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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, 2003
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. [X]
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, 2004, the aggregate market value of the voting and
nonvoting common equity held by nonaffiliates of the issuer was $264,824 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 June 30, 2004,
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......................................................... 5
Item 3 Legal Proceedings.................................................. 6
Item 4 Submission of Matters to a Vote of Security Holders................ 6
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities................ 7
Item 6 Selected Financial Data............................................ 8
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operation......................................... 9
Item 7A Quantitative and Qualitative Disclosures about Market Risk......... 12
Item 8 Financial Statements and Supplementary Data........................ 13
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 13
Item 9A Controls and Procedures............................................ 13
Part III
Item 10 Directors and Executive Officers of the Registrant................. 14
Item 11 Executive Compensation............................................. 15
Item 12 Security Ownership of Certain Beneficial Owners and Management..... 17
Item 13 Certain Relationships and Related Transactions..................... 19
Item 14 Principal Accounting Fees and Services............................. 20
Part IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 21
Signatures......................................................... 25
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, 2003, 2002 and 2001, we reported
revenues, primarily from our asphalt manufacturing and distribution operations,
of approximately $17.0 million, $18.0 million and $27.0 million respectively.
During 2003, we continued the manufacturing and distribution of liquid
asphalt and attained a total sales volume of roughly 86,400 tons. Our sales
volume and revenue for 2003 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 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 2002, the Series A Preferred Stock, the warrant, and all
associated rights were acquired by the Mealey Family Limited Partnership, which
is the current holder of the Series A Preferred Stock, the warrant, all
associated rights, and accrued dividends. Jay Mealey, our chief executive
officer, president and a director, 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, 2003, there were dividends payable to the holder of
the Series A Preferred Stock of $1.5 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 $0.01 per share as of April 30, 2004, approximately 150 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, 2003, we had a working capital deficit of
approximately $1.5 million, an accumulated deficit of approximately $5.0
million, and stockholders' deficit attributable to the common stock of
approximately $0.53 million. Our auditor's report on our financial statements
for the year ended December 31, 2003, as for prior years, contained an
explanatory paragraph about our ability to continue as a going concern. During
2003 we continued 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.
In view of our continuing inability to arrange required financing as
discussed above, 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. As we
1
investigated these possible going private alternatives, we also continued our
search for financing from a variety of sources through a number of alternative
arrangements.
As a result of our efforts to obtain funding, on June 7, 2004, we
entered into an agreement with an unrelated asphalt distribution firm to
organize a joint venture that will be owned 51% by the other firm and 49% by us.
Substantially all of our asphalt business, operations and assets will be
transferred to the joint venture entity in consideration of a promissory note
for $7.5 million, the payment of which will be largely contingent upon the joint
venture having earnings sufficient to permit such payment, and a 49% interest in
the joint venture entity. In addition, the other joint venture participant will
provide the joint venture with an operating line of credit through the end of
calendar year 2004, which may be extended in subsequent years at the election of
our joint venture partner. In anticipation of completing this transaction the
joint venture partner has advanced interim operating capital, secured by our
inventory, work in progress, finished goods and accounts receivable. Formation
of the joint venture is contingent on a number of factors, including approval by
our stockholders (a majority of which has indicated that they intend to do so),
the negotiation of definitive agreements, the completion of a review of business
and financial matters and other items.
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.
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
2
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.
Our Business
General
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.
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
3
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.
Employees
As of June 15, 2004, we had 30 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.
4
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 $203,000
note(2)
Terminal........................... CAT, LLC Owned, subject to a lien for $469,000
note, of which Company is responsible for
67%, or $314,000(3)
Equipment.......................... Crown Asphalt Distribution Owned
Rawlins, Wyoming
Terminal land...................... CAPCO Lease expiring 2020
Equipment.......................... CAPCO Owned, subject to lien for $1.5 million
bank loan
Fredonia, Arizona...................... Crown Asphalt Distribution Owned
Gadsby, Salt Lake City, Utah
Terminal........................... Crown Asphalt Distribution Lease expiring 2006
Equipment.......................... Crown Asphalt Distribution Lease expiring 2004
Grand Island, Nebraska.................
Terminal........................... CAPCO Lease expiring 2004
Equipment.......................... CAPCO Owned
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(1) As of December 31, 2003.
(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.
We believe that the foregoing facilities are adequate for our
foreseeable business needs.
5
ITEM 3. LEGAL PROCEEDINGS
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 sought to recover
$75,000 in liquidated damages, plus interest, or actual damages, and attorneys'
fees and costs, for alleged breaches of the convertible debentures. While we
denied any and all liability and believe that Oriental's claims are without
merit, on December 8, 2003 we agreed to fully settle the matter. Pursuant to the
settlement agreement we paid New Oriental $10,000 and agreed to pay and
additional $ 10,000 on or before December 31, 2004and $15,000 on or before
December 31, 2005.
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 sought 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. On November 19, 2003 the
matter was fully settled. The Company paid S & L $30,000 and agreed to pay an
additional $ 25,000 on or before December 15, 2004.
On May 22, 2003, GATX Financial Corporation filed a complaint against
us in the Third Judicial District Court of Salt Lake County, Utah. The parties
have fully settled the matter and the Company has agreed to pay GATX $75,000
over a 36-month period.
From time to time, we file litigation as a regular part of our business
to seek collection of uncollected accounts receivable, plus costs and attorney's
fees, as provided by or sales agreements.
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 2003.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has been traded in the over-the-counter market since
1980. Our common stock was quoted under the symbol "CROE"on the Nasdaq OTC
Bulletin Board prior to June 2, 2004 and thereafter on the Pink Sheets published
by Pink Sheets, LLP, due to our failure to file timely our periodic reports
under the Securities Exchange Act. The following table sets forth the range of
high and low bid quotations of our common stock as reported by the OTC Bulletin
Board or the Pink Sheets, as the case may be, 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
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2004:
Second Quarter (through June 15, 2004).... $0.01 $0.02
First Quarter............................. 0.02 0.04
2003:
Fourth Quarter............................ 0.01 0.03
Third Quarter............................. 0.01 0.015
Second Quarter............................ 0.01 0.02
First Quarter............................. 0.01 0.02
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
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, 2003, accrued but unpaid
dividends equaled $1.5 million. We estimate that, as of March 31, 2004, we had
approximately 746 stockholders.
7
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 year ended December 31, 1999, were audited by
Deloitte & Touche, LLP, independent public accountants. The financial statements
as of and for the years ended December 31, 2000, 2001, 2002 and 2003, 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
-----------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ -------------
(in thousands, except per share)
Net revenues...................................... $16,954 $17,965 $27,033 $22,787 $35,519
Income (loss) from continuing operations.......... (1,260) (769) (6,488) (18,361) (3,054)
Income (loss) per share
from continuing operations...................... (0.06) (0.05) (0.51) (1.39) (0.26)
Total assets...................................... 11,077 13,275 15,717 17,052 33,114
Total long-term obligations....................... 2,165 2,442 11,130 11,337 11,333
Redeemable Series A Preferred Stock............... 5,000 5,000 4,953 4,896 4,840
Cash dividends per common share -- -- -- -- --
Common stockholders' equity (deficit)............. (527) 1,134 (27,994) (21,050) (2,276)
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.
8
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.
Introduction
During 2003, we continued our performance-grade asphalt paving product
manufacturing and distribution segment activities. Our business is capital
intensive and requires a working capital credit facility to operate efficiently.
Due to prior disputes and the resulting poor financial condition of the Company,
we have been unable to obtain third party working capital credit arrangements
since 1999. 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. On June 07, 2004, we entered into a Memorandum of Understanding with an
unrelated asphalt distribution company to form a new limited liability company
to purchase all of our asphalt manufacturing and distribution assets and related
business. At closing of the transaction, we will own 49% of the membership
interest in the new limited liability company. The new limited liability company
will purchase the assets and business for $7.5 million in the form of a six-year
promissory secured by the sold assets and business. As part of the transaction,
the other member of the limited liability company will supply the working
capital financing to enable the company to take advantage of off-season asphalt
purchase to fill the storage tank capacity. This transaction is described in
more detail in the Liquidity and Capital Resources Section.
As of December 31, 2003, we had a working capital deficit of $1.5
million, an accumulated deficit of $5.0 million, and stockholders' deficit
attributable to the common stock of $0.53 million. Our auditor's report on our
financial statements for the year ended December 31, 2003, as for prior years,
contained an explanatory paragraph about our ability to continue as a going
9
concern. As previously reported, as we continued our search for funding our
board of directors approved the investigation of alternatives for a
"going-private" transaction. In order to ensure our survival and resolve our
working capital problems, the board has approved the sale of all of our asphalt
manufacturing and distribution assets and related business to form a joint
venture to continue operations with funding provided by the other joint venture
participant as discussed below.
Liquidity and Capital Resources
At December 31, 2003, we had cash and other current assets of $2.4
million, as compared to cash and other current assets of $4.0 million at
December 31, 2002. The decrease of $1.6 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 2004; 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 have not
had 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. In order to resolve our working capital
problems and operate the business more efficiently, we have agreed in principle
to sell our asphalt manufacturing and distribution assets and related business
to a new limited liability company of which we will own 49%.
On June 7, 2004, the Company entered into an agreement with an
unrelated asphalt distribution firm to organize a joint venture that will be
owned 51% by the other firm and 49% by us. Substantially all of our asphalt
business, operations and assets with a net book value of approximately $8.4
million will be transferred to the joint venture entity in consideration of a
promissory note for $7.5 million, the payment of which will be largely
contingent upon the joint venture having earnings sufficient to permit such
payment assumption of debt of approximately $2.3 million, and a 49% interest in
the joint venture entity. In addition, the other joint venture participant will
provide the joint venture with an operating line of credit through the end of
calendar year 2004, which may be extended in subsequent years at the election of
our joint venture partner. In anticipation of completing this transaction the
joint venture partner has advanced interim operating capital, secured by our
inventory, work in progress, finished goods, and accounts receivable. Formation
of the joint venture is contingent on a number of factors, including approval by
our stockholders, a majority of which has indicated that they intend to do so.
Our failure to complete this transaction would have a significant negative
impact on our future operations and may make it unable for us to continue.
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 2004.
Results of Operations
Comparison of 2002 and 2003
Total revenue decreased from $18.0 million for the year ended December
31, 2002, to $17.0 million for the year ended December 31, 2003, a revenue
10
decrease of approximately $1.0 million, or 6%. This decrease was primarily due
to a reduction in sales volume from 92,000 tons for the year ended December 31,
2002, to a volume of approximately 86,000 tons for the year ended December 31,
2003. This reduction of 6,000 tons was a direct result of our limited working
capital to purchase inventory, which required us to limit our sales volume and
revenues.
Our gross profit decreased from approximately $467,000, or 2.6%, for
2002 to approximately $101,000, or 0.5%, for 2003. This decrease was primarily
due to two factors: first, an overall decrease in the gross margin of
approximately $4.00 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 $4.00 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 2004, 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 increased
from $1.0 million for the year ended December 31, 2002, to $1.1 million for the
year ended December 31, 2003, an increase of $100,000, or approximately 0.6% of
revenue. This increase was primarily the result of a non-recurring recovery of
bad debt expenses in 2002 that had been written off in the year ended December
31, 2000. Cost-cutting procedures in 2003 and a reduction in administrative
staff also contributed to the change.
The loss from operations decreased from $1.4 million in 2002 to $1.1
million in 2003, a decreased loss of $300,000, or 1.7% of revenue. The decreased
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. This was partially offset by synergies in the fixed
costs and improved operating costs of the plants. 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.
Total other income (expense) decreased from net income of $560,000 for
the year ended December 31, 2002, to net expense of $221,000 for the year ended
December 31, 2003, a decrease of $781,000. 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 settlement of litigation and the relinquishment
of debt
Minority interest of $49,673 represents Foreland's approximate 33%
interest in the loss in CAT, LLC.
Comparison of 2001 and 2002
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.
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
11
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.
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.
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 settlement of certain litigation and relinquishment of debt.
Minority interest of $44,000 represents Foreland's approximate 33%
interest in the loss in CAT, LLC.
Extraordinary gain on the extinguishment of debt of $30.1 million is
the result of settlement of certain litigation. 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.
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.
12
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.
ITEM 9A. 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 principal 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.
13
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.......... 48 Chairman of the Board of Directors
Chief Executive Officer, President, Treasurer
Stephen J. Burton... 56 Secretary
Andrew W. Buffmire.. 57 Vice President Business Development, Director
Alan L. Parker...... 52 Vice President, Director
Scott Beall......... 50 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.
Audit Committee and Audit Committee Financial Expert
We do not have an audit committee composed entirely of independent
directors; our board of directors acts as our audit committee. Additionally, we
do not have an audit committee financial expert, as that term is defined by Item
401(h) of Regulation SK. Given our financial condition and recent history of
legal matters, our board of directors has determined that it would be unlikely
to identify a qualified audit committee financial expert who would be willing to
serve.
14
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.
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 2003 all Section 16(a) filing requirements applicable to our directors,
executive officers and greater than 10% stockholders were complied with.
Code of Ethics
We have not adopted a code of ethics because the board of directors has
determined that given our small size, the service of our chief executive officer
and our principal financial officers on our board of directors, and the
significant majority of our common stock owned by our officers and directors, a
written code of ethics would be a mere formality and would not meaningfully
enhance our commitment to act honestly and ethically, provide full, fair,
accurate, timely and understandable disclosure, or comply with applicable
governmental laws, rules and regulations.
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)
Securities
Other Underlying
Annual Restricted Options/ All Other
Year Compen- Stock SARs LTIP Compen-
Name and Principal Ended sation Award(s) (no.) Payouts sation
Position Dec. 31 Salary ($) Bonus ($) ($) ($) ($) ($)
- --------------------------- -------- ---------- ----------- -------------- ------------ ------------ -------- ------------
Jay Mealey 2003 $302,700 -- $10,563(1) -- -- -- $734(2)
President 2002 344,600 -- 10,563(1) -- -- -- 688(2)
(CEO) 2001 250,000 -- 8,400(1) -- -- -- 647(2)
Scott Beall 2003 $110,300 -- -- -- -- -- --
Vice-President 2002 128,462 -- -- -- -- -- --
2001 107,225 -- -- -- -- -- --
- ------------------
(1) Car allowance.
(2) Term life insurance paid for Mr. Mealey.
15
Option/SAR Grants in Last Fiscal Year
During the fiscal year ended December 31, 2003, we did not grant any
stock options or stock appreciation rights to any Named Executive Officers.
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 $0.03 per share, the average bid and asked
price for our common stock on December 31, 2003:
(a) (b) (c) (d) (e)
Number Value of Unexercised
of Securities Underlying In-the-Money
Shares Unexercised Options/ Options/SARs
Acquired SARs at FY-End (#) at FY-End ($)
on Value
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ---------------------------- ------------ ---------- -------------------------- --------------------------
Jay Mealey -- -- 750,000 / --(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 .................. 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
Jay Mealey, our Chief Executive Officer, President and Treasurer, was
employed under a November 1997 employment agreement that expired on December 31,
2003. The employment agreement provided for a base salary plus compensation
bonuses. No bonus has been paid to Mr. Mealey under these provisions during the
preceding three fiscal years. In previous years, Mr. Mealey was also issued
options to purchase an aggregate of 900,000 shares, subject to vesting and
16
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. Mr. Mealey continues his employment at the same rate of
compensation without an employment agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the our common stock as of June 15, 2004, 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) 13,841,818 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
35,196,282 67.1%
Andrew W. Buffmire (2)...................... Common stock 1,600,000 17.7
Options 85,000 0.3
1,685,000 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 (4 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) 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.
17
(2) The address for all principal stockholders is c/o Crown Energy Corporation,
1710 West 2600 South, Woods Cross, Utah 84087.
(3) Consists of 3,307,452 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 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; 150 million shares issuable at the election of the holder at the
market price of $0.01 per share as of April 30, 2003, in payment of $1.5
million of dividends accrued as of December 31, 2003 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.
Change of Control Contracts
In November 1997, we entered into an employment agreement with Jay
Mealey that contained "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). No change of control events occurred and the employment agreement
terminated December 31, 2003.
Equity Compensation Plan Information
Number of securities
available for future
issuance under equity
Number of securities to be Weighted average exercise compensation plans
Plan Category issued upon exercise of prices of outstanding (excluding securities
outstanding options options reflected in column (a))
(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
18
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 2002, the
Series A Preferred Stock, the warrant, and all associated rights were acquired
by the Mealey Family Limited Partnership, which is the current holder of the
Series A Preferred Stock, the warrant, all associated rights, and accrued
dividends. Jay Mealey, our Chief Executive Officer, President and a director,
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, 2004, there were dividends payable to the holder of
the Series A Preferred Stock of $1.5 million that may, at the election of the
holder be taken in cash or common stock. At the market price of $0.01 per share
as of April 30, 2004, 150 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 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 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.
19
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The aggregate fees billed by Tanner + Co. for professional services
rendered for the audit of the Company's annual financial statements for the
fiscal year ended December 31, 2003, and for the reviews of the financial
statements included in the Company's quarterly reports on Form 10-Q for that
fiscal year were $33,000. The aggregate fees billed by Tanner + Co. for
professional services rendered for the audit of the Company's annual financial
statements for the fiscal year ended December 31, 2002, and for the reviews of
the financial statements included in the Company's quarterly reports on Form
10-Q for that fiscal year were $52,295.
Audit Related Fees
Tanner + Co. did not bill the Company for any professional services
that were reasonably related to the performance of the audit or review of
financial statements for either the fiscal year ended December 31, 2003, or the
fiscal year ended December 31, 2002, that are not included under Audit Fees
above.
Tax Fees
The aggregate fees billed by Tanner + Co. for professional services
rendered for tax compliance, tax advice, and tax planning for the fiscal years
ended December 31, 2003, and December 31, 2002, were $12,750 and $5,348,
respectively.
All Other Fees
Tanner + Co. did not perform any services for the Company or charge any
fees other than the services described above under "Audit Fees" and "Tax Fees"
for either the fiscal year ended December 31, 2003, or the fiscal year ended
December 31, 2002.
The engagements of Tanner + Co. to perform all of the above-described
services were approved by the board of directors, acting as the audit committee,
before the Company entered into the engagements, and the policy of the board of
directors is to require that all services performed by the independent auditor
be preapproved by the board of directors before the services are performed.
20
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Documents. 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 Accountants F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Operations for each of the Three
Years Ended December 31, 2003, 2002 and 2001, respectively F-4
Consolidated Statements of Cash Flows for each of the Three
Years Ended December 31, 2003, 2002 and 2001, respectively F-5
Consolidated Statements of Stockholders' Equity (Deficit) for
each of the Three Years Ended December 31, 2003, 2002
and 2001, 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:
Exhibit
Number Title of Document Location
- ---------------------------------------------------------------------------------------------------------------------
Item 3 Articles of Incorporation and Bylaws
- ----------------------------------------------------------------- ---------------------------------------------------
3.01 Articles of Incorporation Incorporated by reference from the Registration
Statement on Form S-1 filed March 13, 1996, file
number 333-02358.
3.02 Certificate of the Voting Powers, Designations, Incorporated by reference from Enron Capital &
Preferences and Relative, Participating, Optional Trade Resources Corp. Form 13D filed October 10,
or other Special Rights, and Qualifications, 1997, file number 005-51717.
Limitations and Restrictions Thereof, of Series A
Cumulative Convertible Preferred Stock of Crown
Energy Corporation
3.03 Amended Bylaws Incorporated by reference from the Registration
Statement on Form 10 filed July 1, 1991, amended
August 30, 1991.
Instruments Defining the Rights of Security
Item 4 Holders, Including Indentures
- ----------------------------------------------------------------- ---------------------------------------------------
4.01 Convertible Debenture Agreement dated May 6, Incorporated by reference from the Current Report
1997, between Crown Energy Corporation and on Form 8-K filed June 12, 1997.
Oriental New Investments, Ltd.
21
Exhibit
Number Title of Document Location
- ---------------------------------------------------------------------------------------------------------------------
4.02 Form of Stock Option Agreements between Crown Incorporated by reference from the Annual Report
Energy Corporation and (1) Jay Mealey, (2) on Form 10-K for the year ended December 31,
Richard Rawdin, and (3) Thomas Bachtell 1997, filed March 31, 1998.
4.03 The Crown Energy Long Term Equity-Based Incentive Incorporated by reference from the Amended Annual
Plan Report on Form 10-K for the year ended
December 31, 1997, filed April 30, 1998.
4.04 Common Stock Purchase Warrant dated November 4, Incorporated by reference from Enron Capital &
1997, issued to Enron Capital & Trade Resources Trade Resources Corp. Form 13D filed October 10,
Corp. 1997, file number 005-51717.
4.05 May 1998 Warrant issued to Ladenburg Thalmann & Incorporated by reference from the Annual Report
Co., Inc. on Form 10-K for the year ended December 31,
1998, filed June 14, 1999.
Item 10 Material Contracts
- ----------------------------------------------------------------- ---------------------------------------------------
10.01 Employment Agreement with Jay Mealey Incorporated by reference from the Annual Report
on Form 10-K for the year ended December 31,
1997, filed March 31, 1998.
10.02 Revised Right of Co-Sale Agreement between Jay Incorporated by reference from Enron Capital &
Mealey and Enron Capital & Trade Resources Corp. Trade Resources Corp. Form 13D/A filed November
12, 1997.
10.03 Lease Agreement dated June 6, 1996, between Petro Incorporated by reference from the Quarterly
Source Refining Corporation and PacifiCorp (which Report on Form 10-Q for the quarter ended
was assigned to the Company on or about July 2, September 30, 1998, filed November 25, 1998.
1998)
10.04 Operating Agreement for Cowboy Asphalt Incorporated by reference from the Annual Report
Distribution L.L.C. on Form 10-K for the year ended December 31,
1998, filed June 14, 1999.
10.05 April 3, 1998, Agreement regarding Investment Incorporated by reference from the Annual Report
Banking Services with Ladenburg Thalmann & Co., on Form 10-K for the year ended December 31,
Inc. 1998, filed June 14, 1999.
10.06 Indemnification Agreement with Ladenburg Thalmann Incorporated by reference from the Annual Report
& Co., Inc. on Form 10-K for the year ended December 31,
1998, filed June 14, 1999.
10.07 $1,800,000 Loan Agreement: Community First Incorporated by reference from the Annual Report
National Bank to Crown Asphalt Products Company on Form 10-K for the year ended December 31,
1999, filed April 4, 2000.
10.08 Letter Amendment to Loan Agreement with Community Incorporated by reference from the Annual Report
First National Bank dated June 2, 1999 on Form 10-K for the year ended December 31,
1999, filed April 4, 2000.
22
Exhibit
Number Title of Document Location
- ---------------------------------------------------------------------------------------------------------------------
10.09 Guaranty of Community First National Bank Loan by Incorporated by reference from the Annual Report
Crown Energy Corporation on Form 10-K for the year ended December 31,
1999, filed April 4, 2000.
10.10 Assignment & Assumption Agreement (Off Site Incorporated by reference from the Annual Report
Services Agreement) on Form 10-K for the year ended December 31,
1999, filed April 4, 2000.
10.11 First Amendment to Employment Agreement with Jay Incorporated by reference from the Annual Report
Mealey on Form 10-K for the year ended December 31,
1999, filed April 4, 2000.
10.12 Settlement Agreement among Crown Energy Incorporated by reference from the Annual Report
Corporation, MCNIC and related parties on Form 10-K for the year ended December 31,
2002, filed April 15, 2003.
10.13 Lease Agreement with Frontier Grand Island, L.L.C. Incorporated by reference from the Annual Report
on Form 10-K for the year ended December 31,
2002, filed April 15, 2003.
10.14 Asset Sale Agreement with Fruita Marketing and Incorporated by reference from the Annual Report
Management, Inc. on Form 10-K for the year ended December 31,
2002, filed April 15, 2003.
10.15 Extension to Lease Agreement with Frontier Grand Incorporated by reference from the Annual Report
Island L.L.C. on Form 10-K for the year ended December 31,
2002, filed April 15, 2003.
Item 21 Subsidiaries of the Company
- ----------------------------------------------------------------- ---------------------------------------------------
21.01 List of subsidiaries [Incorporated by reference from the Annual Report
on Form 10-K for the year ended December 31,
2002, filed April 15, 2003.]
Item 31 Rule 13a-14(a)/15d-14(a) Certifications
- ----------------------------------------------------------------- ---------------------------------------------------
31.01 Certification of Chief Executive Officer Pursuant This filing.
to Rule 13a-14
31.02 Certification of Chief Financial Officer Pursuant This filing
to Rule 13a-14
Item 32 Section 1350 Certifications
- ----------------------------------------------------------------- ---------------------------------------------------
32.01 Certification Pursuant to 18 U.S.C. Section 1350, This filing.
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)
32.02 Certification Pursuant to 18 U.S.C. Section 1350, This filing.
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
- --------------------
23
* All exhibits are numbered with the number preceding the decimal indicating
the applicable SEC reference number in Item 601 and the number following
the decimal indicating the sequence of the particular document. Omitted
numbers in the sequence refer to documents previously filed as an exhibit,
but no longer required.
We agree to furnish supplementally to the SEC a copy of any omitted schedule or
exhibit to and document filed as an exhibit upon request by the SEC.
(b) Reports on Form 8-K: We did not report any items on Form 8-K for
the quarter ended December 31, 2003.
24
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: July 2, 2004 By /s/ Jay Mealey
--------------------------------
Jay Mealey
Its Principal Executive Officer
Date: July 2, 2004 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: July 2, 2004 /s/ Jay Mealey
---------------------------------
Jay Mealey, Director
/s/ Alan L. Parker
---------------------------------
Alan L. Parker, Director
/s/ Andrew W. Buffmire
---------------------------------
Andrew W. Buffmire, Director
25
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
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
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, 2003 and 2002, and the consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 2003, 2002,
and 2001. 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 the standards of the Public Company
Accounting Oversight Board. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Crown
Energy Corporation as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for the years ended December 31, 2003, 2002, and
2001, 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.
/s/ Tanner + Co.
Salt Lake City, Utah
April 8, 2004
F-2
CROWN ENERGY CORPORATION
Consolidated Balance Sheet
December 31,
- -------------------------------------------------------------------------------------------------------------------------------
Assets 2003 2002
-----------------------------
Current assets:
Cash and cash equivalents $ 1,089,862 $ 2,723,068
Accounts receivable, net of allowance for doubtful accounts
of $164,630 and $175,927, respectively 546,309 539,214
Inventory 636,809 604,106
Prepaid and other current assets 110,745 143,977
-----------------------------
Total current assets 2,383,725 4,010,365
Property, plant, and equipment, net 8,635,741 8,949,032
Intangible assets, net - 25,000
Other assets 57,527 290,399
-----------------------------
Total $ 11,076,993 $ 13,274,796
=============================
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,592,949 $ 2,349,242
Preferred stock dividends payable 1,400,000 1,000,000
Accrued expenses 105,685 192,878
Accrued interest 316,508 224,508
Current portion of long-term debt 483,245 423,585
-----------------------------
Total current liabilities 3,898,387 4,190,213
Long-term debt 2,165,577 2,442,673
Redeemable preferred stock 5,000,000 5,000,000
-----------------------------
Total liabilities 11,063,964 11,632,886
-----------------------------
Commitments and contingencies - -
Minority interest in consolidated joint ventures 539,579 507,575
Stockholders' equity:
Common stock, $.02 par value, 50,000,000 shares authorized 26,482,388 and
26,482,388 shares issued and outstanding, respectively 529,647 529,647
Additional paid-in capital 3,519,417 3,919,417
Stock warrants 186,256 186,256
Accumulated deficit (4,761,870) (3,500,985)
-----------------------------
Total stockholders' equity (deficit) (526,550) 1,134,335
-----------------------------
Total $ 11,076,993 $ 13,274,796
=============================
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-3
CROWN ENERGY CORPORATION
Consolidated Statement of Operations
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------------------------
Sales, net $ 16,936,627 $ 17,964,675 $ 27,032,658
Cost of goods sold 16,835,994 17,497,665 24,126,190
----------------------------------------------
Gross profit (loss) 100,633 467,010 2,906,468
General and administrative expenses (1,529,017) (2,676,325) (3,449,053)
Recovery of (provision for) bad debt expenses 338,729 1,646,531 (30,051)
Loss on impairment of property and equipment - (544,639)
Loss on impairment of goodwill - (265,430) -
----------------------------------------------
Loss from operations (1,089,655) (1,372,853) (572,636)
----------------------------------------------
Other income (expense):
Interest income 4,358 16,718 65,857
Interest expense (275,920) (2,404,563) (4,018,738)
Gain on transfer of interest in unconsolidated affilate - 2,998,175 -
Other (expense) income 50,659 (50,612) 598,247
Arbitration expense - - (2,609,519)
----------------------------------------------
Total other income (expense), net (220,903) 559,718 (5,964,153)
----------------------------------------------
Loss before provision for income taxes
minority interests and extraordinary gain (1,310,558) (813,135) (6,536,789)
Income tax benefit - - -
Minority Interest in losses of consolidated joint venture 49,673 44,094 48,808
----------------------------------------------
Loss before extraordinary gain (1,260,885) (769,041) (6,487,981)
Extraordinary gain on extinquishment of debt - 30,144,724 -
----------------------------------------------
Net Income (loss) (1,260,885) 29,375,683 (6,487,981)
Redeemable preferred stock dividends (400,000) (400,000) (400,000)
----------------------------------------------
Net income (loss) applicable to common shares $ (1,660,885) $ 28,975,683 $ (6,887,981)
==============================================
Loss per common share before extraordinary item -
basic and diluted $ (0.06) $ (0.05) $ (0.51)
Extraordinary gain on extinquishment of debt -
basic and diluted $ - $ 1.19 $ -
==============================================
Net income (loss) per common share - basic and diluted $ (0.06) $ 1.14 $ (0.51)
==============================================
Weighted average common shares - basic and diluted 26,482,000 25,436,000 13,635,000
==============================================
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-4
CROWN ENERGY CORPORATION
Consolidated Statement of Stockholders' Deficit
Years Ended December 31, 2003, 2002, and 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Stock Common Stock Warrants
---------------------- Paid-in Subscription --------------------- Accumulated
Shares Amount Capital Receivable Warrants Amount Deficit
-------------------------------------------------------------------------------------
Balance, January 1, 2001 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)
Dividends on preferred stock - - (400,000) - - - -
Net loss - - - - - - (1,260,885)
-------------------------------------------------------------------------------------
Balance, December 31, 2003 26,482,388 $ 529,647 $ 3,519,417 $ - $ 400,000 $ 186,256 $ (4,761,870)
=======================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5
CROWN ENERGY CORPORATION
Consolidated Statement of Cash Flows
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------
2003 2002 2001
---------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (1,260,885) $ 29,375,683 $ (6,487,981)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation, depletion, and amortization 785,736 783,666 763,607
(Decrease) increase in allowance for doubtful accounts (11,297) (1,546,555) (105,414)
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 property and equipment - 544,639
Impairment of goodwill - 265,430 -
Minority interest in losses of consolidated joint venture,
net of distributions to minority interest shareholders 32,004 30,782 48,808
Loss on disposal of equipment - 50,612 -
Changes in operating assets and liabilities:
Accounts receivable 4,202 2,239,170 146,064
Inventory (32,703) 753,916 1,012,865
Prepaid and other current assets 33,232 (56,325) (20,045)
Related party receivable - 25,700 -
Other assets 232,872 (7,193) (58,197)
Accounts payable (756,293) 1,938,678 (906,658)
Accrued interest 92,000 2,199,743 3,486,256
Accrued arbitration expense - - 2,609,519
Accrued expenses (87,193) 17,084 48,428
---------------------------------------------
Net cash provided by (used in) operating activities (968,325) 3,472,131 537,252
---------------------------------------------
Cash flows from investing activities:
Purchase of property, plant, and equipment (47,441) (640,385) (442,212)
---------------------------------------------
Cash flows from financing activities:
Cash paid for purchase of interest in subsidiary - (2,000,000) -
Payments on long-term debt (617,440) (361,536) (320,323)
Payment of dividends - (400,000) -
---------------------------------------------
Net cash used in financing activities (617,440) (2,761,536) (320,323)
---------------------------------------------
Net change in cash and cash equivalents (1,633,206) 70,210 (225,283)
Cash and cash equivalents at beginning of year 2,723,068 2,652,858 2,878,141
---------------------------------------------
Cash and cash equivalents at end of year $ 1,089,862 $ 2,723,068 $ 2,652,858
=============================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 181,941 $ 411,038 $ 555,330
=============================================
Cash paid for income taxes $ - $ - $ -
=============================================
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-6
CROWN ENERGY CORPORATION
Consolidated Statement of Cash Flows
Continued
- --------------------------------------------------------------------------------
Supplemental disclosure of non-cash investing and financing activities:
During the year ended December 31, 2003:
o The Company acquired equipment with long-term debt of
$400,000.
o The Company accrued dividends to preferred shareholders of
$400,000.
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 15). 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 15).
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.
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-7
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
- --------------------------------------------------------------------------------
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-8
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 have been
Policies prepared assuming that the Company will continue as a going
concern. As of December 31, 2003, 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-9
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 is
Policies subject to the attainment of profitable operations or
Continued 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.
Management is also attempting to secure financing to fund its
working capital deficit. 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.
If management is unable to secure additional financing it may
be required to slow or cease its operations.
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
- --------------------------------------------------------------------------------
F-10
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Revenue Recognition
Accounting Revenue for sales of product is recognized when a valid
Policies purchase order has been received, product has been shipped,
Continued the selling price is fixed or determinable, and collectibility
is reasonably assured.
Income Taxes
Income taxes are determined using the asset and liability
method, which requires recognition of deferred income tax
liabilities and assets for the expected future tax
consequences of events that have been included in the
financial statements or tax returns. Under this method,
deferred income tax liabilities and assets are determined
based on the difference between financial statement and tax
bases of assets and liabilities using estimated tax rates in
effect for the year in which the differences are expected to
reverse. Deferred tax assets are recognized only if it is more
likely than not that the asset will be realized in future
years.
Concentration Risks
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.
One customer accounted for 16% of 2003 revenues. Loss of this
customer could significantly affect the companies operations.
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.
- --------------------------------------------------------------------------------
F-11
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Loss Per Common Share - Continued
Accounting The computation of diluted earnings per common share is based
Policies on the weighted average number of shares outstanding during
Continued 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 3,513,919,
3,988,919, and 3,163,148 shares of common stock at prices
ranging from $.002 to $1.94 per share were outstanding at
December 31, 2003, 2002, and 2001, respectively, but were not
included in the diluted loss per share calculation because the
effect would have been antidilutive.
Use of Estimates in Preparing Financial Statements The
preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses
during the reporting periods. Actual results could differ from
those estimated.
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 year ended December 31, 2001,
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-12
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 (loss) income
Policies and net (loss) income per share for each of the three years
Continued ended December 31, adjusted to give effect to the adoption of
SFAS 142:
2003 2002 2001
---------------------------------------------
Reported net income (loss) applicable
to common shareholders $ (1,660,885) $ 28,975,683 $ (6,887,981)
Add-back goodwill amortization,
net of taxes - - 13,970
---------------------------------------------
Adjusted net Income (loss) applicable
to common shareholders $ (1,660,885) $ 28,975,683 $ (6,874,011)
=============================================
Reported earnings per share -
basic and diluted $ (.06) $ 1.14 $ (.51)
Add-back goodwill amortization - .01
---------------------------------------------
Adjusted earnings per share -
basic and diluted $ (.06) $ 1.14 $ (.50)
=============================================
As of December 31, 2003 and 2002, the net book value of
goodwill was $0.
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-13
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Environmental Expenditures
Accounting Environmental related restoration and remediation costs are
Policies recorded as liabilities when site restoration and
Continued 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 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 adoption
of FIN No. 45 did not have a material impact on the Company's
consolidated financial position, results of operations or cash
flows.
- --------------------------------------------------------------------------------
F-14
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Recent Accounting Pronouncements - Continued
Accounting In December 2002, the FASB issued SFAS No. 148 "Accounting for
Policies Stock-Based Compensation--Transition and Disclosure--an
Continued amend-ment 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.
In December 2003, the FASB issued Interpretation No. 46 ("FIN
46R") (revised December 2003), Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research
Bulletin No. 51 ("ARB 51"), which addresses how a business
enterprise should evaluate whether it has a controlling
interest in an entity though means other than voting rights
and accordingly should consolidate the entity. FIN 46R
replaces FASB Interpretation No. 46 (FIN 46), which was issued
in January 2003. Before concluding that it is appropriate to
apply ARB 51 voting interest consolidation model to an entity,
an enterprise must first determine that the entity is not a
variable interest entity (VIE). As of the effective date of
FIN 46R, an enterprise must evaluate its involvement with all
entities or legal structures created before February 1, 2003,
to determine whether consolidation requirements of FIN 46R
apply to those entities. There is no grandfathering of
existing entities. Public companies must apply either FIN 46
or FIN 46R immediately to entities created after January 31,
2003 and no later than the end of the first reporting period
that ends after March 15, 2004. The adoption of FIN 46 had no
effect on the Company's consolidated financial position,
results of operations or cash flows.
- --------------------------------------------------------------------------------
F-15
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Recent Accounting Pronouncements - Continued
Accounting In April 2003, FASB issued SFAS No. 149, Amendment of
Policies Statement 133 on Derivative Instruments and Hedging
Continued Activities. SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging
activities under SFAS 133, Accounting for Derivatives and
Hedging Activities. SFAS 149 is generally effective for
derivative instruments, including derivative instruments
embedded in certain contracts, entered into or modified after
June 30, 2003. The adoption of SFAS 149 did not have a
material impact on the operating results or financial
condition of the Company.
In May 2003, the FASB issued SFAS 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities
and Equity. SFAS 150 clarifies the accounting for certain
financial instruments with characteristics of both liabilities
and equity and requires that those instruments be classified
as liabilities in statements of financial position.
Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for 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. The adoption of SFAS 150
resulted in the reclassification of $5 million of redeemable
preferred stock from mezzanine capital to liabilities.
In December 2003, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition. SAB 104 revises or rescinds portions of the
interpretive guidance included in Topic 13 of the codification
of staff accounting bulletins in order to make this
interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and
regulations. The adoption of SAB 104 did not have a material
effect on the Company's results of operations or financial
position.
- --------------------------------------------------------------------------------
F-16
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Significant Stock-Based Compensation
Accounting The Company accounts for stock options granted to employees
Policies under the recognition and measurement principles of APB
Continued 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,
-------------------------------------------
2003 2002 2001
-------------------------------------------
Net income (loss) applicable to common
shareholders - as reported $ (1,660,885) $ 28,975,683 $ (6,887,981)
Deduct total stock based employee
compensation expense determined
under fair value based method for
all awards, net of related taxes (9,791) (63,935) (103,525)
-------------------------------------------
Net income (loss) - pro forma $ (1,670,676) $ 28,911,748 $ (6,991,506)
===========================================
Diluted income (loss) per share - as
reported $ (.06) $ 1.14 $ (.51)
===========================================
Diluted income (loss ) per share -
pro forma $ (.06) $ 1.14 $ (.51)
===========================================
No stock options were granted in 2003, 2002, or 2001.
Reclassifications
Certain amounts in the 2002 and 2001 consolidated financial
statements have been reclassified to conform with
classifications adopted in the current year.
- --------------------------------------------------------------------------------
F-17
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Settlement Crown Distribution
of MCNIC As of December 31, 2001, Crown Distribution owed amounts as
Obligations follows to its 49.99% owner, MCNIC:
o Working capital loan in the amount of $14,935,222
o Accrued interest on the working capital loan of
$4,884,401
o Preferential loan in the amount of $5,325,723
o Accrued interest on such preferential debt of
$2,429,405
During 2001, pursuant to an arbitration judgment (see note
15), 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 15), 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-18
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 $5.5
Obligations million and therefore entered into additional settlement
Continued discussions with MCNIC. In October 2002, the Company reached a
final settlement agreement with MCNIC (see note 15) 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-19
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Property, The following is a summary of property, plant, and equipment
Plant and as of December 31:
Equipment
2003 2002
--------------------------------
Land $ 1,000,000 $ 1,000,000
Plant and improvements and tankage 10,265,166 9,762,598
Computer equipment, furniture, and
fixtures 336,260 391,386
Vehicles 29,148 29,148
-------------------------
Total property, plant, and equipment 11,630,574 11,183,132
Less accumulated depreciation (2,994,833) (2,234,100)
-------------------------
Total $ 8,635,741 $ 8,949,032
=========================
5. Investments In August 1997, the Company, through its wholly owned
In and subsidiary, CAC, entered into a joint venture with MCNIC for
Advances to the purpose of developing, mining, processing, and marketing
an Equity asphalt, performance grade asphalt, diesel fuel, hydrocarbons,
Affiliate 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 15), 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-20
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Intangibles Intangible assets consist of the following:
December 31,
--------------------------
2003 2002
--------------------------
Non-compete agreement $ 250,000 $ 250,000
Accumulated amortization (250,000) (225,000)
--------------------------
$ - $ 25,000
==========================
At December 31, 2002 the Company re-assessed the
recoverability of goodwill associated with its Rawlin's
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.
7. Long-term Long-term debt consists of the following at December 31:
Debt
2003 2002
---------------------------
Note payable with interest at prime plus 1% (5%
at December 31, 2003) to a bank, in monthly
principal and interest payments until the debt
matures in May 2014, secured by assets at
Rawlins Terminal. $ 1,532,112 $ 1,644,377
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. 468,627 664,308
Note payable with interest at 8.77%, due in
monthly installments of $8,200, maturing in May
2008, secured by assets as the Rawlins
Terminal. 356,691 -
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 203,042 224,405
- --------------------------------------------------------------------------------
F-21
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Long-term Deferred Debt purchase price on Rawlins
Continued Terminal acquisition with interest at the LIBOR
rate (1.12% at December 31, 2003), due in
monthly installments through February 2010. 25,000 225,000
Oriental New Investments, Ltd. Litigation
settlement with interest at 10% due in two
installments of $10,000 and $15,000 on December
31, 2004 and 2005, respectively. 25,000 -
Note payable with interest at 9.59% to a bank,
due in monthly principal and interest payments
until the debt matures in June 2007, secured by
assets at the Cowboy Terminal 17,635 21,603
Capital leases (see note 8) 20,715 86,565
---------------------------
Total 2,648,822 2,866,258
Less estimated current portion (483,245) (423,585)
---------------------------
Long-term portion $ 2,165,577 $ 2,442,673
===========================
The schedule maturities of long-term debt at
December 31, 2003 are as follows:
Year Ending December 31:
------------------------
2004 $ 483,245
2005 468,558
2006 251,913
2007 246,325
2008 198,829
Thereafter 999,952
-----------
Total $ 2,648,822
===========
8. Capital Lease The Company leases equipment under capital lease agreements.
Obligations 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 $213,000 and $211,000 and accumulated
amortization of approximately $122,000 and $57,000 at December
31, 2003 and 2002, respectively.
- --------------------------------------------------------------------------------
F-22
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Capital Lease Amortization expense for the equipment under capital lease for
Obligations the years ended December 31, 2003, 2002, and 2001 was
Continued approximately $109,000, $30,000, and $27,000, respectively.
Future minimum payments on the capital lease obligations are
as follows:
Year Ending December 31:
------------------------
2004 $ 16,676
2005 4,266
--------
20,942
Less amount representing interest (227)
--------
Present value of future minimum capital
lease payments $ 20,715
========
9. Operating The Company leases certain premises and equipment under
Leases operating leases. Approximate future minimum lease payments
under non-cancelable operating leases as of December 31, 2003
are as follows:
Year Ending December 31:
------------------------
2004 $ 388,531
2005 385,890
2006 334,890
2007 325,890
2008 108,630
Thereafter -
-----------
Total $ 1,543,831
===========
Lease expense for the years ended December 31, 2003, 2002, and
2001 totaled $459,093, $782,332, and $1,046,000, respectively.
- --------------------------------------------------------------------------------
F-23
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Redeemable Redeemable preferred stock consists of 500,000 issued and
Preferred outstanding Series A cumulative convertible shares with a par
Stock 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, 2003, and 2002 the redeemable preferred stock had
a balance of $5,000,000.
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, 2003 and 2002 the Company owed $1,400,000 and
$1,000,000, 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-24
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Redeemable The holder of the Series A Preferred may also require the
Preferred Company to redeem the Series A Preferred after the eighth
Stock anniversary of the Series A Preferred's issuance. The holders
Continued 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.
11. Stock Stock Options
Options and The Company has a stock option plan for directors and salaried
Warrants 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-25
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Stock A summary of the stock option and warrant activity for fiscal
Options and years 2003, 2002, and 2001 is as follows:
Warrants
Continued
Options Warrants
---------------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
---------------------------------------------------
Outstanding at January 1, 2001 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
Granted - - - -
Forfeited (75,000) 1.50 (400,000) 1.94
---------------------------------------------------
Outstanding at December 31, 2003 2,588,148 $ .29 925,771 $ .002
===================================================
The following table summarizes information about stock options
and warrants outstanding at December 31, 2003:
Outstanding Exercisable
------------------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
------------------------------------------------------- --------------------------
$ .002 925,771 3.87 $ .002 925,771 $ .002
.10 - .13 1,540,000 5.65 0.12 1,540,000 0.12
.38 - 1.13 1,048,148 3.00 0.54 1,048,148 0.54
----------------------------------------- --------------------------
$.002 to 1.13 3,513,919 4.49 $ 0.22 3,206,919 $ 0.22
========================================= ==========================
- --------------------------------------------------------------------------------
F-26
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Stock Common Stock Warrant
Options and In conjunction with the issuance of the preferred stock
Warrants described in note 10, the Company issued a warrant to the
Continued 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, in accordance with the preferred stock agreement, the
warrant became exercisable into 925,771 shares of common
stock, the maximum number of shares of common allowed under
the agreement, at $.002 per share. The warrants expire in
2007.
12. Impairment on As of December 31, 2002, the Company revaluated the carrying
Long-Lived value of its Gadsby terminal facility located in Salt Lake
Assets 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 in 2002.
- --------------------------------------------------------------------------------
F-27
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Income Taxes The components of income tax benefit for the years ended
December 31 are summarized as follows:
2003 2002 2001
----------------------------------------
Current $ - $ - $ -
Deferred:
Federal - - -
State - - -
----------------------------------------
- - -
----------------------------------------
Total $ - $ - $ -
========================================
Income tax expense (benefit) differed from amounts computed by
applying the federal statutory rate to pretax loss as follows:
Years Ended December 31,
----------------------------------------------
2003 2002 2001
----------------------------------------------
Income (loss) before income
taxes and minority interest -
computed tax at the expected
federal statutory rate, 34% $ (429,000) $ 9,988,000 $ (2,205,000)
State income taxes, net of
federal income tax benefits (34,000) 881,000 (194,000)
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 19,000 259,000 1,605,000
Expiration of net operating
losses - 20,000 22,000
Other 70,000 170,000 36,000
Change in valuation reserve 374,000 (4,710,000) 736,000
----------------------------------------------
Total income tax benefit $ - $ - $ -
==============================================
- --------------------------------------------------------------------------------
F-28
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Income Taxes Deferred tax assets (liabilities) are comprised of the
Continued following:
December 31,
----------------------------
2003 2002
----------------------------
Net operating loss carryforwards $ 4,121,000 $ 3,616,000
Allowance for doubtful accounts 61,000 65,000
Capital loss carryforwards 203,000 203,000
Amortization and impairments of goodwill 137,000 85,000
Depreciation (784,000) (618,000)
Other 34,000 47,000
Valuation allowance (3,772,000) (3,398,000)
----------------------------
$ - $ -
============================
The Company has available at December 31, 2003, unused tax
operating loss carryforwards of approximately $12.4 million
which may be applied against future taxable income and expire
in varying amounts through 2012.
14. Related During 1998, 946,296 options were exercised by officers of the
Party Company through an 8% common stock subscription receivable in
Transactions the amount of $549,166. The respective receivable was
Not Otherwise reflected as a reduction in common stockholders' equity
Disclosed (deficit). During the year ended December 31, 2002, the
subscription receivable was extin-guished, by the Company, in
exchange for the 946,296 common shares issued in connection
with the original subscription receivable.
15. Commitments Litigation
and On May 24, 2002, Geneva Rock Products, Inc. filed a complaint
Contingencies against the Company in the Third Judicial District Court, Salt
Lake County, Utah. Geneva has alleged that the Company
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. The Company has denied
liability on all of Geneva's claims and believes 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 the Company is unaware of any
additional information that suggests that the asphalt binder
was deficient. Because discovery has not been completed and
due to the serious nature of Geneva's claims, the Company has
no way of predicting whether it will ultimately prevail.
- --------------------------------------------------------------------------------
F-29
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Commitments Litigation - Continued
and On December 20, 2001, Oriental New Investments, Ltd. served a
Contingencies complaint against the Company, which was filed in the Third
Continued Judicial District Court, Salt Lake County, Utah. The action
relates to a 1997 convertible debenture and replacement
convertible debenture issued by the Company to Oriental. The
action sought to recover $75,000 in liquidated damages, plus
interest, or actual damages, and attorneys' fees and costs,
for alleged breaches of the convertible debentures. While the
Company denied any and all liability and believes that
Oriental's claims are without merit, on December 8, 2003 the
Company agreed to fully settle the matter. Pursuant to the
settlement agreement, the Company paid New Oriental $10,000
and agreed to pay and additional $10,000 on or before December
31, 2004 and $15,000 on or before December 31, 2005.
On April 9, 2003, S & L Industrial filed legal action against
the Company 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 sought
to recover amounts that the Company 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. On November 19, 2003 the matter
was fully settled. The Company paid S & L $30,000 and agreed
to pay an additional $25,000 on or before December 15, 2004.
On May 22, 2003, GATX Financial Corporation filed a complaint
against the Company in the Third Judicial District Court of
Salt Lake County, Utah. The parties have fully settled the
matter and the Company has agreed to pay GATX $75,000 over a
36 month period.
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-30
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Subsidiary The Company operates in the asphalt production and
Information distribution segment through the following subsidiaries:
Year Ended December 31, 2003
-------------------------------------------------------------------------
Crown
Asphalt Crown
Products Asphalt
CEC Company Distribution CAT Total
-------------------------------------------------------------------------
Revenues from
external customers $ - $ 16,915,302 $ 18,325 $ 3,000 $ 16,936,627
Gross profit (loss) $ - $ 582,371 $ (391,445) $ (90,293) $ 100,633
Interest expense $ 92,085 $ 133,456 $ - $ 50,379 $ 275,920
Depreciation and
amortization $ 14,137 $ 345,108 $ 374,940 $ 51,551 $ 785,736
Subsidiary net income
(loss) $ (220,284) $ (878,635) $ (61,108) $ (100,858) $ (1,260,885)
Subsidiary total
assets $ 10,178,340 $ 35,719,869 $ 7,946,007 $ 1,911,208 $ 55,755,424
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
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F-31
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. Subsidiary
Information 2003 2002
Continued ---------------------------
Reconciliation of assets:
Total assets for individual subsidiaries $ 55,755,424 $ 53,508,000
Elimination of investment in subsidiaries (40,215,023) (40,049,177)
Elimination of intercompany receivables (4,463,408) (184,027)
---------------------------
Total consolidated assets $ 11,076,993 $ 13,274,796
===========================
During 2003, 2002 and 2001, 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.
17. Employee In 1999, the Company established a defined contribution plan
Benefit 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, 2003,
2002, and 2001 totaled approximately $29,000, $35,000, and
$35,000, respectively.
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F-32
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
18. Subsequent On June 7, 2004, the Company entered into an agreement with an
Event unrelated asphalt distribution firm headquartered in Idaho to
organize a joint venture that will be owned 51% by the other
firm and 49% by the Company. Substantially all of the
Company's asphalt business and operation assets with a net
book value of approximately $8.5 million, will be transferred
to the joint venture entity in consideration of a promissory
note for $7.5 million, the payment of which will be largely
contingent upon the joint venture having earnings sufficient
to permit such payment, assumption of debt of approximately
$2.3 million, and a 49% interest in the joint venture entity.
In addition, the other joint venture participant will provide
the joint venture with an operating line of credit of up to $4
million through the end of calendar year 2004, which may be
extended in subsequent years at the election of the joint
venture partner. In anticipation of completing this
transaction, on May 17, 2004, the joint venture partner
provided the Company with a $1.4 million interim operating
line of credit, secured by the Company's inventory, work in
progress, finished goods and accounts receivable. Formation of
the joint venture is contingent on a number of factors,
including approval by the Company's stockholders, a majority
of which have indicated that they intend to do so.
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F-33