved with 7,816,167 shares voting in favor of the proposal, 1,800 voting
against and 14,800 abstaining.
No other matters were presented to the Company's shareholders for their
approval in the fourth quarter of the Company's 1997 fiscal year.
PART II.
ITEM 5. MARKET PRICE FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Crown's Common Stock has been traded in the over-the-counter market
since 1980. The common stock is currently listed on the NASD OTC Bulletin Board
under the symbol CROE. At the present time, only the common stock is publicly
traded. The following table sets forth the range of high and low bid quotations,
as adjusted for stock splits, of Crown's common stock as reported by the
National Quotation Bureau for each full quarter during the two most recent
fiscal years.
12
The table represents prices between dealers, and does not include retail
markups, markdowns or commissions, and may not represent actual transactions:
CALENDAR QUARTER ENDED HIGH BID LOW BID
March 31, 1996 1.13 0.63
June 30, 1996 1.03 0.69
September 30, 1996 0.81 0.63
December 31, 1996 1.44 0.60
March 31, 1997 1.25 0.63
June 30, 1997 1.03 0.53
September 30, 1997 1.50 0.63
December 31, 1997 2.00 1.22
As of March 13, 1998, the high bid and low offer quotations reported by
the National Quotation Bureau were $1.44 and $1.38, respectively. Crown has not
paid any cash dividend on its common shares. It is the present policy of the
Board of Directors of Crown to retain any earnings for use in the business, and
therefore, the Company does not anticipate paying any cash dividends on its
common stock in the foreseeable future. On March 24, 1998, approximately 796
shareholders of record held Crown's common stock.
On November 4, 1997 the Company completed the sale of 500,000 shares of
its Series A Preferred to ECT pursuant to a stock purchase agreement dated
September 25, 1997, and in reliance of Section 4(2) and 4(6) of the Securities
Act of 1933 (the "1933 Act"), for an aggregate sales price of $5,000,000.
Crown's Series A Preferred is not traded. Crown must pay dividends on its
outstanding Series A Preferred, which dividends accrue at the rate of 8% per
annum and may be paid in cash or common stock at the option of the holder(s) of
the Series of Preferred. The Company also agreed to issue a Warrant to ECT to
purchase up to 8% of the issued and outstanding shares of common stock of the
Company if the Company does not realize an internal rate of return of 39% after
five years.
On or about September 2, 1997, the Company's Board of Directors
approved the 1997 Stock Option Plan which the shareholders subsequently approved
on October 21, 1997. The Plan provides for the granting of awards of up to
2,000,000 shares of Common Stock to key employees, officers, directors, and
consultants. The awards consist of non-qualified options. Awards under the Plan
will be granted as determined by the Board of Directors. At present, 450,000
options have been granted under the plan in reliance upon Section 4(2) of the
1933 Act.
On September 24, 1997, the Company committed to issue a warrant to an
entity to purchase 100,000 shares of the Company's common stock at $1.00 per
share in reliance on section 4(2) of the 1933 Act for services to be rendered in
connection with the raising of financing. The Warrants expire September 24,
2002.
In 1997, the Company issued 35,000 shares of common stock to PGEI as
payment on a license, 8,606 shares to an individual as compensation for paying
an accounts payable for the Company and 56,877 shares to an individual in
payment of a promissory note, each in reliance on Section 4(2) of the 1933 Act.
The Company also issued a warrant, which had vested in April, 1995, to
purchase an aggregate of 183,750 shares of common stock to an entity for
services in connection with the raising of financing in reliance on Section 4(2)
of the 1933 Act.
13
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in the following table has been derived
from the financial statements for the periods indicated. The financial
statements as of and for the years ended December 31, 1993 through 1997 were
audited by Pritchett, Siler & Hardy, P.C., independent public accountants. The
following financial data should be read in conjunction with the financial
statements and related notes and with management's discussion and analysis of
financial conditions and results of operations included elsewhere herein.
Year Ended December 31
(In thousands except per share)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net Revenues $87 $225 $214 $326 $445
Income (Loss) from
Continuing
Operations ($1,153) ($422) ($234) ($230) ($193)
Income(Loss) Per Share
from Continuing
Operations ($0.11) ($0.04) ($0.03) ($0.03) ($0.02)
Total Assets $7,064 $4,591 $4,344 $4,351 $4,481
Total Long-Term
Obligations -0- $182 $794 $964 $1,040
Convertible Preferred
Stock 5,000 -0- -0- -0- -0-
Cash Dividends Per
Common Share $0.00 $0.00 $0.00 $0.00 $0.00
Shareholder's
Equity $6,929 $3,471 $3,065 $2,940 $2,880
The foregoing selected financial data is presented on a historical
basis and may not be comparable from period to period due to changes in the
Company's operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS
Liquidity and Capital Resources
At December 31, 1997, the Company had cash and other current assets of
$3,288,989 as compared to cash and other current assets of $245,931 at December
31, 1996. The increase of $3,043,058 was primarily due to the sale of $5 million
of preferred stock to ECT. The increase was partially offset by capital
contributions to Crown Ridge and payments on debt obligations. As of December
31, 1997, the Company had no long-term debt obligations and believes it has
sufficient capital to meet all of its current working capital requirements and
its share of Crown Ridge's budgeted capital requirements.
In addition, the Company will incur its proportionate share of
operating expenses of Crown Ridge until such time that Crown Ridge's operations
become profitable. Furthermore, should Crown Ridge incur unforseen additional
capital costs, the Company is obligated to pay its proportionate share of such
costs.
14
The Company believes it has sufficient capital to cover such obligations.
However, there can be no assurance that such additional obligations can be met.
Results of Operations
1997 vs. 1996
-------------
Oil and gas revenue decreased from $224,855 for the year ended December
31, 1996 to $86,781 for the year ended December 31, 1997, a decrease of $138,074
(61%). This decrease was due to the sale of the Company's oil and gas producing
subsidiary, Gavilan Petroleum, Inc. in July, 1997.
Oil and gas production costs decreased from $137,340 for the year ended
December 31, 1996 to $54,653 for the year ended December 31, 1997, a decrease of
$82,687 (60%). This decrease was due to the sale of the Company's oil and gas
producing subsidiary, Gavilan Petroleum, Inc. in July, 1997.
General and administrative expenses increased from $551,401 for the
year ended December 31, 1996 to $775,544 for the year ended December 31, 1997,
an increase of $224,143 (41%). This increase was primarily due to an increase in
expenses relating to the Asphalt Ridge oil sand project financing.
Depletion, depreciation and amortization decreased from $80,062 for the
year ended December 31, 1996 to $39,857 for the year ended December 31, 1997, a
decrease of $40,205 (50%). This decrease was primarily due to a reduction in
depletion expense related to the sale of the Company's oil and gas producing
subsidiary, Gavilan Petroleum, Inc. in July, 1997.
Other income/expenses increased from total expenses of $6,682 for the
year ended December 31, 1996, to total expenses of $803,290 for the year ended
December 31, 1997, an increase of $796,608. This increase was due to the loss
recorded on the sale of Gavilan Petroleum, Inc.
1996 vs. 1995
-------------
Oil and gas revenue increased from $213,526 for the year ended December
31, 1995 to $224,855 for the year ended December 31, 1996, an increase of
$11,329 (5%). This increase was due to higher average oil prices. Average oil
prices increased from $16.90 per barrel in 1995 to $19.85 per barrel in 1996, an
increase of 17%. This revenue increase was partially offset by a decline in
barrels produced. Barrels of oil sold for the year ended December 31, 1996 were
9,435 as compared to 10,501 barrels for the same period in 1995, a decrease of
10%. In 1997, the Company sold its oil producing subsidiary to focus on the
production of asphalt and other products from oil sands.
Oil and gas production costs increased from $132,641 for the year ended
December 31, 1995 to $137,340 for the year ended December 31, 1996, an increase
of $4,699 (4%). This immaterial increase was due to higher maintenance costs due
to aging well equipment.
General and administrative expenses increased from $432,655 for the
year ended December 31, 1995 to $551,401 for the year ended December 31, 1996,
an increase of $118,746 (27%). This increase was primarily due to an increase in
expenses relating to the Asphalt Ridge oil sands project.
Depletion, depreciation and amortization decreased from $81,149 for the
year ended December 31, 1995 to $80,062 for the year ended December 31, 1996, a
15
decrease of $1,087 (1%). This decrease was due to lower production for the
period and was partially offset by a higher unit depletion rate.
Other income/expenses decreased from total expense of $31,714 for the
year ended December 31, 1995, to total expense of $6,682 for the year ended
December 31, 1996, a decrease of $25,032 (79%). This decrease was due to an
increase in interest income and other miscellaneous income items.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE
The financial statements required by this item are set forth following
Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
accountants with respect to any matter of accounting principles or practices or
financial statement disclosure.
PART III.
Items 10 through 13 of Part III of this Form are incorporated by
reference from the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A of the Securities Act of 1933 within 120
days after the close of the Company's most recent fiscal year.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Consolidated balance sheet and statement of income and cash
flows for the period ended December 31, 1997.
(2) EXHIBITS:
EXHIBIT NO. DOCUMENT
3.1 Articles of Incorporation (6)
3.2 Certificate of Voting Powers, etc. of the Company's Preferred
Stock (10)
3.2 Amended By-Laws (1)
4.1 Stock Option Agreement - 1991 (2)
4.2 Stock Option Agreements (6)
4.3 Convertible Debenture - Agreement dated May 6, 1997, between
Crown Energy Corporation and Oriental New Investments, Ltd.
(7)
4.4 Warrant with Encap Investments, L.C.
4.5 Form of Stock Option Agreements between the Company
and (1) Jay Mealey, (2) Richard Rawdin and (3) Thomas
Bachtell.
10.1 License Agreements with Park Guymon Enterprises,
Inc., dated January 20, 1989, June 1, 1990 and June
1, 1990 (3)
16
10.2 Amendment to License Agreement with Park Guymon Enterprises,
Inc. (6)
10.3 Executive Employment Agreement with James A. Middleton (6)
10.4 Employment Agreement with Jay Mealey
10.5 Consulting Agreement with IBEX Group, Inc. and Hoffman
Partners, Inc. (6)
10.6 Promissory Note issued to Jay Mealey 12/31/95 (6) 10.7
Promissory Note issued to Thomas W. Bachtell 12/31/95 (6) 10.8
Promissory Note issued to Thomas W. Bachtell 12/31/95 (6) 10.9
Oil and Gas Minerals Lease, dated September 1, 1991 with
Wembco, Inc. (4)
10.10 Crown Office Space Lease (5)
10.11 First Amendment to Crown Office Space Lease
10.12 Investment Banking Agreement with Fortress Financial Group,
Ltd.
10.13 Promissory Note from Jay Mealey
10.14 Promissory Note from Rich Rawdin
10.15 Stock Pledge Agreement with Jay Mealey
10.16 Stock Pledge Agreement with Rich Rawdin
10.17 Assignment of Assets to Crown Asphalt Ridge, L.L.C. by Crown
Asphalt Corporation
10.18 Assignment to Crown Asphalt Ridge, L.L.C. by Crown Ashpalt
Corporation
10.19 Asphalt Ridge Project Operating and Management Agreement with
Crown Asphalt Ridge L.L.C., dated August 1, 1997
10.20 Sublicense and Agreement between Crown Asphalt Ridge, L.L.C.
and Crown Asphalt Corporation
10.21 Stock Purchase Agreement with Enron Capital & Trade Resources
Corp. (10)
10.22 Facility Construction contract with CEntry
10.23 Engineering, Construction and Procurement Agreement w/CENTRY
Constructors & Engineers, LLC Revised Right of Co-Sale
Agreement between Jay Mealey and Enron Capital & Trade
Resources Corp. (11)
10.24 Guaranty Agreement in favor of MCNIC Pipeline & Processing
Company
10.25 Crown Office Space Sublease
10.26 Stock Purchase Agreement dated July 2, 1997, between Crown
Energy Corporation and Road Runner Oil, Inc. (8)
10.27 Letter Agreement with EnCap Investments L.C.
21 Subsidiaries of the Company
24 Power of Attorney
27 Financial Data Schedule
- -------------------------
(1) Incorporated by reference from the Company's Registration Statement
on Form 10 filed with the Commission on July 1, 1991, amended August
30, 1991 and bearing Commission file number 0-19365.
(2) Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1991 bearing Commission file
number 0- 19365.
(3) Incorporated by reference from the Company's Report on Form 8-K
filed with the Commission on or about September 30, 1992, bearing
Commission file number 0-19365.
17
(4) Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1992, bearing Commission file
number 0- 19365.
(5) Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1992, bearing Commission file
number 0- 19365.
(6) Incorporated by reference from the Company's Registration Statement
on Form S-1 filed with the Commission on or about March 13, 1996,
bearing Commission file number 0-19365.
(7) Incorporated by reference from the Company's Form 8-K filed with
the Commission on or about June 12, 1997, bearing Commission file
number 0-19365.
(8) Incorporated by reference from the Company's Form 8-K filed with
the Commission on or about July 21, 1997, bearing Commission file
number 0-19365.
(9) Incorporated by reference from the Company's Form 8-K filed with
the Commission on or about November 18, 1997, bearing Commission file
number 0-19365.
(10) Incorporated by reference from Enron Capital & Trade Resources
Corp. Form 13D filed with the Commission on or about October 10, 1997.
(11) Incorporated by reference from Enron Capital & Trade Resources
Corp. Form 13D/A filed with the Commission on or about November 12,
1997.
(b)During the quarter ended December 31, 1997, the Company filed a Form
8-K on November 18, 1997 to report (1) the disposition of assets by its
wholly-owned subsidiary, Crown Asphalt Corporation, to a newly formed limited
liability company jointly organized and owned by one of the Company's subsidiary
and a third-party; and (2) the sale of 500,000 shares of the Company's $10
Series A Cumulative Convertible Preferred Stock pursuant to a Stock Purchase
Agreement dated September 25, 1997 for an aggregate sales price of $5 million.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
CROWN ENERGY CORPORATION
(Registrant)
By: /S/ James A Middleton
---------------------
James A. Middleton
Chief Executive Officer,
Chairman of the Board of Directors
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Jay Mealey
/S/ Jay Mealey
--------------
President, Chief Operating Officer and
Director
Date: March 30, 1998
Richard S. Rawdin
/S/ Richard S. Rawdin
---------------------
Vice President, Director and Secretary
Date: March 30, 1998
19
CROWN ENERGY CORPORATION
STATEMENTS
----------
PAGE
Independent Auditors' Report of Pritchett, Siler & Hardy, P.C. F-1
Consolidated Balance Sheets, December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity, for the years
ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows, for the years ended
December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
Supplemental Information - Unaudited F-24
20
CROWN ENERGY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
PRITCHETT, SILER AND HARDY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
CROWN ENERGY CORPORATION
FINANCIAL STATEMENTS
CONTENTS
PAGE
------
- Independent Auditors' Report 1
- Consolidated Balance Sheets, December 31,
1997 and 1996 2 - 3
- Consolidated Statements of Operations, for the
years ended December 31, 1997, 1996 and
1995 4
- Consolidated Statement of Stockholders' Equity,
for the years ended December 31, 1997, 1996
and 1995 5 - 6
- Consolidated Statements of Cash Flows, for the
years ended December 31, 1997, 1996 and
1995 7 - 8
- Notes to Consolidated Financial Statements 9 - 23
- Supplemental Information - Unaudited 24 - 29
INDEPENDENT AUDITORS' REPORT
Board of Directors
CROWN ENERGY CORPORATION
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheets of Crown Energy
Corporation at December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1997, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the consolidated financial position of Crown
Energy Corporation as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years ended December 31, 1997, 1996 and
1995, in conformity with generally accepted accounting principles.
/s/ Pritchett, Siler & Hardy, P.C.
Salt Lake City, Utah
March 5, 1997
CROWN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------------------
1997 1996
----------- -----------
CURRENT ASSETS:
Cash $3,100,765 $ 142,772
Trade and other accounts receivable, net
of allowance for doubtful accounts of
$75,000 and $0 at 1997 and 1996 10,808 30,379
Other current assets 177,416 72,780
---------- ----------
Total Current Assets 3,288,989 245,931
PROPERTY AND EQUIPMENT, net 7,383 1,758
EQUITY INVESTMENT IN A LIMITED
LIABILITY COMPANY 3,412,355 --
INVESTMENT IN OIL SAND PROPERTIES -- 2,919,077
INVESTMENT IN OIL AND GAS PRODUCING
PROPERTIES, full cost method -- 1,083,882
OTHER ASSETS 354,930 340,726
---------- ----------
$7,063,657 $4,591,374
---------- ----------
The accompanying notes are an integral part of these financial statements
CROWN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
-----------------------------
1997 1996
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 9,535 $ 2,663
Other current liabilities 124,981 225,322
Current portion of long-term debt -- 185,984
------------ ------------
Total Current Liabilities 134,516 503,969
LONG-TERM DEBT, net of current portion -- 60,845
LONG-TERM DEBT - related parties -- 121,248
DEFERRED TAX LIABILITY -- 434,056
------------ ------------
Total Liabilities 134,516 1,120,118
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.005 par value,
1,000,000 shares authorized, 500,000
$10 series A Cumulative Convertible
Shares issued and outstanding 2,500 --
Common stock, $.02 par value,
50,000,000 shares authorized,
11,722,216 and 11,430,571 shares
issued and outstanding at 1997 and
1996 234,444 228,611
Capital in excess of par value 10,165,245 5,497,772
Retained earnings (deficit) (3,473,048)
------------ ------------
Total Stockholders' Equity 6,929,141 3,471,256
------------ ------------
$ 7,063,657 $ 4,591,374
------------ ------------
The accompanying notes are an integral part of these financial statements
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
REVENUE:
Oil and gas sales $ 86,781 $ 224,855 $ 213,526
------------ ------------ ------------
Total Revenue 86,781 224,855 213,526
------------ ------------ ------------
EXPENSES:
Production costs
and related taxes 54,653 137,340 132,641
General and administrative 775,544 551,401 432,655
Depreciation, depletion
and amortization 39,857 80,062 81,149
------------ ------------ ------------
Total Expenses 870,054 768,803 646,445
------------ ------------ ------------
OPERATING (LOSS) (783,273) (543,948) (432,919)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 35,451 20,589 11,880
Interest and other expense (37,280) (27,271) (43,595)
Loss on sale of subsidiary (801,461) -- --
------------ ------------ ------------
Total Other Income (Expense) (803,290) (6,682) (31,715)
------------ ------------ ------------
(LOSS) BEFORE INCOME TAXES (1,586,563) (550,630) (464,634)
CURRENT TAX EXPENSE -- -- --
DEFERRED TAX (BENEFIT) (434,056) (129,044) (231,025)
------------ ------------ ------------
NET (LOSS) $ (1,152,507) $ (421,586) $ (233,609)
------------ ------------ ------------
(LOSS) PER COMMON SHARE $ (.11) $ (.04) $ (.03)
------------ ------------ ------------
WEIGHTED AVERAGE SHARES 11,524,822 10,932,091 9,143,720
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Preferred Common Capital
Stock Stock in Excess
------------------ ------------------- of Par Retained
Shares Amount Shares Amount Value Deficit Total
------ ------ ------ ------ ----- ------- -----
BALANCE,
December
31, 1994 -- $ -- 8,991,217 $ 179,823 $4,359,609 $(1,599,932) $2,939,500
Shares
issued for
cash at
$.35 and
$.60 per
share -- -- 292,857 5,857 134,143 -- 140,000
Shares
issued for
non-cash
consideration
at $.33 to
$.76 per
share -- -- 195,273 3,905 102,029 -- 105,934
Shares
issued for
non-cash
consideration
at $.28 and
$.35 per
share to
related
parties -- -- 381,722 7,635 105,412 -- 113,047
Net loss
for the
year ended
December
31, 1995 -- -- -- -- -- (233,609) (233,609)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE,
December
31, 1995 -- -- 9,861,069 197,220 4,701,193 (1,833,541) 3,064,872
Shares
issued for
cash at
$.50 per
share, net
of placement
costs of
$65,000 -- -- 800,000 16,000 319,000 -- 335,000
Shares
issued for
commissions -- -- 80,000 1,600 38,400 -- 40,000
Shares
issued for
services at
$.79 to
$1.00 per
share -- -- 241,547 4,832 224,542 -- 229,374
Shares
issued for
payment of
note payable -- -- 47,955 959 22,637 -- 23,596
Shares
issued for
cash at
$.50 per
share -- -- 400,000 8,000 192,000 -- 200,000
Net loss
for the
year ended
December
31, 1996 -- -- -- -- -- (421,586) (421,586)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE,
December
31, 1996 -- -- 11,430,571 228,611 5,497,772 (2,255,127) 3,471,256
Shares
issued for
non-cash
consideration
at $1.00 per
share -- -- 35,000 700 34,300 -- 35,000
Shares
issued for
payables at
$.86 per
share -- -- 10,000 200 8,406 -- 8,606
Shares
issued for
payment of
note payable -- -- 56,877 1,138 24,847 -- 25,985
[Continued]
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
[Continued]
Preferred Common Capital
Stock Stock in Excess
--------------------- ----------------------- of Par Retained
Shares Amount Shares Amount Value Deficit Total
------ ------ ------ ------ ----- ------- -----
Shares
issued upon
conversion of
convertible
debentures at
$.90 per
share -- -- 173,101 3,462 152,441 -- 155,903
Cancellation
of shares
previously
Issued -- -- (25,000) (500) (19,188) -- (19,688)
Issuance
of common
stock upon
exercise
of stock
options -- -- 41,667 833 (833) -- --
Preferred
shares issued
for cash
at $10 per
share, less
offering
cost of
$530,000 500,000 2,500 -- -- 4,467,500 -- 4,470,000
Dividends
on preferred
stock -- -- -- -- -- (65,414) (65,414)
Net loss
for the
year ended
December
31, 1997 -- -- -- -- -- (1,152,507)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE,
December
31,1997 500,000 $ 2,500 11,722,216 $ 234,444 $ 10,165,245 $ (3,473,048) $ (6,929,141)
------------ ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash Flows From
Operating Activities:
Net (loss) $(1,152,507) $ (421,586) $ (233,609)
----------- ----------- -----------
Adjustments to reconcile net (loss)
to net cash used in operating
activities:
Depreciation, Depletion
and Amortization 39,857 80,062 81,149
Loss on sale of subsidiary 801,461 -- --
Non-cash (income) expense 117,738 474,082 33,078
Changes in Assets and Liabilities:
(Increase) decrease in
receivables (12,529) 7,318 868
(Increase) decrease in
other current assets 35,464 -- 4,875
(Increase) decrease in
other assets 1,792 (102,981) (33,325)
Increase (decrease) in
accounts payable (78,576) (151,651) 100,073
Increase (decrease) in
other current liabilities (140,209) (52,072) 205,654
Increase (decrease) in
deferred tax liability (434,056) (129,044) (231,025)
----------- ----------- -----------
330,942 125,714 161,347
----------- ----------- -----------
Net Cash (Used) by
Operating Activities (821,565) (295,872) (72,262)
----------- ----------- -----------
Cash Flows From Investing Activities:
Purchase of property
and equipment (6,960) -- --
Proceeds from sale of oil and
gas investments 75,000 -- 150,000
Additions to mining properties (25,060) (185,997) (129,852)
Payment for reclamation deposit (138,701) -- --
Investment in oil
sand joint venture (433,219) -- --
----------- ----------- -----------
Net Cash (Used) Provided
by Investing Activities (528,940) (185,997) 20,148
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from notes payable -- -- 20,000
Payments on notes payable (311,502) (7,606) (41,231)
Proceeds from convertible
debentures 150,000 -- --
Net proceeds from issuance of
preferred stock 4,470,000 -- --
Net proceeds from issuance of
common stock -- 535,000 140,000
----------- ----------- -----------
Net Cash Provided by
Financing Activities 4,308,498 527,394 118,769
----------- ----------- -----------
Net Increase (Decrease)
in Cash and Cash
Equivalents 2,957,993 45,525 66,655
Cash at Beginning of Year 142,772 97,247 30,592
----------- ----------- -----------
Cash at End of Year $ 3,100,765 $ 142,772 $ 97,247
----------- ----------- -----------
[Continued]
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS [Continued]
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for
1997 1996 1995
----------- ----------- -----------
Interest $ 27,131 $ 7,744 $ 7,616
----------- ----------- -----------
Income taxes $ -- $ -- $ --
----------- ----------- -----------
Supplemental Schedule of Non-cash Investing and Financing Activities: For the
Year Ended December 31, 1997: The Company issued 41,667 shares of common stock
upon the exercise of stock options in consideration for the individual canceling
83,333 stock options.
The Company issued 45,000 shares of common stock in payment of $43,606 in
licensing fees and other accounts payable.
The Company issued 56,877 shares of common stock in payment of a promissory note
and accrued interest totaling $25,985.
The Company issued 173,101 shares of common stock upon conversion of $150,000 in
convertible debentures with accrued interest of $5,903.
For the Year Ended December 31, 1996:
The Company issued 241,547 shares of common stock in payment of $229,375 in
consulting fees.
The Company issued 47,955 shares of common stock in payment of $23,596 for
payment on a promissory note.
Accounts payable in the amount of $78,708 were converted to a note payable.
The Company renewed certain notes payable and accrued interest of $17,032 was
added to the principal of the new notes.
For the Year Ended December 31, 1995:
The Company issued 3,250 shares of common stock to extend the maturity date of
the convertible debentures to January 1, 1997.
The Company issued 179,987 shares of common stock in payment of $99,320 in
consulting and legal fees.
The Company issued 381,722 shares of common stock in payment of $113,047 in
deferred salaries.
The Company issued 12,036 shares of common stock in payment of principal of
$4,460 and $783 of interest due on a note payable.
The Company converted deferred salaries of $38,271 into a note payable.
The Company converted accrued interest payable of $14,211 into notes payable.
The accompanying notes are an integral part of these financial statements
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Crown Energy Corporation ["PARENT"], is a Utah Corporation that
is engaged in the mining, production and selling of asphalt products through its
wholly owned subsidiary Crown Asphalt Corporation ["CAC"] and CAC's equity
investment in a Limited Liability Company (See Note 3). The Company was
previously engaged in the production and selling of oil and gas from leases it
operated in the State of Utah through its previously owned subsidiary Gavilan
Petroleum, Inc. ["Gavilan"].
Crown Asphalt Corporation ["CAC"], (formerly BuenaVentura Resources) was
incorporated under the laws of the State of Utah on October 24, 1985.
Applied Enviro Systems, Inc. ["AES"], was incorporated under the laws of the
State of Oregon. During 1993, AES discontinued its previous operations. AES
currently is an inactive subsidiary.
Gavilan Petroleum, Inc. ["Gavilan"] was acquired by Parent in 1991. Gavilan was
incorporated under the laws of the State of Utah and was sold on July 2, 1997
for $150,000. The sale was retroactive to June 1, 1997 and, accordingly, is
accounted for in these financial statements (See Note 5).
During September, 1991, the Company incorporated a subsidiary Energy
Technologies Corporation ["ETC"], a Utah Corporation, to acquire sell and
develop oil and gas prospects and related technologies. The subsidiary never
began operations and has remained inactive through December 31, 1997.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
inter-company transactions have been eliminated in consolidation.
Property and Equipment - Property and equipment are recorded at cost which is
depreciated over the estimated useful lives of the related assets. Depreciation
is computed using the straight-line method for financial reporting purposes,
with accelerated methods used for income tax purposes. The estimated useful
lives of property and equipment for purposes of financial reporting range from
three to seven years.
Oil Sand Properties - The Company's investment in oil sand properties, including
acquisition and development costs, were contributed for an equity investment in
a Limited Liability Company (See Note 3). The Company regularly reviewed the
carrying value of its investment in oil sand properties for impairment in
accordance with SFAS No.121.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Oil and Gas Properties - Oil and gas properties are accounted for on the full
cost method, whereby all costs associated with acquisition, exploration and
development of oil and gas properties are capitalized on a country-by-country,
cost center basis. All oil and gas revenues are derived from reserves located in
the state of Utah. Amortization of such costs is determined by the ratio of
current period production to estimated proved reserves. Estimated proved
reserves are based upon reports of petroleum engineers. The net carrying value
of oil and gas properties is limited to the lower of amortized costs or the cost
center ceiling defined as the sum of the present value [10% discount rate] of
estimated, unescalated future net cash flows from proved reserves, plus the
lower of cost or estimated fair value of unproved properties, giving effect to
income taxes.
Intangible Assets - In connection with the acquisition of CAC, the Company
recorded intangible assets in the amount of $250,000. These are included in
other assets and are being amortized over seventeen years on a straight-line
method. During 1997, 1996 and 1995, amortization expense of $14,706 was
recorded.
Revenue Recognition - The Company's revenue comes primarily from the sale of oil
and gas. Revenue from oil and gas sales is recognized when the product is
transferred to the purchaser.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
Loss Per Share - Effective for the year ended December 31, 1997 the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share," which requires the Company to present basic earnings per share and
dilutive earning per share when the effect is dilutive. There was no effect on
the financial statements for the change in accounting principle. [See Note 14]
Cash and Cash Equivalents - For purposes of the statements of cash flows, the
Company considers all highly liquid debt investments purchased with a maturity
of three months or less to be cash equivalents. The Company maintains its cash
in bank deposits 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.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimated.
Long-Lived Assets - The Company adopted SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets" effective January 1, 1996. This standard
requires that the Company review the valuation of certain long-lived assets,
such as property, plant and equipment, equity investments, certain identifiable
intangibles, and goodwill related to those assets, and that an impairment loss
be recorded whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. It is the Company's policy
to reduce the carrying value of its investment if the estimated future cash
flows from the investment falls below the current carrying value of the assets.
No reduction has been recorded in the current year. The adoption of SFAS No. 121
did not have a material effect on the Company's financial statements.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment - at cost, less accumulated
depreciation as of December 31:
1997 1996
-------- --------
Furniture and office equipment $ 73,506 $ 66,546
Less: accumulated depreciation (66,123) (64,788)
-------- --------
Total $ 7,383 $ 1,758
-------- --------
Depreciation expense charged to operations was $1,355, $4,024 and $4,805, in
1997, 1996 and 1995, respectively.
NOTE 3 - EQUITY INVESTMENT IN LIMITED LIABILITY COMPANY
In August, 1997, the Company through its wholly owed subsidiary CAC entered into
a Limited Liability Company, Crown Asphalt Ridge, LLC ["CAR"], with MCNIC
Pipeline and Processing Company ["MCNIC"] for the purpose of developing, mining,
processing, and marketing asphalt, performance grade asphalt, diesel fuel,
hydrocarbons, bitumen, asphaltum, minerals, mineral resources and other oil sand
products. During the year ended December 31, 1997, the Company contributed cash
of $433,219 and the right to their oil sand properties and a license agreement,
which allows the Company to use certain patented oil extraction technology and
oil sand property leases, with a book value of $2,919,077 to CAR. The Company is
estimating to contribute an additional $3,942,000 of which $3,500,000 is
expected to be contributed through certain equipment leases on mining equipment.
These contributions to CAR are in exchange for an equity investment. MCNIC and
the Company will initially own shares of 75% and 25%, respectively, in the
profits, losses and obligations of the CAR. Once the initial plant is built by
CAR and the economic operations of CAR are successful to the extent of paying
out specific returns to MCNIC as described within the operating agreement then
CAC's interest in CAR will increase to 50%. The excess of the Company's
investment in CAR over its share in the related underlying equity in net assets
(approximately $2,500,000) will be amortized on a straight-line basis over a
period of 20 years when the production plant is completed and placed in
operation. In addition, the Company made advances to CAR in the form of prepaid
royalties in the amount of $108,000 recorded as other current assets and $24,902
recorded as other assets. During the year ended December 31, 1997, CAR entered
into an engineering, construction and procurement agreement to construct a
$16,000,000 mining and production plant, which is projected to be completed and
producing during 1998. The Company's ability to realize its equity investment in
CAR is dependent upon CAR successfully constructing and operating a full scale
production plant. In connection with CAR acquiring the rights to use patented
oil extraction technology, CAR will be required to pay royalties of 2% to 5%
based on future revenues after certain production costs and taxes.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - EQUITY INVESTMENT IN LIMITED LIABILITY COMPANY [Continued]
The following sumarizes the separate financial information of CAR at December
31, 1997:
1997
-------------
Current assets $ 47,530
Non-current assets 4,937,684
Current liabilities 812,293
Non-current liabilities --
Net equity 4,172,921
Revenues $ --
Costs and other deductions --
Net earnings --
----------
NOTE 4 - OIL SAND PROPERTIES
The Company's investment in oil sand properties at December 31, 1996 included
approximately $2,400,000 in acquisition costs from the business acquisition of
CAC during 1992. The Company has also capitalized approximately $500,000 in
additional acquisition and development costs related to the properties through
December 31, 1996. During 1997, the Company capitalized approximately $100,000
in additional acquisition and development costs. The Company's investment in oil
sand properties of $2,919,077 were contributed to acquire an equity interest in
CAR (See Note 3).
NOTE 5 - OIL AND GAS PROPERTIES
Upon placing oil and gas properties and productive equipment in use, the
unit-of-production method, based upon estimates of proven developed and
undeveloped reserves, is used in the computation of depletion. Depletion expense
for the years ended December 31, 1997, 1996 and 1995 amounted to $23,817,
$61,332, and $61,638, respectively. Because the Company has elected to value its
properties under the "full cost" method of accounting for oil and gas
properties, it has a maximum allowance value which is related to the underlying
oil and gas reserves. Where the capitalized value of its properties exceeds the
fair market value of the oil and gas reserves, the Company is required to adjust
the value of properties to the cost center ceiling [See Note 1] by increasing
the valuation allowance. The Company did not record a valuation adjustment for
the years ended December 31, 1997, 1996, or 1995.
During 1995, the Company sold certain oil and gas interests for total proceeds
of $150,000. The interests which were sold were not a significant portion of the
overall full cost pool and consequently the proceeds were recorded as a
reduction to the full cost pool. On July 2, 1997, the Company sold Gavilan
Petroleum, Inc. with all the remaining oil and gas interests for $150,000. The
sale was retroactive to June 1, 1997. The Company received $25,000 down and
accepted a note receivable of $125,000. At December 31, 1997 there was a
remaining balance of $75,000 on the note.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG TERM DEBT
The following is a summary of long-term debt as of December 31:
1997 1996
------ ------
9% Note payable to an officer, director and
shareholder, due July 1, 1998. [See Below] $ - $41,833
9% Note payable to an officer, director and
share-holder, due July 1, 1998. - 58,197
Payable to various parties in connection
with foreclosed Oil & Gas properties
for production taxes and royalties payable.
[See Below] - 65,139
10% Loan payable to an individual, maturing
June, 1997, Secured by trust deeds on oil
and gas properties. [See Below] - 15,282
10% Unsecured note payable to individual,
due on demand. - 20,706
9% Note payable to an officer, director and
shareholder, due July 1, 1998. - 21,218
Unsecured debentures to individuals, Interest
at 6%, due January 1, 1997. [See Below] - 74,600
18% Note payable to corporation due
November 1, 1997. - 71,102
------- -------
- 368,077
Less: Current Portion - (185,984)
------- -------
$ - $182,093
------- -------
During July, 1997, the Company issued a $150,000 9% convertible debenture which
matured November 13, 1997. The debenture was converted into 173,101 shares of
the Company's common stock, valued at $.901 per share, which was 65% of the
average closing bid price for the ten days prior to the date of conversion.
During 1996, the Company converted accounts payable of $78,708 into a note
payable with interest accruing at 18%. The note provided for monthly payments of
$8,000 and matures on November 1, 1997. During 1997, the Company converted
accounts payable of $18,930 into the note payable and paid off the notes
together with $8,620 in accrued interest.
On December 31, 1996 the Company converted accrued interest of $3,562, $4,956
and $1,807 on notes payable to officers and directors to principal bringing the
balance outstanding on the notes to $41,833, $58,197 and $21,218, respectively.
During 1997, the Company paid off the respective notes together with accrued
interest of $3,284, $4,125 and $1,666 respectively.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG TERM DEBT [Continued]
During February, 1995, the Company borrowed $20,000 on an 18% note payable from
an individual who is an officer, director and shareholder of the Company with
three monthly payments of $3,000 beginning February 28, 1995 with the remaining
principal and interest due May 31, 1995. The note was paid in full during 1995.
During November 1995, the Company converted deferred salaries of $34,750 and
their related accrued interest of $3,521 payable to an officer, director and
shareholder of the Company into a Note Payable.
During June, 1994, the Company raised $65,000 through the sale of partial units
of an Unsecured Debenture in a private placement. The Company had offered up to
twelve $50,000 units in the offering which expired September 30, 1994. Each unit
consisted of a promissory note for $50,000 due on or before January 1, 1996,
plus 12,500 shares of the Company's Common Stock. The promissory notes accrue
interest at 6% per year payable at maturity. During 1995 the Company, at its
option, extended the due dates of the notes to January 1, 1997 by issuing 3,250
shares of common stock to their holders. The debentures were paid off during
1997 together with accrued interest of $7,468.
In August, 1991, the Company perfected its interest under certain operating
liens to commence foreclosure on two properties and recorded the underlying
liabilities of $388,116 as the acquisition cost of the properties. The entire
amount of these liabilities is non-recourse and is to be repaid out of net
proceeds from the wells which is estimated to be $5,000 per month. Management is
currently negotiating with the respective parties for a long-term, non-recourse
payment plan wherein the parties would be paid from a percentage of the net
production proceeds. During 1993 the amount of liability was reduced by $295,544
to reflect management's current estimate of the actual amounts to be assumed by
the Company.
NOTE 7 - COMMON STOCK TRANSACTIONS
Common Stock Issuances - During 1997, the Company issued 56,877 shares of
restricted common stock in payment of $25,985 in notes payable. The Company also
issued 173,101 shares of common stock upon conversion of a $150,000 debenture
with related accrued interest of $5,903. [See Note 6]
During 1997, the Company also issued 10,000 and 35,000 shares of common stock in
payment of $8,606 in accounts payable and $35,000 in oil sand extraction
licensing fees. The Company also canceled 25,000 previously issued shares valued
at $19,688.
During February, 1996, the Company successfully completed a private placement of
800,000 shares of restricted common stock for $400,000. In connection with the
private placement, the Company issued 80,000 shares of restricted common stock
in commissions.
During 1996, the Company issued 51,547 shares of restricted common stock in
payment of a $50,000 finders fee included in accounts payable, 10,000 shares of
restricted common stock in connection with the renegotiations of oil sand
leases, 50,000 shares of common stock in payment of accrued liabilities, and
130,000 shares of common stock in payment of consulting and engineering work
performed.
During 1996, the Company issued 47,955 shares of restricted common stock in
payment of $23,596 in notes payable.
On November 7, 1996, the Company sold 400,000 shares of restricted common stock
in a private placement offering at $.50 per share. Total proceeds amounted to
$200,000.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMON STOCK TRANSACTIONS [Continued]
On November 7, 1996, management filed a Form S-1 registration statement to
register under the Securities Act for the future sale, from time to time, of
2,890,600 shares of the Company's common stock, of which 1,236,850 are presently
issued and outstanding and 1,653,750 are reserved for issuance upon the exercise
of Company's outstanding stock options held by officers, directors and employees
of the Company and by other investors and consultants.
During 1995, the Company sold 292,857 shares of restricted common stock to an
individual for $140,000 at prices of $.35 and $.60 per share. The Company issued
179,987 shares of restricted common stock at prices ranging from ($.76 to $.33
per share) for legal and consulting services valued at $99,320. Also during
1995, the Company issued 12,036 shares of common stock in lieu of payments on a
note payable of $5,243.
During 1995, the Company issued 381,722 shares of restricted common stock to
officers and employees of the Company in payment of $103,500 of deferred
salaries and related accrued interest of $9,547. Also during 1995, the Company
issued 3,250 shares of restricted common stock to the purchasers of the
Company's unsecured debenture. [See Note 6]
Stock Options and Warrants - As of December 31, 1997 the Company has the
following options outstanding to purchase common stock:
Number
Number Exercise of Shares
of Shares Price Exercised Vesting Date Expiration Date
(A) 250,000 $ .60 - July 5, 1993 May 30, 2000
(A) 250,000 $ .60 - July 5, 1994 May 30, 2000
(A) 250,000 $ .60 - July 5, 1995 May 30, 2000
(A) 300,000 $ .56 - May 31, 1995 May 30, 2000
(B) 25,000 $ .56 - May 31, 1995 May 30, 2005
(C) 444,444 $ .56 - November 5, 1997 May 30, 2000
(D) 25,000 $ 1.00 - September 10, 1993 May 30, 2000
(E) 183,750 $ .75 - April 23, 1995 April 23, 2000
(F) 300,000 $ .66 - January 29, 1996 January 9, 2001
(G) 450,000 $ 1.62 - See Below November 1, 2007
(H) 100,000 $ 1.00 - September 24, 1997 September 24,2002
-----------
2,578,194
-----------
(A) Options issued to three of the Company's officers.
(B) Options issued to a consultant of the Company.
(C) Options issued to three of the Company's officers vesting contingent on the
Company obtaining financing.
(D) Options issued to an employee.
(E) Warrants issued to an organization [See Note 13], to purchase one share of
the Company's common stock per warrant. The warrants vest on issuance and
are exercisable for seven years after their issuance.
(F) Options issued to one of the Company's officers.
(G) Options issued to an officer of the Company in connection with an
employment agreement. The first 150,000 options vest on the execution of
the agreement and when the Company's average stock price for a 30 day
period exceed $2.00; the second and third 150,000 options vest on the first
and second anniversary dates and when the average market price exceeds
$3.00 and $4.00, respectively.
(H) Warrants to an organization to purchase one share per warrant. Warrants are
exercisable for a five year period.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMON STOCK TRANSACTIONS [Continued]
During the periods presented in the accompanying financial statements the
Company has granted options to employees . The Corporation has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock option plans. Had compensation cost for
the Company's stock option plans been determined based on the fair value at the
grant date for awards in 1997, 1996 and 1995 consistent with the provisions of
SFAS No. 123, the Company's net loss and loss per common share would have been
increased to the pro forma amounts indicated below:
1997 1996 1995
------------ ------------ -------------
Net Loss As reported $ (1,152,507) $ (421,586) $ (233,609)
Proforma $ (1,166,606) $ (428,760) $ (248,698)
Loss per Common Share
As reported $ (.10) $ (.04) $ (.03)
Proforma $ (.10) $ (.04) $ (.03)
The fair value of each option granted is estimated on the date granted using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the period ended December 31, 1997, 1996 and
1995 risk-free interest rates of 5.9%, 5.5% and 6.3% expected dividend yields of
zero, expected life of 10, 6.1 and 5.6 years, and expected volatility 111%, 110%
and 99%.
A summary of the status of the options granted to employees at December 31,
1997, 1996 and 1995 and changes during the periods then ended is presented in
the table below:
Year Ended Period Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995
---------------------- ------------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding
at beginning
of period 1,860,444 .60 1,560,444 .59 782,000 .61
Granted 450,000 $ 1.62 300,000 .66 778,444 .56
Exercised -- -- -- -- -- --
Forfeited (16,000) $ .51 -- -- -- --
Canceled -- -- -- -- -- --
---------- -------- --------- ------ --------- ------
Outstanding
at end of
Period 2,294,444 .80 1,860,444 .60 1,560,444 .59
---------- -------- --------- ------ --------- ------
Weighted
average
fair value
of options
granted 450,000 .12 300,000 .04 778,444 .03
---------- -------- --------- ------ --------- ------
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMON STOCK TRANSACTIONS [Continued]
A summary of the status of the options outstanding to employees at December 31,
1997 is presented below:
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ----------- ----------- ----------- -------- ----------- ---------
$ .56 - .60 1,519,444 2.4 .58 1,091,000 .58
$ .66 300,000 4.0 .66 300,000 .66
$1.00 25,000 2.4 1.00 25,000 1.00
$1.62 450,000 9.8 1.62 - -
- ----------- ----------- ----------- -------- ----------- ---------
$ .56 - $1.62 2,294,444 .80 1,416,000 .60
Preferred Stock - The Company is authorized to issue 1,000,000 preferred shares,
par value $.005 per share. The preferred shares may be issued by the Board from
time to time in one or more issues and with such serial designations as may be
stated or expressed in its resolution providing for the issuance of such shares.
There were no series of preferred stock designated issued or outstanding at
December 31, 1996.
Preferred Stock Issuance - On November 4, 1997, the Company completed the sale
of 500,000 shares of its Series A Cumulative Convertible Preferred Stock
("Series A Preferred Stock") pursuant to a stock purchase agreement dated
September 25, 1997 for an aggregate sales price of $5,000,000. The Series A
Preferred are convertible at the option of its holder into 24% of the common
stock of the Company. Dividends shall accrue on the outstanding Series A
Preferred shares 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 ($10) which will vary
depending on when the Company exercises such right. The Holder of the Series A
Preferred may also require the Company to redeem the Series A Preferred under
certain circumstances 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. In
addition, the Holder will have certain voting rights upon any attempt by the
Company to 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. 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 is 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 (See Note 3) 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.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMON STOCK TRANSACTIONS [Continued]
Common Stock Warrant - Upon the fifth anniversary of the issuance of the
preferred stock the Company will issue a warrant to the holder of the preferred
stock. The warrant will become exercisable, at $.002 per share, into a 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%multiplied by (iii) 5 (the 39% internal rate
of return)))[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 below) 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 preceeding the fifth anniversary date of the
issuance of the preferred stock. Terminal Value is defined as the (x) 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 (y) the fair market value of the Company's common
stock on a weighted average basis for the 90 days immediately preceeding the
fifth anniversary date of the issuance of the preferred stock. The warrants will
expire in 2007.
Stock Option Plan - On September 2, 1997, the Board of Directors of the Company
adopted and on October 21, 1997 the stockholders approved, the 1997 Stock Option
Plan. The plan provides for the granting of awards of up to 2,000,000 shares of
common stock to key employees, officers, directors, and consultants. The awards
consist of non-qualified stock options. Awards under the plan will be granted as
determined by the board of directors. At present 450,000 options have been
granted under the plan.
NOTE 8 - LEASES
Operating Leases - The Company leases its current office facility on an
operating lease which expires in September, 2001. During 1997 the Company
entered into a sublease for additional office space which expires in September
2001.
The future minimum lease payments for non-cancelable operating leases as of
December 31, 1997 are as follows:
Year ending
December 31 Amount
--------- ----------
1998 53,510
1999 56,374
2000 59,245
2001 46,063
2002 -
----------
TOTAL $ 215,192
----------
Lease expense charged to operations was $36,437, $31,778, and $28,699 for the
years ended December 31, 1997, 1996 and 1995.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes [FASB 109] during Fiscal 1993. FASB 109 requires the
Company to provide a net deferred tax asset or liability equal to the expected
future tax benefit or expense of temporary reporting differences between book
and tax accounting and any available operating loss or tax credit carryforwards.
At December 31, 1997 and 1996, the total of all deferred tax assets were
$1,317,846 and $908,156 and the total of the deferred tax liabilities were $0
and $1,342,212. The amount of and ultimate realization of the benefits from the
deferred tax assets for income tax purposes is dependent, in part, upon the tax
laws in effect, the Company's future earnings, and other future events. The
Company has established a valuation allowance of $1,317,846 and $0 for the years
ended December 31, 1997 and 1996. The change in the valuation allowance during
the years ended December 31, 1997 and 1996 was $1,317,846 and $0, respectively.
The Company has available at December 31, 1997, unused tax operating loss
carryforwards of approximately $3,200,000 which may be applied against future
taxable income and expire in varying amounts beginning in 1997 through 2012. The
Company also has unused capital loss carryforwards of approximately $360,000
which may be applied against future taxable income and expire in 2003.
The components of income tax expense from continuing operations for the years
ended December 31, 1997, 1996 and 1995 consist of the following:
December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ------------
Current income tax expense:
Federal $ - $ - $ -
State - - -
---------- ---------- -----------
Net current tax
expense (benefit) $ - $ - $ -
---------- ---------- -----------
Deferred tax expense (benefit) arising from:
Excess of book over tax
basis depletion in oil
& gas properties $ (373,833) $ (323) $ (61,983)
Excess of book over tax
basis depletion in oil
sand properties (968,283) 43,917 (54,799)
Excess tax over book basis
depreciation (122) (161) (423)
Capital loss carryforwards (133,144) -- --
Net operating loss carryforwards (276,520) (172,477) (113,820)
Increase (decrease in
valuation allowance) 1,317,846 -- --
----------- ----------- -----------
Net deferred tax
expense (benefit) $ (434,056) $ (129,044) $ (231,025)
----------- ----------- -----------
Deferred income tax expense results primarily from the reversal of temporary
timing differences between tax and financial statement income.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES [Continued]
A reconciliation between income tax expense at the federal statutory rate to
income tax expense at the Company's effective rate is as follows:
December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
Computed tax at the expected
federal statutory rate, 34% $ (539,431) $ (187,214) $ (157,976)
State income taxes, net of
federal income tax benefits (47,597) (16,519) (13,939)
Excess of book over tax basis
depletion in oil & gas properties (201,624) 20,193 (49,884)
Excess of book over tax basis
depletion in oil sand properties (968,283) 40,521 (60,516)
Other 5,033 13,975 51,290
Valuation allowance 1,317,846 -- --
----------- ----------- -----------
Effective income tax rates $ (434,056) $ (129,044) $ (231,025)
----------- ----------- -----------
The temporary differences gave rise to the following deferred tax asset
(liability) at December 31, 1997 and 1996:
1997 1996
---------- ----------
NOL carryforwards $1,184,675 $ 908,156
Capital loss carryforward 133,144 --
Excess of tax over book accounting
depreciation 27 (95)
Excess of book over tax basis
in oil and gas properties -- (373,833)
Excess of book over tax basis
in oil sand properties $ -- $ (968,284)
The deferred taxes are reflected in the consolidated balance sheet for the years
ended December 31 1997 and 1996 as follows:
1997 1996
---------- ---------
Short term asset (liability) $ - $ -
Long term asset (liability) $ - $(434,056)
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - RELATED PARTY TRANSACTIONS
A current shareholder and officer of the Company has made loans to the Company
or its subsidiaries. At December 31, 1996, $58,197 was owing to the
officer/shareholder on a 9% note. The note was paid in full in November 1997.
During the year ended December 31, 1997 and 1996 the Company recorded interest
expense of $4,125 and $4,956 in connection with the note.
During 1995, the Company issued 381,722 shares of restricted common stock to
officers of the Company for deferred salaries of $103,000 and their related
accrued interest of $9,547. Also during 1995, the Company converted deferred
salaries of $34,750 and their related accrued interest of $3,521 to a $38,271
note payable bearing interest at 9% per annum. The note was paid in full
together with accrued interest of $6,846, during 1997.
During May, 1995, the Company issued 300,000 options to purchase common stock at
$.5625 per share to directors and officers of the Company.
Accounts payable at December 31, 1997 and 1996 includes $635 and $27,429 in
legal fees owing to a law firm in which a shareholder and former officer of the
Company is a partner. During 1995, the Company paid $33,092 to the law firm
through the issuance of 47,273 shares of common stock.
An officer/shareholder originally advanced $15,000 to the Company during 1993.
The underlying note payable provides for interest at 9% per annum. The balance
outstanding at December 31, 1996 was $21,218. The note was paid in full during
1997 together with accrued interest of $1,666.
NOTE 11 - LITIGATION
The Company may become or is subject to investigation, claim or lawsuits ensuing
out of the conduct of its business, including those related to environmental,
safety and health, commercial transactions etc. The Company is currently not
aware of any such items which it believes could have a material adverse affect
on its financial position.
NOTE 12 - CONCENTRATION OF CREDIT RISKS
The Company sold substantially all of its oil production to one purchaser for
the fiscal years ending December 31, 1997, 1996 and 1995. The oil sand property
leases held by the Company during 1996 and contributed into CAR during 1997 are
all located in eastern Utah.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - AGREEMENTS
The Company entered into an employment agreement, effective November 1, 1997
with a director and officer of the Company. The agreement covers the three year
period ending December 31, 2000, with the option to extend the agreement through
December 31, 2002. The agreement includes a base salary of $150,000 subject to
increase as of November 1 of each year provided that the Company achieves
positive cash flows from operations before interest, debt service, taxes,
depreciation, amortization, extraordinary and non-recurring items and dividends.
The annual base salary will increase to $180,000 on November 1, 1998, $210,000
on November 1, 1999 and should the term be extended, the annual base salary,
should increase 20% effective January 1, 2001 and each successive year
thereafter. In addition to the base salary, the director and officer is entitled
to receive a bonus for each fiscal year of the agreement provided certain
earnings levels are obtained or the underlying price of the Company's stock
increases to determined levels. If the earnings per share of the Company, for
the year ended December 31, 1998, is positive the director and officer shall be
paid a bonus of 50% of his base salary. For each subsequent year, if the
earnings per share is positive and increase from the preceeding fiscal year, the
director and officer shall be paid a bonus of 20% of the applicable EPS bonus
payment for each $.01 per share increases, provided that in no event shall the
EPS bonus for any fiscal year exceed the EPS bonus payment applicable. In
addition, the director and officer shall be paid a bonus if the average bid
price for the Company's common stock for all of the trading days in the month of
October in each applicable year exceeds $1.62, $2.62 and $3.62 for the years
ending December 31, 1998, 1999, and 2000. The director and officer for each
applicable year shall be paid a bonus equal to 10% of the base salary for each
$.20 increase in the average stock price over the predetermined levels. In the
event the stock price exceeds the determined levels, the director and officer
shall receive a bonus equal to the pro rata portion of the stock bonus payment
for additional increases which are less than $.20. In addition to the bonuses
the director and officer shall be granted an option to purchase 450,000 shares
of the Company's common stock at an exercise price of $1.62 per share.
The Company entered into an employment agreement, effective January 26, 1996
with the Chief Executive Officer and Chairman of the Board of Directors of the
Company. The agreement covers the three year period ending February 26, 1999,
with the option to extend the agreement through February 26, 2001. The agreement
includes a base salary of 5% of the Company's net profits from operations before
depletion, depreciation, tax credits, and amortization, but after interest
expense on debt; not to exceed $1,000,000 per year. The agreement also calls for
the Company to grant 300,000 stock options to purchase the Company's restricted
Common Stock at $.66 per share and an additional 75,000 options for each year of
Executive Employment which is completed after funding is achieved. Additionally,
other benefits are provided including participation in certain insurance,
vacation and expense reimbursements. As of December 31, 1995, the Company had
accrued a $50,000 finders fee in connection with the new employment agreement.
The fee was paid in February 1996, through the issuance of 51,547 shares of
restricted common stock.
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - AGREEMENTS [Continued]
During April, 1995 the Company entered into an agreement with an organization to
perform professional, technical and project development services in connection
with the planned oil sand processing facility, to identify potential investors
for the project financing and to assist the Company in negotiating and closing
project financing terms and agreements. The terms of the agreement provided for
the Company to pay to the organization monthly amounts of $5,000 in cash or
$7,500 in common stock of the Company and to issue monthly 15,000 warrants to
purchase one share per warrant of the Company's common stock at $.75 per share.
These warrants are exercisable for seven years after their issuance. These
warrants allow the organization to purchase one common share of the Company's
stock at $1.00 per share and are exercisable for a period of seven years from
the date of issuance. A total of 183,750 warrants valued at $9,665 were issued
under the agreement. The agreement was terminated during 1997.
NOTE 14 - EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share and the
effect on income and the weighted average number of shares of dilutive potential
common stock for the years ended December 31, 1997, 1996 and 1995:
For the years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Income from continuing
operations applicable
to common stock $ 1,152,507) $ (421,586) $ (233,609)
Less: preferred dividends (65,414) -- --
------------ ------------ ------------
Income available to
common stockholders
used in Earnings
per share $ (1,217,921) $ (421,586) $ (233,609)
------------ ------------ ------------
Weighted average number
of common shares used
in earnings per share
outstanding during
the period 11,524,822 10,932,091 9,143,720
------------ ------------ ------------
Dilutive earnings per share was not presented as its effect is anti-dilutive.
The Company had at December 31, 1997, 1996 and 1995 options and warrants to
purchase 2,103,194, 1,835,444 and 1,535,444 shares of common stock ,
respectively, at prices ranging from $.40 to $1.96 per share, that were not
included in the computation of diluted earnings per share because their effect
was anti-dilutive (the options exercise price was greater than the average
market price of the common shares). The Company also has preferred stock
outstanding at December 31, 1997 which is convertible into approximately
4,334,340 shares of common stock that was not included in the computation of
diluted earnings per share as its effect was anti-dilutive.
NOTE 15 - SUBSEQUENT EVENTS
Subsequent to the year ended December 31, 1997 officers and directors of the
Company exercised 946,296 options to purchase common stock for $549,166 in notes
receivable. The notes bear interest at 8% and are payable on or before Jan 2,
2003.
On February 17, 1998, Energy Technologies Corporation a subsidiary of the
company changed its name Crown Asphalt Products Company.
CROWN ENERGY CORPORATION
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES
Oil and Gas Reserves - Users of this information should be aware that the
process of estimating oil and gas reserves is very complex, requiring
significant subjective decisions in the evaluation of available geological,
engineering, and economic data for each reservoir. The data for a given
reservoir may change substantially over time as a result of, among other things,
additional development activity, production history and viability of production
under varying economic conditions; consequently, material revisions to existing
reserve estimates may occur in the future. Although every reasonable effort is
made to ensure that the reserve estimates reported represent the most accurate
assessment possible, the significance of the subjective decisions required, and
variances in available data for various reservoirs make these estimates
generally less precise than other estimates presented in connection with
financial statement disclosure.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate, and natural gas liquids which geological and engineering data
demonstrate, with reasonable certainty, to be recoverable in future years from
known reservoirs under existing economic and operating conditions.
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
The oil and gas reserve information presented in the following tables as of
December 31, 1997, 1996 and 1995 is based upon reports of petroleum engineers
and management's estimate. All reserves presented are proved reserves, all of
which are located within the United States, and are defined as estimated
quantities which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Such reserves are estimates only and should
not be construed as exact amounts. The Company does not have proved reserves
applicable to long term supply agreements with foreign governments.
CROWN ENERGY CORPORATION
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES [Continued]
Changes in Net Proved Reserves
[Volumes in Thousands]
1997 1996 1995
----------------- --------------- ---------------
Oil Gas Oil Gas Oil Gas
(MBbls) (MMcf) (MBbls) (MMcf) (MBbls) (MMcf)
------- ------ ------- ------ ------- ------
Estimated quantity at
beginning of period 823 - 774 - 871 -
Revisions of previous
estimates - - 58 - 3 -
Discoveries and extensions - - - - - -
Purchase of reserves
in place - - - - - -
Production (4) - (9) - (10) -
Sale/disposal of reserves
in place (819) - - - (90) -
------- ------ ------- ------ ------- ------
Estimated quantity at
end of period - - 823 - 774 -
------- ------ ------- ------ ------- ------
Proved developed reserves:
Beginning of period 68 - 51 - 151 -
End of period - - 68 - 51 -
------- ------ ------- ------ ------- ------
Company's proportional
interest in reserves
of investees accounted
for by the equity
method - end of year - - - - - -
------- ------ ------- ------ ------- ------
CROWN ENERGY CORPORATION
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES [Continued]
Costs Incurred in Oil and Gas Property Acquisition,
Exploration and Development Activities
December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
[In Thousand of Dollars]
Acquisition of properties:
Undeveloped leases $ -- $ -- $ --
Proved producing leases -- --
Exploration costs -- --
Development costs -- --
----------- ----------- -----------
Total Additions to Oil and Gas
Properties -- $ -- $ --
----------- ----------- -----------
Company's share of equity method
investees' costs of property
acquisition, exploration and
development costs $ -- $ -- $ --
----------- ----------- -----------
Capitalized Costs Relating to Oil and Gas Producing Activities
Capitalized costs as of the end of the
period: [In thousands of dollars]
Proved properties $ -- $ 2,196 $ 2,196
Unproved properties -- -- --
----------- ----------- -----------
Total Capitalized Costs -- 2,196 2,196
Less: accumulated depreciation and
depletion -- 1,112 1,051
----------- ----------- -----------
Net Capitalized Costs $ -- $ 1,084 $ 1,145
----------- ----------- -----------
Company's share of equity method
investees' net
capitalized costs $ -- $ -- $ --
----------- ----------- -----------
CROWN ENERGY CORPORATION
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES [Continued]
Results of Operations for Producing Activities
December 31,
-------------------------------
1997 1996 1995
-------- ------- ------
[In Thousand of Dollars]
Oil and gas sales $ 77 $ 214 $ 197
Production costs 55 137 128
Exploration costs -- -- --
Depreciation and depletion 24 61 62
----- ----- -----
Income (loss) from operations (2) 16 7
Income tax benefit (expense) 1 (6) (3)
----- ----- -----
Results of Operations from Producing
Activities [Excluding Corporate Overhead
and Interest Costs] (1) 10 4
----- ----- -----
Company's share of equity method
investees' results of operations
for producing activities -- -- --
----- ----- -----
Standard Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
The information that follows has been developed pursuant to procedures
prescribed by SFAS No. 69, and utilizes reserve and production data estimated by
management and independent petroleum engineers. The information may be useful
for certain comparison purposes, but should not be solely relied upon in
evaluating the Company or its performance. Moreover, the projections should not
be construed as realistic estimates of future cash flows, nor should the
standardized measure be viewed as representing current value.
The future cash flows are based on sales, prices, costs, and statutory income
tax rates in existence at the dates of the projections. Material revisions to
reserve estimates may occur in the future, development and production of the oil
and gas reserves may not occur in the periods assumed, and actual prices
realized and actual costs incurred are expected to vary significantly from those
used. Management does not rely upon the information that follows in making
investment and operating decisions; rather, those decisions are based upon a
wide range of factors, including estimates of probable reserves as well as
proved reserves, and different price and cost assumptions than those reflected
herein.
CROWN ENERGY CORPORATION
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES [Continued]
Standard Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
The following table sets forth the standardized measure of discounted future net
cash flows from projected production of the Company's proved oil and gas
reserves:
December 31,
--------------------------------
1997 1996 1995
------- ------- -------
[In Thousand of Dollars]
Future reserves $ -- $17,510 $13,925
Future production and development
costs -- 12,324 10,403
Future income tax expenses -- -- --
-------- ------- -------
Future net cash flows -- 5,186 3,522
Discount to present
value at 10 percent -- 3,325 2,256
-------- ------- -------
Standardized measure of discounted
future net cash flows $ -- $ 1,861 $ 1,266
-------- ------- -------
Company's share of equity method
investees' standardized measure of
discounted future
net cash flows $ -- $ -- $ --
-------- ------- -------
CROWN ENERGY CORPORATION
SUPPLEMENTAL INFORMATION
[Unaudited]
OIL AND GAS PRODUCING ACTIVITIES [Continued]
Standard Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
The following table sets forth the changes in standardized measure of discounted
future net cash flows:
December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
[In Thousand of Dollars]
Balance at
beginning of period $ 1,861 $ 1,266 $ 1,506
Sales of oil and gas
net of production costs (22) (77) (69)
Changes in prices and costs -- 1,083 571
Changes in quantity estimates and
timing of production -- (411) (509)
Acquisition of reserves in place -- -- --
Current year discoveries, extensions
and improved recoveries -- -- --
Estimated future development and
production costs related to current
year acquisitions, discoveries,
extensions and improved recoveries -- -- --
Net change in income taxes -- -- --
Sales of reserves in place (1,839) -- (233)
Accretion of discount -- -- --
Other - change in ten percent
discount -- -- --
------- ------- -------
Balance at End of Period $ -- $ 1,861 $ 1,266
------- ------- -------