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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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
incorporation or organization) Identification No.)
1710 West 2600 South
Woods Cross, Utah 84087
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(Address of principal executive offices) (Zip Code)
801-296-0166
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.02
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) 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. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes | | No |X|
State the aggregate market value of the voting and nonvoting common equity held
by nonaffiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked prices of such common equity, as of
last business day of the registrant's most recently completed second fiscal
quarter. As of June 30, 2002, the aggregate market value of the voting and
nonvoting common equity held by nonaffiliates of the issuer was $589,716 using
the average bid and asked prices for registrant's common stock.
Indicate the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date. As of March 17, 2003,
registrant had outstanding 26,482,388 shares of its common stock, par value
$0.02.
DOCUMENTS INCORPORATED BY REFERENCE: None.
TABLE OF CONTENTS
Item Description Page
- ---- ----------- ----
Part I
Item 1 Business...................................................... 1
Item 2 Properties.................................................... 6
Item 3 Legal Proceedings............................................. 7
Item 4 Submission of Matters to a Vote of Security Holders........... 8
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 9
Item 6 Selected Financial Data....................................... 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation.......................... 10
Item 7A Quantitative and Qualitative Disclosures about Market Risk.... 15
Item 8 Financial Statements and Supplementary Data................... 15
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 15
Part III
Item 10 Directors and Executive Officers of the Registrant............ 16
Item 11 Executive Compensation........................................ 17
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 20
Item 13 Certain Relationships and Related Transactions................ 21
Item 14 Controls and Procedures....................................... 22
Part IV
Item 15 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 23
Signatures.................................................... 26
Certifications................................................ 27
i
PART I
ITEM 1. BUSINESS
General
Crown Energy Corporation, headquartered in Woods Cross, Utah,
manufactures and distributes asphalt paving and related products from facilities
in Utah, Arizona, Nebraska and Wyoming.
For the years ended December 31, 2002, 2001 and 2000, we reported
revenues, primarily from our asphalt manufacturing and distribution operations,
of $18.0 million, $27.0 million and $22.8 million respectfully.
During 2002, we continued the manufacturing and distribution of liquid
asphalt and attained a total sales volume of roughly 92,300 tons. Our sales
volume and revenue for 2002 were constrained by the lack of working capital that
limited the purchase of base asphalt and blend components for sale. Cash flow
and operational costs were carefully monitored to allow for the maximization of
the limited working capital available. In an ongoing effort to further preserve
working capital, the administrative offices were relocated to the Woods Cross
facility and a reduction in staff size for nonessential personnel was made.
During 2002, we resolved disputes with MCNIC Pipeline and Processing
Company that grew out of our joint formation of Crown Asphalt Ridge, L.L.C. in
1997 and Crown Asphalt Distribution, L.L.C. in 1998. These disputes led to an
arbitration proceeding with MCNIC in which a ruling adverse to us was rendered
in late 2001.
In an effort to settle the arbitration award, the parties entered into
an agreement on March 8, 2002, in which we assigned all of our interest in Crown
Asphalt Ridge to MCNIC and agreed not to compete in certain tar sands activities
in the western United States in consideration of a conveyance to us of an
overriding royalty in Crown Asphalt Ridge's lands, leases and oil sand
processing facility, MCNIC's forgiveness of indebtedness due from us, and
MCNIC's payment of certain third-party obligations.
On October 16, 2002, we and MCNIC, along with all other parties to the
arbitration, executed a settlement agreement to settle fully all claims and
liabilities among us. Under the settlement agreement, we conveyed to MCNIC all
of our interests in overriding royalty assigned March 8, 2002, and in the lands,
leases and oil sand processing facility at the Asphalt Ridge project in Vernal,
Utah, and MCNIC agreed to assign its interest in Crown Asphalt Distribution,
L.L.C., including approximately $30.1 million in Company obligations. We no
longer own an interest in Crown Asphalt Ridge, L.L.C. or any of the properties
at the Asphalt Ridge project. As a result of this settlement, we realized a gain
of approximately $30.1 million, calculated as the amount by which the sum of our
liabilities cancelled exceeded our cost for the assets conveyed, which was
recorded as an extraordinary gain on extinguishment of debt. Notwithstanding
this significant reduction in our liabilities, we continue to have very limited
operating and working capital.
In order for us to meet our obligation for funding Crown Asphalt Ridge,
L.L.C., in 1997 we sold to an unrelated third party for $5.0 million in cash
500,000 shares of $10 Series A Cumulative Convertible Preferred Stock and a
warrant to purchase at $0.002 per share an amount equal to 8% of the shares of
common stock then outstanding and reserved for issuance, or approximately
925,771 shares. In February 2002, the Series A Preferred Stock, the warrant, and
all associated rights were purchased from the original holder by Manhattan
Goose, LLC, which was then owned 32.5% by Jay Mealey, our Chief Executive
Officer, President and a director, and 67.5% by other directors and unrelated
1
parties. During 2002, we paid accrued dividends on the Series A Preferred Stock
of $400,000 in cash and $200,000 in 13,793,103 shares of common stock, or at
$0.0145 per share, the approximate market price on the date of payment. In
November 2002, Jay Mealey acquired the other 67.5% membership interests in
Manhattan Goose and simultaneously conveyed all membership interests to the
Mealey Family Limited Partnership, which is the current holder of the Series A
Preferred Stock, the warrant, all associated rights, and accrued dividends. Mr.
Mealey owns 48.5% of the Mealey Family Limited Partnership and is its general
partner and his immediate family is its beneficiary.
As of December 31, 2002, there were dividends payable to the holder of
the Series A Preferred Stock of $1.0 million that may, at the election of the
holder of the Series A Preferred Stock, be taken in cash or common stock. At the
market price of $0.018 per share as of March 28, 2003, approximately 55.6
million shares of common stock would have to be issued to satisfy the dividend
payable. The Series A Preferred Stock is convertible to 4,285,000 shares of
common stock, if so elected by the holder of the Series A Preferred Stock.
As of December 31, 2002, we had a working capital deficit of $180,000,
an accumulated deficit of $3.5 million, and stockholders' equity attributable to
the common stock of $1.1 million. Our auditor's report on our financial
statements for the year ended December 31, 2002, as for prior years, contained
an explanatory paragraph about our ability to continue as a going concern. We
continue to suffer from shortages of working capital needed to optimize
operating economies. Further, our operating history and the prevailing current
conditions in the investment markets generally have made it difficult to obtain
outside equity capital. Given our financial condition, generally, outside
working capital funding requires personal guarantees, and our officers and
directors have been unwilling to provide such guarantees for our benefit as a
publicly-held company. The market price for our common stock has ranged from a
low of $0.008 to a high of $0.055 during 2002, closing on March 28, 2003, at
$0.018 per share. Finally, we have reviewed the costs required to meet
regulatory and stockholder requirements associated with being a publicly-held
company subject to the periodic reporting, proxy and other requirements under
the Securities Exchange Act along with the increased cost of insurance and other
burdens we believe result from the enactment of the Sarbanes-Oxley Act of 2002,
particularly for a small company such as us.
In view the foregoing, in March 2003, our board of directors, which
includes affiliates of our principal stockholders, authorized management to
investigate available alternatives for a so-called "going private" transaction,
with the effect that we would become privately held by our current principal
stockholders, subject to satisfying various regulatory requirements. This
investigation will include a review of available alternatives and their related
legal, financial, regulatory and related considerations. In connection with that
investigation, management may seek a third-party valuation of our Company and
the interests of our minority stockholders from a financial point of view. We
cannot give any assurance of when or if a going private transaction will take
place or describe the terms on which such a transaction might occur.
__________________
When we use the terms "we" and the "Company" in this document, we
include, unless otherwise noted, the entities through which we conduct our
activities, consisting of our wholly-owned subsidiaries Crown Asphalt Products
Company, or CAPCO, and Crown Asphalt Distribution, L.L.C., or Crown Asphalt
Distribution, and a 67% interest in Cowboy Asphalt Terminal, L.L.C., or CAT,
LLC. Another subsidiary, Crown Asphalt Corporation, or CAC, previously became
inactive and terminated its existence December 31, 2002. Our consolidated
financial statements and results of operation include the accounts and results
of operations of CAPCO, CAC, Crown Asphalt Distribution and CAT, LLC.
2
The Paving Asphalt Manufacturing and Distribution Industry
The liquid paving asphalt industry is a 30 million ton per year market.
The industry is segmented into commodity asphalt, performance-grade (performance
grade asphalt) and asphalt emulsions and maintenance products. The commodity
asphalt segment is by far the largest comprised of private construction projects
(parking lots, driveways, etc.) and much of the minor city and county road
projects. The liquid asphalt used by this segment generally has few quality or
performance specifications and is served by refined sand asphalt wholesalers.
The performance-grade asphalt segment is comprised of interstate highways and
larger state highways and city/county roads. The liquid asphalt used in this
segment must meet very stringent performance standards and requires the blending
of asphalt with other asphalts, additives and modifiers to meet the product
specification. This segment is our primary focus. The asphalt
emulsions/maintenance segment is also growing as states and other agencies
implement pavement maintenance programs to rehabilitate and extend the life of
existing roads. We manufacture a broad slate of products to serve this segment
of the asphalt industry.
The paving asphalt business is seasonal and quite weather dependent. In
areas served by us, paving is generally limited to the warmer months, typically
extending from May through October. During the other colder months of the year,
virtually no construction occurs and therefore demand for liquid asphalt is low.
Asphalt is the residual product left after heavy crude oils are refined
to make gasoline, diesel and other petrochemical products. Even though demand
for asphalt is seasonal, the supply is continuous as refiners process crude oil
into gasoline and diesel all year. Most refineries have limited tank capacity to
store product and must therefore sell the refined asphalt throughout the year.
These dynamics generally lead to an oversupply of asphalt during the colder
months, which typically leads to much lower asphalt prices during those colder
months. In order to take advantage of the lower winter prices, the liquid
asphalt must be purchased and stored until the paving season starts. Tank
storage capacity at terminals such as those owned/operated by us is necessary to
benefit from winter-fill asphalt pricing.
The large volume of inventory placed into storage tanks and the long
period between purchase and sale consumes a significant amount of working
capital. Manufacturing performance-grade asphalt and asphalt emulsions requires
highly-trained and experienced operating personnel, which allows only some of
the labor force to be employed on a seasonal basis. In addition, operations
continue throughout the year to receive and transfer asphalt inventory. These
ongoing operational expenses also demand large amounts of working capital during
the off-season months.
Asphalt manufacturers such as us sell liquid asphalt to paving
contractors that add liquid asphalt to aggregates such as rock, gravel or sand
at a high temperature in hot-mix asphalt equipment to make the paving product
generally referred to as "asphalt." Liquid asphalt suppliers distribute the
product as either a direct sale (primarily non-highway projects) or as a
subcontractor to the paving contractors that are awarded projects by federal,
state and local agencies after a bid process.
The asphalt industry is very competitive, both within the industry with
other manufacturing/distribution companies and as an industry competing for road
projects with other paving products such as concrete. The industry is dependent
on tax-based funding from the federal, state and local governments through road
and highway budgets. As such, the industry is driven by the economy at both
national and regional levels.
3
Our Business
We focus primarily on the performance-grade asphalt and
emulsion/maintenance segments of the liquid asphalt industry. We have
approximately 75,000 tons of asphalt tank storage at our facilities. Given
adequate working capital availability, we prefer to purchase enough asphalt
inventory from November through April to fill the storage tanks and benefit from
the approximate $30 to $50 per ton price advantage relative to purchasing
inventory in the summer months. We purchase the base asphalt inventory from
refineries and transport it to our facilities via rail and truck. The material
is unloaded and stored until needed during the asphalt paving season.
We manufacture finished liquid asphalt products by blending the base
asphalt inventory from the storage tanks with other additives, chemicals and
modifiers to meet the various product specifications. Our products are sold to
paving contractors that mix it with aggregate (rock and gravel) to make a hot
mix asphalt pavement or directly to customers for pavement maintenance.
For the majority of our business, we submit sealed bids to contractors,
who in turn bid for road and highway projects, for most of our business. We also
have direct sales to contractors, states, counties and cities for some of our
business. As of March 31, 2003 and 2002, we had pending and signed contracts to
sell approximately 90,000 tons of liquid asphalt.
Crown Asphalt Ridge
In August 1997, we formed Crown Asphalt Ridge, L.L.C. with MCNIC to
construct, own and operate an asphalt oil sand production facility at Asphalt
Ridge near Vernal, Utah. In July 1998, we (through our CAPCO subsidiary) and
MCNIC formed as a second joint venture, Crown Asphalt Distribution, to acquire
the inventory and assets of Petro Source Asphalt Company, an unrelated Texas
corporation. By completing this acquisition, we acquired ownership or leasehold
interests in certain performance asphalt product manufacturing and distribution
facilities located in Utah, Arizona, Colorado and Nevada. Our strategy was to
produce asphalt from oil sands at the Asphalt Ridge facility and to manufacture
and market performance-grade asphalt products with the facilities acquired from
Petro Source.
During the start-up of the Asphalt Ridge facility, mechanical and
process difficulties were experienced that affected asphalt recoverability and,
in turn, production economics. Significant additional capital investment would
have been required to modify the facility in order for it to achieve commercial
production, but the full feasibility and cost of such modifications were
unknown. We did not have and did not expect that we would have the financial
resources to participate in additional capital contributions. Disputes arose
between us and our affiliates on the one hand and MCNIC and its affiliates on
the other, which led to the initiation of litigation and arbitration proceedings
in which an arbitration ruling adverse to us was rendered in late 2001.
The Asphalt Ridge facility never achieved commercial asphalt production
and all substantial activities to initiate production were terminated in
approximately 2000.
During 2002, we settled all of our disputes with MCNIC under agreements
in which we conveyed to MCNIC all of our interests in Crown Asphalt Ridge,
L.L.C. and the Asphalt Ridge project, MCNIC agreed to forgive an aggregate of
approximately $30.1 million in obligations that we owed, and we retained all of
Crown Asphalt Distribution. As a result of this settlement, we realized a gain
of approximately $30.1 million, calculated as the amount by which the total of
our liabilities cancelled exceeded our cost for the assets conveyed, which was
recorded as an extraordinary gain on extinguishment of debt. Notwithstanding
this significant reduction in our liabilities, we continue to have very limited
operating and working capital. See "Item 3. Legal Proceedings."
4
The asphalt product manufacturing and distribution facilities acquired
from Petro Source in 1998, along with the facilities we already owned, formed
the base for our ongoing performance-grade asphalt manufacturing and
distribution activities.
Cowboy Asphalt Terminal
In June 1998, we and Foreland Refining Corporation, an unrelated entity
engaged in the asphalt roofing products business, formed CAT, LLC to acquire an
asphalt terminal and its underlying real property located in Woods Cross, Utah.
Though the property and tanks are owned by CAT, LLC, the property was divided by
specific assets and use by the Company and Foreland. Foreland retained three
storage tanks and a certain portion of the land for exclusive use in its roofing
asphalt business. The remaining tanks and a certain portion of the land are for
our exclusive use in our paving asphalt business. The remaining land may be used
jointly by the parties. All revenues generated from the exclusive use assets are
the sole property of the respective party. Both Foreland and the Company have
made capital equipment improvements to the respective exclusive use assets.
Those capital improvements are the sole property of the party making the
improvement. Each party retains all revenues and profits generated from its
respective exclusive operations. CAT, LLC is owned 66.7% by us and 33.3% by
Foreland, and we are the operator. The accounts and results of operations of
CAT, LLC are included within our consolidated financial statements and results
of operations as majority-owned subsidiary.
Foreland and we are obligated to make equal contributions to CAT, LLC
for environmental clean-up costs, if any, up to $650,000 and related legal
expenses. Contributions for these costs will not affect our respective
percentage interests in CAT, LLC.
Environmental Matters
We are subject to federal, state and local requirements regulating the
discharge of materials into the environment, the handling and disposal of solid
and hazardous wastes, and protection of health and the environment generally.
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.
We 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.
We expect that we may be required to expend funds to comply with
federal, state and local provisions and orders that relate to the environment.
Based upon information available to us at this time, we believe that compliance
with such provisions will not have a material effect on our capital
expenditures, earnings and competitive position.
5
Employees
As of April 1, 2003, we had 26 full and part-time employees. None of
our employees is represented by a union or other collective bargaining group.
Management believes that its relations with its employees are good.
ITEM 2. PROPERTIES
Our principal executive offices are located in the office building we
own at 1710 West 2600 South, Woods Cross, Utah 84087, adjacent to the Woods
Cross asphalt terminal owned by CAT, LLC.
We conduct our activities from the following manufacturing and
distribution facilities:
Location Owner/Lessee Company's Interest (1)
-------- ------------ ----------------------
Woods Cross (Cowboy), Utah
Office building.................... Company Owned, subject to a lien for $224,000
note(2)
Terminal........................... CAT, LLC Owned, subject to a lien for $664,000
note, of which Company is responsible for
67%, of $445,000(3)
Equipment.......................... Crown Asphalt Distribution Owned
Rawlins, Wyoming
Terminal land...................... CAPCO Lease expiring 2020
Equipment.......................... CAPCO Owned, subject to lien for $1.6 million
bank loan
Fredonia, Arizona...................... Crown Asphalt Distribution Owned
Gadsby, Salt Lake City, Utah
Terminal........................... Crown Asphalt Distribution Lease expiring 2006(4)
Equipment.......................... Crown Asphalt Distribution Lease expiring 2004(4)
Grand Island, Nebraska.................
Terminal........................... CAPCO Lease expiring 2004
Equipment.......................... CAPCO Owned
- ---------------------------
(1) As of December 31, 2002.
(2) We also agreed to pay a former landlord $80,000 as a termination fee for a
lease, and to extinguish all of our obligations with a balance of $80,000
as of December 31, 2002, due under our prior lease.
(3) We hold a 66.7% interest in CAT, LLC, a joint venture limited liability
company with an unrelated party.
6
(4) The lessor of the facility attempted to terminate the property lease in
2002. Since 1998, Crown Distribution has paid the lease payments for the
equipment on site that is leased to another company while that equipment
has been utilized. The termination of the property lease resulted in the
cessation of use of the facility and Crown Distribution has discontinued
making those lease payments since it no longer utilizes the equipment. We
are in discussions with both the property owner and equipment lessor for
new leases, however, no definitive agreement has been reached.
We believe that the foregoing facilities are adequate for our
foreseeable business needs.
ITEM 3. LEGAL PROCEEDINGS
Road Runner Oil, Inc.
On May 21, 1998, Road Runner Oil, Inc. and Gavilan Petroleum, Inc.
filed an action in the Third Judicial District Court, Salt Lake County, State of
Utah, civil no. 98-0905064, against us and our President relating to Road
Runner's purchase in 1997 of the stock of Gavilan. In January 2003, we reached a
settlement with the plaintiffs in this action in which we paid Road Runner
$10,000 and exchanged mutual releases.
MCNIC
In February 2002, the Third Judicial District Court of Salt Lake
County, Utah, confirmed a damage award against us that had been rendered in
October 2001 in an arbitration proceeding between us and MCNIC to resolve
litigation that had been pending since mid-2001 related to disputes arising out
of our Asphalt Ridge project. MCNIC Pipeline & Processing Company v. Crown
Asphalt Distribution, Third Judicial District Court of Salt Lake County, Utah,
No. 00904867; U.S. District Court for the District of Utah, Central Division,
Crown Energy Corporation, et al. v. MCN Energy Group, Inc. et al., No.
2CV-0583ST. The amount of the damage award, as of March 29, 2002, was $20.3
million, plus post-judgment interest. The arbitrator also awarded $2.6 million
in fees and costs against us and our related entities on a joint and several
basis.
On March 8, 2002, the parties entered into a settlement agreement
pursuant to which we assigned our interest in Crown Asphalt Ridge, L.L.C. to
MCNIC and agreed not to compete in certain tar sands activities in the western
United States and Canada in return for: (i) the receipt of a non-cost-bearing
overriding royalty interest; (ii) the elimination of all of our obligations to
MCNIC; and (iii) MCNIC's payment of a third-party obligation. We were granted
the option to acquire for $5.5 million all of MCNIC's interest in Crown Asphalt
Distribution. All litigation and related judgment enforcement actions were
stayed. The settlement agreement provided that if we did not exercise the option
to purchase Crown Asphalt Distribution, MCNIC could seek collection of the full
damage award and that the parties could either move to confirm or appeal, as the
case may be, the $2.6 million fee award.
We did not have the financial resources to exercise the option to
acquire MCNIC's interest in Crown Asphalt Distribution. Accordingly, we and
MCNIC undertook further discussions to resolve the substantial monetary awards
against us. On October 16, 2002, all parties to the above litigation and
arbitration executed a settlement agreement to settle all claims and liabilities
among them. Under the settlement agreement, we conveyed to MCNIC all of our
interests in the overriding royalty assigned March 8, 2002, and in the lands,
leases and oil sand processing facility at the Asphalt Ridge project, and MCNIC
agreed to assign its interest in Crown Asphalt Distribution, L.L.C., including
approximately $30.1 million in obligations that we owed. We no longer own an
interest in Crown Asphalt Ridge, L.L.C. or any of the properties at the Asphalt
Ridge project. We now own all of Crown Asphalt Distribution. As a result of this
settlement, we realized a gain of approximately $30.1 million, calculated as the
amount by which the total of our liabilities cancelled exceeded our cost for the
assets conveyed, which was recorded as an extraordinary gain on extinguishment
of debt.
7
Other
On May 24, 2002, Geneva Rock Products, Inc. filed a complaint against
us in the Third Judicial District Court, Salt Lake County, Utah. Geneva has
alleged that we supplied it with defective asphalt binder for approximately four
months in 1999. In this action, Geneva seeks to recover damages, which it has
indicated may exceed $1,600,000 plus interest, costs and attorneys' fees. We
have denied liability on all of Geneva's claims. We believe that the asphalt
binder sold to Geneva met all applicable industry standards and did not cause
any of the problems on which Geneva has based its claims. The litigation is
currently in the early discovery phase, and we are unaware of any additional
information that suggests that our asphalt binder was deficient. Because
discovery has not been completed and due to the serious nature of Geneva's
claims, we have no way of predicting whether we will ultimately prevail.
On December 20, 2001, Oriental New Investments, Ltd. served a complaint
against us, which was filed in the Third Judicial District Court, Salt Lake
County, Utah. The action relates to a 1997 convertible debenture and replacement
convertible debenture issued by us to Oriental. The action seeks to recover
$75,000 in liquidated damages, plus interest, or actual damages, and attorneys'
fees and costs, for alleged breaches of the convertible debentures. We have
denied any and all liability and believe that Oriental's claims are without
merit. (Oriental filed a similar complaint against us in January 2000 related to
the same debentures, but that complaint was dismissed for Oriental's failure to
prosecute.) We will vigorously defend our position that Oriental's claims are
without merit; however, there can be no assurance we will ultimately prevail.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders for vote during the
fourth quarter of fiscal year 2002.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded in the over-the-counter market since
1980. Our common stock is currently listed on the Nasdaq OTC Bulletin Board
under the symbol "CROE." The following table sets forth the range of high and
low bid quotations of our common stock as reported by the OTC Bulletin Board 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:
Low High
--------- ---------
2003:
Second Quarter (through April 2, 2003)...... $0.018 $0.025
First Quarter............................... 0.01 0.025
2002:
Fourth Quarter.............................. 0.008 0.012
Third Quarter............................... 0.011 0.02
Second Quarter.............................. 0.02 0.055
First Quarter............................... 0.011 0.04
2001:
Fourth Quarter.............................. 0.02 0.085
Third Quarter............................... 0.06 0.075
Second Quarter.............................. 0.035 0.125
First Quarter............................... 0.0375 0.0625
We have not paid any dividends or made any other distributions on our common
stock, and we do not anticipate paying any cash dividends on our common stock in
the foreseeable future. The terms of our Series A Preferred Stock prohibit the
payment of dividends on common stock at any time that accrued dividends on the
Series A Preferred Stock are unpaid. As of December 31, 2002, accrued but unpaid
dividends equaled $1.0 million. We estimate that, as of March 31, 2003, we had
approximately 746 stockholders.
Equity Compensation Plan Information
Number of securities
available for future
issuance under equity
Number of securities to be Weighted average exercise compensation plans
issued upon exercise of prices of outstanding (excluding securities
outstanding options options reflected in column (a))
Plan Category (a) (b) (c)
------------- -------------------------- ------------------------- ---------------------------
Equity compensation plans
approved by shareholders... 2,263,148 $0.122 460,000
Equity compensation plans not
approved by security holders -- -- --
--------- ------ -------
Total.................. 2,263,148 $0.122 460,000
========= ====== =======
9
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in the following table have been derived
from the financial statements for the periods indicated. The financial
statements as of and for the years ended December 31, 1998 and 1999, were
audited by Deloitte & Touche, LLP, independent public accountants. The financial
statements as of and for the years ended December 31, 2000, 2001 and 2002, 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:
Year Ended December 31
-----------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ -------------
(in thousands, except per share)
Net revenues...................................... $17,965 $27,033 $22,787 $35,519 $23,836
Income (loss) from continuing operations.......... (769) (6,488) (18,361) (3,054) (498)
Income (loss) per share
from continuing operations...................... (0.05) (0.51) (1.39) (0.26) (0.07)
Total assets...................................... 13,275 15,717 17,052 33,114 23,571
Total long-term obligations....................... 2,442 11,130 11,337 11,333 4,326
Redeemable Series A Preferred Stock............... 5,000 4,953 4,896 4,840 4,783
Cash dividends per common share -- -- -- -- --
Common stockholders' equity (deficit)............. 1,134 (27,994) (21,050) (2,276) 767
The foregoing selected financial data are presented on a historical
basis and may not be comparable from period to period due to significant changes
in our operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Note about Forward-Looking Information
The following discussion and analysis of our 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 that express, either directly or by implication, management's
beliefs, expectations or intentions regarding our future performance or future
events or trends that may affect us or our 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 our 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 risk of loss of certain operating assets serving as collateral
to secure such financing, and other similar risks inherent in our operations or
in business operations generally. Any such risks or uncertainties, either alone
or in combination with other factors, may cause our actual results, performance
or achievements to differ materially from our 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.
10
Introduction
During 2002, we continued our performance-grade asphalt paving product
manufacturing and distribution segment activities while we devoted substantial
management resources to resolving the outstanding damage award against us, which
totaled approximately $30.0 million at March 31, 2002, with interest continuing
to accrue. See "Item 3. Legal Proceedings." Our business is capital intensive
and requires a working capital credit facility to operate efficiently. Due to
the pending disputes with MCNIC and the adverse arbitration award in late 2001,
we have not had such a credit facility since 1999 and have been unable to obtain
required working capital from outside sources through the sale of equity
securities. During 2001 we were able to structure favorable supply arrangements
that allowed us to increase our sales revenues without obtaining a working
capital loan or line of credit. We have not been able to continue these
favorable arrangements because of changes in the supply markets. This has
imposed substantial operating constraints on us and has adversely affected our
results of operations. These negative effects continue.
Our inability to obtain a working capital line-of-credit substantially
limited our ability to purchase inventory, which forced us to limit our sales
volume and revenues and reduced the gross profit on sales because we were unable
to purchase inventory at the more favorable prices prevailing during the colder
months. We implemented a number of cost-cutting measures during 2002, but
incurred legal and other costs associated with the resolution of our dispute
with MCNIC. In 2003 we continue to be limited in our ability to purchase asphalt
because of our lack of a working capital line of credit. We are continuing to
try to structure favorable purchase agreements or find additional methods of
purchasing base stock. We are also considering the consolidation of
manufacturing facilities to maximize operating efficiencies. Forecasted sales
during 2003 are expected to approximate those of 2002.
In October 2002, we fully settled the arbitration award against us. In
this settlement, MCNIC agreed to assign its interest in Crown Asphalt
Distribution, L.L.C., including approximately $30.1 million in obligations that
we owed in exchange for conveyance to MCNIC of all of our interests in the
overriding royalty assigned March 8, 2002, and in the lands, leases and oil sand
processing facility at the Asphalt Ridge project. We now own 100% of Crown
Asphalt Distribution. As a result of this settlement, we realized a gain of
approximately $30.1 million, calculated as the amount by which the total of our
liabilities cancelled exceeded our cost for the assets conveyed, which was
recorded as an extraordinary gain on extinguishment of debt.
As of December 31, 2002, we had a working capital deficit of $180,000,
an accumulated deficit of $3.5 million, and stockholders' equity attributable to
the common stock of $1.1 million. Our auditor's report on our financial
statements for the year ended December 31, 2002, as for prior years, contained
an explanatory paragraph about our ability to continue as a going concern. We
continue to suffer from shortages of working capital needed to optimize
operating economies. Further, our operating history and the prevailing current
conditions in the investment markets generally have made it difficult to obtain
outside equity capital. The market price for our common stock has ranged from a
low of $0.008 to a high of $0.055 during 2002, closing on March 28, 2003, at
$0.018 per share. Finally, we have reviewed the costs required to meet
regulatory and stockholder requirements associated with being a publicly-held
company subject to the periodic reporting, proxy and other requirements under
the Securities Exchange Act and the increased burdens we believe result from the
enactment of the Sarbanes-Oxley Act of 2002, particularly for a small company
such as us.
In view of the foregoing, in March 2003, our board of directors, which
includes affiliates of our principal stockholders, authorized management to
investigate available alternatives for a so-called "going private" transaction,
with the effect that we would become privately held by our current principal
stockholders, subject to satisfying various regulatory requirements. This
investigation will include a review of available alternatives and their related
legal, financial, regulatory and related considerations. In connection with that
investigation, management may seek a third-party valuation of our Company and
the interests of our minority stockholders from a financial point of view.
11
Liquidity and Capital Resources
At December 31, 2002, we had cash and other current assets of $4.0
million, as compared to cash and other current assets of $5.5 million at
December 31, 2001. The decrease of $1.5 million was generally due to a reduction
in accounts receivable and in year-end asphalt inventory levels. Our business is
capital intensive and requires a working capital credit facility to operate
efficiently. We have not had such a credit facility since 1999, which has
resulted in lowered profitability. We plan to diminish part of our working
capital constraints by structuring supply arrangements in 2003; however, there
can be no guarantee we will be able to accomplish such arrangements.
Our business requires a large amount of working capital to purchase and
store inventory and for accounts receivable and general operations. We do not
have adequate working capital to operate our business currently and must rely on
outside third-party sources to finance that requirement. We have not had outside
working capital financing since 1999. Although the settlement of our obligation
to MCNIC in late 2002 releases much of the encumbrance on our assets, we believe
it will continue to be very difficult to obtain the working capital needed to
operate the business. We continue to explore avenues to obtain working capital
financing, including supplier financing, through put arrangements and joint
ventures with industry participants, facility leasing and conventional bank
financing. Given our financial condition, generally, outside working capital
funding requires personal guarantees, and our officers and directors have been
unwilling to provide such guarantees for our benefit as a publicly-held company.
However, to date, we have been unable to obtain financing on acceptable terms,
and we cannot assure that we will be able to. Our failure to obtain the
necessary working capital financing would have a significant negative impact on
our future operations and may make it unable for us to continue.
We continue to consider other asphalt-related business opportunities to
complement our existing asphalt distribution capabilities. However, we
anticipate that many opportunities may require additional capital, and we cannot
assure that we can obtain additional capital required to finance such
opportunities on acceptable terms and conditions.
A portion of our accounts receivable is subject to the risks and
uncertainties of litigation and related collection risks. See "Item 3. Legal
Proceedings." In the event that we are unable to collect our current accounts
receivables, we are unable to secure the necessary working capital
line-of-credit for our operations, our operating losses and working capital
deficits continue, or if we are unable to recoup our losses, we may not have
sufficient capital to operate through 2003.
Results of Operations
Comparison of 2002 and 2001
Total revenue decreased from $27.0 million for the year ended December
31, 2001, to $18.0 million for the year ended December 31, 2002, a revenue
decrease of approximately $9.1 million, or 34%. This decrease was primarily due
to a reduction in sales volume of 130,000 tons for the year ended December 31,
2001, to a volume of 92,000 tons for the year ended December 31, 2002. This
reduction of 38,000 tons was a direct result of our limited working capital to
purchase inventory, which required us to limit our sales volume and revenues.
During 2001, we were able to structure favorable supply arrangements that
allowed us to increase our sales revenues without obtaining a working capital
loan or line of credit. We have not been able to continue these favorable
arrangements because of changes in the supply markets.
12
Our gross profit decreased from approximately $2.9 million, or 10.75%,
for 2001 to approximately $467,000, or 2.6 %, for 2002. This decrease was
primarily due to two factors: first, an overall decrease in the gross margin of
approximately $2.00 per ton, and second, a lower sales volume at the facilities,
which negated the effects of certain synergies in the fixed costs of operating
the plants. The decrease in the gross margin of $2.00 per ton can be attributed
to the inability to purchase enough asphalt in the winter, when prices are
traditionally lower, to fill our tanks. We believe continued cost-cutting
procedures will impact 2003, but the lack of an adequate working capital credit
facility could offset the benefits of those cost-cutting procedures.
General, administrative and provision for bad debt expenses decreased
from $3.5 million for the year ended December 31, 2001, to $1.0 million for the
year ended December 31, 2002, a decrease of $2.5 million, or approximately 13.9%
of revenue. This decrease was primarily the result of the recovery of $1.6
million of bad debt expenses that had been written off in the year ended
December 31, 2000. Cost-cutting procedures in 2002 and a reduction in
administrative staff also contributed to the decrease. These were partially
offset by legal expenses associated with our disputes with MCNIC incurred in
2002.
The loss from operations increased from $573,000 in 2001 to $1.4
million in 2002, an increased loss of $800,000, or approximately 4.0% of
revenue. The increased loss was a result of limited working capital not allowing
us to take full advantage of lower winter-fill pricing and limiting the volume
of asphalt that could be purchased to sell. The inability to purchase enough
winter-fill asphalt to fill our storage capacity contributed to a lower gross
margin as higher priced asphalt was purchased during the warmer months at higher
prices as working capital would allow. In addition, other items attributing to
the increased loss in 2002 are the impairment of goodwill in the amount of
$265,000 and the impairment of property and equipment for $545,000.
Total other income (expense) increased from net expenses of $6.0
million for the year ended December 31, 2001, to net income of $560,000 for the
year ended December 31, 2002, an increase of $6.5 million, or approximately
36.0% of revenue. The 2002 income is comprised of a $3.0 million gain on the
transfer of interest in an unconsolidated affiliate. This gain is the result of
the agreement dated March 8, 2002, in which we assigned all of our interest in
Crown Asphalt Ridge, L.L.C. to MCNIC in exchange for the relinquishment of
approximately $3.0 million debt owed to MCNIC. This amount is offset partially
by interest expense of $2.4 million due MCNIC, which is comprised of $2.1
million attributable to interest at 15% accrued on a 1998 $6.0 million capital
contribution to fund the purchase of the Petro Source assets and interest at
varying rates of 8% to 18% on 1998 and 1999 loans of working capital for the
initial and continuing purchase of inventory. As of December 31, 2001, MCNIC had
loaned Crown Asphalt Distribution approximately $14.9 million for inventory
purchases. Interest stopped accruing on these amounts due MCNIC when the October
16, 2002, settlement agreement was signed with MCNIC. The 2001 amount in
interest and other expenses included a nonrecurring expense of $2.6 million
resulting from a final arbitration award of legal fees and costs incurred in the
dispute between MCNIC and us.
Minority interest of $44,000 represents Foreland's approximate 33%
interest in the loss in CAT, LLC.
13
Extraordinary gain on the extinguishment of debt of $30.1 million is
the result of a settlement with MCNIC during October 2002. In this settlement,
MCNIC agreed to forgive an aggregate of approximately $30.1 million in
obligations that we owed in exchange for conveyance to MCNIC of all of our
interests in the overriding royalty assigned March 8, 2002, and in the lands,
leases and oil sand processing facility at the Asphalt Ridge project. As a
result of this settlement, we realized a gain of approximately $30.1 million,
calculated as the amount by which the total of our liabilities cancelled
exceeded our cost for the assets conveyed.
Comparison of 2001 and 2000
Total revenue increased from $22.8 million for the year ended December
31, 2000, to $27.0 million for the year ended December 31, 2001, an increase of
18.6%. This increase was primarily due to an increase in sales volume, which was
a direct result of our ability to purchase inventory from cash flow and as a
result of supply arrangements reached with our suppliers.
Our gross profit increased from approximately ($818,000), or -3.59%,
for the year ended 2000, to approximately $2.9 million, or 10.75%, for the year
ended 2001. This increase was due to an overall reduction in the cost of base
stock asphalt, because of the ability to bring in asphalt inventory during the
winter months when cost is significantly lower which we were 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.
General, administrative and provision for bad debt expenses decreased
from $4.6 million for the year ended December 31, 2000, to $3.5 million for the
year ended December 31, 2001, a decrease of $1.1 million. 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 creditworthiness 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 associated with our arbitration proceeding
and related disputes with MCNIC.
The loss from operations decreased from $16.0 million in 2000 to
$573,000 in 2001, an improvement of $15.5 million, or approximately 57% of
revenue.
Interest and other income (expense) increased from net expenses of $2.3
million for the year ended December 31, 2000, to net expenses of $6.0 million
for the year ended December 31, 2001, an increase of $3.6 million, or
approximately 13.5% of revenue. The 2001 total was comprised of $3.3 million in
interest costs accrued on a 1998 $6.0 million capital contribution to fund the
purchase of the Petro Source assets and on 1998 and 1999 loans of working
capital for the initial and continuing purchase of inventory and the damage
award in the arbitration with MCNIC. Other interest expense was $692,000 on
various other debts, and interest and other income was $664,000. Other expenses
in the amount of $2.6 million resulted from a final decision of the arbitrator
awarding legal fees and costs incurred in the dispute between MCNIC and us to
MCNIC on February 5, 2002.
Minority interest of $49,000 represents Foreland's approximate 33%
interest in the loss in CAT, LLC.
Crown Asphalt Distribution had losses during 2001 of $8.7 million. We,
through our wholly-owned subsidiary CAPCO, owned 50.01% and MCNIC owned 49.99%
of Crown Asphalt Distribution through October 16, 2002, when we acquired 100% of
Crown Asphalt Distribution pursuant to our settlement agreement with MCNIC.
CAPCO was the manager and operating agent of Crown Asphalt Distribution. Because
there is no agreement requiring the minority stockholder, 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 Asphalt Distribution, including MCNIC's 49.99% interest in the losses
totaling $4.3 million for 2001, are included as a loss in our Financial
Statements.
14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe we are subject to material market risks, such as
interest rate risks, foreign currency exchange rate risks, or similar risks, and
therefore, we do not engage in transactions, such as hedging or similar
transactions in derivative financial instruments, intended to reduce our
exposure to such risks. However, we are subject to general market fluctuations
related to the purchase of base stock asphalt and may suffer reduced operating
margins to the extent our increased costs are not passed through to our
customers. Such prices generally fluctuate with the price of crude oil.
We are also subject to certain price escalation and de-escalation
clauses in our asphalt distribution sales contracts. We supply 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. We include such de-escalation risk into our bid
prices and do not believe we have material exposure to risk resulting from these
regulations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements, including the accountant's report, are
included beginning at page F-1 immediately following the signature pages and
related officer certifications.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OF THE REGISTRANT
Directors and Executive Officers
Our directors are elected annually by the stockholders. Our officers
serve at the pleasure of the board of directors. Our officers and directors,
their ages, and their positions are set forth below:
Name Age Position
---- --- --------
Jay Mealey............. 46 Chairman of the Board of Directors
Chief Executive Officer, President, Treasurer
Stephen J. Burton...... 57 Secretary
Andrew W. Buffmire..... 56 Vice President Business Development, Director
Alan L. Parker......... 51 Vice President, Director
Scott Beall............ 49 Vice President
Jay Mealey has served as President and Chief Operating Officer and as
our director since 1991 and was appointed as Chief Executive Officer in April
1999 and treasurer in October 2000. Mr. Mealey has been actively involved in the
oil and gas exploration and production business since 1978. Prior to becoming
our employee, Mr. Mealey served as Vice President of Ambra Oil and Gas Company
and prior to that position, worked for Belco Petroleum Corporation and Conoco,
Inc. in their exploration divisions. Mr. Mealey is responsible for managing our
day-to-day operations.
Stephen J. Burton was elected Secretary in October 2000. Mr. Burton has
held various accounting positions with us since 1989. He is currently
responsible for our 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, Mr.
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, Mr. 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.
Alan L. Parker, Vice-President and Controller, has been employed by us
since 1998 and our predecessor, Petro Source Asphalt Company, since 1987.
Scott Beall, Vice President, has been employed by us since 1998 and our
predecessor, Petro Source Asphalt Company, since 1979.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and officers, and persons who own more than 10% of our outstanding
common stock, to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership in our common stock and
other equity securities.
16
Except as described below, to our knowledge, based solely on a review
of the copies of the Section 16(a) reports furnished to us, or written
representations that no reports were required, we believe that during fiscal
year 2002 all Section 16(a) filing requirements applicable to our directors,
executive officers and greater than 10% stockholders were complied with. Reports
on Form 3 were not filed timely on behalf of Jeff Fishman and Alexander L.
Searl, each a greater than 10% stockholder, due to their interest in Manhattan
Goose, L.L.C. Reports on Form 4 were not timely filed with regard to the
Manhattan Goose transactions. All required reports were filed, however, within
the time allotted for filing of Form 5.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth, for the last three fiscal years, the
annual and long-term compensation earned by, awarded to, or paid to the person
who was our Chief Executive Officer and each of our other highest compensated
executive officers as of the end of the last fiscal year (the "Named Executive
Officers"):
Long-Term Compensation
-----------------------------
Annual Compensation Awards Payouts
--------------------------------- --------------------- -------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying All Other
Year Compen- Stock Options/ LTIP Compen-
Name and Principal Ended sation Award(s) SARs Payouts sation
Position Dec. 31 Salary ($) Bonus ($) ($) ($) (no.) ($) ($)
- ------------------------ ---------- ----------- ----------- ------------ ---------- ---------- -------- ----------
Jay Mealey 2002 $344,600 -- $10,563(1) -- -- -- $688(2)
President 2001 250,000 -- 8,400(1) -- -- -- 647(2)
(CEO) 2000 210,000 -- 8,400(1) -- -- -- 610(2)
Scott Beall 2002 $128,462 -- -- -- -- -- --
Vice-President 2001 107,225 -- -- -- -- -- --
2000 102,572 -- -- -- -- -- --
- ---------------------
(1) Car allowance.
(2) Term life insurance paid for Mr. Mealey.
Option/SAR Grants in Last Fiscal Year
During the fiscal year ended December 31, 2002, we did not grant any
stock options or stock appreciation rights to any Named Executive Officers.
17
Aggregate Option/SAR Exercises and Fiscal Year-End Option/SAR Values
The following table contains information regarding the fiscal year-end
value of unexercised options held by the Named Officers. The aggregate value of
the options was calculated using $0.02 per share, the average bid and asked
price for our common stock on December 31, 2002:
(a) (b) (c) (d) (e)
Number Value of Unexercised
Shares of Securities Underlying In-the-Money
Acquired Unexercised Options/ Options/SARs
on Value SARs at FY-End (#) at FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ------------------------------------------- ---------- ------------------------- --------------------------
Jay Mealey -- -- 750,000 / 150,000(1) -- / --
Scott Beall -- -- 125,000 / -- -- / --
- ----------------------
(1) Represents six tranches of 150,000 options each granted in two separate
grants to Mr. Mealey in November 1997 and November 1999 and exercisable as
follows:
Exercise Market Price
Number Expiration Date Price Condition *
------ --------------- ----- -----------
150,000.............................................. November 1, 2007 $0.125 $0.16
150,000.............................................. November 1, 2007 0.125 0.23
150,000.............................................. November 1, 2007 0.125 0.31
150,000.............................................. November 1, 2009 0.38 1.00
150,000.............................................. November 1, 2009 0.38 1.30
150,000 (to vest on May 1, 2003)..................... November 1, 2009 0.38 1.69
- ------------------------
* Vested options cannot be exercised unless the market price for the common
stock is at least equal to the market price stated.
Director Compensation
Members of the board of directors are not compensated for their time or
service representing the Company. Direct expenses incurred by members of the
board in connection with our business are reimbursed.
Employment Contracts
We employ Jay Mealey, our Chief Executive Officer, President and
Treasurer, under a November 1997 employment agreement that has been extended to
expire on December 31, 2003. The employment agreement provides for a base salary
plus compensation bonuses in any year that our earnings per share are positive
and constitute an increase over the preceding year or that the price of our
common stock increases by at least 30%. No bonus has been payable to date to Mr.
Mealey under these provisions. Mr. Mealey is also eligible to receive a
discretionary bonus in amounts determined by our board of directors in its sole
discretion. Mr. Mealey was also issued options to purchase an aggregate of
900,000 shares, subject to vesting and minimum trading price conditions as
summarized above. Of these, options to purchase 450,000 shares at $1.62 were
repriced in 2000 to an exercise price of $0.125 per share.
18
Mr. Mealey's employment agreement is terminable upon his death or
disability, terminable for cause, and terminable by Mr. Mealey for "good reason"
(as defined in the employment agreement) following a "change of control" (as
defined in the employment agreement). If terminated for "cause" (as defined in
the employment agreement), Mr. Mealey is not entitled to receive compensation or
benefits beyond that which have been earned or have vested on the date of
termination. If terminated by Mr. Mealey's death or disability, Mr. Mealey's
legal representatives or beneficiaries are entitled to receive continued
payments in an amount equal to 70% of his base salary in effect at the time of
his death or disability until the end of the term of the employment agreement or
for a period of 12 months, whichever is longer, plus a prorated amount of any
bonus payable under the employment agreement. In the event of the termination of
Mr. Mealey's employment without cause or upon termination of employment by Mr.
Mealey for "good reason" following a "change of control," Mr. Mealey is entitled
to payment of his unpaid base salary, plus a lump sum payment equal to three
times the sum of his base salary and bonuses. Further, all options granted to
Mr. Mealey vest and become fully exercisable and, at Mr. Mealey's option, can be
surrendered to us for cash in an amount equal to the fair market value of the
share of the our common stock minus the exercise price of the option times the
number of options surrendered. Mr. Mealey is also entitled to receive any and
all fringe benefits offered to our employees for a certain period of time. In
addition, if the benefit payments are subject to excise taxes, we are required
to pay Mr. Mealey an amount sufficient to cover such taxes.
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to
beneficial ownership of the our common stock as of April 11, 2003, to the extent
known to us, of each of our executive officers and directors, each person known
to us to be the beneficial owner of more than 5% of the outstanding shares of
any class of our stock, and all directors and officers as a group:
Name and Address of Person or Group Nature of Ownership Amount Percent(1)
- ----------------------------------- ------------------- ------ ----------
Principal Stockholders:
- -----------------------
Jay Mealey (2).............................. Common stock (3) 10,752,198 40.6%
Options 900,000 3.3
Shares issuable on conversion
of Series A Preferred, payment
of accrued dividends and
exercise of warrant (4) 20,454,464 43.6
----------
32,106,662 67.1%
Andrew W. Buffmire (2)...................... Common stock 4,689,620 17.7
Options 85,000 0.3
----------
4,774,620 18.0
Directors:
Jay Mealey.................................. ----------See above----------
Andrew W. Buffmire.......................... ----------See above----------
Alan L. Parker.............................. Common stock -- --
All Executive Officers and Directors as a
Group (3 persons):........................... Common Stock 15,441,818 58.3
Options (5) 1,052,500 3.8
Shares issuable on conversion
of Series A Preferred, payment
of accrued dividends and
exercise of warrant (4) 20,454,464 43.6
----------
36,948,782 77.0
==========
- ------------------------
(1) Based on 26,482,388 shares of our common stock issued and outstanding on
April 10, 2003. Under Rule 13d-3 of the Securities Exchange Act, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire the shares (for example, upon exercise of an option) within 60 days
of the date as of which the information is provided. In computing the
percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person
(and only such person) by reason of these acquisition rights. As a result,
the percentage of outstanding shares of any person as shown in this table
does not necessarily reflect the person's actual ownership or voting power
with respect to the number of shares of common stock actually outstanding.
Unless otherwise indicated, all securities are owned beneficially and of
record.
(2) The address for all principal stockholders is c/o Crown Energy Corporation,
1710 West 2600 South, Woods Cross, Utah 84087.
(3) Consists of 217,832 shares owned of record and beneficially by Mr. Mealey,
9,524,366 shares owned by the Mealey Family Partnership, 110,000 shares
owned by Mr. Mealey's brother, as custodian for Mr. Mealey's minor
children, and 900,000 shares owned for the benefit of Mr. Mealey's minor
children by a trust, of which Mr. Mealey is the trustee. Mr. Mealey is the
general partner of the Mealey Family Partnership and owns 48.5% of the
partnership, and members of his immediate family are the beneficiaries. Mr.
Mealey expressly disclaims beneficial ownership of the shares held by his
brother and mother. Furthermore, the options that are included within this
calculation may not be exercised unless specified trading prices are
realized for our common stock. As of the date hereof, such trading prices
have been not been met and there is no assurance that they will ever be met
during the terms of the options.
(4) The number reported constitutes the maximum issuable, based on our
authorized capitalization of 50,000,000 shares, with 26,482,388 shares
issued and outstanding and 3,063,148 shares reserved for issuance on the
exercise of outstanding options and warrants. The Mealey Family Limited
Partnership has the right to acquire common stock as follows: 4,285,000
shares issuable upon conversion of 500,000 shares of our Series A Preferred
Stock; 55,555,556 shares issuable at the election of the holder at the
market price of $0.018 per share as of March 28, 2003, in payment of $1.0
million of dividends accrued as of December 31, 2002 on the Series A
Preferred Stock; and 925,771 shares issuable on the exercise of warrants to
purchase shares at $0.002. Mr. Mealey and the Mealey Family Limited
Partnership, which he controls, own beneficially a sufficient number of
shares to amend our articles of incorporation to increase our authorized
capitalization, which would enable us to issue all 60,766,327 shares to
which the Mealey Family Limited Partnership would be entitled on conversion
of the Series A Preferred Stock, the payment of accrued dividends, and the
exercise of the warrant.
(5) Includes 67,500 shares underlying options held by an unnamed executive
officer to acquire common stock.
20
Change of Control Contracts
In November 1997, we entered into an employment agreement with Jay
Mealey that contains "change of control" provisions providing for the payment of
compensation and benefits upon our termination of Mr. Mealey's employment
without cause or termination by Mr. Mealey for "good reason" (as defined in that
agreement). The change of control terms of Mr. Mealey's contract are more fully
discussed above in "Item 11. Executive Compensation - Employment Contracts." The
employment agreement provides that upon a change of control as defined in the
employment agreement, that all options issued pursuant to the employment
agreement will automatically vest and all periods or conditions of restriction
will be deemed to have been completed or fulfilled, as the case may be.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1997, we sold to an unrelated third party for $5.0 million
in cash 500,000 shares of $10 Series A Cumulative Convertible Preferred Stock
and a warrant to purchase 925,771 shares at $0.002 per share. In February 2002,
the Series A Preferred Stock, the warrant, and all associated rights were
purchased from the original holder by Manhattan Goose, LLC, which was then owned
32.5% by Jay Mealey, our Chief Executive Officer, President and a director, and
67.5% by other directors and unrelated parties. During 2002, we paid accrued
dividends on the Series A Preferred Stock of $400,000 in cash and $200,000 in
13,793,103 shares of common stock, or at $0.0145 per share, the approximate
market price on the date of payment. In November 2002, Jay Mealey acquired the
other 67.5% membership interests in Manhattan Goose and simultaneously conveyed
all membership interests to the Mealey Family Limited Partnership, which is the
current holder of the Series A Preferred Stock, the warrant, all associated
rights, and accrued dividends. Mr. Mealey owns 48.5% of the Mealey Family
Limited Partnership and is its general partner and his immediate family is its
beneficiary. See Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
As of December 31, 2002, there were dividends payable to the holder of
the Series A Preferred Stock of $1.0 million that may, at the election of the
holder be taken in cash or common stock. At the market price of $0.018 per share
as of April 8, 2003, 55,555,555 shares of common stock would have to be issued
to satisfy the dividend payable. The Series A Preferred Stock is convertible to
4,285,000 shares of common stock, if so elected by the holder of the Series A
Preferred Stock.
We currently have an authorized capital of 50.0 million shares of
common stock, of which approximately 26.5 million shares are issued and
outstanding and approximately 3.1 million shares are reserved for issuance on
the exercise of outstanding options and warrants, for a total of approximately
29.6 million shares, excluding the shares issuable on conversion of the Series A
Preferred Stock, the payment of accrued dividends thereon, and exercise of the
warrant. Therefore, there are only approximately 20.4 million shares available
for issuance under the Series A Preferred Stock on conversion or the payment of
21
dividends or on exercise of the warrant. We have not undertaken to renegotiate
with the Mealey Family Limited Partnership any of the terms of the Series A
Preferred Stock or the warrant, do not know whether we will attempt to do so,
and have not analyzed our obligations or responsibilities if Mealey Family
Limited Partnership would elect to convert the Series A Preferred Stock, demand
payment of the dividends in common stock, or exercise the warrant.
In July 2002, Mr. Mealey surrendered all rights to 548,148 shares of
common stock that he had pledged as security for a $319,583 non-recourse
promissory note due us for the purchase of such shares on the exercise of an
option in 1998, and we cancelled the note.
ITEM 14. CONTROLS AND PROCEDURES
Disclosure controls are procedures that are designed with an objective
of ensuring that information required to be disclosed in our periodic reports
filed with the SEC, such as this Annual Report on Form 10-K, is recorded,
processed, summarized and reported within the time periods specified by the SEC.
Disclosure controls are also designed with an objective of ensuring that such
information is accumulated and communicated to our management, including the
Chief Executive Officer and Controller, who is our chief financial officer, in
order to allow timely consideration regarding required disclosures.
The evaluation of our disclosure controls by the Chief Executive
Officer and Controller included a review of the controls' objectives and design,
the operation of the controls, and the effect of the controls on the information
presented in this Annual Report. Our management, including the Chief Executive
Officer and Controller, does not expect that disclosure controls can or will
prevent or detect all errors and all fraud, if any. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Also, projections
of any evaluation of the disclosure controls and procedures to future periods
are subject to the risk that the disclosure controls and procedures may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Based on their review and evaluation as of a date within 90 days of the
filing of this Form 10-K, and subject to the inherent limitations all as
described above, our Chief Executive Officer and Controller have concluded that
our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14
under the Securities Exchange Act of 1934) are effective. They are not aware of
any significant changes in our disclosure controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
22
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report or
incorporated herein by reference.
(1) Financial Statements. See the following beginning at
page F-1:
Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 2002
and 2001 F-3
Consolidated Statements of Operations for each of the
Three Years Ended December 31, 2002, 2001 and 2000,
respectively F-4
Consolidated Statements of Cash Flows for each of the
Three Years Ended December 31, 2002, 2001 and 2000,
respectively F-5
Consolidated Statements of Stockholders' Equity
(Deficit) for each of the Three Years Ended
December 31, 2002, 2001 and 2000, respectively F-6
Notes to the Consolidated Financial Statements F-7
(2) Supplemental Schedules. The financial statement schedules have been
omitted because they are not applicable or the required information is
otherwise included in the accompanying financial statements and the
notes thereto.
(3) Exhibits. The following exhibits are included as part of this
report:
23
SEC
Exhibit Reference
Number Number Title of Document Location
- -------------------------------------------------------------------------------------------------------------------
Item 3 Articles of Incorporation and Bylaws
- --------------------------------------------------------------------------------------------- ---------------------
3.01 3 Articles of Incorporation Incorporated by
reference (1)
3.02 3 Certificate of the Voting Powers, Designations, Preferences Incorporated by
and Relative, Participating, Optional or other Special Rights, reference (2)
and Qualifications, Limitations and Restrictions Thereof, of
Series A Cumulative Convertible Preferred Stock of Crown
Energy Corporation
3.03 3 Amended Bylaws Incorporated by
reference (3)
Instruments Defining the
Item 4 Rights of Security Holders, Including Indentures
- --------------------------------------------------------------------------------------------- ---------------------
4.01 4 Convertible Debenture Agreement dated May 6, 1997, between Incorporated by
Crown Energy Corporation and Oriental New Investments, Ltd. reference (4)
4.02 4 Form of Stock Option Agreements between Crown Energy Incorporated by
Corporation and (1) Jay Mealey, (2) Richard Rawdin, and (3) reference (5)
Thomas Bachtell
4.03 4 The Crown Energy Long Term Equity-Based Incentive Plan Incorporated by
reference (6)
4.04 4 Common Stock Purchase Warrant dated November 4, 1997, issued Incorporated by
to Enron Capital & Trade Resources Corp. reference (2)
4.05 4 May 1998 Warrant issued to Ladenburg Thalmann & Co., Inc. Incorporated by
reference (7)
Item 10 Material Contracts
- --------------------------------------------------------------------------------------------- ---------------------
10.01 10 Employment Agreement with Jay Mealey Incorporated by
reference (5)
10.02 10 Revised Right of Co-Sale Agreement between Jay Mealey and Incorporated by
Enron Capital & Trade Resources Corp. reference (8)
10.03 10 Lease Agreement dated June 6, 1996, between Petro Source Incorporated by
Refining Corporation and PacifiCorp (which was assigned to the reference (9)
Company on or about July 2, 1998)
10.04 10 Operating Agreement for Cowboy Asphalt Distribution L.L.C. Incorporated by
reference (7)
10.05 10 April 3, 1998, Agreement regarding Investment Banking Services Incorporated by
with Ladenburg Thalmann & Co., Inc. reference (7)
24
SEC
Exhibit Reference
Number Number Title of Document Location
- -------------------------------------------------------------------------------------------------------------------
10.06 10 Indemnification Agreement with Ladenburg Thalmann & Co., Inc. Incorporated by
reference (7)
10.07 10 $1,800,000 Loan Agreement: Community First National Bank to Incorporated by
Crown Asphalt Products Company reference (10)
10.08 10 Letter Amendment to Loan Agreement with Community First Incorporated by
National Bank dated June 2, 1999 reference (10)
10.09 10 Guaranty of Community First National Bank Loan by Crown Energy Incorporated by
Corporation reference (10)
10.10 10 Assignment & Assumption Agreement (Off Site Services Agreement) Incorporated by
reference (10)
10.11 10 First Amendment to Employment Agreement with Jay Mealey Incorporated by
reference (10)
10.12 10 Settlement Agreement among Crown Energy Corporation, MCNIC and This filing
related parties
10.13 10 Lease Agreement with Frontier Grand Island, L.L.C. This filing
10.14 10 Asset Sale Agreement with Fruita Marketing and Management, Inc. This filing
10.15 10 Extension to Lease Agreement with Frontier Grand Island L.L.C. This filing
Item 21 Subsidiaries of the Company
- --------------------------------------------------------------------------------------------- ---------------------
21.01 21 List of subsidiaries This filing
Item 99 Additional Exhibits
- --------------------------------------------------------------------------------------------- ---------------------
99.01 99 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted This filing
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
99.02 99 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted This filing
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
- -----------------------
(1) Incorporated by reference from the Registration Statement on Form S-1 filed
March 13, 1996.
(2) Incorporated by reference from Enron Capital & Trade Resources Corp. Form
13D filed October 10, 1997.
(3) Incorporated by reference from the Registration Statement on Form 10 filed
July 1, 1991, amended August 30, 1991.
(4) Incorporated by reference from the Current Report on Form 8-K filed June
12, 1997.
(5) Incorporated by reference from the Annual Report on Form 10-K for the year
ended December 31, 1997, filed March 31, 1998.
(6) Incorporated by reference from the Amended Annual Report on Form 10-K for
the year ended December 31, 1997, filed April 30, 1998.
(7) Incorporated by reference from the Annual Report on Form 10-K for the year
ended December 31, 1998, filed June 14, 1999.
(8) Incorporated by reference from Enron Capital & Trade Resources Corp. Form
13D/A filed November 12, 1997.
(9) Incorporated by reference from the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, filed November 25, 1998.
(10) Incorporated by reference from the Annual Report on Form 10-K for the year
ended December 31, 1999, filed April 4, 2000.
25
We agree to furnish supplementally to the SEC a copy of any omitted schedule or
exhibit to such agreement upon request by the SEC.
(b) Reports on Form 8-K: We filed the following report on Form 8-K for
the quarter ended December 31, 2002:
Date of Event Reported Item(s) Reported
------------------------ ------------------------
October 16, 2002 Item 5. Other Events
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CROWN ENERGY CORPORATION
Date: April 15, 2003 By /s/ Jay Mealey
-------------------------------
Jay Mealey
Its Principal Executive Officer
Date: April 15, 2003 By /s/ Alan L. Parker,
-------------------------------
Alan L. Parker,
Its Principal Financial Officer
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.
Dated: April 15, 2003 /s/ Jay Mealey
-------------------------------
Jay Mealey, Director
/s/ Alan L. Parker
-------------------------------
Alan L. Parker, Director
/s/ Andrew W. Buffmire
-------------------------------
Andrew W. Buffmire, Director
26
CERTIFICATION
I, Jay Mealey, certify that:
1. I have reviewed this annual report on Form 10-K of Crown Energy
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ Jay Mealey
- ---------------------------
Jay Mealey
Principal Executive Officer
27
CERTIFICATION
I, Alan L. Parker, certify that:
1. I have reviewed this annual report on Form 10-K of Crown Energy
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ Alan L. Parker
- ---------------------------
Alan L. Parker
Principal Financial Officer
28
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, 2002 and 2001, and the consolidated statements of operations,
stockholders' deficit and cash flows for the years ended December 31, 2002,
2001, and 2000. 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, 2002 and 2001, and the results of its
operations and its cash flows for the years ended December 31, 2002, 2001, and
2000, 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, has a working capital deficit, 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.
TANNER + CO.
Salt Lake City, Utah
February 18, 2003
- --------------------------------------------------------------------------------
F-2
CROWN ENERGY CORPORATION
Consolidated Balance Sheet
December 31,
- ------------------------------------------------------------------------------------------------------------
Assets 2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 2,723,068 $ 2,652,858
Accounts receivable, net of allowance for doubtful accounts
of $175,927 and $1,722,482, respectively 539,214 1,378,610
Inventory 604,106 1,358,022
Prepaid and other current assets 143,977 87,652
Related party receivable - 25,700
------------ ------------
Total current assets 4,010,365 5,502,842
Property, plant, and equipment, net 8,949,032 9,590,787
Intangible assets, net 25,000 340,430
Other assets 290,399 283,206
------------ ------------
Total $ 13,274,796 $ 15,717,265
============ ============
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,349,242 $ 410,564
Preferred stock dividends payable 1,000,000 1,200,000
Accrued expenses 192,878 175,794
Accrued arbitration costs - 2,609,519
Accrued interest 224,508 7,473,512
Current portion of long-term debt 423,585 347,153
Working capital loan to related party - 14,935,222
------------ ------------
Total current liabilities 4,190,213 27,151,764
Long-term debt 2,442,673 11,130,056
------------ ------------
Total liabilities 6,632,886 38,281,820
------------ ------------
Commitments and contingencies
Redeemable preferred stock 5,000,000 4,952,831
Minority interest in consolidated joint ventures 507,575 476,793
Stockholders' equity:
Common stock, $.02 par value, 50,000,000 shares authorized
26,482,388 and 13,635,581 shares issued and outstanding,
respectively 529,647 272,711
Additional paid-in capital 3,919,417 4,972,688
Stock subscriptions receivable from officers - (549,166)
Stock warrants 186,256 186,256
Accumulated deficit (3,500,985) (32,876,668)
------------ ------------
Total stockholders' equity 1,134,335 (27,994,179)
------------ ------------
Total $ 13,274,796 $ 15,717,265
============ ============
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-3
CROWN ENERGY CORPORATION
Consolidated Statement of Operations
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Sales, net $ 17,964,675 $ 27,032,658 $ 22,787,103
Cost of goods sold 17,497,665 24,126,190 23,605,063
------------ ------------ ------------
Gross profit (loss) 467,010 2,906,468 (817,960)
General and administrative expenses (2,676,325) (3,449,053) (3,060,627)
Recovery of (provision for) bad debt expenses 1,646,531 (30,051) (1,529,896)
Loss on impairment of investment in equity affiliate - - (6,904,085)
Loss on impairment of property and equipment (544,639)
Loss on impairment of goodwill (265,430) - (3,625,848)
Equity in losses from unconsolidated equity affiliate - - (145,814)
------------ ------------ ------------
Loss from operations (1,372,853) (572,636) (16,084,230)
------------ ------------ ------------
Other income (expense):
Interest income 16,718 65,857 157,042
Interest expense (2,404,563) (4,018,738) (2,576,386)
Gain on transfer of interest in unconsolidated affilate 2,998,175 - -
Other (expense) income (50,612) 598,247 104,000
Arbitration expense - (2,609,519) -
------------ ------------ ------------
Total other income (expense), net 559,718 (5,964,153) (2,315,344)
------------ ------------ ------------
Loss before provision for income taxes
minority interests and extraordinary gain (813,135) (6,536,789) (18,399,574)
Income tax benefit - - -
Minority Interest in losses of consolidated joint venture 44,094 48,808 38,653
------------ ------------ ------------
Loss before extraordinary gain (769,041) (6,487,981) (18,360,921)
Extraordinary gain on extinquishment of debt 30,144,724 - -
------------ ------------ ------------
Net Income (loss) 29,375,683 (6,487,981) (18,360,921)
Redeemable preferred stock dividends (400,000) (400,000) (400,000)
------------ ------------ ------------
Net Income (loss) applicable to common shares $ 28,975,683 $ (6,887,981) $(18,760,921)
============ ============ ============
Loss per common share before extraordinary item -
basic and diluted $ (0.05) $ (0.51) $ (1.39)
============ ============ ============
Extraordinary gain on extinquishment of debt -
basic and diluted $ 1.19 $ - $ -
============ ============ ============
Net income (loss) per common share - basic and diluted $ 1.14 $ (0.51) $ (1.39)
============ ============ ============
Weighted average common shares - basic and diluted 25,436,000 13,635,000 13,455,000
============ ============ ============
- -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-4
CROWN ENERGY CORPORATION
Consolidated Statement of Stockholders' Deficit
Years Ended December 31, 2002, 2001, and 2000
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Stock Common Stock Warrants
---------------------- Paid-in Subscription --------------------- Accumulated
Shares Amount Capital Receivable Warrants Amount Deficit
---------- --------- ----------- ---------- --------- --------- ------------
Balance, January 1, 2000 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) - - - -
Expiration of warrants - - 57,318 - (283,750) (57,318) -
Net loss - - - - - - (18,360,921)
---------- --------- ----------- ---------- --------- --------- ------------
Balance, December 31, 2000 13,635,581 272,711 5,429,292 (549,166) 400,000 186,256 (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 4,972,688 (549,166) 400,000 186,256 (32,876,668)
Shares issued as dividend payments 13,793,103 275,862 (75,862) - - - -
Preferred stock accretion - - (47,169) - - - -
Dividends on preferred stock - - (400,000) - - - -
Write-off of stock subscription
receivable (946,296) (18,926) (530,240) 549,166 - - -
Net income - - - - - - 29,375,683
---------- --------- ----------- ---------- --------- --------- ------------
Balance, December 31, 2002 26,482,388 $ 529,647 $ 3,919,417 $ - $ 400,000 $ 186,256 $ (3,500,985)
========== ========= =========== ========== ========= ========= ============
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5
CROWN ENERGY CORPORATION
Consolidated Statement of Cash Flows
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------- ------------ --------------
Cash flows from operating activities:
Net income (loss) $ 29,375,683 $ (6,487,981) $ (18,360,921)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation, depletion, and amortization 783,666 763,607 903,864
(Recovery of) provision for doubtful accounts receivable (1,546,555) (105,414) 1,529,896
Stock issued for services - - 43,750
Extraordinary gain on extinquishment of debt (30,144,724) - -
Gain on settlement of liabilities in connection
with transfer of interest in unconsolidated subsidiary (2,998,175) - -
Impairment on investment in equity affiliate - - 6,904,085
Impairment on property and equipment 544,639
Impairment of goodwill 265,430 - 3,625,848
Equity in losses of unconsolidated joint venture, net of
distributions to minority interest shareholders - - 145,814
Minority interest in losses of consolidated joint venture,
net of distributions to minority initerest shareholders 30,782 48,808 126,286
Loss on disposal of equipment 50,612 - -
Changes in operating assets and liabilities:
Accounts receivable 2,239,170 146,064 2,237,169
Inventory 753,916 1,012,865 (237,021)
Prepaid and other current assets (56,325) (20,045) (32,025)
Related party receivable 25,700 - (25,700)
Other assets (7,193) (58,197) (161,241)
Accounts payable 1,938,678 (906,658) 184,971
Accrued interest 2,199,743 3,486,256 1,999,140
Accrued arbitration expense - 2,609,519 -
Accrued expenses 17,084 48,428 (166,510)
------------- ------------ --------------
Net cash provided by (used in) operating activities 3,472,131 537,252 (1,282,595)
------------- ------------ --------------
Cash flows from investing activities:
Purchase of property, plant, and equipment (640,385) (442,212) (729,477)
Investment in and advances to
unconsolidated subsidiary - - 64,377
------------- ------------ --------------
Net cash used in investing activities (640,385) (442,212) (665,100)
------------- ------------ --------------
Cash flows from financing activities:
Cash paid for purchase of interest in subsidiary (2,000,000) - -
Payments on long-term debt (361,536) (320,323) (153,141)
Payment of dividends (400,000) - -
------------- ------------ --------------
Net cash used in financing activities (2,761,536) (320,323) (153,141)
------------- ------------ --------------
Net change in cash and cash equivalents 70,210 (225,283) (2,100,836)
Cash and cash equivalents at beginning of year 2,652,858 2,878,141 4,978,977
------------- ------------ --------------
Cash and cash equivalents at end of year $ 2,723,068 $ 2,652,858 $ 2,878,141
============= ============ ==============
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-6
CROWN ENERGY CORPORATION
Consolidated Statement of Cash Flows
Continued
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 411,038 $ 555,330 $ 587,783
============= ============ ==============
Cash paid for income taxes $ - $ - $ -
============= ============ ==============
Supplemental disclosure of non-cash investing and financing activities:
During the year ended December 31, 2002:
o The Company issued 13,793,103 shares of common stock totaling
a value of $200,000 as a dividend distribution to preferred
stockholders which effectively reduced additional paid in
capital by $75,862 because the estimated fair value was below
par.
o The Company incurred long-term debt of $46,777 in connection
with the acquisition of vehicles.
o The Company received 946,296 shares of common stock for a
write-off of subscriptions receivable of $549,166.
o The Company entered into a settlement agreement with MCNIC
Pipeline and Processing Company (MCNIC) in which Crown assumed
MCNIC's interest in Crown Asphalt Distribution, L.L.C in
exchange for $2,000,000 and $146,781 of receivables. In
connection with the settlement, MCNIC effectively forgave debt
of $20,260,945, accrued interest due of $9,421,041, and
$2,609,519 of accrued legal fees due (see note 3 and 16). This
resulted in an extraordinary gain of $30,144,724.
o The Company increased preferred stock and decreased additional
paid-in capital for $47,169 related to preferred stock
accretion.
o The Company entered into a dispute settlement agreement with
MCNIC, in which MCNIC assumed debt of $2,970,469 and accrued
interest of $27,707 in exchange for Crown's 25% interest in
Crown Asphalt Ridge L.L.C. (see note 3 and 16).
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-7
CROWN ENERGY CORPORATION
Consolidated Statement of Cash Flows
Continued
- --------------------------------------------------------------------------------
During 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, and increased preferred stock and decreased
additional paid-in capital for $56,604 related to preferred
stock accretion.
During 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, and increased preferred stock and decreased
additional paid-in capital for $56,604 related to preferred
stock accretion.
- --------------------------------------------------------------------------------
F-8
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
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
production, distribution, and selling of asphalt
products.
Majority-Owned Subsidiaries
CAPCO is the majority-owner of Crown Asphalt
Distribution, LLC (Crown Distribution). Crown
Distribution was a joint venture formed on July 2,
1998, between CAPCO and MCNIC Pipeline and Processing
Company (MCNIC) for the purpose of asphalt production
and distribution. On October 16, 2002, the Company
entered into a settlement agreement with MCNIC (see
note 15), to release itself from obligations to
MCNIC. As a result of the settlement MCNIC
transferred its 49.99% interest to CAPCO (48.99%) and
CEC (1%), thus making Crown Distribution a
wholly-owned subsidiary of the Company.
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.
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.
- --------------------------------------------------------------------------------
F-9
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization The CAT LLC Operating Agreement also obligates Crown
Continued 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.
Principles of Consolidation
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, 2002,
the Company had a 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. 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.
- --------------------------------------------------------------------------------
F-10
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Going Concern - Continued
Accounting The Company's ability to continue as a going concern
Policies is subject to the attainment of profitable operations
Continued or obtaining necessary funding from outside sources
to fund its cash flow requirements to purchase
inventory. Management is attempting to secure
financing for inventory purchases with inventory
suppliers or other financing institutions. There can
be no assurance that the Company will be successful
in its attempts to obtain financing for its inventory
purchases. In addition, management is continuing its
plans to reduce overhead and other costs. Management
is also considering consolidation of manufacturing
facilities to maximize operating efficiency and
margins on product sales. However, there can be no
assurance that management will be successful in these
efforts.
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.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost
and are depreciated over the estimated useful lives
of the related assets. Depreciation is computed using
the straight-line method for financial reporting
purposes. The estimated useful lives of property,
plant, and equipment are as follows:
Plant and improvements and tankage 10-30 years
Equipment 7 years
Vehicles 5 years
Computer equipment, furniture,
and fixtures 3 years
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.
- --------------------------------------------------------------------------------
F-11
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Income Taxes
Accounting Income taxes are determined using the asset and
Policies liability method, which requires recognition of
Continued 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.
Concentration of Credit Risk
Financial instruments which potentially subject the
Company to concentration of credit risk consist
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 3,988,919,
3,163,148, and 3,463,148, shares of common stock at
prices ranging from $.10 to $2.50 per share were
outstanding at December 31, 2002, 2001, and 2000,
respectively, but were not included in the diluted
loss per share calculation because the effect would
have been antidilutive.
- --------------------------------------------------------------------------------
F-12
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Use of Estimates in Preparing Financial Statements
Accounting The preparation of financial statements in conformity
Policies with generally accepted accounting principles
Continued 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.
Long-Lived Assets
The Company evaluates the carrying value of long-term
assets including intangibles based on current and
anticipated undiscounted cash flows or current
appraisals of such assets and recognizes impairment
when such cash flows or appraised values are 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 and 2000, goodwill was amortized
using the straight-line method over 20 years. After
December 31, 2001 goodwill was no longer amortized
but has been evaluated, 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.
- --------------------------------------------------------------------------------
F-13
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Goodwill and Intangible Assets - Continued
Accounting The following table reflects a comparison of net
Policies income and net income per share for each of the three
Continued years ended December 31, adjusted to give effect to
the adoption of SFAS 142:
2002 2001 2000
-------------- ------------- --------------
Reported net income (loss)
applicable to common
shareholders $ 28,975,683 $ (6,887,981) $ (18,760,921)
Add-back goodwill
amortization, net of taxes - 13,970 222,431
-------------- ------------- --------------
Adjusted net Income (loss)
applicable to common
shareholders $ 28,975,683 $ (6,874,011) $ (18,538,490)
============== ============= ==============
Reported earnings per share -
basic and diluted $ 1.14 $ (.51) $ (1.39)
Add-back goodwill amortization - .01 .01
-------------- ------------- --------------
Adjusted earnings per share -
basic and diluted $ 1.14 $ (.50) $ (1.38)
============== ============= ==============
The changes in the carrying amount of goodwill during
the year ended December 31, 2002 are as follows:
Balance as of December 31, 2001 $ 304,800
Goodwill acquired during the year -
Adjustments to goodwill (304,800)
-----------
Balance as of December 31, 2002 $ -
===========
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.
- --------------------------------------------------------------------------------
F-14
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Environmental Expenditures
Accounting Environmental related restoration and remediation
Policies costs are recorded as liabilities when site
Continued 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.
Recent Accounting Pronouncements
In June 2001, the FASB 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 statements
issued for fiscal years beginning after June 15,
2002. This Statement addresses financial accounting
and reporting for the disposal of long-lived assets.
The Company is currently assessing the impact of this
statement.
In April 2002, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This
statement requires the classification of gains or
losses from the extinguishments of debt to meet the
criteria of Accounting Principles Board Opinion No.
30 before they can be classified as extraordinary in
the income statement. As a result, companies that use
debt extinguishment as part of their risk management
cannot classify the gain or loss from that
extinguishment as extraordinary. The statement also
requires sale-leaseback accounting for certain lease
modifications that have economic effects similar to
sale-leaseback transactions. The Company does not
expect Adoption of SFAS No. 145 did have a material
impact on financial position or future operations.
- --------------------------------------------------------------------------------
F-15
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Recent Accounting Pronouncements - Continued
Accounting In June 2002, the FASB issued SFAS No. 146,
Policies "Accounting for Costs Associated with Exit or
Continued Disposal Activities." This standard, which is
effective for exit or disposal activities initiated
after December 31, 2002, provides new guidance on the
recognition, measurement and reporting of costs
associated with these activities. The standard
requires companies to recognize costs associated with
exit or disposal activities when they are incurred
rather than at the date the company commits to an
exit or disposal plan. The adoption of SFAS No. 146
by the Company is not expected to have a material
impact on the Company's financial position or future
operations.
In December 2002, the FASB issued SFAS No. 148
"Accounting for Stock-Based Compensation--Transition
and Disclosure--an amendment of FASB Statement No.
123," which is effective for all fiscal years ending
after December 15, 2002. SFAS No. 148 provides
alternative methods of transition for a voluntary
change to the fair value based method of accounting
for stock-based employee compensation under SFAS No.
123 from the intrinsic value based method of
accounting prescribed by Accounting Principles Board
Opinion No. 25. SFAS 128 also changes the disclosure
requirements of SFAS 123, requiring a more prominent
disclosure of the pro-forma effect of the fair value
based method of accounting for stock-based
compensation. The adoption of SFAS No. 148 by the
Company did not have a material impact on the
Company's financial position or future operations.
- --------------------------------------------------------------------------------
F-16
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Recent Accounting Pronouncements - Continued
Accounting In January 2003, the Financial Accounting Standards
Policies Board (FASB) issued Interpretation No. 46,
Continued Consolidation of Variable Interest Ethics (FIN No.
46), which addresses consolidation by business
enterprises of variable interest entities. FIN No. 46
clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements,
to certain entities in which equity investors do not
have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for
the entity to finance its activities without
additional subordinated financial support from other
parties. FIN No. 46 applies immediately to variable
interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise
obtains an interest after that date. It applies in
the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company does
not expect to identify any variable interest entities
that must be consolidated. In the event a variable
interest entity is identified, the Company does not
expect the requirements of FIN No. 46 to have a
material impact on its financial condition or results
of operations.
In November 2002, the FASB issued Interpretation No.
45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN No. 45).
FIN No. 45 requires certain guarantees to be recorded
at fair value, which is different from current
practice to record a liability only when a loss is
probable and reasonably estimable, as those terms are
defined in FASB Statement No. 5, Accounting for
Contingencies. FIN No. 45 also requires the Company
to make significant new disclosures about guarantees.
The disclosure requirements of FIN No. 45 are
effective for the Company in the first quarter of
fiscal year 2003. FIN No. 45's initial recognition
and initial measurement provisions are applicable on
a prospective basis to guarantees issued or modified
after December 31, 2002. The Company's previous
accounting for guarantees issued prior to the date of
the initial application of FIN No. 45 will not be
revised or restated to reflect the provisions of FIN
No 45. The Company does not expect the adoption of
FIN No. 45 to have a material impact on its
consolidated financial position, results of
operations or cash flows.
- --------------------------------------------------------------------------------
F-17
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Stock-Based Compensation
Accounting The Company accounts for stock options granted to
Policies employees under the recognition and measurement
Continued principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related
Interpretations, and has adopted the disclosure-only
provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has
been recognized in the financial statements, as all
options granted under those plans had an exercise
price equal to or greater than the market value of
the underlying common stock on the date of grant. Had
the Company's options 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,
-----------------------------------------------
2002 2001 2000
------------- ------------ -------------
Net income (loss) - as reported $ 28,975,683 $ (6,487,981) $ (18,360,921)
Deduct total stock based employee
compensation expense determined under
fair value based method for all
awards, net of related taxes (63,935) (103,525) (123,061)
------------- ------------ -------------
Net loss - pro forma $ 28,911,748 $ (6,591,506) $ (18,483,982)
============= ============ =============
Diluted income (loss) per share - as
reported $ 1.14 $ (.48) $ (1.36)
============= ============ =============
Diluted income (loss) per share - pro
forma $ 1.14 $ (.49) $ (1.37)
============= ============ =============
The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option
pricing model with the following assumptions:
2000
Expected dividend yield $ -
Expected stock price volatility 73%
Risk-free interest rate 5.75%
Expected life of options 4 years
------------
No options were granted in 2002 or 2001. The weighted
average fair value of options and warrants granted
during 2000 were $.10.
- --------------------------------------------------------------------------------
F-18
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Reclassifications
Accounting Certain amounts in the 2001 and 2000 consolidated
Policies financial statements have been reclassified to
Continued conform with classifications adopted in the current
year.
3. Settlement Crown Distribution
of MCNIC As of December 31, 2001, Crown Distribution owed
Obligations amounts as follows to its 49.99% owner, MCNIC:
o Working capital loan in the amount of
$14,935,222, classified as "Working capital
loan to related party" in the balance sheet
o Accrued interest on the working capital loan
of $4,884,401, included in "Accrued
interest" in the balance sheet
o Preferential loan in the amount of
$5,325,723, included in "Long-term debt" in
the balance sheet
o Accrued interest on such preferential debt
of $2,429,405, included in "Accrued
interest" in the balance sheet
During 2001, pursuant to an arbitration judgment (see
note 16), the debts owed to MCNIC were determined to
be in default. The default on the working capital
loan resulted in a default interest rate of 18%
retroactively from December 31, 1999, compounded
annually, on $5,810,581 of the outstanding amount,
and an interest rate of 8% on the remaining balance
of $9,124,641. The preferential debt continued to
accrue interest at 15%. As part of the arbitration
judgment, an additional $2,609,519 in fees and costs
was awarded to MCNIC.
In March 2002, the Company entered into a settlement
agreement with MCNIC (see note 16), in which the
Company obtained the option to purchase all of
MCNIC's rights, title and interests in Crown
Distribution (including its right to above-mentioned
award rendered in the arbitration judgment), in
exchange for $5.5 million.
- --------------------------------------------------------------------------------
F-19
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Settlement Crown Distribution - Continued
of MCNIC The Company was unable to pay the purchase price of
Obligations $5.5 million and therefore entered into additional
Continued settlement discussions with MCNIC. In October 2002,
the Company reached a final settlement agreement with
MCNIC (see note 16) in which CAPCO purchased MCNIC's
interest in CAD in exchange for $2 million,
receivables of $146,781, and CAC's 1% overriding
royalty in Crown Ridge. As part of the settlement,
MCNIC released its rights to all debt due to MCNIC,
including the working capital loan of $14,935,222,
related interest on the working capital loan of
$6,359,115, the preferential debt of $5,325,723,
accrued interest on the preferential debt of
$3,061,926, and legal fees and costs of $2,609,519.
Therefore, the balance at December 31, 2002 of the
working capital loan, accrued interest on the working
capital loan, the preferential debt, accrued interest
on the preferential debt, and the accrued amounts for
the above mentioned fees and costs were $0. The gain
associated with this settlement of $30,144,724,
calculated as the difference between the liabilities
settled and the value paid was recorded as an
extraordinary gain on extinguishment of debt.
Crown Ridge
As of December 31, 2001, CAC, a wholly-owned
subsidiary, owed MCNIC, in the form of a note
payable, $2,970,469. As part of the above-mentioned
March 2002 settlement, the Company, through its CAC
subsidiary, transferred its ownership in Crown Ridge
to MCNIC in exchange for MCNIC's assumption of
certain liabilities, including $2,998,175 of the debt
and related interest owed by CAC to MCNIC, and a 1%
overriding royalty interest in the sales proceeds
received by Crown Ridge. In connection with this
settlement, the Company recognized a gain on the
transfer of its ownership in Crown Ridge, which had a
book basis of $0, of $2,998,175.
- --------------------------------------------------------------------------------
F-20
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Property, The following is a summary of property, plant, and
Plant and equipment as of December 31:
Equipment
2002 2001
------------- -------------
Land $ 1,000,000 $ 1,000,000
Plant and improvements
and tankage 9,762,598 9,978,423
Computer equipment,
furniture, and fixtures 391,386 441,013
Vehicles 29,148 29,148
------------- -------------
Total property, plant,
and equipment 11,183,132 11,448,584
Less accumulated
depreciation (2,234,100) (1,857,797)
------------- -------------
Total $ 8,949,032 $ 9,590,787
============= =============
5. 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 Asphalt Ridge, L.L.C. ("Crown
Ridge"). MCNIC and the Company initially owned
interests of 75% and 25%, respectively, in the
profits and losses of Crown Ridge.
During the year ended December 31, 2000, the Company
evaluated the carrying value of its investments in
and advances to Crown Ridge and determined that its
investment in and advances to Crown Ridge were
impaired. Accordingly, an aggregate non-cash expense
for the impairment of $6,904,085 was recorded.
In March 2002, in accordance with a settlement
agreement entered into by CAC with MCNIC (see notes 3
and 16), CAC transferred its interest in Crown Ridge
to MCNIC in exchange for MCNIC's assumption of
certain liabilities of CAC. In connection with this
transaction, the Company recorded a gain of
$2,998,175.
- --------------------------------------------------------------------------------
F-21
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Losses The Company's former 25% equity in the net loss of
From Equity Crown Ridge plus amortization of excess of investment
Affiliate over the Company's equity in net assets is reported
in the accompanying consolidated statement of
operations as follows:
2002 2001 2000
------------ -------------- -----------
Equity in losses of
unconsolidated equity
affiliate $ - $ - $ (145,814)
Amortization of excess
investment included in
general and administrative
expense - - (60,644)
------------ -------------- -----------
Total $ - $ - $ (206,458)
============ ============== ===========
As disclosed in note 5, during the year ended
December 31, 2000, the Company's investment in and
advances to Crown Ridge was reduced to $0 through an
impairment of $6,904,085.
7. Intangibles Intangible assets consist of the following:
December 31,
------------------------------------
2002 2001
------------ --------------
Goodwill $ - $ 304,800
Non-compete agreement 250,000 250,000
Accumulated amortization (225,000) (150,400)
------------ --------------
$ 25,000 $ 404,400
============ ==============
- --------------------------------------------------------------------------------
F-22
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Intangibles At December 31, 2000, the Company re-assessed the
Continued recoverability of goodwill associated with the Petro
Source acquisition. Due to litigation with MCNIC, the
Company had been unable to secure financing needed to
build up inventory at favorable prices. This lack of
funding and the ongoing dispute with MCNIC resulted
in losses from operations. Because of these
circumstances the Company recognized an impairment of
$3,625,848 in the statement of operations for the
year ended December 31, 2000.
At December 31, 2002 the Company re-assessed the
recoverability of goodwill associated with its
Rawlins facility. Based on a current appraisal of
the facility based on an income approach, the Company
determined that the goodwill was not recoverable and
recorded an impairment loss of $265,430.
8. Long-term Long-term debt consists of the following at
Debt December 31:
2002 2001
------------- -------------
Note payable with interest at prime plus 1% (5.25%
at December 31, 2002) to a bank, in monthly
principal and interest payments until the debt
matures in May 2014, secured by assets at Rawlins
Terminal. $ 1,644,377 $ 1,742,406
Note payable to a company with interest at 9%,
payable in 84 equal monthly principal and interest
installments of $20,627, maturing January 1, 2006,
secured by assets at the Cowboy Terminal Facility. 664,308 843,208
Deferred purchase price on Rawlins Terminal
acquisition with interest at the LIBOR rate (1.38%
at December 31, 2002), 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
Note payable 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, maturing in November 2010, secured by
property and equipment 224,405 244,134
- --------------------------------------------------------------------------------
F-23
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Long-term Note payable with interest at 9.59% to a bank, due
Debt in monthly principal and interest payments until
Continued the debt matures in June 2007, secured by assets at
the Cowboy Terminal 21,603 -
Preferential debt to MCNIC with interest at 15%,
annual principal and interest installments equal to
50% of the net cash flows (as defined) of Crown
Distribution, secured by all of the assets of Crown
Distribution. This debt was forgiven in connection
with a settlement agreement (see notes 3 and 16) - 5,325,723
Note payable to MCNIC with interest at prime plus
1%, in monthly principal and interest payments
until the debt matures July 2014, secured by an
interest in Crown Ridge resulting from the loan
proceeds. This debt was forgiven in connection with
a settlement agreement (see note 4) - 2,970,469
Capital leases (see note 9) 86,565 126,269
------------- -------------
Total (2,866,258) (11,477,209)
Less estimated current portion (423,585) (347,153)
------------- -------------
Long-term portion $ (2,442,673) $ (11,130,056)
============= =============
The schedule maturities of long-term debt at December
31, 2002 are as follows:
Year Ending December 31:
------------------------
2003 $ 423,585
2004 368,167
2005 385,193
2006 177,071
2007 141,026
Thereafter 1,371,216
--------------
Total $ 2,866,258
==============
- --------------------------------------------------------------------------------
F-24
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. 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 $211,000 and $187,000 and accumulated
amortization of approximately $57,000 and $27,000 at
December 31, 2002 and 2001, respectively.
Amortization expense for the equipment under capital
lease for the years ended December 31, 2002, 2001,
and 2000 was approximately $30,000, $27,000, and $0,
respectively. Future minimum payments on the capital
lease obligations are as follows:
Year Ending December 31:
------------------------
2003 $ 69,152
2004 16,676
2005 4,266
--------------
90,094
Less amount representing
interest (3,529)
--------------
Present value of future minimum
capital lease payments $ 86,565
==============
10. 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, 2002 are as follows:
Year Ending December 31:
2003 $ 410,206
2004 283,341
2005 60,000
2006 9,000
Thereafter -
--------------
Total $ 762,547
==============
- --------------------------------------------------------------------------------
F-25
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Operating Lease expense for the years ended December 31, 2002,
Leases 2001, and 2000 totaled $782,332, $1,046,000, and
Continued $1,129,000 respectively.
11. 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 $47,169, $56,604 and $56,604
for the years ended December 31, 2002, 2001, and
2000, respectively, toward the stated and liquidation
value of $5,000,000. At December 31, 2002, and 2001
the redeemable preferred stock had a balance of
$5,000,000 and $4,952,831, 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. The Series A
Preferred shares were sold to an entity majority -
owned and controlled by the Company's CEO. 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. During 2002, the Company paid dividends of
$400,000 in cash and $200,000 in common stock to an
entity controlled by the Company's CEO. At December
31, 2002 and 2001 the Company owed $1,000,000 and
$1,200,000, 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-26
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. 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 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.
12. 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-27
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Stock A summary of the stock option and warrant activity
Options for fiscal years 2002, 2001, and and 2000 is as
Warrants follows:
Continued
Options Warrants
------------------------ ------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
--------- --------- ---------- ------------
Outstanding at January 1, 2000 2,228,148 $ .88 683,750 $ 1.48
Granted 1,040,000 .13 - -
Forfeited (205,000) 1.13 (283,750) .84
--------- --------- ---------- ------------
Outstanding at December 31, 2000 3,063,148 .88 400,000 1.94
Granted - - - -
Forfeited (300,000) 1.05 - -
--------- --------- ---------- ------------
Outstanding at December 31, 2001 2,763,148 .33 400,000 1.94
Granted - - 925,771 .002
Forfeited (100,000) 1.00 - -
--------- --------- ---------- ------------
Outstanding at December 31, 2002 2,663,148 $ .30 1,325,771 $.002 - 1.94
========= ========= ========= ============
The following table summarizes information about
stock options and warrants outstanding at December
31, 2002:
Outstanding Exercisable
---------------------------------------------------- -------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercisable Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
---------------------------------------------------- -------------------------
$ .002 925,771 4.87 $ .002 925,771 $ .002
.10 - .13 1,540,000 6.86 0.12 1,540,000 0.12
.38 - 1.13 1,048,148 4.00 0.54 898,148 0.57
1.50 - 2.50 475,000 .33 1.87 475,000 1.87
------------------------------------- -------------------------
$.10 to 2.50 3,988,919 4.87 $ 0.41 3,838,919 $ 0.41
================================================================
- --------------------------------------------------------------------------------
F-28
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Stock Common Stock Warrant
Options and In conjunction with the issuance of the preferred
Warrants stock described in note 11, the Company issued a
Continued warrant to the holders of the preferred stock. The
fair value of the warrant at the date of issuance was
estimated to be $283,019 and was recorded to
additional paid-in capital and as a reduction to the
stated value of the preferred stock. The reduction in
preferred stock has been 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 bacome exercisable into
925,771 shares of common stock, the maximum number of
shares of common allowed under the agreement, in
accordance with the preferred stock agreement, at
$.002 per share. The warrants expire in 2007.
- --------------------------------------------------------------------------------
F-29
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Impairment on As of December 31, 2002, the Company revaluated the
Long-Lived carrying value of its Gadsby terminal facility
Assets located in Salt Lake City, Utah operated under its
CAD subsidiary. In 2002 the Company, entered into a
plea and abeyance agreement with the City of Salt
Lake to cease its manufacturing operations at that
location for at least one year because of an odor
violation of the City's ordinance. The Company
determined that it would no longer manufacture
asphalt from that facility but use it as a shipping
and receiving location for its products. The Company
determined that the equipment at the facility solely
related to the manufacturing process would not have
significant value apart from the facility based on
estimated net present value of future cash flows to
be derived from the operation of those manufacturing
assets. Accordingly, an aggregate non-cash expense
for the impairment of plant and equipment in the
amount of $544,639 was recognized.
14. Income Taxes The components of income tax benefit for the years
ended December 31 are summarized as follows:
2002 2001 2000
---------- ------------ ------------
Current $ - $ - $ _
Deferred:
Federal - - -
State - - -
---------- ------------ ------------
- - -
---------- ------------ ------------
Total $ - $ - $ _
========== ============ ============
- --------------------------------------------------------------------------------
F-30
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Income Taxes Income tax expense (benefit) differed from amounts
Continued computed by applying the federal statutory rate to
pretax loss as follows:
Years Ended December 31,
-------------------------------------------
2002 2001 2000
-------------- ------------ -------------
Income (loss) before income
taxes and minority interest
- computed tax at the
expected federal statutory
rate, 34% $ 9,988,000 $ (2,205,000) $ (6,332,000)
State income taxes, net of
federal income tax benefits 881,000 (194,000) (461,000)
Goodwill impairment not
deductible for tax purposes
due to settlement with MCNIC 321,000 - -
Joint venture affiliate share
of gain for tax purposes (5,577,000) - -
Permanent difference on
disposal of assets (1,352,000) - -
Minority interest 259,000 1,605,000 2,087,000
Expiration of net operating
losses 20,000 22,000 38,000
Other 170,000 36,000 34,000
Change in valuation reserve (4,710,000) 736,000 4,634,000
-------------- ------------ -------------
Total income tax benefit $ - $ - $ -
============== ============ =============
Deferred tax assets (liabilities) are comprised of
the following:
December 31,
--------------------------------
2002 2001
--------------------------------
Net operating loss carryforwards $ 3,616,000 $ 3,094,000
Impairment of investment in equity affiliate - 2,555,000
Allowance for doubtful accounts 65,000 638,000
Accrued interest - 1,353,000
Start-up costs - 99,000
Capital loss carryforwards 203,000 203,000
Differences between tax basis and financial
reporting basis of investment in equity - 439,000
affiliate
Amortization and impairment of goodwill 85,000 (319,000)
Depreciation (618,000) (730,000)
Other 47,000 105,000
Valuation allowance (3,398,000) (8,108,000)
--------------- ---------------
$ - $ -
=============== ===============
The Company has available at December 31, 2002,
unused tax operating loss carryforwards of
approximately $11 million which may be applied
against future taxable income and expire in varying
amounts through 2012.
- --------------------------------------------------------------------------------
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 Otherwise officer of the Company. The employment agreement
Disclosed expires December 31, 2003. The agreement includes a
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
officer/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 officer/director 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
officer/director 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.
During 1998, 946,296 options were exercised by
officers of the Company through an 8% common stock
subscription receivable in the amount of $549,166.
The respective receivable was reflected as a
reduction in common stockholders' equity (deficit).
During the year ended December 31, 2002, the
subscription receivable was extinguished, by the
Company, in exchange for the 946,296 common shares
issued in connection with the original subscription
receivable.
- --------------------------------------------------------------------------------
F-32
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
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. On January 6, 2003
the Company entered in to a settlement agreement and
mutual release wherein the Company paid Road Runner
$10,000.
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 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-33
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and On October 31, 2001, the Arbitrator issued the Damage
Contingencies Award in which held that MCNIC's loans were due and
Continued 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.
In addition, the Arbitrator awarded $2,609,519 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 in 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.
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 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.
- --------------------------------------------------------------------------------
F-34
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Commitments Litigation - Continued
and Pursuant to the Settlement Agreement, the Company
Contingencies also acquired the Option to purchase all of MCNIC's
Continued 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
provided that the Purchase Price 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 had 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. The Company did not meet its obligation
on September 30, 2002.
On October 16, 2002, the Company reached a final
settlement agreement with MCNIC in which CAPCO
purchased MCNIC's interest in CAD in exchange for $2
million, receivables of $146,781 and CAC's 1%
overriding royalty in Crown Ridge. As part of the
settlement, MCNIC released its rights to all debt due
to MCNIC, including the working capital loan of
$14,935,222, related interest on the working capital
loan of $6,359,115, the preferential debt of
$5,325,723, accrued interest on the preferential debt
of $3,061,926, and fees and other costs of
$2,609,519. The gain associated with this settlement
of $30,144,724, calculated as the difference between
the liabilities settled and the value paid was
recorded as an extraordinary gain on extinguishment
of debt.
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.
- --------------------------------------------------------------------------------
F-35
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
17. Subsidiary The Company operates in the asphalt production and
Information distribution segment through the following
subsidiaries:
Year Ended December 31, 2002
---------------------------------------------------------
Crown
Crown Asphalt
Asphalt Products CEC
Distribution Company and CAC Total
---------------------------------------------------------
Revenues from
external customers $ 266,269 $ 17,698,406 $ - $ 17,964,675
Gross profit (loss) $ (1,200,552)$ 1,667,562 $ - $ 467,010
Interest expense $ 2,179,691 $ 129,573 $ 95,299 $ 2,404,563
Depreciation and
amortization $ 553,411 $ 199,457 $ 30,798 $ 783,666
Subsidiary net income
(loss) $ (2,541,181)$ 29,374,116 $ 2,542,748 $ 29,375,683
Subsidiary total
assets $ 10,318,775 $ 37,335,055 $ 5,854,170 $ 53,508,000
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
Subsidiary net loss $ (9,191,518)$ 3,090,477 $ (386,940) $ (6,487,981)
Subsidiary total
assets $ 11,009,753 $ 7,981,851 $ (16,322,244) $ 2,669,360
Year Ended December 31, 2000
---------------------------------------------------------
Crown
Crown Asphalt
Asphalt Products CEC
Distribution Company and CAC 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 $ 299,106 $ 2,576,386
Depreciation and
amortization $ 708,614 $ 109,840 $ 85,410 $ 903,864
Subsidiary net loss $ (11,365,018)$ 712,126 $ 7,708,029 $(18,360,921)
Subsidiary total
assets $ 13,461,698 $ 3,500,902 $ (15,265,175) $ 1,697,425
- --------------------------------------------------------------------------------
F-36
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
17. Subsidiary
Information
Continued
2002 2001
-------------- -------------
Reconciliation of assets:
Total assets for individual subsidiaries $ 53,508,000 $ 2,669,360
Elimination of investment in subsidiaries (40,049,177) 15,192,849
Elimination of intercompany receivables (184,027) (2,144,944)
-------------- -------------
Total consolidated assets $ 13,274,796 $ 15,717,265
============== =============
During 2002, 2001 and 2000, 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, 2002,
2001, and 2000 totaled approximately $35,000,
$35,000, and $36,000, respectively.
- --------------------------------------------------------------------------------
F-37