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, 2000
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
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(Exact name of registrant as specified in its charter)
Utah 87-0368981
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
215 South State, Suite 650, Salt Lake City, Utah, 84111
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(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 13,285,581shares of $.02 par value common stock outstanding as of
August 14, 2000.
<PAGE>
CROWN ENERGY CORPORATION
INDEX
PAGE(S)
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30,
2000 (unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations for
the Three Months ended June 30, 2000 and 1999
(unaudited) 5
Condensed Consolidated Statements of Operations for
the Six Months ended June 30, 2000 and 1999
(unaudited) 6
Condensed Consolidated Statements of Cash Flows for
the Six Months ended June 30, 2000 and 1999
(unaudited) 7
Notes to Condensed Consolidated Financial Statements
(unaudited) 9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risks 22
PART II. Other Information
ITEM 1. Legal Proceedings 23
ITEM 2. Changes in Securities 23
ITEM 3. Defaults upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 5. Other Information 24
ITEM 6. Exhibits and Reports on Form 8-K 24
PART III. Signatures 25
2
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
2000 December 31,
[unaudited] 1999
---------------- ----------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 937,545 $ 4,978,977
Accounts receivable, net of allowance for uncollectible
accounts and demerits of $262,696 and $298,000 at June 30, 2000
and December 31, 1999, respectively 5,657,135 5,186,325
Inventory 4,789,251 2,133,866
Prepaid and other current assets 47,408 35,582
---------------- ----------------
Total Current Assets 11,431,339 12,334,750
PROPERTY, PLANT AND EQUIPMENT, Net 9,617,925 9,237,735
INVESTMENT IN AND ADVANCES
TO AN EQUITY AFFILIATE 6,633,778 7,174,920
GOODWILL, Net 3,879,446 4,127,680
OTHER INTANGIBLE ASSETS, Net 287,020 175,000
OTHER ASSETS 210,306 63,768
---------------- ----------------
TOTAL $ 32,059,814 $ 33,113,853
================ ================
</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
June 30,
2000 December 31,
[unaudited] 1999
---------------- ----------------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 1,606,481 $ 1,132,251
Preferred stock dividends payable 599,996 400,000
Accrued expenses 3,814,237 2,281,992
Long-term debt - estimated current portion 156,386 166,204
Borrowings from related party 14,935,222 4,935,222
---------------- ----------------
Total current liabilities 21,112,322 8,915,669
---------------- ----------------
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 415,388 301,699
CAPITALIZATION:
Long-term debt 11,268,199 11,332,681
Redeemable preferred stock 4,867,925 4,839,623
Common stockholders' deficit (5,604,020) (2,275,819)
---------------- ----------------
Total capitalization 10,532,104 13,896,485
---------------- ----------------
TOTAL $ 32,059,814 $ 33,113,853
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
[Unaudited]
For the Three Months Ended
June 30,
---------------------------------------
2000 1999
------------------ ----------------
<S> <C> <C>
SALES, Net of demerits $ 6,872,696 $ 10,057,495
EXPENSES:
Cost of goods sold 5,733,582 7,442,952
Operating expenses 1,102,730 1,803,323
General and administrative 457,942 648,802
Depreciation, and amortization 215,323 128,335
------------------ ----------------
TOTAL 7,509,577 10,023,412
------------------ ----------------
INCOME (LOSS) FROM OPERATIONS (636,881) 34,083
OTHER INCOME (EXPENSES):
Interest and other income 284,461 113,881
Interest and other expense (644,565) (530,734)
Equity in losses of unconsolidated equity affiliate (167,088) (196,875)
------------------ ----------------
Total other (expense) net (527,192) (613,728)
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (1,164,073) (579,645)
------------------ ----------------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN LOSSES OF
CONSOLIDATED JOINT VENTURE 10,039 85,266
------------------ ----------------
NET LOSS $ (1,154,034) $ (494,379)
------------------ ----------------
NET LOSS PER COMMON SHARE-
Basic and diluted $ (0.09) $ (0.04)
================== ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
[Unaudited]
For the Six Months Ended
June 30,
---------------------------------------
2000 1999
------------------ ----------------
<S> <C> <C>
SALES, Net of demerits $ 8,189,105 $ 14,876,581
EXPENSES:
Cost of goods sold 6,638,461 10,619,620
Operating expenses 1,944,263 3,145,360
General and administrative 1,093,857 1,234,060
Depreciation, and amortization 433,749 339,985
------------------ ----------------
TOTAL 10,110,330 15,339,025
------------------ ----------------
INCOME LOSS FROM OPERATIONS (1,921,225) (462,444)
OTHER INCOME (EXPENSES):
Interest and other income 587,827 226,136
Interest and other expense (1,266,453) (912,853)
Equity in losses of unconsolidated equity affiliate (434,013) (426,273)
------------------ ----------------
Total other (expense) net (1,112,639) (1,112,990)
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (3,033,864) (1,575,434)
------------------ ----------------
DEFERRED INCOME TAX BENEFIT 0 0
MINORITY INTEREST IN LOSSES OF
CONSOLIDATED JOINT VENTURE 17,214 404,962
------------------ ----------------
NET LOSS $ (3,016,650) $ (1,170,472)
------------------ ----------------
NET LOSS PER COMMON SHARE-
Basic and diluted $ (0.24) $ (0.10)
================== ================
</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
[Unaudited]
For the Six Months Ended
June 30,
---------------------------------------
2000 1999
------------------ ----------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss $ (3,016,650) $ (1,170,472)
------------------ ----------------
Adjustments to reconcile net loss to net cash used by operating
activities:
Amortization, depreciation and depletion 433,749 339,983
Equity in losses of unconsolidated affiliate 434,013 426,273
Minority interest (17,214) (404,962)
Changes in assets and liabilities:
Accounts receivable (470,810) (3,135,951)
Inventory (2,655,389) (6,513,028)
Other assets (158,363) (888,635)
Accounts payable 474,230 5,133,285
Accrued expenses 1,531,030 (33,003)
------------------ ----------------
Total adjustments (428,754) (5,076,038)
------------------ ----------------
Net Cash Used in Operating Activities (3,445,404) (6,246,510)
------------------ ----------------
Cash Flows From Investing Activities:
Investment in and advances to Crown Asphalt Ridge, LLC 76,808 (1,010,981)
Acquisition of Asphalt Terminals 0 (3,856,390)
Purchase of property and equipment (647,400) (1,240,057)
------------------ ----------------
Net Cash Used by Investing Activities (570,592) (6,107,428)
------------------ ----------------
Cash Flows From Financing Activities:
Net change in borrowings from related party 0 6,000,000
Sale of equity interest in subsidiary to a minority shareholder 0 192,971
Long-term debt payment (73,089) (67,422)
Proceeds from borrowings of long-term debt 0 3,307.070
------------------ ----------------
Capital contribution from partners 47,653 0
Net Cash Provided by Used in
Financing Activities $ (25,436) $ 9,432,619
------------------ ----------------
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE>
<CAPTION>
CROWN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Continued]
For the Six Months Ended
June 30,
---------------------------------------
2000 1999
------------------ ----------------
<S> <C> <C>
Net Increase (Decrease) in Cash: $ (4,041,432) $ (2,921,319)
================== ================
Cash at Beginning of Period $ 4,978,977 $ 3,735,632
================== ================
Cash at End of Period $ 937,545 $ 814,313
================== ================
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest $ 285,229 $ 69,942
================== ================
Income taxes --- ---
================== ================
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period ended June 30, 2000:
None
For the period ended June 30, 1999:
On January 27, 1999, the Company issued 317,069 shares of common
stock to its preferred stockholders as payment in full for preferred
stock dividends payable totaling $467,433.
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, 2000 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, 1999 Annual Report on Form 10-K. The results of operations
for the period ended June 30, 2000 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. Because
there is no agreement requiring the minority shareholder to guarantee
the subsidiary's debt or a commitment to provide additional capital,
other than working capital, all losses related to Crown Distribution
(including MCNIC's 49% interest in the losses totaling $1,205,640) are
included in the Company's Financial Statements. 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. MCNIC has
since filed suit on this matter and the Company and/or its subsidiaries
have answered such suit and filed counter claims and claims
independently, as detailed in Part II Item 1.
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.
Basis of Presentation - The accompanying consolidated financial
statements have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. The consolidated financial statements
do not include any adjustments relating to the recoverability and
classifications of recorded amounts of assets or the amounts and
9
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Basis of Presentation (continued) - classifications of liabilities that
might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern depend upon its
ability to generate sufficient cash flows to meet its obligations on a
timely basis and to obtain additional financing or refinancing as may
be required.
At June 30, 2000, the company's current liabilities exceeded current
assets by $9,680,983 and the Company had a common stockholders' deficit
of $5,604,020. For the year ended December 31, 1999, the Company had a
loss of $3,053,516 and for the six month period ended June 30, 2000,
the Company had a loss of $3,016,650. On March 27, 2000, the Company
was advised by MCNIC that it was in default of the working capital
loan. MCNIC has also demanded immediate payment of the working capital
loan plus accrued interest. References to the Company may also include
references to Crown Distribution within this Report where it is
appropriate. Management believes that the Company is not in default of
the working capital loan, since only the initial loan had specified
terms and such loan was extinguished by the replacement loan, which
management believes is a line of credit as interpreted by the Operating
Agreement between MCNIC and Capco. The Company does not believe that
MCNIC will provide additional working capital in excess of the existing
loan and Management has been unable to secure additional working
capital through other sources.
The Crown Ridge production facility, which is a joint venture between
MCNIC and CAC, has not completed the pilot operations in the second
quarter as indicated by Management in its December 31, 1999 annual
report on Form 10-K. The continued delays of the pilot operations,
indicate that the $6,633,778 investment that the Company holds on its
balance sheet in Crown Ridge has the potential to be impaired if the
facility does not achieve an acceptable level of profitable operations.
Management believes that if viable and economic solution exists at the
facility and the facility becomes operational, then Crown Ridge will be
able to continue as a going concern.
These factors, as well as continued operating losses raise some concern
regarding the Company's ability to operate as a going concern.
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, 2000, all net deferred tax assets were offset
by a valuation allowance.
Number of Shares Outstanding - The number of shares shown as
outstanding do not reflect 350,000 shares committed to be issued to the
law firm of Berman, Gaufin, Tomsic & Savage in connection with the
litigation against MCNIC described in Part II Item 1.
Loss Per Share - Net loss per common share is computed under the basic
method using 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 diluted loss per
share computations as such common stock equivalents are anti-dilutive.
10
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 accounting principles generally
accepted in the United States of America, 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, 2000 and
December 31, 1999.
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 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.
Derivative Instruments and Hedging - In June 1998, the FASB issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
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.
11
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
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.
Revenue Recognition - In December 1999, the Securities and Exchange
Commission (SEC) issued SEC Staff Accounting Bulletin (SAB): No. 101 -
Revenue Recognition in Financial Statements. This SAB summarizes
certain of the staff's views in applying generally accepted accounting
principals to revenue recognition in financials statements. The SAB
will be effective in the fourth quarter of this year. The company is
still evaluating the impact that the SAB will have on its financial
statements.
NOTE 2 - 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 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. Capco
currently processes asphalt for Crown Distribution for a fee through
the Rawlins Asphalt Terminal by throughput agreement. The Company has
been notified by MCNIC that it will participate in this acquisition and
will fund one-half of all costs. To date, however, MCNIC has not taken
the actions required in order for it to participate.
NOTE 3 - 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 Capco marketed the slate of products
produced, primarily asphalt. This agreement was acquired through the
acquisition of Petro Source Asphalt Company in 1998. The agreement was
terminated effective April 30, 1999. Revenues resulting from the
agreement were approximately $4.8 million in the first six months of
1999.
NOTE 4 - BORROWINGS FROM RELATED PARTY
Pursuant to the Crown Distribution Operating Agreement, Management
believes, MCNIC elected to provide a working capital revolving line of
credit to Crown Distribution in lieu of the Company completing a line
with an outside financial institution. As of June 30, 2000, this line
had a balance of approximately $14,935,222 and accrues interest at 8%.
Management of the Company has indicated that MCNIC believes the
borrowing is a working capital loan. Through the period ended June 30,
2000, $1,754,390 in interest had been accrued. This line is repaid
solely out of the cash flow from Crown Distribution. Crown Distribution
has received a notice of default of a working capital loan from MCNIC
made in conjunction with the Petro Source asset acquisition. Further,
MCNIC has filed
12
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 4 - BORROWINGS FROM RELATED PARTY (continued)
a complaint seeking, among other things, repayment of the working
capital loan plus all interest accrued thereon. The Company has
answered MCNIC's suit and filed counterclaims and an additional action
of its own relating to MCNIC's actions with regard to the Company and
its ventures with it. (See "Part II, Item 1 Legal Proceedings and Item
3. Defaults upon Senior Securities.")
NOTE 5 - LOSSES FROM EQUITY AFFILIATE
Crown Ridge has recorded certain expenses, the majority of which relate
to the pilot project currently being conducted, that the Company
believes were not approved by the Management Committee of Crown Ridge.
The Company has recorded its share of such expenses, however should
these expenses be determined not to be valid Crown Ridge expenditures,
the Company will reverse its share of such expenses, estimated to be
$391,122, in the period upon such determination.
NOTE 6 - LONG TERM DEBT
Long-term debt consists of the following at June 30, 2000:
Debt with Hancock-Geisler R.I.C., interest at 9%, with
monthly principal and interest payments of $20,627 for
84 months $ 1,083,205
Debt with Community First National Bank, interest at
prime plus 1%, with monthly payments of $13,600
through May 12, 2001 with additional principal
payments due in 2000 and 2001 of $60,000 and $66,000
respectively, based on cash flow from Capco only.
Balance as of May 12, 2001 to be amortized over 13
year. $ 1,798,788
Debt with S&L Industrial, interest at LIBOR with annual
payments equal to the greater of 25% of the Rawlins
Terminal cash flow after debt service or principal and
interest payments annualized over 10 years. Such
amount will be reduced because certain representations
of S&L were not satisfied. $ 225,000
Preferential Capital Contribution in Crown Distribution
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 and
is repayable solely from Crown Distribution's cash
flow and is non-recourse to the Company. $ 5,325,723
Debt with MCNIC, interest at prime plus 1%, with monthly
payments of $20,757 through July 20, 2001 with
additional payments due in 2000 and 2001 based upon
the Company's cash flow. Balance as of July 20, 2001
to be amortized over 13 years. $ 2,991,869
Less estimated current portion $ (156,386)
-----------
Long-term portion $11,268,199
===========
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' DEFICIT AND REDEEMABLE PREFERRED STOCK
At June 30, 2000 and December 31, 1999, common stockholders' equity and
redeemable preferred stock consists of the following:
June 30, December 31,
2000 1999
----------- ----------
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, 2000 and December 31, 1999,
respectively, toward the stated value of
$5,000,000 $ 4,867,925 $ 4,839,623
============ ===========
Common stockholders' equity:
Common stock, $.02 par value; 50,000,000
shares authorized; 13,285,581 and 13,285,581
shares issued and outstanding at June 30, 2000
and December 31, 1999, respectively $ 265,711 $ 265,711
Additional paid-in capital 5,563,527 5,791,828
Stock warrants outstanding; 683,750 at June
30, 2000 and December 31, 1999, respectively 243,574 243,574
Common stock subscription receivable from
officers (549,166) (549,166)
Retained deficit (11,127,666) (8,027,766)
----------- ----------
Total $ (5,604,020) $(2,275,819)
============ ===========
NOTE 9 - CAPITAL TRANSACTIONS
Preferred Stock - The Company is authorized to issue 1,000,000
preferred shares, par value $.005 per share. On November 4, 1997, the
Company completed the sale of 500,000 shares of its Series A Cumulative
Convertible Preferred Stock ("Series A Preferred") pursuant to a stock
purchase agreement dated September 25, 1997 for an aggregate sales
price of $5,000,000. Each share of Series
14
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
A Preferred is convertible at the option of its holder, at any time,
into 8.57 shares of common stock of the Company. At the date of the
issuance of the preferred stock, the embedded conversion price was
$1.17 and the estimated fair value of the common stock was $1.03.
Dividends accrue on the outstanding Series A Preferred at the rate of
8% per annum and may be declared, at the option of the Company, 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% ofthe Company's
Board of Directors. The Company may not alter the rights and
preferences of the Series A Preferred, authorize any security having
liquidation preference, redemption, voting or dividend rights senior to
the Series A Preferred, increase the number of Series A Preferred,
reclassify its securities or enter into specified extraordinary events
without obtaining written consent or an affirmative vote of at least
75% of the holders of the outstanding shares of the Series A Preferred
stock. All voting rights of the Series A Preferred expire upon the
issuance by the Company of its notice to redeem such shares. The shares
of common stock issuable upon conversion of the Series A Preferred are
subject to adjustment upon the issuance of additional shares of the
Company's common stock resulting from stock splits, share dividends,
and other similar events as well as upon the issuance of additional
shares or options which are issued in connection with the Company's
equity investment or as compensation to any employee, director,
consultant, or other service provider of the Company or any subsidiary,
other than options to acquire up to 5% of the Company's common stock at
or less than fair market value. This anti-dilution provision only
applies upon the issuance of additional equity in connection with the
Company's interest in Crown Asphalt Ridge, LLC or equity issued to any
employee, director, consultant or other service provider outside of the
Company's Long Term Incentive Plan.
Common Stock Warrant - In conjunction with the issuance of the
preferred stock described above, the Company issued a warrant to the
holders of the preferred stock. The fair value of the warrant at the
date of issuance was estimated to be $283,019 and was recorded to
additional paid-in capital and as a reduction to the stated value of
the preferred stock. The reduction in preferred stock is being accreted
over the five-year period from the date of issuance to the earliest
exercise date of the warrant. Upon the fifth anniversary of the
issuance of the preferred stock, the warrant becomes exercisable, at
$.002 per share, into the number of common shares of the Company equal
to (a) [$5,000,000 plus the product of (i) ($5,000,000 multiplied by
(ii) 39% (internal rate of return) multiplied by (iii) 5 years]
(14,750,000), minus (b) the sum of (i) all dividends and other
distributions paid by the Company on the preferred stock or on the
common stock received upon conversion of the preferred stock plus (ii)
the greater of the proceeds from the sale of any common stock received
by the holder upon the conversion of the preferred stock prior to the
fifth anniversary date or the terminal value (as defined below) of such
common stock sold before the fifth anniversary plus (iii) the terminal
value of the preferred stock and common stock received upon conversion
of the preferred stock then held, divided by (c) the fair market value
of the Company's common stock on a weighted average basis for the 90
days immediately preceding the fifth anniversary date of the issuance
of the preferred stock. Terminal value is defined as the sum of (i) the
shares of common stock into which the preferred stock then held is
convertible, plus (ii) shares of common stock received upon conversion
of preferred
15
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Common Stock Warrant (continued) - stock, multiplied by the fair market
value of the Company's common stock on a weighted average basis for the
90 days immediately preceding the fifth anniversary date of the
issuance of the preferred stock. The warrants will expire in 2007 and
is subject to a cap of up to an additional 8% of the Company's fully
diluted outstanding shares as of September 25, 1997 and other certain
adjustments.
NOTE 10 - 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, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---------------------- --------------------
Loss Loss
Loss Per Share Loss Per Share
---- --------- ---- ---------
<S> <C> <C> <C> <C>
Net Loss $ (3,016,650) $ (1,170,472)
Redeemable preferred
stock dividends (200,000) (200,000)
-------- --------
Net loss attributable to
common stockholders $ (3,216,650) $ (0.24) $ (1,370,472) $ (0.10)
============ ======= ============ =======
Weighted average common
shares outstanding -
basic and diluted 13,285,581 13,285,581
---------- ----------
</TABLE>
The Company had at June 30, 2000 and December 31, 1999, 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, 2000 and December 31, 1999 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 - COMMITMENTS AND CONTINGENCIES
On June 20, 2000, MCNIC filed a Complaint in the Third Judicial
District Court, Salt Lake County, Utah, against Crown Distribution. The
action seeks to foreclose on alleged mortgage and security interest in
and to certain real and personal property of Crown Distribution, which
property constitutes a substantial part of the operating assets of
Crown Distribution. In summary, in its Complaint MCNIC does not
acknowledge its prior commitment to "roll" the Loan into the Credit
Line and alleges that Crown Distribution is in default on the
promissory note evidencing the Loan to Crown Distribution in the amount
of $7,141,930.00. MCNIC further alleges that the total amount owed by
Crown Distribution to MCNIC is in excess of $15,000,000, as well as
interest at the rate of 18% from January 1, 2000 until paid in full.
The Complaint also seeks the appointment of a receiver to ensure and
protect the interests of MCNIC in the property of Crown Distribution,
pending a determination by the Court of the merits of the Complaint.
Crown Distribution intends to vigorously defend against this litigation
and believes that it has certain available defenses, claims and
counterclaims. Crown Distribution's
16
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)
managements further believe that certain of MCNIC's allegations are
lacking in either legal or factual basis. However, litigation is
inherently uncertain and Crown Distribution is therefore unable to
predict the outcome of the litigation.
NOTE 12 - SUBSEQUENT EVENT
On July 25, 2000, the Company brought suit against MCN, MCNIC and
certain officers of MCN and MCNIC in the United States District Court
for the District of Utah, Central Division. The Company alleges claims
against defendants for breach of fiduciary duties, economic duress,
breach of implied covenants of good faith and fair dealing, breach of
contracts, estoppel, intentional interference, and trade libel and
slander of title as a result of defendants' wrongful and bad faith
conduct in the joint venture relationships. Damages of an amount
exceeding $100 million are being sought with the full amount of damages
on all claims to be proven at trial. (See "Part II - Item 1 - Legal
Proceedings")
On August 1, 2000, Crown Distribution filed its Answer and
Counterclaims to the MCNIC Complaint and named additional counterclaim
defendants, MCN and certain officers of MCN and MCNIC. The Answer and
Counterclaims substantially denied all of the allegations set forth in
the MCNIC Complaint and alleged numerous counterclaims. (See "Part II -
Item 1 - Legal Proceedings")
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
The following discussion and analysis of the Company's financial
condition, results of operations and related matters includes a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include, by way of illustration and not limitation,
statements containing the words "anticipates", "believes", "expects", "intends",
"future" and words of similar import which express, either directly or by
implication, management's beliefs, expectations or intentions regarding the
Company's future performance or future events or trends which may affect the
Company or its results of operations.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors, including but not limited to changes in
economic conditions generally or with respect to the Company's asphalt products
market in particular, new or increased governmental regulation, 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, 2000, the Company had cash and other current assets of
$11,431,339 as compared to cash and other current assets of $12,334,750 at
December 31, 1999. The decrease of $903,411 was primarily the result of the
Company's operating loss for the six month period ended June 30, 2000. The
operating loss resulted from insufficient funds available under its working
capital line of credit to complete its asphalt inventory winterfill program. The
winterfill program involves the purchase of asphalt during the winter months to
fill the available storage capacity, when prices are lower, for subsequent sale
during the asphalt season, typically during the months from April through
October. Management believes, MCNIC, the minority interest owner, having agreed
to provide such line of credit in lieu of third party bank financing has
declined to make available to the Company additional borrowings. The Company has
accrued interest on the line at an interest rate of 8%. At June 30, 2000, the
line had an outstanding principal balance of $14,935,222. (See "Part II - Item 1
- Legal Proceedings")
On March 27, 2000, MCNIC delivered to the Company a notice of default
with respect to the working capital loan, and demanded payment of the
outstanding principal balance plus all interest accrued thereon. MCNIC,
immediately following its notice of default, proposed an extension on the
working capital loan, provided the Company also relinquishes operational control
of Crown Distribution to MCNIC. The Company has endeavored to resolve these
issues with MCNIC on mutually acceptable terms. However, on June 20, 2000, MCNIC
filed a Complaint in the Third Judicial District Court, Salt Lake County, Utah,
against Crown Distribution. The action seeks to foreclose on alleged mortgage
and security interest in and to certain real and personal property of Crown
Distribution, which property constitutes a substantial part of the operating
assets of Crown Distribution. In summary, in its Complaint MCNIC does not
acknowledge its prior agreement to extinguish the working capital loan and
"roll" such loan into the working capital line of credit. The Complaint alleges
that Crown Distribution is in default on the promissory note evidencing the
working capital loan to Crown Distribution in the amount of $7,141,930.00. MCNIC
further alleges that the total amount owed by Crown Distribution to MCNIC is in
excess of $15,000,000, as well as interest at the rate of 18% from January 1,
2000 until paid in full. The Complaint also seeks the appointment of a receiver
to ensure and protect the interests of MCNIC in the property of Crown
Distribution, pending a determination by the Court of the merits of the
Complaint.
Management of the Company believes that the working capital loan was
fully satisfied and replaced by the working capital line of credit and no
default has occurred under the working capital loan or working capital line of
credit. The Company further believes that MCNIC is improperly attempting to
demand repayment of the working capital loan. Additionally, Management believes
that MCNIC is improperly attempting to gain control of Crown Distribution and
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)
other aspects of the Company's operations. The Company and Crown Distribution
intend to vigorously defend against this litigation. An Answer and Counterclaims
to the MCNIC Complaint were filed on August 1, 2000 with the court and named
additional counterclaim defendants, MCN Energy Group, Inc. ("MCN") and certain
officers of MCN and MCNIC. The Answer and Counterclaims substantially denied all
of the allegations set forth in the MCNIC Complaint and made certain defensive
arguments, claims and counterclaims. The Answer and Counterclaims further argued
that certain of MCNIC's allegations are lacking in either legal or factual
basis.
Interested persons should note that litigation is inherently uncertain
and the Company and Crown Distribution are therefore unable to predict the
outcome of the litigation. Should MCNIC prevails in the action against Crown
Distribution, and depending upon the extent and nature of any relief granted by
the Court, Crown Distribution may be severely and adversely impacted and may
lose possession of some or all of its primary assets and sources of revenues.
Further, since Crown Distribution provides a very significant portion of the
Company's revenues from operations, the Company is likely to be materially and
adversely impacted by any adverse outcome of MCNIC's litigation. On the other
hand, interested persons should note that, subject of course to available
equitable and other creditor remedies, neither the MCNIC working capital loan or
working capital line to Crown Distribution contain cross-default provisions
giving MCNIC any right to declare a default or to seek control or possession
over the assets or operations of Crown Ridge or the Company's interest in Crown
Ridge or any other assets of the Company.
Management of the Company intends to take all actions necessary or
appropriate to assert the Company's rights and preserve its rights and assets in
Crown Distribution and other aspects of its operations. As a result, the Company
on July 25, 2000 filed suit in United States District Court for the District of
Utah, Central Division against MCN, MCNIC and certain officers of MCN and MCNIC
in which the Company alleges claims against defendants for breach of fiduciary
duties, economic duress, breach of implied covenants of good faith and fair
dealing, breach of contracts, estoppel, intentional interference, and trade
libel and slander of title as a result of defendants' wrongful and bad faith
conduct in the joint venture relationships. Damages of an amount exceeding $100
million are being sought with the full amount of damages on all claims to be
proven at trial. While there is no way of predicting or knowing the outcome of
the litigation which is now in process, the Company is confident that it is
asserting its claims in good faith, has a reasonable basis for pursuing them and
will continue to pursue them with vigor. Given the wide range of potential
actions which MCNIC might take, and the equally wide range of defenses,
counterclaims and other actions which the Company might assert and/or take, it
is difficult to predict possible outcomes at this time. Again, interested
persons should note the significant and material risks facing the Company, as
well as the related material, negative impacts the Company would experience in
the event the Company does not prevail.
The Company also owed MCNIC an additional $5,325,723 at June 30, 2000
with respect to the Preferential Capital Contribution which funded Crown
Distribution's acquisition of the assets of Petro Source Asphalt Company. The
Preferential Capital Contribution yields a 15% rate of return and is payable
solely from 50% of the cash flow from Crown Distribution's operations. .
The Company believes its asphalt distribution business, which is
operated through Capco, is a business whose success is not dependent on the
Company's interest in the Crown Ridge facility. However, the asphalt
distribution business is capital intensive and requires substantial investments
to acquire terminal storage, blending, and raw material assets. For instance,
the Rawlins, Wyoming asphalt terminal, acquired by Capco in 1999, has not yet
generated positive cash flow and requires working capital to fund its ongoing
operations. Under the Company's contractual relationship with MCNIC, MCNIC has
certain rights to participate in additional business opportunities, if any,
which may be pursued by the Company. MCNIC has agreed to jointly own the Rawlins
asphalt terminal in a new, separate joint venture, Crown Distribution II.
Assuming that both the Company and MCNIC satisfy their respective obligations to
contribute assets to and otherwise fund Crown Distribution II, it is anticipated
that Crown Distribution II will be owned 50.01% by the Company and 49.99% by
MCNIC. The final operating agreement for Crown Distribution II was not completed
as of the date of this Report, and no assets have been contributed to Crown
Distribution II, but has not taken the steps necessary to consummate the
transaction. The Company expects that MCNIC will fund its proportionate share of
all costs and losses retroactive to the acquisition date of May 12, 1999.
Additionally, the Rawlins asphalt terminal will require a separate working
capital line of credit to operate the business, which line of credit the Company
expects will be
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)
jointly funded by MCNIC and the Company. Therefore, until such time as the
Rawlins asphalt terminal generates positive cash flow, the Company expects that
the operations at the Rawlins asphalt terminal will require working capital
provided by the Company.
The Company remains open to other asphalt related business
opportunities to complement its existing asphalt distribution capabilities.
There can be no assurance that the Company can obtain additional capital
financing required to finance such transactions on acceptable terms and
conditions.
The Company has a portion of its accounts receivable subject to the
risks and uncertainties of litigation (See "Part II, Item 1. Legal Proceedings")
and subject to related collection risks. In the event that the Company is unable
to collect these amounts, or the Company is unable to secure the necessary
working capital line from third party sources (such as MCNIC) for the Rawlins
asphalt terminal, or if the Company's operating losses and working capital
deficits continue, the Company may not have sufficient capital to operate
through 2000. Thus, the risk exists that the Company may not be able to continue
as a going concern. Furthermore, if Crown Ridge approves an additional capital
contribution for the modification to the facility and the Company is unable to
finance its approximate 25% of such capital contribution, its sharing ratio in
Crown Ridge may be diluted.
As of June 30, 2000, the Company has made cash contributions of
approximately $5.7 million to Crown Ridge. During the start-up of the Crown
Ridge facility, mechanical and process difficulties were experienced that
affected production economics. Crown Ridge is currently conducting a pilot study
to develop a solution to these problems. 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, 2000, compared to the three
months ended June 30, 1999
Total revenue decreased from $10,057,495 for the three month period
ended June 30, 1999 to $6,872,696 for the same period in 2000, a decrease of
$3,184,799. The decrease was due to the termination of the processing agreement
with the Santa Maria Refinery that expired April 30, 1999. Revenues generated
from the Santa Maria agreement during the same prior year period were
$3,547,938. The Company is presently engaged in litigation with the owners of
the Santa Maria Refinery (See "Part II - Item 1 - Legal Proceedings).
Cost of sales decreased from $7,442,952 for the three month period
ended June 30, 1999 to $5,733,582 for the same period in 2000, a decrease of
$1,709,370. This decrease was due to reduced costs resulting from the
termination of the Santa Maria Refining agreement.
Operating expenses decreased from $1,803,323 for the three month period
ended June 30, 1999 to $1,102,730 for the same period in 2000, a decrease of
$700,593. This decrease was due to lower through put for the period, improved
operating efficiencies, and the termination of the Santa Maria Processing
Agreement. Estimated through put for the three month period ended March 31, 1999
was 24,100 tons as compared to 6,050 tons for the same period in 2000.
General and administrative expenses decreased from $648,802 for the
three month period ended June 30, 1999 to $457,942 for the same period in 2000,
a decrease of $190,860. This change was primarily due to the collection of a
receivable of $320,000 from the Zimmerman litigation, which was expensed as a
bad debt in the prior year. This was partially offset by the additional overhead
attributed to the acquisition of the Rawlins Asphalt Terminal.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)
Interest and other income/expenses decreased from net other expenses of
$613,728 for the three month period ended June 30, 1999 to net other expenses of
$527,192 for the same period ended June 30, 2000, a decrease of $86,536. The
2000 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 $644,565 and losses of $167,088 related to equity in the losses of
Crown Ridge. These amounts were partially offset by interest and other income of
$284,461. (See "Part I - Note 5. Equity Affiliate")
Minority interest of $10,039 Foreland's approximate 33% interest in
CAT, LLC.
For the six month period ended June 30, 2000, compared to the six
months ended June 30, 1999
Total revenue decreased from $14,876,581 for the six month period ended
June 30, 1999 to $8,189,105 for the same period in 2000, a decrease of
$6,687,476. The decrease was due to the termination of the processing agreement
with the Santa Maria Refinery that expired April 30, 1999. Revenues generated
from the Santa Maria agreement during the same prior year period were
$7,769,632. The Company is presently engaged in litigation with the owners of
the Santa Maria Refinery (See "Part II - Item 1 - Legal Proceedings") that
refused to deliver the Company's inventory at that facility.
Cost of sales decreased from $10,619,620 for the six month period ended
June 30, 1999 to $6,638,461 for the same period in 2000, an increase of
$3,981,159. This decrease was due to reduced costs resulting from the
termination of the Santa Maria Refining agreement.
Operating expenses decreased from $3,145,360 for the six month period
ended June 30, 1999 to $1,944,263 for the same period in 2000, a decrease of
$1,201,097. This decrease was due to lower through put for the period, improved
operating efficiencies, and the termination of the Santa Maria Processing
Agreement. Estimated through put for the six month period ended June 30, 1999
was 81,500 tons as compared to 41,500 tons for the same period in 2000.
General and administrative expenses decreased from $1,234,060 for the
six month period ended June 30, 1999 to $1,093,857 for the same period in 2000,
a decrease of $140,203. This change was due to the collection of a receivable
which was expensed as a bad debt in the prior year and cost efficiencies. This
was partially offset by the additional overhead attributed to the acquisition of
the Rawlins Asphalt Terminal.
Interest and other income/expenses decreased from net other expenses of
$1,112,990 for the six month period ended June 30, 1999 to net other expenses of
$1,112,639 for the same period in 2000, a decrease of $351. The 2000 total was
comprised of interest costs related to the Company's working capital line,
preferential loan and other debt for its asphalt distribution business of
$1,266,453 and losses of $434,013 related to equity in the losses of Crown
Ridge. These amounts were partially offset by interest and other income of
$587,827. (See "Part I - Note 5. Equity Affiliate")
Minority interest of $17,214 represents Foreland's approximate 33%
interest in CAT, LLC.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe it is subject to the material risks of
loss related to certain market risks, such as interest rate risks, foreign
currency exchange rate risks or similar risks, and therefore the Company does
not engage in transactions, such as hedging or similar transactions in
derivative financial instruments, intended to reduce its exposure to such risks.
However, the Company is subject to general market fluctuations related to the
purchase of its basestock asphalt and may suffer reduced operating margins to
the extent its increased costs are not passed through to its customers. Such
prices generally fluctuate with the price of crude oil. The Company is prevented
in certain contracts with MCNIC from utilizing any hedging strategies to
minimize any market price changes. The Company believes the inability to protect
itself from market fluctuations may negatively impact its profit margins.
The Company is also subject to certain price escalation and
de-escalation clauses in its asphalt distribution sales contracts. The Company
supplies asphalt to projects in certain states where regulations provide for
escalation and de-escalation of the price for such asphalt relative to the price
difference from the time the project is awarded to the successful bidding
company and the time the project is completed. The Company includes such
de-escalation risk into its bid process and does not believe it has material
exposure to risk resulting from these regulations.
22
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. Legal Proceedings
On April 17, 2000, pursuant to a February 2000 settlement agreement,
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, delivered the sum of $320,000 to the Company in exchange for a release
of all claims and rescission of the Company's acquisition of the asphalt
terminals.
On June 20, 2000, MCNIC filed a Complaint in the Third Judicial
District Court, Salt Lake County, Utah, against Crown Distribution. The action
seeks to foreclose on alleged mortgage and security interest in and to certain
real and personal property of Crown Distribution, which property constitutes a
substantial part of the operating assets of Crown Distribution. In summary, in
its Complaint MCNIC does not acknowledge its prior commitment to "roll" the Loan
into the Credit Line and alleges that Crown Distribution is in default on the
promissory note evidencing the Loan to Crown Distribution in the amount of
$7,141,930.00. MCNIC further alleges that the total amount owed by Crown
Distribution to MCNIC is in excess of $15,000,000, as well as interest at the
rate of 18% from January 1, 2000 until paid in full. The Complaint also seeks
the appointment of a receiver to ensure and protect the interests of MCNIC in
the property of Crown Distribution, pending a determination by the Court of the
merits of the Complaint. Crown Distribution intends to vigorously defend against
this litigation and believes that it has certain available defenses, claims and
counterclaims. Crown Distribution's managements further believe that certain of
MCNIC's allegations are lacking in either legal or factual basis. However,
litigation is inherently uncertain and Crown Distribution is therefore unable to
predict the outcome of the litigation.
On July 25, 2000, the Company brought suit against MCN, MCNIC and
certain officers of MCN and MCNIC. The suit was brought in the United States
District Court for the District of Utah, Central Division, and is styled Crown
Energy Corporation, Crown Asphalt Corporation, and Crown Asphalt Products
Company v. MCN Energy Group, Inc., MCNIC Pipeline & Processing Company, Howard
L. ("Lee") Dow III, and William E. Kraemer, Civil No. 2:00CV-05873ST. The
Company's action arises from the joint ventures between affiliates of the
Company and MCNIC with regard to the asphalt business in the Western United
States involving the mining, processing, storage, manufacture, and marketing of
asphalt the Company alleges claims against defendants for breach of fiduciary
duties, economic duress, breach of implied covenants of good faith and fair
dealing, breach of contracts, estoppel, intentional interference, and trade
libel and slander of title as a result of defendants' wrongful and bad faith
conduct in the joint venture relationships. Damages of an amount exceeding $100
million are sought on the Company's claims for breach of fiduciary duties,
economic duress, and breach of implied covenants of good faith and fair dealing,
with the full amount of damages on all claims to be proven at trial. While there
is no way of predicting or knowing the outcome of the litigation which is now in
process, the Company is confident in its claims and will continue to pursue them
with vigor.
On August 1, 2000, Crown Distribution filed its Answer and
Counterclaims to the MCNIC Complaint and named additional counterclaim
defendants, MCN Energy Group, Inc., Howard L. ("Lee") Dow III, and William E.
Kraemer. Crown Distribution's Answer and Counterclaims substantially denied all
of the allegations set forth in the MCNIC Complaint and alleged numerous
counterclaims, including breach of fiduciary duty, economic duress, breach of
implied covenants of good faith and fair dealing, breach of contracts, estoppel,
intentional interference, trade libel and slander of title, and abuse of
process. Crown Distribution, pursuant to its counterclaims, has requested a jury
trial and is seeking relief in the way of damages in amounts to be proven at
trial, punitive damages, attorney's fees, interest, costs and any other relief
to which they may be entitled. While there is no way of predicting or knowing
the outcome of the litigation which is now in process, Crown Distribution is
confident in its defenses and counterclaims and will continue to pursue them
with vigor.
ITEM 2. Changes in Securities
None.
23
<PAGE>
ITEM 3. Defaults upon Senior Securities
On March 27, 2000, MCNIC delivered to the Company a notice of default
with respect to the working capital loan, and demanded payment of the
outstanding principal balance plus all interest accrued thereon. Management of
the Company believes that the working capital loan was fully satisfied and
replaced by the working capital line of credit and no default has occurred under
the working capital loan or working capital line of credit. At June 30, 2000,
the line had an outstanding principal balance of $14,935,222. The Company
further believes that MCNIC is improperly attempting to demand repayment of the
working capital loan. (See "Part I - Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.")
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
The Company postponed its 2000 Annual Meeting of Shareholders until a
future date to be determined. The Annual Meeting was tentatively scheduled for
June 21, 2000. The Company is presently evaluating its options and strategic
alternatives and believes postponing its Annual Meeting will enable it to
further explore and evaluate such matters and to present any related matters, if
required under applicable corporate laws, to shareholders at the Annual Meeting.
ITEM 6. Exhibits and Reports on Form 8-K
The Company filed a Form 8-K on June 6, 2000 to report that on May 26,
2000, the Company received notice that MCNIC had elected to exercise its option
to assume operations as Operator of the Crown Ridge facility in Vernal, Utah,
effective June 26, 2000, from the Company's wholly owned subsidiary, CAC. MCNIC
had the right to replace CAC as Operator by the Crown Ridge Operating Agreement
and a January 20, 2000 letter agreement. MCNIC will become Operator under a new
Operating and Management Agreement similar to that currently in effect. MCNIC's
assumption of Crown Ridge's operations will not affect CAC's (i) right to serve
as Operator for any additional plants built on Crown Ridge's tar sands leases,
or (ii) rights as a Member under Crown Ridge's Operating Agreement. To date, the
Company does not believe that MCNIC has performed all steps entitling it to
assume its status as operator of Crown Ridge.
The Company filed a Form 8-K on June 28, 2000 to report that on June
20, 2000, MCNIC filed a Complaint in the Third Judicial District Court, Salt
Lake County, Utah, against Crown Distribution. The action seeks to foreclose on
alleged mortgage and security interest in and to certain real and personal
property of Crown Distribution. The Complaint results from MCNIC's assertion
that Crown Distribution is in default with respect to a MCNIC loan, and the
payment of the outstanding principal balance plus all interest accrued thereon.
The property constitutes a substantial part of the operating assets of Crown
Distribution. (See "Part 1- Item 2 - Liquidity and Capital Resources.")
The Company filed a Form 8-K on August 4, 2000 to report that on July
25, 2000, the Company brought suit against MCN, MCNIC and certain officers of
MCN and MCNIC in the United States District Court for the District of Utah,
Central Division. The Company alleges claims against defendants for breach of
fiduciary duties, economic duress, breach of implied covenants of good faith and
fair dealing, breach of contracts, estoppel, intentional interference, and trade
libel and slander of title as a result of defendants' wrongful and bad faith
conduct in the joint venture relationships. Damages of an amount exceeding $100
million are being sought with the full amount of damages on all claims to be
proven at trial. On August 1, 2000, Crown Distribution filed its Answer and
Counterclaims to the MCNIC Complaint and named additional counterclaim
defendants, MCN and certain officers of MCN and MCNIC. The Answer and
Counterclaims substantially denied all of the allegations set forth in the MCNIC
Complaint and alleged numerous counterclaims. (See "Part 1 - Item 2 - Liquidity
and Capital Resources.")
24
<PAGE>
PART III. - SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN ENERGY CORPORATION
(Registrant)
Date: August 14, 2000 By: /s/ JAY MEALEY
---------------
Jay Mealey, Chief Executive
Officer
Date: August 14, 2000 By: /s/ ALEXANDER L. SEARL
--------------------------
Alexander L. Searl, Chief
Operating and Financial
Officer
25
