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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, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________
Commission File Number 0-19365
CROWN ENERGY CORPORATION
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(Exact name of registrant as specified in its charter)
UTAH 87-0368981
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
215 South State, Suite 650
Salt Lake City, Utah 84111
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(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
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(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, 2002, was $1,714,292.75
using the average bid and asked price for Registrant's common stock. As of April
11, 2002, registrant had 27,428,684 shares 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 2002 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]
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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 ("Crown") 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.
Under the terms of a Stock Purchase Agreement dated September 25, 1997,
the Company sold to Enron Capital and Trade Resources Corp. ("ECT") 500,000
shares of $10 Series A Cumulative Convertible Preferred Stock of the Company
(the "Preferred Stock") and a warrant (the "Warrant") exercisable five years
from its date of issuance for up to 925,771 shares of Common Stock of the
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Company at a per share exercise price of $0.002, subject to limits based on the
financial performance of the Company. The 500,000 shares of Preferred Stock are
convertible into 4,285,000 shares of Common Stock of the Company.
On November 1, 2001, Manhattan Goose, L.L.C., acquired all of the
outstanding shares of Preferred Stock, the Warrants, 317,069 shares of Common
Stock previously issued as a dividend on the Preferred Stock and dividends
accrued but unpaid. Manhattan Goose is a Utah limited liability company owned by
Jay Mealey, the Chief Executive Officer, President and director of the Company,
Andrew W. Buffmire, a director of the Company, Jeff Fishman and Alexander L.
Searl.
The Preferred Stock provides for the accrual of dividends at 8% per
annum on its "Stated Value" of $5,000,000. Accrued dividends on the Preferred
Stock may be paid in the Common Stock of the Company at the option of the
holders of such stock. On February 28, 2002, Manhattan Goose requested that the
Company pay $200,000 in accrued dividends through the issuance of 13,793,103
shares of Common Stock, as calculated pursuant to the designations and
preferences of the Preferred Stock. In compliance with the instructions from
Manhattan Goose, the Board of Directors of the Company authorized the issuance
of 13,793,103 shares of Common Stock to Manhattan Goose as partial payment of
the accumulated dividends on the Preferred Stock. As of March 29, 2002, this
13,793,103 shares of Common Stock issued to Manhattan Goose represented 50.3% of
the outstanding Common Stock.
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.
("CAT, LLC"), a Utah limited liability company, that is operated by Capco.
CAC previously owned an interest in certain leases and properties owned
by Crown Asphalt Ridge, L.L.C. ("Crown Ridge") in Vernal, Utah. As a result of a
settlement agreement executed on March 8, 2002, (the "Settlement Agreement")
between the Company and MCNIC Pipeline & Processing Company, a Michigan
corporation ("MCNIC") and related parties, CAC now owns certain overriding
royalty interests granted by Crown Ridge. The Settlement Agreement and the
royalty interests are described in greater detail below. See Item 1. Business -
Crown Asphalt Ridge, L.L.C. and Item 3. Legal Proceedings.
Crown's consolidated financial statements and results of operations
include the accounts and results of operations of CAC, Capco, CAT, L.L.C and
Crown Distribution. Accordingly, references in this Annual Report to "Crown" or
the "Company" include, unless otherwise noted, CAC, Capco, CAT, L.L.C and Crown
Distribution.
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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, 1999, 2000 and 2001, the Company reported revenues from the sale of asphalt
products of approximately $36 million, $23 million and $27 million respectively.
See Item 6. Selected Financial Data.
In August 1997, the Company formed Crown Ridge with MCNIC, to
construct, own and operate an asphalt oil sand production facility at Asphalt
Ridge, near Vernal, Utah (the "Facility"). During the start-up of the Facility
mechanical and process difficulties were experienced that affected production
economics. It has been determined by MCNIC that significant additional capital
investment is required to modify the Facility in order for it to achieve
commercial production, but the cost of such modifications is unknown. The
Company does not have the financial wherewithal to participate in additional
capital contributions and would not have the ability to make such contributions
for the foreseeable future. On March 8, 2002, the Company assigned its interest
in Crown Ridge to MCNIC in return for: (i) the assignment to CAC of a non-cost
bearing overriding royalty interest; (ii) the elimination of all obligations of
CAC to MCNIC; and (iii) the payment by MCNIC of the MK judgment and
indemnification of CAC against that judgment. See Item 1. Business - Crown
Asphalt Ridge, L.L.C. and Item 3. Legal Proceedings.
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"). 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 CAT, LLC with Foreland Refining Corporation ("Foreland"), a Utah
corporation engaged in the asphalt roofing products business. 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. The
accounts and results of operations of CAT, LLC are included within the Company's
consolidated financial statements and results of operations. See Item 1.
Business - 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,
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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.
As described elsewhere in this Report, the Company has been involved in
extensive litigation and arbitration with MCNIC relating primarily to the
business of Crown Distribution. On March 8, 2002, the Company, MCNIC and their
related parties entered into the Settlement Agreement pursuant to which (i) all
litigation (and the enforcement of judgments obtained in such litigation) was
stayed, and (ii) the Company was granted the option to acquire all of MCNIC's
interests in, or relating to, Crown Distribution. See Item 1. Business - Crown
Asphalt Distribution, L.L.C. and Item 3. Legal Proceedings 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 is currently owned and
operated by Capco.
The Company's revenues during the year ended December 31, 2001, were
generated primarily through its asphalt manufacturing and distribution
operations. See Item 1. Business - Crown Asphalt Distribution, L.L.C. below.
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
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
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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. The Company manufactures a broad range of performance
asphalt products meeting the SHRP specifications.
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 and PG asphalt
blending processes, the Company believes that it is well positioned to meet the
needs of the changing asphalt market. However, the Company competes with several
larger companies in the regional asphalt supply business. Competition in the
asphalt supply business is based primarily on price and quality. 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. The Company purchases asphalt
from refiners and other suppliers in the winter months, when prices are lower,
stores the asphalt at its terminal facilities and manufactures and distributes
finished asphalt products during the peak spring and summer months. In addition,
the Company purchases asphalt throughout its peak months to resupply the
terminal facilities.
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 PSAC, effective June 1, 1998 ("PSAC
Acquisition"). 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,
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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. In addition,
MCNIC made loans to Crown Distribution for a portion of the PSAC Acquisition,
inventory purchases and its general working capital requirements.
The Company manufactured and distributed 133,783 tons of asphalt
products in 2001 up from 100,930 tons of asphalt products in 2000. 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. Since 1999, the
Company has not had a working capital credit facility. During 2001, the Company
was able to purchase asphalt and other raw materials from certain suppliers
under terms not requiring a working capital credit facility. The terms were very
expensive to the Company and resulted in a higher cost of goods sold than would
have occurred had the Company had a conventional working capital credit
facility. The Company continues to be hindered in its purchases of some raw
materials because those purchases must be made from operating cash flow limiting
the flexibility in supply purchases. This inflexibility caused costs to be at
levels higher than desired.
At the time of formation, 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, 2001, of $843,207. Crown Distribution is responsible for its 67.67%
of the promissory note payments. The remaining 33.33% ownership interest in CAT,
LLC is owned by Foreland. The accounts and results of operations of CAT, LLC are
therefore included within the consolidated financial statements of the Company
with a provision for minority interest owned by Foreland.. See Item 1. Business
- - 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 an additional loan from MCNIC,
was used by Crown Distribution to acquire the assets of PSAC and pay related
closing and other acquisition costs. MCNIC made an additional capital
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contribution in the amount of $1.5 million when the Company contributed its
interest in CAT, LLC to Crown Distribution that Crown Distribution immediately
used to reduce the balance of the loan to MCNIC.
Management Of Crown Distribution. 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. 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. Capco
is the operator of Crown Distribution.
Loans. MCNIC, pursuant to its rights granted under the Crown
Distribution Operating Agreement, elected to loan Crown Distribution amounts to
cover its working capital requirements in lieu of it obtaining a line of credit
from an third party financial institution. As of December 31, 2001, MCNIC had
loaned Crown Distribution approximately $14,935,222.
On March 27, 2000, MCNIC delivered to the Company a notice of default
demanding payment of the outstanding principal balance of the amounts loaned to
Crown Distribution plus all interest accrued thereon. 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 a mortgage and
security interest claimed by MCNIC in and to the real and personal property of
Crown Distribution. See Item 3. Legal Proceedings.
The Company and Crown Distribution acted to 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 alleged
claims against the defendants under a wide variety of causes of action. An
Answer and Counterclaim to the MCNIC Complaint was 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 were lacking in either legal
or factual basis.
MCNIC, MCN and the Company agreed to submit the Complaint, the Crown
Complaint and the Answer and Counterclaim to binding arbitration. The
arbitration concluded in August 2001. On November 5, 2001, the Company received
the decision of the arbitrator (the "Arbitrator") in the dispute between the
Company and MCNIC in which it was held that the loans made by MCNIC to Crown
Distribution are currently due and payable along with accrued interest ("Damage
Award"). On February 07, 2002, the Third Judicial Court, Salt Lake County, Utah
confirmed the Damage Award and entered a judgment in favor of MCNIC. The amount
of the Damage Award judgment as of March 29, 2002, including accrued interest is
$20,266,822.71, and continues to accrue interest daily of $5,102.84. As is
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discussed elsewhere within this Report, if the Company exercises the option (the
"Option") given it under the Settlement Agreement to purchase all of MCNIC's
interests in, or relating to, Crown Distribution, the amount owing under the
Damage Award will be discharged. See Item 3. Legal Proceedings.
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 2001, 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 is the operator of Crown Distribution and
manages and conducts its business including the negotiation and execution of
contracts, 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
compensation paid to employees of the Company in relation to their management
services under the Management Agreement; and (iv) a monthly 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 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 of the Company as the operator,
after the initial five-year term on economic grounds. 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.
The Company and third parties store and throughput asphalt through
excess capacity at the terminal facilities for an industry standard fee.
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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 - 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.
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
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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 the Company 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. CAT, LLC is operated by
Capco. The operator 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 operator.
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 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.
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
equipment for the Facility up to $3,500,000 in value. Both MCNIC and the Company
made 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, 2001, the Company had 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 Crown Ridge, which
includes costs incurred prior to the joint venture with MCNIC.
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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, executed a promissory note in the amount of $2,991,868 (the "CAC Loan"),
bearing interest at the prime rate plus 1% per annum, adjusted monthly, and
providing for interest only payments of $20,757 per month through July 20, 2004.
On August 20, 2001, CAC and MCNIC agreed that the Facility would not be able to
operate commercially and the interest only period was extended under the CAC
Loan and no principal payments were due until July 20, 2004. The CAC Loan was
secured by that portion of CAC's sharing ratio in Crown Ridge directly
attributable to the proceeds of the loan. The gross proceeds of the CAC Loan
($2,991,868.66) were treated as a capital contribution by CAC to Crown Ridge. As
a result of the execution of the Settlement Agreement, the Company's obligations
under the CAC Loan have been discharged.
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
for the Facility to achieve commercial production, significant capital
investment in the Facility will be required. The Company does not now have, or
expect to have in the near future, the financial wherewithal to contribute its
pro rata share of the capital investment.
The Company has previously impaired the value of its Crown Ridge
interest in its Consolidated Financial Statement for the year ending December
31, 2000. On March 8, 2002, the Company assigned its interest in Crown Ridge to
MCNIC pursuant to the Settlement Agreement in return for: (i) the granting to
CAC of a one percent (1%) non-cost bearing overriding royalty interest in the
"A" tract at Asphalt Ridge; (ii) the assignment to CAC of a three percent (3%)
non-cost bearing overriding royalty interest in Crown Ridge's other properties
at Asphalt Ridge; (iii) the elimination of the CAC Loan; and (iv) the payment by
MCNIC of a judgment against CAC by Morrison Knudsen (the "MK Judgment") which
arose out of the construction of the Facility, and the indemnification of the
Company against the MK judgment. Given the: (i) extreme financial and legal
pressures confronting the Company, and Crown Ridge specifically; and (ii)
continuing technical difficulties experienced at Crown Ridge, Management of the
Company believes that its actions with regard to Crown Ridge are in its best
interests. See Item 3 Legal Proceedings.
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
12
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 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 owns an overriding
royalty interest in the properties of Crown Ridge. See Item 1. Crown Asphalt
Ridge, L.L.C.
Capco is a wholly owned subsidiary of the Company that was formed in
1991. Until 1998, Capco 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.
13
Employees
As of April 1, 2001, the Company had 44 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 and operating
results for the Company and its operational units, see Note 17 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, and is currently leasing
the space on a month-to-month basis. 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. On November 17, 2000, the Company purchased
a building in Woods Cross, Utah adjacent to the Cowboy Terminal Property
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.
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 Damage Award judgment and security interest of MCNIC. See
Item 1. Business - Crown Asphalt Distribution, L.L.C. and 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.
14
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 sale of Gavilan
Stock to Roadrunner, 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 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. No evaluation presently can be made as to the
final outcome of this case or the likelihood or range of potential loss or
recovery, in any.
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. The Settlement Agreement obligates
MCNIC to pay the MK Judgment and indemnify the Company from any associated cost,
and the case has been subsequently dismissed.
In late July and August, 2001, the Company participated in a binding
arbitration proceeding (the "Arbitration") in Salt Lake City, Utah against
MCNIC, its related entities and certain of their officers. The Arbitration
addressed all claims previously asserted between the parties either in the Third
Judicial District Court of Salt Lake County in a proceeding entitled MCNIC
Pipeline & Processing Company v. Crown Asphalt Distribution Civil No. 00904867
(the "State Action") and the proceeding filed in the United States District
Court for the District of Utah Central Division entitled Crown Energy
Corporation, et al. v. MCN Energy Group, Inc. et al., Civil No. 2CV-0583ST (the
"Federal Action"). In summary, in the State Action, MCNIC alleged that funds
15
previously advanced by it to Crown Distribution in an amount in excess of $14
million, plus interest, were immediately due and payable. MCNIC also sought the
appointment of a receiver for Crown Distribution's assets and sought to
foreclose on security interests in the assets of Crown Distribution.
In contrast, the Company asserted that the funds previously advanced to
Crown Distribution by MCNIC were part of a revolving credit facility which was
not due and payable at that time and from which Crown Distribution should be
able to make additional draws. Further, the Company sought recovery against
MCNIC, its related entities and certain of its officers under other causes of
action, including breach of fiduciary duties, economic duress, breach of implied
covenants of good faith and fair dealing, breach of contracts and intentional
interference with business relations.
On October 31, 2001, the Arbitrator issued a damage award (the "Damage
Award") in which he held that MCNIC's loans were due and payable with interest
accruing on such loans from 8% to 18%, depending upon the particular loan
involved. The decision also failed to find for the Company on its claims against
MCNIC, its related entities and officers. The Damage Award was subsequently
confirmed by the Third Judicial District Court of Salt Lake County, state of
Utah on February 7, 2002. The amount of the Damage Award as of March 29, 2002,
is $20,266,822.71, with interest accruing daily in the amount of $5,102.84.
In addition, the Arbitrator awarded $2,609,518.69 in fees and costs
(the "Fee Award") to MCNIC against the Company and its related entities on a
joint and several basis. The Fee Award has yet to be confirmed by the
appropriate Utah state court and proceedings regarding it have been stayed as
further explained below.
On March 8, 2002, the Company and MCNIC, its related entities and
certain of its officers executed the Settlement Agreement. Pursuant to the
Settlement Agreement, the Company transferred all of its interests in Crown
Ridge and the leases relating to the Asphalt Ridge properties to MCNIC. In
addition, the Company and its officers agreed not to compete with Crown Ridge in
the Western United States and Western Canada in any way with regard to tar sands
leasing, mining, extraction or processing for a period of three years. However,
the Settlement Agreement provides that the Company may continue to conduct its
present business of buying, storing, blending and selling asphalt.
In exchange for the assignment of the Crown Ridge interest, the Company
received (i) MCNIC's commitment to pay the MK Judgment and its indemnification
of the Company from the MK Judgment, (ii) the assignment from Crown Ridge of a
1% non-cost bearing, overriding royalty interest in the sales proceeds received
by Crown Ridge or its successors and assigns from any products produced on the
assigned leases of "Tract A" at Asphalt Ridge and a 3% non-cost bearing,
overriding royalty interest in proceeds received by Crown Ridge or its
successors and assigns from any other lands which are currently leased by Crown
Ridge or the Company, and (iii) the mutual release between the parties of any
known or unknown claims between them relating to Crown Ridge, including the
obligation of the Company to pay the CAC Loan.
16
Pursuant to the Settlement Agreement, the Company also acquired an
option to purchase all of MCNIC's rights, title and interests in, or relating
to, Crown Distribution (including its right to receive the Damage Award and the
Fee Award) for an amount equal to $5,500,000 (the "Purchase Price"). The
Settlement Agreement provides that the Purchase Price shall be paid through the
payment of $200,000 at execution with the balance due upon the closing of the
Option (if such closing occurs on or before April 30, 2002). After April 30,
2002, the Company shall have the right to extend the Option until September 30,
2002, by making an additional $100,000 payment for each 30 days by which the
Option is extended. If the Company closes under the Option, then all payments
made to MCNIC shall be credited against the Purchase Price. If, however, the
Company does not exercise the Option, the initial $200,000 payment shall be
credited against the Company's ultimate liability under the Fee Award.
Promptly following the execution of the Settlement Agreement, the
Company and MCNIC stayed all pending litigation relating to the Arbitration or
any enforcement of its conclusion issued as a result of it. The Settlement
Agreement provides that if the Company does not exercise the Option, MCNIC may
execute on the Damage Award and that the parties may either move to confirm or
appeal, as the case may be, the Fee Award.
Management of the Company believes that under the severe legal and
financial constraints facing the Company as a result of the Arbitration's
outcome, the negotiation and execution of the Settlement Agreement were in the
best interests of the Company and its shareholders. Management of the Company is
presently taking actions intended to permit it to exercise the Option but cannot
assure that it will be successful in obtaining the requisite financing on terms
which are acceptable to the Company. Further, the Company cannot describe what
form future financing might take.
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 2001.
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
---- --- --------
Jay Mealey 45 Chairman of the Board of Directors, Chief
Executive Officer, President,
Treasurer
Stephen J. Burton 56 Secretary
Andrew W. Buffmire 55 Director
17
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.
James A. Middleton has served as a director since February 1996 and
served as Chief Executive Officer from December 1996 through April 16, 1999. As
of March 29, 2002, Mr. Middleton resigned as a director for personal reasons.
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 Department. 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 from October 1997 until
May 2001. 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 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:
18
CALENDAR QUARTER ENDED HIGH BID LOW BID
---------------------- -------- -------
March 31, 2001 .02 .015
June 30, 2001 .125 .035
September 30, 2001 .075 .06
December 31, 2001 .085 .02
March 31, 2000 .0625 .0625
June 30, 2000 .468 .017
September 30, 2000 .187 .125
December 31, 2000 .125 .06
As of March 31, 2002, the high bid and low offer quotations reported by
the National Quotation Bureau were $.04 and $.011, respectively. On April 1,
2002, approximately739 shareholders of record held the Company's common stock.
The Company declared and paid no dividends in 2001.
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 year ended December 31, 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, and
December 31, 2001, were audited by Tanner + Co., 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.
19
Year Ended December 31
-----------------------
(In thousands except per share)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net Revenues $27,033 $22,787 $35,519 $23,836 $87
Income (Loss) from
Continuing Operations ($6,488) ($18,361) ($3,054) ($498) ($1,153)
Income (Loss) Per Share
From Continuing Operations ($0.51) ($1.39) ($0.26) ($0.07) ($0.11)
Total Assets $15,717 $17,052 $33,114 $23,571 $6,610
Total Long-Term Obligations $11,130 $11,337 $11,333 $4,326 $0.00
Redeemable Preferred Stock $4,953 $4,896 $4,840 $4,783 $4,726
Cash Dividends Per Common Share
$0.00 $0.00 $0.00 $0.00 $0.00
Common Stockholders' Equity ($27,994) ($21,050) ($2,276) $767 $1,749
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.
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, 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
20
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, are 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, 2001, the Company had cash and other current assets of
$5,502,842 as compared to cash and other current assets of $6,761,595 at
December 31, 2000. The decrease of $1,258,753 was generally due to a reduction
in year end asphalt inventory levels. The Company's wholly owned subsidiary,
Capco, is the majority owner of Crown Distribution, and also conducts asphalt
distribution independent of Crown Distribution. Together Capco and Crown
Distribution accounted for most of the companies cash and other current assets.
As of December 31, 2001, Capco and Crown Distribution had cash and other current
assets of approximately $5,343,836, consisting primarily of $2,536,048 in cash,
$1,358,022 in inventory and $1,363,883 in accounts receivable, excluding related
party balances. The Company's business is capital intensive and requires a
working capital credit facility to operate efficiently. The Company has not had
such a credit facility since 1999, which has resulted in lowered profitability.
Until 1999, MCNIC provided loans to Crown Distribution for inventory purchases
and general working capital requirements. As of December 31, 2001, those loans
had a principal balance of $14,935,222. The Company plans to diminish part of
its working capital constraints by structuring favorable supply arrangements
with its suppliers in 2002.
On March 27, 2000, MCNIC delivered to the Company a notice of default
demanding payment of the outstanding principal balance of the amounts loaned to
Crown Distribution plus all interest accrued thereon. 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 a mortgage and
security interest claimed by MCNIC in and to the real and personal property of
Crown Distribution. See Item 3. Legal Proceedings.
The Company and Crown Distribution acted to 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 alleged
claims against the defendants under a wide variety of causes of action. An
Answer and Counterclaim 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 were lacking in either legal
or factual basis.
21
MCNIC, MCN and the Company agreed to submit the Complaint, the Crown
Complaint and the Answer and Counterclaim to binding arbitration. The
arbitration concluded in August 2001. On November 5, 2001, the Company received
a decision of the Arbitrator in the dispute between the Company and MCNIC where
it was ruled that the loans made by MCNIC to Crown Distribution are currently
due and payable along with accrued interest ("Damage Award"). On February 07,
2002, the Third Judicial Court, Salt Lake County, Utah confirmed the Damage
Award and entered a judgment in favor of MCNIC
On February 05, 2002, the Company received a final decision of the
Arbitrator awarding legal fees and costs incurred in the dispute between MCNIC
and the Company to MCNIC in the amount of $2,609,519 (the "Fee Award"). The Fee
Award was entered jointly and severally against Crown Distribution, Crown,
Capco, CAC, and Crown Ridge.
Crown Distribution also owed MCNIC an additional $5,325,723 at December
31, 2001, with respect to the Preferential Capital Contribution that funded
Crown Distribution's acquisition of the assets of PSAC. See Item 1. Business -
Crown Asphalt Distribution, L.L.C. The Preferential Capital Contribution
requires payment solely from 50% of the cash flow from Crown Distribution's
operations until repayment of the face amount plus a 15% rate of return.
On March 8, 2002, the Company and MCNIC entered into an agreement
("Settlement Agreement") in which the execution of the Damage Award judgment and
the proceedings to confirm the Fee Award in the Third Judicial Court, Salt Lake
County, Utah were both stayed. The terms of the Settlement Agreement also
provide that the Company will have the option to purchase all of MCNIC's
interest in Crown Distribution by the payment of certain amounts on or before
September 30, 2002, and that the stay of the execution of the Damage Award
judgment and the proceeding relating to the Fee Award will continue as long as
the option to purchase remains valid. Upon execution of the option to purchase
and closing by the Company, both MCNIC and the Company will mutually release the
other party from and against all claims, obligations and liabilities (including
the Damage Award, Fee Award and Preferential Capital Contribution). See Item 3.
Legal Proceedings. The Company will be required to raise substantial additional
capital to exercise the option to purchase MCNIC's interest in Crown
Distribution. This may require the Company to sell all or part of its assets to
finance the capital requirements. There is no assurance that the Company will be
able to raise the necessary capital or that the Company will be able to complete
the purchase of MCNIC's interest. This could result in the foreclosure by MCNIC
of substantially all of the assets of Crown Distribution. Although the Company
would vigorously defend against confirmation of the Fee Award against Crown,
Capco and CAC, there can be no assurance that the Company would prevail due to
the inherent risks of litigation. If MCNIC were to prevail and receive a joint
and several judgment for the Fee Award, substantially all of the remaining
assets of the Company would be at risk of loss to satisfy such a judgment. This
would place the Company at serious risk of insolvency and interested parties are
encouraged to note the significant risk of complete loss.
22
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. The Company is seeking other ways to
finance its working capital requirements, but there can be 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 2002.
As part of the Settlement Agreement, the Company assigned to MCNIC all
of its interest in Crown Ridge. In return the Company received: (i) the
assignment to CAC of a one percent (1%) non-cost bearing overriding royalty
interest in the "A" tract at Asphalt Ridge; (ii) the a assignment to CAC of a
three percent (3%) non-cost bearing overriding royalty interest in Crown Ridge's
other properties at Asphalt Ridge; (iii) the elimination of the promissory note
from CAC to MCNIC; and (iv) the payment by MCNIC of the MK judgment and
indemnification of the Company against the MK judgment. The Company will have no
further costs in Crown Ridge. See Item 3. Legal Proceedings.
Results of Operations
2001 vs. 2000
Total revenue increased from $22,787,103 for the year ended December
31, 2000, to $27,032,658 for the year ended December 31, 2001, an increase of
18.63%. This increase was primarily due to an increase in sales volume which was
a direct result of the Companies ability to purchase inventory from cash flow
and as a result of supply arrangements reached with its suppliers.
The Company's gross profit increased from approximately ($817,960) or
- -3.59% for the year ended 2000 to approximately $2,906,468 or 10.75% for the
year ended 2001. This increase was due to an overall reduction in the Company's
cost of basestock asphalt, because of the ability to bring in asphalt inventory
during the winter months when cost is significantly lower which it was not able
to do in 2000 due to financing difficulties resulting from working capital
constraints. (See "Item 3. - Legal Proceedings"). Another factor contributing to
the increased profit was improved operating efficiencies at the facilities. The
Company believes continued cost cutting procedures will favorably impact gross
margins in 2002, but the lack of an adequate working capital credit facility
could partially offset those margins.
23
General, administrative and provision for bad debt expenses decreased
from $4,590,523 for the year ended December 31, 2000, to $3,479,104 for the year
ended December 31, 2001, a decrease of $1,111,419. This decrease was primarily
the result of having to increase the reserve for doubtful accounts in 2000 as a
result of the decline in the credit worthiness of certain account balances. Cost
cutting procedures in 2001 and a reduction in administrative staff also
contributed to the decrease. These were partially offset by the increase in
legal expenses in 2001.
The loss from operations decreased from $16,084,230 in 2000 to $572,636
in 2001 an improvement of $15,511,594.
Interest and other income (expenses) increased from net expenses of
$2,315,344 for the year ended December 31, 2000, to net expenses of $5,964,153
for the year ended December 31, 2001, an increase of $3,648,809. The 2001 total
was comprised of $3,326,549 in interest costs related to the Crown
Distribution's Credit Facility, Preferential Capital Contribution to MCNIC and
the Damage Award. Other interest expense was $692,189 on various other debt.
Interest and other income was $664,104. Other expenses in the amount of
$2,609,519 resulting from a final decision of the Arbitrator awarding legal fees
and costs incurred in the dispute between MCNIC and the Company to MCNIC on
February 05, 2002.
Minority interest of $48,808 represents Foreland's approximate 33%
interest in the loss in CAT, LLC.
Crown Distribution had losses for the year ended December 31, 2001, of
$8,669,457. 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 of the loss attributable to Crown Distribution, including
MCNIC's 49.99% interest in the losses totaling $4,333,861.55 are included as a
loss in the Company's Financial Statements.
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 its working capital credit facility previously provided by MCNIC and loss of
funds and disruption caused by MCNIC.
24
The Company's gross margins decreased from approximately 4.81% for the
year ended 1999 to approximately -3.59% 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.
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 certain 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.
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 was 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
was 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 Preferential Capital
Contribution and other loans 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.
25
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.
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 base stock 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 has been prevented
from utilizing any hedging strategies to minimize any market price changes by
the terms of the Operating Agreement with MCNIC. See Item 7. Management's
Discussion and Analysis Results of Operations - 2000 vs. 1999.
The Company is also subject to certain price escalation and
de-escalation clauses in its asphalt distribution sales contracts. The Company
supplies asphalt to projects in certain states where regulations provide for
escalation and de-escalation of the price for such asphalt relative to the price
difference from the time the project is awarded to the successful bidding
company and the time the project is completed. The Company includes such
de-escalation risk into its bid prices and does not believe it has material
exposure to risk resulting from these regulations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE
The financial statements required by this item are set forth following
Item 14 hereof.
As indicated below, pursuant to Instruction G(3) to Form 10-K, portions
of Items 10 through 13 of Part III of this Form 10-K are incorporated by
reference from the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A of the Securities Act of 1933 within 120
days after the close of the Company's most recent fiscal year (the "Proxy
Statement").
26
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors of the Company required by this Item 10
will be set forth in the Proxy Statement, which information is incorporated
herein by reference. Information regarding the executive officers of the Company
required by this Item 10 is included as Item 4A of Part I of this Form 10-K as
permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information
required by Item 405 of Regulation S-K will be set forth in the Proxy Statement,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item 11 will be set forth in the Proxy
Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item 12 will be set forth in the Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item 13 will be set forth in the Proxy
Statement, which information is incorporated herein by reference.
27
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Documents filed as part of this Report:
(1) Financial statements, as set forth on the attached Index to
Financial Statements.
(2) Exhibits, as set forth on the attached Exhibit Index.
Schedule II: Valuation and Qualifying Accounts
The Company filed a form 8-K on November 1, 2001, to report a final
settlement, effective October 23, 2001, had been reached in the litigation
between the Company's wholly owned subsidiary, Crown Asphalt Products Company
("Capco"), its majority owned subsidiary Crown Asphalt Distribution, L.L.C.
("Crown Distribution") and Santa Maria Refining Company ("SMRC"), Saba Petroleum
Company ("Saba") and Greka Energy Corporation ("Greka").The Settlement Agreement
between the parties requires that the terms of the settlement not be disclosed.
The Company filed a Form 8-K on November 6, 2001, to report a decision
in the arbitration conducted by it and its majority owned affiliate, Crown
Asphalt Distribution, L.L.C. ("Crown Distribution") against MCN Energy Group,
Inc. ("MCN") and MCNIC Pipeline and Processing Company ("MCNIC") and related
parties.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
CROWN ENERGY CORPORATION
(Registrant)
/s/ Jay Mealey
-----------------------------------
Jay Mealey
Chief Executive Officer,
Date: April 15, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Jay Mealey
-----------------------------------
Jay Mealey
Chief Executive Officer and Director
Date: April 15, 2002
/s/ Alan Parker
-----------------------------------
Alan L. Parker
Controller
Date: April 15, 2002
/s/ Andrew Buffmire
-----------------------------------
Andrew W. Buffmire
Director
Date: April 15, 2002
29
CROWN ENERGY CORPORATION
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS ADDITIONS
Balance at Charge to Charge to Balance at
Beginning Cash and Other End of
Description Of Year Expenses Accounts Deductions Year
- ----------------------------- ----------- ---------- ----------- ---------- -----------
Year ended December 31, 2001:
Deducted from assets accounts
Accounts receivable:
Allowance $1,827,896 $105,414 $1,722,482
Deferred tax assets:
Valuation allowance 7,372,000 736,000 8,108,000
Year ended December 31, 2000:
Deducted from assets accounts
Accounts receivable:
Allowance $298,000 $1,529,896 $1,827,896
Deferred tax assets:
Valuation allowance 2,738,000 4,634,000 7,372,000
Year ended December 31, 1999:
Deducted from assets accounts
Accounts receivable:
Allowance $150,000 $77,000 $161,000 $90,000 $298,000
Deferred tax assets:
Valuation allowance 1,704,000 1,034,000 2,738,000
30
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT
----------- --------
2.1 Purchase and Sale Agreement regarding Petro Source Asphalt
Company, dated July 2, 1998 (15)
2.2 Memorandum of Closing regarding Refinery Technologies, Inc.
(18)
2.3 Assignment and Agreement with Refinery Technologies, Inc. (18)
2.4 Asset Purchase Agreement (S&L Industrial) dated May 12, 1999,
regarding S&L Industrial
3.1 Articles of Incorporation (6)
3.2 Certificate of Voting Powers, etc. of the Company's Preferred
Stock (10)
3.3 Amended Bylaws (1)
4.1 Convertible Debenture - Agreement dated May 6, 1997, between
Crown Energy Corporation and Oriental New Investments, Ltd.
(7)
4.2 Warrant with Encap Investments, L.C. (12)
4.3 Form of Stock Option Agreements between the Company and (1)
Jay Mealey, (2) Richard Rawdin and (3) Thomas Bachtell (12)
4.4 The Crown-Energy Long Term Equity Basic Incentive Plan (13)
4.5 Common Stock Purchase Warrant dated November 4, 1997 issued to
Enron Capital & Trade Resources Corp. (10)
4.6 Form of Warrant issued to principals of IBEX Group, Inc. and
Hoffman Partners, Inc. (18)
4.7 May 1998 Warrant issued to Ladenburg Thalmann (18)
10.1 License Agreements with Park Guymon Enterprises, Inc., dated
January 20, 1989, June 1, 1990 and June 1, 1990 (3)
10.2 Amendment to License Agreement with Park Guymon Enterprises,
Inc. (6)
10.3 Employment Agreement with Jay Mealey (12)
10.4 Consulting Agreement with IBEX Group, Inc. and Hoffman
Partners, Inc. (6)
10.5 Promissory Note issued to Jay Mealey 12/31/95 (6)
10.6 Promissory Note issued to Thomas W. Bachtell 12/31/95 (6)
10.7 Promissory Note issued to Thomas W. Bachtell 12/31/95 (6)
10.8 Oil and Gas Minerals Lease, dated September 1, 1991 with
Wembco, Inc. (4)
10.9 Crown Office Space Lease (5)
10.10 First Amendment to Crown Office Space Lease (12)
10.11 Investment Banking Agreement with Fortress Financial Group,
Ltd. (12)
10.12 Promissory Note from Jay Mealey (12)
10.13 Promissory Note from Rich Rawdin (12)
10.14 Stock Pledge Agreement with Jay Mealey (12)
10.15 Stock Pledge Agreement with Rich Rawdin (12)
10.16 Assignment of Assets to Crown Asphalt Ridge, L.L.C. by Crown
Asphalt Corporation (12)
10.17 Assignment to Crown Asphalt Ridge, L.L.C. by Crown Asphalt
Corporation (12)
31
10.18 Asphalt Ridge Project Operating and Management Agreement with
Crown Asphalt Ridge L.L.C., dated August 1, 1997 (12)
10.19 Sublicense and Agreement between Crown Asphalt Ridge, L.L.C.
and Crown Asphalt Corporation (12)
10.20 Stock Purchase Agreement with Enron Capital & Trade Resources
Corporation (10)
10.21 Engineering, Construction, and Procurement Agreement with
CEntry Constructors & Engineers, LLC (12)
10.22 Revised Right of Co-Sale Agreement between Jay Mealey and
Enron Capital & Trade Resources Corp. (11)
10.23 Guaranty Agreement in favor of MCNIC Pipeline & Processing
Company (12)
10.24 Crown Office Space Sublease (12)
10.25 Stock Purchase Agreement dated July 2, 1997, between Crown
Energy Corporation and Road Runner Oil, Inc. (8)
10.26 Letter Agreement with EnCap Investments L.C. (12)
10.27 Purchase and Sale Agreement dated July 2, 1998, between Petro
Source Asphalt Company and Crown Asphalt Distribution LLC (15)
10.28 Saba Petroleum Processing Agreement for Santa Maria Refinery
in California dated May 1, 1997, between Petro Source Refining
Corporation and Santa Maria Refining Company and Saba
Petroleum Company, which was assigned to the Company on or
about July 2, 1998. (16)
10.29 MetLife Equipment Lease dated May 1, 1997, between Petro
Source Refining Corporation and MetLife Capital Corporation,
which was assigned to the Company on or about July 2, 1998.
(16)
10.30 PacifiCorp Property Lease dated April 1, 1996, between Petro
Source Refining Corporation and PacifiCorp, which was assigned
to the Company on or about July 2, 1998. (16)
10.31 GATX Rail Car Lease dated December 10, 1987, between Petro
Source Corporation and General American Transportation
Corporation, assigned to the Company on or about July 2,1998
(16)
10.32 Office Space Lease (16)
10.33 Operating Agreement for Crown Asphalt Ridge, L.L.C. (17)
10.34 Operating Agreement for Crown Asphalt Distribution L.L.C. (18)
10.35 Operating and Management Agreement for Crown Asphalt
Distribution L.L.C. (18)
10.36 Operating Agreement for Cowboy Asphalt Terminal L.L.C. (18)
10.37 April 3, 1998, Agreement regarding investment banking services
with Ladenburg Thalmann (18)
10.38 Indemnification Agreement with Ladenburg Thalmann (18)
10.39 Letter Agreement between CAC, Capco, and MCNIC Pipeline &
Processing Company dated July 20, 1999 (19)
10.40 Letter Agreement between Capco and MCNIC Pipeline & Processing
Company dated July 20, 1999 (19)
10.41 First Amendment to Operating Agreement (Crown Asphalt
Distribution, L.L.C.)(19)
32
10.42 Loan Agreement: MCNIC Pipeline & Processing Company loan to
Crown Asphalt Corporation dated July 20, 1999 (19)
10.43 CAR Promissory Note (19)
10.44 $1,800,000 Loan Agreement: Community First National Bank to
Crown Asphalt Products Company (19)
10.45 Letter Amendment to Community First National Bank Loan
Agreement dated June 2, 1999 (19)
10.46 Crown Energy Corporation Guaranty of Community First National
Bank Loan (19)
10.47 Assignment & Assumption Agreement (19)
10.48 Offsite Services Agreement (19)
10.49 Amendment to Mealey Employment Agreement (19)
10.50 MCNIC election to proceed with additional pilot plan (1/7/00)
(19)
10.51 Settlement Agreement with Zimmerman (19)
10.52 Amendment to Settlement Agreement with Zimmerman (19)
10.53 5th Amendment to Building Lease (19)
10.54 January 20, 2000, Letter to MCNIC (20)
10.55 January 7, 2000, Election to Proceed with Pilot Plant Letter
to MCNIC (20)
10.56 January 7, 2000, Additional Costs Letter to MCNIC (20)
10.57 Agreement with Refinery Technologies, Inc. (20)
10.58 Notice of Termination of Building Lease (20)
10.59 Arbitration Agreement (20)
10.60 Settlement Agreement between the Company, MCNIC and related
parties
11 Statement regarding computation of per share earnings (the
information required for Exhibit 11 is set forth on page F-25
of the Financial Statements of Crown Energy Corporation of
this Form 10K)
16 Letter of Pritchett, Siler & Hardy, P.C. dated June 5, 1998
(14)
21 Subsidiaries of the Company (the information required for
Exhibit 21 is set forth in Item 1. Subsidiaries of the
Company)
- -----------------------------
(1) Incorporated by reference from the Company's Registration Statement on
Form 10 filed with the Commission on July 1, 1991, amended August 30,
1991, and bearing Commission file number 0-19365.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1991, bearing Commission file number
0-19365.
(3) Incorporated by reference from the Company's Report on Form 8-K filed
with the Commission on or about September 30, 1992, bearing Commission
file number 0-19365.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1992, bearing Commission file number
0-19365.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1992, bearing Commission file number
0-19365.
(6) Incorporated by reference from the Company's Registration Statement on
Form S-1 filed with the Commission on or about March 13, 1996, bearing
Commission file number 0-19365.
33
(7) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about June 12, 1997, bearing Commission file number
0-19365.
(8) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about July 21, 1997, bearing Commission file number
0-19365.
(9) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about November 18, 1997, bearing Commission file
number 0-19365.
(10) Incorporated by reference from Enron Capital & Trade Resources Corp.
Form 13D filed with the Commission on or about October 10, 1997.
(11) Incorporated by reference from Enron Capital & Trade Resources Corp.
Form 13D/A filed with the Commission on or about November 12, 1997.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, filed with the Commission on or
about March 31, 1998, bearing Commission file number 0-19365.
(13) Incorporated by reference from the Company's Amended Annual Report on
Form 10-K for the year ended December 31, 1997, filed with the
Commission on or about April 30, 1998, bearing Commission file number
0-19365.
(14) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about June 9, 1998, bearing Commission file number
0-19365.
(15) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about July 17, 1998, bearing Commission file number
0-19365
(16) Incorporated by reference of the Company's Amended Form 10-Q filed with
the Commission for the period ending September 30, 1998, filed with the
Commission on November 25, 1998.
(17) Incorporated by reference from the Company's Amended Form 8-K filed
with the Commission on or about November 18, 1997, bearing Commission
file number 0-19365.
(18) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, filed with the Commission on or
about June 14, 1999.
(19) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, filed with the Commission on or
about April 4, 2000.
(20) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, filed with the Commission on or
about April 17, 2001.
o The Company agrees to furnish supplementally to the Commission a copy
of any omitted schedule or exhibit to such agreement upon request by
the Commission.
34
CROWN ENERGY CORPORATION
Consolidated Financial Statements
December 31, 2001, 2000, and 1999
CROWN ENERGY CORPORATION
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Operations F-4
Consolidated Statement of Shareholders' Deficit F-5
Consolidated Statement of Cash Flows F-6
Notes to consolidated Financial Statements F-8
- --------------------------------------------------------------------------------
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Crown Energy Corporation
We have audited the consolidated balance sheet of Crown Energy Corporation as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Crown
Energy Corporation as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has had substantial recurring
losses from operations, is involved in significant litigation and has relied
upon financing from debt to satisfy its obligations. These conditions raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to that matter are also described in note
2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ TANNER + CO.
Salt Lake City, Utah
February 15, 2002, except for
Note 19 which is dated February 28, 2002
- --------------------------------------------------------------------------------
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Crown Energy Corporation
Salt Lake City, Utah
We have audited the accompanying consolidated statements of operations,
stockholders' deficit, and cash flows of Crown Energy Corporation and
Subsidiaries (the Company) for the year ended December 31, 1999. Our audit also
included the financial statement schedule for the year ended December 31, 1999
listed in the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the Company's results of operations and its cash flows for
the year ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, such
financial statement schedule for the year ended December 31, 1999, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's recurring
losses from operations, stockholders' deficiency, and negative working capital
raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Salt Lake City, Utah
March 29, 2000
- --------------------------------------------------------------------------------
F-3
CROWN ENERGY CORPORATION
Consolidated Balance Sheet
December 31,
- ---------------------------------------------------------------------------------------------------------------
Assets 2001 2000
---------------------------------
Current assets:
Cash and cash equivalents $ 2,652,858 $ 2,878,141
Accounts receivable, net of allowance for doubtful accounts of
$1,722,482 and $1,827,896, respectively 1,378,610 1,419,260
Inventory 1,358,022 2,370,887
Prepaid and other current assets 87,652 67,607
Related party receivable 25,700 25,700
---------------------------------
Total current assets 5,502,842 6,761,595
Property, plant, and equipment, net 9,590,787 9,661,174
Intangible assets, net 340,430 404,400
Other assets 283,206 225,009
---------------------------------
Total $ 15,717,265 $ 17,052,178
=================================
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 410,564 $ 1,317,222
Preferred stock dividends payable 1,200,000 800,000
Accrued expenses 175,794 127,366
Accrued arbitration costs 2,609,519 -
Accrued interest 7,473,512 3,987,256
Current portion of long-term debt 347,153 273,633
Working capital loan to related party 14,935,222 14,935,222
---------------------------------
Total current liabilities 27,151,764 21,440,699
Commitments and contingencies - -
Long-term debt principally due to related party 11,130,056 11,336,861
Redeemable preferred stock 4,952,831 4,896,227
Minority interest in consolidated joint ventures 476,793 427,985
Stockholders' deficit:
Common stock $.02 par value 50,000,000 shares authorized,
13,635,581 shares outstanding 272,711 272,711
Additional paid-in capital 4,915,370 5,371,974
Stock subscriptions receivable from officers (549,166) (549,166)
Stock warrants 243,574 243,574
Accumulated deficit (32,876,668) (26,388,687)
---------------------------------
Stockholders' deficit (27,994,179) (21,049,594)
---------------------------------
Total $ 15,717,265 $ 17,052,178
=================================
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-4
CROWN ENERGY CORPORATION
Consolidated Statement of Operations
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------
Sales, net $ 27,032,658 $ 22,787,103 $ 35,518,541
Cost of sales 24,126,190 23,605,063 33,811,003
---------------------------------------------------
Gross profit (loss) 2,906,468 (817,960) 1,707,538
General and administrative expenses (3,449,053) (3,060,627) (2,668,011)
Provision for bad debt expenses (30,051) (1,529,896) (77,018)
Loss on impairment of investment in equity affiliate - (6,904,085) -
Loss on impairment of goodwill - (3,625,848) -
Equity in losses from unconsolidated equity affiliate - (145,814) (870,288)
---------------------------------------------------
Loss from operations (572,636) (16,084,230) (1,907,779)
---------------------------------------------------
Other income (expense):
Interest income 65,857 157,042 -
Interest expense (4,018,738) (2,576,386) (2,203,591)
Other income (expense) 598,247 104,000 (290,482)
Arbitration expense (2,609,519) - -
---------------------------------------------------
Total other expense, net (5,964,153) (2,315,344) (2,494,073)
---------------------------------------------------
Loss before income taxes and minority interests (6,536,789) (18,399,574) (4,401,852)
Deferred income tax benefit - - -
Minority Interest in losses of
consolidated joint venture 48,808 38,653 1,348,336
---------------------------------------------------
Net loss (6,487,981) (18,360,921) (3,053,516)
Redeemable preferred stock dividends (400,000) (400,000) (400,000)
---------------------------------------------------
Net loss applicable to common shares $ (6,887,981) $ (18,760,921) $ (3,453,516)
====================================================
Net loss per common share - basic and diluted $ (.51) $ (1.39) $ (.26)
====================================================
Weighted average common shares - basic and diluted 13,635,000 13,455,000 13,260,000
====================================================
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See accompanying notes to consolidated financial statements. F-5
CROWN ENERGY CORPORATION
Consolidated Statement of Stockholders' Deficit
Years Ended December 31, 2001, 2000, and 1999
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Common Stock Additional Stock Common Stock Warrants
--------------------------- Paid-In Subscription -------------------------- Accumulated
Shares Amount Capital Receivable Warrants Amount (Deficit)
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Balance, December 31, 1998 12,968,512 $ 259,370 $ 5,787,340 $ (549,166) 683,750 $ 243,574 $ (4,974,250)
Dividends on preferred stock
accrued from prior years 317,069 6,341 461,092 - - - -
Preferred stock accretion - - (56,604) - - - -
Dividends on preferred stock - - (400,000) - - - -
Net loss - - - - - - (3,053,516)
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Balance, December31, 1999 13,285,581 265,711 5,791,828 (549,166) 683,750 243,574 (8,027,766)
Stock issued for legal services 350,000 7,000 36,750 - - - -
Preferred stock accretion - - (56,604) - - - -
Dividends on preferred stock - - (400,000) - - - -
Net loss - - - - - - (18,360,921)
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Balance, December 31, 2000 13,635,581 272,711 5,371,974 (549,166) 683,750 243,574 (26,388,687)
Stock issued for legal services - - - - -
Preferred stock accretion - - (56,604) - - - -
Dividends on preferred stock - - (400,000) - - - -
Net loss - - - - - - (6,487,981)
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Balance, December 31, 2001 13,635,581 $ 272,711 $ 4,915,370 $ (549,166) 683,750 $ 243,574 $ (32,876,668)
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See accompanying notes to consolidated financial statements. F-6
CROWN ENERGY CORPORATION
Consolidated Statement of Cash Flows
Years Ended December 31,
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2001 2000 1999