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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, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________
Commission File Number 0-19365
CROWN ENERGY CORPORATION
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(Exact name of registrant as specified in its charter)
UTAH 87-0368981
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
215 South State, Suite 650
Salt Lake City, Utah 84111
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(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
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(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 29, 2002, was $1,714,292.75
using the average bid and asked price for Registrant's common stock. As of April
11, 2002, registrant had 27,428,684 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be used in connection
with the solicitation of proxies for the Registrant's Fiscal 2002 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Annual Report
on Form 10-K.
Transitional Small Business Disclosure Format (check one) YES[ ] NO[X]
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PART I.
STATEMENTS MADE OR INCORPORATED IN THIS ANNUAL REPORT INCLUDE A NUMBER OF
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING
THE WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FUTURE", AND WORDS
OF SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS
REGARDING THE COMPANY'S FUTURE PERFORMANCE OR FUTURE EVENTS OR TRENDS. RELIANCE
SHOULD NOT BE PLACED ON FORWARD-LOOKING STATEMENTS BECAUSE THEY INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM
ANTICIPATED FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION, THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ITEM 1. BUSINESS
General
Crown Energy Corporation ("Crown") is a Utah corporation that
specializes in the production and distribution of premium asphalt products to
meet the new, higher quality standards for federal and state highways. The
Company is based in Salt Lake City, Utah and operates primarily through two
wholly owned subsidiaries, Crown Asphalt Corporation ("CAC") and Crown Asphalt
Products Company ("Capco"), both of which are Utah corporations.
Under the terms of a Stock Purchase Agreement dated September 25, 1997,
the Company sold to Enron Capital and Trade Resources Corp. ("ECT") 500,000
shares of $10 Series A Cumulative Convertible Preferred Stock of the Company
(the "Preferred Stock") and a warrant (the "Warrant") exercisable five years
from its date of issuance for up to 925,771 shares of Common Stock of the
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Company at a per share exercise price of $0.002, subject to limits based on the
financial performance of the Company. The 500,000 shares of Preferred Stock are
convertible into 4,285,000 shares of Common Stock of the Company.
On November 1, 2001, Manhattan Goose, L.L.C., acquired all of the
outstanding shares of Preferred Stock, the Warrants, 317,069 shares of Common
Stock previously issued as a dividend on the Preferred Stock and dividends
accrued but unpaid. Manhattan Goose is a Utah limited liability company owned by
Jay Mealey, the Chief Executive Officer, President and director of the Company,
Andrew W. Buffmire, a director of the Company, Jeff Fishman and Alexander L.
Searl.
The Preferred Stock provides for the accrual of dividends at 8% per
annum on its "Stated Value" of $5,000,000. Accrued dividends on the Preferred
Stock may be paid in the Common Stock of the Company at the option of the
holders of such stock. On February 28, 2002, Manhattan Goose requested that the
Company pay $200,000 in accrued dividends through the issuance of 13,793,103
shares of Common Stock, as calculated pursuant to the designations and
preferences of the Preferred Stock. In compliance with the instructions from
Manhattan Goose, the Board of Directors of the Company authorized the issuance
of 13,793,103 shares of Common Stock to Manhattan Goose as partial payment of
the accumulated dividends on the Preferred Stock. As of March 29, 2002, this
13,793,103 shares of Common Stock issued to Manhattan Goose represented 50.3% of
the outstanding Common Stock.
Capco operates the asphalt manufacturing and distribution business of
Crown both independently and through its majority interest in Crown Asphalt
Distribution, L.L.C., a Utah limited liability company ("Crown Distribution").
Crown Distribution owns a majority interest in Cowboy Asphalt Terminal, L.L.C.
("CAT, LLC"), a Utah limited liability company, that is operated by Capco.
CAC previously owned an interest in certain leases and properties owned
by Crown Asphalt Ridge, L.L.C. ("Crown Ridge") in Vernal, Utah. As a result of a
settlement agreement executed on March 8, 2002, (the "Settlement Agreement")
between the Company and MCNIC Pipeline & Processing Company, a Michigan
corporation ("MCNIC") and related parties, CAC now owns certain overriding
royalty interests granted by Crown Ridge. The Settlement Agreement and the
royalty interests are described in greater detail below. See Item 1. Business -
Crown Asphalt Ridge, L.L.C. and Item 3. Legal Proceedings.
Crown's consolidated financial statements and results of operations
include the accounts and results of operations of CAC, Capco, CAT, L.L.C and
Crown Distribution. Accordingly, references in this Annual Report to "Crown" or
the "Company" include, unless otherwise noted, CAC, Capco, CAT, L.L.C and Crown
Distribution.
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The Company was formed in 1981 as an oil and gas production company.
The Company changed its business focus to concentrate on the production and
distribution of premium asphalt products in 1995. For the years ended December
31, 1999, 2000 and 2001, the Company reported revenues from the sale of asphalt
products of approximately $36 million, $23 million and $27 million respectively.
See Item 6. Selected Financial Data.
In August 1997, the Company formed Crown Ridge with MCNIC, to
construct, own and operate an asphalt oil sand production facility at Asphalt
Ridge, near Vernal, Utah (the "Facility"). During the start-up of the Facility
mechanical and process difficulties were experienced that affected production
economics. It has been determined by MCNIC that significant additional capital
investment is required to modify the Facility in order for it to achieve
commercial production, but the cost of such modifications is unknown. The
Company does not have the financial wherewithal to participate in additional
capital contributions and would not have the ability to make such contributions
for the foreseeable future. On March 8, 2002, the Company assigned its interest
in Crown Ridge to MCNIC in return for: (i) the assignment to CAC of a non-cost
bearing overriding royalty interest; (ii) the elimination of all obligations of
CAC to MCNIC; and (iii) the payment by MCNIC of the MK judgment and
indemnification of CAC against that judgment. See Item 1. Business - Crown
Asphalt Ridge, L.L.C. and Item 3. Legal Proceedings.
In August 1997, contemporaneous with the Company's Crown Ridge joint
venture with MCNIC, the Company also completed the private sale of $5 million of
the Company's $10 Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred"). Certain rights, preferences and limitations relating to the Series
A Preferred are detailed in Item 5. Market Price for the Company's Common Equity
and Related Stockholder Matters below.
In June 1998, the Company, through Capco, entered into a joint venture
by forming CAT, LLC with Foreland Refining Corporation ("Foreland"), a Utah
corporation engaged in the asphalt roofing products business. CAT, LLC was
formed to acquire an asphalt terminal and its underlying real property located
in Woods Cross, Utah. The asphalt terminal property of CAT, LLC was apportioned
and portions designated for the exclusive uses of either Capco or Foreland, each
of which will retain all revenues and profits generated from their respective
exclusive operations. Capco is the operator of CAT, LLC. Crown Distribution,
through the exercise of an option on or about December 21, 1998, is entitled to
own 66.67% of CAT, LLC and the remaining 33.33% is owned by Foreland. The
accounts and results of operations of CAT, LLC are included within the Company's
consolidated financial statements and results of operations. See Item 1.
Business - Cowboy Asphalt Terminal, L.L.C. below.
On July 2, 1998, Crown Distribution was formed as a second joint
venture between the Company (through its Capco subsidiary) and MCNIC. Crown
Distribution is owned 50.01% by the Company and 49.99% by MCNIC. Crown
Distribution was formed to acquire the inventory and assets of Petro Source
Asphalt Company, a Texas corporation ("PSAC"). By completing this acquisition,
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the Company acquired ownership or leasehold interests in certain asphalt
manufacturing and distribution facilities located in Utah, Arizona, Colorado and
Nevada. These facilities enable the Company to manufacture a broad range of
performance asphalt products for sale to its customers in the western United
States.
As described elsewhere in this Report, the Company has been involved in
extensive litigation and arbitration with MCNIC relating primarily to the
business of Crown Distribution. On March 8, 2002, the Company, MCNIC and their
related parties entered into the Settlement Agreement pursuant to which (i) all
litigation (and the enforcement of judgments obtained in such litigation) was
stayed, and (ii) the Company was granted the option to acquire all of MCNIC's
interests in, or relating to, Crown Distribution. See Item 1. Business - Crown
Asphalt Distribution, L.L.C. and Item 3. Legal Proceedings below.
On May 12, 1999, the Company entered into an agreement to acquire an
asphalt distribution terminal in Rawlins, Wyoming (the "Rawlins Asphalt
Terminal") and the related asphalt inventory for $2,291,571 from S&L Industrial,
a Wyoming corporation. The Rawlins Asphalt Terminal is currently owned and
operated by Capco.
The Company's revenues during the year ended December 31, 2001, were
generated primarily through its asphalt manufacturing and distribution
operations. See Item 1. Business - Crown Asphalt Distribution, L.L.C. below.
More detailed information about the asphalt industry and the Company's
asphalt production and distribution businesses is provided below.
The Asphalt Industry
The United States asphalt market is estimated to be a 30 million-ton
market that historically has been supplied by the large U.S. oil refiners. In
recent years, management of the Company believes that the U.S. asphalt market
has undergone significant changes. In particular, national and international
demand for asphalt has increased. Further, recently established standards which
require the use of higher quality asphalt for federal and state highways in the
United States have increased the demand for higher quality asphalts. At the same
time, recent reductions of heavy crude processing have resulted in a decrease in
asphalt supply. The Company believes that these changes are favorable to asphalt
suppliers such as the Company.
Deterioration of the nation's infrastructure has drawn increasing
public attention and concern, and the emphasis in the highway industry is
shifting from construction of new roads and bridges to maintenance and
replacement of aging facilities. As the U.S. government, state and federal
agencies focus on decaying infrastructure and facilities, the need for better
techniques and materials to build longer-lasting roads and to repair existing
ones cost-effectively has developed. Congress authorized the Strategic Highway
Research Program (SHRP) as a coordinated national effort to meet the tough
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challenges facing the highway industry. SHRP was a five-year, $150 million
research program funded through state-apportioned federal highway aid funds. Its
research was tightly focused on the development of pragmatic products of
immediate use to the highway agencies. Using a wide range of advanced materials
characterization techniques that had not been applied to asphalt previously,
SHRP determined how asphalt material properties affect pavement performance. The
new performance graded (PG) specifications focus on the climate conditions of a
given location and the specific temperature band within which the PG asphalt
must work. The recommendation for the improved PG asphalt binder specifications
has been adopted by the Federal Highways Administration (FHWA) and many states.
Implementation of the new PG specifications by all states is expected. The
result of the more stringent SHRP performance grades in the western United
States is that most asphalt used on state and federal projects will need to be
modified with polymers or high performance asphalts, or both, to meet the
required specifications. The Company manufactures a broad range of performance
asphalt products meeting the SHRP specifications.
Through its relationships with producers, refiners, suppliers,
transporters and users of asphalt, including state and federal governmental
departments, asphalt associations, consultants and private sector companies; as
well as its strategically located asphalt distribution terminals and PG asphalt
blending processes, the Company believes that it is well positioned to meet the
needs of the changing asphalt market. However, the Company competes with several
larger companies in the regional asphalt supply business. Competition in the
asphalt supply business is based primarily on price and quality. In general,
these competitors have significant financial, technical, managerial and
marketing resources and, both separately and combined, represent significant
competition for the Company in its markets.
The asphalt industry is seasonal. Demand for asphalt decreases
significantly during the winter months when cold weather and precipitation
interferes with highway construction and repair. The Company purchases asphalt
from refiners and other suppliers in the winter months, when prices are lower,
stores the asphalt at its terminal facilities and manufactures and distributes
finished asphalt products during the peak spring and summer months. In addition,
the Company purchases asphalt throughout its peak months to resupply the
terminal facilities.
Crown Asphalt Distribution, L.L.C.
Formation and Current Development Status. On July 2, 1998, Crown
Distribution was formed as a second joint venture between the Company and MCNIC.
The Company and MCNIC (sometimes referred to hereafter as the members) possess
sharing ratios ("sharing ratios") of 50.01% and 49.99%, respectively, in the
profits, losses and obligations of Crown Distribution. Accordingly, the Company
holds a majority and controlling interest in Crown Distribution and the accounts
and results of operations of Crown Distribution are included within the
Company's consolidated financial statements. On July 2, 1998, Crown Distribution
purchased the inventory and assets of PSAC, effective June 1, 1998 ("PSAC
Acquisition"). The purchased assets included asphalt supply and marketing
contracts, owned and leased equipment, personal property, fixtures, equipment
leases, real estate leases, technology licenses, other related agreements,
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certain intellectual property, products inventory, ownership interests in and to
asphalt distribution facilities in Utah, Colorado, Nevada and Arizona, and
certain processing rights at a refinery in Santa Maria, California. In addition,
MCNIC made loans to Crown Distribution for a portion of the PSAC Acquisition,
inventory purchases and its general working capital requirements.
The Company manufactured and distributed 133,783 tons of asphalt
products in 2001 up from 100,930 tons of asphalt products in 2000. Success in
the asphalt manufacturing and distribution business depends on the ability to
purchase inventory of base asphalt, additives and chemicals to manufacture a
finished product. Typically the cost of this inventory is less expensive during
the winter months when supply is greater than demand. It is during these months
that the Company normally fills its storage tanks and contracts for the sale of
finished product to be delivered during the paving season, generally from April
through October. The cyclical nature of the purchasing and sale of product
creates the requirement for a large amount of working capital. Since 1999, the
Company has not had a working capital credit facility. During 2001, the Company
was able to purchase asphalt and other raw materials from certain suppliers
under terms not requiring a working capital credit facility. The terms were very
expensive to the Company and resulted in a higher cost of goods sold than would
have occurred had the Company had a conventional working capital credit
facility. The Company continues to be hindered in its purchases of some raw
materials because those purchases must be made from operating cash flow limiting
the flexibility in supply purchases. This inflexibility caused costs to be at
levels higher than desired.
At the time of formation, the Company agreed to transfer and assign to
Crown Distribution, as a capital contribution, its 66.67% membership interest in
CAT, LLC. The Company was credited with a $1.5 million capital contribution to
Crown Distribution as a result of the assignment of the CAT, LLC membership
interests to Crown Distribution. Crown Distribution also assumed CAT, LLC's
payment obligations under a promissory note. The promissory note, assumed by the
Company, had an original principal balance of $1,282,070, with a balance as of
December 31, 2001, of $843,207. Crown Distribution is responsible for its 67.67%
of the promissory note payments. The remaining 33.33% ownership interest in CAT,
LLC is owned by Foreland. The accounts and results of operations of CAT, LLC are
therefore included within the consolidated financial statements of the Company
with a provision for minority interest owned by Foreland.. See Item 1. Business
- - Cowboy Asphalt Terminal, L.L.C. below for further information regarding CAT,
LLC.
MCNIC originally contributed the amount of $100 to the capital of Crown
Distribution. MCNIC also made a capital contribution in the amount of $6,000,000
as a preferential contribution (the "Preferential Capital Contribution"). The
Preferential Capital Contribution, together with an additional loan from MCNIC,
was used by Crown Distribution to acquire the assets of PSAC and pay related
closing and other acquisition costs. MCNIC made an additional capital
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contribution in the amount of $1.5 million when the Company contributed its
interest in CAT, LLC to Crown Distribution that Crown Distribution immediately
used to reduce the balance of the loan to MCNIC.
Management Of Crown Distribution. Crown Distribution is governed by a
management committee consisting of three managers. The Company is entitled to
appoint two managers and MCNIC is entitled to appoint one manager. Management
decisions are generally made by the management committee. Generally, the
management committee may act through majority vote. The Crown Distribution
Operating Agreement, however, requires that certain decisions ("Major
Decisions") be undertaken by the unanimous vote of the committee members. Capco
is the operator of Crown Distribution.
Loans. MCNIC, pursuant to its rights granted under the Crown
Distribution Operating Agreement, elected to loan Crown Distribution amounts to
cover its working capital requirements in lieu of it obtaining a line of credit
from an third party financial institution. As of December 31, 2001, MCNIC had
loaned Crown Distribution approximately $14,935,222.
On March 27, 2000, MCNIC delivered to the Company a notice of default
demanding payment of the outstanding principal balance of the amounts loaned to
Crown Distribution plus all interest accrued thereon. On June 20, 2000, MCNIC
filed a Complaint in the Third Judicial District Court, Salt Lake County, Utah,
against Crown Distribution. The action sought to foreclose on a mortgage and
security interest claimed by MCNIC in and to the real and personal property of
Crown Distribution. See Item 3. Legal Proceedings.
The Company and Crown Distribution acted to defend against MCNIC's
actions. On July 25, 2000, the Company filed suit in the United States District
Court for the state of Utah, Central Division, against MCNIC, MCN and certain
officers of MCN. In its Complaint (the "Crown Complaint"), the Company alleged
claims against the defendants under a wide variety of causes of action. An
Answer and Counterclaim to the MCNIC Complaint was filed by the Company on
August 1, 2000, and named additional counterclaim defendants, MCN Energy Group,
Inc. ("MCN") and certain officers of MCN and MCNIC. The Answer and Counterclaims
substantially denied all of the allegations set forth in the MCNIC Complaint and
asserted defenses, claims and counterclaims. The Answer and Counterclaims
further argued that certain of MCNIC's allegations were lacking in either legal
or factual basis.
MCNIC, MCN and the Company agreed to submit the Complaint, the Crown
Complaint and the Answer and Counterclaim to binding arbitration. The
arbitration concluded in August 2001. On November 5, 2001, the Company received
the decision of the arbitrator (the "Arbitrator") in the dispute between the
Company and MCNIC in which it was held that the loans made by MCNIC to Crown
Distribution are currently due and payable along with accrued interest ("Damage
Award"). On February 07, 2002, the Third Judicial Court, Salt Lake County, Utah
confirmed the Damage Award and entered a judgment in favor of MCNIC. The amount
of the Damage Award judgment as of March 29, 2002, including accrued interest is
$20,266,822.71, and continues to accrue interest daily of $5,102.84. As is
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discussed elsewhere within this Report, if the Company exercises the option (the
"Option") given it under the Settlement Agreement to purchase all of MCNIC's
interests in, or relating to, Crown Distribution, the amount owing under the
Damage Award will be discharged. See Item 3. Legal Proceedings.
Distributions: Allocations Of Profits and Losses. Until such time as
MCNIC has received the return of its Preferential Capital Contribution and a 15%
internal rate of return on its investment in Crown Distribution, Crown
Distribution is obligated to distribute to MCNIC 50% of the net cash flow from
operations. The remaining cash flow balance is distributed roughly 50% to MCNIC
and 50% to the Company (in accordance with their respective sharing ratios).
During 2001, no distributions were made. In the event of liquidation, MCNIC
would receive 100% of any and all amounts available for distribution up to its
outstanding Preferential Capital Contribution balance and remaining amounts
would be distributed in proportion to the member's capital account balances.
Profits and losses are generally allocated in accordance with the members'
respective sharing ratios. However, after profits are allocated to offset any
previous allocations of losses made to members, in the event of a complete
liquidation of Crown Distribution, profits will be allocated 100% to MCNIC until
its Preferential Capital Contribution and the 15% rate of return has been
satisfied.
Management Agreement. Pursuant to an Operating and Management Agreement
(the "Management Agreement"), Capco is the operator of Crown Distribution and
manages and conducts its business including the negotiation and execution of
contracts, the buying and selling of asphalt, and the paying of expenses. As
compensation for the services rendered under the Management Agreement, the
Company receives: (i) a monthly fee of $5,000; (ii) the payment of all
out-of-pocket expenses incurred through the performance of its duties; (iii) the
reimbursement of the reasonable salaries, wages, overtime and other similar
compensation paid to employees of the Company in relation to their management
services under the Management Agreement; and (iv) a monthly overhead charge of
$10,000.
The term of the Management Agreement is five years, which term will be
automatically extended for unlimited successive one-year periods unless either
party furnishes the other with written notice at least 90 days prior to the
expiration of any such initial or extended period. During the initial term of
the Management Agreement, the Company can be removed only for good cause by the
affirmative vote of the management committee. The Management Agreement also
contains provisions allowing the replacement of the Company as the operator,
after the initial five-year term on economic grounds. Such a decision would
require the majority vote of the management committee of Crown Distribution. Two
of the members of the management committee are nominees of the Company.
The Company and third parties store and throughput asphalt through
excess capacity at the terminal facilities for an industry standard fee.
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Cowboy Asphalt Terminal, L.L.C.
Formation and Acquisition of Assets. CAT, LLC is a joint venture
between the Company and Foreland. Foreland is engaged in the asphalt roofing
products business. On June 16, 1998, CAT, LLC was formed to acquire an asphalt
terminal and related refinery assets and real property located in Woods Cross,
Utah (the "Cowboy Terminal Assets"). The real property acquired by CAT, LLC as
part of the Cowboy Terminal Assets is referred to hereinafter as the "Cowboy
Terminal Property".
On September 11, 1998, CAT, LLC, Capco, Foreland and Refinery
Technologies, Inc., a Utah corporation ("Refinery Technologies"), entered into
an Assignment and Agreement (the "Assignment Agreement") under which Refinery
Technologies assigned all of its ownership rights in and to the Cowboy Terminal
Assets purchase contract to CAT, LLC. In turn, CAT, LLC agreed to assume all of
the obligations under the real property purchase contract, and issued a
promissory note in connection with the purchase in the amount of $1,067,111 to
the former owner.
On January 9, 1999, CAT, LLC purchased the Cowboy Terminal Assets for
$1,477,070 (net of $496,441 of deposits paid in 1998). CAT, LLC paid $195,000 in
cash at closing and executed and delivered a promissory note in the amount of
$1,282,070. This promissory note is payable in 84 equal monthly installments of
$20,627 beginning on February 1, 1999, and ending on January 1, 2006. The note
bears interest at the rate of 9% and is secured by a deed of trust encumbering
the Cowboy Terminal Property.
The Company and Foreland initially owned sharing ratios ("sharing
ratios") of 66.67% and 33.33%, respectively, in the profits, losses and
obligations of CAT, LLC. However, the Company has assigned its sharing ratios
and ownership interests in CAT, LLC to Crown Distribution. In connection with
the transfer of the 66.67% interest in CAT, LLC to Crown Distribution, Crown
Distribution assumed payment obligations under this promissory note. See Item 1.
Business - Crown Asphalt Distribution, L.L.C.
The Cowboy Terminal Property has been divided into portions dedicated:
(i) to the exclusive uses of the Company for its asphalt paving products
business and; (ii) to the exclusive uses of Foreland for its asphalt roofing
products business. Revenues or profits generated by such exclusive uses will
belong to the Company or Foreland, as the case may be, and the other party will
have no right to participate in the revenues, profits or income generated by the
business of the other with respect to such exclusive uses. Further, the use of
the Cowboy Terminal Property by the Company and by Foreland is free of charge or
other cost above the parties' respective operating costs.
The CAT, LLC Operating Agreement obligates both the Company and
Foreland to make additional capital contributions equal to one-half of any
additional amounts needed for: (i) CAT, LLC to fulfill its obligations, not to
exceed $650,000, under any corrective action plan that may be accepted by CAT,
LLC and the Utah Department of Environmental Quality with respect to certain
environmental conditions at the Cowboy Terminal Property; and (ii) legal costs
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incurred in the purchase or related to the environmental matters in (i) of this
paragraph. The CAT, LLC Operating Agreement also obligates Crown Distribution
and Foreland to make additional capital contributions, in proportion to their
ownership percentages, in order to fund any additional amounts required for CAT,
LLC to fulfill its obligations under the purchase contract for the Cowboy
Terminal Assets, for environmental management and containment costs, expenses
for operations, or the construction of certain approved capital improvements to
the Cowboy Terminal Property. None of the foregoing additional contributions
will result in an increase in the number of units or percentage interests held
by the Company or Foreland.
CAT, LLC has title to the Cowboy Terminal Property and the Company has
the exclusive right to use portions thereof for its asphalt terminal operations.
Refinery Technologies did, however, retain certain contract rights with respect
to the Cowboy Terminal Assets, certain rights to receive payments upon any
liquidation of CAT, LLC and a right of first refusal to purchase the Cowboy
Terminal Property or membership interests in CAT, LLC under certain conditions.
Management of Cowboy Asphalt Terminal, LLC. CAT, LLC is operated by
Capco. The operator generally has authority to conduct the day-to-day business
and affairs of CAT, LLC. Certain matters must be approved by members holding 75%
or more of the outstanding units of CAT, LLC. The Company is not compensated for
its services as operator.
Crown Asphalt Ridge, L.L.C.
Formation and Current Development Status. Effective August 1, 1997, the
Company jointly formed Crown Ridge with MCNIC to construct and operate an oil
sand processing facility for the production of premium asphalt oil at Asphalt
Ridge in Uintah County, Utah.
The Facility constructed by Crown Ridge is located on a portion of the
Oil Sand Resources known as the "A" tract, which is believed to contain in
excess of 18 million barrels of surface minable reserves with an average oil
saturation of 11% by weight. There is a partially opened pit on this tract that
has been mined since the 1940's for native asphalt material for road surfaces.
Under the Crown Ridge Operating Agreement, MCNIC initially funded 75%
and the Company 25% of the amounts required by Crown Ridge to construct the
Facility. The Company was initially required to contribute: (i) $500,000 of oil
sand leases and technology; and (ii) the obligation to lease certain mining
equipment for the Facility up to $3,500,000 in value. Both MCNIC and the Company
made additional contributions as were required pursuant to the contract for the
construction of the Facility and as otherwise unanimously agreed to by the
Company and MCNIC. As of December 31, 2001, the Company had made cash
contributions of approximately $5,663,985 to Crown Ridge and has invested a
total of approximately $6,904,086 in the development of Crown Ridge, which
includes costs incurred prior to the joint venture with MCNIC.
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Because operations at Crown Ridge did not yet require it, the Company
did not contribute as part of its capital contribution, the leased mining
equipment contemplated when the entity was formed. To replace the foregoing
obligation to lease certain mining equipment as its required capital
contribution, on July 20, 1999, the Company's CAC subsidiary, at the demand of
MCNIC, executed a promissory note in the amount of $2,991,868 (the "CAC Loan"),
bearing interest at the prime rate plus 1% per annum, adjusted monthly, and
providing for interest only payments of $20,757 per month through July 20, 2004.
On August 20, 2001, CAC and MCNIC agreed that the Facility would not be able to
operate commercially and the interest only period was extended under the CAC
Loan and no principal payments were due until July 20, 2004. The CAC Loan was
secured by that portion of CAC's sharing ratio in Crown Ridge directly
attributable to the proceeds of the loan. The gross proceeds of the CAC Loan
($2,991,868.66) were treated as a capital contribution by CAC to Crown Ridge. As
a result of the execution of the Settlement Agreement, the Company's obligations
under the CAC Loan have been discharged.
During the start-up of the Facility mechanical and process difficulties
were experienced that affected production economics. Extensive research and
engineering to develop a solution to these problems was conducted and tested in
a pilot study at the Facility during 2000. MCNIC, as the majority owner of Crown
Ridge, has solely managed the operation of the pilot plant and study. In order
for the Facility to achieve commercial production, significant capital
investment in the Facility will be required. The Company does not now have, or
expect to have in the near future, the financial wherewithal to contribute its
pro rata share of the capital investment.
The Company has previously impaired the value of its Crown Ridge
interest in its Consolidated Financial Statement for the year ending December
31, 2000. On March 8, 2002, the Company assigned its interest in Crown Ridge to
MCNIC pursuant to the Settlement Agreement in return for: (i) the granting to
CAC of a one percent (1%) non-cost bearing overriding royalty interest in the
"A" tract at Asphalt Ridge; (ii) the assignment to CAC of a three percent (3%)
non-cost bearing overriding royalty interest in Crown Ridge's other properties
at Asphalt Ridge; (iii) the elimination of the CAC Loan; and (iv) the payment by
MCNIC of a judgment against CAC by Morrison Knudsen (the "MK Judgment") which
arose out of the construction of the Facility, and the indemnification of the
Company against the MK judgment. Given the: (i) extreme financial and legal
pressures confronting the Company, and Crown Ridge specifically; and (ii)
continuing technical difficulties experienced at Crown Ridge, Management of the
Company believes that its actions with regard to Crown Ridge are in its best
interests. See Item 3 Legal Proceedings.
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
12
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 for 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 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
effect on the capital expenditures, earnings and competitive position of the
Company.
Subsidiaries of the Company
Crown Asphalt Corporation, a Utah corporation which is a wholly owned
subsidiary of the Company, was organized October 24, 1985, and was acquired by
the Company on September 30, 1992. Crown Asphalt Corporation owns an overriding
royalty interest in the properties of Crown Ridge. See Item 1. Crown Asphalt
Ridge, L.L.C.
Capco is a wholly owned subsidiary of the Company that was formed in
1991. Until 1998, Capco was a dormant entity. The Company activated Capco for
the purpose of conducting an asphalt marketing and distribution business. Capco
is a member of and holds 50.01% of the membership interests in Crown
Distribution and currently owns the Rawlins Asphalt Terminal.
On July 2, 1998, Crown Distribution was formed as a second joint
venture between the Company and MCNIC. Crown Distribution is owned 50.01% by the
Company and 49.99% by MCNIC. Crown Distribution was formed to acquire the
inventory and assets of PSAC. Crown Distribution is a member of and holds 66.67%
of the membership interests in CAT, LLC. The Company includes within its
consolidated financial statements the accounts and results of operations of both
Crown Distribution and CAT, LLC.
13
Employees
As of April 1, 2001, the Company had 44 full and part-time employees.
None of the Company's employees are represented by a union or other collective
bargaining group. Management believes that its relations with its employees are
good.
Segments
The Company considers its principal business to be within one industry
segment. For information regarding the breakdown of revenues and operating
results for the Company and its operational units, see Note 17 to the
Consolidated Financial Statements of Crown Energy Corporation.
ITEM 2. PROPERTIES
The Company conducts its business operations at 215 South State, Suite
650, Salt Lake City, Utah, where it has approximately 10,284 square feet of
office space under lease until July 31, 2001. On October 30, 2000, the Company
notified the landlord of the lease that it would exercise its option under the
lease to terminate the lease effective July 31, 2001, and is currently leasing
the space on a month-to-month basis. The Company has an obligation to pay the
landlord the unamortized cost of the tenant improvements and commissions as of
the July 31, 2001, termination date. On November 17, 2000, the Company purchased
a building in Woods Cross, Utah adjacent to the Cowboy Terminal Property
executing a promissory note of $264,750.00 payable over 120 payments for the
purchase price. The Company plans to relocate its offices to this building, and
management of the Company believes that building will be sufficient for its
needs and believes that it will be able to obtain suitable other space in the
Salt Lake City area in the alternative.
Crown Distribution owns asphalt distribution facilities located in
Utah, Colorado, Nevada and Arizona. These properties are used by the Company to
store, process, blend, manufacture and sell finished asphalt products in its
western United States target market. All of Crown Distribution's assets are
encumbered by the Damage Award judgment and security interest of MCNIC. See
Item 1. Business - Crown Asphalt Distribution, L.L.C. and Item 3. Legal
Proceedings.
The Company, through its subsidiary Capco, owns the Rawlins Asphalt
Terminal. These properties are used to store, process, blend, manufacture and
sell finished asphalt products. All of the Rawlins Asphalt Terminal assets are
encumbered by the lien and security interest of Community First National Bank,
which advanced the purchase price for such assets.
14
CAT, LLC's asphalt distribution and storage facility is located in
Woods Cross, Utah, just north of Salt Lake City. CAT, LLC owns all of the assets
and underlying real property of the Cowboy Terminal Property, which is
encumbered by a Deed of Trust in favor of the seller.
ITEM 3. LEGAL PROCEEDINGS
On May 21, 1998, Road Runner Oil, Inc. ("Road Runner") and Gavilan
Petroleum, Inc. ("Gavilan") filed an action in the Third Judicial District
Court, Salt Lake County, State of Utah, as Civil #98-0905064 against the Company
and its President. The action relates to the purchase by Road Runner of 100% of
the stock of Gavilan in 1997, and generally seeks to: (i) obtain corporate
records of Gavilan in the Company's possession relating to the amount of oil and
gas royalties potentially owed to third parties prior to the sale of Gavilan
Stock to Roadrunner, and (ii) to determine the amount of royalties owed. The
action further alleges, on behalf of Gavilan, claims of breach of fiduciary
duty, professional negligence and mismanagement against the Company's President
for alleged mismanagement of Gavilan's affairs. The Plaintiffs seek injunctive
relief requiring the tendering by the Company of the referenced records and such
damages as may be proven at trial. The Company believes that the Plaintiff's
claims are groundless and that it is entitled to payment of the $75,000, plus
accrued interest, still owed by Road Runner as part of the purchase price for
Gavilan. In addition, since the action was filed, the Company has tendered the
corporate records to the Plaintiffs. On March 8, 2000, the Company filed an
answer denying liability and filed a counterclaim against Road Runner and
Gavilan for breach of contract and declaratory judgment. The Company is not
certain as to whether or not the outstanding balance under the promissory note
is collectible by the Company. No evaluation presently can be made as to the
final outcome of this case or the likelihood or range of potential loss or
recovery, in any.
On July 12, 1999, Morrison Knudsen Corporation ("MK") filed a Complaint
in the Eighth Judicial District Court, Uintah County, State of Utah, alleging
that CAC had breached an agreement whereby MK would provide certain mining
services for CAC at Crown Ridge's Facility in Uintah County, Utah (the
"Project"). Judgment in favor of MK was entered on January 30, 2001, in the
principal amount of $303,873.39, $49,062.33 of pre-judgment interest and
$2,033.14 of costs, which totals $354,968.86. The Settlement Agreement obligates
MCNIC to pay the MK Judgment and indemnify the Company from any associated cost,
and the case has been subsequently dismissed.
In late July and August, 2001, the Company participated in a binding
arbitration proceeding (the "Arbitration") in Salt Lake City, Utah against
MCNIC, its related entities and certain of their officers. The Arbitration
addressed all claims previously asserted between the parties either in the Third
Judicial District Court of Salt Lake County in a proceeding entitled MCNIC
Pipeline & Processing Company v. Crown Asphalt Distribution Civil No. 00904867
(the "State Action") and the proceeding filed in the United States District
Court for the District of Utah Central Division entitled Crown Energy
Corporation, et al. v. MCN Energy Group, Inc. et al., Civil No. 2CV-0583ST (the
"Federal Action"). In summary, in the State Action, MCNIC alleged that funds
15
previously advanced by it to Crown Distribution in an amount in excess of $14
million, plus interest, were immediately due and payable. MCNIC also sought the
appointment of a receiver for Crown Distribution's assets and sought to
foreclose on security interests in the assets of Crown Distribution.
In contrast, the Company asserted that the funds previously advanced to
Crown Distribution by MCNIC were part of a revolving credit facility which was
not due and payable at that time and from which Crown Distribution should be
able to make additional draws. Further, the Company sought recovery against
MCNIC, its related entities and certain of its officers under other causes of
action, including breach of fiduciary duties, economic duress, breach of implied
covenants of good faith and fair dealing, breach of contracts and intentional
interference with business relations.
On October 31, 2001, the Arbitrator issued a damage award (the "Damage
Award") in which he held that MCNIC's loans were due and payable with interest
accruing on such loans from 8% to 18%, depending upon the particular loan
involved. The decision also failed to find for the Company on its claims against
MCNIC, its related entities and officers. The Damage Award was subsequently
confirmed by the Third Judicial District Court of Salt Lake County, state of
Utah on February 7, 2002. The amount of the Damage Award as of March 29, 2002,
is $20,266,822.71, with interest accruing daily in the amount of $5,102.84.
In addition, the Arbitrator awarded $2,609,518.69 in fees and costs
(the "Fee Award") to MCNIC against the Company and its related entities on a
joint and several basis. The Fee Award has yet to be confirmed by the
appropriate Utah state court and proceedings regarding it have been stayed as
further explained below.
On March 8, 2002, the Company and MCNIC, its related entities and
certain of its officers executed the Settlement Agreement. Pursuant to the
Settlement Agreement, the Company transferred all of its interests in Crown
Ridge and the leases relating to the Asphalt Ridge properties to MCNIC. In
addition, the Company and its officers agreed not to compete with Crown Ridge in
the Western United States and Western Canada in any way with regard to tar sands
leasing, mining, extraction or processing for a period of three years. However,
the Settlement Agreement provides that the Company may continue to conduct its
present business of buying, storing, blending and selling asphalt.
In exchange for the assignment of the Crown Ridge interest, the Company
received (i) MCNIC's commitment to pay the MK Judgment and its indemnification
of the Company from the MK Judgment, (ii) the assignment from Crown Ridge of a
1% non-cost bearing, overriding royalty interest in the sales proceeds received
by Crown Ridge or its successors and assigns from any products produced on the
assigned leases of "Tract A" at Asphalt Ridge and a 3% non-cost bearing,
overriding royalty interest in proceeds received by Crown Ridge or its
successors and assigns from any other lands which are currently leased by Crown
Ridge or the Company, and (iii) the mutual release between the parties of any
known or unknown claims between them relating to Crown Ridge, including the
obligation of the Company to pay the CAC Loan.
16
Pursuant to the Settlement Agreement, the Company also acquired an
option to purchase all of MCNIC's rights, title and interests in, or relating
to, Crown Distribution (including its right to receive the Damage Award and the
Fee Award) for an amount equal to $5,500,000 (the "Purchase Price"). The
Settlement Agreement provides that the Purchase Price shall be paid through the
payment of $200,000 at execution with the balance due upon the closing of the
Option (if such closing occurs on or before April 30, 2002). After April 30,
2002, the Company shall have the right to extend the Option until September 30,
2002, by making an additional $100,000 payment for each 30 days by which the
Option is extended. If the Company closes under the Option, then all payments
made to MCNIC shall be credited against the Purchase Price. If, however, the
Company does not exercise the Option, the initial $200,000 payment shall be
credited against the Company's ultimate liability under the Fee Award.
Promptly following the execution of the Settlement Agreement, the
Company and MCNIC stayed all pending litigation relating to the Arbitration or
any enforcement of its conclusion issued as a result of it. The Settlement
Agreement provides that if the Company does not exercise the Option, MCNIC may
execute on the Damage Award and that the parties may either move to confirm or
appeal, as the case may be, the Fee Award.
Management of the Company believes that under the severe legal and
financial constraints facing the Company as a result of the Arbitration's
outcome, the negotiation and execution of the Settlement Agreement were in the
best interests of the Company and its shareholders. Management of the Company is
presently taking actions intended to permit it to exercise the Option but cannot
assure that it will be successful in obtaining the requisite financing on terms
which are acceptable to the Company. Further, the Company cannot describe what
form future financing might take.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders for vote during
the fourth quarter of fiscal year 2001.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company, their ages and
their positions are set forth below:
NAME AGE POSITION
---- --- --------
Jay Mealey 45 Chairman of the Board of Directors, Chief
Executive Officer, President,
Treasurer
Stephen J. Burton 56 Secretary
Andrew W. Buffmire 55 Director
17
Jay Mealey has served as President and Chief Operating Officer and as a
director of the Company since 1991. Mr. Mealey was appointed as Chief Executive
Officer in April 1999, treasurer in October 2000, and will serve as Chief
Executive Officer, President and Treasurer and as a director, until a new
officer and director, respectively, are appointed or elected and qualified. Mr.
Mealey has been actively involved in the oil and gas exploration and production
business since 1978. Prior to employment with the Company, Mr. Mealey served as
Vice President of Ambra Oil and Gas Company and prior to that worked for Belco
Petroleum Corporation and Conoco, Inc. in their exploration divisions. Mr.
Mealey is responsible for managing the day-to-day operations of the Company.
James A. Middleton has served as a director since February 1996 and
served as Chief Executive Officer from December 1996 through April 16, 1999. As
of March 29, 2002, Mr. Middleton resigned as a director for personal reasons.
Stephen J. Burton was elected Secretary in October 2000. Mr. Burton has
held various accounting positions with the Company since 1989. He is currently
responsible for the Company's Human Resources Department. Mr. Burton graduated
from Utah State University in 1986.
Andrew W. Buffmire is the Vice President Business Development for
publicly traded Ubiquitel, Inc., a wireless telecommunications company
headquartered in Conshohocken, Pennsylvania. Prior to joining Ubiquitel,
Buffmire was a Director in the business development group at Sprint PCS, a
national wireless telecommunications service provider from October 1997 until
May 2001. Before joining Sprint PCS, Buffmire was an attorney in private legal
practice in Salt Lake City, Utah for 16 years, with the exception of two years
(1985-1987), when he was the founder, general counsel and registered principal
of an NASD-registered investment-banking firm.
PART II.
ITEM 5. MARKET PRICE FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company'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 the Company's common stock as
reported by the National Quotation Bureau for each full quarter during the two
most recent fiscal years. The table represents prices between dealers, and does
not include retail markups, markdowns or commissions, and may not represent
actual transactions:
18
CALENDAR QUARTER ENDED HIGH BID LOW BID
---------------------- -------- -------
March 31, 2001 .02 .015
June 30, 2001 .125 .035
September 30, 2001 .075 .06
December 31, 2001 .085 .02
March 31, 2000 .0625 .0625
June 30, 2000 .468 .017
September 30, 2000 .187 .125
December 31, 2000 .125 .06
As of March 31, 2002, the high bid and low offer quotations reported by
the National Quotation Bureau were $.04 and $.011, respectively. On April 1,
2002, approximately739 shareholders of record held the Company's common stock.
The Company declared and paid no dividends in 2001.
The Company has not paid any dividends or made any other distributions
on its common shares. It is the present policy of the Board of Directors of the
Company 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. The terms of the Company's Series A Preferred Stock prohibit
the payment of dividends on common stock at any time that dividends on the
Series A Preferred Stock are due yet unpaid.
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 year ended December 31, 1997, were audited by
Pritchett, Siler & Hardy, P.C., independent public accountants. The financial
statements as of and for the year ended December 31, 1998 and December 31, 1999,
were audited by Deloitte & Touche, LLP, independent public accountants. The
financial statements as of and for the year ended December 31, 2000, and
December 31, 2001, were audited by Tanner + Co., 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.
19
Year Ended December 31
-----------------------
(In thousands except per share)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net Revenues $27,033 $22,787 $35,519 $23,836 $87
Income (Loss) from
Continuing Operations ($6,488) ($18,361) ($3,054) ($498) ($1,153)
Income (Loss) Per Share
From Continuing Operations ($0.51) ($1.39) ($0.26) ($0.07) ($0.11)
Total Assets $15,717 $17,052 $33,114 $23,571 $6,610
Total Long-Term Obligations $11,130 $11,337 $11,333 $4,326 $0.00
Redeemable Preferred Stock $4,953 $4,896 $4,840 $4,783 $4,726
Cash Dividends Per Common Share
$0.00 $0.00 $0.00 $0.00 $0.00
Common Stockholders' Equity ($27,994) ($21,050) ($2,276) $767 $1,749
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
The following discussion and analysis of the Company's financial
condition, results of operations and related matters includes a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include, by way of illustration and not limitation,
statements containing the words "anticipates," "believes," "expects," "intends,"
"future" and words of similar import which express, either directly or by
implication, management's beliefs, expectations or intentions regarding the
Company's future performance or future events or trends which may affect the
Company or its results of operations.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors, including but not limited to changes in
economic conditions generally or with respect to the Company's asphalt products
market in particular, new or increased governmental regulation, increased
competition, shortages in labor or materials, delays or other difficulties in
shipping or transporting the Company's products, risks related to the financing
of the Company's operations (including the risk of loss of certain operating
assets serving as collateral to secure such financing), and other similar risks
inherent in the Company's operations or in business operations generally. Any
such risks or uncertainties, either alone or in combination with other factors,
may cause the actual results, performance or achievements of the Company to
20
differ materially from its anticipated future results, performance or
achievements (which may be expressed or implied by such forward looking
statements). Consequently, the following management's discussion and analysis,
including all forward-looking statements contained therein, are qualified and
limited by the foregoing cautionary factors. Interested persons are advised to
consider all forward-looking statements within the context of such cautionary
factors.
Liquidity and Capital Resources
At December 31, 2001, the Company had cash and other current assets of
$5,502,842 as compared to cash and other current assets of $6,761,595 at
December 31, 2000. The decrease of $1,258,753 was generally due to a reduction
in year end asphalt inventory levels. The Company's wholly owned subsidiary,
Capco, is the majority owner of Crown Distribution, and also conducts asphalt
distribution independent of Crown Distribution. Together Capco and Crown
Distribution accounted for most of the companies cash and other current assets.
As of December 31, 2001, Capco and Crown Distribution had cash and other current
assets of approximately $5,343,836, consisting primarily of $2,536,048 in cash,
$1,358,022 in inventory and $1,363,883 in accounts receivable, excluding related
party balances. The Company's business is capital intensive and requires a
working capital credit facility to operate efficiently. The Company has not had
such a credit facility since 1999, which has resulted in lowered profitability.
Until 1999, MCNIC provided loans to Crown Distribution for inventory purchases
and general working capital requirements. As of December 31, 2001, those loans
had a principal balance of $14,935,222. The Company plans to diminish part of
its working capital constraints by structuring favorable supply arrangements
with its suppliers in 2002.
On March 27, 2000, MCNIC delivered to the Company a notice of default
demanding payment of the outstanding principal balance of the amounts loaned to
Crown Distribution plus all interest accrued thereon. On June 20, 2000, MCNIC
filed a Complaint in the Third Judicial District Court, Salt Lake County, Utah,
against Crown Distribution. The action sought to foreclose on a mortgage and
security interest claimed by MCNIC in and to the real and personal property of
Crown Distribution. See Item 3. Legal Proceedings.
The Company and Crown Distribution acted to defend against MCNIC's
actions. On July 25, 2000, the Company filed suit in the United States District
Court for the state of Utah, Central Division, against MCNIC, MCN and certain
officers of MCN. In its Complaint (the "Crown Complaint"), the Company alleged
claims against the defendants under a wide variety of causes of action. An
Answer and Counterclaim to the MCNIC Complaint were filed by the Company on
August 1, 2000, and named additional counterclaim defendants, MCN Energy Group,
Inc. ("MCN") and certain officers of MCN and MCNIC. The Answer and Counterclaims
substantially denied all of the allegations set forth in the MCNIC Complaint and
asserted defenses, claims and counterclaims. The Answer and Counterclaims
further argued that certain of MCNIC's allegations were lacking in either legal
or factual basis.
21
MCNIC, MCN and the Company agreed to submit the Complaint, the Crown
Complaint and the Answer and Counterclaim to binding arbitration. The
arbitration concluded in August 2001. On November 5, 2001, the Company received
a decision of the Arbitrator in the dispute between the Company and MCNIC where
it was ruled that the loans made by MCNIC to Crown Distribution are currently
due and payable along with accrued interest ("Damage Award"). On February 07,
2002, the Third Judicial Court, Salt Lake County, Utah confirmed the Damage
Award and entered a judgment in favor of MCNIC
On February 05, 2002, the Company received a final decision of the
Arbitrator awarding legal fees and costs incurred in the dispute between MCNIC
and the Company to MCNIC in the amount of $2,609,519 (the "Fee Award"). The Fee
Award was entered jointly and severally against Crown Distribution, Crown,
Capco, CAC, and Crown Ridge.
Crown Distribution also owed MCNIC an additional $5,325,723 at December
31, 2001, with respect to the Preferential Capital Contribution that funded
Crown Distribution's acquisition of the assets of PSAC. See Item 1. Business -
Crown Asphalt Distribution, L.L.C. The Preferential Capital Contribution
requires payment solely from 50% of the cash flow from Crown Distribution's
operations until repayment of the face amount plus a 15% rate of return.
On March 8, 2002, the Company and MCNIC entered into an agreement
("Settlement Agreement") in which the execution of the Damage Award judgment and
the proceedings to confirm the Fee Award in the Third Judicial Court, Salt Lake
County, Utah were both stayed. The terms of the Settlement Agreement also
provide that the Company will have the option to purchase all of MCNIC's
interest in Crown Distribution by the payment of certain amounts on or before
September 30, 2002, and that the stay of the execution of the Damage Award
judgment and the proceeding relating to the Fee Award will continue as long as
the option to purchase remains valid. Upon execution of the option to purchase
and closing by the Company, both MCNIC and the Company will mutually release the
other party from and against all claims, obligations and liabilities (including
the Damage Award, Fee Award and Preferential Capital Contribution). See Item 3.
Legal Proceedings. The Company will be required to raise substantial additional
capital to exercise the option to purchase MCNIC's interest in Crown
Distribution. This may require the Company to sell all or part of its assets to
finance the capital requirements. There is no assurance that the Company will be
able to raise the necessary capital or that the Company will be able to complete
the purchase of MCNIC's interest. This could result in the foreclosure by MCNIC
of substantially all of the assets of Crown Distribution. Although the Company
would vigorously defend against confirmation of the Fee Award against Crown,
Capco and CAC, there can be no assurance that the Company would prevail due to
the inherent risks of litigation. If MCNIC were to prevail and receive a joint
and several judgment for the Fee Award, substantially all of the remaining
assets of the Company would be at risk of loss to satisfy such a judgment. This
would place the Company at serious risk of insolvency and interested parties are
encouraged to note the significant risk of complete loss.
22
The Company remains open to other asphalt related business
opportunities to complement its existing asphalt distribution capabilities.
There can be no assurance that the Company can obtain additional capital
financing required to finance such transactions on acceptable terms and
conditions.
The Company has a portion of its accounts receivable subject to the
risks and uncertainties of litigation (see Item 3. Legal Proceedings) and
subject to related collection risks. The Company is seeking other ways to
finance its working capital requirements, but there can be no assurance that
such working capital financing can be secured by the Company. In the event that
the Company is unable to collect its current accounts receivables, or the
Company is unable to secure the necessary working capital line of credit for its
operations from third party sources, or if the Company's operating losses and
working capital deficits continue, or if the Company is unable to recoup the
losses, the Company may not have sufficient capital to operate through 2002.
As part of the Settlement Agreement, the Company assigned to MCNIC all
of its interest in Crown Ridge. In return the Company received: (i) the
assignment to CAC of a one percent (1%) non-cost bearing overriding royalty
interest in the "A" tract at Asphalt Ridge; (ii) the a assignment to CAC of a
three percent (3%) non-cost bearing overriding royalty interest in Crown Ridge's
other properties at Asphalt Ridge; (iii) the elimination of the promissory note
from CAC to MCNIC; and (iv) the payment by MCNIC of the MK judgment and
indemnification of the Company against the MK judgment. The Company will have no
further costs in Crown Ridge. See Item 3. Legal Proceedings.
Results of Operations
2001 vs. 2000
Total revenue increased from $22,787,103 for the year ended December
31, 2000, to $27,032,658 for the year ended December 31, 2001, an increase of
18.63%. This increase was primarily due to an increase in sales volume which was
a direct result of the Companies ability to purchase inventory from cash flow
and as a result of supply arrangements reached with its suppliers.
The Company's gross profit increased from approximately ($817,960) or
- -3.59% for the year ended 2000 to approximately $2,906,468 or 10.75% for the
year ended 2001. This increase was due to an overall reduction in the Company's
cost of basestock asphalt, because of the ability to bring in asphalt inventory
during the winter months when cost is significantly lower which it was not able
to do in 2000 due to financing difficulties resulting from working capital
constraints. (See "Item 3. - Legal Proceedings"). Another factor contributing to
the increased profit was improved operating efficiencies at the facilities. The
Company believes continued cost cutting procedures will favorably impact gross
margins in 2002, but the lack of an adequate working capital credit facility
could partially offset those margins.
23
General, administrative and provision for bad debt expenses decreased
from $4,590,523 for the year ended December 31, 2000, to $3,479,104 for the year
ended December 31, 2001, a decrease of $1,111,419. This decrease was primarily
the result of having to increase the reserve for doubtful accounts in 2000 as a
result of the decline in the credit worthiness of certain account balances. Cost
cutting procedures in 2001 and a reduction in administrative staff also
contributed to the decrease. These were partially offset by the increase in
legal expenses in 2001.
The loss from operations decreased from $16,084,230 in 2000 to $572,636
in 2001 an improvement of $15,511,594.
Interest and other income (expenses) increased from net expenses of
$2,315,344 for the year ended December 31, 2000, to net expenses of $5,964,153
for the year ended December 31, 2001, an increase of $3,648,809. The 2001 total
was comprised of $3,326,549 in interest costs related to the Crown
Distribution's Credit Facility, Preferential Capital Contribution to MCNIC and
the Damage Award. Other interest expense was $692,189 on various other debt.
Interest and other income was $664,104. Other expenses in the amount of
$2,609,519 resulting from a final decision of the Arbitrator awarding legal fees
and costs incurred in the dispute between MCNIC and the Company to MCNIC on
February 05, 2002.
Minority interest of $48,808 represents Foreland's approximate 33%
interest in the loss in CAT, LLC.
Crown Distribution had losses for the year ended December 31, 2001, of
$8,669,457. The Company, through its wholly owned subsidiary Capco, owns 50.01%
and MCNIC owns 49.99% of Crown Distribution. Capco is the manager and operating
agent of Crown Distribution. Because there is no agreement requiring the
minority shareholder, MCNIC, to guarantee the subsidiary's debt or such
cumulative losses or a commitment to provide additional capital, other than
working capital, all of the loss attributable to Crown Distribution, including
MCNIC's 49.99% interest in the losses totaling $4,333,861.55 are included as a
loss in the Company's Financial Statements.
2000 vs. 1999
Total revenue decreased from $35,518,541 for the year ended December
31, 1999, to $22,787,103 for the year ended December 31, 2000, a decrease of
35.84%. This decrease was primarily due to a reduction of the volume of asphalt
sold during 2000. This decrease in sales volume was a direct result of a
reduction in the ability of the Company to purchase inventory in a timely
fashion and its resulting inability to submit competitive bids due to the loss
of its working capital credit facility previously provided by MCNIC and loss of
funds and disruption caused by MCNIC.
24
The Company's gross margins decreased from approximately 4.81% for the
year ended 1999 to approximately -3.59% for the year ended 2000. This decrease
was due to an increase in the Company's cost of basestock asphalt that resulted
from a reduction in the purchase of asphalt inventory during the winter months
when the cost is significantly lower.
General, administrative and provision for bad debt expenses increased
from $2,745,029 for the year ended December 31, 1999, to $4,590,523 for the year
ended December 31, 2000, an increase of $1,845,494. This increase was primarily
due to increased legal expenses and an increase in the reserve for doubtful
accounts as a result of the decline in the credit worthiness of certain account
balances. These were partially offset by cost cutting procedures and a reduction
in administrative staff.
During the year ended December 31, 2000, the Company evaluated the
carrying value of its investments in and advances to Crown Ridge. The evaluation
has been complicated by the fact that the Company's joint venture partner has
effectively taken control of Crown Ridge and has not shared information relative
to its activities pertaining to Crown Ridge, including financial information and
feasibility studies relative to the Asphalt Ridge Project. Based on the lack of
a firm business plan for the Asphalt Ridge Project at this time, the Company
determined that its investment in and advances to Crown Ridge were potentially
impaired. Accordingly, an aggregate non-cash expense for the impairment or
$6,904,085 was recorded.
At year-end December 31, 2000, the company also re-assessed the
recoverability of goodwill associated with the PSAC Acquisition. Due to the
litigation with MCNIC, the Company was unable to secure financing needed to
build up inventory at favorable prices. This lack of funding and the ongoing
dispute with MCNIC has resulted in losses from operations in 1999 and 2000.
Because of these circumstances the Company could not estimate the full carrying
value which could be recovered through the undiscounted future cash flows from
products generated from related assets. Accordingly, an impairment of $3,625,848
was recognized in the statements of operations for the year ended December 31,
2000.
Due to the items discussed above, including the impairments, the loss
from operations increased from $1,907,779 in 1999, to $16,084,230 in 2000.
Interest and other income (expenses) decreased from net expenses of
$2,494,073 for the year ended December 31, 1999, to net expenses of $2,315,344
for the year ended December 31, 2000, a decrease of $178,729. The 2000 total was
comprised of $1,999,138 in interest costs related to the Preferential Capital
Contribution and other loans to MCNIC, other interest expense of $577,248 on
various loans, and $261,042 of interest income and other incomes
Minority interest of $38,653 represents Foreland's approximate 33%
interest in the loss in CAT, LLC.
25
Crown Distribution had losses for the year ended December 31, 2000, of
$11,365,018. The Company, through its wholly owned subsidiary, Capco owns 50.01%
and MCNIC owns 49.99% of Crown Distribution. Capco is the manager and operating
agent of Crown Distribution. Because there is no agreement requiring the
minority shareholder, MCNIC, to guarantee the subsidiary's debt or such
cumulative losses or a commitment to provide additional capital, other than
working capital, all (100%) of the loss attributable Crown Distribution,
including MCNIC's 49.99% interest in the losses totaling $5,681,372 are included
as a loss in the Company's Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe it is subject to material risks of loss
related to certain market risks, such as interest rate risks, foreign currency
exchange rate risks or similar risks, and, therefore, the Company does not
engage in transactions, such as hedging or similar transactions in derivative
financial instruments, intended to reduce its exposure to such risks. However,
the Company is subject to general market fluctuations related to the purchase of
its base stock asphalt and may suffer reduced operating margins to the extent
its increased costs are not passed through to its customers. Such prices
generally fluctuate with the price of crude oil. The Company has been prevented
from utilizing any hedging strategies to minimize any market price changes by
the terms of the Operating Agreement with MCNIC. See Item 7. Management's
Discussion and Analysis Results of Operations - 2000 vs. 1999.
The Company is also subject to certain price escalation and
de-escalation clauses in its asphalt distribution sales contracts. The Company
supplies asphalt to projects in certain states where regulations provide for
escalation and de-escalation of the price for such asphalt relative to the price
difference from the time the project is awarded to the successful bidding
company and the time the project is completed. The Company includes such
de-escalation risk into its bid prices and does not believe it has material
exposure to risk resulting from these regulations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE
The financial statements required by this item are set forth following
Item 14 hereof.
As indicated below, pursuant to Instruction G(3) to Form 10-K, portions
of Items 10 through 13 of Part III of this Form 10-K 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 (the "Proxy
Statement").
26
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors of the Company required by this Item 10
will be set forth in the Proxy Statement, which information is incorporated
herein by reference. Information regarding the executive officers of the Company
required by this Item 10 is included as Item 4A of Part I of this Form 10-K as
permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information
required by Item 405 of Regulation S-K will be set forth in the Proxy Statement,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item 11 will be set forth in the Proxy
Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item 12 will be set forth in the Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item 13 will be set forth in the Proxy
Statement, which information is incorporated herein by reference.
27
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Documents filed as part of this Report:
(1) Financial statements, as set forth on the attached Index to
Financial Statements.
(2) Exhibits, as set forth on the attached Exhibit Index.
Schedule II: Valuation and Qualifying Accounts
The Company filed a form 8-K on November 1, 2001, to report a final
settlement, effective October 23, 2001, had been reached in the litigation
between the Company's wholly owned subsidiary, Crown Asphalt Products Company
("Capco"), its majority owned subsidiary Crown Asphalt Distribution, L.L.C.
("Crown Distribution") and Santa Maria Refining Company ("SMRC"), Saba Petroleum
Company ("Saba") and Greka Energy Corporation ("Greka").The Settlement Agreement
between the parties requires that the terms of the settlement not be disclosed.
The Company filed a Form 8-K on November 6, 2001, to report a decision
in the arbitration conducted by it and its majority owned affiliate, Crown
Asphalt Distribution, L.L.C. ("Crown Distribution") against MCN Energy Group,
Inc. ("MCN") and MCNIC Pipeline and Processing Company ("MCNIC") and related
parties.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
CROWN ENERGY CORPORATION
(Registrant)
/s/ Jay Mealey
-----------------------------------
Jay Mealey
Chief Executive Officer,
Date: April 15, 2002
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.
/s/ Jay Mealey
-----------------------------------
Jay Mealey
Chief Executive Officer and Director
Date: April 15, 2002
/s/ Alan Parker
-----------------------------------
Alan L. Parker
Controller
Date: April 15, 2002
/s/ Andrew Buffmire
-----------------------------------
Andrew W. Buffmire
Director
Date: April 15, 2002
29
CROWN ENERGY CORPORATION
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS ADDITIONS
Balance at Charge to Charge to Balance at
Beginning Cash and Other End of
Description Of Year Expenses Accounts Deductions Year
- ----------------------------- ----------- ---------- ----------- ---------- -----------
Year ended December 31, 2001:
Deducted from assets accounts
Accounts receivable:
Allowance $1,827,896 $105,414 $1,722,482
Deferred tax assets:
Valuation allowance 7,372,000 736,000 8,108,000
Year ended December 31, 2000:
Deducted from assets accounts
Accounts receivable:
Allowance $298,000 $1,529,896 $1,827,896
Deferred tax assets:
Valuation allowance 2,738,000 4,634,000 7,372,000
Year ended December 31, 1999:
Deducted from assets accounts
Accounts receivable:
Allowance $150,000 $77,000 $161,000 $90,000 $298,000
Deferred tax assets:
Valuation allowance 1,704,000 1,034,000 2,738,000
30
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT
----------- --------
2.1 Purchase and Sale Agreement regarding Petro Source Asphalt
Company, dated July 2, 1998 (15)
2.2 Memorandum of Closing regarding Refinery Technologies, Inc.
(18)
2.3 Assignment and Agreement with Refinery Technologies, Inc. (18)
2.4 Asset Purchase Agreement (S&L Industrial) dated May 12, 1999,
regarding S&L Industrial
3.1 Articles of Incorporation (6)
3.2 Certificate of Voting Powers, etc. of the Company's Preferred
Stock (10)
3.3 Amended Bylaws (1)
4.1 Convertible Debenture - Agreement dated May 6, 1997, between
Crown Energy Corporation and Oriental New Investments, Ltd.
(7)
4.2 Warrant with Encap Investments, L.C. (12)
4.3 Form of Stock Option Agreements between the Company and (1)
Jay Mealey, (2) Richard Rawdin and (3) Thomas Bachtell (12)
4.4 The Crown-Energy Long Term Equity Basic Incentive Plan (13)
4.5 Common Stock Purchase Warrant dated November 4, 1997 issued to
Enron Capital & Trade Resources Corp. (10)
4.6 Form of Warrant issued to principals of IBEX Group, Inc. and
Hoffman Partners, Inc. (18)
4.7 May 1998 Warrant issued to Ladenburg Thalmann (18)
10.1 License Agreements with Park Guymon Enterprises, Inc., dated
January 20, 1989, June 1, 1990 and June 1, 1990 (3)
10.2 Amendment to License Agreement with Park Guymon Enterprises,
Inc. (6)
10.3 Employment Agreement with Jay Mealey (12)
10.4 Consulting Agreement with IBEX Group, Inc. and Hoffman
Partners, Inc. (6)
10.5 Promissory Note issued to Jay Mealey 12/31/95 (6)
10.6 Promissory Note issued to Thomas W. Bachtell 12/31/95 (6)
10.7 Promissory Note issued to Thomas W. Bachtell 12/31/95 (6)
10.8 Oil and Gas Minerals Lease, dated September 1, 1991 with
Wembco, Inc. (4)
10.9 Crown Office Space Lease (5)
10.10 First Amendment to Crown Office Space Lease (12)
10.11 Investment Banking Agreement with Fortress Financial Group,
Ltd. (12)
10.12 Promissory Note from Jay Mealey (12)
10.13 Promissory Note from Rich Rawdin (12)
10.14 Stock Pledge Agreement with Jay Mealey (12)
10.15 Stock Pledge Agreement with Rich Rawdin (12)
10.16 Assignment of Assets to Crown Asphalt Ridge, L.L.C. by Crown
Asphalt Corporation (12)
10.17 Assignment to Crown Asphalt Ridge, L.L.C. by Crown Asphalt
Corporation (12)
31
10.18 Asphalt Ridge Project Operating and Management Agreement with
Crown Asphalt Ridge L.L.C., dated August 1, 1997 (12)
10.19 Sublicense and Agreement between Crown Asphalt Ridge, L.L.C.
and Crown Asphalt Corporation (12)
10.20 Stock Purchase Agreement with Enron Capital & Trade Resources
Corporation (10)
10.21 Engineering, Construction, and Procurement Agreement with
CEntry Constructors & Engineers, LLC (12)
10.22 Revised Right of Co-Sale Agreement between Jay Mealey and
Enron Capital & Trade Resources Corp. (11)
10.23 Guaranty Agreement in favor of MCNIC Pipeline & Processing
Company (12)
10.24 Crown Office Space Sublease (12)
10.25 Stock Purchase Agreement dated July 2, 1997, between Crown
Energy Corporation and Road Runner Oil, Inc. (8)
10.26 Letter Agreement with EnCap Investments L.C. (12)
10.27 Purchase and Sale Agreement dated July 2, 1998, between Petro
Source Asphalt Company and Crown Asphalt Distribution LLC (15)
10.28 Saba Petroleum Processing Agreement for Santa Maria Refinery
in California dated May 1, 1997, between Petro Source Refining
Corporation and Santa Maria Refining Company and Saba
Petroleum Company, which was assigned to the Company on or
about July 2, 1998. (16)
10.29 MetLife Equipment Lease dated May 1, 1997, between Petro
Source Refining Corporation and MetLife Capital Corporation,
which was assigned to the Company on or about July 2, 1998.
(16)
10.30 PacifiCorp Property Lease dated April 1, 1996, between Petro
Source Refining Corporation and PacifiCorp, which was assigned
to the Company on or about July 2, 1998. (16)
10.31 GATX Rail Car Lease dated December 10, 1987, between Petro
Source Corporation and General American Transportation
Corporation, assigned to the Company on or about July 2,1998
(16)
10.32 Office Space Lease (16)
10.33 Operating Agreement for Crown Asphalt Ridge, L.L.C. (17)
10.34 Operating Agreement for Crown Asphalt Distribution L.L.C. (18)
10.35 Operating and Management Agreement for Crown Asphalt
Distribution L.L.C. (18)
10.36 Operating Agreement for Cowboy Asphalt Terminal L.L.C. (18)
10.37 April 3, 1998, Agreement regarding investment banking services
with Ladenburg Thalmann (18)
10.38 Indemnification Agreement with Ladenburg Thalmann (18)
10.39 Letter Agreement between CAC, Capco, and MCNIC Pipeline &
Processing Company dated July 20, 1999 (19)
10.40 Letter Agreement between Capco and MCNIC Pipeline & Processing
Company dated July 20, 1999 (19)
10.41 First Amendment to Operating Agreement (Crown Asphalt
Distribution, L.L.C.)(19)
32
10.42 Loan Agreement: MCNIC Pipeline & Processing Company loan to
Crown Asphalt Corporation dated July 20, 1999 (19)
10.43 CAR Promissory Note (19)
10.44 $1,800,000 Loan Agreement: Community First National Bank to
Crown Asphalt Products Company (19)
10.45 Letter Amendment to Community First National Bank Loan
Agreement dated June 2, 1999 (19)
10.46 Crown Energy Corporation Guaranty of Community First National
Bank Loan (19)
10.47 Assignment & Assumption Agreement (19)
10.48 Offsite Services Agreement (19)
10.49 Amendment to Mealey Employment Agreement (19)
10.50 MCNIC election to proceed with additional pilot plan (1/7/00)
(19)
10.51 Settlement Agreement with Zimmerman (19)
10.52 Amendment to Settlement Agreement with Zimmerman (19)
10.53 5th Amendment to Building Lease (19)
10.54 January 20, 2000, Letter to MCNIC (20)
10.55 January 7, 2000, Election to Proceed with Pilot Plant Letter
to MCNIC (20)
10.56 January 7, 2000, Additional Costs Letter to MCNIC (20)
10.57 Agreement with Refinery Technologies, Inc. (20)
10.58 Notice of Termination of Building Lease (20)
10.59 Arbitration Agreement (20)
10.60 Settlement Agreement between the Company, MCNIC and related
parties
11 Statement regarding computation of per share earnings (the
information required for Exhibit 11 is set forth on page F-25
of the Financial Statements of Crown Energy Corporation of
this Form 10K)
16 Letter of Pritchett, Siler & Hardy, P.C. dated June 5, 1998
(14)
21 Subsidiaries of the Company (the information required for
Exhibit 21 is set forth in Item 1. Subsidiaries of the
Company)
- -----------------------------
(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.
(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.
33
(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.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, filed with the Commission on or
about March 31, 1998, bearing Commission file number 0-19365.
(13) Incorporated by reference from the Company's Amended Annual Report on
Form 10-K for the year ended December 31, 1997, filed with the
Commission on or about April 30, 1998, bearing Commission file number
0-19365.
(14) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about June 9, 1998, bearing Commission file number
0-19365.
(15) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about July 17, 1998, bearing Commission file number
0-19365
(16) Incorporated by reference of the Company's Amended Form 10-Q filed with
the Commission for the period ending September 30, 1998, filed with the
Commission on November 25, 1998.
(17) Incorporated by reference from the Company's Amended Form 8-K filed
with the Commission on or about November 18, 1997, bearing Commission
file number 0-19365.
(18) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, filed with the Commission on or
about June 14, 1999.
(19) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, filed with the Commission on or
about April 4, 2000.
(20) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, filed with the Commission on or
about April 17, 2001.
o The Company agrees to furnish supplementally to the Commission a copy
of any omitted schedule or exhibit to such agreement upon request by
the Commission.
34
CROWN ENERGY CORPORATION
Consolidated Financial Statements
December 31, 2001, 2000, and 1999
CROWN ENERGY CORPORATION
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Operations F-4
Consolidated Statement of Shareholders' Deficit F-5
Consolidated Statement of Cash Flows F-6
Notes to consolidated Financial Statements F-8
- --------------------------------------------------------------------------------
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Crown Energy Corporation
We have audited the consolidated balance sheet of Crown Energy Corporation as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 referred to above present
fairly, in all material respects, the consolidated financial position of Crown
Energy Corporation as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has had substantial recurring
losses from operations, is involved in significant litigation and has relied
upon financing from debt to satisfy its obligations. These conditions raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to that matter are also described in note
2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ TANNER + CO.
Salt Lake City, Utah
February 15, 2002, except for
Note 19 which is dated February 28, 2002
- --------------------------------------------------------------------------------
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Crown Energy Corporation
Salt Lake City, Utah
We have audited the accompanying consolidated statements of operations,
stockholders' deficit, and cash flows of Crown Energy Corporation and
Subsidiaries (the Company) for the year ended December 31, 1999. Our audit also
included the financial statement schedule for the year ended December 31, 1999
listed in the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the Company's results of operations and its cash flows for
the year ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, such
financial statement schedule for the year ended December 31, 1999, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's recurring
losses from operations, stockholders' deficiency, and negative working capital
raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Salt Lake City, Utah
March 29, 2000
- --------------------------------------------------------------------------------
F-3
CROWN ENERGY CORPORATION
Consolidated Balance Sheet
December 31,
- ---------------------------------------------------------------------------------------------------------------
Assets 2001 2000
---------------------------------
Current assets:
Cash and cash equivalents $ 2,652,858 $ 2,878,141
Accounts receivable, net of allowance for doubtful accounts of
$1,722,482 and $1,827,896, respectively 1,378,610 1,419,260
Inventory 1,358,022 2,370,887
Prepaid and other current assets 87,652 67,607
Related party receivable 25,700 25,700
---------------------------------
Total current assets 5,502,842 6,761,595
Property, plant, and equipment, net 9,590,787 9,661,174
Intangible assets, net 340,430 404,400
Other assets 283,206 225,009
---------------------------------
Total $ 15,717,265 $ 17,052,178
=================================
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 410,564 $ 1,317,222
Preferred stock dividends payable 1,200,000 800,000
Accrued expenses 175,794 127,366
Accrued arbitration costs 2,609,519 -
Accrued interest 7,473,512 3,987,256
Current portion of long-term debt 347,153 273,633
Working capital loan to related party 14,935,222 14,935,222
---------------------------------
Total current liabilities 27,151,764 21,440,699
Commitments and contingencies - -
Long-term debt principally due to related party 11,130,056 11,336,861
Redeemable preferred stock 4,952,831 4,896,227
Minority interest in consolidated joint ventures 476,793 427,985
Stockholders' deficit:
Common stock $.02 par value 50,000,000 shares authorized,
13,635,581 shares outstanding 272,711 272,711
Additional paid-in capital 4,915,370 5,371,974
Stock subscriptions receivable from officers (549,166) (549,166)
Stock warrants 243,574 243,574
Accumulated deficit (32,876,668) (26,388,687)
---------------------------------
Stockholders' deficit (27,994,179) (21,049,594)
---------------------------------
Total $ 15,717,265 $ 17,052,178
=================================
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-4
CROWN ENERGY CORPORATION
Consolidated Statement of Operations
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------
Sales, net $ 27,032,658 $ 22,787,103 $ 35,518,541
Cost of sales 24,126,190 23,605,063 33,811,003
---------------------------------------------------
Gross profit (loss) 2,906,468 (817,960) 1,707,538
General and administrative expenses (3,449,053) (3,060,627) (2,668,011)
Provision for bad debt expenses (30,051) (1,529,896) (77,018)
Loss on impairment of investment in equity affiliate - (6,904,085) -
Loss on impairment of goodwill - (3,625,848) -
Equity in losses from unconsolidated equity affiliate - (145,814) (870,288)
---------------------------------------------------
Loss from operations (572,636) (16,084,230) (1,907,779)
---------------------------------------------------
Other income (expense):
Interest income 65,857 157,042 -
Interest expense (4,018,738) (2,576,386) (2,203,591)
Other income (expense) 598,247 104,000 (290,482)
Arbitration expense (2,609,519) - -
---------------------------------------------------
Total other expense, net (5,964,153) (2,315,344) (2,494,073)
---------------------------------------------------
Loss before income taxes and minority interests (6,536,789) (18,399,574) (4,401,852)
Deferred income tax benefit - - -
Minority Interest in losses of
consolidated joint venture 48,808 38,653 1,348,336
---------------------------------------------------
Net loss (6,487,981) (18,360,921) (3,053,516)
Redeemable preferred stock dividends (400,000) (400,000) (400,000)
---------------------------------------------------
Net loss applicable to common shares $ (6,887,981) $ (18,760,921) $ (3,453,516)
====================================================
Net loss per common share - basic and diluted $ (.51) $ (1.39) $ (.26)
====================================================
Weighted average common shares - basic and diluted 13,635,000 13,455,000 13,260,000
====================================================
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5
CROWN ENERGY CORPORATION
Consolidated Statement of Stockholders' Deficit
Years Ended December 31, 2001, 2000, and 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Stock Common Stock Warrants
--------------------------- Paid-In Subscription -------------------------- Accumulated
Shares Amount Capital Receivable Warrants Amount (Deficit)
-----------------------------------------------------------------------------------------------------
Balance, December 31, 1998 12,968,512 $ 259,370 $ 5,787,340 $ (549,166) 683,750 $ 243,574 $ (4,974,250)
Dividends on preferred stock
accrued from prior years 317,069 6,341 461,092 - - - -
Preferred stock accretion - - (56,604) - - - -
Dividends on preferred stock - - (400,000) - - - -
Net loss - - - - - - (3,053,516)
-----------------------------------------------------------------------------------------------------
Balance, December31, 1999 13,285,581 265,711 5,791,828 (549,166) 683,750 243,574 (8,027,766)
Stock issued for legal services 350,000 7,000 36,750 - - - -
Preferred stock accretion - - (56,604) - - - -
Dividends on preferred stock - - (400,000) - - - -
Net loss - - - - - - (18,360,921)
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2000 13,635,581 272,711 5,371,974 (549,166) 683,750 243,574 (26,388,687)
Stock issued for legal services - - - - -
Preferred stock accretion - - (56,604) - - - -
Dividends on preferred stock - - (400,000) - - - -
Net loss - - - - - - (6,487,981)
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2001 13,635,581 $ 272,711 $ 4,915,370 $ (549,166) 683,750 $ 243,574 $ (32,876,668)
=====================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-6
CROWN ENERGY CORPORATION
Consolidated Statement of Cash Flows
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------
2001 2000 1999
-----------------------------------------------
Cash flows from operating activities:
Net loss $ (6,487,981) $ (18,360,921) $ (3,053,516)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation, depletion, and amortization 763,607 903,864 746,674
Provision for doubtful accounts receivable (105,414) 1,529,896 77,018
Stock issued for services - 43,750 -
Impairment on investment in equity affiliate - 6,904,085 -
Impairment on goodwill - 3,625,848 -
Equity in losses of unconsolidated joint venture, net
of distributions to minority interest shareholders - 145,814 870,288
Minority interest in losses of consolidated joint
venture, net of distributions to minority interest
shareholders 48,808 126,286 (1,348,336)
Other expenses paid through equity instruments - - -
Changes in operating assets and liabilities
(net of effect of acquisitions, see note 6) :
Accounts receivable 146,064 2,237,169 (2,439,565)
Inventory 1,012,865 (237,021) 2,528,470
Prepaid and other current assets (20,045) (32,025) 3,789
Related party receivable - (25,700) -
Other assets (58,197) (161,241) 136,021
Accounts payable (906,658) 184,971 (725,156)
Accrued interest 3,486,256 1,999,140 1,836,305
Accrued arbitration expense 2,609,519 - -
Accrued expenses 48,428 (166,510) 265,571
-----------------------------------------------
Net cash provided by (used in)
operating activities 537,252 (1,282,595) (1,102,437)
-----------------------------------------------
Cash flows from investing activities:
Purchase of property, plant, and equipment (442,212) (729,477) (2,898,940)
Acquisition of Rawlins Terminal - - (266,571)
Acquisition of Cowboy Terminal - - (195,000)
Investment in and advances to Crown Asphalt Ridge, LLC - 64,377 (562,490)
-----------------------------------------------
Net cash used in
investing activities (442,212) (665,100) (3,923,001)
-----------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings on working capital loan from
related party - - 6,000,001
Payments on long-term debt (320,323) (153,141) (125,776)
Sale of equity interest in subsidiary to a minority
shareholder - - 394,558
-----------------------------------------------
Net cash (used in) provided by
financing activities (320,323) (153,141) 6,268,783
-----------------------------------------------
Net (decrease) increase in cash and cash equivalents (225,283) (2,100,836) 1,243,345
Cash and cash equivalents at beginning of year 2,878,141 4,978,977 3,735,632
-----------------------------------------------
Cash and cash equivalents at end of year $ 2,652,858 $ 2,878,141 $ 4,978,977
===============================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 555,330 $ 587,783 $ 197,135
==============================================
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-7
CROWN ENERGY CORPORATION
Consolidated Statement of Cash Flows
Continued
- --------------------------------------------------------------------------------
Supplemental disclosure of non-cash investing and financing activities:
For the year ended December 31, 2001:
o The Company issued debt of $187,038 in exchange for equipment
o The Company accrued dividends to preferred stockholders of
$400,000
o The Company increased preferred stock and decreased additional
paid-in capital for $56,604 related to preferred stock
accretion.
For the year ended December 31, 2000:
o The Company issued debt of $264,750, in exchange for property
o The Company accrued dividends to preferred stockholders of
$400,000
o The Company increased preferred stock and decreased additional
paid-in capital for $56,604 related to preferred stock
accretion.
For the year ended December 31, 1999:
o The Company issued 317,069 shares of common stock totaling
$467,433 as a dividend distribution to preferred stockholders
and accrued dividends totaling $400,000 on the redeemable
preferred stock.
o The Company incurred long-term debt of $1,282,070 in
connection with the acquisition of the Cowboy Terminal (see
note 6).
o The Company incurred long-term debt of $2,025,000 in
connection with the acquisition of the Rawlins Terminal (see
note 6).
o The Company incurred long-term debt of $2,991,868 to fund its
ongoing capital investment requirements in Crown Asphalt
Ridge.
o The Company increased preferred stock and decreased additional
paid-in capital for $56,604 related to preferred stock
accretion.
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-8
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
- --------------------------------------------------------------------------------
1. Organization Crown Energy Corporation (CEC) and its wholly-owned
subsidiaries, Crown Asphalt Corporation (CAC) and
Crown Asphalt Products Company (CAPCO) (collectively
referred to as the "Company"), are engaged in the
mining, production, and selling of asphalt products.
Prior to 1998, the Company was 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).
By December 31, 1997, the Company had divested itself
of all oil and gas properties and related operations.
Majority-Owned Subsidiaries
CAPCO is the majority-owner of Crown Asphalt
Distribution, LLC (Crown Distribution). Crown
Distribution is a joint venture formed on July 2,
1998, between CAPCO and MCNIC Pipeline and Processing
Company (MCNIC) for the purpose of acquiring certain
assets of Petro Source Asphalt Company (Petro Source)
(see note 6).
CAPCO owns 50.01% and MCNIC owns 49.99% of Crown
Distribution. CAPCO is the general manager and
operating agent of Crown Distribution. Because there
is no agreement requiring the minority shareholder to
guarantee the subsidiary's debt or a commitment to
provide additional capital, other than working
capital, all losses related to Crown Distribution
(including MCNIC's 49.99% interest in the losses
totaling $4,334,600 and $5,681,372 for the years
ended 2001 and 2000, respectively) are included in
the Company's financial statements.
CAT LLC is a joint venture formed on June 16, 1998
between CAPCO and Foreland Asphalt Corporation
(Foreland). CAT LLC owns an asphalt terminal and
storage facility. On December 21, 1998, CAPCO
assigned its interest in CAT LLC to Crown
Distribution. Crown Distribution owns 66.67% and
Foreland owns 33.33% of CAT LLC.
- --------------------------------------------------------------------------------
F-9
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization Principles of Consolidation
Continued The consolidated financial statements include the
accounts of the Company and its wholly-owned and
majority-owned subsidiaries. All significant
inter-company transactions have been eliminated in
consolidation.
2. Significant Going Concern
Accounting The accompanying consolidated financial statements
Policies have been prepared assuming that the Company will
continue as a going concern. As of December 31, 2001,
the Company had a significant working capital
deficit, an accumulated deficit and has had
substantial recurring losses. The consolidated
operations of the Company have not had sustained
profitability and the Company has relied upon debt
financing to satisfy its obligations. As described in
note 8, the Company did not prevail in litigation,
which resulted in the default of certain debt
obligations and requires the Company to pay
substantial legal costs. These conditions raise
substantial doubt about the ability of the Company to
continue as a going concern. The consolidated
financial statements do not include any adjustments
that might result from the outcome of these
uncertainties.
The Company's ability to continue as a going concern
is subject to the attainment of profitable operations
or obtaining necessary funding from outside sources
and settlement of certain legal obligations.
Management's plan with respect to this uncertainty
include inventory purchase strategies, evaluating new
products and markets, minimizing overhead and other
costs and obtaining settlement of certain legal
obligations. However, there can be no assurance that
management will be successful.
Cash and Cash Equivalents
For the 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.
Inventory
Inventory consists principally of refined products
and chemical supplies which are valued at the lower
of cost (computed on a first-in, first-out basis) or
market.
- --------------------------------------------------------------------------------
F-10
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Property, Plant, and Equipment
Accounting Property, plant, and equipment are recorded at cost
Policies and are depreciated over the estimated useful lives
Continued of the related assets. Depreciation is computed using
the straight-line method for financial reporting
purposes. The estimated useful lives of property,
plant, and equipment are as follows:
Plant and improvements and tankage 10-30 years
Equipment 7 years
Vehicles 5 years
Computer equipment, furniture,
and fixtures 3 years
Investment in and Advances to Equity Affiliate
The Company's investment in Crown Asphalt Ridge LLC
(Crown Ridge) is accounted for using the equity
method (see notes 4 and 5). Accordingly, the
Company's investment is recorded at cost and adjusted
by the Company's share of undistributed earnings and
losses. Due to the circumstances discussed in note 4,
an impairment of the Company's investment in Crown
Ridge was recorded during the year ended December 31,
2000.
Revenue Recognition
Revenue for sales of product is recognized when a
valid purchase order has been received, product has
been shipped, the selling price is fixed or
determinable, and collectibility is reasonably
assured.
Income Taxes
Income taxes are determined using the asset and
liability method, which requires recognition of
deferred income tax liabilities and assets for the
expected future tax consequences of events that have
been included in the financial statements or tax
returns. Under this method, deferred income tax
liabilities and assets are determined based on the
difference between financial statement and tax bases
of assets and liabilities using estimated tax rates
in effect for the year in which the differences are
expected to reverse. Deferred tax assets are
recognized only if it is more likely than not that
the asset will be realized in future years.
- --------------------------------------------------------------------------------
F-11
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Concentration of Credit Risk
Accounting Financial instruments which potentially subject the
Policies Company to concentration of credit risk consist
Continued primarily of receivables. In the normal course of
business, the Company provides credit terms to its
customers. Accordingly, the Company performs ongoing
credit evaluations of its customers and maintains
allowances for possible losses which, when realized,
have been within the range of management's
expectations.
The Company maintains its cash in bank deposit
accounts which, at times, may exceed federally
insured limits. The Company has not experienced any
losses in such accounts and believes it is not
exposed to any significant credit risk on cash and
cash equivalents.
Loss Per Common Share
The computation of basic earnings (loss) per common
share is based on the weighted average number of
shares outstanding during each year.
The computation of diluted earnings per common share
is based on the weighted average number of shares
outstanding during the year, plus the common stock
equivalents that would arise from the exercise of
stock options outstanding, using the treasury stock
method and the average market price per share during
the year. Options and warrants to purchase 3,163,148,
3,463,148, and 2,911,898 shares of common stock at
prices ranging from $.10 to $2.50 per share were
outstanding at December 31, 2001, 2000, and 1999,
respectively, but were not included in the diluted
earnings (loss) per share calculation because the
effect would have been antidilutive.
Use of Estimates in Preparing Financial Statements
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 periods. Actual results could
differ from those estimated.
- --------------------------------------------------------------------------------
F-12
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Long-Lived Assets
Accounting The Company evaluates the carrying value of long-term
Policies assets including intangibles based on current and
Continued anticipated undiscounted cash flows and recognizes
impairment when such cash flows will be less than the
carrying values. Measurement of the amount of
impairments, if any, is based upon the difference
between carrying value and fair value.
Goodwill and Intangible Assets
The Company has recorded the amount paid in excess of
the fair value of net tangible assets acquired at the
date of acquisition as goodwill. For the years ended
December 31, 2001, 2000, and 1999 Goodwill is
amortized using the straight-line method over 20
years. After December 31, 2001 goodwill will no
longer be amortized but will be evaluated annually,
or as changes in circumstances may warrant for
impairment according to Statement of Financial
Accounting Standards No. 142 "Goodwill and Other
Intangibles". Other intangible assets consist of a
non-competition agreement that is being amortized
over its five-year term using the straight-line
method.
Asphalt Demerits
Crown's subsidiary, CAPCO, blends asphalt for sale to
contractors and state agencies. The asphalt sold must
meet certain specifications for a particular
application. If the asphalt sold does not meet these
specifications, for whatever reason, the asphalt
supplier may be held liable for possible damages
(asphalt demerits). Management believes that the
Company's product liability insurance would cover any
significant damages.
Environmental Expenditures
Environmental related restoration and remediation
costs are recorded as liabilities when site
restoration and environmental remediation and
clean-up obligations are either known or considered
probable, and the related costs can be reasonably
estimated. Other environmental expenditures, that are
principally maintenance or preventative in nature,
are recorded when expended and expensed or
capitalized as appropriate.
- --------------------------------------------------------------------------------
F-13
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Comprehensive Income
Accounting Comprehensive income is reported in accordance with
Policies SFAS No. 130, "REPORTING COMPREHENSIVE INCOME". SFAS
Continued 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a
financial statement and (b) display the accumulated
balance of other comprehensive income separately from
additional paid-in capital, retained earnings, and
stockholders' equity. The Company does not currently
have any components of comprehensive income other
than net loss.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment of
Long-Lived Assets". This Statement addresses
financial accounting and reporting for the impairment
of long-lived assets and for long-lived assets to be
disposed of. This Statement supercedes FASB Statement
121 and APB Opinion No. 30. However, this Statement
retains certain fundamental provisions of Statement
121, namely; recognition and measurement of the
impairment of long-lived assets to be held and used,
and measurement of long-lived assets to be disposed
of by sale. The Statement also retains the
requirement of Opinion 30 to report discontinued
operations separately from continuing operations.
This Statement also Amends ARB No. 51 to eliminate
the exception of consolidation for a temporarily
controlled subsidiary. The provisions of this
statement are effective for financial statements
issued for fiscal years beginning after December 15,
2001. The Company is currently assessing the impact
of this statement.
In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement
Obligations". This Statement addresses financial
accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement
is effective for financial statement issued for
fiscal years beginning after June 15, 2002. the
Disposal of Long-Lived Assets. This Statement
addresses financial accounting and reporting for the
disposal of long-lived assets. Management does not
expect the adoption of SFAS No. 143 to have a
significant impact on the financial position or
results of operations of the Company. The Company is
currently assessing the impact of this statement.
- --------------------------------------------------------------------------------
F-14
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant In June 2001, the Financial Accounting Standards
Accounting Board issued Statements of Financial Accounting
Policies Standards No. 141 "Business Combinations" (SFAS No.
Continued 141)and No. 142 "Goodwill and Other Intangibles"
(SFAS No. 142). SFAS No. 141 and No. 142 are
effective for the Company on July 1, 2001. SFAS No.
141 requires that the purchase method of accounting
be used for all business combinations initiated after
June 30, 2001. The statement also establishes
specific criteria for recognition of intangible
assets separately from goodwill and requires
unallocated negative goodwill to be written off
immediately as an extraordinary gain. SFAS No. 142
primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition.
The statement requires that goodwill and indefinite
lived intangible assets no longer be amortized and be
tested for impairment at least annually. The
amortization period of intangible assets with finite
lives will no longer be limited to forty years.
Management does not expect the adoption of SFAS No.
141 and 142 to have a significant impact on the
financial position or results of operations of the
Company.
Stock-Based Compensation
The Company has elected to continue to apply
Accounting Principles Board (APB) Opinion 25 (as
permitted by SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION). The appropriate disclosures required
by SFAS No. 123 are included in note 13.
Reclassification
Certain amounts in the 2000 and 1999 consolidated
financial statements have been reclassified to
conform with classifications adopted in the current
year.
- --------------------------------------------------------------------------------
F-15
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Property, The following is a summary of property, plant, and
Plant and equipment as of December 31:
Equipment
2001 2000
------------ ------------
Land $ 1,000,000 $ 1,000,000
Plant and improvements and
tankage 7,229,051 6,801,650
Equipment 2,838,476 2,640,438
Computer equipment,
furniture, and fixtures 351,909 348,098
Vehicles 29,148 29,148
------------ ------------
Total property, plant, and
equipment 11,448,584 10,819,334
Less accumulated depreciation (1,857,797) (1,158,160)
------------ ------------
Total $ 9,590,787 $ 9,661,174
============ ============
4. Investments In August 1997, the Company, through its wholly owned
In and subsidiary, CAC, entered into a joint venture with
Advances to MCNIC for the purpose of developing, mining,
an Equity processing, and marketing asphalt, performance grade
Affiliate asphalt, diesel fuel, hydrocarbons, bitumen,
asphaltum, minerals, mineral resources, and other oil
sand products. The joint venture resulted in the
formation of Crown Ridge, which is a development
stage company. During the year ended December, 31,
1997, the Company contributed cash of $433,219 and
the right to its 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 $2,715,428 to
Crown Ridge. This technology was recorded at $500,001
by Crown Ridge. During the year ended December 31,
2001, and 2000, the Company made no contributions to
Crown Ridge. MCNIC and the Company initially own
interests of 75% and 25%, respectively, in the
profits and losses of Crown Ridge. According to a
settlement agreement entered into by CAC (see note
16) with MCNIC, CAC has assigned its interest in
Crown Ridge which would have increased CAC's interest
in Crown Ridge to 50% once operations of Crown Ridge
were generating sufficient cash flows to pay specific
returns, as defined, to MCNIC.
- --------------------------------------------------------------------------------
F-16
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Investments Crown Ridge has experienced certain difficulties
In and relating to its production plant. Crown Ridge has
Advances to conducted extensive research and engineering to
an Equity develop a solution to these difficulties which was
Affiliate tested in a pilot study during 2000. The results of
Continued the pilot study are being evaluated to determine if
certain modifications or retrofit of the plant are
technically and economically viable. Certain
modifications to the Facility will be required,
provided financing for the modifications is available
and contributed to Crown Ridge.
During the year ended December 31, 2000, the Company
evaluated the carrying value of its investments in
and advances to Crown Ridge. The evaluation has been
complicated by the fact that the Company's joint
venture partner has effectively taken control of
Crown Ridge and has not shared information relative
to its activities pertaining to Crown Ridge,
including financial information and feasibility
studies relative to the Asphalt Ridge Project. The
Company determined that its investment in and
advances to Crown Ridge were potentially impaired.
Accordingly, an aggregate non-cash expense for the
impairment or $6,904,085 was recorded.
Net investments in and advances to Crown Ridge are
summarized as follows:
2001 2000
------------ ------------
The Company's equity in net
assets $ - $ 4,878,264
Excess of investment over the
Company's equity in net assets
totaling $60,644 in 2000. - 2,025,640
Advances to affiliate - 181
Impairment on investment in
equity affiliate - (6,904,085)
------------ ------------
Total investment in and advances
to an equity affiliate $ - $ -
============ ============
- --------------------------------------------------------------------------------
F-17
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Losses The Company's 25% equity in net loss plus
From Equity amortization of excess of investment over the
Affiliate Company's equity in net assets is reported in the
accompanying consolidated statement of operations as
follows:
2001 2000 1999
---------- ----------- -----------
Equity in losses of
unconsolidated equity
affiliate $ - $ (145,814) $ (870,288)
Amortization of excess
investment included in
general and
administrative expense - (60,644) (60,645)
---------- ----------- -----------
Total $ - $ (206,458) $ (930,933)
========== =========== ===========
Crown Ridge may have recorded certain expenses, the
majority of which relate to the pilot project
conducted at the Asphalt Ridge facility, that the
Company believes were not approved by the Management
Committee of Crown Ridge and thus are not considered
expenses related to the Company's portion of Crown
Ridge. MCNIC, the majority interest owner and current
acting operator of Crown Ridge, has been unwilling to
provide the Company with sufficient financial
information through December 31, 2001 and 2000.
Consequently, the Company has prepared estimates to
record its share of approved expenses.
- --------------------------------------------------------------------------------
F-18
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Acquisitions Acquisition of Cowboy Terminal
On January 9, 1999, CAT LLC acquired a controlling
interest in the Cowboy Terminal for a total purchase
price of $1,973,511. CAT LLC paid cash deposits on
the purchase price totaling $496,441 during 1998,
paid $195,000 in cash at closing, and executed and
delivered a promissory note in the amount of
$1,282,070 in 1999. The assets acquired were recorded
at their estimated fair values at the date of
acquisition and the results of operations are
included in the accompanying consolidated statement
of operations from the date of acquisition. The
acquisition was accounted for as a purchase. The
preliminary purchase price was allocated entirely to
property and equipment.
The CAT LLC Operating Agreement obligates both Crown
Distribution and Foreland to make additional capital
contributions equal to one-half of any additional
requirements, not to exceed $650,000, required for
(i) CAT LLC to fulfill its obligations under any
corrective action plan that may be accepted by CAT
LLC and the Utah Department of Environmental Quality
with respect to certain environmental conditions at
the Cowboy Terminal and (ii) any additional amounts
required to cover legal costs incurred in obtaining
title to the Cowboy Terminal or otherwise relating to
the environmental remediation work potentially
needed.
The CAT LLC Operating Agreement also obligates Crown
Distribution and Foreland to make additional capital
contributions in proportion to their ownership
percentages in order to fund any additional amounts
required for CAT LLC to fulfill its obligations under
the purchase contract for the Cowboy Terminal Assets,
for environmental management and containment costs,
expenses for operations, or the construction of
certain approved capital improvements to the Cowboy
Terminal. None of the foregoing additional
contributions will result in an increase in the
number of units or percentage interests held by Crown
Distribution or Foreland.
CAT LLC is managed by CAPCO. CAPCO has authority to
conduct the day-to-day business and affairs of CAT
LLC. However, certain matters considered to be
protective rights must be approved by members holding
75% or more of the outstanding units of CAT LLC.
CAPCO is not compensated for its services as manager.
- --------------------------------------------------------------------------------
F-19
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Acquisitions Rawlins Asphalt Terminal
Continued On May 12, 1999, the Company acquired the Rawlins
Asphalt Terminal and inventory for $2,291,571 from
S&L Industrial (S&L). The purchase price consists of
the Company assuming S&L's debt of approximately
$1,800,000, entering into a note payable to S&L for
$225,000, and a cash payment of $266,571. The
acquisition was accounted for as a purchase. The
assets acquired were recorded at their estimated fair
values at the date of acquisition and the results of
operations are included in the consolidated
statements of operations from the date of
acquisition. The preliminary purchase price was
allocated $1,770,200 to property, plant, an
equipment, $216,571 to inventory, and $304,800 to
goodwill.
Petro Source Asphalt Company
On July 2, 1998, Crown Distribution acquired the
inventory and assets of Petro Source Asphalt Company
(Petro Source) for $14,235,726. The acquisition was
accounted for as a purchase. The assets acquired were
recorded at their estimated fair values at the date
of acquisition and the results of operations are
included in the accompanying consolidated statements
of operations from the date of acquisition. In
conjunction with the acquisition, the Company
recorded goodwill of $4,143,827. Due to circumstances
described in note 7, the remaining goodwill balance
of $3,625,848 was impaired and written off as of
December 31, 2000. The assets acquired relate to the
refining, production, and distribution of asphalt
products.
Crown Distribution is governed by a management
committee consisting of three managers. The Company
is entitled to appoint two managers and MCNIC is
entitled to appoint one manager. Management decisions
are generally made by the management committee.
However, one of the managers appointed by the Company
serves as the operating manager and has the powers,
authority, duties, and obligations specified in the
operating agreement, which generally requires the
operating manager to implement the policies and
pursue the objectives specified in the annual
operating plan.
- --------------------------------------------------------------------------------
F-20
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Acquisitions The annual operating plan is adopted by the
Continued management committee on an annual basis and addresses
all aspects of Crown Distribution's operations for
the coming year, including the nature and extent of
the proposed activities, marketing plans, capital
expenditure plans, and similar matters. 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
Distribution's operations at levels comparable to
those approved in its most recent annual operating
plan.
7. Intangibles Intangible assets consist of the following:
December 31,
2001 2000
----------- -----------
Goodwill $ 304,800 $ 304,800
Non-compete agreement 250,000 250,000
Accumulated amortization (214,370) (150,400)
----------- -----------
$ 340,430 $ 404,400
=========== ===========
At December 31, 2000, the Company re-assessed the
recoverability of goodwill associated with the Petro
Source acquisition (see note 6). Due to litigation
with MCNIC, the Company has been unable to secure
financing needed to build up inventory at favorable
prices. This lack of funding and the ongoing dispute
with MCNIC has resulted in losses from operations in
1999 and 2000. Because of these circumstances the
Company could not estimate the full carrying value
which could be recovered through undiscounted future
cash flows from products generated from related
assets. Accordingly, an impairment of $3,625,848 has
been recognized in the statement of operations for
the year ended December 31, 2000.
- --------------------------------------------------------------------------------
F-21
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Litigation and Pursuant to an arbitration judgment relating to a
Borrowings claim filed by MCNIC against CAD LLC, CAD LLC is in
From Related default of its obligation to repay MCNIC the working
Party capital loan of which had a balance of $14,935,222 at
December 31, 2001 and 2000. The judgment determined
that $5,810,581 of the loan is in default and will
accrue interest at 18% retroactively from December
31, 1999, compounded annually. The remaining balance
of $9,124,641 is also in default and will accrue
interest at 8% annually. Through the period ended
December 31, 2001 and 2000, $4,884,401 and $2,356,711
in interest had been accrued, respectively.
9. Long-term Long-term debt principally due related party consists
Debt of the following at December 31:
2001 2000
-------------- --------------
Preferential debt with MCNIC with interest at 15%,
annual principal and interest installments equal to
50% of the net cash flows (as defined) of Crown
Distribution. This debt is secured by all of the
assets of Crown Distribution. The Total amount is
included in the thereafter portion of the debt
maturity schedule below due to uncertainty of
payment terms. $ 5,325,723 $ 5,325,723
Note payable to unrelated third party with interest
at 9%, payable in 84 equal monthly principal and
interest installments of $20,627, maturing January
1, 2006. The debt is secured by assets at the
Cowboy Terminal Facility. 843,208 1,006,764
Note payable with MCNIC with interest at prime plus
1% (5.75%) at December 31, 2001). Monthly principal
and interest payments are due until the debt
matures July 2014. The debt is secured by CAC's
proportional increase in its interest in Crown
Ridge resulting from the loan proceeds. 2,970,469 2,991,868
Note payable with interest at prime plus 1% (5.75%
at December 31, 2001) to a bank. Monthly principal
and interest payments are due until the debt
matures in May 2014. The debt is secured by assets
at Rawlins Terminal. 1,742,406 1,798,788
- ------------------------------------------------------------------------------------------------------------------------
F-22
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Long-term Deferred purchase price on Rawlins Terminal
Debt acquisition (see note 6) with interest at the LIBOR
Continued rate (6.6% at December 31, 2000). The debt is due
in monthly installments through February 2010. Due
to a dispute over certain environmental remediation
associated with the Rawlins Terminal this amount
has been included in the thereafter portion of the
debt maturities schedule below due to the
uncertainty of payments 225,000 225,000
Deferred purchase price on the Cowboy Asphalt
Terminal acquisition with interest at 8% per year
over a 10-year term, with the principal and
interest payments made to a company in monthly
installments of $3,212. The debt matures in
November 2010. Debt is secured by property and
equipment 244,134 262,351
Capital leases (See note 10) 126,269 -
-------------- --------------
Total 11,477,209 11,610,494
Less estimated current portion (347,153) (273,633)
-------------- --------------
Long-term portion $ 11,130,056 $ 11,336,861
============== ==============
The schedule maturities of long-term debt at December
31, 2001 are as follows:
Year Ending December 31:
2002 $ 347,153
2003 358,745
2004 466,596
2005 502,919
2006 315,447
Thereafter 9,486,349
------------
Total $ 11,477,209
============
- --------------------------------------------------------------------------------
F-23
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Capital Lease The Company leases equipment under capital lease
Obligations agreements. The leases provide the Company the option
to purchase the equipment at the end of the initial
lease terms. The equipment under capital lease is
included in property and equipment at a cost of
approximately $187,000 and accumulated amortization
of approximately $27,000 and $0 at December 31, 2001
and 2000, respectively.
Amortization expense for the equipment under capital
lease for the years ended December 31, 2001, 2000,
and 1999 was approximately $27,000 $0, and $0,
respectively. Future minimum payments on the capital
lease obligations are as follows:
Year Ending December 31:
2002 $ 68,913
2003 60,011
2004 8,531
137,455
-------------
Less amount representing
interest (11,186)
Present value of future
minimum capital lease
payments $ 126,269
=============
11. Operating The Company leases certain premises and equipment
Leases under operating leases. Approximate future minimum
lease payments under non-cancelable operating leases
as of December 31, 2001 are as follows:
Year Ending December 31:
2002 $ 1,121,000
2003 1,108,000
2004 576,000
2005 64,000
2006 64,000
Thereafter 9,000
-------------
Total $ 2,942,000
=============
- --------------------------------------------------------------------------------
F-24
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Operating Lease expense for the years ended December 31, 2001,
Leases 2000, and 1999 totaled $1,046,000, $1,129,000 and,
Continued $762,000, respectively.
12. Redeemable Redeemable preferred stock consists of 500,000 issued
Preferred and outstanding Series A cumulative convertible
Stock shares with a par value of $.005 and a stated value
of $10.00. The Company has authorized 1,000,000
shares of preferred stock. The original estimated
fair value of the outstanding shares is $4,716,981
with annual accretion of $56,604 for the years ended
December 31, 2001, 2000, and 1999 toward the stated
and liquidation value of $5,000,000. At December 31,
2001 and 2000 the redeemable preferred stock had a
balance of $4,952,831 and $4,896,227, respectively.
The Company is authorized to issue 1,000,000
preferred shares, par value $.005 per share. On
November 4, 1997, the Company completed the sale of
500,000 shares of its Series A Cumulative Convertible
Preferred Stock ("Series A Preferred") pursuant to a
stock purchase agreement dated September 25, 1997 for
an aggregate sales price of $5,000,000. Each share of
Series A Preferred is convertible at the option of
its holder, at any time, into 8.57 shares of common
stock of the Company. At the date of the issuance of
the preferred stock, the embedded conversion price
was $1.17 and the estimated fair value of the common
stock was $1.03. Dividends accrue on the outstanding
Series A Preferred at the rate of 8% per annum and
may be declared by the Company and paid through cash
or common shares of the Company at the option of the
holder. At December 31, 2001 and 2000 the Company
owed $1,200,000 and $800,000, respectively, in
dividends. Dividends accrued interest at 8% per annum
for any unpaid balance. Subject to the holder's right
to convert the Series A Preferred, the Company may
redeem the Series A Preferred at any time from the
date on which it is issued at a percentage of the
Series A Preferred's stated value of $10 per share;
130% of stated value if redemption occurs within
thirty-six months of the date of issuance, 115% of
stated value if redemption occurs between thirty-six
and forty-eight months after the date of issuance,
110% of stated value if redemption occurs between
forty-eight and sixty months after the date of
issuance, and 100% if redemption occurs thereafter.
- --------------------------------------------------------------------------------
F-25
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Redeemable The holder of the Series A Preferred may also require
Preferred the Company to redeem the Series A Preferred after
Stock the eighth anniversary of the Series A Preferred's
Continued issuance. The holders of the Series A Preferred shall
have the right, but shall not be obligated, to
appoint 20% of the Company's Board of Directors. The
Company may not alter the rights and preferences of
the Series A Preferred, authorize any security having
liquidation preference, redemption, voting or
dividend rights senior to the Series A Preferred,
increase the number of Series A Preferred, reclassify
its securities or enter into specified extraordinary
events without obtaining written consent or an
affirmative vote of at least 75% of the holders of
the outstanding shares of the Series A Preferred
stock. All voting rights of the Series A Preferred
expire upon the issuance by the Company of its notice
to redeem such shares. The shares of common stock
issuable upon conversion of the Series A Preferred
are subject to adjustment upon the issuance of
additional shares of the Company's common stock
resulting from stock splits, share dividends, and
other similar events as well as upon the issuance of
additional shares or options which are issued in
connection with the Company's equity investment (see
note 4) 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.
13. Stock Stock Options
Options and The Company has a stock option plan for directors and
Warrants salaried employees. Options are granted at a price
not less than the fair market value on the date of
grant, become exercisable between one to four years
following the date of grant, and generally expire in
ten years. Fair market value is determined based on
quoted market prices.
- --------------------------------------------------------------------------------
F-26
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock A summary of the stock option and warrant activity
Options and for fiscal years 2001, 2000, and 1999 is as follows:
Warrants
Continued
Options Warrants
-------------------------------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
Outstanding at
January 1, 2000 2,228,148 0.88 683,750 1.48
Granted 1,040,000 0.13 -
Cancelled (208,750) 0.78 -
Forfeited (280,000) 1.05 -
-------------------------------------------------------
Outstanding at
December 31, 2000 2,779,398 $ 0.59 683,750 $ 1.48
Granted - - -
Cancelled - - -
Forfeited (300,000) 0.66 -
-------------------------------------------------------
Outstanding at
December 31, 2001 2,479,398 $ 0.59 683,750 $ 1.48
=======================================================
When accounting for the issuance of stock options and
warrants financial accounting standards allows
entities the choice between adopting a fair value
method or an intrinsic value method with footnote
disclosures of the pro forma effects if the fair
value method had been adopted. The Company has opted
for the latter approach. Had the Company's options
and warrants been determined based on the fair value
method, the results of operations would have been
reduced to the pro forma amounts indicated below:
Years Ended December 31,
2001 2000 1999
------------- ------------- -------------
Net loss - as reported $ (6,487,981) $ (18,360,921) $ (3,053,516)
Net loss - pro forma $ (6,591,506) $ (18,483,982) $ (3,478,954)
Diluted income (loss) per
share - as reported $ (.48) $ (1.36) $ (.26)
Diluted loss per share -
pro forma $ (.49) $ (1.37) $ (.29)
============= ============= =============
- --------------------------------------------------------------------------------
F-27
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock The fair value of each option grant is estimated on
Options and the date of grant using the Black-Scholes option
Warrants pricing model with the following assumptions:
Continued
2000 1999
------------ -------------
Expected dividend yield $ - $ -
Expected stock price volatility 73% 76%
Risk-free interest rate 5.75% 5.50%
Expected life of options 4 years 1.5 years
No options were granted in 2001. The weighted average
fair value of options and warrants granted during
2000, and 1999 are $.10, and $.43 respectively.
The following table summarizes information about
stock options and warrants outstanding at December
31, 2001:
Outstanding Exercisable
--------------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
----------------------------------------------------------------------------------------
$ .10 - .13 1,540,000 7.86 $ 0.12 1,400,000 $ 0.12
$ .38 - 1.13 1,148,148 4.63 $ 0.58 1,148,148 $ 0.58
$1.50 - 2.50 475,000 1.33 $ 1.87 475,000 $ 1.87
$ .10 to 2.50 3,163,148 5.71 $ 0.55 3,023,148 $ 0.57
- --------------------------------------------------------------------------------
F-28
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock Common Stock Warrant
Options and In conjunction with the issuance of the preferred
Warrants stock described in note 10, the Company issued a
warrant to the holders of the preferred stock. The
fair Continued value of the warrant at the date of
issuance was estimated to be $283,019 and was
recorded to additional paid-in capital and as a
reduction to the stated value of the preferred stock.
The reduction in preferred stock is being accreted
over the five-year period from the date of issuance
to the earliest exercise date of the warrant. Upon
the fifth anniversary of the issuance of the
preferred stock, the warrant becomes exercisable, at
$.002 per share, into the number of common shares of
the Company equal to (a) [$5,000,000 plus the product
of (i) ($5,000,000 multiplied by (ii) 39% (internal
rate of return) multiplied by (iii) 5 years]
(14,750,000), minus (b) the sum of (i) all dividends
and other distributions paid by the Company on the
preferred stock or on the common stock received upon
conversion of the preferred stock plus (ii) the
greater of the proceeds from the sale of any common
stock received by the holder upon the conversion of
the preferred stock prior to the fifth anniversary
date or the terminal value (as defined 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
preceding the fifth anniversary date of the issuance
of the preferred stock. Terminal value is defined as
the sum of (i) the shares of common stock into which
the preferred stock then held is convertible, plus
(ii) shares of common stock received upon conversion
of preferred stock, multiplied by the fair market
value of the Company's common stock on a weighted
average basis for the 90 days immediately preceding
the fifth anniversary date of the issuance of the
preferred stock. The warrants will expire in 2007.
Conversion of Preferred Dividends to Common Stock
On January 27, 1999, the Company issued 317,069
shares of common stock to its preferred stockholders
as payment in full of preferred stock dividends
payable totaling $467,433.
- --------------------------------------------------------------------------------
F-29
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Income Taxes The components of income tax benefit for the years
ended December 31 are summarized as follows:
2001 2000 1999
Current $ - $ - $ -
Deferred:
Federal - - -
State - - -
-------- ------- --------
- - -
-------- ------- --------
Total $ - $ - $ -
======== ======= ========
Income tax expense (benefit) differed from amounts
computed by applying the federal statutory rate to
pretax loss as follows:
Years Ended December 31,
------------------------------------------------
2001 2000 1999
------------- ------------- -------------
Loss before income taxes and
minority interest - computed
tax at the expected federal
statutory rate, 34% $ (2,205,000) $ (6,332,000) $ (1,496,000)
State income taxes, net of
federal income tax benefits (194,000) (461,000) (92,000)
Minority interest 1,605,000 2,087,000 458,000
Expiration of net operating
losses 22,000 38,000 42,000
Other 36,000 34,000 54,000
Change in valuation reserve 736,000 4,634,000 1,034,000
------------- ------------- -------------
Total income tax benefit $ - $ - $ -
============= ============= =============
- --------------------------------------------------------------------------------
F-30
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Income Taxes Deferred tax assets (liabilities) are comprised of
Continued the following:
December 31,
----------------------------
2001 2000
------------ ------------
Net operating loss carryforwards $ 3,094,000 $ 3,280,000
Impairment of investment in equity affiliate 2,555,000 2,555,000
Impairment of goodwill 671,000 671,000
Allowance for doubtful accounts 638,000 676,000
Accrued interest 1,353,000 -
Start-up costs 99,000 99,000
Capital loss carryforwards 203,000 203,000
Differences between tax basis and financial
reporting basis of investment in equity affiliate 439,000 439,000
Amortization of goodwill (319,000) (36,000)
Depreciation (730,000) (573,000)
Other 105,000 58,000
Valuation allowance (8,108,000) (7,372,000)
------------ ------------
$ - $ -
============ ============
The Company has available at December 31, 2001,
unused tax operating loss carryforwards of
approximately $8,361,000 which may be applied against
future taxable income and expire in varying amounts
through 2012. The Company also has unused capital
loss carry-forwards of approximately $550,000 which
may be applied against future taxable income and
expire in 2002.
- --------------------------------------------------------------------------------
F-31
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Related Party The Company has an employment agreement (amended
Transactions November 1, 1999) with a director who is also an
not officer of the Company. The employment agreement
Otherwise expires December 31, 2003. The agreement includes a
Disclosed base salary of $150,000 subject to various increases
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. In addition to the base salary, the
director 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
subject to certain limitations. In addition to the
bonuses, the director and officer was granted an
option to purchase 450,000 shares of the Company's
common stock at an exercise price of $.125 per share
in 1997. With the amended agreement, the director and
officer was granted an option to purchase an
additional 450,000 shares of the Company's common
stock at an exercise price based on the average fair
market price of the Company's common stock for the
three months immediately preceding and following the
options grant date. The option exercise price
approximated the average fair market value of the
Company's common stock at the date of grant. The
options vest over a three year period commencing on
May 1, 2001, subject to accelerated vesting should
the Company's common stock market price exceed
certain defined levels.
The Company entered into an employment agreement,
effective January 26, 1996 with the former Chief
Executive Officer and Chairman of the Board of
Directors of the Company. The agreement expired
February 26, 1999. The agreement included 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 called for the Company to grant
300,000 stock options to purchase the Company's
unregistered 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. In 1996, 300,000 options were issued at
$.66 per share. In 1999 and 1998, 75,000 options were
issued at $1.15 and $1.50 per share, respectively.
Additionally, other benefits were provided including
participation in certain insurance, vacation, and
expense reimbursements.
- --------------------------------------------------------------------------------
F-32
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Related Party Pursuant to the operating agreement of Crown Ridge,
Transactions while operator of Crown Ridge the Company received
not $104,000 for management services and overhead
Otherwise charges.
Disclosed
Continued
16. Commitments Litigation
and On May 21, 1998, Road Runner Oil, Inc. ("Road
Contingencies Runner") and Gavilan Petroleum, Inc. ("Gavilan")
filed an action in the Third Judicial District Court,
Salt Lake County, State of Utah, as Civil #
98-0905064 against the Company and its President. The
action relates to the purchase by Road Runner of 100%
of the stock of Gavilan in 1997, and generally seeks
to (i) obtain corporate records of Gavilan in the
Company's possession relating to the amount of oil
and gas royalties potentially owed to third parties
prior to the aforementioned stock sale, and (ii) to
determine the amount of royalties owed. The action
further alleges, on behalf of Gavilan, claims of
breach of fiduciary duty, professional negligence and
mismanagement against the Company's President for
alleged mismanagement of Gavilan's affairs. The
Plaintiffs seek injunctive relief requiring the
tendering by the Company of the referenced records
and such damages as may be proven at trial. The
Company believes that the Plaintiff's claims are
groundless and that it is entitled to payment of the
$75,000, plus accrued interest, still owed by Road
Runner as part of the purchase price for Gavilan. In
addition, since the action was filed, the Company has
tendered the corporate records to the Plaintiffs. On
March 8, 2000, the Company filed an answer denying
liability and filed a counterclaim against Road
Runner and Gavilan for breach of contract and
declaratory judgment. The Company is not certain as
to whether or not the outstanding balance under the
promissory note is collectible by the Company.
- --------------------------------------------------------------------------------
F-33
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Commitments On July 12, 1999, Morrison Knudsen Corporation ("MK")
and filed a Complaint in the Eighth Judicial District
Contingencies Court, Uintah County, State of Utah, alleging that
Continued CAC had breached an agreement whereby MK would
provide certain mining services for CAC at Crown
Ridge's Facility in Uintah County, Utah (the
"Project"). Judgment in favor of MK was entered on
January 30, 2001, in the principal amount of
$303,873.39, $49,062.33 of pre-judgment interest and
$2,033.14 of costs, which totals $354,968.86. The
Settlement Agreement obligates MCNIC to pay the MK
Judgment and indemnify the Company from any costs
associated therewith.
On July 14, 1999, Crown Distribution and CAPCO filed
an action in the United States District Court for the
Central District of California, Southern Division,
against Santa Maria Refining Company ("SMRC"), SABA
Petroleum Company ("SABA") and Greka Energy
Corporation ("Greka"). The claims included causes of
action for breach of contract, breach of the covenant
of good faith and fair dealing, conversion, fraud,
claim and delivery, unjust enrichment and
constructive trust, unfair competition, declaratory
relief and specific performance. These claims arose
out of the Defendant's alleged termination of the
Processing Agreement and subsequent refusal to
deliver asphalt to Crown Distribution. On November
20, 2001 Crown Distribution and CAPCO entered into a
settlement agreement with SMRC. The Company believes
the matter was amicably resolved.
- --------------------------------------------------------------------------------
F-34
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Commitments In late July and August, 2001, the Company
and participated in a binding arbitration proceeding (the
Contingencies "Arbitration") in Salt Lake City, Utah against MCNIC,
Continued its related entities and certain of their officers.
The Arbitration addressed all claims previously
asserted between the parties either in the Third
Judicial District Court of Salt Lake County in a
proceeding entitled MCNIC Pipeline & Processing
Company v. Crown Asphalt Distribution Civil No.
00904867 (the "State Action") and that certain
proceeding filed in the United States District Court
for the District of Utah Central Division entitled
Crown Energy Corporation, et al. v. MCN Energy Group,
Inc. et al., Civil No. 2CV-0583ST (the "Federal
Action"). In summary, in the State Action, MCNIC
alleged that funds previously advanced by it to Crown
Distribution in an amount in excess of $14 million,
plus interest, were immediately due and payable.
MCNIC also sought the appointment of a receiver for
Crown Distribution's assets and sought to foreclose
on security interests in the assets of Crown
Distribution.
In contrast, the Company asserted that the funds
previously advanced to Crown Distribution by MCNIC
were part of a revolving credit facility which was
not due and payable at that time and from which Crown
Distribution should be able to make additional draws.
Further, the Company sought recovery against MCNIC,
its related entities and certain of its officers
under other causes of action, including breach of
fiduciary duties, economic duress, breach of implied
covenants of good faith and fair dealing, breach of
contracts and intentional interference with business
relations.
- --------------------------------------------------------------------------------
F-35
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Commitments On October 31, 2001, the Arbitrator issued the Damage
and Award in which he held that MCNIC's loans were due
Contingencies and payable with interest accruing on such loans from
Continued 8% to 18%, depending upon the particular loan
involved. The decision also failed to find for the
Company on its claims against MCNIC, its related
entities and officers. The Damage Award was
subsequently confirmed by the Third Judicial District
Court of Salt Lake County, state of Utah on February
7, 2002. The amount of the Damage Award as of March
29, 2002 is $20,266,822.71, with interest accruing
daily in the amount of $5,102.84.
In addition, the Arbitrator awarded $2,609,518.69 in
fees and costs (the "Fee Award") to MCNIC against the
Company and its related entities on a joint and
several basis. The Fee Award has yet to be confirmed
by the appropriate Utah state court and proceedings
regarding it have been stayed as further explained
below.
On March 8, 2002, the Company and MCNIC, its related
entities and certain of its officers executed the
Settlement Agreement. Pursuant to the foregoing
agreement, the Company transferred all of its
interests in Crown Ridge and the leases relating to
the Asphalt Ridge properties to MCNIC. In addition,
the Company and its officers agreed not to compete
with Crown Ridge in the Western United States and
Western Canada in any way regards to tar sands
leasing, mining, extraction or processing for a
period of three years. Notwithstanding the following,
it was agreed that the conducting by the Company of
its present business of buying, storing, blending and
selling asphalt did not constitute a breach of the
foregoing covenant.
- --------------------------------------------------------------------------------
F-36
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Commitments In exchange for the assignment of the Crown Ridge
and interest, the Company received (i) MCNIC's commitment
Contingencies to pay the MK Judgment and its indemnification of the
Continued Company from the MK Judgment, (ii) the assignment
from Crown Ridge of a 1% non-cost bearing, overriding
royalty interest in the sales proceeds received by
Crown Ridge or its successors and assigns from any
products produced on the assigned leases of "Tract A"
at Asphalt Ridge or a 3% non-cost bearing, overriding
royalty interest in proceeds received by Crown Ridge
or its successors and assigns from any other lands
which are currently leased by Crown Ridge or the
Company, and (iii) the mutual release between the
parties of any known or unknown claims between them
relating to Crown Ridge, including the obligation of
the Company to pay the CAC Loan.
Pursuant to the Settlement Agreement, the Company
also acquired the Option to purchase all of MCNIC's
rights, title and interests in, or relating to, Crown
Distribution (including its right to Damage Award and
the Fees Award) for an amount equal to $5,500,000
(the "Purchase Price"). The Settlement Agreement
provides that the Purchase Price shall be paid
through the payment of $200,000 at execution with the
balance due upon the closing of the Option (if such
closing occurs on or before April 30, 2002). After
April 30, 2002 the Company shall have the right to
extend the Option until September 30, 2002 by making
an additional $100,000 payment for each 30 days by
which the Option is extended. If the Company closes
under the Option, then all payments made to MCNIC
shall be credited against the Purchase Price. If,
however, the Company does not exercise the Option,
the initial $200,000 payment shall be credited
against the Company's ultimate liability under the
Fee Award.
Promptly following the execution of the Settlement
Agreement, the Company and MCNIC stayed all pending
litigation relating to the Arbitration or any
enforcement of its conclusion issued as a result of
it. The Settlement Agreement provides that if the
Company does not exercise the Option, MCNIC may
execute on the Damage Award and that the parties may
either move to confirm or appeal, as the case may be,
the Fee Award.
- --------------------------------------------------------------------------------
F-37
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Commitments Management of the Company believes that under the
and severe legal and financial constraints facing the
Contingencies Company as a result of the Arbitration's outcome,
Continued that the negotiation and execution of the Settlement
Agreement were in the best interests of the Company
and its shareholders. Management of the Company is
presently taking actions intended to permit it to
exercise the Option but cannot assure that it will be
successful in obtaining the requisite financing on
terms which are acceptable to the Company. Further,
the Company cannot describe what form future
financing might take.
Other
The Company may become or is subject to other
investigations, claims, or lawsuits ensuing out of
the conduct of its business, including those related
to environmental, safety and health, commercial
transactions, etc. Management of the Company is
currently not aware of any other investigations,
claims, or lawsuits which it believes could have a
material adverse affect on its financial position.
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F-38
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
17. Segment In accordance with the provisions of SFAS No. 131,
Reporting the Company makes key financial decisions based on
certain operating results of certain of its
subsidiaries. Segment information as reviewed by the
Company is as follows:
Year Ended December 31, 2001
---------------------------------------------------------------------
Crown
Crown Asphalt
Asphalt Products CEC
Distribution Company and CAC Total
------------- ------------- ----------- -------------
Revenues from
external customers $ 572,965 $ 26,459,693 $ - $ 27,032,658
Gross profit (loss) $ (1,838,969) $ 4,745,437 $ - $ 2,906,468
Interest expense $ 3,411,221 $ 232,360 $ 375,157 $ 4,018,738
Depreciation and
amortization $ 566,241 $ 169,407 $ 27,959 $ 763,607
Segment net loss $ (9,191,518) $ 3,090,477 $ (386,940) $ (6,487,981)
Segment total assets $ 11,009,753 $ 7,981,851 $(16,322,244) $ 2,669,360
Year Ended December 31, 2000
----------------------------------------------------------------------------------
Crown
Crown Asphalt
Asphalt Products
Distribution Company CAC CEC Total
------------ ------------ ----------- ------------ -------------
Revenues from
external
customers $ 20,464,624 $ 2,322,479 $ - $ - $ 22,787,103
Gross profit
loss) $ (1,119,221) $ 301,261 $ - $ - $ (817,960)
Interest expense $ 2,096,565 $ 180,715 $ 298,067 $ 1,039 $ 2,576,386
Depreciation and
amortization $ 708,614 $ 109,840 $ 62,037 $ 23,373 $ 903,864
Segment net loss $(11,365,018) $ 712,126 $(7,328,766) $ (379,263) $ (18,360,921)
Segment total
assets $ 13,461,698 $ 3,500,902 $ 15,871 $(15,281,046) $ 1,697,425
Year Ended December 31, 1999
-----------------------------------------------------------------------
Crown
Asphalt Rawlins
Distribution Terminal CEC Total
-------------- ------------- ------------- --------------
Revenues from external
customers $ 32,934,592 $ 2,583,949 $ - $ 35,518,541
Gross profit $ 2,458,780 $ 48,758 $ - $ 2,507,538
Interest expense $ 1,933,359 $ 146,884 $ 123,348 $ 2,203,591
Depreciation and amortization $ 595,168 $ 64,089 $ 87,417 $ 746,674
Segment net loss $ (1,325,229) $ (344,661) $ (1,383,626) $ (3,053,516)
Segment total assets $ 23,341,506 $ 2,454,902 $ 14,979,700 $ 40,776,108
- -----------------------------------------------------------------------------------------------------------------------------------
F-39
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
17. Segment
Reporting 2001 2000
Continued -------------- ---------------
Reconciliation of assets
Total assets for reportable segments $ 2,669,360 $ 1,697,425
Elimination of investment in subsidiaries 15,192,849 19,609,908
Elimination of intercompany receivables (2,144,944) (4,255,155)
-------------- ---------------
Total consolidated assets $ 15,717,265 $ 17,052,178
============== ===============
During 2001, 2000 and 1999, the Company operated
primarily in the production and distribution of
asphalt. The Company's operations and sales are
dispersed throughout Utah, Arizona, California,
Nevada, Wyoming, New Mexico, Nebraska and Colorado
and could be adversely affected by economic downturns
in these states and by federal or state funding
policies related to road construction or
improvements.
18. Employee In 1999, the Company established a defined
Benefit Plan contribution plan which qualifies under Section
401(k) of the Internal Revenue Code. The plan
provides retirement benefits for employees meeting
minimum age and service requirements. Participants
may contribute up to the lesser of $10,000 or 15
percent of their gross wages, subject to certain
limitations. The plan provides for a discretionary
amount to be contributed to the plan each year. The
contribution for the years ended December 31, 2001,
2000, and 1999 totaled approximately $35,000, $36,000
and $35,000, respectively.
18. Subsequent Pursuant to the Series A Preferred Stock's
Event Certificate of Voting Powers, Designation, and
Preferences, accrued dividends on Preferred Series A
Stock may be paid in common stock of the Company at
the option of the holder upon a written and timely
request before payment of the quarterly dividend. On
February 28, 2002 an entity controlled by the
president of the Company which holds all of the
Series A Preferred Stock requested payment of
$200,000 of accrued dividends in shares of common
stock. Accordingly 13,793,103 shares of the Company's
common stock were issued as payment of $200,000 of
accrued dividends.
- --------------------------------------------------------------------------------
F-40