UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ---------------------
Commission file number 0-19365
----------------------------------------------------------
CROWN ENERGY CORPORATION
- - --------------------------------------------------------------------------------
(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)
215 South State, Suite 550, Salt Lake City, Utah, 84111
- - --------------------------------------------------------------------------------
(Address of principal executive offices, zip code)
(801) 537-5610
- - --------------------------------------------------------------------------------
(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 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 12,668,512 shares of $.02 par value common stock outstanding as of
November 13, 1998.
<PAGE>
CROWN ENERGY CORPORATION
INDEX
-----
<TABLE>
<CAPTION>
PAGE(S)
-------
PART I. Financial Information
ITEM 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets at September 30,
1998 (unaudited) and December 31, 1997 3
Condensed Consolidated Statement of Operations for the Three
Months ended September 30, 1998 and 1997 (unaudited) 5
Condensed Consolidated Statement of Operations for the Nine
Months ended September 30, 1998 and 1997 (unaudited) 6
Condensed Consolidated Statement of Cash Flows for the
Nine Months ended September 30, 1998 and 1997 (unaudited) 7
Notes to Condensed Consolidated Financial Statements
(unaudited) 9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. Other Information
ITEM 1. Legal Proceedings 17
ITEM 2. Changes in Securities 17
ITEM 3. Defaults upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
PART III. Signatures 19
</TABLE>
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
1998 December 31,
[unaudited] 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $2,694,034 $3,100,765
Trade receivables, net 8,019,578 10,808
Inventory 6,374,275 0
Other current assets 883,429 177,416
------------ ------------
Total Current Assets 17,971,316 3,288,989
PROPERTY AND EQUIPMENT, net 4,248,075 7,383
EQUITY INVESTMENT IN A LIMITED LIABILITY
COMPANY 4,738,410 3,412,355
GOODWILL 5,018,410 354,930
OTHER ASSETS, net 94,554
TOTAL ASSETS $32,070,765 $7,063,657
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
<PAGE>
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30,
1998 December 31,
[Unaudited] 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 4,229,843 $ 9,535
Line of credit with a related party 10,266,571 0
Current portion-long term debt 61,493 0
Dividends payable 377,110 65,414
Other current liabilities 889,662 59,567
------------ ------------
Total Current Liabilities 15,824,679 134,516
------------ ------------
LONG-TERM DEBT 958,435 0
PREFERENTIAL DEBT WITH A RELATED PARTY 6,000,000 0
MINORITY INTEREST 2,197,936 0
STOCKHOLDERS' EQUITY:
Preferred stock, $.005 par value, 1,000,000 shares
authorized, 500,000 $10 Series A Cumulative Convertible
Shares issued and outstanding 2,500 2,500
Common stock, $.02 par value, 50,000,000 shares
authorized, 12,668,512 and 11,722,216 issued and
outstanding at 1998 and 1997, respectively 253,370 234,444
Capital in excess of par value 10,719,376 10,165,245
Common stock subscription receivable from related parties (572,058) 0
Retained deficit (3,313,473) (3,473,048)
------------ ------------
Total Stockholders' Equity 7,089,715 6,929,141
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,070,765 $ 7,063,657
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
4
<PAGE>
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUE:
Asphalt revenue $ 15,734,718 $ 0
------------ ------------
Total Revenue 15,734,718 0
------------ ------------
COSTS AND OPERATING EXPENSES:
Cost of goods sold 11,299,005 0
Operating expenses 2,178,830 0
------------ ------------
Total Costs and Operating Expenses 13,477,835 0
------------ ------------
GROSS PROFIT 2,256,883 0
General and administrative expenses 438,184 145,011
Depletion, depreciation and amortization 133,332 0
------------ ------------
INCOME (LOSS) FROM OPERATIONS 1,685,367 (145,011)
------------ ------------
OTHER INCOME (EXPENSES):
Interest and other income 97,254 8,786
Interest and other expense (475,031) (9,768)
------------ ------------
Total Other Expenses, net (377,777) (982)
------------ ------------
MINORITY INTEREST 690,884 0
INCOME BEFORE TAX PROVISION 616,706 (145,993)
------------ ------------
PROVISION FOR TAXES:
Deferred tax expense (benefit) 0 (49,638)
------------ ------------
NET INCOME (LOSS) $ 616,706 ($ 96,355)
============ ============
BASIC EARNINGS PER SHARE $ 0.05 ($ 0.01)
============ ============
DILUTED EARNINGS PER SHARE $ 0.03 ($ 0.01)
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
5
<PAGE>
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUE:
Asphalt revenue $ 15,921,645 $ 0
Oil and gas production 0 77,496
------------ ------------
Total Revenue 15,921,645 77,496
------------ ------------
COSTS AND OPERATING EXPENSES:
Production costs and related taxes 0 54,653
Cost of goods sold 11,424,955 0
Operating expenses 2,179,646 0
------------ ------------
Total Costs and Operating Expenses 13,604,601 54,653
------------ ------------
GROSS PROFIT 2,317,044 22,843
General and administrative expenses 756,410 299,009
Depletion, depreciation and amortization 133,332 23,817
------------ ------------
INCOME (LOSS) FROM OPERATIONS 1,427,302 (299,983)
------------ ------------
OTHER INCOME (EXPENSES):
Interest and other income 217,440 4,928
Interest and other expense (475,535) (17,010)
Loss on sale of subsidiary 0 (751,461)
------------ ------------
Total Other Expenses, net (258,095) (763,543)
------------ ------------
MINORITY INTEREST (697,935) 0
INCOME BEFORE TAX PROVISION 471,272 (1,063,526)
------------ ------------
PROVISION FOR TAXES:
Deferred tax expense (benefit) 0 (361,599)
------------ ------------
NET INCOME (LOSS) $ 471,272 ($701,927)
============ ============
BASIC EARNINGS PER SHARE $ 0.04 ($0.06)
============ ============
DILUTED EARNINGS PER SHARE $ 0.03 ($0.06)
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
6
<PAGE>
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 471,271 ($ 701,927)
------------ ------------
Adjustments to reconcile net loss to net cash used by operating
activities:
Amortization, depreciation and depletion 133,332 23,817
Minority interest 697,936 0
Net effect of sale of subsidiary 0 844,926
Change in assets and liabilities:
Trade receivable (6,484,287) 17,357
Inventory 2,045,972 0
Other assets (392,023) (60,187)
Accounts payable 1,963,728 (2,550)
Other current liabilities 789,494 (90,929)
Line of credit with related party 3,124,647 0
Deferred tax liability 0 (361,599)
------------ ------------
Total adjustments 1,878,799 370,835
------------ ------------
Net Cash Provided by (Used in) Operating Activities 2,350,070 (331,092)
------------ ------------
Cash Flows From Investing Activities:
Additions to oil sand properties 0 (16,152)
Additions to property and equipment (1,031,361) 0
Equity investment in limited liability company (1,326,055) 0
Payment received on note receivable 0 75,000
Purchase of net asphalt distribution assets (16,061,243) 0
------------ ------------
Net Cash Used by
Investing Activities (18,418,659) 58,848
------------ ------------
Cash Flows From Financing Activities:
Proceeds from line of credit from related party 7,141,930 0
Proceeds from preferential loan from related party 6,000,000 0
Proceeds from minority interest 1,500,000 0
Net changes in long-term debt 1,019,928 (9,442)
Net proceeds from issuance of convertible debenture 0 150,000
Net proceeds from sale of common stock 0 300,000
------------ ------------
Net Cash Provided by Used in Financing Activities $ 15,661,858 $ 440,558
------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
7
<PAGE>
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Continued]
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net Increase (Decrease) in Cash: ($ 406,731) $ 168,314
=========== ===========
Cash at Beginning of Period $ 3,100,765 $ 142,772
=========== ===========
Cash at End of Period $ 2,694,034 $ 311,086
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $ 52,670 $ 4,844
=========== ===========
Income taxes -- --
=========== ===========
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended September 30, 1998:
None
For the period ended September 30, 1997:
The company issued 45,000 shares of common stock in payment of
accounts payable and oil sand project costs.
The Company issued 56,877 shares of common stock in payment of
$25,985 in long-term debt.
The Company issued 64,693 shares of common stock in a partial
debenture conversion.
The accompanying notes are an integral part of these
consolidated financial statements
8
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been
prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the
financial position, results of operations and changes in
stockholders' equity and cash flows at September 30, 1998 and
for all periods presented 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 the Company's December 31, 1997 Annual
Report on Form 10-K. The results of operations for the period
ended September 30, 1998 are not necessarily indicative of the
operating results for the full year.
ORGANIZATION
Crown Energy Corporation ["Crown" or the "Registrant"], a Utah
corporation, was organized on March 17, 1981. Crown's primary
activities have been the acquisition and development of oil
and gas leases.
BuenaVentura Resources Corporation ["BVRC"], a Utah
corporation, was organized October 24, 1985. Crown acquired
100% of BVRC on September 30, 1992. On August 6, 1997, the
name of BVRC was changed to Crown Asphalt Corporation ["CAC"].
On September 1, 1997, the corporation entered into a joint
venture with MCNIC Pipeline and Processing Company to
construct and operate an asphalt production facility at
Asphalt Ridge (See Note 2 - Formation of Joint Venture). The
Company's asphalt production business is CAC's primary
business activity.
Crown Asphalt Products Company ("CAPCO") was formerly known as
Energy Technologies Corporation. CAPCO was formed in 1991, but
until recently has been a dormant entity. The Company recently
activated CAPCO for the purpose of developing an asphalt
marketing and distribution business. On July 2, 1998, CAPCO
formed Crown Asphalt Distribution, LLC ("CAD"), with MCNIC
Pipeline and Processing Company ("MCNIC") a subsidiary of MCN
Energy Group, Inc. ("MCN"), a large diversified energy holding
company with approximately $4 billion in assets to acquire the
asphalt distribution assets of Petro Source Asphalt Company.
CAD is operated by CAPCO.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All
significant inter-company transactions have been eliminated in
consolidation.
9
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2 - FORMATION OF JOINT VENTURE
On August 1, 1997, Crown's wholly-owned subsidiary, CAC
entered into a joint venture with MCNIC, The joint venture
will operate through Crown Asphalt Ridge, L.L.C., a Utah
limited liability company, ("Crown Ridge") and will be devoted
to extracting commercially marketable products from CAC's oil
sand reserves (the "Reserves") located at Asphalt Ridge in
eastern Utah.
MCNIC and CAC will initially hold sharing ratios of 75% and
25%, respectively, in profits, losses and obligations of the
L.L.C. The forgoing ratios will be adjusted to provide each
party with a 50% sharing ratio upon the achievement of certain
payouts to MCNIC. CAC's required capital contribution to the
L.L.C. consists of (i) CAC's rights under certain equipment
leases with a fair market value of up to $3.5 million to be
obtained by CAC; (ii) the Sublicense of Crown's proprietary
oil sands refining technology from Park Guymon Enterprises,
Inc.; (iii) the capital reserves (which were valued at the
time of the formation of the L.L.C. at $500,000) and (iv) an
amount of cash, if any, needed to bring CAC's capital
contributions up to 25% of the capital required to construct
the initial oil sands refining plant. After giving effect to
the value of the items described above, MCNIC, in turn, will
be required to fund 75% of the cash required to construct the
initial plant contemplated by the L.L.C.'s Operating
Agreement.
NOTE 3 - ACQUISITION OF ASSETS
On July 2, 1998, Crown Asphalt Distribution, L.L.C. ("CAD"), a
newly formed limited liability company, the sole members of
which are MCNIC and CAPCO, a wholly owned subsidiary of Crown,
completed the acquisition of the inventory and assets of Petro
Source Asphalt Company ("Seller"), a Texas corporation,
including asphalt supply and marketing contracts, owned and
leased equipment, personal property, fixtures, equipment
leases, real estate leases, technology licenses, other related
agreements, certain intellectual property, products inventory,
and ownership, leasehold or other contractual interests in and
to asphalt distribution facilities in Utah, Colorado, Nevada
and Arizona and a refinery in Santa Maria, California (the
"Acquired Assets").
CAD is owned by CAPCO (50.01%) and MCNIC (49.99%).
The business of CAD is operated by CAPCO. No officer, director
or affiliate of the Registrant has a material relationship
with the Seller. The Acquired Assets (excluding products
inventory) were purchased for $7.5 million, the amount
determined by the parties to be the fair market value of such
assets, with capital contributed to CAD by MCNIC. The products
inventory had an agreed upon fair market value of $6,797,932
and was purchased with the proceeds of a working capital loan
to CAD from MCNIC. To finance the acquisition, MCNIC funded
the $14,641,930 acquisition through a combination of a
$6,000,000 Preferential contribution, which yields 15% and is
payable solely out of 50% of the net cash flow from CAD and a
working capital line, which accrues interest at 8% (see Note
5).
10
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 4 - PROCESSING AGREEMENT EXPIRATION
The Company, through its subsidiary, CAD has an agreement with
Santa Maria Refining Company ("SMRC") and SABA Petroleum
whereby it purchases crude oil, processes it at the Santa
Maria Refinery and markets the slate of products produced,
primarily asphalt. This agreement was acquired through the
Petro Source asset acquisition. The profits of the refinery
are split approximately 50% to Crown and 50% to SMRC. The
primary term of the agreement expires on December 31, 1998.
Pursuant to agreement, Crown has given written notice
requesting an extension. SMRC has until December 31, 1998 to
either accept or reject this request.
NOTE 5 - WORKING CAPITAL LINE
CAPCO's partner in the acquisition of the acquired assets (see
Note 3), MCNIC, extended a working capital line to CAD to
finance the Company's asphalt purchases and accounts
receivable. As of September 30, 1998, this line plus
additional funds advanced, had a balance of approximately
$10,266,571 and accrues interest at 8%. Through the period
ended September 30, 1998, $184,230 in interest had been
accrued. This line is repaid solely out of the cash flow from
CAD. The Company is currently reviewing other proposals for
the working capital line, however MCNIC has the option to
match the terms of such line.
NOTE 6- 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) therefrom. Crown is currently
reviewing two jobs sold in which the purchaser is claiming
damages due to asphalt that they claim did not meet
specifications. Crown carries product liability insurance that
it believes will cover any such damages.
NOTE 7 - LONG TERM DEBT
As part of the contemplated acquisition of the Cowboy asphalt
terminal in North Salt Lake City, Utah, the Company assumed
debt of approximately $1,067,111. The terms of such debt have
not been finalized, however as presently contemplated, the
Company believes such debt shall accrue interest at 10% and be
repaid in monthly installments of approximately $16,000 per
month with a balloon payment of $650,000 due in the year 2008.
11
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 8 - CONCENTRATION OF CREDIT RISK
The realization of the Company's investment in oil sand
properties is dependent on the success of the joint venture
with MCNIC to successfully complete construction of its
asphalt production facility and profitably sell the related
asphalt products. The Company currently has not generated any
significant revenues through the sale of asphalt products from
its project at Asphalt Ridge in eastern Utah.
NOTE 9 - EXERCISE OF STOCK OPTIONS
On January 2, 1998, certain officers, directors and employees
of the Company exercised 946,296 options to purchase common
stock for $549,166 in notes receivable. The notes bear
interest at the prime rate, adjusted the 1st day of each
calendar quarter, and are payable on or before January 2,
2003.
NOTE 10 - ACCOUNTING STANDARDS
Reporting Comprehensive Income - In June 1997, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. SFAS No.130
requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement
and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional
paid-in-capital in the equity section of a statement of
financial position. Effective January 1, 1998, the Company
adopted the provisions of SFAS No. 130. Accordingly, the
Company determined that no transactions were considered to be
an additional component of comprehensive income. Therefore,
comprehensive income (loss) equaled net income (loss) for the
three and nine-month periods ended September 30, 1998 and
1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which
redefines how public business enterprises report information
about operating segments in annual financial statements. The
statement also establishes standards for related disclosures
about products and services, geographical areas, and major
customers. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years
is to be restated. The Company does not expect the impact of
SFAS No. 131 to be material in relation to its financial
statements
In February 1998, the FASB issued SFAS No. 132, Employer's
Disclosures about Pensions and Other Postretirement Benefits.
SFAS No. 132 does not change the measurement or recognition of
pension and other postretirement benefit plans. It
standardizes the disclosure requirements for those plans,
requires additional information on changes in the benefit
obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain
disclosures. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997. The Company does not expect
the impact of SFAS No. 132 to be material in relation to its
financial statements.
12
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 10 - ACCOUNTING STANDARDS (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which
supersedes SFAS No. 80, Accounting for Futures Contracts, SFAS
No. 105, Disclosure of Information About Financial Instruments
with Off-Balance-sheet Risk and Financial Instruments with
Concentration of Credit Risk, and SFAS No. 119, Disclosure
about Derivative Financial Instruments and Fair Value of
Financial Instruments, and also amends certain aspects of
other SFAS's previously issued. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. SFAS No.
133 is effective for the Company's financial statements for
the year ending December 31, 2000. The Company does not expect
the impact of SFAS No. 133 to be material in relation to its
financial statements.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
-----------------------------------------------
RESULTS OF OPERATIONS
- - ---------------------
For the three month period ended September 30, 1998, compared to the three
- - --------------------------------------------------------------------------------
months ended September 30, 1997.
- - --------------------------------
Asphalt revenue increased from $0 for the three months ended September
30, 1997 to $15,734,718 for the three months ended September 30, 1998. This
increase was due to revenue from CAPCO's operation and the Company's newly
formed asphalt distribution subsidiary, Crown Asphalt Distribution, LLC ("CAD").
CAD sold approximately 114,000 tons of asphalt during the period.
Cost of goods sold increased from $0 for the three months ended
September 30, 1997 to $11,299,005 for the three months ended September 30, 1998.
This increase was due to the cost of products sold by CAD. Cost of goods sold
primarily represents the cost of asphalt purchased from suppliers, such as
Exxon, and the related transportation and blending costs.
Operating expenses increased form $0 for the three months ended
September 30, 1997 to $2,178,830 for the three months ended September 30, 1998.
This increase was due to the cost of operating the asphalt distribution assets
acquired through CAD. Operating expenses primarily represent asphalt terminal
labor expenses, utility expenses and lease expenses.
Gross profit of $2,256,883 represents a margin of approximately 14% on
sales after cost of goods sold and operating expenses. The Company's gross
margin is dependent on the Company's ability to operate its facilities
efficiently, purchase its asphalt at favorable market prices and blend its
products to meet required industry specifications.
General and administrative expenses increased from $145,011 for the
three months ended September 30, 1997 to $438,184 for the three months ended
September 30, 1998, an increase of $293,173. This change was due to increased
costs related to the Company's investment in the Crown Asphalt Ridge joint
venture with MCNIC and administrative costs related to CAD.
Depletion, depreciation and amortization increased from $0 for the
three months ended September 30, 1997 to $133,332 for the three months ended
September 30, 1998. This increase was due to depreciation on the asphalt assets
acquired and amortization of goodwill recorded on the acquisition.
Other Income (Expense) fluctuated from total expenses of $982 for the
three months ended September 30, 1997 to $475,031 for the three months ended
Sept 30, 1998. This fluctuation was primarily due to interest expense on the
debt recorded in the asphalt asset acquisition and interest on the line of
credit used to finance the operation of the business.
For the nine month period ended September 30, 1998, compared to the nine months
- - --------------------------------------------------------------------------------
ended September 30, 1997.
- - -------------------------
Asphalt revenue increased from $0 for the nine months ended September
30, 1997 to $15,921,645 for the nine months ended September 30, 1998. This
increase was due to revenue from CAPCO's operations and the Company's newly
formed asphalt distribution subsidiary, Crown Asphalt Distribution, LLC ("CAD").
CAD sold approximately 114,000 tons of asphalt during the period.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
- - ---------------------------------
Cost of goods sold increased from $0 for the nine months ended
September 30, 1997 to $11,424,955 for the nine months ended September 30, 1998.
This increase was due to the cost of products sold by CAD. Cost of goods sold
primarily represents the cost of asphalt purchased from suppliers, such as
Exxon, and the related transportation and blending costs.
Operating expenses increased from $0 for the nine months ended
September 30, 1997 to $2,179, 646 for the nine months ended September 30, 1998.
This increase was due to the cost of operating the asphalt distribution assets
acquired through CAD. Operating expenses primarily represent asphalt terminal
labor expenses, utility expenses and lease expenses.
Gross profit of $2,317,044 represents a margin of approximately 15% on
sales after cost of goods sold and operating expenses. The Company's gross
margin is dependent on the Company's ability to operate its facilities
efficiently, purchase its asphalt at favorable market prices and blend its
products to meet required industry specifications.
General and administrative expenses increased from $299,009 for the
nine months ended September 30, 1997 to $756,410 for the nine months ended
September 30, 1998, an increase of $457,401. This change was due to increased
costs related to the Company's investment in the Crown Asphalt Ridge joint
venture with MCNIC and administrative costs related to CAD.
Depletion, depreciation and amortization increased from $23,817 for the
nine months ended September 30, 1997 to $133,332 for the nine months ended
September 30, 1998. This increase was due to depreciation on the asphalt assets
acquired and amortization of goodwill recorded on the acquisition.
Other Income (Expense) fluctuated from total expenses of $763,543 for
the nine months ended September 30, 1997 to $258,095 for the nine months ended
September 30, 1998. This fluctuation was due to a loss of $751,461 recorded on
the sale of a subsidiary in 1997. This change was partially offset by interest
and other income of $217,440 recorded in 1998 and interest expense incurred on
the debt recorded in the asphalt asset acquisition and interest on the line of
credit used to finance the operation of the business.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
At September 30, 1998, the Company had cash and other current assets of
$17,971,316 and current liabilities of $15,824,679 as compared to cash and other
current assets of $3,288,989 and current liabilities of $124,981 at December 31,
1997. These fluctuations were due to the business operations of the CAD asphalt
asset acquisition, income from operations and equity contributions to the Crown
Asphalt Ridge, L.L.C. ("Crown Ridge"). As of September 30, 1998, the Company had
long-term debt obligations of approximately $1,000,000 and a preferential debt
obligation of $6,000,000 related to the asset acquisition. The Company is
obligated to make monthly payments of approximately $16,000 on the $1,000,000
debt and is obligated to distribute 50% of the net cash flow from CAD, after the
debt payment above, as payment on the $6,000,000 preferential debt. The Company
is also obligated to distribute 50% of the remaining cash flow of CAD to MCNIC
Pipeline and Processing Company, the minority interest holder. The Company has
available for CAD's operations a working capital line from MCNIC of
approximately $10,000,000. The Company believes it has sufficient capital to
meet all of its current working capital requirements and its share of Crown
Ridge's budgeted capital requirements. However, there can be no assurance that
such obligations can be met.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- - -------------------------------------------
In addition, the Company will incur its proportionate share of
operating expenses of Crown Ridge until such time that Crown Ridge's operations
become profitable. Furthermore, should Crown Ridge incur unforeseen additional
capital costs, the Company is obligated to pay its proportionate share of such
costs. The Company believes it has sufficient capital to cover such obligations.
However, there can be no assurance that such additional obligations can be met.
YEAR 2000 ISSUES
- - ----------------
Crown and its subsidiaries have not yet completed an assessment of Year
2000 ("Y2K") issues that could impact its information technology ("IT") and
non-IT systems. Crown and its subsidiaries employ a number of IT systems in
their operations, including, without limitation, computer networking systems,
financial systems and other similar systems. In 1998, Crown and its subsidiaries
began conversion of their principal computer software systems to a new
integrated system to support future growth and improve productivity. Crown
believes that its new computer system will be Y2K compliant, but has not tested
the system.
With respect to non-IT systems containing embedded electronic circuits,
Crown has not conducted an assessment of such systems for it or its
subsidiaries. Crown's greatest non-IT Y2K concerns are with Crown Ridge, a
limited liability company partially owned by Crown's wholly-owned subsidiary
CAC, and CAD, a limited liability company partially owned by Crown's
wholly-owned subsidiary CAPCO. Crown Ridge owns and operates an asphalt
processing facility near Vernal, Utah and Crown Distribution owns and operates
asphalt distribution facilities in Utah, Colorado, Nevada and Arizona and
California. The vast majority of Crown's income is derived from these
operations.
Crown is not aware of the potential cost, if any, to remediate direct
or indirect Y2K problems for Crown and its subsidiaries. At present, Crown has
spent approximately $20,000 upgrading its IT systems. Crown has not spent any
money to assess or remediate non-IT issues. Crown expects to begin an assessment
of Y2K issues in the first quarter of 1999. However, there is no assurance that
Crown will be able to complete its assessment or remediate problems before the
end of 1999.
Crown believes that it is most reasonably likely that its own computers
will perform according to expectations on and after January 1, 2000. However,
Crown is highly dependant upon electric power, natural gas, asphalt, petroleum
based products and chemicals as well as the delivery of such items by all forms
of transportation, including, pipeline, shipping, rail and truck. A shortage of
any of the foregoing products or a failure one or more methods of transportation
would have a material adverse affect on Crown, its subsidiaries and their
operations. Because Crown has not evaluated whether its key suppliers are or
will be Y2K compliant, it must assume that these suppliers will have disruptions
in their deliveries and services to Crown and its subsidiaries. The worst case
Y2K scenarios for Crown would include a complete shut-down of Crown Ridge's
Facility and one or more of the distribution centers of Crown Distribution since
most of Crown's income is expected to be derived from these operations.
Crown has not yet developed any contingency plans in the event that its
or its subsidiaries' IT or non-IT systems fail or in the event that material
suppliers of goods or services fail or have significant disruptions in
deliveries to Crown and its subsidiaries.
16
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. Legal Proceedings
On May 21, 1998, Road Runner Oil, Inc. ("Road Runner") and Gavilan
Petroleum, Inc. ("Gavilan") filed an action in the Third Judicial District
Court, Salt Lake County, State of Utah, as Civil Number 98-0905064 against the
Company and its President. The action relates to the purchase by Road Runner of
100% of the stock of Gavilan in 1997, and generally seeks to (i) obtain
corporate records of Gavilan in the Company's possession relating to the amount
of oil and gas royalties potentially owed to third parties prior to the
aforementioned stock sale, and (ii) to determine the amount of royalties owed.
The action further alleges, on behalf of Gavilan, claims of breach of fiduciary
duty, professional negligence and mismanagement against the Company's President
for alleged mismanagement of Gavilan's affairs. The Plaintiffs seek injunctive
relief requiring the tendering by the Company of the referenced records and such
damages as may be proven at trial. The Company believes that the Plaintiffs
claims are groundless and that it is entitled to payment of the $75,000 still
owed by Road Runner as part of the purchase price for Gavilan. In addition,
since the action was filed, the Company has tendered substantial quantities of
corporate records to the Plaintiffs for their review. On June 17, 1998, an order
was entered granting an open extension to the Company of its obligation to file
an answer to the above-described Complaint so that the parties may informally
pursue a settlement, if any, of the matter.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit Name
------- ----
10.1 Purchase and Sale Agreement dated July 2, 1998
between Petro Source and Crown Asphalt Distribution*
10.2 Saba Petroleum Processing Agreement for Santa Maria
Refinery in California dated May 1, 1997 between
Petro Source Refining Corporation and Santa Maria
Refining Company and Saba Petroleum Company, which
was assigned to the Company on or about July 2,
1998**
17
<PAGE>
PART II. - OTHER INFORMATION (CONTINUED)
ITEM 6. Exhibits and Reports on Form 8-K (CONTINUED)
10.3 MetLife Equipment Lease dated May 1, 1997 between
Petro Source Refining Corporation and MetLife Capital
Corporation, which was assigned to the Company on or
about July 2, 1998**
10.4 PacifiCorp Property Lease dated April 1, 1996 between
Petro Source Refining Corporation and PacifiCorp,
which was assigned to the company on or about July
2, 1998**
10.5 GATX Rail Car Lease dated December 10, 1987 between
Petro Source Corporation and General American
Transportation Corporation, which was assigned to the
Company on or about July 2, 1998**
10.6 Office Space Lease**
27 Financial Data Schedule
----
*Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about July 17, 1998, bearing commission file number
0-19365.
**To be filed pursuant to Rule 201 Temporary Hardship Exemption.
----
The Company filed a Form 8-K on June 8, 1998, to report a change in
auditors. The Company also filed a Form 8-K on July 17, 1998, to report
the acquisition of the inventory and assets of Petro Source Asphalt
Company.
18
<PAGE>
PART III. - 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: November 14, 1998 By: /s/ JAY MEALEY
------------------------ -----------------------------------------
Jay Mealey, President
Date: November14, 1998 By: /s/ RICHARD S. RAWDIN
------------------------ -----------------------------------------
Richard S. Rawdin, Vice President of Finance
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2694034
<SECURITIES> 0
<RECEIVABLES> 8019578
<ALLOWANCES> 0
<INVENTORY> 6374275
<CURRENT-ASSETS> 17971316
<PP&E> 4447530
<DEPRECIATION> 199455
<TOTAL-ASSETS> 32070765
<CURRENT-LIABILITIES> 15824679
<BONDS> 0
0
2500
<COMMON> 253370
<OTHER-SE> 10719376
<TOTAL-LIABILITY-AND-EQUITY> 32070765
<SALES> 15921645
<TOTAL-REVENUES> 15921645
<CGS> 11424955
<TOTAL-COSTS> 13604601
<OTHER-EXPENSES> 889742
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 475535
<INCOME-PRETAX> 471272
<INCOME-TAX> 0
<INCOME-CONTINUING> 471272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 471272
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
