Back to GetFilings.com
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year ended December 31, 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
(Exact name of registrant as specified in its charter)
UTAH 87-0368981
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
215 South State, Suite 650
Salt Lake City, Utah 84111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 537-5610
Securities registered pursuant to Section 12(b) of the Act:
(None)
Securities registered pursuant to Section 12(g) of the Act:
$0.02 PAR VALUE COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock, par value $0.02 per share, held
by non-affiliates of the registrant on March 29, 2001 was $598,149.86 using the
average bid and asked price for Registrant's common stock. As of March 29, 2001,
registrant had 13,635,581shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be used in connection with
the solicitation of proxies for the Registrant's Fiscal 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Annual Report on
Form 10-K.
Transitional Small Business Disclosure Format (check one) YES [ ] NO [X]
PART I.
STATEMENTS MADE OR INCORPORATED IN THIS ANNUAL REPORT INCLUDE 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, WITHOUT LIMITATION, STATEMENTS CONTAINING
THE WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FUTURE", AND WORDS
OF SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS
REGARDING THE COMPANY'S FUTURE PERFORMANCE OR FUTURE EVENTS OR TRENDS. RELIANCE
SHOULD NOT BE PLACED ON FORWARD-LOOKING STATEMENTS BECAUSE THEY INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM
ANTICIPATED FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION, THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ITEM 1. BUSINESS
General
Crown Energy Corporation is a Utah corporation that specializes in the
production and distribution of premium asphalt products to meet the new, higher
quality standards for federal and state highways. The Company is based in Salt
Lake City, Utah and operates primarily through two wholly owned subsidiaries,
Crown Asphalt Corporation ("CAC") and Crown Asphalt Products Company ("CAPCO"),
both of which are Utah corporations. Since August of 1997, CAC had operated as
the Operator of Crown Asphalt Ridge, L.L.C., a Utah limited liability company
("Crown Ridge"), the asphalt production business in which Crown owns a minority
interest in Vernal, Utah. CAC's present status as Operator of Crown Ridge is
discussed below. See "Item 1. Business - Asphalt Production - Crown Asphalt
Ridge, L.L.C."
CAPCO operates the asphalt manufacturing and distribution business of Crown
both independently and through its majority interest in Crown Asphalt
Distribution, L.L.C., a Utah limited liability company ("Crown Distribution").
Crown Distribution owns a majority interest in Cowboy Asphalt Terminal, L.L.C.,
a Utah limited liability company, that is operated by CAPCO.
Crown's consolidated financial statements and results of operations include
the accounts and results of operations of CAC, CAPCO and Crown Distribution.
Accordingly, references in this Annual Report to "Crown" or the "Company"
include, unless otherwise noted, CAC, CAPCO and Crown Distribution.
The Company was formed in 1981 as an oil and gas production company. The
Company changed its business focus to concentrate on the production and
distribution of premium asphalt products in 1995. For the years ended December
31, 1998, 1999 and 2000, the Company reported revenues from the sale of asphalt
products of approximately $24 million, $36 million and $23 million respectively.
See "Item 6 - Selected Financial Data." Most of the revenues for 1998 were
recorded in the last half of 1998 as a result of Crown Distribution's asphalt
product sales.
In August 1997, the Company formed Crown Ridge with MCNIC Pipeline &
Processing Company, a Michigan corporation ("MCNIC"), to construct, own and
operate an asphalt oil sand production Facility at Asphalt Ridge, near Vernal,
Utah (the "Facility") at the Company's Asphalt Ridge deposit in northeast Utah.
MCNIC is a wholly owned subsidiary of MCN Energy Group, Inc. ("MCN") (NYSE:MCN),
a large diversified energy holding company. Information about MCN Energy Group
is available on the World
2
Wide Web at http://www.mcnenergy.com. To date, Crown Ridge has invested
approximately $20 million in the Facility. During the start-up of the Facility
mechanical and process difficulties were experienced that affected production
economics. Extensive research and engineering to develop a solution to these
problems was conducted and tested in a pilot study at the Facility during 2000.
The results of the pilot study are currently being evaluated by MCNIC to
determine the technical and economic viability of the Facility. The Company
assumes that modifications to the Facility will be required in order for it to
achieve commercial production, but the cost of such modifications is unknown. If
the decision is made to proceed with the required modifications, the Company
does not anticipate completing the modifications sooner than the fall of 2001.
The Company presently owns approximately a 24% equity interest in Crown Ridge
and MCNIC holds the remaining approximately 76% equity interest. It is important
to note that because MCNIC owns the large majority interest in Crown Ridge, any
decision to proceed with modifications or retrofit of the Facility can be
controlled by MCNIC. The Company has the right to acquire up to a 60% equity
interest in Crown Ridge contingent, however, upon MCNIC's receipt of certain
preferential returns and Crown Ridge's election to pursue certain expansion
opportunities. See "Item 1. Business - Asphalt Production - Crown Asphalt Ridge,
L.L.C." below.
In August 1997, contemporaneous with the Company's Crown Ridge joint
venture with MCNIC, the Company also completed the private sale of $5 million of
the Company's $10 Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred") to Enron Capital & Trade Resources Corp. ("ECT"), a subsidiary of
Enron Corp. ("Enron"), (NYSE:ENE). Enron is a large diversified energy company
with assets in excess of $33 billion. Information about Enron is available on
the World Wide Web at http://www.enron.com. Proceeds from the sale of stock to
ECT were used for working capital and to finance the Company's share of
construction and start-up costs related to Crown Ridge, which includes the
construction of the Facility. Certain rights, preferences and limitations
relating to the Series A Preferred are detailed in "Item 5. Market Price for the
Company's Common Equity and Related Stockholder Matters" below.
In June 1998, the Company, through CAPCO, entered into a joint venture by
forming Cowboy Asphalt Terminal, L.L.C., a Utah limited liability company ("CAT
LLC"), with Foreland Asphalt Corporation, a Utah corporation engaged in the
asphalt roofing products business ("Foreland"). CAT LLC was formed to acquire an
asphalt terminal and its underlying real property located in Woods Cross, Utah.
The asphalt terminal property of CAT LLC was apportioned and portions designated
for the exclusive uses of either CAPCO or Foreland, each of which will retain
all revenues and profits generated from their respective exclusive operations.
CAPCO is the operator of CAT, LLC. Crown Distribution, through the exercise of
an option on or about December 21, 1998, is entitled to own 66.67% of CAT LLC
and the remaining 33.33% is owned by Foreland. CAT LLC is a majority owned and
controlled subsidiary of Crown Distribution and the accounts and results of
operations of CAT LLC will be included within the Company's consolidated
financial statements and results of operations. See "Item 1. Business - Asphalt
Distribution - Cowboy Asphalt Terminal, L.L.C." below.
On July 2, 1998, Crown Distribution was formed as a second joint venture
between the Company (through its CAPCO subsidiary) and MCNIC. Crown Distribution
is owned 50.01% by the Company and 49.99% by MCNIC. Crown Distribution was
formed to acquire the inventory and assets of Petro Source Asphalt Company, a
Texas corporation ("PSAC"). By completing this acquisition, the Company acquired
ownership or leasehold interests in certain asphalt manufacturing and
distribution facilities located in Utah, Arizona, Colorado and Nevada. These
facilities enable the Company to manufacture a broad range of performance
asphalt products for sale to its customers in the western United States. See
"Item 1. Business - Asphalt Distribution - Crown Asphalt Distribution, L.L.C."
below.
On May 12, 1999, the Company entered into an agreement to acquire an
asphalt distribution terminal in Rawlins, Wyoming (the "Rawlins Asphalt
Terminal") and the related asphalt inventory for $2,291,571 from S&L Industrial,
a Wyoming corporation. The Rawlins Asphalt Terminal was acquired in conjunction
with the acquisition of two additional manufacturing and distribution terminals
to expand the Company's asphalt manufacturing and distribution operations in the
western United States. The operating agreement for Crown Distribution required
that the Company present this opportunity to MCNIC in order for it to
participate in the acquisition and the Company did present the transaction (and
the acquisition of two other
3
terminals which were ultimately not acquired) to MCNIC in accordance with its
obligations. Despite its agreement to participate in the ownership of the
Rawlins Asphalt Terminal (and the other two terminals which were ultimately not
acquired) through the formation of a new joint venture, MCNIC failed to take the
actions necessary to complete the transfer of the project to joint ownership and
the Company does not believe at present that MCNIC will perform. Thus, the
Rawlins Asphalt Terminal is currently owned and operated by CAPCO.
The Company's revenues during the year ended December 31, 2000 were
generated primarily through its asphalt manufacturing and distribution
operations. See "Item 1. Business - Asphalt Distribution - Crown Asphalt
Distribution, L.L.C." below. The Company's control of Crown Distribution and the
Rawlins Asphalt Terminal, through CAPCO, complement the Company's interest in
Crown Ridge (more specifically, its anticipated asphalt production at the
Facility). Its asphalt production, manufacturing and distribution capabilities
allow the Company to produce, transport, store, process, blend, manufacture and
sell finished asphalt products in its Western United States target market. These
operations rely primarily upon the purchase of asphalt, additives, modifiers and
other raw materials used to manufacture the finished asphalt products from third
party suppliers. Should Crown Ridge's extraction and processing operations at
the Facility produce commercial quantities of asphalt, management of the Company
expects that production can displace some of the raw materials purchased from
third party suppliers for resale. As reflected elsewhere within this Report,
however, no assurance can be given when, or if at all, commercially viable
production at Crown Ridge's Facility will commence. As the Company increases its
asphalt manufacturing, marketing and distribution activities at its asphalt
terminals, the Company remains open to other asphalt related business.
More detailed information about the asphalt industry and the Company's
asphalt production and distribution businesses is provided below.
The Asphalt Industry
The United States asphalt market is estimated to be a 30 million-ton market
that historically has been supplied by the large U.S. oil refiners. In recent
years, management of the Company believes that the U.S. asphalt market has
undergone significant changes. In particular, national and international demand
for asphalt has increased. Further, recently established standards which require
the use of higher quality asphalt for federal and state highways in the United
States have increased the demand for higher quality asphalts. At the same time,
recent reductions of heavy crude processing have resulted in a decrease in
asphalt supply. The Company believes that these changes are favorable to asphalt
producers and suppliers such as the Company.
Deterioration of the nation's infrastructure has drawn increasing public
attention and concern, and the emphasis in the highway industry is shifting from
construction of new roads and bridges to maintenance and replacement of aging
facilities. As the U.S. government, state and federal agencies focus on decaying
infrastructure and facilities, the need for better techniques and materials to
build longer-lasting roads and to repair existing ones cost-effectively has
developed. Congress authorized the Strategic Highway Research Program (SHRP) as
a coordinated national effort to meet the tough challenges facing the highway
industry. SHRP was a five-year, $150 million research program funded through
state-apportioned federal highway aid funds. Its research was tightly focused on
the development of pragmatic products of immediate use to the highway agencies.
Using a wide range of advanced materials characterization techniques that had
not been applied to asphalt previously, SHRP determined how asphalt material
properties affect pavement performance. The new performance graded (PG)
specifications focus on the climate conditions of a given location and the
specific temperature band within which the PG asphalt must work. The
recommendation for the improved PG asphalt binder specifications has been
adopted by the Federal Highways Administration (FHWA) and many states.
Implementation of the new PG specifications by all states is expected. The
result of the more stringent SHRP performance grades in the western United
States is that most asphalt used on state and federal projects will need to be
modified with polymers or high performance asphalts, or both, to meet the
required specifications.
4
The Company manufactures a broad range of performance asphalt products
meeting the SHRP specifications. Management believes the Facility will produce
asphalt that meets SHRP performance specifications and will augment the current
slate of asphalt products. However, until the asphalt is produced at the
Facility in commercial quantities there can be no assurance of its quality or
performance.
Through its relationships with producers, refiners, suppliers, transporters
and users of asphalt, including state and federal governmental departments,
asphalt associations, consultants and private sector companies; as well as its
strategically located asphalt distribution terminals, PG asphalt blending
processes and Asphalt Ridge reserves, the Company believes that it is well
positioned to meet the needs of the changing asphalt market. However, the
Company will be competing with several larger companies in the regional asphalt
supply business. Competition in the asphalt supply business is based primarily
on price and quality. Further, the Company will be competing with traditional
refineries with respect to the production of asphalt products. In general, these
competitors have significant financial, technical, managerial and marketing
resources and, both separately and combined, represent significant competition
for the Company in its markets.
The asphalt industry is seasonal. Demand for asphalt decreases
significantly during the winter months when cold weather and precipitation
interferes with highway construction and repair. Notwithstanding the decrease in
demand for asphalt and asphalt-related products during the winter months, the
Company believes that it can continue producing asphalt, and storing such
product, to meet the peak demands of spring and summer. In addition, the Company
expects to continue purchasing asphalt from outside suppliers in the winter
months, when prices are lower, for storage at its asphalt terminals and
manufacturing and distribution during the peak spring and summer months.
Asphalt Storage and Distribution
Crown Asphalt Distribution, L.L.C.
Formation and Current Development Status. On July 2, 1998, Crown
Distribution was formed as a second joint venture between the Company and MCNIC.
The Company and MCNIC (sometimes referred to hereafter as the members) possess
sharing ratios ("sharing ratios") of 50.01% and 49.99%, respectively, in the
profits, losses and obligations of Crown Distribution. Accordingly, the Company
holds a majority and controlling interest in Crown Distribution and the accounts
and results of operations of Crown Distribution are included within the
Company's consolidated financial statements. On July 2, 1998, Crown Distribution
purchased the inventory and assets of Petro Source Asphalt Company, a Texas
corporation ("PSAC"), effective June 1, 1998. The purchased assets included
asphalt supply and marketing contracts, owned and leased equipment, personal
property, fixtures, equipment leases, real estate leases, technology licenses,
other related agreements, certain intellectual property, products inventory,
ownership interests in and to asphalt distribution facilities in Utah, Colorado,
Nevada and Arizona, and certain processing rights at a refinery in Santa Maria,
California (see below). These assets (excluding products inventory) were
purchased for $7.5 million, the amount determined by the parties to be the fair
market value of such assets. The products inventory was also purchased by Crown
Distribution and this portion of the purchase price was initially funded by a
loan to Crown Distribution from MCNIC totaling $7,141,930 (the "Working Capital
Loan"). It is the Company's position that this loan was replaced by a working
capital Facility (the "Credit Facility") from MCNIC to Crown Distribution. The
Company believes that the outstanding balance of the Credit Facility on December
31, 2000 was $14,935,222.
Results from the asphalt manufacturing and distribution business have been
disappointing. The Company manufactured and distributed 100,930 tons of asphalt
products in 2000 down from 175,787 in 1999. Success in the asphalt manufacturing
and distribution business depends on the ability to purchase inventory of base
asphalt, additives and chemicals to manufacture a finished product. Typically
the cost of this inventory is less expensive during the winter months when
supply is greater than demand. It is during these months that the Company
normally fills its storage tanks and contracts for the sale of finished product
to be delivered during the paving season, generally from April through October.
The cyclical nature of the purchasing and sale of product creates the
requirement for a large amount of working capital. As discussed elsewhere, in
late 1999 MCNIC discontinued providing working capital to the Company as the
Company
5
maintains it had agreed. In addition, MCNIC refused to guaranty, on behalf of
Crown Distribution, a third party financed working capital line of credit as the
Company also asserts MCNIC previously agreed, and engaged in other actions which
the Company believes were injurious to the Company. The lack of working capital,
interference, and uncertainty created by MCNIC's actions caused Crown
Distribution to severely limit its winter-fill purchases leading to very low
levels of inventory at the beginning of this asphalt season. In addition, the
price of crude oil rose rapidly in early 2000 causing a significant increase in
the cost of asphalt raw materials used to service its supply contracts. Most of
this work was contracted prior to the price increases resulting in poor profit
margins. In addition, making purchases of raw material only from operating cash
flow limited the flexibility in supply purchases. This inflexibility caused
inventory purchases to be postponed to later in the season when prices were at
their highest. The working capital constraints limited the quantity of asphalt
that could be purchased and forced the Company to make uncompetitively high bids
on projects during the season, reducing it's total sales volume.
Collectively, the asphalt manufacturing and distribution facilities
purchased from PSAC enable the Company to purchase and store asphalt and other
related raw materials from third party vendors and to manufacture a broad range
of performance asphalt products for sale to its customers. For the year ended
December 31, 2000, these assets, excluding the revenues associated with the
Rawlins Asphalt Terminal, distributed approximately 71,902 tons of asphalt and
generated revenue of approximately $14,806,275.
Under the Santa Maria Refinery Corporation processing agreement (the
"Processing Agreement"), Crown Distribution (and it's predecessor, PSAC, prior
to the June 1, 1998 effective date) purchased crude oil, marketed and sold the
refined products (including asphalt) and maintained the inventory at this
refinery, in exchange for approximately 50% of the net profit realized upon the
sale of the refined product. The Processing Agreement had an automatic
termination date of December 31, 1998 at the time it was acquired by the
Company, but was extended by amendment effective in December, 1998. Pursuant to
the terms of the amendment, the Company was notified in February, 1999 that the
Processing Agreement would terminate effective April 30, 1999. Upon termination
of the Processing Agreement, the refinery owner was obligated to deliver certain
of the refined products to the Company and to purchase the balance of the
refined products and crude oil inventories located at the refinery from the
Company. The refinery owner breached the terms of the Processing Agreement and
amendment by, among other things, (1) failing to properly terminate the
Processing Agreement and amendment; (2) failing to deliver the refined products
(including asphalt) to the Company or paying for the refined products (including
asphalt) and (3) interfering with the Company's contractual commitments for the
sale of asphalt. See "Item 3. Legal Proceedings."
The Company agreed to transfer and assign to Crown Distribution, as a
capital contribution, its 66.67% membership interest in CAT LLC. The Company was
credited with a $1.5 million capital contribution to Crown Distribution as a
result of the assignment of the CAT LLC membership interests to Crown
Distribution. Crown Distribution also assumed CAT LLC's payment obligations
under a promissory note. The promissory note assumed by the Company had an
original principal balance of $1,282,070, with a balance as of December 31, 2000
of $1,006,764. The remaining 33.33% ownership interest in CAT LLC is owned by
Foreland. Crown Distribution's proportionate share of the accounts and results
of operations of CAT LLC are therefore included within the consolidated
financial statements of the Company. See "Item 1. Business - Asphalt
Distribution - Cowboy Asphalt Terminal, L.L.C." below for further information
regarding CAT LLC.
MCNIC originally contributed the amount of $100 to the capital of Crown
Distribution. MCNIC also made a capital contribution in the amount of $6,000,000
as a preferential contribution (the "Preferential Capital Contribution"). The
Preferential Capital Contribution, together with the Working Capital Loan, were
used by Crown Distribution to acquire the assets of PSAC and pay related closing
and other acquisition costs. MCNIC made an additional capital contribution in
the amount of $1.5 million when the Company contributed its interest in CAT LLC
to Crown Distribution. That sum was immediately used by Crown Distribution to
pay down the Working Capital Loan previously advanced by MCNIC. The Company
asserts that the Working Capital Loan has been replaced, at the election of
MCNIC, by the Credit Facility, a revolving credit facility, discussed elsewhere
herein. See "Item 1. Business - Asphalt Distribution - Crown Asphalt
Distribution, L.L.C. - Working Capital Facility" below.
6
Management Of Crown Distribution; Major Decisions. Crown Distribution is
governed by a management committee consisting of three managers. The Company is
entitled to appoint two managers and MCNIC is entitled to appoint one manager.
Management decisions are generally made by the management committee. However,
one of the managers appointed by the Company serves as the operating manager and
has the powers, authority, duties and obligations specified in the operating
agreement, which generally requires the operating manager to implement the
policies and pursue the objectives specified in the annual operating plan.
Generally, the management committee may act through majority vote. The Crown
Distribution operating agreement, however, requires that certain decisions
("Major Decisions") be undertaken by the unanimous vote of the committee
members.
The operating agreement of Crown Distribution specifies that the adoption
of an annual operating plan is a Major Decision. The annual operating plan is
intended to address all aspects of Crown Distribution's operations for the
coming year, including the nature and extent of the proposed activities,
marketing plans, capital expenditure plans and similar matters. In the event the
management committee is unable to unanimously approve an annual operating plan
for any given calendar year, a majority of the managers shall have the authority
to continue to maintain Crown Distribution's operations at levels comparable to
those approved in its most recent annual operating plan. As of the date of this
Report, the annual operating plan for calendar year 2000 has not been approved
by the management committee and therefore not approved by Crown Distribution.
Consequently operations are being conducted at levels comparable to those of the
initial operating plan adopted at the formation of Crown Distribution.
Additional Opportunities. The Crown Distribution operating agreement
provides that certain additional business opportunities that become available to
any of the members which are the same as or similar to Crown Distribution's then
current business must be first offered to Crown Distribution by such members.
Through amendment to the operating agreement of Crown Distribution certain
limitations on the rights of the Company or MCNIC to pursue additional business
opportunities outside of Crown Distribution continue until June 18, 2001. If
either the Company or MCNIC desires to pursue an additional business
opportunity, the member must first offer the opportunity to Crown Distribution
and, if Crown Distribution does not elect to participate, the participating
member may pursue or acquire the additional business opportunity. However, if
the non-participating member does not consent to the participating member's
pursuit of the opportunity, the non-participating member will retain the right
and option to "back in" to a 50% sharing ratio, without paying any purchase
price, after such time as the participating member has received a 150% payout of
its investment (as calculated under the operating agreement). Following June 18,
2001, the foregoing restrictions will be lifted except that any additional
opportunity must be first offered to Crown Distribution for its possible
participation. If Crown Distribution then chooses not to participate, the
participating member which located the opportunity may pursue it without
restriction.
Credit Facility. The Company maintains that MCNIC, pursuant to its rights
granted under the Crown Distribution Operating Agreement, elected to extend the
Credit Facility, a revolving credit facility, to Crown Distribution to cover its
working capital requirements in lieu of the Company obtaining a line of credit
from an third party financial institution and pursuant to the terms proposed by
such third party institution. Further, the Company asserts that in accordance
with the original intent of the members, MCNIC elected to have the original
Working Capital Loan discussed above replaced and the outstanding balance
transferred to this Credit Facility. As of December 31, 2000, the Company
believes that the Credit Facility had a balance of approximately $14,935,222 and
the Company has accrued interest on the Credit Line at the same interest rate
(approximately 8%) as set forth in the proposed third party financial
institution proposal that the Company. Through the period ended December 31,
2000, $2,356,711 in interest had been accrued.
MCNIC's Working Capital Loan (which the Company maintains was replaced by
the Credit Facility) and its Preferential Capital Contribution was secured by a
first priority lien, security interest in and pledge of all the property of
Crown Distribution including, Crown Distribution's rights, title and interest in
and to the membership interests in CAT LLC, but excluding inventory and
receivables which are used to secure the Credit Facility.
7
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. Significantly, MCNIC,
immediately following the delivery of its notice of default, proposed an
extension on the Working Capital Loan, provided the Company also relinquished
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 sought 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 (the "MCNIC Complaint"), MCNIC does not acknowledge its prior
agreement to extinguish the Working Capital Loan and "roll" such loan into the
Credit Facility. The Complaint alleged 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 alleged 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
sought 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. (See "Item 3. Legal Proceedings").
As indicated above, Management of the Company strongly believes that the
Working Capital Loan was fully satisfied and replaced by the Credit Facility and
no default has occurred under the Working Capital Loan or Credit Facility. The
Company further believes that MCNIC is improperly (i) attempting to demand
repayment of the Working Capital Loan, and (ii) is attempting to gain control of
Crown Distribution and other aspects of the Company's operations. The Company
and Crown Distribution have acted to vigorously defend against MCNIC's actions.
On July 25, 2000, the Company filed suit in the United States District Court for
the state of Utah, Central Division, against MCNIC, MCN and certain officers of
MCN. In its Complaint, (the "Crown Complaint"), the Company alleges claims
against the defendants under a wide variety of causes of action sought damage in
excess of $100 million. An Answer and Counterclaims to the MCNIC Complaint were
filed by the Company on August 1, 2000 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 asserted defenses, claims and
counterclaims. The Answer and Counterclaims further argued that certain of
MCNIC's allegations are lacking in either legal or factual basis. Recently, all
of (i) MCNIC's Complaint, (ii) the Company's Answer and Counterclaims to the
MCNIC Complaint, and (iii) the Crown Complaint and the Answers thereto were
submitted to binding arbitration (the "Arbitration"). Because of the importance
of the outcome of the Arbitration to the Company and its shareholders, it is
discussed at length elsewhere within this Report. See "Item 3. Legal
Proceedings; Item 7. Management's Discussion and Analysis."
Distributions; Allocations Of Profits and Losses. Until such time as MCNIC
has received the return of its Preferential Capital Contribution and a 15%
internal rate of return on its investment in Crown Distribution, Crown
Distribution is obligated to distribute to MCNIC 50% of the net cash flow from
operations. The remaining cash flow balance is distributed roughly 50% to MCNIC
and 50% to the Company (in accordance with their respective sharing ratios).
During 2000, no distributions were made. In the event of liquidation, MCNIC
would receive 100% of any and all amounts available for distribution up to its
outstanding Preferential Capital Contribution balance and remaining amounts
would be distributed in proportion to the member's capital account balances.
Profits and losses are generally allocated in accordance with the members'
respective sharing ratios. However, after profits are allocated to offset any
previous allocations of losses made to members, in the event of a complete
liquidation of Crown Distribution, profits will be allocated 100% to MCNIC until
its Preferential Capital Contribution and the 15% rate of return has been
satisfied.
Management Agreement. Pursuant to an Operating and Management Agreement
(the "Management Agreement"), CAPCO manages and conducts the business of Crown
Distribution, including the negotiation and execution of contracts with
customers, the buying and selling of asphalt and the paying of expenses. As
compensation for the services rendered under the Management Agreement, the
Company receives (i) a monthly fee of $5,000, (ii) the payment of all
out-of-pocket expenses incurred through the performance of its duties; (iii) the
reimbursement of the reasonable salaries, wages, overtime and other similar
8
compensation paid to employees of the Company in relation to their management
services under the Management Agreement; and (iv) a monthly home office overhead
charge of $10,000.
The term of the Management Agreement is five years, which term will be
automatically extended for unlimited successive one-year periods unless either
party furnishes the other with written notice at least ninety (90) days prior to
the expiration of any such initial or extended period. During the initial term
of the Management Agreement, the Company can be removed only for good cause by
the affirmative vote of the management committee. The Management Agreement also
contains provisions allowing the replacement, after the initial five year term,
of the Company as the manager on economic grounds if Crown Distribution notifies
the Company that it believes the operations may be conducted more efficiently
and is willing to become the operating manager or has a commitment from a third
party to do so. Following the receipt of an economic challenge, the Company will
have thirty (30) days to notify Crown Distribution that it elects to allow Crown
Distribution or its designee to become the operator under the proposed terms or
that the Company elects to continue as the operator under the proposed terms.
Such a decision would require the majority vote of the management committee of
Crown Distribution. Two of the members of the management committee are nominees
of the Company.
In addition to asphalt distribution, Crown Distribution stores asphalt for
CAPCO in its excess storage facilities in return for the receipt of an industry
standard "throughput fee."
Cowboy Asphalt Terminal, L.L.C.
Formation and Acquisition of Assets. CAT LLC is a joint venture between the
Company and Foreland. Foreland is engaged in the asphalt roofing products
business. On June 16, 1998, CAT LLC was formed to acquire an asphalt terminal
and related refinery assets and real property located in Woods Cross, Utah (the
"Cowboy Terminal Assets"). The real property acquired by CAT LLC as part of the
Cowboy Terminal Assets is referred to hereinafter as the "Cowboy Terminal
Property".
On September 11, 1998, CAT LLC, CAPCO, Foreland and Refinery Technologies,
Inc., a Utah corporation ("Refinery Technologies"), entered into an Assignment
and Agreement (the "Assignment Agreement") under which Refinery Technologies
assigned all of its ownership rights in and to the Cowboy Terminal Assets
purchase contract to CAT LLC. In turn, CAT LLC agreed to assume all of the
obligations under the real property purchase contract and issued a promissory
note in connection with the purchase in the amount of $1,067,111 to the former
owner.
On January 9, 1999 CAT LLC purchased the Cowboy Terminal Assets for
$1,477,070 (net of $496,441 of deposits paid in 1998). 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 Company and Foreland initially owned sharing ratios ("sharing ratios")
of 66.67% and 33.33%, respectively, in the profits, losses and obligations of
CAT LLC. However, the Company has assigned its sharing ratios and ownership
interests in CAT LLC to Crown Distribution. In connection with the transfer of
the 66.67% interest in CAT LLC to Crown Distribution, Crown Distribution assumed
payment obligations under this promissory note. See "Item 1. Business - Asphalt
Distribution - Crown Asphalt Distribution, L.L.C."
The Cowboy Terminal Property has been divided into portions dedicated (i)
to the exclusive uses of the Company for its asphalt paving products business
and (ii) to the exclusive uses of Foreland for its asphalt roofing products
business. Revenues or profits generated by such exclusive uses will belong to
the Company or Foreland, as the case may be, and the other party will have no
right to participate in the revenues, profits or income generated by the
business of the other with respect to such exclusive uses. Further, the use of
the Cowboy Terminal Property by the Company and by Foreland is free of charge or
other cost above the parties' respective operating costs.
9
The CAT LLC Operating Agreement obligates both the Company and Foreland to
make additional capital contributions equal to one-half of any additional
amounts needed for (i) CAT LLC to fulfill its obligations, not to exceed
$650,000, under any corrective action plan that may be accepted by CAT LLC and
the Utah Department of Environmental Quality with respect to certain
environmental conditions at the Cowboy Terminal Property and (ii) legal costs
incurred in the purchase or related to the environmental matters in (i) of this
paragraph. The CAT LLC Operating Agreement also obligates Crown Distribution and
Foreland to make additional capital contributions, in proportion to their
ownership percentages, in order to fund any additional amounts required for CAT
LLC to fulfill its obligations under the purchase contract for the Cowboy
Terminal Assets, for environmental management and containment costs, expenses
for operations, or the construction of certain approved capital improvements to
the Cowboy Terminal Property. None of the foregoing additional contributions
will result in an increase in the number of units or percentage interests held
by Crown Distribution or Foreland.
CAT LLC has title to the Cowboy Terminal Property and the Company has the
exclusive right to use portions thereof for its asphalt terminal operations.
Refinery Technologies did, however, retain certain contract rights with respect
to the Cowboy Terminal Assets, certain rights to receive payments upon any
liquidation of CAT LLC and a right of first refusal to purchase the Cowboy
Terminal Property or membership interests in CAT LLC under certain conditions.
Management of Cowboy Asphalt Terminal, LLC; Major Decisions. CAT LLC is
managed by CAPCO. The manager generally has authority to conduct the day-to-day
business and affairs of CAT LLC. Certain matters must be approved by members
holding 75% or more of the outstanding units of CAT LLC. The Company is not
compensated for its services as manager.
Asphalt Production
Crown Asphalt Ridge, L.L.C.
Formation and Current Development Status. Effective August 1, 1997, the
Company jointly formed Crown Ridge with MCNIC to construct and operate an oil
sand processing facility for the production of premium asphalt oil at Asphalt
Ridge in Uintah County, Utah. The Company believes that the Asphalt Ridge oil
sand reserves constitute one of the country's largest and most accessible
deposits of oil sands. Crown Ridge controls, through numerous mineral leases,
approximately 5,700 acres of private and state land encompassing these tracts,
which the Company believes contains in excess of 100 million barrels of surface
minable reserves (the "Oil Sand Resources").
The Facility constructed by Crown Ridge is located on a portion of the Oil
Sand Resources known as the "A" tract, which is believed to contain in excess of
18 million barrels of surface minable reserves with an average oil saturation of
11% by weight. There is a partially opened pit on this tract that has been mined
since the 1940's for native asphalt material for road surfaces. The production
process entails three major steps: (1) mining, (2) extraction (separation of the
oil from the sand), and (3) distillation (recovery of the solvent and separation
of light fractions from the asphalt). See "Item 1. Business - Asphalt Production
- - Crown Asphalt Ridge, L.L.C. - Additional Opportunities Within the Project Area
and Areas of Mutual Interest."
MCNIC and the Company (sometimes referred to hereafter as the "Members")
own sharing ratios ("sharing ratios") of approximately 76% and 24%,
respectively, in the profits, losses and obligations of Crown Ridge. However,
the Company has the right to acquire up to a 60% equity interest in Crown Ridge,
contingent upon MCNIC's receipt of certain preferential financial returns (as
described below) and Crown Ridge's election to pursue certain expansion
opportunities. Since the Company holds only a minority interest in Crown Ridge,
the Company's consolidated financial statements and results of operations only
include its net interest in the accounts and results of operations of Crown
Ridge.
Under the Crown Ridge Operating Agreement, MCNIC initially funded 75% and
the Company 25% of the amounts required by Crown Ridge to construct the
Facility. The Company was initially required to contribute (i) $500,000 of oil
sand leases and technology; and (ii) the obligation to lease certain mining
10
equipment for the Facility up to $3,500,000 in value. Both Members may make such
additional contributions as were required pursuant to the contract for the
construction of the Facility and as otherwise unanimously agreed to by the
Company and MCNIC. As of December 31, 2000, the Company has made cash
contributions of approximately $5,663,985 to Crown Ridge and has invested a
total of approximately $6,904,086 in the development of Asphalt Ridge, which
includes costs incurred prior to the joint venture with MCNIC.
Because operations at Crown Ridge did not yet require it, the Company did
not contribute as part of its capital contribution, the leased mining equipment
contemplated when the entity was formed. To replace the foregoing obligation to
lease certain mining equipment as its required capital contribution, on July 20,
1999 the Company's CAC subsidiary, at the demand of MCNIC, closed a loan
transaction with MCNIC. Under the loan, CAC executed a promissory note in the
amount of $2,991,868, bearing interest at the prime rate plus 1% per annum,
adjusted monthly, and providing for interest only payments of $20,757 per month
through August 20, 2001. Additional payments may be required if CAC's cash flow
exceeds certain thresholds. Beginning on August 20, 2001, the note provides for
principal and interest payments in order to fully pay off the note over a
13-year period. However, if at August 20, 2001, CAC and MCNIC agree that the
Facility will not be able to operate commercially, the interest only period will
be extended and no principal payments will be due until July 20, 2004. The
foregoing loan is secured by that portion of CAC's sharing ratio in Crown Ridge
directly attributable to the proceeds of the loan (approximately 12.29% of its
aggregate sharing ratio). The gross proceeds of the loan ($2,991,868.66) were
treated as a capital contribution by CAC to Crown Ridge. The net cash proceeds
of the loan ($1,891,650.50), after deduction of amounts previously paid by MCNIC
to creditors of Crown Ridge and less certain amounts owed by Crown Ridge and/or
CAC to MCNIC, were paid by MCNIC directly to Crown Ridge. Additional capital
contributions may be required in the future as otherwise provided under the
Crown Ridge operating agreement.
If the economic operations of Crown Ridge are successful to the extent of
paying out to MCNIC an amount equal to 115% of its cash investment in Crown
Ridge, excluding tax benefits, the Company's sharing ratio in Crown Ridge will
increase to 50%. Thereafter, the Members may build other plants to further
develop the Oil Sand Resources. These additional plants will require additional
capital contributions from the Members, which are described in more detail
below. The Company may participate up to 50% in the additional facilities and up
to 60% after payout of the cash investment in such facilities. There are
provisions for the Company to retain an interest in these facilities after the
recoupment of certain amounts in the event the Company does not participate in
the costs of such additional facilities, as provided in the "Back-In Option. See
"Item 1. Business - Crown Asphalt Distribution, L.L.C. - The Back-In Option."
Operating History; Status of Operating and Management Agreement. During the
start-up of the Facility mechanical and process difficulties were experienced
that affected production economics. Extensive research and engineering to
develop a solution to these problems was conducted and tested in a pilot study
at the Facility during 2000. MCNIC, as the majority owner of Crown Ridge, has
solely managed the operation of the pilot plant and study. In order to
facilitate the completion of the pilot plant, the Company entered into an
agreement with MCNIC pursuant to which MCNIC agreed to fund the Company's
portion of certain pilot plant expenses in the aggregate amount, including the
Company's portion, of $714,799. Pursuant to this arrangement, the amounts funded
by MCNIC were treated as additional capital contributions to Crown Ridge. A
similar arrangement was entered into with regard to the payment of other
miscellaneous expenses owed by Crown Ridge. As a result of the foregoing
agreements with MCNIC and the adjustments required thereby, the Company's
sharing ratio in Crown Ridge was reduced from 25% to approximately 24%.
As part of the agreements entered into with MCNIC by the Company for the
purposes of (i) ensuring that the pilot plant study was expeditiously performed,
and (ii) paying the outstanding expenses of Crown Ridge, the Company was also
required by MCNIC to grant it the option, under certain conditions, to remove
the Company as the Operator of Crown Ridge under that certain Operating and
Management Agreement dated August 1, 1997 (the "Crown Ridge Management
Agreement"). The agreements provided that if the foregoing option was exercised
by MCNIC, the Company's (i) right to serve as Operator for any additional plants
built on Crown Ridge's oil sands leases, or (ii) rights as a member of Crown
Ridge would
11
not be impaired. In addition, in the event that MCNIC exercised its option to
remove the Company as Operator under the Crown Ridge Agreements, MCNIC was
required to assume such duties under a newly executed operating and management
agreement.
On May 26, 2000, the Company received notice that MCNIC had elected to
exercise its option to remove the Company as operator of Crown Ridge, effective
June 26, 2000. Although the Company acknowledges that MCNIC possessed the right
to remove it as Operator under certain conditions, it objected to MCNIC's
actions on the grounds that (i) the requirements attached to those rights were
not met by MCNIC (i.e., no substitute operating and management agreement has
been submitted by MCNIC), (ii) no annual operating plan has been prepared by
MCNIC for the operations of Crown Ridge, and (iii) the Company does not believe
that MCNIC has taken other actions consistent with an intention to bring the
Crown Ridge Facility to commercial production as quickly as possible.
Although the Company does not view MCNIC's assumption of operational
control of the Facility as valid, management of the Company has deemed it to be
in the Company's best interest to conserve the Company's resources by formally
and consistently objecting to MCNIC's assumption of control, but not otherwise
seeking to block MCNIC's actions at this time so that the final results of the
pilot plant study can be completed and analyzed. MCNIC has previously reported
to the Company that the previous production problems were not encountered during
the final runs of the pilot plant. While the Management of the Company believes
this initial news is encouraging, it notes that the definitive engineering
procedures needed to incorporate the pilot plant modifications into the existing
Facility and the cost of such modifications have not been determined. In
addition, despite its commitment to the contrary, MCNIC has repeatedly failed to
meet the Company's demands for detailed engineering and financial information
relating to the Facility. Because of the uncertainty created by this lack of
information, the Company has impaired the value of its Crown Ridge interest as
is explained in its Consolidated Financial Statements attached to this Report.
In summary, the future of the Crown Ridge Facility remains uncertain.
Ultimately, commercial production of the Facility will require further
expenditures and may require the consent of both MCNIC and the Company as
members in Crown Ridge. If the pilot plant studies do prove that the commercial
production at the pilot plant is feasible, the Company will still need to obtain
the necessary financing for its proportionate share of the expenses in modifying
the Facility and there is no assurance that such financing can be obtained
giving the current financial condition of the Company. Further, MCNIC's stated
intention to sell its interest in Crown Ridge creates additional uncertainty in
that it is not clear whether the modifications to the Facility will be made
prior to or after such sale. The Company does not anticipate that the necessary
modifications will be made to the Facility prior to the fall of 2001 under any
circumstances. Such continued difficulties at Crown Ridge or the inability to
commercially operate the Facility economically could significantly impact Crown
Ridge's ability to continue as a going concern and could have the materially
adverse impact on the Company's operations and financial condition.
Subsequent Plants. Under the Crown Ridge Operating Agreement, the members
may construct up to two subsequent plants (the "Subsequent Plants") similar to
the Facility if the economics of Crown Ridge's oil sands processing business so
permit. In sum, a Subsequent Plant may be constructed if certain economic
returns (approximately 18% on 50% of its Capital Contributions to Crown Ridge or
any successor joint venture during any 12 month period) have been experienced by
MCNIC from the Facility and if the members believe or are independently advised
that a sufficient market exists to allow for the operation of the Subsequent
Plants without damaging the competitive position or returns of the Facility or
any other then-existing asphalt processing plants owned or operated by Crown
Ridge or any Successor Entity (as defined below). The agreement of MCNIC and the
Company is that any Subsequent Plant will be held and operated by a separate
legal entity (a "Successor Entity") formed by the members with governing terms
and provisions similar to Crown Ridge. The Company may elect to participate in
either of the Subsequent Plants and may obtain, at its option, between 10% and
50% of the interests in the newly formed entity. A portion of the Company's
obligations to contribute to the Successor Entity may be satisfied through the
value of the contributed properties which the Company may be credited with, as
described below.
12
Following the determination by both members or one member to proceed with
the construction of a Subsequent Plant, Crown Ridge will convey to the Successor
Entity sufficient oil sands resources or other property and water rights to
enable it to sustain operations in accordance with the applicable projections
and market study. If, during the twelve months prior to the sale of products
from the first Subsequent Plant, MCNIC has realized a return of approximately
30% on 50% of its Capital Contributions to Crown Ridge, the Company will be
credited with a value for these oil sand resources and properties equal to $.10
per barrel for the products estimated to be produced from the Subsequent Plant
over a 20 year period.
If the Company elects not to proceed with any Subsequent Plant, and to not
make the needed capital contributions to build and operate the Subsequent Plant,
Crown will have a reduced interest in the Subsequent Plant (but will still be
credited with an interest equal to the value of the contributed properties as
described below, if the requisite return is achieved), subject to an escalation
under the Back-In Option described below.
Whether or not the Company elects to proceed with either Subsequent Plant,
if the Subsequent Plants reach certain levels of economic success (approximately
115% of MCNIC's investment in plant 2 without giving effect to any tax
benefits), the Company will receive an increased interest of 10% in the
Subsequent Plant as a result of its oil sand properties and technology being
used by the Subsequent Plant(s).
Management of Crown Ridge; Major Decisions. Crown Ridge is governed by a
management committee consisting of five managers. The Company is entitled to
appoint one manager and MCNIC is entitled to appoint four managers. Management
decisions are generally made by the management committee. Any manager may be
removed or replaced from time to time by the member which appointed such
manager. If any adjustment is made in the members' respective sharing ratios
both the Company and MCNIC will be entitled to appoint one manager for each 20%
of Crown Ridge interest held by that member (rounded to the nearest 20% level),
provided, that MCNIC and the Company shall each be entitled to at least one
manager at all times that they are members of Crown Ridge. The size of the
management committee may be increased to six managers if the foregoing
calculation requires it.
Management decisions shall generally be made through a majority vote of the
managers. However, certain "Major Decisions," such as: (i) the approval of the
detailed engineering for the Facility; (ii) the approval of, or substantial
amendment to, the annual operating plan described below; and (iii) calls for any
additional Capital Contributions (except for calls contemplated by the EPC
Contract for the construction of the original Facility as defined in Crown
Ridge's Operating Agreement and those required to maintain Crown Ridge in
emergencies), require unanimous approval of all managers. Most distributions to
the members require unanimous approval of the managers.
The operating agreement for Crown Ridge states that Crown Ridge's
operations shall be conducted each year pursuant to the annual operating plan
addressing all aspects of Crown Ridge's operations for the coming year,
including budgeting for operations, the mining of oil sand products and the
marketing of those products. In the event the management committee is unable to
unanimously approve an annual operating plan for any given calendar year, a
majority of the Managers shall have the authority to continue to maintain Crown
Ridge's operations at levels comparable to those approved under the last annual
operating plan. As of the date of this Report, the annual operating plan for
calendar years 1999, 2000 and 2001 have not been approved by the management
committee. Consequently operations are to be conducted at levels comparable to
those of the initial operating plan adopted at the formation of Crown Ridge.
Additional Opportunities Within the Project Area and Area of Mutual
Interest. Crown Ridge may elect to pursue additional opportunities ("Additional
Opportunities") within the Asphalt Ridge project area ("Project Area") which are
brought to its attention by one of its members. Should Crown Ridge elect to
pursue such an Additional Opportunity, it may do so either through Crown Ridge
or by forming a new company containing terms and provisions substantially
similar to those of Crown Ridge. In the event that Crown Ridge does proceed with
any Additional Opportunity, the Company shall have the right, but not the
obligation, to obtain an equity interest in each such Additional Opportunity of
no less than 10% and no greater than 50% (with MCNIC obtaining the remaining
interest). If the management committee determines
13
not to proceed with the Additional Opportunity, any member of Crown Ridge may
then do so alone, subject to the Back-In Option, discussed below, of the
nonparticipating member.
If either member desires to develop any interests in real property,
fixtures or improvements within the State of Utah relating to the processing of
oil sands, bitumen, asphaltum or other minerals or mineral resources into
asphalt, performance grade asphalt, synthetic crude oil, diesel fuel, or any
other product produced using the intellectual property sublicensed by the
Company to Crown Ridge or any derivation thereof (an "AMI Opportunity"), the AMI
Opportunity must first be offered to Crown Ridge. The Company, shall then have
the option, but not the obligation, of acquiring (i) up to a 50% equity interest
if the AMI Opportunity relates to, or is designed for, the production and sale
of asphalt or performance grade asphalt; or (ii) up to a 66% equity interest if
the AMI Opportunity relates to the production of synthetic crude oil, diesel
fuel or any other similar products.
If Crown Ridge elects not to proceed with the AMI Opportunity, the member
who brought the opportunity to Crown Ridge may proceed alone and the
nonparticipating member shall have no further interest in the activity covered
by such opportunity. Except as limited in the discussion above, each member of
Crown Ridge shall have the right to independently engage in any business
activities except that MCNIC shall not be entitled to use the Company's
technology provided to Crown Ridge in connection with such activities.
The Back-In Option. The Back-in Option is a means by which the member which
initially elects not to participate in a plant may subsequently participate at a
later date upon favorable terms. The Back-In Option applies if:
(i) The Company elects not to proceed with construction of the Facility
following the completion of the detailed engineering (and MCNIC elects
to proceed);
(ii) either member elects not to participate in the construction of a
Subsequent Plant; or
(iii) either member elects not to participate in an Additional Opportunity.
In the case of the Company's election not to participate in Subsequent
Plants or Additional Opportunities, the Company shall be entitled to a 60%
interest in the particular plant or opportunity if it is the non-participating
member, and MCNIC shall be entitled to a 40% interest if it is the
non-participating member, after the participating member has achieved a 200%
payout of the costs of the respective facility.
Distributions; Allocations of Profits and Losses. The Management Committee
shall cause Crown Ridge to distribute Available Cash, as defined within the
Operating Agreement, to the members quarterly, within 30 days following the end
of each quarter. Distributions will be made in connection with the respective
capital account balances after taking into account all allocations.
Environment
The Company and its subsidiaries are subject to federal, state and local
requirements regulating the discharge of materials into the environment, the
handling and disposal of solid and hazardous wastes, and protection of health
and the environment generally (collectively "Environmental Laws"). Governmental
authorities have the power to require compliance with these Environmental Laws,
and violators may be subject to civil or criminal penalties, injunctions or
both. Third parties may also have the right to sue for damages and/or enforce
compliance and to require remediation for contamination.
The Company and its subsidiaries are also subject to Environmental Laws
that impose liability for costs of cleaning up contamination resulting from past
spills, disposal and other releases of substances. In particular, an entity may
be subject to liability under the Federal Comprehensive Environmental Response,
Compensation and Liability Act and similar state laws that impose liability -
without a showing of fault, negligence, or regulatory violations - for the
generation, transportation or disposal of hazardous substances
14
that have caused or may cause environmental contamination. In addition, an
entity could be liable for cleanup of property it owns or operates even if it
did not contribute to contamination of such property.
The Company expects that it may be required to expend funds to comply with
federal, state and local provisions and orders which relate to the environment.
Based upon information available to the Company at this time, the Company
believes that compliance with such provisions will not have a material effect on
the capital expenditures, earnings and competitive position of the Company.
Subsidiaries of the Company
Crown Asphalt Corporation, a Utah corporation which is a wholly owned
subsidiary of the Company, was organized October 24, 1985 and was acquired by
the Company on September 30, 1992. Crown Asphalt Corporation is a member of and
holds roughly 24% of the membership interests in Crown Ridge. The Company
includes its net share of the net assets and results of operations of Crown
Ridge in its consolidated financial statements.
Crown Asphalt Products Company ("CAPCO"), a Utah corporation which is
wholly owned subsidiary of the Company, was formed in 1991, but until 1998 was a
dormant entity. The Company activated CAPCO for the purpose of conducting an
asphalt marketing and distribution business. CAPCO is a member of and holds
50.01% of the membership interests in Crown Distribution and currently owns the
Rawlins Asphalt Terminal.
On July 2, 1998, Crown Distribution was formed as a second joint venture
between the Company and MCNIC. Crown Distribution is owned 50.01% by the Company
and 49.99% by MCNIC. Crown Distribution was formed to acquire the inventory and
assets of PSAC. Crown Distribution is a member of and holds 66.67% of the
membership interests in CAT LLC. The Company includes within its consolidated
financial statements the accounts and results of operations of both Crown
Distribution and CAT LLC.
Employees
As of March 13, 2000, the Company had 41 full and part-time employees. None
of the Company's employees are represented by a union or other collective
bargaining group. Management believes that its relations with its employees are
good.
Segments
The Company considers its principal business to be within one industry
segment. For information regarding the breakdown of revenues & operating results
for the Company and its operational units, see note 16 to the consolidated
financial statements of Crown Energy Corporation.
ITEM 2. PROPERTIES
The Company conducts its business operations at 215 South State, Suite 650,
Salt Lake City, Utah, where it has approximately 10,284 square feet of office
space under lease until July 31, 2001. On October 30, 2000 the Company notified
the landlord of the lease that it would exercise its option under the lease to
terminate the lease effective July 31, 2001. The Company has an obligation to
pay the landlord the unamortized cost of the tenant improvements and commissions
as of the July 31, 2001 termination date. Under the terms of the lease, the
Company pays $15,024 per month through November 30, 2000; $15,512 per month
through July 31, 2001. There is no renewal option under the terms of this lease.
On November 17, 2000, the Company purchased a building in Woods Cross, Utah
adjacent to the Cowboy Terminal executing a promissory note of $264,750.00
payable over 120 payments for the purchase price. The Company plans to relocate
its offices to this building, and management of the Company believes that
building will be sufficient for its needs and believes that it will be able to
obtain suitable other space in the Salt Lake City area in the alternative.
15
As described above in the section captioned "Item 1. Business - Asphalt
Production - Crown Asphalt Ridge, L.L.C.," the Company controls through mineral
leases certain Oil Sand Resources consisting of approximately 5,700 acres of
private and state land at Asphalt Ridge in Uintah County, Utah. The Asphalt
Ridge oil sands deposit is located in the Uintah Basin in eastern Utah near the
town of Vernal.
Extensive reserve studies, including core drilling performed by Bechtel and
Sohio between the late 1950's and mid-1980's, estimate surface minable reserves
to be in excess of 100 million barrels. Crown Ridge controls the Oil Sands
Resources through certain long term operating leases and the Company has the
right to extract mineral reserves on these tracts so long as the Company
continues to conduct active operations under such leases, pay required royalties
and otherwise comply with the terms of the leases.
In connection with the formation and development of Crown Ridge, the
Company contributed the certain mineral leases to Crown Ridge. Crown Ridge has
been notified by Wembco, Inc. the lessor of the lease upon which the Facility is
located, that it believes the lease is terminated pursuant to the terms of the
lease due to inactivity. The Company believes it and Crown Ridge are in
compliance with, and not in material default under, all of its mineral leases.
Crown Ridge has notified Wembco, Inc. of this fact and its intent to defend its
leasehold interest if Wembco's claims persist. Further information regarding the
oil sand resources controlled by the Company is found at "Item 1. Business -
Asphalt Production - Crown Asphalt Ridge, L.L.C." above. That portion of CAC's
sharing ratio in Crown Ridge directly attributable to the proceeds of the
$2,991,868 loan from MCNIC to CAC is encumbered by a lien and security interest
of MCNIC. See "Item 1. Business - Asphalt Production - Crown Asphalt Ridge,
L.L.C."
Crown Distribution owns asphalt distribution facilities located in Utah,
Colorado, Nevada and Arizona. These properties are used by the Company to store,
process, blend, manufacture and sell finished asphalt products in its western
United States target market. All of Crown Distribution's assets are encumbered
by the lien and security interest of MCNIC, which advanced the purchase price
for such assets and has, the Company asserts, advanced certain funds under the
Credit Line to Crown Distribution. See "Item 1. Business - Asphalt Distribution
- - Crown Asphalt Distribution, L.L.C.; Item 3. Legal Proceedings."
The Company, through its subsidiary CAPCO, owns the Rawlins Asphalt
Terminal. These properties are used to store, process, blend, manufacture and
sell finished asphalt products. All of the Rawlins Asphalt Terminal assets are
encumbered by the lien and security interest of Community First National Bank,
which advanced the purchase price for such assets. As described above under Item
1, MCNIC initially indicated that it wished to participate in the purchase and
ownership of the foregoing terminal but has not performed the agreed upon
actions necessary to obtain such ownership. See "Item 1. Business - Asphalt
Distribution - Crown Asphalt Distribution, L.L.C."
CAT LLC's asphalt distribution and storage facility is located in Woods
Cross, Utah, just north of Salt Lake City. CAT LLC owns all of the assets and
underlying real property of the Cowboy Terminal Property, which is encumbered by
a Deed of Trust in favor of the seller.
ITEM 3. 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 # 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, plus
accrued interest, still owed by Road Runner as part of the purchase price for
Gavilan. In addition, since the action was filed, the Company has tendered the
corporate records to the
16
Plaintiffs. On March 8, 2000, the Company filed an answer denying liability and
filed a counterclaim against Road Runner and Gavilan for breach of contract and
declaratory judgment. The Company is not certain as to whether or not the
outstanding balance under the promissory note is collectible by the Company.
On July 12, 1999, Morrison Knudsen Corporation ("MK") filed a Complaint in
the Eighth Judicial District Court, Uintah County, State of Utah, alleging that
CAC had breached an agreement whereby MK would provide certain mining services
for CAC at Crown Ridge's Facility in Uintah County, Utah (the "Project").
Judgment in favor of MK was entered on January 30, 2001 in the principal amount
of $303,873.39, $49,062.33 of pre-judgment interest and $2,033.14 of costs,
which totals $354,968.86. A Notice of Appeal was filed by CAC on March 1, 2001.
Although CAC will attempt to set aside the trial courts judgment, there can be
no assurance that CAC will prevail on its appeal. In addition, CAC has made a
demand on Crown Ridge for payment of the judgment amount and indemnity from any
liability in this matter because CAC was acting as operator for and on behalf of
Crown Ridge in the contractual relationship with MK that was the subject of the
litigation.
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 the Defendant's alleged termination of
the Processing Agreement and subsequent refusal to deliver asphalt to Crown
Distribution. Discovery of facts and testimony related to issues arising in the
lawsuit has been completed. Trial has been scheduled to begin April 24, 2001. It
is anticipated that the damages caused by the Defendant'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 January 25, 2000, Oriental New Investments, Ltd. ("Oriental") filed a
Complaint against the Company in the Third Judicial District Court, Salt Lake
County, Utah. The action relates to a 1997 convertible debenture and replacement
convertible debenture issued by the Company to Oriental. The action seeks to
recover from the Company $50,000 liquidated damages, plus interest, and
attorneys fees and costs, for alleged breaches of the convertible debentures.
The Company answered the Complaint on March 1, 2000, denying any and all
liability, and believes that Oriental's claims are meritless. The Company will
vigorously defend its position that Oriental's claims are meritless. However,
due to the uncertainties inherent in any litigation proceeding, there can be no
assurance that the Company will ultimately prevail.
On June 20, 2000, MCNIC filed a Complaint in the Third Judicial District
Court, Salt Lake County, Utah, against Crown Distribution. The action sought to
foreclose an 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
the MCNIC Complaint, MCNIC does not acknowledge its prior commitment to "roll"
the Working Capital Loan into the Credit Facility and 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 MCNIC Complaint also sought 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 has moved to vigorously defend against this litigation and believes
that it has certain available defenses, claims and counterclaims. Crown
Distribution's management further believe that certain of MCNIC's allegations
are lacking in either legal or factual basis.
On July 25, 2000, the Company filed the Crown Complaint 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
17
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 the
Company and MCN 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.
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.
On August 31, 2000, MCNIC filed motions to stay both the state court and
federal court actions and have them submitted to an arbitration panel selected
by the American Arbitration Association in accordance with the rules of the
American Arbitration Association. The Company contested whether either lawsuit
should be subject to arbitration and filed an answer to both motions on October
2, 2000 to that effect. However, the state court ultimately ordered arbitration
and the federal court, though it did not compel arbitration, concluded that the
major disputes were arbitrable.
On January 29, 2000, the Company determined that binding arbitration of
all of the claims set forth above before a single retired federal judge would be
in the Company's best interest. Accordingly, an Arbitration Agreement was signed
between all of the parties on January 26, 2001. The arbitration (the
"Arbitration") is being arbitrated before Judge John G. Davies (ret.) in Salt
Lake City, Utah. The arbitration hearing is scheduled for July 23, 2001 through
August 10, 2001, with extensive pre-hearing discovery to occur prior to that
time.
Commencing March 5, 2001, the Company, MCNIC, MCN and various officers
exchanged claims and counterclaims relating to the Arbitration. The claims
contained therein substantially restate the parties' prior positions within the
litigation described above. However, in its claims in arbitration, MCNIC
asserted claims against CAC and CAPCO and also included the Company's chief
executive officer, president and treasurer, Jay Mealey, as a party. The Company
denies MCNIC's claims. Mr. Mealey believes that his inclusion at this point is
highly improper due to the fact that he had not been a party to the pending
actions nor to the Arbitration Agreement pursuant to which the actions were
submitted to the Arbitration. Accordingly, Mr. Mealey has filed a motion with
the arbitrator to be removed from the Arbitration.
The Company believes that it has a strong case on the claims and
counterclaims in the Arbitration. However, because arbitration proceedings are
inherently uncertain, the Company cannot predict the outcome of any such
proceedings. Management of the Company is keenly aware of the importance of the
Arbitration to the Company. If MCNIC prevails in the Arbitration, and depending
upon the extent in nature of any relief granted by the Arbitrator, the Company
may be severely and adversely impacted and may lose possession of some or all of
its primary assets and sources of revenues.
On July 10, 2000 the Company entered into an agreement with Berman,
Gaufin, Tomsic, Savage & Campbell, a law firm in Salt Lake City, Utah
("Berman"), to represent the Company in the legal matters involving MCNIC, its
affiliates and certain officers. This agreement provided for 350,000 shares of
the Company's common stock to be issued to Berman as a retainer. In addition,
the Company will reimburse
18
Berman's costs of litigation and pay a contingency fee of 33.33% of any recovery
from such litigation. The Company agreed upon these terms on the basis that this
was in its best interest in that the Company was able to conserve its available
capital for operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders for vote during the
fourth quarter of fiscal year 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company, their ages and their
positions are set forth below:
NAME AGE POSITION
James A. Middleton 64 Chairman of the Board of Directors
Jay Mealey 44 Chief Executive Officer, President,
Treasurer, Director
Stephen J. Burton 55 Secretary
Andrew W. Buffmire 54 Director
James A. Middleton has served as a director since February 1996 and served
as Chief Executive Officer from December 1996 through April 16, 1999. Mr.
Middleton will continue to serve as Chairman and a director until a new Chairman
and director is duly elected and qualified. Mr. Middleton was an Executive Vice
President and director of Atlantic Richfield Co. from October 1987 to September
1994 and resigned in March 2001, as a director of Texas Utilities Co.
Jay Mealey has served as President and Chief Operating Officer and as a
director of the Company since 1991. Mr. Mealey was appointed as Chief Executive
Officer in April, 1999 treasurer in October, 2000 and will serve as Chief
Executive Officer, President and Treasurer and as a director, until a new
officer and director, respectively, are appointed or elected and qualified. Mr.
Mealey has been actively involved in the oil and gas exploration and production
business since 1978. Prior to employment with the Company, Mr. Mealey served as
Vice President of Ambra Oil and Gas Company and prior to that worked for Belco
Petroleum Corporation and Conoco, Inc. in their exploration divisions. Mr.
Mealey is responsible for managing the day-to-day operations of the Company.
Stephen J. Burton was elected Secretary in October, 2000. Mr. Burton has
held various accounting positions with the Company since 1989. He is currently
responsible for the Company's Human Resources. Mr. Burton graduated from Utah
State University in 1986.
Andrew W. Buffmire is the Vice President Business Development for publicly
traded Ubiquitel, Inc., a wireless telecommunications company headquartered in
Conshohocken, Pennsylvania. Prior to joining Ubiquitel, Buffmire was a Director
in the business development group at Sprint PCS, a national wireless
telecommunications service provider. Before joining Sprint PCS, Buffmire was an
attorney in private legal practice in Salt Lake City, Utah for 16 years, with
the exception of two years (1985-1987), when he was the founder, general counsel
and registered principal of an NASD-registered investment-banking firm.
PART II.
ITEM 5. MARKET PRICE FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been traded in the over-the-counter market
since 1980. The common stock is currently listed on the NASD OTC Bulletin Board
under the symbol CROE. At the
19
present time, only the common stock is publicly traded. The following table sets
forth the range of high and low bid quotations, as adjusted for stock splits, of
the Company's common stock as reported by the National Quotation Bureau for each
full quarter during the two most recent fiscal years. The table represents
prices between dealers, and does not include retail markups, markdowns or
commissions, and may not represent actual transactions:
CALENDAR QUARTER ENDED HIGH BID LOW BID
March 31, 2000 .65625 .5625
June 30, 2000 .21875 .1875
September 30, 2000 .14 .125
December 31, 2000 .075 .0625
March 31, 1999 1.38 1.00
June 30, 1999 1.06 .59
September 30, 1999 .66 .31
December 31, 1999 .41 .26
As of March 29, 2001, the high bid and low offer quotations reported by the
National Quotation Bureau were $.054 and $.05, respectively. On March 29, 2000,
approximately 13,635,581 shareholders of record held the Company's common stock.
The Company declared and paid no dividends in 2000.
The Company has not paid any dividends or made any other distributions on
its common shares. It is the present policy of the Board of Directors of the
Company to retain any earnings for use in the business, and therefore, the
Company does not anticipate paying any cash dividends on its common stock in the
foreseeable future. The terms of the Company's Series A Preferred Stock prohibit
the payment of dividends on common stock at any time that dividends on the
Series A Preferred Stock are due yet unpaid.
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in the following table has been derived from
the financial statements for the periods indicated. The financial statements as
of and for the years ended December 31, 1994 through 1997 were audited by
Pritchett, Siler & Hardy, P.C., independent public accountants. The financial
statements as of and for the year ended December 31, 1998 and December 31, 1999
were audited by Deloitte & Touche, LLP, independent public accountants. The
financial statements as of and for the year ended December 31, 2000 were audited
by Tanner + Co., LLP, independent public accountants. The following financial
data should be read in conjunction with the financial statements and related
notes and with management's discussion and analysis of financial conditions and
results of operations included elsewhere herein.
Year Ended December 31
----------------------
(In thousands except per share)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Revenues $22,787 $35,519 $23,836 $87 $225
Income (Loss from
Continuing Operations) ($18,361) ($3,054) ($498) ($1,153) ($422)
Income (Loss) Per Share
From Continuing Operations ($1.39) ($0.26) ($0.07) ($0.11) ($0.04)
Total Assets $17,052 $33,114 $23,571 $6,610 $4,591
Total Long-Term Obligations $11,337 $11,333 $4,326 $0.00 $182
Redeemable Preferred Stock $4,896 $4,840 $4,783 $4,726 -0-
Cash Dividends Per Common Share $0.00 $0.00 $0.00 $0.00 $0.00
Common Stockholders' Equity ($21,050) ($2,276) $767 $1,749 $3,018
20
The foregoing selected financial data is presented on a historical basis
and may not be comparable from period to period due to changes in the Company's
operations. Common Stockholders' Equity was restated as of January 1, 1996 to
reflect the amortization of $453,649 in research and development expenditures
previously capitalized by the Company.
ITEM 7. 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, risks related
to the financing of the Company's operations (including the risk of loss of
certain operating assets serving as collateral to secure such financing), 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 December 31, 2000, the Company had cash and other current assets of
$6,761,595 as compared to cash and other current assets of $12,334,750 at
December 31, 1999. The decrease of $5,573,155 was generally due to a decrease in
asphalt sold by the Company. The Company's majority owned subsidiary, Crown
Distribution, accounted for a substantial portion of the Company's current
assets. As of December 31, 2000, Crown Distribution had approximately $2,732,686
million in cash, $2,348,042 million in inventory and $555,166 in accounts
receivable, excluding related party balances. Crown Distribution's business
requires a working capital Credit Facility. MCNIC, the minority interest owner,
elected to provide such Credit Facility in lieu of the Company's pursuing
proposals with it had obtained from banks and to replace a prior loan with this
Credit Facility. The Company has accrued interest on the Credit Facility at an
average interest rate of 8.0%. At December 31, 2000, the line had an outstanding
principal balance of $14,935,222.
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
the MCNIC Complaint, MCNIC does not acknowledge its prior commitment to "roll"
the Working Capital Loan into the Credit Facility and 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
21
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 MCNIC 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 has moved to vigorously
defend against this litigation and believes that it has certain available
defenses, claims and counterclaims. Crown Distribution's management further
believes that certain of MCNIC's allegations are lacking in either legal or
factual basis.
On July 25, 2000, the Company filed the Crown Complaint 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 the Company and MCN 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.
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, requested a jury trial and sought
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.
On August 31, 2000, MCNIC filed motions to stay both the state court and
federal court actions and have them submitted to an arbitration panel selected
by the American Arbitration Association in accordance with the rules of the
American Arbitration Association. The Company contested whether either lawsuit
should be subject to arbitration and filed an answer to both motions on October
2, 2000 to that effect. Ultimately, however, arbitration of substantial claims
in the litigation was ordered or required.
On January 29, 2000, the Company agreed that binding arbitration of all of
the claims set forth above before a single retired federal judge would be in the
Company's best interest. Accordingly, an Arbitration Agreement was signed
between all of the parties on January 29, 2001. The arbitration (the
"Arbitration") is being arbitrated before Judge John G. Davies (ret.) in Salt
Lake City, Utah. The arbitration hearing is scheduled for July 23, 2001 through
August 10, 2001, with extensive pre-hearing discovery to occur prior to that
time.
Commencing March 5, 2001, the Company, MCNIC, MCN and various officers
exchanged claims and counterclaims relating to the Arbitration. The claims
contained therein substantially restate the parties' prior positions within the
litigation described above. However, in its claims in arbitration, MCNIC, MCN
and certain of its officers have included the Company's chief executive officer,
president and treasurer, Jay Mealey, as a party to certain claims. Mr. Mealey
believes that his inclusion at this point is highly improper due to the fact
that he had not been a party to the pending actions nor to the Arbitration
Agreement pursuant to which the actions were submitted to the Arbitration.
According, a motion has been filed with the arbitrator to remove Mr. Mealey from
the Arbitration.
The Company believes that it has a strong case on the claims and
counterclaims in the Arbitration. However, because arbitration proceedings are
inherently uncertain, the Company cannot predict the
22
outcome of any such proceedings. Management of the Company is keenly aware of
the importance of the Arbitration to the Company. If MCNIC prevails in the
Arbitration, and depending upon the extent in nature of any relief granted by
the Arbitrator, the Company may be severely and adversely impacted and may lose
possession of some or all of its primary assets and sources of revenues.
Interested persons should also note that, subject of course to available
equitable and other creditor remedies, neither the MCNIC Working Capital Loan
nor Credit Facility 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.
The Company also owed MCNIC an additional $5,325,723 at December 31, 2000
with respect to the Preferential Capital Contribution that funded Crown
Distribution's acquisition of the assets of PSAC. See -"Item 1. Business -
Asphalt Distribution - Crown Asphalt Distribution, L.L.C. The Preferential
Capital Contribution requires payment of 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 project or Crown Distribution. However, the asphalt
distribution business is capital intensive and requires substantial investments
to acquire terminal storage and blending assets as well as raw material
inventory.
On May 12, 1999, the Company entered into an agreement to acquire an
asphalt distribution terminal in Rawlins, Wyoming and the related asphalt
inventory for $2,291,571 from S&L Industrial, a Wyoming corporation. The
Rawlins, Wyoming asphalt terminal (the "Rawlins Asphalt Terminal") expands the
Company's asphalt manufacturing and distribution operations in the Western
United States. The operating agreement for Crown Distribution required that the
Company present this opportunity to MCNIC in order for it to participate in the
acquisition and the Company did present the transaction (and the acquisition of
two other terminals which were ultimately not acquired) to MCNIC in accordance
with its obligation. Despite its agreement to participate within the ownership
of the Rawlins Asphalt Terminal (and the two other asphalt terminals) through
the formation of a new joint venture, MCNIC failed to take the actions necessary
to complete the transfer of the project to joint ownership and the Company does
not believe at present that MCNIC will perform. Thus, the Rawlins Asphalt
Terminal continues to be owned by CAPCO. The Company believes that it has and
will continue to have adequate working capital to service the obligations
relating to the Rawlins Asphalt Terminal.
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 "Item 3. Legal Proceedings") and subject to
related collection risks.
MCNIC has advised the Company it will no longer provide funding under the
Credit Facility as the Company asserts it previously agreed and has refused to
guaranty a third party financed Credit Facility on behalf of Crown Distribution
as the Company believes it had also previously agreed. The Company relies on the
Credit Facility to purchase inventory and fund other working capital
requirements for operations. The Company is seeking other ways to finance its
working capital requirements, but there is no assurance that such working
capital financing can be secured by the Company.
In the event that the Company is unable to collect its current accounts
receivables, or the Company is unable to secure the necessary working capital
line of credit for its operations from third party sources or if the Company's
operating losses and working capital deficits continue, or if the Company is
unable to recoup the losses, the Company may not have sufficient capital to
operate through 2001. Furthermore, if Crown Ridge approves an additional capital
contribution for the modification to the Facility by a unanimous decision of its
members and the Company is unable to finance its approximate 24% of such capital
contribution, its sharing ratio in Crown Ridge may be further diluted.
23
As of December 31, 2000, the Company has made cash contributions of
approximately $5,663,985 to Crown Ridge. During the start-up of the Crown Ridge
Facility mechanical and process difficulties were experienced that affected
production economics. A pilot study to develop a solution to these problems was
conducted during 2000. As discussed elsewhere herein, the ramifications of the
pilot study for the Company are uncertain. This uncertainty arises from the
facts that (i) the costs of the engineering modifications which may need to be
made to the Crown Ridge Facility have not been determined, and (ii) Crown has
been denied access by MCNIC to vital information concerning the pilot study and
the Crown Ridge Facility, generally.
During the year ended December 31, 2000, the Company evaluated the carrying
value of its investment in and advances to Crown Ridge. The evaluation has been
complicated by the fact that MCNIC has effectively taken control of Crown Ridge,
including financial information and engineering and feasibility studies of the
Facility. As discussed elsewhere herein, the Company is in litigation with MCNIC
with a final arbitration trial scheduled to commence July 23, 2001. Based on the
lack of information provided from MCNIC, the inherent risk of litigation and the
lack of a firm business plan for Asphalt Ridge from MCNIC, the Company
determined that its investment in and advances to Crown Ridge are potentially
impaired. Accordingly, an aggregate non-cash expense was recorded for the
impairment of $6,904,085. Should 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 resulting in an
impairment of the remainder of the asset. See - "Item 1. Business - Asphalt
Production - Crown Asphalt Ridge, L.L.C."
Results of Operations
2000 vs. 1999
Total revenue decreased from $35,518,541 for the year ended December 31,
1999 to $22,787,103 for the year ended December 31, 2000, a decrease of 35.84%.
This decrease was primarily due to a reduction of the volume of asphalt sold
during 2000. This decrease in sales volume was a direct result of a reduction in
the ability of the Company to purchase inventory in a timely fashion and its
resulting inability to submit competitive bids due to the loss of the working
capital line previously provided by MCNIC and loss of funds and disruption
caused by MCNIC.
The Company's gross margins decreased from approximately 5% for the year
ended 1999 to approximately -4% for the year ended 2000. This decrease was due
to an increase in the Company's cost of basestock asphalt that resulted from a
reduction in the purchase of asphalt inventory during the winter months when the
cost is significantly lower. The Company believes continued cost cutting
procedures will contribute to improved margins in 2001. However, the Company is
prevented in its Operating Agreement with MCNIC from utilizing any hedging
strategies to minimize market risk fluctuations and therefore remains subject to
basestock asphalt price fluctuations.
General, administrative and provision for bad debt expenses increased from
$2,745,029 for the year ended December 31, 1999 to $4,590,523 for the year ended
December 31, 2000, an increase of $1,845,494. This increase was primarily due to
increased legal expenses and an increase in the reserve for doubtful accounts as
a result of the decline in the credit worthiness of account balances. These were
partially offset by cost cutting procedures and a reduction in administrative
staff.
During the year ended December 31, 2000, the Company evaluated the carrying
value of its investments in and advances to Crown Ridge. The evaluation has been
complicated by the fact that the Company's joint venture partner has effectively
taken control of Crown Ridge and has not shared information relative to its
activities pertaining to Crown Ridge, including financial information and
feasibility studies relative to the Asphalt Ridge Project. Based on the lack of
a firm business plan for the Asphalt Ridge Project at this time, the Company
determined that its investment in and advances to Crown Ridge were potentially
impaired. Accordingly, an aggregate non-cash expense for the impairment or
$6,904,085 was recorded.
24
At year-end December 31, 2000 the company also re-assessed the
recoverability of goodwill associated with the PSAC acquisition. Due to the
litigation with MCNIC, the Company has been unable to secure financing needed to
build up inventory at favorable prices. This lack of funding and the ongoing
dispute with MCNIC has resulted in losses from operations in 1999 and 2000.
Because of these circumstances the Company could not estimate the full carrying
value which could be recovered through the undiscounted future cash flows from
products generated from related assets. Accordingly, an impairment of $3,625,848
has been recognized in the statements of operations for the year ended December
31, 2000.
Due to the items discussed above, including the impairments, the loss from
operations increased from $1,907,779 in 1999 to $16,084,230 in 2000.
Interest and other income/expenses decreased from net expenses of
$2,494,073 for the year ended December 31, 1999 to net expenses of $2,315,344
for the year ended December 31, 2000, a decrease of $178,729. The 2000 total was
comprised of $1,999,138 in interest costs related to the Crown Distribution's
Credit Facility and preferential capital contribution owed to MCNIC, other
interest expense of $577,248 on various loans, and $261,042 of interest income
and other incomes
Minority interest of $38,653 represents Foreland's approximate 33% interest
in the loss in CAT LLC.
At December 31, 2000, the Company evaluated the recoverability of goodwill
associated with the acquisition by Crown Distribution of the PSAC assets. As
discussed elsewhere herein, the litigation with MCNIC resulted in the Company's
inability to secure working capital financing and losses from operations for
1999 and 2000. Because of these circumstances and the inherent risk of
litigation, the Company could not estimate the full carrying value which could
be recovered through undiscounted cash flows from products generated from the
related assets. Accordingly, an impairment of $3,625,848 has been recognized in
the statement of operations for the year ended December 31, 2000.
Crown Distribution had losses for the year ended December 31, 2000 of
$11,365,018. The Company, through its wholly owned subsidiary, CAPCO owns 50.01%
and MCNIC owns 49.99% of Crown Distribution. CAPCO is the manager and operating
agent of Crown Distribution. Because there is no agreement requiring the
minority shareholder, MCNIC, to guarantee the subsidiary's debt or such
cumulative losses or a commitment to provide additional capital, other than
working capital, all (100%) of the loss attributable Crown Distribution,
including MCNIC's 49.99% interest in the losses totaling $5,681,372 are included
as a loss in the Company's Financial Statements.
1999 vs. 1998
Total revenue increased from $23,835,734 for the year ended December 31,
1998 to $35,518,541 for the year ended December 31, 1999, an increase of
$11,682,807 (49%). This increase was primarily due to the Company recording a
full year of revenue from its 1998 acquisition of the assets of Petro Source
Asphalt Company and its 1999 acquisition of the Rawlins Asphalt Terminal.
For the year ended December 31, 1998, the Company recorded revenue of
approximately $6,423,000 (41,000 tons) from its distribution facilities and
$15,904,000 (104,000 tons) from the Processing Agreement with Santa Maria
Refinery Corporation. For the same period in 1999, the Company recorded revenue
of approximately $24,963,000 (159,000 tons) from its distribution facilities,
which revenues included $2,584,000 (16,787 tons) from the Rawlins Asphalt
Terminal and $10,555,000 (37,900 tons) from the Processing Agreement with Santa
Maria Refinery Corporation. However, the Processing Agreement expired on April
30, 1999. The Company believes the loss of revenues associated with the now
expired Processing Agreement will be offset by the growth in its asphalt
distribution operations.
The Company's gross margins decreased from approximately 9% for the year
ended 1998 to approximately 5% for the year ended 1999. This decrease was due to
higher operating costs at the Company's distribution facilities, an increase in
the Company's cost of basestock asphalt at the end of 1999
25
and non-recurring costs recorded of $800,000. However, the Company is prevented
in its Operating Agreement with MCNIC from utilizing any hedging strategies to
minimize market risk fluctuations and therefore remains subject to basestock
asphalt price fluctuations. The Company believes that the asphalt production
from Crown Ridge, should it commence commercial operations, will provide its
distribution business a consistent asphalt basestock supply at a fixed price,
assuming that acceptable pricing agreements are reached with Crown Ridge.
General, administrative, and provision for bad debt expenses increased from
$1,250,381 for the year ended December 31, 1998 to $2,745,029 for the year ended
December 31, 1999, an increase of $1,494,648. This increase was primarily due to
the Company recording a full year of general and administrative expenses from
its 1998 acquisition of the assets of PSAC.
Interest and other income/expenses increased from net expenses of $800,420
for the year ended December 31, 1998 to net expenses of $2,494,073 for the year
ended December 31, 1999, an increase of $1,693,653. The 1999 total was comprised
of $2.2 million in interest costs related to the Company's Credit Facility and
preferential capital contribution for its asphalt distribution owed to MCNIC and
other expenses of $290,482.
Minority interest of $1,348,336 represents MCNIC's approximate 49% interest
in the loss of Crown Distribution and Foreland's approximate 33% interest in the
loss in CAT LLC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe it is subject to 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 preve