<PAGE>
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, 1999
------------------------------------------------
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 650, 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 X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
There were 13,285,581 shares of $.02 par value common stock outstanding as of
November 12, 1999.
<PAGE>
CROWN ENERGY CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at September 30,
1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statement of Operations for the Three
Months ended September 30, 1999 and 1998 (unaudited) 5
Condensed Consolidated Statement of Operations for the Nine
Months ended September 30, 1999 and 1998 (unaudited) 6
Condensed Consolidated Statement of Cash Flows for the
Nine Months ended September 30, 1999 and 1998 (unaudited) 7
Notes to Condensed Consolidated Financial Statements
(unaudited) 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 5. OTHER INFORMATION 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
PART III. SIGNATURES 25
</TABLE>
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
1999 December 31,
[unaudited] 1998
-------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,631,016 $ 3,735,632
Accounts receivable, net of allowance for uncollectible
accounts of $100,475 at September 30, 1999
and December 31, 1998 9,969,186 2,823,778
Inventory 5,804,275 4,445,819
Prepaid and other current assets 597,724 39,371
------------ ------------
Total Current Assets 18,002,201 11,044,600
PROPERTY, PLANT AND EQUIPMENT, Net 8,834,795 3,013,792
INVESTMENT IN AND ADVANCES
TO AN EQUITY AFFILIATE 7,500,534 4,551,441
GOODWILL, Net 3,884,837 4,040,231
OTHER INTANGIBLE ASSETS, Net 187,500 225,000
OTHER ASSETS 768,465 696,200
------------ ------------
TOTAL $ 39,178,332 $ 23,571,264
============ ============
</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,
1999 December 31,
[unaudited] 1998
-------------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 4,846,207 $ 1,857,407
Preferred stock dividends payable 300,000 467,433
Accrued expenses 1,584,564 180,116
Long-term debt - estimated current portion 210,228 1,000,000
Line-of-credit to related party 14,935,221 8,935,221
------------ ------------
Total current liabilities 21,876,220 12,440,177
------------ ------------
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 1,432,439 1,255,477
CAPITALIZATION:
Long-term debt 11,312,302 4,325,723
Redeemable preferred stock 4,825,472 4,783,019
Common stockholders' equity (268,101) 766,868
------------ ------------
Total capitalization 15,869,673 9,875,610
------------ ------------
TOTAL $ 39,178,332 $ 23,571,264
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
CROWN ENERGY CORPORATION
[UNAUDITED]
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
SALES $15,848,550 $15,734,718
EXPENSES:
Cost of goods sold 12,536,520 11,299,005
Operating expenses 1,573,455 2,178,830
General and administrative 603,515 438,184
Depreciation, depletion and amortization 154,433 133,332
----------- -----------
TOTAL 14,867,923 14,049,351
----------- -----------
INCOME FROM OPERATIONS 980,627 1,685,367
OTHER INCOME (EXPENSES):
Interest and other income 103,826 97,254
Interest and other expense (641,994) (475,031)
Equity in losses of unconsolidated equity affiliate (70,208) 0
----------- -----------
Total other (expense) net (608,376) (377,777)
INCOME BEFORE INCOME TAXES
AND MINORITY INTERESTS 372,251 1,307,590
----------- -----------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN (EARNINGS) OF
CONSOLIDATED JOINT VENTURE (361,727) (690,884)
----------- -----------
NET INCOME $10,524 $616,706
----------- -----------
NET INCOME (LOSS) PER COMMON SHARE-
Basic ($0.01) $0.04
=========== ===========
Diluted ($0.01) $0.03
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
CROWN ENERGY CORPORATION
[UNAUDITED]
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
SALES $30,725,129 $15,921,645
EXPENSES:
Cost of goods sold 23,156,140 11,424,955
Operating expenses 4,722,713 2,179,646
General and administrative 1,833,657 756,410
Depreciation, depletion and amortization 494,438 133,332
----------- -----------
TOTAL 30,206,948 14,494,343
----------- -----------
INCOME FROM OPERATIONS 518,181 1,427,302
OTHER INCOME (EXPENSES):
Interest and other income 329,962 217,440
Interest and other expense (1,554,847) (475,535)
Equity in losses of unconsolidated equity affiliate (496,481) 0
----------- -----------
Total other (expense) net (1,721,366) (258,095)
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (1,203,185) 1,169,207
----------- -----------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN (EARNINGS) LOSSES OF
CONSOLIDATED JOINT VENTURE 43,236 (697,935)
----------- -----------
NET INCOME (LOSS) ($1,159,949) $471,272
----------- -----------
NET INCOME (LOSS) PER COMMON SHARE-
Basic ($0.11) $0.01
=========== ===========
Diluted ($0.11) $0.01
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
CROWN ENERGY CORPORATION
[UNAUDITED]
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) ($1,159,949) $471,271
----------- -----------
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization, depreciation and depletion 494,438 133,332
Equity in losses of unconsolidated affiliate 496,481 0
Minority interest (43,236) 697,935
Change in assets and liabilities:
Accounts receivable (7,145,408) (6,484,287)
Inventory (1,358,456) 2,045,972
Other assets (630,640) (392,023)
Accounts payable 2,988,900 1,963,728
Accrued expenses 1,404,448 789,494
----------- -----------
Total adjustments (3,793,473) (1,245,848)
----------- -----------
Net Cash Used in Operating Activities (4,953,422) (774,577)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in and advances to Crown Asphalt Ridge, LLC (3,491,057) (1,326,055)
Acquisition of Asphalt Terminals (3,856,390) 0
Purchase of net asphalt distribution assets 0 (16,061,243)
Purchase of property and equipment (2,220,653) (1,031,361)
----------- -----------
Net Cash Used by
Investing Activities (9,568,100) (18,418,659)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit from related party 6,000,000 7,141,930
Proceeds from preferential loan from related party 0 6,000,000
Sale of equity interest in subsidiary to a minority shareholder 220,199 1,500,000
Net changes in long-term debt 6,196,707 1,019,928
----------- -----------
Net Cash Provided by Financing Activities $12,416,906 $15,661,858
----------- -----------
</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,
1999 1998
----------- -----------
<S> <C> <C>
Net (Decrease) in Cash: ($2,104,616) ($406,731)
=========== ===========
Cash at Beginning of Period $3,735,632 $3,100,765
=========== ===========
Cash at End of Period $1,631,016 $2,694,034
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $158,671 $52,670
=========== ===========
Income taxes -- --
=========== ===========
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended September 30, 1999:
On January 27, 1999, the Company issued 317,069 shares of common stock
to its preferred stockholders as payment in full for preferred stock
dividends payable totaling $467,433.
For the period ended September 30, 1998:
None
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, 1999 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, 1998
Annual Report on Form 10-K. The results of operations for the period ended
September 30, 1999 are not necessarily indicative of the operating results
for the full year.
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 mining, production, and selling of asphalt products. Prior to 1998, the
Company was engaged in the production and selling of oil and gas from
leases it operated in the State of Utah through its previously owned
subsidiary, Gavilan Petroleum, Inc. (Gavilan).
MAJORITY OWNED SUBSIDIARIES - Capco is the majority-owner of Crown Asphalt
Distribution, LLC (Crown Distribution). Crown Distribution is a joint
venture formed on July 2, 1998, between Capco and MCNIC Pipeline and
Processing Company (MCNIC) for the purpose of acquiring certain assets of
Petro Source Asphalt Company (Petro Source). Capco owns 50.01% and MCNIC
owns 49.99% of Crown Distribution. Capco is the general manager and
operating agent of Crown Distribution. CAT LLC is a joint venture formed on
June 16, 1998 between Capco and Foreland Asphalt Corporation (Foreland).
Cowboy Asphalt Terminal, LLC (CAT LLC) is 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.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated in
consolidation.
INVESTMENT IN AND ADVANCES TO EQUITY AFFILIATE - The Company's investment
in Crown Asphalt Ridge, LLC (Crown Ridge) is accounted for using the equity
method. Accordingly, the Company's investment is recorded at cost and
adjusted by the Company's share of undistributed earnings and losses. The
excess of the Company's investment in Crown Ridge over its equity in the
related underlying net assets (approximately $2,168,000) is being amortized
over 40 years.
REVENUE RECOGNITION - Revenues are recognized when the related product is
shipped.
INCOME TAXES - The Company utilizes an asset and liability approach for
financial accounting and reporting for income taxes. Deferred income taxes
are provided for temporary differences in the basis of assets and
liabilities as reported for financial statement and income tax purposes. As
of September 30, 1999, all net deferred tax assets were offset by a
valuation allowance.
9
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
LOSS PER SHARE - Effective for the year ended December 31, 1997, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
EARNINGS PER SHARE. Accordingly, net loss per common share computed under
the basic method uses the weighted average number of the Company's common
shares outstanding. The effect of common shares from stock options,
warrants, and convertible securities is not considered in the loss per
share computations as such common stock equivalents are anti-dilutive.
CASH AND CASH EQUIVALENTS - For 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.
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
period. Actual results could differ from those estimated.
INVENTORY - Inventories consist principally of asphalt hydrocarbons and
chemical supplies which are valued at the lower of cost (computed on a
first-in, first-out basis) or market.
LONG-LIVED ASSETS - The Company evaluates the carrying value of long-term
assets including intangibles based on current and anticipated undiscounted
cash flows and recognizes impairment when such cash flows will be less than
the carrying values. Measurement of the amount of impairments, if any, is
based upon the difference between carrying value and fair value. There were
no impairments as of September 30, 1999 and December 31, 1998.
GOODWILL - The Company has recorded the amount paid for Petro Source in
excess of the fair value of the net tangible assets acquired at the date of
acquisition as goodwill. Such goodwill is amortized using the straight-line
method over 20 years.
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. Management
believes that the Company's product liability insurance would cover any
significant damages.
ENVIRONMENTAL EXPENDITURES - Environmental related restoration and
remediation costs are recorded as liabilities when site restoration and
environmental remediation and clean-up obligations are either known or
considered probable, and the related costs can be reasonably estimated.
Other environmental expenditures, that are principally maintenance or
preventative in nature, are recorded when expended and expensed or
capitalized as appropriate.
COMPREHENSIVE INCOME - In 1998, the Company adopted SFAS No. 130,
"REPORTING COMPREHENSIVE INCOME". SFAS 130 requires that an enterprise (a)
classify items of other comprehensive income by
10
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from additional paid-in
capital, retained earnings, and stockholders' equity. The Company does not
currently have any components of comprehensive income other than net loss.
SEGMENT REPORTING - In 1998, the Company adopted SFAS No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which redefined
how 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. During 1998 and 1999, the Company operated primarily in
the production and distribution of asphalt. The Company's operations and
sales are dispersed throughout Utah, Arizona, California, Nevada 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.
DERIVATIVE INSTRUMENTS AND HEDGING - 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, 2001. The Company does not
expect the impact of SFAS No. 133 to be material in relation to its
financial statements.
STOCK-BASED COMPENSATION - The Company has elected to continue to apply
Accounting Principles Board (APB) Opinion 25 (as permitted by SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION). The appropriate disclosures
required by SFAS No. 123 are included in Note 8.
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 operates through Crown Ridge
and will be devoted to extracting commercially marketable products from
Crown Ridge's oil sand reserves (the "Reserves") located at Asphalt Ridge
in eastern Utah.
MCNIC and CAC hold sharing ratios of 75% and 25%, respectively, in profits,
losses and obligations of Crown Ridge. 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 Crown
Ridge 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 Crown Ridge at $500,000) and (iv) cash, if
any, needed to bring CAC's
11
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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, has been funding 75% of the cash
required to construct the initial plant contemplated by Crown Ridge LLC's
Operating Agreement. (See Note 11 - Note with Related Party)
NOTE 3 - ACQUISITION OF ASSETS
ACQUISITION OF COWBOY ASPHALT TERMINAL PROPERTY - On January 9, 1999, CAT
LLC acquired the Cowboy Terminal Property for $1,973,511. CAT LLC paid
deposits totaling $496,441 during 1998. In addition, CAT LLC paid $195,000
in cash at closing and executed and delivered a promissory note in the
amount of $1,282,070. This promissory note is payable in 84 equal monthly
installments of $20,627 beginning on February 1, 1999 and ending on January
1, 2006. The note bears interest at the rate of 9% and is secured by a deed
of trust encumbering the Cowboy Terminal Property. The acquisition was
accounted for as a purchase. There were no significant operations during
1998.
ACQUISITION OF LAUREL AND WILLISTON ASPHALT TERMINALS - On April 17, 1999,
the Company acquired the fixed assets, the associated inventory, and
certain contractual agreements of Asphalt Supply & Services, Inc. and
Inoco, Inc. (collectively, the Seller) for $4,000,0000, consisting of
$750,000 in cash and 2,500,000 shares of unregistered common stock valued
at $1.30 per share. In the event that the bid price of the common stock is
less than $1.10 for 120 consecutive trading days at any time between April
17, 1999 and December 31, 2000, the Seller has the right to require the
Company to repurchase all shares issued for $1.10 per share. The Company
has the right to repurchase up to 2,000,000 of the shares of common stock
from the Seller, at any time, for $2.05. Per the agreement, the Seller may
only sell up to 500,000 shares of the Company's common stock per calendar
quarter. The acquisition has been accounted for as a purchase. Certain
conditions precedent were required to be satisfied by the seller for final
funding to be completed. As of November 12, 1999 such conditions have not
been completed by the Seller and the Company fully intends to seek damages
for the breach of the asset purchase agreement.
ACQUISITION OF RAWLINS ASPHALT TERMINAL - On May 12, 1999, the Company
acquired the Rawlins Asphalt Terminal and inventory for $2,291,571 from S&L
Industrial (S&L). The purchase price consists of the Company assuming S&L's
debt of approximately $1,800,000, entering into a note payable to S&L for
$225,000, and a cash payment of $266,571. There were no significant
operations for the first four months of the year.
The Company has been notified by MCNIC that it will participate in the
Rawlins, Williston and Laurel acquisitions and will fund one-half of all
costs.
NOTE 4 - PROCESSING AGREEMENT TERMINATION
The Company, through its subsidiary, Crown Distribution had a Processing
Agreement with Santa Maria Refining Company (SMRC) and SABA Petroleum
whereby Crown Distribution purchased from third party producers crude oil
which was then processed at the Santa Maria Refinery. The slate of products
produced, primarily asphalt, was then sold by Crown Distribution. The
Processing Agreement was acquired through the Petro Source asset
acquisition. Revenues resulting from the
12
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Processing Agreement were approximately $10.7 million in 1999. SMRC
extended the agreement, which expired on December 31, 1998, to April 30,
1999. As anticipated, the Processing Agreement was not extended subsequent
to April 30, 1999. The Company has offset this loss of revenue with revenue
from its recent acquisition and revenue growth from its other facilities.
Following the termination of the Processing Agreement, SMRC and the Company
agreed upon terms under which the Company would continue to purchase
asphalt from the facility until October 31, 1999, and SMRC would continue
to process crude products delivered to it by the Company. Although a
written settlement agreement was not executed, the Company intends to
enforce the settlement terms previously reached by the parties.
NOTE 5 - WORKING CAPITAL LINE OF CREDIT
MCNIC elected to extend a working capital revolving line of credit to Crown
Distribution in lieu of the Company completing a line with an outside
financial institution. As of September 30, 1999, this line had a balance of
approximately $14,935,221 and accrues interest at 8%. Through the period
ended September 30, 1999, $859,482 in interest had been accrued. This line
is repaid solely out of the cash flow from Crown Distribution.
NOTE 6 - LONG TERM DEBT
Long-term debt consists of the following at September 30, 1999:
<TABLE>
<S> <C>
Debt with Hancock-Geisler R.I.C., interest at 9%, with monthly principal $ 1,179,938
and interest payments of $20,627 for 82 months
Debt with Community First National Bank, interest at prime plus 1%, with
monthly payments of $13,600 through May 12, 2001 with additional
principal payments due in 2000 and 2001 of $60,000 and $66,000,
respectively, based on cash flow from Capco only. Balance as of May 12,
2001 to be amortized over 13 years. $ 1,800,000
Debt with S&L Industrial, interest at LIBOR with annual payments equal
to the greater of 25% of the Rawlins Terminal cash flow after debt
service or principal and interest payments annualized over 10 years. Such
amount could be reduced should certain representations of S&L not be
satisfied. $ 225,000
Preferential debt with MCNIC, interest at 15%, with annual principal and
itnerest installments equal to 50% of the net cash flows (as defined) of
Crown Distribution. This debt is secured by all of the assets of Crown
Distribution and is repayable solely from Crown Distribution's cash flow
and is non-recourse to the Company. $ 5,325,723
Debt with MCNIC, interest at prime plus 1%, with monthly payments of
$20,757 through July 20, 2001 with additional principal payments due in
2000 and 2001 based on the Company's cash flow. Balances as of July 20,
2001 to be amortized over 13 years. $ 2,991,869
Less estimated current portion ($210,228)
-----------
Long-term portion $11,312,302
===========
</TABLE>
13
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 7 - CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentration of credit
risk consist principally of trade receivables. The Company's policy is to
evaluate, prior to shipment, each customer's financial condition and
determine the amount of open line credit to be extended. It is also the
Company's policy to obtain adequate letters of credit or other acceptable
security as collateral for amounts in excess of the open line.
NOTE 8 - COMMON STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
At September 30, 1999 and December 31, 1998, common stockholders' equity
and redeemable preferred stock consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Redeemable preferred stock - $.005 par value; 1,000,000 shares authorized;
$10.00 stated value; 500,000 Series A cumulative convertible shares issued and
outstanding; original estimated fair value of $4,716,981, accretion of $42,453
and $56,604 for the periods ended September 30, 1999 and December 31, 1998,
respectively, toward the stated value of $5,000,000 $4,825,472 $4,783,019
=========== ===========
Common stockholders' equity:
Common stock, $.02 par value; 50,000,000 shares
authorized; 13,285,581 and 12,968,512 shares issued and
outstanding at September 30, 1999 and December 31, 1998, respectively $265,711 $259,370
Additional paid-in capital 5,905,979 5,787,340
Stock warrants outstanding; 683,750 at
September 30, 1999 and December 31, 1998, respectively 243,574 243,574
Common stock subscription receivable from officers (549,166) (549,166)
Retained deficit (6,134,199) (4,974,250)
----------- -----------
Total $(268,101) $766,868
=========== ===========
</TABLE>
NOTE 9 - CAPITAL TRANSACTIONS
PREFERRED STOCK - 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. Each share of Series
14
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 if declared, paid through cash or common shares
of the Company at the option of the holder. 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. The holder of the
Series A Preferred may also require the Company to redeem the Series A
Preferred after the eighth anniversary of the Series A Preferred's
issuance. The holders of the Series A Preferred shall have the right, but
shall not be obligated, to appoint 20% ofthe 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 which are issued in connection
with the Company's equity investment 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. This anti-dilution provision only
applies upon the issuance of additional equity in connection with the
Company's interest in Crown Asphalt Ridge, LLC or equity issued to any
employee, director, consultant or other service provider outside of the
Company's Long Term Incentive Plan.
COMMON STOCK WARRANT - In conjunction with the issuance of the preferred
stock described above, the Company issued a warrant to the holders of the
preferred stock. The fair value of the warrant at the date of issuance was
estimated to be $283,019 and was recorded to additional paid-in capital and
as a reduction to the stated value of the preferred stock. The reduction in
preferred stock is being accreted over the five-year period from the date
of issuance to the earliest exercise date of the warrant. Upon the fifth
anniversary of the issuance of the preferred stock, the warrant becomes
exercisable, at $.002 per share, into the number of common shares of the
Company equal to (a) [$5,000,000 plus the product of (i) ($5,000,000
multiplied by (ii) 39% (internal rate of return) multiplied by (iii) 5
years] (14,750,000), minus (b) the sum of (i) all dividends and other
distributions paid by the Company on the preferred stock or on the common
stock received upon conversion of the preferred stock plus (ii) the greater
of the proceeds from the sale of any common stock received by the holder
upon the conversion of the preferred stock prior to the fifth anniversary
date or the terminal value (as defined below) of such common stock sold
before the fifth anniversary plus (iii) the terminal value of the preferred
stock and common stock received upon conversion of the preferred stock then
held, divided by (c) the fair market value of the Company's common stock on
a weighted average basis for the 90 days immediately preceding the fifth
anniversary date of the issuance of the preferred stock. Terminal value is
defined as the sum of (i) the shares of common stock into which the
preferred stock then held is convertible, plus (ii) shares of common stock
received upon conversion of preferred
15
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
stock, multiplied by the fair market value of the Company's common stock on
a weighted average basis for the 90 days immediately preceding the fifth
anniversary date of the issuance of the preferred stock. The warrants will
expire in 2007 and is subject to a cap of up to an additional 8% of the
Company's fully diluted outstanding shares as of September 25, 1997 and
other certain adjustments.
NOTE 10 - INCOME (LOSS) PER SHARE
The following table is a reconciliation of the net income (loss) numerator
of basic and diluted net loss per common share for the three month and nine
month periods ended September 30, 1999 and 1998:
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998
----------------------------- --------------------------
LOSS LOSS
LOSS PER SHARE INCOME PER SHARE
<S> <C> <C> <C> <C>
Net Income (Loss) $(1,159,949) $ 471,272
Redeemable preferred
stock dividends (300,000) (300,000)
------------ ------------
Net Income (Loss) attributable to
common stockholders $(1,459,949) $ (0.11) $171,272 $ 0.01
============ ======== ============ ========
Weighted average common
shares outstanding -
basic 13,253,874 12,752,189
============ ============
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998
----------------------------- --------------------------
Loss Loss
Income Per Share Income Per Share
<S> <C> <C> <C> <C>
Net Income $ 10,524 $ 616,706
Redeemable preferred
stock dividends (100,000) (100,000)
------------ ------------
Net loss attributable to
common stockholders $ (89,476) $ (0.01) $ 516,706 $ 0.04
============ ======== ============ ========
Weighted average common
shares outstanding -
basic 13,285,581 12,668,513
============ ============
</TABLE>
16
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The Company had at September 30, 1999 and December 31, 1998, incremental
options and warrants to purchase, computed under the treasury stock method,
668,256 shares of common stock that were not included in the computation of
diluted earnings per share for the nine months ended September 30, 1999
because their effect was anti-dilutive. The Company also has preferred
stock outstanding at September 30, 1999 and December 31, 1998, which is
convertible into approximately 4,300,000 shares of common stock, that was
not included in the computation of diluted earnings per share for the nine
months ended September 30, 1999 as its effect was anti-dilutive.
Accordingly, diluted earnings per share does not differ from basic earnings
for the nine months ended September 30, 1999.
NOTE 11 - NOTE WITH RELATED PARTY
Pursuant to the Crown Ridge Operating Agreement with MCNIC, the Company is
required to contribute to the joint venture its rights under certain mining
equipment leases with a fair market value of up to $3.5 million once the
Asphalt Ridge Project's mining equipment requirements are conclusively
determined. Due to the delays at Asphalt Ridge, the Company and MCNIC have
agreed to share the mining equipment costs and the costs of any mine
equipment leases in accordance with their respective sharing ratios once
such equipment requirements are determined. In order to bring the partners
current capital account sharing ratios of 75% and 25% in balance and to
eliminate the requirement of the Company to provide mining equipment, on
July 20, 1999, the Company executed a promissory note in the amount of
$2,991,869 with MCNIC Pipeline and Processing Company. Such note is
interest only for two years and bears interest at prime plus 1% and is
adjusted monthly with payments of $20,757.14 per month. Additional payments
may be required based on the Company's cash flow. On July 20, 2001, the
remaining balance will be amortized over 13 years.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
The following discussion and analysis of the Company's 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 which express,
either directly or by implication, management's beliefs, expectations or
intentions regarding the Company's future performance or future events or
trends which may affect the Company or its 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 the Company's asphalt
products market in particular, new or increased governmental regulation,
changes in federal or state funding policies relating to road construction
and improvements, increased competition, shortages in labor or materials,
delays or other difficulties in shipping or transporting the Company's
products, technical or operational difficulties at the facility of Crown
Ridge, difficulties in integrating the Company's recent joint venture and
acquisition related businesses and other similar risks inherent in the
Company's operations or in business operations generally. Any such risks or
uncertainties, either alone or in combination with other factors, may cause
the actual results, performance or achievements of the Company to differ
materially from its 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 September 30, 1999, the Company had cash and other current assets of
$18,002,201 as compared to cash and other current assets of $11,044,600 at
December 31, 1998. The increase of $6,957,601 was primarily due to the
increase in accounts receivable which accumulate during the asphalt season,
typically during the months from April through October. The Company's
operations require a working capital line for inventory purchases and other
operating expenses. MCNIC, the minority interest owner, has provided Crown
Distribution with such line at an interest rate of 8%. At September 30, 1999,
the line had a principal balance of $14,935,221.
The Company also owed MCNIC an additional $5,325,723 at September 30,
1999 with respect to the Preferential Capital Contribution which funded Crown
Distribution's acquisition of the assets of Petro Source Asphalt Company. The
Preferential Capital Contribution yields a 15% rate of return and is payable
solely from 50% of the cash flow from Crown Distribution's operations.
The Company believes its asphalt distribution business, which is
operated through Capco, is a growth business whose success is not dependent
on the Company's interest in the Crown Ridge Project. However, the asphalt
distribution business is capital intensive and requires substantial
investments to acquire terminal storage, blending and raw material assets. On
May 12, 1999, the Company acquired an asphalt terminal in Rawlins, Wyoming
along with related inventory for $2,291,571 from S&L Industrial. The purchase
price consisted of the Company assuming S&L's debt of approximately
$1,800,000, entering into a note payable to S&L for $225,000, and a cash
payment of $266,571. The Company remains open to other asphalt related
business opportunities to complement its existing asphalt distribution
capabilities. There can be no assurance that the Company can obtain
additional capital financing required to finance such transactions on
acceptable terms and conditions.
Under the Company's contractual relationships with MCNIC, MCNIC has
certain rights to participate in additional business opportunities, including
the Rawlins asphalt terminal transaction. MCNIC has indicated that it intends
to participate in the foregoing business opportunities. Assuming that MCNIC's
participation in the business opportunities is consummated, MCNIC would be
required to fund its proportionate share of the capital expenditures.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS (CONTINUED)
The Company is required to fund 25% of Crown Ridge's capital costs,
start-up costs and operating expenses. As of September 30, 1999, the Company
has made cash contributions of approximately $5,541,114. A portion of these
cash contributions were made using the proceeds of a loan from MCNIC in the
amount of $2,991,869, dated July 20, 1999. Crown Ridge has experienced
mechanical and process difficulties with its facility at Asphalt Ridge. The
Company believes these difficulties can be resolved and is currently
engineering such a solution, following which the Company will evaluate its
technical and economic feasibility. The Company believes additional capital
contributions will be required for the Crown Ridge Project to become
operational and there can be no assurance that the Company can obtain its
share of such funds on acceptable terms. The Company is projecting a loss for
Crown Distribution for the year ended December 31, 1999. Should such losses
continue, should the delays or technical difficulties at Asphalt Ridge
continue, or should the facility be unable to operate economically, the
Company believes this would significantly impact the Company's operations and
financial condition and may affect its ability to continue as a going concern.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999, COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1998
Total revenue increased from $15,734,718 for the three month period
ended September 30, 1998 to $15,848,550 for the same period in 1999, an
increase of $113,832. The increase was due to increases at all of the
Company's asphalt distribution facilities and the acquisition of the Rawlins
asphalt distribution terminal. These facilities accounted for an increase of
approximately $5.4 million in revenue. This increase was partially offset by
a decrease of approximately $5.2 million in revenue recorded in 1998 from the
processing agreement with the Santa Maria Refinery that expired April 30,
1999. The Company is presently engaged in litigation with the owners of the
Santa Maria Refinery (See Part II - Item 2 - Legal Proceedings).
Cost of sales increased from $11,299,005 (72% of sales) for the three
month period ended September 30, 1998 to $12,536,520 (79% of sales) for the
same period in 1999, an increase of $1,237,515 (11%). This increase was due
to higher asphalt product costs resulting from the increase in the price of
oil.
Operating expenses decreased from $2,178,830 for the three month period
ended September 30, 1998 to $1,573,455 for the same period in 1999, a
decrease of $605,375 (28%). This decrease was due to operating costs of
approximately $1.2 million recorded in 1998 from the processing agreement
with the Santa Maria Refinery that expired April 30, 1999. This decrease was
partially offset by operating expense increases at the Company's asphalt
distribution facilities and from the newly acquired Rawlins asphalt
distribution terminal.
General and administrative expenses increased from $438,184 for the
three month period ended September 30, 1998 to $603,515 for the same period
in 1999, an increase of $165,331 (38%). This change was due to an increase in
the Company's overhead related to its growth in its asphalt distribution
business.
Interest and other income/expenses decreased from net other expenses of
$377,777 for the three month period ended September 30, 1998 to net other
expenses of $608,376 for the same period ended September 30, 1999, a decrease
of $266,452. The 1999 total is comprised of interest costs related to the
Company's working capital line, preferential loan and other debt for its
asphalt distribution business of $641,994 and losses of $70,208 related to
equity in the losses of Crown Ridge. These amounts were partially offset by
interest and other income of $103,826.
Minority interest of $361,727 represents MCNIC's approximate 49%
interest in Crown Distribution and Foreland's approximate 33% interest in
CAT, LLC.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS (CONTINUED)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999, COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1998
Total revenue increased from $15,921,645 for the nine month period ended
September 30, 1998 to $30,725,129 for the same period in 1999, an increase of
$14,803,484. This increase was due to the Company recording nine months of
revenue from its asphalt distribution operations in 1999 as opposed to only
three months in 1998. The Company acquired its asphalt distribution
operations in July, 1998. Revenues of $10.7 million and $10.4 million,
respectively, were included in the nine month period ended September 30, 1998
and 1999 from the processing agreement with the Santa Maria Refinery that
expired April 30, 1999. The Company is presently engaged in litigation with
the owners of the Santa Maria Refinery (See Part II - Item 2 - Legal
Proceedings).
Cost of sales increased from $11,424,955 (72% of sales) for the nine
month period ended September 30, 1998 to $23,156,140 (75% of sales) for the
same period in 1999, an increase of $11,731,185. This increase was due to the
Company recording nine months of cost of sales from its asphalt distribution
operations in 1999 as opposed to only three months in 1998. The Company
acquired its asphalt distribution operations in July, 1998.
Operating expenses increased from $2,179,646 for the nine month period
ended September 30, 1998 to $4,722,713 for the same period in 1999, an
increase of $2,543,067. This increase was due to the Company recording nine
months of operating expenses from its asphalt distribution operations in 1999
as opposed to only three months in 1998. The Company acquired its asphalt
distribution operations in July, 1998.
General and administrative expenses increased from $756,410 for the nine
month period ended September 30, 1998 to $1,833,658 for the same period in
1999, an increase of $1,077,248. This increase was due to the Company
recording nine months of general and administrative expenses from its asphalt
distribution operations in 1999 as opposed to only three months in 1998. The
Company acquired its asphalt distribution operations in July, 1998.
Interest and other income/expenses decreased from net other expenses of
$258,095 for the nine month period ended September 30, 1998 to net other
expenses of $1,721,366 for the same period in 1999, a decrease of $1,463,271.
The 1999 total was comprised of interest costs related to the Company's
working capital line, preferential loan and other debt for its asphalt
distribution business of $1,554,847 and losses of $496,481 related to equity
in the losses of Crown Ridge. These amounts were partially offset by interest
and other income of $329,962.
Minority interest of $43,236 represents MCNIC's approximate 49% interest
in Crown Distribution and Foreland's approximate 33% interest in CAT, LLC.
YEAR 2000 ASSESSMENT
Like many other companies, the "Year 2000 problem" creates risks for the
Company. The "Year 2000 problem" is the result of computer systems and other
equipment with embedded chips or processors using two digits, rather than
four, to define a specific year and potentially being unable to accurately
process, provide and/or receive date and time data from, into and between the
twentieth and twenty-first centuries, including the years 1999 and 2000, and
leap year calculations. The Year 2000 problem, if not identified and
corrected in a timely manner, could result in system failures or
miscalculations, causing disruptions to various Company activities and
operations and could adversely impact its financial condition and results of
operations.
The Company continues to address the Year 2000 problem in three
overlapping phases: (i) the identification and assessment of all critical
equipment, hardware and software systems requiring modification or
replacement prior to 2000; (ii) the remediation and testing of modifications
to critical items; and (iii) the development of contingency and business
continuation plans to mitigate the extent of any disruption to the Company's
operations arising from the Year 2000 problem.
20
<PAGE>
YEAR 2000 ASSESSMENT (CONTINUED)
The Company began its assessment of Year 2000 issues in the first
quarter of 1999 and the Company continues to assess the Year 2000 problem and
its potential impact on its information technology ("IT") and non-IT systems.
These activities are intended to encompass all major categories of systems in
use by the Company, including oil sands extraction functions, asphalt
processing, transportation and logistics systems, sales and finance and
accounting. The Company is also actively working with critical suppliers of
products and services to determine that the suppliers' operations and the
products and services they provide are Year 2000 compliant or to monitor
their progress toward year 2000 compliance. The Company expects that
assessment, remediation and contingency planning activities will continue
throughout 1999 with the goal of appropriately resolving all material
internal systems and third party issues. However, there can be no assurance
that the Company will be able to complete its assessment, remediate problems
or implement effective contingency plans before the end of 1999. Further, the
Company's recent acquisitions of asphalt terminals, and the Company's
continuing efforts to integrate these assets and new personnel into the
Company's overall operations, present additional difficulties in the
Company's assessment and remediation efforts.
The Company and its affiliated joint venture entity, Crown Ridge, employ
a number of IT systems in their operations, including, without limitation,
computer networking systems, financial systems and other similar systems. In
1998, the Company and its subsidiaries began conversion of their principal
computer software systems to a new integrated system to support future growth
and improve productivity. Although no independent assessment has been
conducted, management of the Company believes that the new computer system is
Year 2000 compliant based upon indications from its vendors that the new
computer systems incorporate current technology and software which are Year
2000 compliant.
The Facility constructed by Crown Ridge incorporates state of the art
technology and the Company believes that its IT and non-IT systems are Year
2000 compliant. However, the sophisticated nature of this Facility and the
fact that it is experiencing mechanical and process difficulties requires
that the Company continue to assess its Year 2000 readiness.
The Company is also assessing its non-IT systems containing embedded
electronic circuits. The Company has identified the operations of Crown
Ridge, Crown Distribution and CAT LLC, the Company's joint venture operating
companies, as having the most non-IT Year 2000 operational risks since the
Company's revenues and income are or will be derived primarily from these
operations. As of November 12, 1999, the Company has not identified any
material non-IT systems that are not Year 2000 compliant, although the
Company's assessment efforts are ongoing.
The Company 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 of
or delays in one or more methods of transportation could have a material
adverse affect on the Company and Crown Ridge and their respective operations.
Although the Company has obtained assurances from some of its key
suppliers, it has not independently evaluated whether its key suppliers are
or will be Year 2000 compliant, and therefore the Company's contingency plans
will assume that at least some of these suppliers will have disruptions in
their deliveries and services to the Company or Crown Ridge. Given that
assumption (and the risk that some of the Company's IT or non-IT systems will
experience unidentified or unremediated Year 2000 problems), some of the
worst case Year 2000 scenarios that the Company might experience include a
complete shut-down of Crown Ridge's facility and one or more of the asphalt
terminals of Crown Distribution, or a failure or substantial delay in the
transportation of the Company's asphalt products. The occurrence of any of
these events could result in lost revenues, lost customers, increased
processing, storage or transportation costs, increased financing costs
related to inventory shortages or sales order backlogs, substantial
remediation costs and other similar costs and expenses.
The potential costs, if any, to remediate direct or indirect Year 2000
problems the Company may have or identify has not been determined, nor can
such costs, if any, be accurately predicted or determined given the ongoing
nature of the Company's assessment efforts. At present, the Company has spent
approximately $125,000 upgrading its IT systems and has spent roughly $10,000
to assess or remediate non-IT issues (excluding salaries of Company
personnel). The Company currently expects that the total cost of these
programs, including both incremental spending and redeployed resources, will
not be in excess of $150,000. The total cost estimate is based on the current
assessment of the projects and is subject to change as the projects progress.
21
<PAGE>
YEAR 2000 ASSESSMENT (CONTINUED)
The Company has not yet developed any contingency plans in the event
that it 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 the Company and its subsidiaries.
The foregoing disclosure is based on the Company's current expectations,
estimates and projections, which could ultimately prove to be inaccurate.
Because of uncertainties, the actual effects of the Year 2000 problem on the
Company may be different from the Company's current assessment. Factors, many
of which are outside the control of the Company, that could affect the
Company's ability to be Year 2000 compliant by the end of 1999 include the
failure of customers, suppliers, governmental entities and others to achieve
compliance; the inability or failure to identify all critical Year 2000
issues or to develop appropriate contingency plans for all Year 2000 issues
that ultimately may arise.
22
<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 Plaintiff's 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. The Company is aware that the new
principals of Gavilan have experienced extensive legal difficulties and the
law firm which previously represented Gavilan has withdrawn as counsel in
this matter. Gavilan has taken no action to prosecute this matter for many
months, and the Company has not been notified that Gavilan has engaged new
legal counsel. Accordingly, the Company expects, although there can be no
assurance, that Gavilan will fail or refuse to prosecute this matter further.
The Company is not certain as to whether or not the outstanding balance under
the promissory note is collectible by the Company.
On February 10, 1999, CEntry Constructors and Engineers, L.L.C. (CEntry)
filed a demand for arbitration with the American Arbitration Association for
claims arising out of the November 5, 1997 Engineering, Construction and
Procurement Agreement between Crown Ridge and CEntry (the "Contract") for the
design and construction of Crown Ridge's facility near Vernal, Utah. CEntry
seeks damages in excess of $1.0 million for amounts allegedly due to CEntry
under the Contract, including a retention or liquidated damages amount of
$803,660, as well as amounts for modifications to the Contract allegedly made
by Crown Ridge. Crown Ridge has denied the claims and filed its own
counterclaims against CEntry. Crown Ridge asserts, among other things, that
Crown Ridge is entitled to the retention amount based upon certain breaches
of the Contract by CEntry and that Crown Ridge is entitled to liquidated
damages for CEntry's failure to meet a mechanical completion deadline
specified in the Contract. An arbitration panel has been selected and a date
for the arbitration hearing is being scheduled. Due to the uncertainties
inherent in any litigation or arbitration proceeding, there can be no
assurance that Crown Ridge will or will not prevail or that significant
damages will not be awarded against Crown Ridge.
On July 14, 1999, Crown Distribution and Capco filed an action in the
United States District Court for the Central District of California, Southern
Division, against Santa Maria Refining Company ("SMRC"), SABA Petroleum
Company ("SABA") and Greka Energy Corporation ("Greka"). The claims include
causes of action for breach of contract, breach of the covenant of good faith
and fair dealing, conversion, fraud, claim and delivery, unjust enrichment
and constructive trust, unfair competition, declaratory relief and specific
performance. These claims arise out of SMRC's termination of the Processing
Agreement and subsequent refusal to deliver asphalt to Crown Distribution.
Crown Distribution and Capco also made an application to the U.S. District
Court for a writ of possession or temporary restraining order, requesting
that SMRC continue providing asphalt to Crown Distribution, in order that
Crown Distribution could satisfy certain of its contractual commitments.
After a hearing on July 16, 1999, Crown Distribution's and Capco's request
for the entry of a temporary restraining order was granted. However, on July
30, 1999, after a hearing on Crown Distribution's and Capco's request for a
preliminary injunction, the temporary restraining order was dissolved. As a
result, SMRC refused to deliver any more asphalt to Crown Distribution. It is
anticipated that the damages caused by SMRC's actions could be substantial.
Although Crown Distribution will attempt to recoup those damages from SMRC,
SABA and Greka, due to the uncertainties inherent in any litigation
proceeding, there can be no assurance that Crown Distribution or Capco will
ultimately prevail.
23
<PAGE>
LEGAL PROCEEDINGS (CONTINUED)
On July 28, 1999, Robert Ryan Zimmerman, d/b/a Asphalt Supply & Service,
Inc., Robert A. Zimmerman, d/b/a Inoco, Inc., and Connie R. Zimmerman, d/b/a
Interstate Asphalt Company, (collectively, the "Zimmermans") filed an
application for preliminary injunction, temporary restraining order, and
declaratory judgment in the First Judicial District Court, Lewis & Clark
County, State of Montana, against the Company, Capco and the Company's
President. The action relates to Capco's purchase of the fixed assets, the
associated inventory, and certain contractual agreements of Asphalt Supply &
Service, Inc. and Inoco, Inc. (See Item 2 - - "Management's Discussion and
Analysis"). The action generally seeks a declaration that the Zimmermans
remain the owners and operators of the purchased asphalt terminals, as well
as a preliminary injunction and temporary restraining order. Without hearing
or opportunity for the Company or Capco to respond, on July 28, 1999, the
First Judicial District Court, Lewis & Clark County, State of Montana, issued
an order temporarily and preliminarily enjoining Capco and the Company from
participating in the day-to-day decisions of the purchased asphalt terminals,
from collecting any receivables for the terminal, and from selling,
transferring, conveying, encumbering, or disturbing in any manner, the
Zimmermans' assets. The Court refused to grant a declaratory judgement that
the Zimmermans are the rightful owners of the purchased asphalt terminals, or
that they have complete control and decision-making authority regarding the
purchased terminals. On August 9, 1999, the First Judicial District Court
issued an order transferring the action to the Thirteenth Judicial District
Court, Yellowstone County (Billings), State of Montana. The Company and Capco
intend to vigorously defend its position that the Zimmerman's breached the
asset purchase agreement by failing to comply with certain terms and
conditions, whereby the Company has been damaged.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders in Salt Lake City,
Utah at 2:00 p.m. on Wednesday, October 27, 1999. At the Annual Meeting of
Shareholders, James A Middleton, Jay Mealey, Alexander L. Searl and Richard
S. Rawdin were elected to the Board of Directors and Deloitte & Touch, L.L.P.
was ratified and affirmed as the Company's independent auditors for the 1999
fiscal year.
With respect to the election of directors, 10,771,017 votes were cast in
favor of Mr. James A. Middleton, no votes were cast against, and 633,500
votes were withheld (of this number, all were abstentions and none were
broker non-votes). On Mr. Mealey's election, 10,639,945 votes were cast in
favor, no votes were cast against, and 764,385 votes were withheld (of this
number, all were abstentions and none were broker non-votes). On Mr. Searl's
election, 10,771,517 votes were cast in favor, no votes were cast against,
and 632,813 votes were withheld (of this number, all were abstentions and
none were broker non-votes). On Mr. Rawdin's election 10,768,517 votes were
cast in favor, no votes were cast against, and 635,813 votes were withheld
(of this number, all were abstentions and none were broker non-votes).
With respect to the appointment of Deloitte & Touch, L.L.P. as the
Company's independent auditors, there were 11,196,145 votes cast in favor,
172,756 votes cast against, and 35,429 votes withheld (of the votes withheld,
all were abstentions and none were broker non-votes).
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
24
<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 12, 1999 By: /s/ Jay Mealey
----------------- -----------------------------------
Jay Mealey, Chief Executive Officer
Date: November 12, 1999 By: /s/ Alexander L. Searl
----------------- -----------------------------------
Alexander L. Searl, Chief Operating
and Financial Officer
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,631,016
<SECURITIES> 0
<RECEIVABLES> 10,069,661
<ALLOWANCES> 100,475
<INVENTORY> 5,804,275
<CURRENT-ASSETS> 18,002,201
<PP&E> 9,262,375
<DEPRECIATION> (427,580)
<TOTAL-ASSETS> 39,178,332
<CURRENT-LIABILITIES> 21,876,220
<BONDS> 0
4,825,472
0
<COMMON> 265,711
<OTHER-SE> (533,812)
<TOTAL-LIABILITY-AND-EQUITY> 39,178,332
<SALES> 30,725,129
<TOTAL-REVENUES> 30,725,129
<CGS> 23,156,140
<TOTAL-COSTS> 30,206,948
<OTHER-EXPENSES> 1,721,366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,554,847
<INCOME-PRETAX> (1,159,949)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,159,949)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,159,949)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</TABLE>
