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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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
incorporation or organization) Identification No.)
1710 West 2600 South
Woods Cross, Utah 84087
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(Address of principal executive offices) (Zip Code)
801-296-0166
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.02
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) 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. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes | | No |X|
State the aggregate market value of the voting and nonvoting common equity held
by nonaffiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked prices of such common equity, as of
last business day of the registrant's most recently completed second fiscal
quarter. As of June 30, 2002, the aggregate market value of the voting and
nonvoting common equity held by nonaffiliates of the issuer was $589,716 using
the average bid and asked prices for registrant's common stock.
Indicate the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date. As of March 17, 2003,
registrant had outstanding 26,482,388 shares of its common stock, par value
$0.02.
DOCUMENTS INCORPORATED BY REFERENCE: None.
TABLE OF CONTENTS
Item Description Page
- ---- ----------- ----
Part I
Item 1 Business...................................................... 1
Item 2 Properties.................................................... 6
Item 3 Legal Proceedings............................................. 7
Item 4 Submission of Matters to a Vote of Security Holders........... 8
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 9
Item 6 Selected Financial Data....................................... 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation.......................... 10
Item 7A Quantitative and Qualitative Disclosures about Market Risk.... 15
Item 8 Financial Statements and Supplementary Data................... 15
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 15
Part III
Item 10 Directors and Executive Officers of the Registrant............ 16
Item 11 Executive Compensation........................................ 17
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 20
Item 13 Certain Relationships and Related Transactions................ 21
Item 14 Controls and Procedures....................................... 22
Part IV
Item 15 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 23
Signatures.................................................... 26
Certifications................................................ 27
i
PART I
ITEM 1. BUSINESS
General
Crown Energy Corporation, headquartered in Woods Cross, Utah,
manufactures and distributes asphalt paving and related products from facilities
in Utah, Arizona, Nebraska and Wyoming.
For the years ended December 31, 2002, 2001 and 2000, we reported
revenues, primarily from our asphalt manufacturing and distribution operations,
of $18.0 million, $27.0 million and $22.8 million respectfully.
During 2002, we continued the manufacturing and distribution of liquid
asphalt and attained a total sales volume of roughly 92,300 tons. Our sales
volume and revenue for 2002 were constrained by the lack of working capital that
limited the purchase of base asphalt and blend components for sale. Cash flow
and operational costs were carefully monitored to allow for the maximization of
the limited working capital available. In an ongoing effort to further preserve
working capital, the administrative offices were relocated to the Woods Cross
facility and a reduction in staff size for nonessential personnel was made.
During 2002, we resolved disputes with MCNIC Pipeline and Processing
Company that grew out of our joint formation of Crown Asphalt Ridge, L.L.C. in
1997 and Crown Asphalt Distribution, L.L.C. in 1998. These disputes led to an
arbitration proceeding with MCNIC in which a ruling adverse to us was rendered
in late 2001.
In an effort to settle the arbitration award, the parties entered into
an agreement on March 8, 2002, in which we assigned all of our interest in Crown
Asphalt Ridge to MCNIC and agreed not to compete in certain tar sands activities
in the western United States in consideration of a conveyance to us of an
overriding royalty in Crown Asphalt Ridge's lands, leases and oil sand
processing facility, MCNIC's forgiveness of indebtedness due from us, and
MCNIC's payment of certain third-party obligations.
On October 16, 2002, we and MCNIC, along with all other parties to the
arbitration, executed a settlement agreement to settle fully all claims and
liabilities among us. Under the settlement agreement, we conveyed to MCNIC all
of our interests in overriding royalty assigned March 8, 2002, and in the lands,
leases and oil sand processing facility at the Asphalt Ridge project in Vernal,
Utah, and MCNIC agreed to assign its interest in Crown Asphalt Distribution,
L.L.C., including approximately $30.1 million in Company obligations. We no
longer own an interest in Crown Asphalt Ridge, L.L.C. or any of the properties
at the Asphalt Ridge project. As a result of this settlement, we realized a gain
of approximately $30.1 million, calculated as the amount by which the sum of our
liabilities cancelled exceeded our cost for the assets conveyed, which was
recorded as an extraordinary gain on extinguishment of debt. Notwithstanding
this significant reduction in our liabilities, we continue to have very limited
operating and working capital.
In order for us to meet our obligation for funding Crown Asphalt Ridge,
L.L.C., in 1997 we sold to an unrelated third party for $5.0 million in cash
500,000 shares of $10 Series A Cumulative Convertible Preferred Stock and a
warrant to purchase at $0.002 per share an amount equal to 8% of the shares of
common stock then outstanding and reserved for issuance, or approximately
925,771 shares. In February 2002, the Series A Preferred Stock, the warrant, and
all associated rights were purchased from the original holder by Manhattan
Goose, LLC, which was then owned 32.5% by Jay Mealey, our Chief Executive
Officer, President and a director, and 67.5% by other directors and unrelated
1
parties. During 2002, we paid accrued dividends on the Series A Preferred Stock
of $400,000 in cash and $200,000 in 13,793,103 shares of common stock, or at
$0.0145 per share, the approximate market price on the date of payment. In
November 2002, Jay Mealey acquired the other 67.5% membership interests in
Manhattan Goose and simultaneously conveyed all membership interests to the
Mealey Family Limited Partnership, which is the current holder of the Series A
Preferred Stock, the warrant, all associated rights, and accrued dividends. Mr.
Mealey owns 48.5% of the Mealey Family Limited Partnership and is its general
partner and his immediate family is its beneficiary.
As of December 31, 2002, there were dividends payable to the holder of
the Series A Preferred Stock of $1.0 million that may, at the election of the
holder of the Series A Preferred Stock, be taken in cash or common stock. At the
market price of $0.018 per share as of March 28, 2003, approximately 55.6
million shares of common stock would have to be issued to satisfy the dividend
payable. The Series A Preferred Stock is convertible to 4,285,000 shares of
common stock, if so elected by the holder of the Series A Preferred Stock.
As of December 31, 2002, we had a working capital deficit of $180,000,
an accumulated deficit of $3.5 million, and stockholders' equity attributable to
the common stock of $1.1 million. Our auditor's report on our financial
statements for the year ended December 31, 2002, as for prior years, contained
an explanatory paragraph about our ability to continue as a going concern. We
continue to suffer from shortages of working capital needed to optimize
operating economies. Further, our operating history and the prevailing current
conditions in the investment markets generally have made it difficult to obtain
outside equity capital. Given our financial condition, generally, outside
working capital funding requires personal guarantees, and our officers and
directors have been unwilling to provide such guarantees for our benefit as a
publicly-held company. The market price for our common stock has ranged from a
low of $0.008 to a high of $0.055 during 2002, closing on March 28, 2003, at
$0.018 per share. Finally, we have reviewed the costs required to meet
regulatory and stockholder requirements associated with being a publicly-held
company subject to the periodic reporting, proxy and other requirements under
the Securities Exchange Act along with the increased cost of insurance and other
burdens we believe result from the enactment of the Sarbanes-Oxley Act of 2002,
particularly for a small company such as us.
In view the foregoing, in March 2003, our board of directors, which
includes affiliates of our principal stockholders, authorized management to
investigate available alternatives for a so-called "going private" transaction,
with the effect that we would become privately held by our current principal
stockholders, subject to satisfying various regulatory requirements. This
investigation will include a review of available alternatives and their related
legal, financial, regulatory and related considerations. In connection with that
investigation, management may seek a third-party valuation of our Company and
the interests of our minority stockholders from a financial point of view. We
cannot give any assurance of when or if a going private transaction will take
place or describe the terms on which such a transaction might occur.
__________________
When we use the terms "we" and the "Company" in this document, we
include, unless otherwise noted, the entities through which we conduct our
activities, consisting of our wholly-owned subsidiaries Crown Asphalt Products
Company, or CAPCO, and Crown Asphalt Distribution, L.L.C., or Crown Asphalt
Distribution, and a 67% interest in Cowboy Asphalt Terminal, L.L.C., or CAT,
LLC. Another subsidiary, Crown Asphalt Corporation, or CAC, previously became
inactive and terminated its existence December 31, 2002. Our consolidated
financial statements and results of operation include the accounts and results
of operations of CAPCO, CAC, Crown Asphalt Distribution and CAT, LLC.
2
The Paving Asphalt Manufacturing and Distribution Industry
The liquid paving asphalt industry is a 30 million ton per year market.
The industry is segmented into commodity asphalt, performance-grade (performance
grade asphalt) and asphalt emulsions and maintenance products. The commodity
asphalt segment is by far the largest comprised of private construction projects
(parking lots, driveways, etc.) and much of the minor city and county road
projects. The liquid asphalt used by this segment generally has few quality or
performance specifications and is served by refined sand asphalt wholesalers.
The performance-grade asphalt segment is comprised of interstate highways and
larger state highways and city/county roads. The liquid asphalt used in this
segment must meet very stringent performance standards and requires the blending
of asphalt with other asphalts, additives and modifiers to meet the product
specification. This segment is our primary focus. The asphalt
emulsions/maintenance segment is also growing as states and other agencies
implement pavement maintenance programs to rehabilitate and extend the life of
existing roads. We manufacture a broad slate of products to serve this segment
of the asphalt industry.
The paving asphalt business is seasonal and quite weather dependent. In
areas served by us, paving is generally limited to the warmer months, typically
extending from May through October. During the other colder months of the year,
virtually no construction occurs and therefore demand for liquid asphalt is low.
Asphalt is the residual product left after heavy crude oils are refined
to make gasoline, diesel and other petrochemical products. Even though demand
for asphalt is seasonal, the supply is continuous as refiners process crude oil
into gasoline and diesel all year. Most refineries have limited tank capacity to
store product and must therefore sell the refined asphalt throughout the year.
These dynamics generally lead to an oversupply of asphalt during the colder
months, which typically leads to much lower asphalt prices during those colder
months. In order to take advantage of the lower winter prices, the liquid
asphalt must be purchased and stored until the paving season starts. Tank
storage capacity at terminals such as those owned/operated by us is necessary to
benefit from winter-fill asphalt pricing.
The large volume of inventory placed into storage tanks and the long
period between purchase and sale consumes a significant amount of working
capital. Manufacturing performance-grade asphalt and asphalt emulsions requires
highly-trained and experienced operating personnel, which allows only some of
the labor force to be employed on a seasonal basis. In addition, operations
continue throughout the year to receive and transfer asphalt inventory. These
ongoing operational expenses also demand large amounts of working capital during
the off-season months.
Asphalt manufacturers such as us sell liquid asphalt to paving
contractors that add liquid asphalt to aggregates such as rock, gravel or sand
at a high temperature in hot-mix asphalt equipment to make the paving product
generally referred to as "asphalt." Liquid asphalt suppliers distribute the
product as either a direct sale (primarily non-highway projects) or as a
subcontractor to the paving contractors that are awarded projects by federal,
state and local agencies after a bid process.
The asphalt industry is very competitive, both within the industry with
other manufacturing/distribution companies and as an industry competing for road
projects with other paving products such as concrete. The industry is dependent
on tax-based funding from the federal, state and local governments through road
and highway budgets. As such, the industry is driven by the economy at both
national and regional levels.
3
Our Business
We focus primarily on the performance-grade asphalt and
emulsion/maintenance segments of the liquid asphalt industry. We have
approximately 75,000 tons of asphalt tank storage at our facilities. Given
adequate working capital availability, we prefer to purchase enough asphalt
inventory from November through April to fill the storage tanks and benefit from
the approximate $30 to $50 per ton price advantage relative to purchasing
inventory in the summer months. We purchase the base asphalt inventory from
refineries and transport it to our facilities via rail and truck. The material
is unloaded and stored until needed during the asphalt paving season.
We manufacture finished liquid asphalt products by blending the base
asphalt inventory from the storage tanks with other additives, chemicals and
modifiers to meet the various product specifications. Our products are sold to
paving contractors that mix it with aggregate (rock and gravel) to make a hot
mix asphalt pavement or directly to customers for pavement maintenance.
For the majority of our business, we submit sealed bids to contractors,
who in turn bid for road and highway projects, for most of our business. We also
have direct sales to contractors, states, counties and cities for some of our
business. As of March 31, 2003 and 2002, we had pending and signed contracts to
sell approximately 90,000 tons of liquid asphalt.
Crown Asphalt Ridge
In August 1997, we formed Crown Asphalt Ridge, L.L.C. with MCNIC to
construct, own and operate an asphalt oil sand production facility at Asphalt
Ridge near Vernal, Utah. In July 1998, we (through our CAPCO subsidiary) and
MCNIC formed as a second joint venture, Crown Asphalt Distribution, to acquire
the inventory and assets of Petro Source Asphalt Company, an unrelated Texas
corporation. By completing this acquisition, we acquired ownership or leasehold
interests in certain performance asphalt product manufacturing and distribution
facilities located in Utah, Arizona, Colorado and Nevada. Our strategy was to
produce asphalt from oil sands at the Asphalt Ridge facility and to manufacture
and market performance-grade asphalt products with the facilities acquired from
Petro Source.
During the start-up of the Asphalt Ridge facility, mechanical and
process difficulties were experienced that affected asphalt recoverability and,
in turn, production economics. Significant additional capital investment would
have been required to modify the facility in order for it to achieve commercial
production, but the full feasibility and cost of such modifications were
unknown. We did not have and did not expect that we would have the financial
resources to participate in additional capital contributions. Disputes arose
between us and our affiliates on the one hand and MCNIC and its affiliates on
the other, which led to the initiation of litigation and arbitration proceedings
in which an arbitration ruling adverse to us was rendered in late 2001.
The Asphalt Ridge facility never achieved commercial asphalt production
and all substantial activities to initiate production were terminated in
approximately 2000.
During 2002, we settled all of our disputes with MCNIC under agreements
in which we conveyed to MCNIC all of our interests in Crown Asphalt Ridge,
L.L.C. and the Asphalt Ridge project, MCNIC agreed to forgive an aggregate of
approximately $30.1 million in obligations that we owed, and we retained all of
Crown Asphalt Distribution. As a result of this settlement, we realized a gain
of approximately $30.1 million, calculated as the amount by which the total of
our liabilities cancelled exceeded our cost for the assets conveyed, which was
recorded as an extraordinary gain on extinguishment of debt. Notwithstanding
this significant reduction in our liabilities, we continue to have very limited
operating and working capital. See "Item 3. Legal Proceedings."
4
The asphalt product manufacturing and distribution facilities acquired
from Petro Source in 1998, along with the facilities we already owned, formed
the base for our ongoing performance-grade asphalt manufacturing and
distribution activities.
Cowboy Asphalt Terminal
In June 1998, we and Foreland Refining Corporation, an unrelated entity
engaged in the asphalt roofing products business, formed CAT, LLC to acquire an
asphalt terminal and its underlying real property located in Woods Cross, Utah.
Though the property and tanks are owned by CAT, LLC, the property was divided by
specific assets and use by the Company and Foreland. Foreland retained three
storage tanks and a certain portion of the land for exclusive use in its roofing
asphalt business. The remaining tanks and a certain portion of the land are for
our exclusive use in our paving asphalt business. The remaining land may be used
jointly by the parties. All revenues generated from the exclusive use assets are
the sole property of the respective party. Both Foreland and the Company have
made capital equipment improvements to the respective exclusive use assets.
Those capital improvements are the sole property of the party making the
improvement. Each party retains all revenues and profits generated from its
respective exclusive operations. CAT, LLC is owned 66.7% by us and 33.3% by
Foreland, and we are the operator. The accounts and results of operations of
CAT, LLC are included within our consolidated financial statements and results
of operations as majority-owned subsidiary.
Foreland and we are obligated to make equal contributions to CAT, LLC
for environmental clean-up costs, if any, up to $650,000 and related legal
expenses. Contributions for these costs will not affect our respective
percentage interests in CAT, LLC.
Environmental Matters
We are subject to federal, state and local requirements regulating the
discharge of materials into the environment, the handling and disposal of solid
and hazardous wastes, and protection of health and the environment generally.
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.
We 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.
We expect that we may be required to expend funds to comply with
federal, state and local provisions and orders that relate to the environment.
Based upon information available to us at this time, we believe that compliance
with such provisions will not have a material effect on our capital
expenditures, earnings and competitive position.
5
Employees
As of April 1, 2003, we had 26 full and part-time employees. None of
our employees is represented by a union or other collective bargaining group.
Management believes that its relations with its employees are good.
ITEM 2. PROPERTIES
Our principal executive offices are located in the office building we
own at 1710 West 2600 South, Woods Cross, Utah 84087, adjacent to the Woods
Cross asphalt terminal owned by CAT, LLC.
We conduct our activities from the following manufacturing and
distribution facilities:
Location Owner/Lessee Company's Interest (1)
-------- ------------ ----------------------
Woods Cross (Cowboy), Utah
Office building.................... Company Owned, subject to a lien for $224,000
note(2)
Terminal........................... CAT, LLC Owned, subject to a lien for $664,000
note, of which Company is responsible for
67%, of $445,000(3)
Equipment.......................... Crown Asphalt Distribution Owned
Rawlins, Wyoming
Terminal land...................... CAPCO Lease expiring 2020
Equipment.......................... CAPCO Owned, subject to lien for $1.6 million
bank loan
Fredonia, Arizona...................... Crown Asphalt Distribution Owned
Gadsby, Salt Lake City, Utah
Terminal........................... Crown Asphalt Distribution Lease expiring 2006(4)
Equipment.......................... Crown Asphalt Distribution Lease expiring 2004(4)
Grand Island, Nebraska.................
Terminal........................... CAPCO Lease expiring 2004
Equipment.......................... CAPCO Owned
- ---------------------------
(1) As of December 31, 2002.
(2) We also agreed to pay a former landlord $80,000 as a termination fee for a
lease, and to extinguish all of our obligations with a balance of $80,000
as of December 31, 2002, due under our prior lease.
(3) We hold a 66.7% interest in CAT, LLC, a joint venture limited liability
company with an unrelated party.
6
(4) The lessor of the facility attempted to terminate the property lease in
2002. Since 1998, Crown Distribution has paid the lease payments for the
equipment on site that is leased to another company while that equipment
has been utilized. The termination of the property lease resulted in the
cessation of use of the facility and Crown Distribution has discontinued
making those lease payments since it no longer utilizes the equipment. We
are in discussions with both the property owner and equipment lessor for
new leases, however, no definitive agreement has been reached.
We believe that the foregoing facilities are adequate for our
foreseeable business needs.
ITEM 3. LEGAL PROCEEDINGS
Road Runner Oil, Inc.
On May 21, 1998, Road Runner Oil, Inc. and Gavilan Petroleum, Inc.
filed an action in the Third Judicial District Court, Salt Lake County, State of
Utah, civil no. 98-0905064, against us and our President relating to Road
Runner's purchase in 1997 of the stock of Gavilan. In January 2003, we reached a
settlement with the plaintiffs in this action in which we paid Road Runner
$10,000 and exchanged mutual releases.
MCNIC
In February 2002, the Third Judicial District Court of Salt Lake
County, Utah, confirmed a damage award against us that had been rendered in
October 2001 in an arbitration proceeding between us and MCNIC to resolve
litigation that had been pending since mid-2001 related to disputes arising out
of our Asphalt Ridge project. MCNIC Pipeline & Processing Company v. Crown
Asphalt Distribution, Third Judicial District Court of Salt Lake County, Utah,
No. 00904867; U.S. District Court for the District of Utah, Central Division,
Crown Energy Corporation, et al. v. MCN Energy Group, Inc. et al., No.
2CV-0583ST. The amount of the damage award, as of March 29, 2002, was $20.3
million, plus post-judgment interest. The arbitrator also awarded $2.6 million
in fees and costs against us and our related entities on a joint and several
basis.
On March 8, 2002, the parties entered into a settlement agreement
pursuant to which we assigned our interest in Crown Asphalt Ridge, L.L.C. to
MCNIC and agreed not to compete in certain tar sands activities in the western
United States and Canada in return for: (i) the receipt of a non-cost-bearing
overriding royalty interest; (ii) the elimination of all of our obligations to
MCNIC; and (iii) MCNIC's payment of a third-party obligation. We were granted
the option to acquire for $5.5 million all of MCNIC's interest in Crown Asphalt
Distribution. All litigation and related judgment enforcement actions were
stayed. The settlement agreement provided that if we did not exercise the option
to purchase Crown Asphalt Distribution, MCNIC could seek collection of the full
damage award and that the parties could either move to confirm or appeal, as the
case may be, the $2.6 million fee award.
We did not have the financial resources to exercise the option to
acquire MCNIC's interest in Crown Asphalt Distribution. Accordingly, we and
MCNIC undertook further discussions to resolve the substantial monetary awards
against us. On October 16, 2002, all parties to the above litigation and
arbitration executed a settlement agreement to settle all claims and liabilities
among them. Under the settlement agreement, we conveyed to MCNIC all of our
interests in the overriding royalty assigned March 8, 2002, and in the lands,
leases and oil sand processing facility at the Asphalt Ridge project, and MCNIC
agreed to assign its interest in Crown Asphalt Distribution, L.L.C., including
approximately $30.1 million in obligations that we owed. We no longer own an
interest in Crown Asphalt Ridge, L.L.C. or any of the properties at the Asphalt
Ridge project. We now own all of Crown Asphalt Distribution. As a result of this
settlement, we realized a gain of approximately $30.1 million, calculated as the
amount by which the total of our liabilities cancelled exceeded our cost for the
assets conveyed, which was recorded as an extraordinary gain on extinguishment
of debt.
7
Other
On May 24, 2002, Geneva Rock Products, Inc. filed a complaint against
us in the Third Judicial District Court, Salt Lake County, Utah. Geneva has
alleged that we supplied it with defective asphalt binder for approximately four
months in 1999. In this action, Geneva seeks to recover damages, which it has
indicated may exceed $1,600,000 plus interest, costs and attorneys' fees. We
have denied liability on all of Geneva's claims. We believe that the asphalt
binder sold to Geneva met all applicable industry standards and did not cause
any of the problems on which Geneva has based its claims. The litigation is
currently in the early discovery phase, and we are unaware of any additional
information that suggests that our asphalt binder was deficient. Because
discovery has not been completed and due to the serious nature of Geneva's
claims, we have no way of predicting whether we will ultimately prevail.
On December 20, 2001, Oriental New Investments, Ltd. served a complaint
against us, which was filed in the Third Judicial District Court, Salt Lake
County, Utah. The action relates to a 1997 convertible debenture and replacement
convertible debenture issued by us to Oriental. The action seeks to recover
$75,000 in liquidated damages, plus interest, or actual damages, and attorneys'
fees and costs, for alleged breaches of the convertible debentures. We have
denied any and all liability and believe that Oriental's claims are without
merit. (Oriental filed a similar complaint against us in January 2000 related to
the same debentures, but that complaint was dismissed for Oriental's failure to
prosecute.) We will vigorously defend our position that Oriental's claims are
without merit; however, there can be no assurance we will ultimately prevail.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders for vote during the
fourth quarter of fiscal year 2002.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded in the over-the-counter market since
1980. Our common stock is currently listed on the Nasdaq OTC Bulletin Board
under the symbol "CROE." The following table sets forth the range of high and
low bid quotations of our common stock as reported by the OTC Bulletin Board 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:
Low High
--------- ---------
2003:
Second Quarter (through April 2, 2003)...... $0.018 $0.025
First Quarter............................... 0.01 0.025
2002:
Fourth Quarter.............................. 0.008 0.012
Third Quarter............................... 0.011 0.02
Second Quarter.............................. 0.02 0.055
First Quarter............................... 0.011 0.04
2001:
Fourth Quarter.............................. 0.02 0.085
Third Quarter............................... 0.06 0.075
Second Quarter.............................. 0.035 0.125
First Quarter............................... 0.0375 0.0625
We have not paid any dividends or made any other distributions on our common
stock, and we do not anticipate paying any cash dividends on our common stock in
the foreseeable future. The terms of our Series A Preferred Stock prohibit the
payment of dividends on common stock at any time that accrued dividends on the
Series A Preferred Stock are unpaid. As of December 31, 2002, accrued but unpaid
dividends equaled $1.0 million. We estimate that, as of March 31, 2003, we had
approximately 746 stockholders.
Equity Compensation Plan Information
Number of securities
available for future
issuance under equity
Number of securities to be Weighted average exercise compensation plans
issued upon exercise of prices of outstanding (excluding securities
outstanding options options reflected in column (a))
Plan Category (a) (b) (c)
------------- -------------------------- ------------------------- ---------------------------
Equity compensation plans
approved by shareholders... 2,263,148 $0.122 460,000
Equity compensation plans not
approved by security holders -- -- --
--------- ------ -------
Total.................. 2,263,148 $0.122 460,000
========= ====== =======
9
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in the following table have been derived
from the financial statements for the periods indicated. The financial
statements as of and for the years ended December 31, 1998 and 1999, were
audited by Deloitte & Touche, LLP, independent public accountants. The financial
statements as of and for the years ended December 31, 2000, 2001 and 2002, 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:
Year Ended December 31
-----------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ -------------
(in thousands, except per share)
Net revenues...................................... $17,965 $27,033 $22,787 $35,519 $23,836
Income (loss) from continuing operations.......... (769) (6,488) (18,361) (3,054) (498)
Income (loss) per share
from continuing operations...................... (0.05) (0.51) (1.39) (0.26) (0.07)
Total assets...................................... 13,275 15,717 17,052 33,114 23,571
Total long-term obligations....................... 2,442 11,130 11,337 11,333 4,326
Redeemable Series A Preferred Stock............... 5,000 4,953 4,896 4,840 4,783
Cash dividends per common share -- -- -- -- --
Common stockholders' equity (deficit)............. 1,134 (27,994) (21,050) (2,276) 767
The foregoing selected financial data are presented on a historical
basis and may not be comparable from period to period due to significant changes
in our operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Note about Forward-Looking Information
The following discussion and analysis of our 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 that express, either directly or by implication, management's
beliefs, expectations or intentions regarding our future performance or future
events or trends that may affect us or our 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 our 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 risk of loss of certain operating assets serving as collateral
to secure such financing, and other similar risks inherent in our operations or
in business operations generally. Any such risks or uncertainties, either alone
or in combination with other factors, may cause our actual results, performance
or achievements to differ materially from our 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.
10
Introduction
During 2002, we continued our performance-grade asphalt paving product
manufacturing and distribution segment activities while we devoted substantial
management resources to resolving the outstanding damage award against us, which
totaled approximately $30.0 million at March 31, 2002, with interest continuing
to accrue. See "Item 3. Legal Proceedings." Our business is capital intensive
and requires a working capital credit facility to operate efficiently. Due to
the pending disputes with MCNIC and the adverse arbitration award in late 2001,
we have not had such a credit facility since 1999 and have been unable to obtain
required working capital from outside sources through the sale of equity
securities. During 2001 we were able to structure favorable supply arrangements
that allowed us to increase our sales revenues without obtaining a working
capital loan or line of credit. We have not been able to continue these
favorable arrangements because of changes in the supply markets. This has
imposed substantial operating constraints on us and has adversely affected our
results of operations. These negative effects continue.
Our inability to obtain a working capital line-of-credit substantially
limited our ability to purchase inventory, which forced us to limit our sales
volume and revenues and reduced the gross profit on sales because we were unable
to purchase inventory at the more favorable prices prevailing during the colder
months. We implemented a number of cost-cutting measures during 2002, but
incurred legal and other costs associated with the resolution of our dispute
with MCNIC. In 2003 we continue to be limited in our ability to purchase asphalt
because of our lack of a working capital line of credit. We are continuing to
try to structure favorable purchase agreements or find additional methods of
purchasing base stock. We are also considering the consolidation of
manufacturing facilities to maximize operating efficiencies. Forecasted sales
during 2003 are expected to approximate those of 2002.
In October 2002, we fully settled the arbitration award against us. In
this settlement, MCNIC agreed to assign its interest in Crown Asphalt
Distribution, L.L.C., including approximately $30.1 million in obligations that
we owed in exchange for conveyance to MCNIC of all of our interests in the
overriding royalty assigned March 8, 2002, and in the lands, leases and oil sand
processing facility at the Asphalt Ridge project. We now own 100% of Crown
Asphalt Distribution. As a result of this settlement, we realized a gain of
approximately $30.1 million, calculated as the amount by which the total of our
liabilities cancelled exceeded our cost for the assets conveyed, which was
recorded as an extraordinary gain on extinguishment of debt.
As of December 31, 2002, we had a working capital deficit of $180,000,
an accumulated deficit of $3.5 million, and stockholders' equity attributable to
the common stock of $1.1 million. Our auditor's report on our financial
statements for the year ended December 31, 2002, as for prior years, contained
an explanatory paragraph about our ability to continue as a going concern. We
continue to suffer from shortages of working capital needed to optimize
operating economies. Further, our operating history and the prevailing current
conditions in the investment markets generally have made it difficult to obtain
outside equity capital. The market price for our common stock has ranged from a
low of $0.008 to a high of $0.055 during 2002, closing on March 28, 2003, at
$0.018 per share. Finally, we have reviewed the costs required to meet
regulatory and stockholder requirements associated with being a publicly-held
company subject to the periodic reporting, proxy and other requirements under
the Securities Exchange Act and the increased burdens we believe result from the
enactment of the Sarbanes-Oxley Act of 2002, particularly for a small company
such as us.
In view of the foregoing, in March 2003, our board of directors, which
includes affiliates of our principal stockholders, authorized management to
investigate available alternatives for a so-called "going private" transaction,
with the effect that we would become privately held by our current principal
stockholders, subject to satisfying various regulatory requirements. This
investigation will include a review of available alternatives and their related
legal, financial, regulatory and related considerations. In connection with that
investigation, management may seek a third-party valuation of our Company and
the interests of our minority stockholders from a financial point of view.
11
Liquidity and Capital Resources
At December 31, 2002, we had cash and other current assets of $4.0
million, as compared to cash and other current assets of $5.5 million at
December 31, 2001. The decrease of $1.5 million was generally due to a reduction
in accounts receivable and in year-end asphalt inventory levels. Our business is
capital intensive and requires a working capital credit facility to operate
efficiently. We have not had such a credit facility since 1999, which has
resulted in lowered profitability. We plan to diminish part of our working
capital constraints by structuring supply arrangements in 2003; however, there
can be no guarantee we will be able to accomplish such arrangements.
Our business requires a large amount of working capital to purchase and
store inventory and for accounts receivable and general operations. We do not
have adequate working capital to operate our business currently and must rely on
outside third-party sources to finance that requirement. We have not had outside
working capital financing since 1999. Although the settlement of our obligation
to MCNIC in late 2002 releases much of the encumbrance on our assets, we believe
it will continue to be very difficult to obtain the working capital needed to
operate the business. We continue to explore avenues to obtain working capital
financing, including supplier financing, through put arrangements and joint
ventures with industry participants, facility leasing and conventional bank
financing. Given our financial condition, generally, outside working capital
funding requires personal guarantees, and our officers and directors have been
unwilling to provide such guarantees for our benefit as a publicly-held company.
However, to date, we have been unable to obtain financing on acceptable terms,
and we cannot assure that we will be able to. Our failure to obtain the
necessary working capital financing would have a significant negative impact on
our future operations and may make it unable for us to continue.
We continue to consider other asphalt-related business opportunities to
complement our existing asphalt distribution capabilities. However, we
anticipate that many opportunities may require additional capital, and we cannot
assure that we can obtain additional capital required to finance such
opportunities on acceptable terms and conditions.
A portion of our accounts receivable is subject to the risks and
uncertainties of litigation and related collection risks. See "Item 3. Legal
Proceedings." In the event that we are unable to collect our current accounts
receivables, we are unable to secure the necessary working capital
line-of-credit for our operations, our operating losses and working capital
deficits continue, or if we are unable to recoup our losses, we may not have
sufficient capital to operate through 2003.
Results of Operations
Comparison of 2002 and 2001
Total revenue decreased from $27.0 million for the year ended December
31, 2001, to $18.0 million for the year ended December 31, 2002, a revenue
decrease of approximately $9.1 million, or 34%. This decrease was primarily due
to a reduction in sales volume of 130,000 tons for the year ended December 31,
2001, to a volume of 92,000 tons for the year ended December 31, 2002. This
reduction of 38,000 tons was a direct result of our limited working capital to
purchase inventory, which required us to limit our sales volume and revenues.
During 2001, we were able to structure favorable supply arrangements that
allowed us to increase our sales revenues without obtaining a working capital
loan or line of credit. We have not been able to continue these favorable
arrangements because of changes in the supply markets.
12
Our gross profit decreased from approximately $2.9 million, or 10.75%,
for 2001 to approximately $467,000, or 2.6 %, for 2002. This decrease was
primarily due to two factors: first, an overall decrease in the gross margin of
approximately $2.00 per ton, and second, a lower sales volume at the facilities,
which negated the effects of certain synergies in the fixed costs of operating
the plants. The decrease in the gross margin of $2.00 per ton can be attributed
to the inability to purchase enough asphalt in the winter, when prices are
traditionally lower, to fill our tanks. We believe continued cost-cutting
procedures will impact 2003, but the lack of an adequate working capital credit
facility could offset the benefits of those cost-cutting procedures.
General, administrative and provision for bad debt expenses decreased
from $3.5 million for the year ended December 31, 2001, to $1.0 million for the
year ended December 31, 2002, a decrease of $2.5 million, or approximately 13.9%
of revenue. This decrease was primarily the result of the recovery of $1.6
million of bad debt expenses that had been written off in the year ended
December 31, 2000. Cost-cutting procedures in 2002 and a reduction in
administrative staff also contributed to the decrease. These were partially
offset by legal expenses associated with our disputes with MCNIC incurred in
2002.
The loss from operations increased from $573,000 in 2001 to $1.4
million in 2002, an increased loss of $800,000, or approximately 4.0% of
revenue. The increased loss was a result of limited working capital not allowing
us to take full advantage of lower winter-fill pricing and limiting the volume
of asphalt that could be purchased to sell. The inability to purchase enough
winter-fill asphalt to fill our storage capacity contributed to a lower gross
margin as higher priced asphalt was purchased during the warmer months at higher
prices as working capital would allow. In addition, other items attributing to
the increased loss in 2002 are the impairment of goodwill in the amount of
$265,000 and the impairment of property and equipment for $545,000.
Total other income (expense) increased from net expenses of $6.0
million for the year ended December 31, 2001, to net income of $560,000 for the
year ended December 31, 2002, an increase of $6.5 million, or approximately
36.0% of revenue. The 2002 income is comprised of a $3.0 million gain on the
transfer of interest in an unconsolidated affiliate. This gain is the result of
the agreement dated March 8, 2002, in which we assigned all of our interest in
Crown Asphalt Ridge, L.L.C. to MCNIC in exchange for the relinquishment of
approximately $3.0 million debt owed to MCNIC. This amount is offset partially
by interest expense of $2.4 million due MCNIC, which is comprised of $2.1
million attributable to interest at 15% accrued on a 1998 $6.0 million capital
contribution to fund the purchase of the Petro Source assets and interest at
varying rates of 8% to 18% on 1998 and 1999 loans of working capital for the
initial and continuing purchase of inventory. As of December 31, 2001, MCNIC had
loaned Crown Asphalt Distribution approximately $14.9 million for inventory
purchases. Interest stopped accruing on these amounts due MCNIC when the October
16, 2002, settlement agreement was signed with MCNIC. The 2001 amount in
interest and other expenses included a nonrecurring expense of $2.6 million
resulting from a final arbitration award of legal fees and costs incurred in the
dispute between MCNIC and us.
Minority interest of $44,000 represents Foreland's approximate 33%
interest in the loss in CAT, LLC.
13
Extraordinary gain on the extinguishment of debt of $30.1 million is
the result of a settlement with MCNIC during October 2002. In this settlement,
MCNIC agreed to forgive an aggregate of approximately $30.1 million in
obligations that we owed in exchange for conveyance to MCNIC of all of our
interests in the overriding royalty assigned March 8, 2002, and in the lands,
leases and oil sand processing facility at the Asphalt Ridge project. As a
result of this settlement, we realized a gain of approximately $30.1 million,
calculated as the amount by which the total of our liabilities cancelled
exceeded our cost for the assets conveyed.
Comparison of 2001 and 2000
Total revenue increased from $22.8 million for the year ended December
31, 2000, to $27.0 million for the year ended December 31, 2001, an increase of
18.6%. This increase was primarily due to an increase in sales volume, which was
a direct result of our ability to purchase inventory from cash flow and as a
result of supply arrangements reached with our suppliers.
Our gross profit increased from approximately ($818,000), or -3.59%,
for the year ended 2000, to approximately $2.9 million, or 10.75%, for the year
ended 2001. This increase was due to an overall reduction in the cost of base
stock asphalt, because of the ability to bring in asphalt inventory during the
winter months when cost is significantly lower which we were 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.
General, administrative and provision for bad debt expenses decreased
from $4.6 million for the year ended December 31, 2000, to $3.5 million for the
year ended December 31, 2001, a decrease of $1.1 million. 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 creditworthiness 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 associated with our arbitration proceeding
and related disputes with MCNIC.
The loss from operations decreased from $16.0 million in 2000 to
$573,000 in 2001, an improvement of $15.5 million, or approximately 57% of
revenue.
Interest and other income (expense) increased from net expenses of $2.3
million for the year ended December 31, 2000, to net expenses of $6.0 million
for the year ended December 31, 2001, an increase of $3.6 million, or
approximately 13.5% of revenue. The 2001 total was comprised of $3.3 million in
interest costs accrued on a 1998 $6.0 million capital contribution to fund the
purchase of the Petro Source assets and on 1998 and 1999 loans of working
capital for the initial and continuing purchase of inventory and the damage
award in the arbitration with MCNIC. Other interest expense was $692,000 on
various other debts, and interest and other income was $664,000. Other expenses
in the amount of $2.6 million resulted from a final decision of the arbitrator
awarding legal fees and costs incurred in the dispute between MCNIC and us to
MCNIC on February 5, 2002.
Minority interest of $49,000 represents Foreland's approximate 33%
interest in the loss in CAT, LLC.
Crown Asphalt Distribution had losses during 2001 of $8.7 million. We,
through our wholly-owned subsidiary CAPCO, owned 50.01% and MCNIC owned 49.99%
of Crown Asphalt Distribution through October 16, 2002, when we acquired 100% of
Crown Asphalt Distribution pursuant to our settlement agreement with MCNIC.
CAPCO was the manager and operating agent of Crown Asphalt Distribution. Because
there is no agreement requiring the minority stockholder, 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 Asphalt Distribution, including MCNIC's 49.99% interest in the losses
totaling $4.3 million for 2001, are included as a loss in our Financial
Statements.
14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe we are subject to material market risks, such as
interest rate risks, foreign currency exchange rate risks, or similar risks, and
therefore, we do not engage in transactions, such as hedging or similar
transactions in derivative financial instruments, intended to reduce our
exposure to such risks. However, we are subject to general market fluctuations
related to the purchase of base stock asphalt and may suffer reduced operating
margins to the extent our increased costs are not passed through to our
customers. Such prices generally fluctuate with the price of crude oil.
We are also subject to certain price escalation and de-escalation
clauses in our asphalt distribution sales contracts. We supply 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. We include such de-escalation risk into our bid
prices and do not believe we have material exposure to risk resulting from these
regulations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements, including the accountant's report, are
included beginning at page F-1 immediately following the signature pages and
related officer certifications.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OF THE REGISTRANT
Directors and Executive Officers
Our directors are elected annually by the stockholders. Our officers
serve at the pleasure of the board of directors. Our officers and directors,
their ages, and their positions are set forth below:
Name Age Position
---- --- --------
Jay Mealey............. 46 Chairman of the Board of Directors
Chief Executive Officer, President, Treasurer
Stephen J. Burton...... 57 Secretary
Andrew W. Buffmire..... 56 Vice President Business Development, Director
Alan L. Parker......... 51 Vice President, Director
Scott Beall............ 49 Vice President
Jay Mealey has served as President and Chief Operating Officer and as
our director since 1991 and was appointed as Chief Executive Officer in April
1999 and treasurer in October 2000. Mr. Mealey has been actively involved in the
oil and gas exploration and production business since 1978. Prior to becoming
our employee, Mr. Mealey served as Vice President of Ambra Oil and Gas Company
and prior to that position, worked for Belco Petroleum Corporation and Conoco,
Inc. in their exploration divisions. Mr. Mealey is responsible for managing our
day-to-day operations.
Stephen J. Burton was elected Secretary in October 2000. Mr. Burton has
held various accounting positions with us since 1989. He is currently
responsible for our 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, Mr.
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, Mr. 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.
Alan L. Parker, Vice-President and Controller, has been employed by us
since 1998 and our predecessor, Petro Source Asphalt Company, since 1987.
Scott Beall, Vice President, has been employed by us since 1998 and our
predecessor, Petro Source Asphalt Company, since 1979.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and officers, and persons who own more than 10% of our outstanding
common stock, to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership in our common stock and
other equity securities.
16
Except as described below, to our knowledge, based solely on a review
of the copies of the Section 16(a) reports furnished to us, or written
representations that no reports were required, we believe that during fiscal
year 2002 all Section 16(a) filing requirements applicable to our directors,
executive officers and greater than 10% stockholders were complied with. Reports
on Form 3 were not filed timely on behalf of Jeff Fishman and Alexander L.
Searl, each a greater than 10% stockholder, due to their interest in Manhattan
Goose, L.L.C. Reports on Form 4 were not timely filed with regard to the
Manhattan Goose transactions. All required reports were filed, however, within
the time allotted for filing of Form 5.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth, for the last three fiscal years, the
annual and long-term compensation earned by, awarded to, or paid to the person
who was our Chief Executive Officer and each of our other highest compensated
executive officers as of the end of the last fiscal year (the "Named Executive
Officers"):
Long-Term Compensation
-----------------------------
Annual Compensation Awards Payouts
--------------------------------- --------------------- -------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying All Other
Year Compen- Stock Options/ LTIP Compen-
Name and Principal Ended sation Award(s) SARs Payouts sation
Position Dec. 31 Salary ($) Bonus ($) ($) ($) (no.) ($) ($)
- ------------------------ ---------- ----------- ----------- ------------ ---------- ---------- -------- ----------
Jay Mealey 2002 $344,600 -- $10,563(1) -- -- -- $688(2)
President 2001 250,000 -- 8,400(1) -- -- -- 647(2)
(CEO) 2000 210,000 -- 8,400(1) -- -- -- 610(2)
Scott Beall 2002 $128,462 -- -- -- -- -- --
Vice-President 2001 107,225 -- -- -- -- -- --
2000 102,572 -- -- -- -- -- --
- ---------------------
(1) Car allowance.
(2) Term life insurance paid for Mr. Mealey.
Option/SAR Grants in Last Fiscal Year
During the fiscal year ended December 31, 2002, we did not grant any
stock options or stock appreciation rights to any Named Executive Officers.
17
Aggregate Option/SAR Exercises and Fiscal Year-End Option/SAR Values
The following table contains information regarding the fiscal year-end
value of unexercised options held by the Named Officers. The aggregate value of
the options was calculated using $0.02 per share, the average bid and asked
price for our common stock on December 31, 2002:
(a) (b) (c) (d) (e)
Number Value of Unexercised
Shares of Securities Underlying In-the-Money
Acquired Unexercised Options/ Options/SARs
on Value SARs at FY-End (#) at FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ------------------------------------------- ---------- ------------------------- --------------------------
Jay Mealey -- -- 750,000 / 150,000(1) -- / --
Scott Beall -- -- 125,000 / -- -- / --
- ----------------------
(1) Represents six tranches of 150,000 options each granted in two separate
grants to Mr. Mealey in November 1997 and November 1999 and exercisable as
follows:
Exercise Market Price
Number Expiration Date Price Condition *
------ --------------- ----- -----------
150,000.............................................. November 1, 2007 $0.125 $0.16
150,000.............................................. November 1, 2007 0.125 0.23
150,000.............................................. November 1, 2007 0.125 0.31
150,000.............................................. November 1, 2009 0.38 1.00
150,000.............................................. November 1, 2009 0.38 1.30
150,000 (to vest on May 1, 2003)..................... November 1, 2009 0.38 1.69
- ------------------------
* Vested options cannot be exercised unless the market price for the common
stock is at least equal to the market price stated.
Director Compensation
Members of the board of directors are not compensated for their time or
service representing the Company. Direct expenses incurred by members of the
board in connection with our business are reimbursed.
Employment Contracts
We employ Jay Mealey, our Chief Executive Officer, President and
Treasurer, under a November 1997 employment agreement that has been extended to
expire on December 31, 2003. The employment agreement provides for a base salary
plus compensation bonuses in any year that our earnings per share are positive
and constitute an increase over the preceding year or that the price of our
common stock increases by at least 30%. No bonus has been payable to date to Mr.
Mealey under these provisions. Mr. Mealey is also eligible to receive a
discretionary bonus in amounts determined by our board of directors in its sole
discretion. Mr. Mealey was also issued options to purchase an aggregate of
900,000 shares, subject to vesting and minimum trading price conditions as
summarized above. Of these, options to purchase 450,000 shares at $1.62 were
repriced in 2000 to an exercise price of $0.125 per share.
18
Mr. Mealey's employment agreement is terminable upon his death or
disability, terminable for cause, and terminable by Mr. Mealey for "good reason"
(as defined in the employment agreement) following a "change of control" (as
defined in the employment agreement). If terminated for "cause" (as defined in
the employment agreement), Mr. Mealey is not entitled to receive compensation or
benefits beyond that which have been earned or have vested on the date of
termination. If terminated by Mr. Mealey's death or disability, Mr. Mealey's
legal representatives or beneficiaries are entitled to receive continued
payments in an amount equal to 70% of his base salary in effect at the time of
his death or disability until the end of the term of the employment agreement or
for a period of 12 months, whichever is longer, plus a prorated amount of any
bonus payable under the employment agreement. In the event of the termination of
Mr. Mealey's employment without cause or upon termination of employment by Mr.
Mealey for "good reason" following a "change of control," Mr. Mealey is entitled
to payment of his unpaid base salary, plus a lump sum payment equal to three
times the sum of his base salary and bonuses. Further, all options granted to
Mr. Mealey vest and become fully exercisable and, at Mr. Mealey's option, can be
surrendered to us for cash in an amount equal to the fair market value of the
share of the our common stock minus the exercise price of the option times the
number of options surrendered. Mr. Mealey is also entitled to receive any and
all fringe benefits offered to our employees for a certain period of time. In
addition, if the benefit payments are subject to excise taxes, we are required
to pay Mr. Mealey an amount sufficient to cover such taxes.
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to
beneficial ownership of the our common stock as of April 11, 2003, to the extent
known to us, of each of our executive officers and directors, each person known
to us to be the beneficial owner of more than 5% of the outstanding shares of
any class of our stock, and all directors and officers as a group:
Name and Address of Person or Group Nature of Ownership Amount Percent(1)
- ----------------------------------- ------------------- ------ ----------
Principal Stockholders:
- -----------------------
Jay Mealey (2).............................. Common stock (3) 10,752,198 40.6%
Options 900,000 3.3
Shares issuable on conversion
of Series A Preferred, payment
of accrued dividends and
exercise of warrant (4) 20,454,464 43.6
----------
32,106,662 67.1%
Andrew W. Buffmire (2)...................... Common stock 4,689,620 17.7
Options 85,000 0.3
----------
4,774,620 18.0
Directors:
Jay Mealey.................................. ----------See above----------
Andrew W. Buffmire.......................... ----------See above----------
Alan L. Parker.............................. Common stock -- --
All Executive Officers and Directors as a
Group (3 persons):........................... Common Stock 15,441,818 58.3
Options (5) 1,052,500 3.8
Shares issuable on conversion
of Series A Preferred, payment
of accrued dividends and
exercise of warrant (4) 20,454,464 43.6
----------
36,948,782 77.0
==========
- ------------------------
(1) Based on 26,482,388 shares of our common stock issued and outstanding on
April 10, 2003. Under Rule 13d-3 of the Securities Exchange Act, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire the shares (for example, upon exercise of an option) within 60 days
of the date as of which the information is provided. In computing the
percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person
(and only such person) by reason of these acquisition rights. As a result,
the percentage of outstanding shares of any person as shown in this table
does not necessarily reflect the person's actual ownership or voting power
with respect to the number of shares of common stock actually outstanding.
Unless otherwise indicated, all securities are owned beneficially and of
record.
(2) The address for all principal stockholders is c/o Crown Energy Corporation,
1710 West 2600 South, Woods Cross, Utah 84087.
(3) Consists of 217,832 shares owned of record and beneficially by Mr. Mealey,
9,524,366 shares owned by the Mealey Family Partnership, 110,000 shares
owned by Mr. Mealey's brother, as custodian for Mr. Mealey's minor
children, and 900,000 shares owned for the benefit of Mr. Mealey's minor
children by a trust, of which Mr. Mealey is the trustee. Mr. Mealey is the
general partner of the Mealey Family Partnership and owns 48.5% of the
partnership, and members of his immediate family are the beneficiaries. Mr.
Mealey expressly disclaims beneficial ownership of the shares held by his
brother and mother. Furthermore, the options that are included within this
calculation may not be exercised unless specified trading prices are
realized for our common stock. As of the date hereof, such trading prices
have been not been met and there is no assurance that they will ever be met
during the terms of the options.
(4) The number reported constitutes the maximum issuable, based on our
authorized capitalization of 50,000,000 shares, with 26,482,388 shares
issued and outstanding and 3,063,148 shares reserved for issuance on the
exercise of outstanding options and warrants. The Mealey Family Limited
Partnership has the right to acquire common stock as follows: 4,285,000
shares issuable upon conversion of 500,000 shares of our Series A Preferred
Stock; 55,555,556 shares issuable at the election of the holder at the
market price of $0.018 per share as of March 28, 2003, in payment of $1.0
million of dividends accrued as of December 31, 2002 on the Series A
Preferred Stock; and 925,771 shares issuable on the exercise of warrants to
purchase shares at $0.002. Mr. Mealey and the Mealey Family Limited
Partnership, which he controls, own beneficially a sufficient number of
shares to amend our articles of incorporation to increase our authorized
capitalization, which would enable us to issue all 60,766,327 shares to
which the Mealey Family Limited Partnership would be entitled on conversion
of the Series A Preferred Stock, the payment of accrued dividends, and the
exercise of the warrant.
(5) Includes 67,500 shares underlying options held by an unnamed executive
officer to acquire common stock.
20
Change of Control Contracts
In November 1997, we entered into an employment agreement with Jay
Mealey that contains "change of control" provisions providing for the payment of
compensation and benefits upon our termination of Mr. Mealey's employment
without cause or termination by Mr. Mealey for "good reason" (as defined in that
agreement). The change of control terms of Mr. Mealey's contract are more fully
discussed above in "Item 11. Executive Compensation - Employment Contracts." The
employment agreement provides that upon a change of control as defined in the
employment agreement, that all options issued pursuant to the employment
agreement will automatically vest and all periods or conditions of restriction
will be deemed to have been completed or fulfilled, as the case may be.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1997, we sold to an unrelated third party for $5.0 million
in cash 500,000 shares of $10 Series A Cumulative Convertible Preferred Stock
and a warrant to purchase 925,771 shares at $0.002 per share. In February 2002,
the Series A Preferred Stock, the warrant, and all associated rights were
purchased from the original holder by Manhattan Goose, LLC, which was then owned
32.5% by Jay Mealey, our Chief Executive Officer, President and a director, and
67.5% by other directors and unrelated parties. During 2002, we paid accrued
dividends on the Series A Preferred Stock of $400,000 in cash and $200,000 in
13,793,103 shares of common stock, or at $0.0145 per share, the approximate
market price on the date of payment. In November 2002, Jay Mealey acquired the
other 67.5% membership interests in Manhattan Goose and simultaneously conveyed
all membership interests to the Mealey Family Limited Partnership, which is the
current holder of the Series A Preferred Stock, the warrant, all associated
rights, and accrued dividends. Mr. Mealey owns 48.5% of the Mealey Family
Limited Partnership and is its general partner and his immediate family is its
beneficiary. See Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
As of December 31, 2002, there were dividends payable to the holder of
the Series A Preferred Stock of $1.0 million that may, at the election of the
holder be taken in cash or common stock. At the market price of $0.018 per share
as of April 8, 2003, 55,555,555 shares of common stock would have to be issued
to satisfy the dividend payable. The Series A Preferred Stock is convertible to
4,285,000 shares of common stock, if so elected by the holder of the Series A
Preferred Stock.
We currently have an authorized capital of 50.0 million shares of
common stock, of which approximately 26.5 million shares are issued and
outstanding and approximately 3.1 million shares are reserved for issuance on
the exercise of outstanding options and warrants, for a total of approximately
29.6 million shares, excluding the shares issuable on conversion of the Series A
Preferred Stock, the payment of accrued dividends thereon, and exercise of the
warrant. Therefore, there are only approximately 20.4 million shares available
for issuance under the Series A Preferred Stock on conversion or the payment of
21
dividends or on exercise of the warrant. We have not undertaken to renegotiate
with the Mealey Family Limited Partnership any of the terms of the Series A
Preferred Stock or the warrant, do not know whether we will attempt to do so,
and have not analyzed our obligations or responsibilities if Mealey Family
Limited Partnership would elect to convert the Series A Preferred Stock, demand
payment of the dividends in common stock, or exercise the warrant.
In July 2002, Mr. Mealey surrendered all rights to 548,148 shares of
common stock that he had pledged as security for a $319,583 non-recourse
promissory note due us for the purchase of such shares on the exercise of an
option in 1998, and we cancelled the note.
ITEM 14. CONTROLS AND PROCEDURES
Disclosure controls are procedures that are designed with an objective
of ensuring that information required to be disclosed in our periodic reports
filed with the SEC, such as this Annual Report on Form 10-K, is recorded,
processed, summarized and reported within the time periods specified by the SEC.
Disclosure controls are also designed with an objective of ensuring that such
information is accumulated and communicated to our management, including the
Chief Executive Officer and Controller, who is our chief financial officer, in
order to allow timely consideration regarding required disclosures.
The evaluation of our disclosure controls by the Chief Executive
Officer and Controller included a review of the controls' objectives and design,
the operation of the controls, and the effect of the controls on the information
presented in this Annual Report. Our management, including the Chief Executive
Officer and Controller, does not expect that disclosure controls can or will
prevent or detect all errors and all fraud, if any. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Also, projections
of any evaluation of the disclosure controls and procedures to future periods
are subject to the risk that the disclosure controls and procedures may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Based on their review and evaluation as of a date within 90 days of the
filing of this Form 10-K, and subject to the inherent limitations all as
described above, our Chief Executive Officer and Controller have concluded that
our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14
under the Securities Exchange Act of 1934) are effective. They are not aware of
any significant changes in our disclosure controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
22
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report or
incorporated herein by reference.
(1) Financial Statements. See the following beginning at
page F-1:
Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 2002
and 2001 F-3
Consolidated Statements of Operations for each of the
Three Years Ended December 31, 2002, 2001 and 2000,
respectively F-4
Consolidated Statements of Cash Flows for each of the
Three Years Ended December 31, 2002, 2001 and 2000,
respectively F-5
Consolidated Statements of Stockholders' Equity
(Deficit) for each of the Three Years Ended
December 31, 2002, 2001 and 2000, respectively F-6
Notes to the Consolidated Financial Statements F-7
(2) Supplemental Schedules. The financial statement schedules have been
omitted because they are not applicable or the required information is
otherwise included in the accompanying financial statements and the
notes thereto.
(3) Exhibits. The following exhibits are included as part of this
report:
23
SEC
Exhibit Reference
Number Number Title of Document Location
- -------------------------------------------------------------------------------------------------------------------
Item 3 Articles of Incorporation and Bylaws
- --------------------------------------------------------------------------------------------- ---------------------
3.01 3 Articles of Incorporation Incorporated by
reference (1)
3.02 3 Certificate of the Voting Powers, Designations, Preferences Incorporated by
and Relative, Participating, Optional or other Special Rights, reference (2)
and Qualifications, Limitations and Restrictions Thereof, of
Series A Cumulative Convertible Preferred Stock of Crown
Energy Corporation
3.03 3 Amended Bylaws Incorporated by
reference (3)
Instruments Defining the
Item 4 Rights of Security Holders, Including Indentures
- --------------------------------------------------------------------------------------------- ---------------------
4.01 4 Convertible Debenture Agreement dated May 6, 1997, between Incorporated by
Crown Energy Corporation and Oriental New Investments, Ltd. reference (4)
4.02 4 Form of Stock Option Agreements between Crown Energy Incorporated by
Corporation and (1) Jay Mealey, (2) Richard Rawdin, and (3) reference (5)
Thomas Bachtell
4.03 4 The Crown Energy Long Term Equity-Based Incentive Plan Incorporated by
reference (6)
4.04 4 Common Stock Purchase Warrant dated November 4, 1997, issued Incorporated by
to Enron Capital & Trade Resources Corp. reference (2)
4.05 4 May 1998 Warrant issued to Ladenburg Thalmann & Co., Inc. Incorporated by
reference (7)
Item 10 Material Contracts
- --------------------------------------------------------------------------------------------- ---------------------
10.01 10 Employment Agreement with Jay Mealey Incorporated by
reference (5)
10.02 10 Revised Right of Co-Sale Agreement between Jay Mealey and Incorporated by
Enron Capital & Trade Resources Corp. reference (8)
10.03 10 Lease Agreement dated June 6, 1996, between Petro Source Incorporated by
Refining Corporation and PacifiCorp (which was assigned to the reference (9)
Company on or about July 2, 1998)
10.04 10 Operating Agreement for Cowboy Asphalt Distribution L.L.C. Incorporated by
reference (7)
10.05 10 April 3, 1998, Agreement regarding Investment Banking Services Incorporated by
with Ladenburg Thalmann & Co., Inc. reference (7)
24
SEC
Exhibit Reference
Number Number Title of Document Location
- -------------------------------------------------------------------------------------------------------------------
10.06 10 Indemnification Agreement with Ladenburg Thalmann & Co., Inc. Incorporated by
reference (7)
10.07 10 $1,800,000 Loan Agreement: Community First National Bank to Incorporated by
Crown Asphalt Products Company reference (10)
10.08 10 Letter Amendment to Loan Agreement with Community First Incorporated by
National Bank dated June 2, 1999 reference (10)
10.09 10 Guaranty of Community First National Bank Loan by Crown Energy Incorporated by
Corporation reference (10)
10.10 10 Assignment & Assumption Agreement (Off Site Services Agreement) Incorporated by
reference (10)
10.11 10 First Amendment to Employment Agreement with Jay Mealey Incorporated by
reference (10)
10.12 10 Settlement Agreement among Crown Energy Corporation, MCNIC and This filing
related parties
10.13 10 Lease Agreement with Frontier Grand Island, L.L.C. This filing
10.14 10 Asset Sale Agreement with Fruita Marketing and Management, Inc. This filing
10.15 10 Extension to Lease Agreement with Frontier Grand Island L.L.C. This filing
Item 21 Subsidiaries of the Company
- --------------------------------------------------------------------------------------------- ---------------------
21.01 21 List of subsidiaries This filing
Item 99 Additional Exhibits
- --------------------------------------------------------------------------------------------- ---------------------
99.01 99 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted This filing
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
99.02 99 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted This filing
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
- -----------------------
(1) Incorporated by reference from the Registration Statement on Form S-1 filed
March 13, 1996.
(2) Incorporated by reference from Enron Capital & Trade Resources Corp. Form
13D filed October 10, 1997.
(3) Incorporated by reference from the Registration Statement on Form 10 filed
July 1, 1991, amended August 30, 1991.
(4) Incorporated by reference from the Current Report on Form 8-K filed June
12, 1997.
(5) Incorporated by reference from the Annual Report on Form 10-K for the year
ended December 31, 1997, filed March 31, 1998.
(6) Incorporated by reference from the Amended Annual Report on Form 10-K for
the year ended December 31, 1997, filed April 30, 1998.
(7) Incorporated by reference from the Annual Report on Form 10-K for the year
ended December 31, 1998, filed June 14, 1999.
(8) Incorporated by reference from Enron Capital & Trade Resources Corp. Form
13D/A filed November 12, 1997.
(9) Incorporated by reference from the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, filed November 25, 1998.
(10) Incorporated by reference from the Annual Report on Form 10-K for the year
ended December 31, 1999, filed April 4, 2000.
25
We agree to furnish supplementally to the SEC a copy of any omitted schedule or
exhibit to such agreement upon request by the SEC.
(b) Reports on Form 8-K: We filed the following report on Form 8-K for
the quarter ended December 31, 2002:
Date of Event Reported Item(s) Reported
------------------------ ------------------------
October 16, 2002 Item 5. Other Events
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CROWN ENERGY CORPORATION
Date: April 15, 2003 By /s/ Jay Mealey
-------------------------------
Jay Mealey
Its Principal Executive Officer
Date: April 15, 2003 By /s/ Alan L. Parker,
-------------------------------
Alan L. Parker,
Its Principal Financial Officer
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.
Dated: April 15, 2003 /s/ Jay Mealey
-------------------------------
Jay Mealey, Director
/s/ Alan L. Parker
-------------------------------
Alan L. Parker, Director
/s/ Andrew W. Buffmire
-------------------------------
Andrew W. Buffmire, Director
26
CERTIFICATION
I, Jay Mealey, certify that:
1. I have reviewed this annual report on Form 10-K of Crown Energy
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ Jay Mealey
- ---------------------------
Jay Mealey
Principal Executive Officer
27
CERTIFICATION
I, Alan L. Parker, certify that:
1. I have reviewed this annual report on Form 10-K of Crown Energy
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ Alan L. Parker
- ---------------------------
Alan L. Parker
Principal Financial Officer
28
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, 2002 and 2001, and the consolidated statements of operations,
stockholders' deficit and cash flows for the years ended December 31, 2002,
2001, and 2000. 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, 2002 and 2001, and the results of its
operations and its cash flows for the years ended December 31, 2002, 2001, and
2000, 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, has a working capital deficit, 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.
TANNER + CO.
Salt Lake City, Utah
February 18, 2003
- --------------------------------------------------------------------------------
F-2
CROWN ENERGY CORPORATION
Consolidated Balance Sheet
December 31,
- ------------------------------------------------------------------------------------------------------------
Assets 2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 2,723,068 $ 2,652,858
Accounts receivable, net of allowance for doubtful accounts
of $175,927 and $1,722,482, respectively 539,214 1,378,610
Inventory 604,106 1,358,022
Prepaid and other current assets 143,977 87,652
Related party receivable - 25,700
------------ ------------
Total current assets 4,010,365 5,502,842
Property, plant, and equipment, net 8,949,032 9,590,787
Intangible assets, net 25,000 340,430
Other assets 290,399 283,206
------------ ------------
Total $ 13,274,796 $ 15,717,265
============ ============
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,349,242 $ 410,564
Preferred stock dividends payable 1,000,000 1,200,000
Accrued expenses 192,878 175,794
Accrued arbitration costs - 2,609,519
Accrued interest 224,508 7,473,512
Current portion of long-term debt 423,585 347,153
Working capital loan to related party - 14,935,222
------------ ------------
Total current liabilities 4,190,213 27,151,764
Long-term debt 2,442,673 11,130,056
------------ ------------
Total liabilities 6,632,886 38,281,820
------------ ------------
Commitments and contingencies
Redeemable preferred stock 5,000,000 4,952,831
Minority interest in consolidated joint ventures 507,575 476,793
Stockholders' equity:
Common stock, $.02 par value, 50,000,000 shares authorized
26,482,388 and 13,635,581 shares issued and outstanding,
respectively 529,647 272,711
Additional paid-in capital 3,919,417 4,972,688
Stock subscriptions receivable from officers - (549,166)
Stock warrants 186,256 186,256
Accumulated deficit (3,500,985) (32,876,668)
------------ ------------
Total stockholders' equity 1,134,335 (27,994,179)
------------ ------------
Total $ 13,274,796 $ 15,717,265
============ ============
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-3
CROWN ENERGY CORPORATION
Consolidated Statement of Operations
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Sales, net $ 17,964,675 $ 27,032,658 $ 22,787,103
Cost of goods sold 17,497,665 24,126,190 23,605,063
------------ ------------ ------------
Gross profit (loss) 467,010 2,906,468 (817,960)
General and administrative expenses (2,676,325) (3,449,053) (3,060,627)
Recovery of (provision for) bad debt expenses 1,646,531 (30,051) (1,529,896)
Loss on impairment of investment in equity affiliate - - (6,904,085)
Loss on impairment of property and equipment (544,639)
Loss on impairment of goodwill (265,430) - (3,625,848)
Equity in losses from unconsolidated equity affiliate - - (145,814)
------------ ------------ ------------
Loss from operations (1,372,853) (572,636) (16,084,230)
------------ ------------ ------------
Other income (expense):
Interest income 16,718 65,857 157,042
Interest expense (2,404,563) (4,018,738) (2,576,386)
Gain on transfer of interest in unconsolidated affilate 2,998,175 - -
Other (expense) income (50,612) 598,247 104,000
Arbitration expense - (2,609,519) -
------------ ------------ ------------
Total other income (expense), net 559,718 (5,964,153) (2,315,344)
------------ ------------ ------------
Loss before provision for income taxes
minority interests and extraordinary gain (813,135) (6,536,789) (18,399,574)
Income tax benefit - - -
Minority Interest in losses of consolidated joint venture 44,094 48,808 38,653
------------ ------------ ------------
Loss before extraordinary gain (769,041) (6,487,981) (18,360,921)
Extraordinary gain on extinquishment of debt 30,144,724 - -
------------ ------------ ------------
Net Income (loss) 29,375,683 (6,487,981) (18,360,921)
Redeemable preferred stock dividends (400,000) (400,000) (400,000)
------------ ------------ ------------
Net Income (loss) applicable to common shares $ 28,975,683 $ (6,887,981) $(18,760,921)
============ ============ ============
Loss per common share before extraordinary item -
basic and diluted $ (0.05) $ (0.51) $ (1.39)
============ ============ ============
Extraordinary gain on extinquishment of debt -
basic and diluted $ 1.19 $ - $ -
============ ============ ============
Net income (loss) per common share - basic and diluted $ 1.14 $ (0.51) $ (1.39)
============ ============ ============
Weighted average common shares - basic and diluted 25,436,000 13,635,000 13,455,000
============ ============ ============
- -----------------------------------------------------------