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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission file number 0-19365
CROWN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Utah 87-0368981
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1710 West 2600 South, Woods Cross, Utah, 84087
(Address of principal executive offices, zip code)
(801) 296-0166
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
There were 26,482,388 shares of $0.02 par value common stock
outstanding as of June 30, 2003.
CROWN ENERGY CORPORATION
INDEX
PAGE(S)
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2003
(unaudited) and December 31, 2002 3
Condensed Consolidated Statement of Operations
for the Three Months ended June 30, 2003 and
2002 (unaudited) and the Six Months ended
June 30, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statement of Cash Flows
for the Six Months ended June 30, 2003 and 2002
(unaudited) 7
Notes to Unaudited Condensed Consolidated
Financial Statements 9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 16
ITEM 4. Controls and Procedures 17
PART II. Other Information
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities and Use of Proceeds 18
ITEM 3. Defaults upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security Holders 18
ITEM 5. Other Information 18
ITEM 6. Exhibits and Report on Form 8-K 19
Signatures 20
Certifications 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2003 December 31,
[unaudited] 2002
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 91,378 $ 2,723,068
Accounts receivable, net of allowance for uncollectible
accounts of $291,683 and $175,927 respectively 3,339,368 539,214
Inventory 1,792,281 604,106
Prepaid and other current assets 105,408 143,977
------------ ------------
Total Current Assets 5,328,435 4,010,365
PROPERTY PLANT, AND EQUIPMENT, Net 8,940,319 8,949,032
OTHER INTANGIBLE ASSETS, Net - 25,000
OTHER ASSETS 206,627 290,399
------------ ------------
TOTAL $ 14,475,381 $ 13,274,796
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
June 30, 2003 December 31,
[unaudited] 2002
------------ ------------
CURRENT LIABILITIES
Accounts payable $ 4,070,353 $ 2,349,242
Preferred stock dividends payable 1,200,000 1,000,000
Accrued expenses 256,522 192,878
Accrued interest 272,819 224,508
Long-term debt - current portion 462,022 423,585
------------ ------------
Total current liabilities 6,261,716 4,190,213
Long-term debt 2,593,555 2,442,673
Redeemable preferred stock 5,000,000 5,000,000
------------ ------------
Total liabilities 13,855,271 11,632,886
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 520,995 507,575
STOCKHOLDERS EQUITY:
Stockholders' equity/(deficit):
Common Stock $0.02 par value 50,000,000 shares authorized 26,482,388
shares outstanding for each period 529,647 529,647
Additional paid in Capital 3,719,417 3,919,417
Stock warrants 186,256 186,256
Accumulated deficit (4,336,205) (3,500,985)
------------ ------------
Stockholders' equity 99,115 1,134,335
------------ ------------
TOTAL $ 14,475,381 $ 13,274,796
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
4
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended
June 30,
---------------------------------
2003 2002
------------ ------------
SALES, Net of demerits $ 6,241,935 $ 6,184,136
COST OF SALES 5,942,807 5,685,865
------------ ------------
GROSS PROFIT 299,128 498,271
GENERAL AND ADMINISTRATIVE EXPENSES (402,589) (654,438)
Bad debt recovery on accounts previously allowed for 323,524 847,746
------------ ------------
INCOME FROM OPERATIONS 220,063 691,579
------------ ------------
OTHER INCOME (EXPENSES):
Interest income and other income 44,045 1,379
Interest expense (66,778) (694,408)
Gain on Divestiture of Affiliate - 2,998,176
------------ ------------
Total other income (expense), net (22,733) 2,305,147
------------ ------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTERESTS 197,330 2,996,726
------------ ------------
DEFERRED INCOME TAX BENEFIT --- ---
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 13,950 12,135
------------ ------------
NET INCOME $ 211,280 $ 3,008,861
------------ ------------
NET INCOME PER COMMON SHARE-
Basic and diluted $ 0.00 $ 0.04
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
5
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended
June 30,
---------------------------------
2003 2002
------------ ------------
SALES, Net of demerits $ 6,356,642 $ 6,652,457
COST OF SALES 6,716,257 6,998,165
------------ ------------
GROSS PROFIT (LOSS) (359,615) (345,708)
GENERAL AND ADMINISTRATIVE EXPENSES (738,911) (1,277,340)
Bad debt recovery on accounts previously allowed for 323,524 847,746
------------ ------------
INCOME (LOSS) FROM OPERATIONS (775,002) (775,302)
------------ ------------
OTHER INCOME (EXPENSES):
Interest income and other income 45,373 3,534
Interest expense (133,013) (1,466,832)
Gain on Divestiture of Affiliate 0 2,998,176
------------ ------------
Total other income (expense), net (87,640) 1,534,878
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTERESTS (862,642) 759,576
------------ ------------
DEFERRED INCOME TAX BENEFIT --- ---
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 27,422 20,502
------------ ------------
NET INCOME (LOSS) $ (835,220) $ 780,078
------------ ------------
NET (LOSS) INCOME PER COMMON SHARE-
Basic and diluted $ (0.04) $ 0.01
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
6
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
----------------------------------
2003 2002
------------- -------------
Cash flows from operating activities:
Net income (loss) $ (835,220) $ 780,078
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Amortization, depreciation and depletion 361,974 385,839
Recovery of doubtful accounts receivable (323,524) (847,746)
Gain on divestiture of affiliate - (2,998,176)
Minority interest (27,422) (20,502)
Change in assets and liabilities:
Accounts receivable (2,476,630) (1,915,692)
Inventory (1,188,175) (628,160)
Prepaid and other assets 122,341 (276,751)
Deposits on settlement option 0 (300,000)
Accounts payable 1,721,111 3,144,059
Accrued expenses and interest 111,955 1,216,221
------------- -------------
Total adjustments (1,698,370) (2,240,908)
------------- -------------
Net cash used in operating activities (2,533,590) (1,460,830)
------------- -------------
Cash flows used in investing activities-
Purchase of property and equipment (328,261) (524,457)
------------- -------------
Net cash used by investing activities (328,261) (524,457)
------------- -------------
Cash flows from financing activities:
Capital contributions from partners 40,842 34,035
Proceeds from borrowings of long term debt 400,000 0
Payments on long-term debt (210,681) (163,137)
------------- -------------
Net cash provided by (used in) financing activities $ 230,161 $ (129,102)
------------- -------------
The accompanying notes are an integral part of these consolidated financial statements.
7
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Continued]
For the Six Months Ended
June 30,
----------------------------------
2003 2002
------------- -------------
Net Increase (Decrease) in Cash: $ (2,631,690) $ (2,114,389)
============= =============
Cash at Beginning of Period $ 2,723,068 $ 2,652,858
============= =============
Cash at End of Period $ 91,378 $ 538,469
============= =============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $ 88,560 $ 108,957
============= =============
Income taxes --- ---
============= =============
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended June 30, 2003 we accrued dividends on preferred stock
of $200,000.
For the period ended June 30, 2002:
o We issued 13,793,103 shares of common stock to our preferred
stockholders as a payment for preferred stock dividends
payable totaling $200,000.
o We accrued dividends on preferred stock of $200,000 and $28,302
of accretion on preferred stock.
o We acquired $23,627 of equipment through term financing.
The accompanying notes are an integral part of these consolidated financial statements.
8
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have prepared the accompanying consolidated financial statements
without an audit. In our opinion, all adjustments (which include only
normal recurring adjustments) necessary to present fairly our financial
position as of June 30, 2003, results of operations for the three and
six month ended June 30, 2003 and 2002 and cash flows for the six
months ended June 30, 2003, and 2002 have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed financial statements be read in conjunction with
the financial statements and notes thereto included in our December 31,
2002 Annual Report on Form 10-K. The results of operations for the
period ended June 30, 2003, are not necessarily indicative of the
operating results for the full year.
Summary of Disputes - Four outstanding complaints have been filed
against us. One filed by Geneva Rock Products, Inc., one filed by
Oriental New Investments, Ltd., one filed by S & L Industrial, and one
filed by GATX Financial Corporation. The first two of the foregoing
actions were described in detail in our Annual Report on Form 10-K for
the year ending December 31, 2002. The S & L Industrial and the GATX
Financial Corporation actions are discussed in more detail in Part II.
Item 1. Legal Proceedings of this report.
Organization - Crown Energy Corporation ("CEC") and its wholly-owned
subsidiary, Crown Asphalt Products Company ("CAPCO"), and Crown
Distribution, an entity in which CAPCO and CEC now own all interests
(collectively referred to as the "Company"), are engaged in the
production, manufacturing, distribution and selling of asphalt
products. Crown Distribution owns a majority interest in Cowboy Asphalt
Terminal, L.L.C. ("CAT, LLC"). CAT, LLC is a joint venture formed on
September 16, 1998, between CAPCO and Foreland Asphalt Corporation
("Foreland"), which owns an asphalt terminal and storage facility.
Crown Distribution owns 66.67% and Foreland owns 33.33% of CAT, LLC.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly or majority-owned
subsidiaries. All significant inter-company transactions have been
eliminated in consolidation.
Stock-Based Compensation - The Company accounts for stock options
granted to employees under the recognition and measurement 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 is recognized in the financial statements when options granted
under those plans have an exercise price equal to or greater than the
market value of the underlying common stock on the date of grant. The
Company granted no options during the periods ending June 30, 2003 and
2002.
Going Concern - The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going
concern. As of June 30, 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.
9
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The Company's ability to continue as a going concern is subject to the
attainment of profitable operations or obtaining necessary funding from
outside sources 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.
NOTE 2 - LONG-TERM DEBT
During the period we entered into a financing arrangement with GE
Capital for $400,000 to finance an expansion of the emulsion facility
at our Rawlins facility to increase production capacity. The loan bears
interest at 8.77% is payable in equal monthly installments over 5
years, matures in June 2008 and is secured by property and equipment.
NOTE 3 - CAPITAL TRANSACTIONS
Preferred Stock - 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.
As of December 31, 2002, and June 30, 2003, there were dividends
payable to the holder of the Series A Preferred Stock of $1.0 million
and $1.2 million, respectively, that may, at the election of the
holder, be taken in cash or common stock. At the market price of $0.015
per share as of June 30, 2003, 80.0 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.
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
and we could not satisfy our current obligations under the Series A
Preferred Stock on conversion or the payment of 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 the
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.
10
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 4 - PROFIT/ LOSS PER SHARE
The following table is a reconciliation of the net loss numerator of
basic and diluted net loss per common share for the three - and six
month periods ended June 30, 2003 and June 30, 2002:
Six Months Six Months Three Months Three Months
2003 2002 2003 2002
-------------------- ------------------ ------------------ -------------------
Per Per Per Per
Loss Share Profit Share Profit Share Profit Share
----------- ------ -------- ----- -------- ----- ---------- -----
Net Profit (Loss) ($835,220) $780,078 $197,330 $3,008,861
Redeemable preferred
stock dividends and
accretion (200,000) (228,302) (100,000) (100,000)
Add back stock
dividends and accretion ---- 228,302 100,000 100,000
----------- ------ -------- ----- -------- ----- ---------- -----
Net profit (loss)
attributable to
common stockholders ($1,035,220) ($0.04) $780,078 $0.01 $197,330 $0.00 $3,008,861 $0.04
Weighted average
common shares
outstanding -
basic and diluted 26,482,388 77,217,590 84,821,442 81,713,684
We had at June 30, 2003, and December 31, 2002, incremental options and
warrants to purchase, 3,988,919 shares and 3,163,148 shares of common
stock, respectively, that were not included in the computation of
diluted earnings (loss) per share because their effect was
anti-dilutive. We also had preferred stock outstanding at June 30,
2003, and June 30, 2002, which is convertible into approximately
4,285,000 shares of common stock that was not included in the
computation of diluted loss per share as its effect was anti-dilutive.
Accordingly, diluted loss per share does not differ from basic loss. As
of June 30, 2003, there were preferred stock dividends payable in the
amount of $1,200,000. Pursuant to the designations and preferences of
the preferred stock, the foregoing dividends could be satisfied, at the
option of the holder, by the issuance of shares of the Company's common
stock in lieu of cash payments at the "fair market value" of the common
stock as defined in the designations and preferences. At the market
price of $0.015 per share as of June 30, 2003, 80.0 million shares of
common stock would have to be issued to satisfy the dividend payable.
NOTE 5 - BAD DEBT RECOVERY ON ACCOUNTS PREVIOUSLY ALLOWED FOR
During the three months ended June 30, 2003 the Company collected on
significant receivables it had provided an allowance for in a prior
year in the amount of $323,524. The Company has recognized this
collection through operations as a bad debt recovery.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative
11
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. This Statement is effective for contracts
entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003.
Management is currently evaluating the effect of the adoption of SFAS
No. 149.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 requires that certain financial instruments,
which under previous guidance may have been accounted for as equity,
must now be accounted for as liabilities (or an asset in some
circumstances). The financial instruments affected include mandatory
redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash
or other assets and certain obligations that can be settled with shares
of stock. This Statement is effective for all such financial
instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning
after June 15, 2003. SFAS 150 was adopted in the quarter ended June 30,
2003 and did not have a material impact on results of operations or
financial position.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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, is
qualified and limited by the foregoing cautionary factors. Interested persons
are advised to consider all forward-looking statements within the context of
such cautionary factors.
Liquidity and Capital Resources
At June 30, 2003, we had cash and other current assets of $5.3 million,
as compared to cash and other current assets of $4.0 million at December 31,
2002. The increase of approximately $1.3 million was generally due to an
increase in accounts receivable and inventory which is offset by a corresponding
increase in accounts payable and a decrease in cash used in operations.
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 and, to date, we have been unable to obtain
adequate financing on acceptable terms, and cannot assure that we will be able
to. We continue to explore avenues to obtain working capital financing,
including supplier financing, through-put arrangements, structured supply
arrangements and joint ventures with industry participants, facility leasing and
conventional financing from commercial sources. Given our financial condition,
generally, outside working capital funding requires significant equity and
personal guarantees, that our officers and directors are unwilling to provide
for our benefit as a publicly-held company. We do not believe that working
capital financing will be available because of our poor operating history and
our corporate structure as a public company. Failure to obtain the necessary
working capital financing will likely continue to have a significant negative
impact on our future operations and may make it unable for us to continue as a
going concern.
A portion of our accounts receivable is subject to the risks and
uncertainties of litigation and related collection risks. 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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
As of June 30, 2003, we had a working capital deficit of approximately
$0.9 million, an accumulated deficit of $4.3 million, and stockholders' equity
attributable to the common stock of $99,115. 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 significant equity and personal guarantees that
our officers and directors are unwilling to provide for our benefit as a
publicly-held company. The market price for our common stock has ranged from a
low of $0.010 to a high of $0.025 during 2003, closing on June 30, 2003, at
$0.015 per share. The accounting and legal 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 have
become prohibitive and threaten the Company's survival. The enactment of the
Sarbanes-Oxley Act of 2002 and the adoption of related regulations have
increased the costs of compliance. These new laws and regulations have also made
it more difficult for us to attract qualified persons as directors.
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 included a review of available alternatives and their related
legal, financial, regulatory and related considerations. After careful
consideration of all the alternatives, the Board of Directors believes it is in
the best interest of the Company and its stockholders to become privately held
by its principal stockholders through a reverse stock split. Management is
seeking a third-party valuation of our Company and the interests of our minority
stockholders from a financial point of view. We continue to anticipate that a
proxy statement will be prepared to outline the terms of the reverse split and
will be forwarded to the shareholders in the near future.
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.
The consolidated operations of the Company have not sustained
profitability and the Company has relied on debt financing to satisfy its
obligations. The Company's ability to continue as a going concern is subject to
the attainment of profitable operations or obtaining necessary funding from
outside sources 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, and continues to evaluate the 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.
Accounting Policies
Inventory consists principally of refined products and chemical
supplies, which are valued at the lower of cost (computed on a first in, first
out basis) or market.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Revenue recognition for sales of product is recognized when a contract
is executed or a valid purchase order has been received, product has been
shipped, the selling price is fixed or determinable, and collectibility is
reasonably assured.
Property, plant and equipment are recorded at cost and are depreciated
over the estimated useful lives of the related assets. Depreciation is computed
using the straight-line method for financial reporting purposes. The estimated
useful lives of property, plant and equipment are as follows:
Plant and improvements and tankage 10-30 years
Equipment 7 years
Vehicles 5 years
Computer equipment, furniture and fixtures 3 years
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of receivables. In the normal
course of business, the Company performs ongoing credit evaluations of its
customers and maintains allowances for possible losses that, when realized, have
been within the range of management's expectations.
The Company maintains its cash in bank deposit accounts that, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk
on cash and cash equivalents.
Results of Operations
For the three month period ending June 30, 2003, compared to the three
month period ending June 30, 2002
-----------------------------------------------------------------------
Total revenue increased from $6,184,136 for the three-month period
ended June 30, 2002, to $6,241,935 for the three-month period ended June 30,
2003, an increase of $57,799. Cost of sales increased from $5,685,865 for the
same period in 2002 to $5,942,807 for the same period in 2003, an increase of
$256,942. The increase in revenues was primarily the result of an increase in
sales volume of approximately 2,675 tons offset partially by the reduced average
selling price per ton in the three month period. The increase in cost of sales
in the 2003 interim period is primarily the result of increased base stock costs
for the volume of sales offset by a reduction of operating expenses at the
facilities for the same period.
General and administrative expenses decreased from $654,438 for the
three-month period ended June 30, 2002, to $402,589 for the three-month period
ended June 30, 2003, a decrease of $251,849. This decrease is primarily due to
decreased rent expense for our administrative offices and a reduction in
salaries and wages.
Net other income/expenses decreased from income of $2,305,147 for the
three-month period ended June 30, 2002, to an expense of $22,733 for the
three-month period ended June 30, 2003, a decrease of $2,327,880. This decrease
is primarily due to a non-recurring gain on the divestiture of affiliate in
Crown Asphalt Ridge through a settlement with MCNIC Pipeline and Processing
Company ("MCNIC") which was included in our financial results for the
three-month period ended June 30, 2002.
Minority interest of $13,950 represents Foreland's approximate 33%
interest in the loss of CAT, LLC.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
For the six month period ended June 30, 2003, compared to the six-month
period ended June 30, 2002
-----------------------------------------------------------------------
Total revenue decreased from $6,652,457 for the period ended June 30,
2002 to $6,356,642 for the period ended June 30, 2003, a decrease of $295,815.
Cost of sales also decreased from $6,998,165 for the period ended June 30, 2002,
to $6,716,257 for the period ended June 30, 2003, a decrease of $281,908. The
decrease in revenues was primarily due to a reduction in sales revenue per ton
of approximately $9.35. The increase in cost of sales is primarily the result of
higher asphalt costs per ton, due from our lack of working capital and
in-ability to purchase in the early season when costs are typically lower.
General and administrative expenses decreased from $1,277,340 for the
period ended June 30, 2002 to $738,911 for the period ended June 30, 2003, a
decrease of $538,429. This decrease is primarily due to decreased legal
expenses, rent expense on the administrative offices and labor efficiencies.
$323,524 of bad debt recovery was recorded as described in Note 5 to the
financial statements included in Item I of Part I of this report.
Net other income/expenses decreased from an income of $1,534,878 for
the period ended June 30, 2002 to expense of $87,640 for the period ended June
30, 2003, an expense increase of $1,622,518. The 2002 total was comprised of
$1,319,756 interest related to the Company's credit facility and the
Preferential Capital Contribution for its asphalt distribution business. This
amount was offset by a non-recurring a gain on the divestiture of the Crown
Ridge interest to MCNIC of $2,998,176 which was included in period ended June
30, 2002. Neither of these items reoccurred in the period ended June 30, 2003.
Interest income and other income of $45,373 was recorded during this period in
2003.
Minority interest of $27,422 represents Foreland's approximate 33%
interest in the loss of CAT, LLC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We do not engage in transactions involving market risk sensitive
instruments intended to reduce our exposure to interest rate risks, foreign
currency exchange rate risks, commodity price risks or similar risks, and
therefore we do not believe we are subject to material market risks resulting
from such market rate sensitive instruments. 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 cannot be 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 factor such de-escalation risk into our bid
prices and do not believe we have material exposure to risk resulting from these
regulations.
16
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures:
Based on their evaluations as of the filing date of this report, the
principal executive officer and principal financial officer of the Company have
concluded that the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act) are effective
to ensure that information required to be disclosed by the Company in reports
that the Company files or submits under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.
(b) Changes in internal controls:
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these internal controls
subsequent to the date of the most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 9, 2003, S & L Industrial filed legal action against us in the
Fifth Judicial District of Big Horn County, Wyoming. The action was removed to
the United States District Court for Wyoming on May 20, 2003. In the action, S &
L seeks to recover amounts that we offset against the purchase price of the
Rawlins, Wyoming facility in 1999 for items that were warranted by S & L
pursuant to the terms of the asset purchase agreement. S & L disputes our right
to offset such amounts and is seeking payment of $90,000, plus interest in the
amount of $45,705.38 accrued to March 24th, 2003, plus any other interest and
principal accrued to date via the legal action. On June 16, 2003, we answered S
& L's claim and asserted a counterclaim in the amount of $230,000 plus other
accruing costs, and we intend to vigorously contest S & L's claims. This legal
dispute is in its early stages and there can be no assurance that we will
ultimately prevail or what the outcome will be.
On May 22, 2003, GATX Financial Corporation filed a complaint against
us in the Third Judicial District Court of Salt Lake County, Utah. In the
complaint, GATX seeks to recover damages in the amount of $285,148.79, plus
further damages continuing to accrue, and interest for railcar rent and railcar
cleaning. On June 19, 2003, we answered GATX's complaint and made a counterclaim
for damages in the amount of $63,442.17, all interest on all sums awarded and
reasonable attorney fees and costs. We intend to vigorously contest its claims.
This legal dispute is in its early stages and there can be no assurance that we
will ultimately prevail or what the outcome will be.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 2003, there were arrearages in the amount of $1,200,000
on dividends on our preferred stock. Pursuant to the designations and
preferences of the preferred stock, the foregoing arrearages could be satisfied,
at the option of the holder, by the issuance of shares of our common stock in
lieu of cash payments at the "fair market value" of the common stock as defined
in the designations and preferences. As of June 30, 2003, approximately 80.0
million shares of common stock would have been issuable at the then "fair market
value" in satisfaction of the preferred stock dividend arrearages, which exceeds
the number of shares of common stock currently authorized to be issued by the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
18
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits: The following exhibits are included as part of this
report:
SEC
Exhibit Reference
Number Number Title of Document Location
- --------------------------------------------------------------------------------
31.01 31 Certification of Chief Executive Officer This filing
Pursuant to Rule 13a-14
- --------------------------------------------------------------------------------
31.02 31 Certification of Chief Financial Officer This filing
Pursuant to Rule 13a-14
- --------------------------------------------------------------------------------
32.01 32 Certification Pursuant to 18 U.S.C. This filing
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 (Chief Executive Officer)
- --------------------------------------------------------------------------------
32.02 32 Certification Pursuant to 18 U.S.C. This filing
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 (Chief Financial Officer)
(b) Reports on Form 8-K: We did not file any reports on Form 8-K for
the quarter ended June 30, 2003.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN ENERGY CORPORATION
(Registrant)
Date: August 19, 2003 By: /s/ Jay Mealey
-----------------------------------
Jay Mealey, Chief Executive Officer
Date: August 19, 2003 By: /s/ Alan Parker
-----------------------------------
Alan Parker, Controller
20