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 March 31, 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 incorporation (I.R.S. Employer
or organization) Identification No.)
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
July 1, 1999.
<PAGE>
CROWN ENERGY CORPORATION
INDEX
PAGE(S)
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31,
1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statement of Operations for the Three
Months ended March 31, 1999 and 1998 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for the
Three Months ended March 31, 1999 and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements
(unaudited) 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II. Other Information
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities 20
ITEM 3. Defaults upon Senior Securities 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
ITEM 5. Other Information 20
ITEM 6. Exhibits and Reports on Form 8-K 20
PART III. Signatures 21
<PAGE>
<TABLE>
<CAPTION>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1999 December 31,
[unaudited] 1998
------------ ------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,075,406 $ 3,735,632
Accounts receivable, net of allowance for uncollectible
accounts of $100,475 and $100,475 at March 31, 1999
and December 31, 1998, respectively 3,344,586 2,823,778
Inventory 8,652,571 4,445,819
Prepaid and other current assets 158,207 39,371
------------ ------------
Total Current Assets 13,230,770 11,044,600
PROPERTY PLANT, AND EQUIPMENT, Net 4,954,045 3,013,792
INVESTMENT IN AND ADVANCES
TO AN EQUITY AFFILIATE 5,243,507 4,551,441
GOODWILL, Net 3,980,043 4,040,231
OTHER INTANGIBLE ASSETS, Net 221,648 225,000
OTHER ASSETS 300,968 696,200
------------ ------------
TOTAL $ 27,930,981 $ 23,571,264
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
1999 December 31,
[unaudited] 1998
------------ ------------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 3,698,315 $ 1,857,407
Preferred stock dividends payable 100,000 467,433
Accrued expenses 262,201 180,116
Long-term debt - estimated current portion 1,139,805 1,000,000
Line-of-credit to related party 10,935,221 8,935,221
------------ ------------
Total current liabilities 16,135,542 12,440,177
------------ ------------
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 1,108,330 1,255,477
CAPITALIZATION:
Long-term debt 5,445,882 4,325,723
Redeemable preferred stock 4,797,170 4,783,019
Common stockholders' equity 444,057 766,868
------------ ------------
Total capitalization 10,687,109 9,875,610
------------ ------------
TOTAL $ 27,930,981 $ 23,571,264
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended
March 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
SALES, Net of demerits $ 4,819,084 $ 0
COST OF SALES 4,729,659 0
------------ ------------
GROSS PROFIT 89,425 0
GENERAL AND ADMINISTRATIVE EXPENSES 585,951 141,289
------------ ------------
INCOME (LOSS) FROM OPERATIONS (496,526) (141,289)
------------ ------------
OTHER INCOME (EXPENSES):
Interest income and other income 112,251 47,227
Interest and other expense (382,118) (6,523)
Equity in losses of unconsolidated equity affiliate (229,398) 0
------------ ------------
Total other expense, net (499,265) 40,704
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (995,791) (100,585)
------------ ------------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 319,696 0
------------ ------------
NET LOSS ($676,095) ($100,585)
------------ ------------
NET LOSS PER COMON SHARE-
Basic ($0.06) ($0.02)
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
March 31,
1999 1998
------------ ------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net income (loss) ($676,095) ($100,585)
------------ ------------
Adjustments to reconcile net loss to net cash used by operating
activities:
Amortization, depreciation and depletion 144,371 1,700
Equity in losses of unconsolidated affiliate 244,559 0
Minority interest (319,697) 0
Change in assets and liabilities:
Accounts receivable (520,805) 0
Inventory (4,206,752) 0
Other assets 486,214 (157,638)
Accounts payable 1,840,910 (2,305)
Accrued expenses 82,084 (21,227)
------------ ------------
Total adjustments (2,249,116) (179,470)
------------ ------------
Net Cash Provided by (Used in) Operating Activities (2,925,211) (280,055)
------------ ------------
Cash Flows From Investing Activities:
Investment in and advances to Crown Asphalt Ridge, LLC (936,626) (565,159)
Acquisition of Cowboy Asphalt Terminal (1,973,511) 0
Purchase of property and equipment (257,392) (26,712)
------------ ------------
Net Cash Used by
Investing Activities (3,167,529) (591,871)
------------ ------------
Cash Flows From Financing Activities:
Net change in line of credit from related party 2,000,000 0
Sale of equity interest in subsidiary to a minority shareholder 172,550 0
Net changes in long-term debt 1,259,964 0
------------ ------------
Net Cash Provided by Used in Financing Activities $3,432,514 $0
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Continued]
For the Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Net Increase (Decrease) in Cash: ($2,660,226) ($871,926)
============ ============
Cash at Beginning of Period $ 3,735,632 $ 3,100,765
============ ============
Cash at End of Period $ 1,075,406 $ 2,228,834
============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $ 19,148 $ 6,523
============ ============
Income taxes --- ---
============ ============
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended March 31, 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 March 31, 1998:
None
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<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 March 31, 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 March 31, 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) and
Cowboy Asphalt Terminal, LLC (CAT LLC). 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). 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 bases of assets and liabilities as reported
for financial statement and income tax purposes. As of
8
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1999, all net deferred tax assets were offset by a
valuation allowance.
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 March 31, 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
9
<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, 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.
Reclassifications - Certain amounts in the March 31, 1998
consolidated financial statements have been reclassified to
conform with classifications adopted in the current year.
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 CAC'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 the
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
10
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
time of the formation of Crown Ridge at $500,000) and (iv)
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, has been funding 75% of
the cash required to construct the initial plant contemplated
by Crown Ridge's L.L.C.'s Operating Agreement.
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 by the seller for final funding to be completed. As
of July 1, 1999 such conditions have not been completed and
the Company fully intends to enforce its rights under the
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.
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 the costs.
NOTE 4 - PROCESSING AGREEMENT EXPIRATION
The Company, through its subsidiary, Crown Distribution had an
agreement with Santa Maria Refining Company (SMRC) and SABA
Petroleum whereby Crown Distribution purchased crude oil for
processing at the Santa Maria Refinery, and marketed the slate
of products produced, primarily asphalt. This agreement was
acquired through the Petro Source asset acquisition. Revenues
resulting from the agreement were approximately $4.8 million
in 1999. This amount represents substantially all of the
Company's revenue for the period due the seasonal nature of
the Company's other asphalt distribution operations. The
Company expects to offset this loss of revenue with revenue
from its recent acquisitions and its future acquisitions. SMRC
extended the agreement, which expired on December 31, 1998, to
April 30, 1999. As anticipated, the agreement was not extended
subsequent to April 30, 1999. Following the termination of the
Processing Agreement as described within the foregoing
sentence, SMRC and the Company agreed upon terms under which
the Company would continue to purchase asphalt from the
facility until October 31, 1999, and SMCR would continue to
process crude products delivered to it by the Company.
Although a formal Settlement Agreement has not been executed
as of July 2, 1999, the Company intends to enforce the terms
previously reached by the parties.
11
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 5 - LINE OF CREDIT
Capco's partner in the acquisition of the acquired assets,
MCNIC, extended a loan to Crown Distribution to finance
inventory purchased in the acquisition. As of March 31, 1999,
this loan plus a working capital revolving line of credit
provided by MCNIC, had a balance of approximately $10,935,221
and accrues interest at 8%. Through the period ended March 31,
1999, $303,126 in interest had been accrued. This line is
repaid solely out of the cash flow from Crown Distribution.
The Company is currently reviewing other proposals for the
working capital line, however MCNIC has the option to match
the terms of such line.
<TABLE>
<CAPTION>
NOTE 6 - LONG TERM DEBT
Long-term debt consists of the following at March 31, 1999:
<S> <C>
Debt with Hancock-Geisler R.I.C., interest at 9%, with monthly
principal and interest payments of $20,627 for 82 months $ 1,259,964
Preferential debt with MCNIC, interest at 15%, with annual
principal and interest 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 5,325,723
Less estimated current portion (1,139,805)
----------
Long-term portion $ 5,445,882
=============
</TABLE>
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.
12
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOTE 8 - COMMON STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
At March 31, 1999 and December 31, 1998, common stockholders'
equity and redeemable preferred stock consists of the
following:
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 $14,151 and $56,604 for
the periods ended March 31, 1999 and December 31, 1998,
respectively, toward the stated value of $5,000,000 $ 4,797,170 $ 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
March 31, 1999 and December 31, 1998, respectively $ 265,711 $ 259,370
Additional paid-in capital 6,134,281 5,787,340
Stock warrants outstanding; 683,750 at
March 31, 1999 and December 31, 1998, respectively 243,574 243,574
Common stock subscription receivable from officers (549,166) (549,166)
Retained deficit (5,650,343) (4,974,250)
---------- ----------
Total $ 444,057 $ 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 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 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% of
13
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
the Company's Board of Directors. The Company may not alter
the rights and preferences of the Series A Preferred,
authorize any security having liquidation preference,
redemption, voting or dividend rights senior to the Series A
Preferred, increase the number of Series A Preferred,
reclassify its securities or enter into specified
extraordinary events without obtaining written consent or an
affirmative vote of at least 75% of the holders of the
outstanding shares of the Series A Preferred stock. All voting
rights of the Series A Preferred expire upon the issuance by
the Company of its notice to redeem such shares. The shares of
common stock issuable upon conversion of the Series A
Preferred are subject to adjustment upon the issuance of
additional shares of the Company's common stock resulting from
stock splits, share dividends, and other similar events as
well as upon the issuance of additional shares or options
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.
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 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.
14
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 10 - LOSS PER SHARE
The following table is a reconciliation of the net loss
numerator of basic and diluted net loss per common share for
the years ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------------- -----------------------------
Loss Loss
Loss Per Share Loss Per Share
<S> <C> <C>
Net Loss $ (676,095) $ (100,585)
Redeemable preferred
stock dividends (100,000) (100,000)
-------- --------
Net loss attributable to
common stockholders $ (776,095) $ (0.06) $ (200,585) $ (0.02)
========== ======= ========== =======
Weighted average common
shares outstanding -
basic and diluted 13,193,983 11,680,549
---------- ----------
</TABLE>
The Company had at March 31, 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 because their effect was anti-dilutive. The Company also
has preferred stock outstanding at March 31, 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 as its effect was
anti-dilutive. Accordingly, diluted earnings per share does
not differ from basic earnings.
15
<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 works "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, 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 March 31, 1999, the Company had cash and other current assets of
$13,230,770 as compared to cash and other current assets of $11,044,600 at
December 31, 1998. The increase of $2,186,170 was primarily due to the Company's
asphalt inventory winterfill program whereby the Company purchases asphalt
during the winter months, when prices are lower, for storage and subsequent sale
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
established such line, in addition to a working capital loan provided, at an
interest rate of 8%. At March 31, 1999, the line had a balance of $5,124,641 and
the working capital loan had a balance of $5,810,580.
The Company also owed MCNIC an additional $5,325,723 at March 31, 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. At March
31, 1999, the Company has estimated $1,000,000 of this balance to be current.
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. The Company
recently acquired several terminals in transactions requiring substantial
capital commitments. On April 17, 1999, the Company acquired the asphalt
terminal fixed assets in Laurel, Montana and Williston, North Dakota along with
certain contractual agreements of Asphalt Supply & Services, Inc. and Inoco,
Inc. for $4,000,000, consisting of $750,000 in cash and 2,500,000 shares of
unregistered common stock. Final funding of this acquisition will occur when the
seller meets certain conditions precedent. As of July 1, 1999, the seller has
not yet met these conditions. On May 12, 1999, the Company acquired an asphalt
terminal in Rawlins, Wyoming along with 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
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS (continued)
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 transactions with Asphalt Supply and Service, Inc., Inoco, Inc. and the
Rawlins transaction. MCNIC has indicated that it intends to participate in the
foregoing business opportunities. Assuming that MCNIC's participation in the
business opportunities is consumated, MCNIC will be required to fund its
proportionate share of the capital expenditures needed to pursue such
opportunities.
The Company believes it has sufficient capital to meet all of its
current working capital requirements from its cash reserve, working capital line
and other financing sources. However, the Company is required to fund 25% of
Crown Ridge's capital costs, start-up costs and operating expenses. As of March
31, 1999, the Company has made cash contributions of approximately $2,365,400.
Crown Ridge has experienced certain technical difficulties which the Company
believes will be resolved. However, should such delays continue, or should the
facility be unable to operate economically, the Company believes this would
significantly impact Crown Ridge's ability to continue as a going concern and
would adversely impact the Company's operations and financial condition.
Results of Operations
1999 vs. 1998
Total revenue increased from $0 for the period ended March 31, 1998 to
$4,819,084 for the period ended March 31, 1999, an increase of $4,819,084. The
increase was due to revenue generated from the Company's processing agreement
with the Santa Maria Refinery that expired April 30, 1999. The Company's asphalt
terminal distribution operations, which the Company expects to provide it with
its primary future growth, is a seasonal business, therefore no revenues were
expected during this period. The Company expects to offset this loss of revenue
with revenue from its recent acquisitions.
Cost of sales increased from $0 for the period ended March 31, 1998 to
$4,729,659 for the period ended March 31, 1999, an increase of $4,729,659. This
increase was due to costs incurred at the Company's recently acquired asphalt
distribution terminals of $1,264,559 and costs related to the processing
agreement at the Santa Maria Refinery of $3,465,100.
General and administrative expenses increased from $141,289 for the
period ended March 31, 1998 to $585,951 for the period ended March 31, 1999, an
increase of $444,662. 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 income of
$40,704 for the period ended March 31, 1998 to net other expenses of $499,265
for the period ended March 31, 1999, a decrease of $539,969. The 1999 total was
comprised of interest costs related to the Company's working capital line and
preferential loan for its asphalt distribution business of $378,934 and losses
of $229,398 related to equity in the losses of Crown Ridge. These amounts were
partially offset by interest income of $112,251.
Minority interest of $319,696 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
17
<PAGE>
Year 2000 Assessment (continued)
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 adversely impact its financial condition and
results of operations.
The Company is addressing 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.
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 computer systems 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 in its initial operational phase 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 July 1, 1999, the Company has not identified any material non-IT systems that
are not Year 2000 compliant, although the Company 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
18
<PAGE>
Year 2000 Assessment (continued)
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 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 $96,000 upgrading its IT systems and has spent roughly $5,000 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.
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.
19
<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.
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 arbitration will begin
August 2, 1999. The arbitration will take place in Salt Lake City, Utah and the
case is currently in the discovery phase. 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.
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
The Company filed a Form 8-K on April 29, 1999 to report the
acquisition of certain asphalt terminal distribution assets.
20
<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: July 2, 1999 By: /s/ JAY MEALEY
---------------------------------
Jay Mealey, Chief Executive Officer
Date: July 2, 1999 By: /s/ ALEXANDER L. SEARL
---------------------------------
Alexander L. Searl, Chief Operating
and Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,075,406
<SECURITIES> 0
<RECEIVABLES> 3,445,061
<ALLOWANCES> 100,475
<INVENTORY> 8,652,571
<CURRENT-ASSETS> 13,230,770
<PP&E> 5,206,417
<DEPRECIATION> 252,372
<TOTAL-ASSETS> 27,930,981
<CURRENT-LIABILITIES> 16,135,542
<BONDS> 0
4,797,170
0
<COMMON> 265,711
<OTHER-SE> 178,346
<TOTAL-LIABILITY-AND-EQUITY> 27,930,981
<SALES> 4,819,084
<TOTAL-REVENUES> 4,819,084
<CGS> 4,729,659
<TOTAL-COSTS> 5,315,610
<OTHER-EXPENSES> 499,265
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 382,118
<INCOME-PRETAX> (676,095)
<INCOME-TAX> 0
<INCOME-CONTINUING> (676,095)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (676,095)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
