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 June 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
incorporation or organization) Identification No.)
215 South State, Suite 650, Salt Lake City, Utah, 84111
- --------------------------------------------------------------------------------
(Address of principal executive offices, zip code)
(801) 537-5610
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(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
August 12, 1999.
<PAGE>
CROWN ENERGY CORPORATION
INDEX
PAGE(S)
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30,
1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statement of Operations for
the Three Months ended June 30, 1999 and 1998
(unaudited) 5
Condensed Consolidated Statement of Operations for
the Six Months ended June 30, 1999 and 1998
(unaudited) 6
Condensed Consolidated Statement of Cash Flows for
the Six Months ended June 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 21
ITEM 2. Changes in Securities 21
ITEM 3. Defaults upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
PART III. Signatures 22
<PAGE>
<TABLE>
<CAPTION>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
1999 December 31,
[unaudited] 1998
----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 814,313 $ 3,735,632
Accounts receivable, net of allowance for uncollectible
accounts of $100,475 and $100,475 at June 30, 1999
and December 31, 1998, respectively 5,959,729 2,823,778
Inventory 10,958,847 4,445,819
Prepaid and other current assets 1,132,444 39,371
----------- -----------
Total Current Assets 18,865,333 11,044,600
PROPERTY, PLANT AND EQUIPMENT, Net 7,933,700 3,013,792
INVESTMENT IN AND ADVANCES
TO AN EQUITY AFFILIATE 5,105,827 4,551,441
GOODWILL, Net 3,919,854 4,040,231
OTHER INTANGIBLE ASSETS, Net 218,296 225,000
OTHER ASSETS 485,720 696,200
----------- -----------
TOTAL $36,528,730 $23,571,264
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
1999 December 31,
[unaudited] 1998
----------- -----------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 6,990,692 $1,857,407
Preferred stock dividends payable 200,000 467,433
Accrued expenses 147,113 180,116
Long-term debt - estimated current portion 1,207,590 1,000,000
Line-of-credit to related party 14,935,221 8,935,221
----------- -----------
Total current liabilities 23,480,616 12,440,177
----------- -----------
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 1,043,486 1,255,477
CAPITALIZATION:
Long-term debt 7,357,780 4,325,723
Redeemable preferred stock 4,811,321 4,783,019
Common stockholders' equity (164,473) 766,868
----------- -----------
Total capitalization 12,004,628 9,875,610
----------- -----------
TOTAL $36,528,730 $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
June 30,
1999 1998
----------- -----------
<S> <C> <C>
SALES, Net of demerits $10,057,495 $ 186,929
EXPENSES:
Cost of goods sold 7,442,952 123,140
Operating expenses 1,803,323 816
General and administrative 648,802 111,465
Depreciation, depletion and amortization 128,335 7,951
----------- -----------
TOTAL 10,023,412 243,372
----------- -----------
INCOME (LOSS) FROM OPERATIONS 34,083 (56,443)
OTHER INCOME (EXPENSES):
Interest income and other income 113,881 30,851
Interest and other expense (530,734) (350)
Equity in losses of unconsolidated equity affiliate (196,875) 0
----------- -----------
Total other (expense) net (613,728) 30,501
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (579,645) (25,942)
----------- -----------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 85,266 0
----------- -----------
NET LOSS $ (494,379) $ (25,942)
----------- -----------
NET LOSS PER COMMON SHARE - Basic $ (0.04) $ (0.01)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended
June 30,
1999 1998
----------- -----------
<S> <C> <C>
SALES, Net of demerits $ 14,876,581 $ 186,929
EXPENSES:
Cost of goods sold 10,619,620 123,140
Operating expenses 3,145,360 816
General and administrative 1,234,060 250,361
Depreciation, depletion and amortization 339,985 9,651
----------- -----------
TOTAL 15,339,025 383,968
----------- -----------
INCOME LOSS FROM OPERATIONS (462,444) (197,039)
OTHER INCOME (EXPENSES):
Interest income and other income 226,136 78,078
Interest and other expense (912,853) (6,873)
Equity in losses of unconsolidated equity affiliate (426,273) 0
----------- -----------
Total other (expense) net (1,112,990) 71,205
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (1,575,434) (125,834)
----------- -----------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 404,962 0
----------- -----------
NET LOSS $(1,170,472) $ (125,834)
----------- -----------
NET LOSS PER COMMON SHARE - Basic $ (0.10) $ (0.03)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
[Unaudited]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
1999 1998
----------- -----------
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss $(1,170,472) $ (125,834)
----------- -----------
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization, depreciation and depletion 339,983 9,651
Equity in losses of unconsolidated affiliate 426,273 0
Minority interest (404,962) 0
Non-cash (income) expense 0 (22,892)
Change in assets and liabilities:
Accounts receivable (3,135,951) (182,146)
Inventory (6,513,028) (294,764)
Other assets (888,635) (479,143)
Accounts payable 5,133,285 32,770
Accrued expenses (33,003) (6,308)
----------- -----------
Total adjustments (5,076,038) (942,832)
----------- -----------
Net Cash Used in Operating Activities (6,246,510) (1,068,666)
----------- -----------
Cash Flows From Investing Activities:
Investment in and advances to Crown Asphalt Ridge, LLC (1,010,981) (985,083)
Acquisition of Asphalt Terminals (3,856,390) 0
Purchase of property and equipment (1,240,057) (185,639)
----------- -----------
Net Cash Used by Investing Activities (6,107,428) (1,170,722)
----------- -----------
Cash Flows From Financing Activities:
Net change in line of credit from related party 6,000,000 0
Sale of equity interest in subsidiary to a minority shareholder 192,971 0
Net changes in long-term debt 3,239,648 0
----------- -----------
Net Cash Provided by Used in Financing Activities $9,432,619 $0
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Continued]
For the Six Months Ended
June 30,
1999 1998
----------- -----------
<S> <C> <C>
Net Increase (Decrease) in Cash: $(2,921,319) $(2,239,389)
=========== ===========
Cash at Beginning of Period $ 3,735,632 $ 3,100,765
=========== ===========
Cash at End of Period $ 814,313 $ 861,376
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $ 69,942 $ 6,873
=========== ===========
Income taxes --- ---
=========== ===========
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended June 30, 1999:
OnJanuary 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 June 30, 1998:
None
</TABLE>
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 June 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 June 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 bases of assets and liabilities as reported
for financial statement and income tax purposes. As of June
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 June 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, 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 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 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 - Subsequent Event)
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 August 14, 1999 such conditions have not been
completed by the Seller 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 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 Processing
Agreement were approximately $7.8 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 expects
to offset this loss of revenue with revenue from its recent
acquisitions and its future acquisitions. Following the
termination of the Processing Agreement, SMRC and the Company
agreed
12
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CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 formal settlement agreement has not
been executed as of August 14, 1999, the Company intends to
enforce the terms previously reached by the parties.
NOTE 5 - LINE OF CREDIT
MCNIC extended a loan to Crown Distribution to finance
inventory purchased in the acquisition of Petro Source. As of
June 30, 1999, this loan plus a working capital revolving line
of credit provided by MCNIC, had a combined balance of
approximately $14,935,221 and accrues interest at 8%. Through
the period ended June 30, 1999, $556,300 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 proposals.
NOTE 6 - LONG TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following at June 30, 1999:
<S> <C>
Debt with Hancock-Geisler R.I.C., interest at 9%, with monthly $ 1,214,748
principal and interest payments of $20,627 for 82 months
Debt with Community First National Bank, interest at prime plus 1%, $ 1,799,900
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.
Debt with S&L Industrial, interest at LIBOR with annual payments equal $ 225,000
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.
Preferential debt with MCNIC, interest at 15%, with annual principal $ 5,325,723
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
Less estimated current portion $(1,207,590)
-----------
Long-term portion $ 7,357,781
===========
</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 June 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 $28,302 and $56,604
for the periods ended June 30, 1999 and December 31, 1998,
respectively, toward the stated value of $5,000,000 $ 4,811,321 $ 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 June 30, 1999 and December 31, 1998,
respectively $ 265,711 $ 259,370
Additional paid-in capital 6,020,130 5,787,340
Stock warrants outstanding; 683,750 at
June 30, 1999 and December 31, 1998, respectively 243,574 243,574
Common stock subscription receivable from officers (549,166) (549,166)
Retained deficit (6,144,722) (4,974,250)
----------- -----------
Total $ (164,473) $ 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
14
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
outstanding Series A Preferred at the rate of 8% per annum and
may be declared and 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 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. 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 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.
15
<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 six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------------ -----------------------------
Loss Loss
Loss Per Share Loss Per Share
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Net Loss $ (1,170,472) $ (125,834)
Redeemable preferred
stock dividends (200,000) (200,000)
------------ ----------
Net loss attributable to
common stockholders $ (1,370,472) $ (0.10) $ (325,834) $ (0.03)
============ ======= ========== =======
Weighted average common
shares outstanding -
basic and diluted 13,493,021 12,090,220
============ ==========
</TABLE>
The Company had at June 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 because their effect was anti-dilutive. The Company also
has preferred stock outstanding at June 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 as its effect was
anti-dilutive. Accordingly, diluted earnings per share does
not differ from basic earnings.
NOTE 11 - SUBSEQUENT EVENT
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, 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.
16
<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, 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 June 30, 1999, the Company had cash and other current assets of
$18,865,333 as compared to cash and other current assets of $11,044,600 at
December 31, 1998. The increase of $7,820,733 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 June 30, 1999, the line had a balance of $9,124,641 and
the working capital loan had a balance of $5,810,580.
The Company also owed MCNIC an additional $5,325,723 at June 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. At June
30, 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. Although the Company closed the acquisition and took
title to the terminal assets on April 17, 1999, the purchase price is not
payable until seller meets certain conditions precedent. As of August 14, 1999,
the seller has not yet met these conditions. However, on July 28, 1999, the
sellers filed an action in Montana seeking to have the asset purchase
transaction set aside. See "PART II - Item 1- Legal Proceedings". Given the
inherent uncertainties of litigation, there can be no assurance as to the
outcome of this litigation or whether the transaction may be set aside.
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
17
<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 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.
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 and the
working capital requirements may be substantial. As of June 30, 1999, the
Company has made cash contributions of approximately $2,549,246. 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. The Company believes it will require additional
capital contributions to Crown Ridge and there can be no assurance that the
Company can obtain such funds on acceptable terms. 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
For the three month period ended June 30, 1999, compared to the three
months ended June 30, 1998
Total revenue increased from $186,929 for the three month period ended
June 30, 1998 to $10,057,495 for the same period in 1999, an increase of
$9,870,566. The increase was due to revenue generated from the Company's asphalt
distribution operations that were acquired in July, 1998. Included in this
increase were $3,547,938 in revenues generated 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), and the Santa Maria Refinery has refused
to process the Company's products at that facility. The Company will be forced
to find alternative sources for its products and the Company may be forced to
incur additional costs and expenses to fulfill its sales contracts in the
California and Southern Nevada markets. Therefore, the Company's revenues and
gross margins in such market may be adversely affected.
Cost of sales increased from $123,140 for the three month period ended
June 30, 1998 to $7,442,952 for the same period in 1999, an increase of
$7,319,812. This increase was due to costs incurred at the Company's recently
acquired asphalt distribution terminals of $5,048,950 and costs related to the
processing agreement at the Santa Maria Refinery of $2,394,002.
Operating expenses increased from $816 for the three month period ended
June 30, 1998 to $1,803,324 for the same period in 1999, an increase of
$1,802,508. This increase was due to costs incurred at Crown Distribution, which
commenced operations in July, 1999.
General and administrative expenses increased from $111,465 for the
three month period ended June 30, 1998 to $648,802 for the same period in 1999,
an increase of $537,337. This change was due to an increase in the Company's
overhead (including the hiring of a significant number of employees) related to
its growth in its asphalt distribution business.
Interest and other income/expenses decreased from net other income of
$30,501 for the three month period ended June 30, 1998 to net other expenses of
$613,728 for the same period ended June 30, 1999, a decrease of $644,229. 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 $530,734 and losses of $196,875 related to equity in the losses of
Crown Ridge. These amounts were partially offset by interest and other income of
$113,881.
18
<PAGE>
Minority interest of $85,266 represents MCNIC's approximate 49%
interest in Crown Distribution and Foreland's approximate 33% interest in CAT,
LLC.
For the six month period ended June 30, 1999, compared to the six
months ended June 30, 1998
Total revenue increased from $186,929 for the six month period ended
June 30, 1998 to $14,876,581 for the same period in 1999, an increase of
$14,689,652. The increase was due to revenue generated from the Company's
recently acquired asphalt distribution operations. Included in this increase
were revenues of $7,769,632 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), and the Santa Maria Refinery has refused to process the
Company's products at that facility. The Company will be forced to find
alternative sources for its products and the Company may be forced to incur
additional costs and expenses to fulfill its sales contracts in the California
and Southern Nevada markets. Therefore, the Company's revenues and gross margins
in such market may be adversely affected.
Cost of sales increased from $123,140 for the six month period ended
June 30, 1998 to $10,619,620 for the same period in 1999, an increase of
$10,496,480. This increase was due to costs incurred at the Company's recently
acquired asphalt distribution terminals of $5,334,633 and costs related to the
processing agreement at the Santa Maria Refinery of $5,284,987.
Operating expenses increased from $816 for the six month period ended
June 30, 1998 to $3,145,360 for the same period in 1999, an increase of
$3,144,544. This increase was due to costs incurred at Crown Distribution which
commenced operations in July, 1999.
General and administrative expenses increased from $250,361 for the six
month period ended June 30, 1998 to $1,234,060 for the same period in 1999, an
increase of $983,699. This change was due to an increase in the Company's
overhead (including the hiring of a significant number of employees) related to
its growth in its asphalt distribution business.
Interest and other income/expenses decreased from net other income of
$71,205 for the six month period ended June 30, 1998 to net other expenses of
$1,112,990 for the same period in 1999, a decrease of $1,184,195. 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
$912,853 and losses of $426,273 related to equity in the losses of Crown Ridge.
These amounts were partially offset by interest and other income of $226,136.
Minority interest of $404,962 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.
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
19
<PAGE>
Year 2000 Assessment (continued)
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 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 August 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 $100,000 upgrading its IT systems and has spent roughly $8,000 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.
20
<PAGE>
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.
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 some 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 arbitration was to begin
August 2, 1999. The arbitration was to 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. The arbitration originally scheduled to begin
August 2, 1999, has been postponed indefinitely so that the parties may attempt
to settle their differences through mediation to be held in Salt Lake City on
September 2, 1999.
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. While Crown Distribution is attempting
to obtain alternative sources of asphalt and thereby mitigate its damages, it is
nonetheless 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.
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 terminals, and from selling, transferring, conveying,
encumbering, or disturbing in any manner, the Zimmermans' assets. The Court
refused to grant a declaratory judgment 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 enforce their rights under the
agreement to purchase the asphalt terminals. The Company and/or Capco may
respond to the action with a counterclaim or an independent civil action for
breach of contract, or both.
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.
21
<PAGE>
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.
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: August 14, 1999 By: /s/ JAY MEALEY
------------------------------------
Jay Mealey, Chief Executive Officer
Date: August 14, 1999 By: /s/ ALEXANDER L. SEARL
------------------------------------
Alexander L. Searl, Chief Operating
and Financial Officer
22
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