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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number
June 30, 2004 0-19365
CROWN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Utah 87-0368981
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1710 West 2600 South, Woods Cross, Utah, 84087
-------------------------------------------------
(Address of principal executive offices, zip code)
(801) 296-0166
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ] .
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X] .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
There were 26,482,388 shares of $0.02 par value common stock
outstanding as of July 31, 2004.
CROWN ENERGY CORPORATION
INDEX
PAGE(S)
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30,
2004 (unaudited) and December 31, 2003 3
Condensed Consolidated Statement of Operations for
the Three Months ended June 30, 2004 and 2003
(unaudited) and Six Months ended June 30, 2004
and 2003 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for
the Six Months ended June 30, 2004 and 2003
(unaudited) 7
Notes to Unaudited Condensed Consolidated Financial
Statements 9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 18
ITEM 4. Controls and Procedures 19
PART II. Other Information
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities and Use of Proceeds 20
ITEM 3. Defaults upon Senior Securities 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
ITEM 5. Other Information 20
ITEM 6. Exhibits and Report on Form 8-K 21
Signatures 22
Certifications 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2004 December 31,
[unaudited] 2003
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 75,144 $ 1,089,862
Accounts receivable, net of allowance for uncollectible
accounts of $159,970 and $164,630, respectively 2,438,701 546,309
Inventory 2,007,727 636,809
Prepaid and other current assets 67,670 110,745
----------- -----------
Total Current Assets 4,589,242 2,383,725
PROPERTY PLANT, AND EQUIPMENT, Net 8,296,535 8,635,741
OTHER ASSETS 42,228 57,527
----------- -----------
TOTAL $12,928,005 $11,076,993
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
3
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
June 30, 2004 December 31,
[unaudited] 2003
----------- -----------
CURRENT LIABILITIES
Accounts payable $ 3,980,632 $ 1,592,949
Preferred stock dividends payable 1,600,000 1,400,000
Accrued expenses 163,193 105,685
Accrued interest 383,223 316,508
Long-term debt - current portion 802,859 483,245
----------- -----------
Total current liabilities 6,929,907 3,898,387
Long-term debt 2,371,515 2,165,577
Redeemable preferred stock 5,000,000 5,000,000
Total liabilities 14,301,422 11,063,964
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 573,461 539,579
STOCKHOLDERS DEFICIT:
Stockholders' equity:
Common Stock $0.02 par value 50,000,000 shares authorized
26,482,388 shares outstanding for each period 529,647 529,647
Additional paid in Capital 3,319,417 3,519,417
Stock warrants 186,256 186,256
Accumulated deficit (5,982,198) (4,761,870)
----------- -----------
Stockholders' deficit (1,946,878) (526,550)
----------- -----------
TOTAL $12,928,005 $11,076,993
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
4
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended
June 30,
--------------------------------
2004 2003
----------- -----------
SALES, Net of demerits $ 3,275,274 $ 6,241,935
COST OF SALES 3,335,212 5,942,807
----------- -----------
GROSS PROFIT (LOSS) (59,938) 299,128
GENERAL AND ADMINISTRATIVE EXPENSES (354,216) (402,589)
Bad debt recovery on accounts previously allowed for - 323,524
----------- -----------
INCOME (LOSS) FROM OPERATIONS (414,154) 220,063
----------- -----------
OTHER INCOME (EXPENSES):
Interest income and other income 388 44,045
Interest expense (72,396) (66,778)
Total other income (expense), net (72,008) (22,733)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTERESTS (486,162) 197,330
----------- -----------
DEFERRED INCOME TAX BENEFIT - -
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 9,902 13,950
----------- -----------
NET INCOME (LOSS) $ (476,260) $ 211,280
----------- -----------
NET INCOME (LOSS) PER COMMON SHARE:
Basic and diluted $ (0.02) $ 0.00
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
5
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended
June 30,
--------------------------------
2004 2003
----------- -----------
SALES, Net of demerits $ 3,451,424 $ 6,356,642
COST OF SALES 3,914,805 6,716,257
----------- -----------
GROSS PROFIT (LOSS) (463,381) (359,615)
GENERAL AND ADMINISTRATIVE EXPENSES (636,762) (738,911)
Bad debt recovery on accounts previously allowed for - 323,524
----------- -----------
INCOME (LOSS) FROM OPERATIONS (1,100,143) (775,022)
----------- -----------
OTHER INCOME (EXPENSES):
Interest income and other income 1,146 45,373
Interest expense (141,798) (133,013)
Total other income (expense), net (140,652) (87,640)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTERESTS (1,240,795) (862,642)
----------- -----------
DEFERRED INCOME TAX BENEFIT - -
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 20,472 27,422
----------- -----------
NET INCOME (LOSS) $(1,220,323) $ (835,220)
----------- -----------
NET INCOME (LOSS) PER COMMON SHARE:
Basic and diluted $ (0.05) $ (0.04)
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
6
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
--------------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net income (loss) $(1,220,323) $ (835,220)
Adjustments to reconcile net income (loss) to net cash used by operating
activities:
Amortization, depreciation and depletion 339,206 361,974
Recovery of doubtful accounts receivable - (323,524)
Minority interest (20,472) (27,422)
Change in assets and liabilities:
Accounts receivable (1,892,392) (2,476,630)
Inventory (1,370,918) (1,188,175)
Prepaid and other assets 58,374 122,341
Accounts payable 3,250,716 1,721,111
Accrued expenses and interest 124,223 111,955
----------- -----------
Total adjustments 488,737 (1,698,370)
----------- -----------
Net cash used in operating activities (731,586) (2,533,590)
Cash flows used in investing activities:
Purchase of property and equipment - (328,261)
----------- -----------
Cash flows from financing activities:
Capital contributions from partners 54,349 40,842
Proceeds from borrowings of long term debt - 400,000
Payments on long-term debt (337,481) (210,681)
----------- -----------
Net cash provided by(used in) financing activities (283,132) 230,161
----------- -----------
The accompanying notes are an integral part of these consolidated financial statements.
7
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Continued]
For the Six Months Ended
June 30,
--------------------------------
2004 2003
----------- -----------
Net Decrease in Cash: (1,014,718) (2,631,690)
Cash at Beginning of Period $ 1,089,862 $ 2,723,068
=========== ===========
Cash at End of Period $ 75,144 $ 91,378
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $ 85,190 $ 88,560
=========== ===========
Income taxes $ - $ -
=========== ===========
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended June 30, 2004:
We accrued dividends on preferred stock of $200,000.
We refinanced $863,033 of accounts payable to long-term debt through
negotiated extended payment terms with the vendors.
For the period ended June 30, 2003 we accrued dividends on preferred
stock of $200,000.
The accompanying notes are an integral part of these consolidated financial statements.
8
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have prepared the accompanying consolidated financial statements as
of June 30, 2004 and for the three and six months ended June 30, 2004
and 2003 without an audit. In our opinion, all adjustments (which
include only normal recurring adjustments) necessary to present fairly
our financial position as of June 30, 2004, results of operations for
the three and six months ended June 30, 2004 and 2003 and cash flows
for the six months ended June 30, 2004, and 2003 have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed financial statements be read in conjunction with
the financial statements and notes thereto included in our December 31,
2003 Annual Report on Form 10-K. The results of operations for the
period ended June 30, 2004, are not necessarily indicative of the
operating results for the full year.
Summary of Disputes - One outstanding complaint has been filed against
usby Geneva Rock Products, Inc. The foregoing action was described in
detail in our Annual Report on Form 10-K for the year ending December
31, 2003.
Organization - Crown Energy Corporation ("CEC") and its wholly-owned
subsidiary, Crown Asphalt Products Company ("CAPCO"), and Crown
Distribution, an entity in which CAPCO and CEC now own all interests
(collectively referred to as the "Company"), are engaged in the
production, manufacturing, distribution and selling of asphalt
products. Crown Distribution owns a majority interest in Cowboy Asphalt
Terminal, L.L.C. ("CAT, LLC"). CAT, LLC is a joint venture formed on
September 16, 1998, between CAPCO and Foreland Asphalt Corporation
("Foreland"), which owns an asphalt terminal and storage facility.
Crown Distribution owns 66.67% and Foreland owns 33.33% of CAT, LLC.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly or majority-owned
subsidiaries. All significant inter-company transactions have been
eliminated in consolidation.
Impairment of Long-Lived Assets - The Company reviews its long-lived
assets for impairment when events or changes in circumstances indicate
that the book value of an asset may not be recoverable. The Company
evaluates, at each balance sheet date, whether events and circumstances
have occurred which indicate possible impairment. The Company uses an
estimate of future undiscounted net cash flows of the related asset or
group of assets over the estimated remaining life in measuring whether
the assets are recoverable
Stock-Based Compensation - The Company accounts for stock options
granted to employees under the recognition and measurement principles
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations, and has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost is recognized in the financial statements when options granted
under those plans have an exercise price equal to or greater than the
market value of the underlying common stock on the date of grant. The
Company granted no options during the period ending June 30, 2004 and
2003.
9
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS [Continued]
Going Concern - The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going
concern. As of June 30, 2004, 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.
The Company's ability to continue as a going concern is subject to the
attainment of profitable operations or obtaining necessary funding from
outside sources to fund its cash flow requirements to purchase
inventory. Management is attempting to secure financing for inventory
purchases with inventory suppliers or other financing institutions.
There can be no assurance that the Company will be successful in its
attempts to obtain financing for its inventory purchases. In addition,
management is continuing its plans to reduce overhead and other costs.
Management is also considering consolidation of manufacturing
facilities to maximize operating efficiency and margins on product
sales. However, there can be no assurance that management will be
successful in these efforts. As disclosed in Note 6, 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 the Company's
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, assumption
of approximately $2.3 million in liabilities, and a 49% interest in the
joint venture entity. The promissory note will be secured by the sold
assets and business. 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 the Company's inventory, work in
progress, finished goods and accounts receivable. We believe that the
line of credit provided by the joint venture partner will be sufficient
to sustain operations of the joint venture through 2004. The Company's
continuance subsequent to the transaction will be largely dependent on
the success of the joint venture as payment of the $7.5 million
promissory note is contingent on earnings of the joint venture. If the
joint venture is unable to make payments on the promissory note, the
Company may not be able to continue in business. Formation of the joint
venture is contingent on a number of factors, including approval by the
Company's stockholders. The officers and directors have approved the
foregoing transaction. The principal stockholders and their affiliates
holding a majority of the issued and outstanding common stock have also
approved the foregoing transactions. In addition, the holder of the
Series A Preferred Stock has indicated that it intends to approve the
transaction and to waive its right to require the Company to redeem the
preferred stock at its stated value plus all accrued but unpaid
dividends, or for approximately $6.6 million as of June 30, 2004.
NOTE 2 - LONG-TERM DEBT
During 2004 we entered into extended payment arrangements with various
vendors for $863,033 to extend amounts due into equal monthly
installments over 3 years accruing interest at 4%.
NOTE 3 - CAPITAL TRANSACTIONS
Preferred Stock and Related Warrant- 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
10
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS [Continued]
$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, and June 30, 2004, there were dividends
payable to the holder of the Series A Preferred Stock of $1.4 million
and $1.6 million, respectively. Future dividends of 8% per annum 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 June 30, 2004, 160.0 million
shares of common stock would have to be issued to satisfy the dividend
payable. The Series A Preferred Stock is convertible to 4,285,000
shares of common stock, if so elected by the holder of the Series A
Preferred Stock. The holder of the Series A Preferred Stock may also
require the Company to redeem the Series A Preferred Stock after the
eighth anniversary of the Series A Preferred Stock's issuance. In
addition, in the event of a sale of all or substantially all of the
Company's assets, or a merger or consolidation in which control of the
Company is transferred, may, at the option of the Series A Preferred
Stockholder, be treated as a liquidation, thus resulting in the
repurchase of the Series A Preferred Stock at its stated value and all
outstanding related dividends.
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 in
common stock of dividends that may accrue in the future thereon, and
exercise of the warrant. Therefore, there are only approximately 20.4
million shares available for issuance, and we could not satisfy all of
our current obligations under the Series A Preferred Stock on
conversion or the payment of dividends or on exercise of the warrant.
We have not undertaken to renegotiate with the Mealey Family Limited
Partnership any of the terms of the Series A Preferred Stock or the
warrant, do not know whether we will attempt to do so, and have not
analyzed our obligations or responsibilities if the Mealey Family
Limited Partnership would elect to convert the Series A Preferred
Stock, demand payment of the dividends in common stock, or exercise the
warrant.
11
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS [Continued]
NOTE 4 - PROFIT/LOSS PER SHARE
The following table is a reconciliation of the net loss numerator of
basic and diluted net loss per common share for the three and six month
periods ended June 30, 2004 and June 30, 2003:
Six Months Six Months Three Months Three Months
2004 2003 2004 2003
----------------------- ------------------- ---------------------- ---------------------
Per Per Per Per
Loss Share Profit Share Profit Share Profit Share
---- ----- ------ ----- ------ ----- ------ -----
Net Profit (Loss) ($1,220,323) ($835,220) ($476,260) $211,280
Redeemable preferred
stock dividends and
accretion (200,000) (200,000) (100,000) (100,000)
Add back stock
dividends and accretion - - - 100,000
----------- - ----------- --------- --------
Net profit (loss)
attributable to
common stockholders ($1,420,323) ($0.05) ($1,035,220) ($0.04) ($576,260) ($0.02) $211,280 $0.00
Weighted average
common shares
outstanding -
basic 26,482,388 26,482,388 26,482,388 26,482,388
diluted 26,482,388 26,482,388 26,482,388 84,821,442
We had at June 30, 2004, and June 30, 2003, incremental options and
warrants to purchase, 3,372,919 shares and 3,988,919 shares of common
stock, respectively, that were not included in the computation of
diluted earnings (loss) per share for the three and six months ended
June 30, 2004 and for the six months ended June 30, 2003, because their
effect was anti-dilutive. We also had preferred stock outstanding at
June 30, 2004, and June 30, 2003, which is convertible into
approximately 4,285,000 shares of common stock that was not included in
the computation of diluted loss per share for the three and six months
ended June 30, 2004 and for the six months ended June 30, 2003, as its
effect was anti-dilutive. Accordingly, diluted loss per share does not
differ from basic loss. The diluted weighted average shares for the
three months ended June 30, 2003, include the dilutive effect of the
conversion of preferred stock dividends into approximately 58 million
shares of common stock. As of June 30, 2004, there were preferred stock
dividends payable in the amount of $1,600,000. Pursuant to the
designations and preferences of the preferred stock, the holder of the
preferred stock can elect to require us to pay dividends accruing in
the future, by the issuance of common stock in lieu of cash payments at
a price generally equivalent to the trading price for our common stock
in the over-the-counter market, as detailed in the designations and
preferences. The market price for our common stock was $0.01 per share
as of July 31, 2004.
12
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS [Continued]
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities." FIN 46 addresses when a company should consolidate in its
financial statements the assets, liabilities and activities of a
variable interest entity (VIE). It defines VIEs as entities that either
do not have any equity investors with a controlling financial interest,
or have equity investors that do not provide sufficient financial
resources for the entity to support its activities without additional
subordinated financial support. FIN 46 also requires disclosures about
VIEs that a company is not required to consolidate, but in which it has
a significant variable interest. The consolidation requirements of FIN
46 applied immediately to variable interest entities created after
January 31, 2003. The Company has not obtained an interest in a VIE
subsequent to that date. A modification to FIN 46 (FIN 46 (R)) was
released in December 2003. FIN 46 (R) delayed the effective date for
VIEs created before February 1, 2003, with the exception of
special-purpose entities, until the first fiscal year or interim period
ending after March 15, 2004. FIN 46 (R) delayed the effective date for
special-purpose entities until the first fiscal year or interim period
after December 15, 2003. The Company is not the primary beneficiary of
any SPEs at December 31, 2003. The Company adopted FIN 46 (R) for
non-SPE entities as of March 31, 2004. The adoption of FIN 46 (R) did
not have a material impact on results of operations or financial
position.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. This Statement is effective for contracts
entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 did not have a material impact on the results
of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 requires that certain financial instruments,
which under previous guidance may have been accounted for as equity,
must now be accounted for as liabilities (or an asset in some
circumstances). The financial instruments affected include mandatory
redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash
or other assets and certain obligations that can be settled with shares
of stock.
This Statement is effective for all such financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
SFAS 150 resulted in the reclassification of $5 million of Series A
Preferred Stock from mezzanine capital to liabilities.
NOTE 6 - PROPOSED AGREEMENT FOR SALE OF ASSET
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
the Company's 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, assumption of approximately $2.3 million in liabilities,
and a 49% interest in the joint venture entity. The promissory note
will be secured by the sold assets and business. 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
13
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS [Continued]
joint venture partner has advanced interim operating capital, 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.
The officers and directors have approved the foregoing transaction. The
principal stockholders and their affiliates holding a majority of the
issued and outstanding common stock have also approved the foregoing
transactions. In addition, the holder of the Series A Preferred Stock
has indicated that it intends to approve the transaction and to waive
its right to require the Company to redeem the preferred stock at its
stated value plus all accrued but unpaid dividends, or for
approximately $6.6 million as of June 30, 2004.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition,
results of operations and related matters includes a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
include, by way of illustration and not limitation, statements containing the
words "anticipates," "believes," "expects," "intends," "future" and words of
similar import that express, either directly or by implication, management's
beliefs, expectations or intentions regarding our future performance or future
events or trends that may affect us or our results of operations.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors, including, but not limited to changes in
economic conditions generally or with respect to our asphalt products market in
particular, new or increased governmental regulation, increased competition,
shortages in labor or materials, delays or other difficulties in shipping or
transporting, the risk of loss of certain operating assets serving as collateral
to secure financing, and other similar risks inherent in our operations or in
business operations generally. Any such risks or uncertainties, either alone or
in combination with other factors, may cause our actual results, performance or
achievements to differ materially from our anticipated future results,
performance or achievements (which may be expressed or implied by such
forward-looking statements). Consequently, the following management's discussion
and analysis, including all forward-looking statements contained therein, is
qualified and limited by the foregoing cautionary factors. Interested persons
are advised to consider all forward-looking statements within the context of
such cautionary factors.
Liquidity and Capital Resources
At June 30, 2004, we had cash and other current assets of $4.59
million, as compared to cash and other current assets of $2.38 million at
December 31, 2003. The increase of approximately $2.21 million was generally due
to an increase in accounts receivable and inventory, which is offset, by a
corresponding increase in accounts payable.
Our business requires a large amount of working capital to fund raw
material purchases and accounts receivable. During the colder quarters ending
December 31 and March 31, we require working capital to purchase raw materials
when prices are typically at their annual low and store these materials until
they are processed and sold during the warmer summer months when most paving
occurs. As discussed below, in recent years we have not had sufficient working
capital to take advantage of low raw material prices during the winter months
and have, therefore, been required to fill our raw material needs in the warmer
summer months when prices are typically higher. We typically generate a large
majority of our sales during the warmer summer months. For example, during the
preceding year we generated approximately 91% of our annual sales during the
quarters ended June 30 and September 30, 2003. Therefore, during these periods
we require large amounts of working capital to fund accounts receivable and
general operations. We have not had third party working capital financing since
1999 and we have been unable to obtain adequate financing on acceptable terms.
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. We have continued to suffer from
shortages of working capital needed to optimize operating economies and that has
threatened the survival of the Company. 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. As previously reported, our Board of
Directors approved the investigation of alternatives for a "going-private"
transaction. In order to ensure the survival of the Company and resolve its
working capital problems, the Board has approved the sale of all of its asphalt
manufacturing and distribution assets and related business. Formation of the
joint venture is contingent on a number of factors, including approval by the
Company's stockholders. The officers and directors have approved the foregoing
transaction. The principal stockholders and their affiliates holding a majority
of the issued and outstanding common stock have also approved the foregoing
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
transactions. In addition, the holder of the Series A Preferred Stock has
indicated that it intends to approve the transaction and to waive its right to
require the Company to redeem the preferred stock at its stated value plus all
accrued but unpaid dividends, or for approximately $6.6 million as of June 30,
2004.
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 the Company's
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, assumption of liabilities, and a 49% interest
in the joint venture entity. The sold assets and business will secure the
promissory note. 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 provided the Company with interim operating capital, 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.
A portion of our accounts receivable is subject to the risks and
uncertainties of litigation and related collection risks. In the event that we
are unable to collect our current accounts receivables, we are unable to secure
the necessary working capital line of credit for our operations, our operating
losses and working capital deficits continue, or if we are unable to recoup our
losses, we may not have sufficient capital to operate through 2004 and into
2005.
As of June 30, 2004, we had a working capital deficit of approximately
$2.34 million, an accumulated deficit of $5.98 million, and total stockholders'
deficit of $1.9 million.
The consolidated operations of the Company have not sustained
profitability and the Company has relied on debt financing to satisfy its
obligations. The Company's ability to continue as a going concern is subject to
the attainment of profitable operations or obtaining necessary funding from
outside sources to fund its cash flow requirements to purchase inventory.
Failure of the Company to complete the foregoing transaction will have a
significant negative effect and could result in the failure of the Company.
Critical Accounting Policies
Inventory consists principally of refined products and chemical
supplies, which are valued at the lower of cost (computed on a first in, first
out basis) or market.
Revenue recognition for sales of product is recognized when a contract
is executed or a valid purchase order has been received, product has been
shipped, the selling price is fixed or determinable, and collectibility is
reasonably assured.
Property, plant and equipment are recorded at cost and are depreciated
over the estimated useful lives of the related assets. Depreciation is computed
using the straight-line method for financial reporting purposes. The estimated
useful lives of property, plant and equipment are as follows:
Plant and improvements and tankage 10-30 years
Equipment 7 years
Vehicles 5 years
Computer equipment, furniture and fixtures 3 years
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, periodically, whether events and
circumstances have occurred which indicate possible impairment. The Company uses
an estimate of future undiscounted net cash flows of the related asset or group
of assets over the estimated remaining life in measuring whether the assets are
recoverable
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of receivables. In the normal
course of business, the Company performs ongoing credit evaluations of its
customers and maintains allowances for possible losses that, when realized, have
been within the range of management's expectations.
The Company maintains its cash in bank deposit accounts that, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk
on cash and cash equivalents.
Results of Operations
For the three month period ending June 30, 2004, compared to the three
month period ending June 30, 2003
Total revenue decreased from $6,241,935 for the three-month period
ended June 30, 2003, to $3,275,274 for the three-month period ended June 30,
2004, a decrease of $2,966,661. Cost of sales decreased from $5,942,807 for the
same period in 2003 to $3,335,212 for the same period in 2004, a decrease of
$2,607,595. The decrease in revenues was primarily the result of a decrease in
sales volume of approximately 15,770 tons offset partially by an increase in
revenue per ton of approximately $7.84. The decrease in tons is primarily due to
contracted business start dates occurring later in the early asphalt paving
season compared to the previous year. The decrease in cost of sales in the 2004
interim period is primarily the result of the reduced volume and reduced
facility operating costs predominately made up of salaries and wages.
General and administrative expenses decreased from $402,589 for the
three-month period ended June 30, 2003, to $354,216 for the three-month period
ended June 30, 2004, a decrease of $48,373. This decrease is primarily due to a
reduction in salaries, wages and rent expense. During 2003 a recovery of a
receivable that was allowed for in a prior year for $323,524 was recorded as a
bad debt recovery.
Net other income/expenses increased from an expense of $22,733 for the
three-month period ended June 30, 2003, to an expense of $72,008 for the
three-month period ended June 30, 2004, an increased expense of $49,275. This
increase is primarily due to a dividend received in 2003 in the amount of
$42,611.
Minority interest of $9,902 represents Foreland's approximate 33%
interest in the loss of CAT, LLC.
For the six month period ending June 30, 2004, compared to the six
month period ending June 30, 2003
Total revenue decreased from $6,356,642 for the six-month period ended
June 30, 2003, to $3,451,424 for the six-month period ended June 30, 2004, a
decrease of $2,905,218. Cost of sales decreased from $6,716,257 for the same
period in 2003 to $3,914,805 for the same period in 2004, a decrease of
$2,801,452. The decrease in revenues was primarily the result of a decrease in
sales volume of approximately 15,300 tons partially offset by an increase in
revenue per ton of approximately $9.40 per ton. The decrease in tons is
primarily due to contracted business start dates occurring later in the early
asphalt paving season compared to the previous year. The decrease
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
in cost of sales in the 2004 interim period is primarily the result of reduced
volume and reduced facility operating costs predominately made up of salaries,
wages and insurance.
General and administrative expenses decreased from $738,911 for the
six-month period ended June 30, 2003, to $636,762 for the six-month period ended
June 30, 2004, a decrease of $102,149. This decrease is primarily due to a
reduction in salaries, wages, rent expense and supplies. During 2003 a recovery
of a receivable that was allowed for in a prior year for $323,524 was recorded
as a bad debt recovery.
Net other income/expenses increased from an expense of $87,640 for the
six-month period ended June 30, 2003, to an expense of $140,652 for the
six-month period ended June 30, 2004, an increase of $53,012. This increase is
the result of a dividend received in 2003 in the amount of $42,611.
Minority interest of $20,472 represents Foreland's approximate 33%
interest in the loss of CAT, LLC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We do not engage in transactions involving market risk sensitive
instruments intended to reduce our exposure to interest rate risks, foreign
currency exchange rate risks, commodity price risks or similar risks, and
therefore we do not believe we are subject to material market risks resulting
from such market rate sensitive instruments. However, we are subject to general
market fluctuations related to the purchase of base stock asphalt and may suffer
reduced operating margins to the extent our increased costs cannot be passed
through to our customers. Such prices generally fluctuate with the price of
crude oil.
We are also subject to certain price escalation and de-escalation
clauses in our asphalt distribution sales contracts. We supply asphalt to
projects in certain states where regulations provide for escalation and
de-escalation of the price for such asphalt relative to the price difference
from the time the project is awarded to the successful bidding company and the
time the project is completed. We factor such de-escalation risk into our bid
prices and do not believe we have material exposure to risk resulting from these
regulations.
18
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures:
Based on their evaluations as of the filing date of this report, the
principal executive officer and principal financial officer of the Company have
concluded that the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act) are effective
to ensure that information required to be disclosed by the Company in reports
that the Company files or submits under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.
(b) Changes in internal controls:
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these internal controls
subsequent to the date of the most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No change see our Annual Report on Form 10K for year ended December 31,
2003 for pending actions.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 2004, there were arrearages in the amount of $1,600,000
on dividends on our preferred stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Memorandum of Understanding to Sell Asphalt Manufacturing and
Distribution Assets and Related Business
On June 7, 2004 the Company entered into a Memorandum of Understanding
with an unrelated asphalt company to form a new limited liability company to
purchase all of the Company's asphalt manufacturing and distribution assets and
related business. At closing of the transaction, the Company will own 49% of the
membership interest in the new limited liability company and the other asphalt
company will own the remaining membership interest. The new limited liability
company will purchase the assets and business for $7.5 million and will in
addition purchase the Company's current inventory. The purchase price will be
paid in the form of a six-year promissory accruing interest. The sold assets and
business will secure the promissory note. As part of the transaction, the other
member of the limited liability company will supply the working capital
financing to enable the new company to take advantage of off-season asphalt
purchase to fill the storage tank capacity.
20
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits: The following exhibits are included as part of this
report:
SEC
Exhibit Reference
Number Number Title of Document Location
- -----------------------------------------------------------------------------------------------------------------
31.01 31 Certification of Chief Executive Officer Pursuant to Rule This filing
13a-14
- -----------------------------------------------------------------------------------------------------------------
31.02 31 Certification of Chief Financial Officer Pursuant to Rule This filing
13a-14
- -----------------------------------------------------------------------------------------------------------------
32.01 32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted This filing
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
- -----------------------------------------------------------------------------------------------------------------
32.02 32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted This filing
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
(b) Reports on Form 8-K: We did not file any reports on Form 8-K for
the quarter ended September 30, 2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN ENERGY CORPORATION
(Registrant)
Date: August 23, 2004 By: /s/ Jay Mealey
-----------------------------
Jay Mealey,
Chief Executive Officer
Date: August 23, 2004 By: /s/ Alan Parker
-----------------------------
Alan Parker,
Controller
22