FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year ended December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________
Commission File Number 0-19365
CROWN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 87-0368981
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
215 South State, Suite 650
Salt Lake City, Utah 84111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 537-5610
Securities registered pursuant to Section 12(b) of the Act:
(None)
Securities registered pursuant to Section 12(g) of the Act:
$0.02 PAR VALUE COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock, par value $0.02 per share, held
by non-affiliates of the registrant on March 29, 2001 was $598,149.86 using the
average bid and asked price for Registrant's common stock. As of March 29, 2001,
registrant had 13,635,581shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be used in connection with
the solicitation of proxies for the Registrant's Fiscal 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Annual Report on
Form 10-K.
Transitional Small Business Disclosure Format (check one) YES [ ] NO [X]
PART I.
STATEMENTS MADE OR INCORPORATED IN THIS ANNUAL REPORT INCLUDE A NUMBER OF
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING
THE WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FUTURE", AND WORDS
OF SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS
REGARDING THE COMPANY'S FUTURE PERFORMANCE OR FUTURE EVENTS OR TRENDS. RELIANCE
SHOULD NOT BE PLACED ON FORWARD-LOOKING STATEMENTS BECAUSE THEY INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM
ANTICIPATED FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION, THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ITEM 1. BUSINESS
General
Crown Energy Corporation is a Utah corporation that specializes in the
production and distribution of premium asphalt products to meet the new, higher
quality standards for federal and state highways. The Company is based in Salt
Lake City, Utah and operates primarily through two wholly owned subsidiaries,
Crown Asphalt Corporation ("CAC") and Crown Asphalt Products Company ("CAPCO"),
both of which are Utah corporations. Since August of 1997, CAC had operated as
the Operator of Crown Asphalt Ridge, L.L.C., a Utah limited liability company
("Crown Ridge"), the asphalt production business in which Crown owns a minority
interest in Vernal, Utah. CAC's present status as Operator of Crown Ridge is
discussed below. See "Item 1. Business - Asphalt Production - Crown Asphalt
Ridge, L.L.C."
CAPCO operates the asphalt manufacturing and distribution business of Crown
both independently and through its majority interest in Crown Asphalt
Distribution, L.L.C., a Utah limited liability company ("Crown Distribution").
Crown Distribution owns a majority interest in Cowboy Asphalt Terminal, L.L.C.,
a Utah limited liability company, that is operated by CAPCO.
Crown's consolidated financial statements and results of operations include
the accounts and results of operations of CAC, CAPCO and Crown Distribution.
Accordingly, references in this Annual Report to "Crown" or the "Company"
include, unless otherwise noted, CAC, CAPCO and Crown Distribution.
The Company was formed in 1981 as an oil and gas production company. The
Company changed its business focus to concentrate on the production and
distribution of premium asphalt products in 1995. For the years ended December
31, 1998, 1999 and 2000, the Company reported revenues from the sale of asphalt
products of approximately $24 million, $36 million and $23 million respectively.
See "Item 6 - Selected Financial Data." Most of the revenues for 1998 were
recorded in the last half of 1998 as a result of Crown Distribution's asphalt
product sales.
In August 1997, the Company formed Crown Ridge with MCNIC Pipeline &
Processing Company, a Michigan corporation ("MCNIC"), to construct, own and
operate an asphalt oil sand production Facility at Asphalt Ridge, near Vernal,
Utah (the "Facility") at the Company's Asphalt Ridge deposit in northeast Utah.
MCNIC is a wholly owned subsidiary of MCN Energy Group, Inc. ("MCN") (NYSE:MCN),
a large diversified energy holding company. Information about MCN Energy Group
is available on the World
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Wide Web at http://www.mcnenergy.com. To date, Crown Ridge has invested
approximately $20 million in the Facility. During the start-up of the Facility
mechanical and process difficulties were experienced that affected production
economics. Extensive research and engineering to develop a solution to these
problems was conducted and tested in a pilot study at the Facility during 2000.
The results of the pilot study are currently being evaluated by MCNIC to
determine the technical and economic viability of the Facility. The Company
assumes that modifications to the Facility will be required in order for it to
achieve commercial production, but the cost of such modifications is unknown. If
the decision is made to proceed with the required modifications, the Company
does not anticipate completing the modifications sooner than the fall of 2001.
The Company presently owns approximately a 24% equity interest in Crown Ridge
and MCNIC holds the remaining approximately 76% equity interest. It is important
to note that because MCNIC owns the large majority interest in Crown Ridge, any
decision to proceed with modifications or retrofit of the Facility can be
controlled by MCNIC. The Company has the right to acquire up to a 60% equity
interest in Crown Ridge contingent, however, upon MCNIC's receipt of certain
preferential returns and Crown Ridge's election to pursue certain expansion
opportunities. See "Item 1. Business - Asphalt Production - Crown Asphalt Ridge,
L.L.C." below.
In August 1997, contemporaneous with the Company's Crown Ridge joint
venture with MCNIC, the Company also completed the private sale of $5 million of
the Company's $10 Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred") to Enron Capital & Trade Resources Corp. ("ECT"), a subsidiary of
Enron Corp. ("Enron"), (NYSE:ENE). Enron is a large diversified energy company
with assets in excess of $33 billion. Information about Enron is available on
the World Wide Web at http://www.enron.com. Proceeds from the sale of stock to
ECT were used for working capital and to finance the Company's share of
construction and start-up costs related to Crown Ridge, which includes the
construction of the Facility. Certain rights, preferences and limitations
relating to the Series A Preferred are detailed in "Item 5. Market Price for the
Company's Common Equity and Related Stockholder Matters" below.
In June 1998, the Company, through CAPCO, entered into a joint venture by
forming Cowboy Asphalt Terminal, L.L.C., a Utah limited liability company ("CAT
LLC"), with Foreland Asphalt Corporation, a Utah corporation engaged in the
asphalt roofing products business ("Foreland"). CAT LLC was formed to acquire an
asphalt terminal and its underlying real property located in Woods Cross, Utah.
The asphalt terminal property of CAT LLC was apportioned and portions designated
for the exclusive uses of either CAPCO or Foreland, each of which will retain
all revenues and profits generated from their respective exclusive operations.
CAPCO is the operator of CAT, LLC. Crown Distribution, through the exercise of
an option on or about December 21, 1998, is entitled to own 66.67% of CAT LLC
and the remaining 33.33% is owned by Foreland. CAT LLC is a majority owned and
controlled subsidiary of Crown Distribution and the accounts and results of
operations of CAT LLC will be included within the Company's consolidated
financial statements and results of operations. See "Item 1. Business - Asphalt
Distribution - Cowboy Asphalt Terminal, L.L.C." below.
On July 2, 1998, Crown Distribution was formed as a second joint venture
between the Company (through its CAPCO subsidiary) and MCNIC. Crown Distribution
is owned 50.01% by the Company and 49.99% by MCNIC. Crown Distribution was
formed to acquire the inventory and assets of Petro Source Asphalt Company, a
Texas corporation ("PSAC"). By completing this acquisition, the Company acquired
ownership or leasehold interests in certain asphalt manufacturing and
distribution facilities located in Utah, Arizona, Colorado and Nevada. These
facilities enable the Company to manufacture a broad range of performance
asphalt products for sale to its customers in the western United States. See
"Item 1. Business - Asphalt Distribution - Crown Asphalt Distribution, L.L.C."
below.
On May 12, 1999, the Company entered into an agreement to acquire an
asphalt distribution terminal in Rawlins, Wyoming (the "Rawlins Asphalt
Terminal") and the related asphalt inventory for $2,291,571 from S&L Industrial,
a Wyoming corporation. The Rawlins Asphalt Terminal was acquired in conjunction
with the acquisition of two additional manufacturing and distribution terminals
to expand the Company's asphalt manufacturing and distribution operations in the
western United States. The operating agreement for Crown Distribution required
that the Company present this opportunity to MCNIC in order for it to
participate in the acquisition and the Company did present the transaction (and
the acquisition of two other
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terminals which were ultimately not acquired) to MCNIC in accordance with its
obligations. Despite its agreement to participate in the ownership of the
Rawlins Asphalt Terminal (and the other two terminals which were ultimately not
acquired) through the formation of a new joint venture, MCNIC failed to take the
actions necessary to complete the transfer of the project to joint ownership and
the Company does not believe at present that MCNIC will perform. Thus, the
Rawlins Asphalt Terminal is currently owned and operated by CAPCO.
The Company's revenues during the year ended December 31, 2000 were
generated primarily through its asphalt manufacturing and distribution
operations. See "Item 1. Business - Asphalt Distribution - Crown Asphalt
Distribution, L.L.C." below. The Company's control of Crown Distribution and the
Rawlins Asphalt Terminal, through CAPCO, complement the Company's interest in
Crown Ridge (more specifically, its anticipated asphalt production at the
Facility). Its asphalt production, manufacturing and distribution capabilities
allow the Company to produce, transport, store, process, blend, manufacture and
sell finished asphalt products in its Western United States target market. These
operations rely primarily upon the purchase of asphalt, additives, modifiers and
other raw materials used to manufacture the finished asphalt products from third
party suppliers. Should Crown Ridge's extraction and processing operations at
the Facility produce commercial quantities of asphalt, management of the Company
expects that production can displace some of the raw materials purchased from
third party suppliers for resale. As reflected elsewhere within this Report,
however, no assurance can be given when, or if at all, commercially viable
production at Crown Ridge's Facility will commence. As the Company increases its
asphalt manufacturing, marketing and distribution activities at its asphalt
terminals, the Company remains open to other asphalt related business.
More detailed information about the asphalt industry and the Company's
asphalt production and distribution businesses is provided below.
The Asphalt Industry
The United States asphalt market is estimated to be a 30 million-ton market
that historically has been supplied by the large U.S. oil refiners. In recent
years, management of the Company believes that the U.S. asphalt market has
undergone significant changes. In particular, national and international demand
for asphalt has increased. Further, recently established standards which require
the use of higher quality asphalt for federal and state highways in the United
States have increased the demand for higher quality asphalts. At the same time,
recent reductions of heavy crude processing have resulted in a decrease in
asphalt supply. The Company believes that these changes are favorable to asphalt
producers and suppliers such as the Company.
Deterioration of the nation's infrastructure has drawn increasing public
attention and concern, and the emphasis in the highway industry is shifting from
construction of new roads and bridges to maintenance and replacement of aging
facilities. As the U.S. government, state and federal agencies focus on decaying
infrastructure and facilities, the need for better techniques and materials to
build longer-lasting roads and to repair existing ones cost-effectively has
developed. Congress authorized the Strategic Highway Research Program (SHRP) as
a coordinated national effort to meet the tough challenges facing the highway
industry. SHRP was a five-year, $150 million research program funded through
state-apportioned federal highway aid funds. Its research was tightly focused on
the development of pragmatic products of immediate use to the highway agencies.
Using a wide range of advanced materials characterization techniques that had
not been applied to asphalt previously, SHRP determined how asphalt material
properties affect pavement performance. The new performance graded (PG)
specifications focus on the climate conditions of a given location and the
specific temperature band within which the PG asphalt must work. The
recommendation for the improved PG asphalt binder specifications has been
adopted by the Federal Highways Administration (FHWA) and many states.
Implementation of the new PG specifications by all states is expected. The
result of the more stringent SHRP performance grades in the western United
States is that most asphalt used on state and federal projects will need to be
modified with polymers or high performance asphalts, or both, to meet the
required specifications.
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The Company manufactures a broad range of performance asphalt products
meeting the SHRP specifications. Management believes the Facility will produce
asphalt that meets SHRP performance specifications and will augment the current
slate of asphalt products. However, until the asphalt is produced at the
Facility in commercial quantities there can be no assurance of its quality or
performance.
Through its relationships with producers, refiners, suppliers, transporters
and users of asphalt, including state and federal governmental departments,
asphalt associations, consultants and private sector companies; as well as its
strategically located asphalt distribution terminals, PG asphalt blending
processes and Asphalt Ridge reserves, the Company believes that it is well
positioned to meet the needs of the changing asphalt market. However, the
Company will be competing with several larger companies in the regional asphalt
supply business. Competition in the asphalt supply business is based primarily
on price and quality. Further, the Company will be competing with traditional
refineries with respect to the production of asphalt products. In general, these
competitors have significant financial, technical, managerial and marketing
resources and, both separately and combined, represent significant competition
for the Company in its markets.
The asphalt industry is seasonal. Demand for asphalt decreases
significantly during the winter months when cold weather and precipitation
interferes with highway construction and repair. Notwithstanding the decrease in
demand for asphalt and asphalt-related products during the winter months, the
Company believes that it can continue producing asphalt, and storing such
product, to meet the peak demands of spring and summer. In addition, the Company
expects to continue purchasing asphalt from outside suppliers in the winter
months, when prices are lower, for storage at its asphalt terminals and
manufacturing and distribution during the peak spring and summer months.
Asphalt Storage and Distribution
Crown Asphalt Distribution, L.L.C.
Formation and Current Development Status. On July 2, 1998, Crown
Distribution was formed as a second joint venture between the Company and MCNIC.
The Company and MCNIC (sometimes referred to hereafter as the members) possess
sharing ratios ("sharing ratios") of 50.01% and 49.99%, respectively, in the
profits, losses and obligations of Crown Distribution. Accordingly, the Company
holds a majority and controlling interest in Crown Distribution and the accounts
and results of operations of Crown Distribution are included within the
Company's consolidated financial statements. On July 2, 1998, Crown Distribution
purchased the inventory and assets of Petro Source Asphalt Company, a Texas
corporation ("PSAC"), effective June 1, 1998. The purchased assets included
asphalt supply and marketing contracts, owned and leased equipment, personal
property, fixtures, equipment leases, real estate leases, technology licenses,
other related agreements, certain intellectual property, products inventory,
ownership interests in and to asphalt distribution facilities in Utah, Colorado,
Nevada and Arizona, and certain processing rights at a refinery in Santa Maria,
California (see below). These assets (excluding products inventory) were
purchased for $7.5 million, the amount determined by the parties to be the fair
market value of such assets. The products inventory was also purchased by Crown
Distribution and this portion of the purchase price was initially funded by a
loan to Crown Distribution from MCNIC totaling $7,141,930 (the "Working Capital
Loan"). It is the Company's position that this loan was replaced by a working
capital Facility (the "Credit Facility") from MCNIC to Crown Distribution. The
Company believes that the outstanding balance of the Credit Facility on December
31, 2000 was $14,935,222.
Results from the asphalt manufacturing and distribution business have been
disappointing. The Company manufactured and distributed 100,930 tons of asphalt
products in 2000 down from 175,787 in 1999. Success in the asphalt manufacturing
and distribution business depends on the ability to purchase inventory of base
asphalt, additives and chemicals to manufacture a finished product. Typically
the cost of this inventory is less expensive during the winter months when
supply is greater than demand. It is during these months that the Company
normally fills its storage tanks and contracts for the sale of finished product
to be delivered during the paving season, generally from April through October.
The cyclical nature of the purchasing and sale of product creates the
requirement for a large amount of working capital. As discussed elsewhere, in
late 1999 MCNIC discontinued providing working capital to the Company as the
Company
5
maintains it had agreed. In addition, MCNIC refused to guaranty, on behalf of
Crown Distribution, a third party financed working capital line of credit as the
Company also asserts MCNIC previously agreed, and engaged in other actions which
the Company believes were injurious to the Company. The lack of working capital,
interference, and uncertainty created by MCNIC's actions caused Crown
Distribution to severely limit its winter-fill purchases leading to very low
levels of inventory at the beginning of this asphalt season. In addition, the
price of crude oil rose rapidly in early 2000 causing a significant increase in
the cost of asphalt raw materials used to service its supply contracts. Most of
this work was contracted prior to the price increases resulting in poor profit
margins. In addition, making purchases of raw material only from operating cash
flow limited the flexibility in supply purchases. This inflexibility caused
inventory purchases to be postponed to later in the season when prices were at
their highest. The working capital constraints limited the quantity of asphalt
that could be purchased and forced the Company to make uncompetitively high bids
on projects during the season, reducing it's total sales volume.
Collectively, the asphalt manufacturing and distribution facilities
purchased from PSAC enable the Company to purchase and store asphalt and other
related raw materials from third party vendors and to manufacture a broad range
of performance asphalt products for sale to its customers. For the year ended
December 31, 2000, these assets, excluding the revenues associated with the
Rawlins Asphalt Terminal, distributed approximately 71,902 tons of asphalt and
generated revenue of approximately $14,806,275.
Under the Santa Maria Refinery Corporation processing agreement (the
"Processing Agreement"), Crown Distribution (and it's predecessor, PSAC, prior
to the June 1, 1998 effective date) purchased crude oil, marketed and sold the
refined products (including asphalt) and maintained the inventory at this
refinery, in exchange for approximately 50% of the net profit realized upon the
sale of the refined product. The Processing Agreement had an automatic
termination date of December 31, 1998 at the time it was acquired by the
Company, but was extended by amendment effective in December, 1998. Pursuant to
the terms of the amendment, the Company was notified in February, 1999 that the
Processing Agreement would terminate effective April 30, 1999. Upon termination
of the Processing Agreement, the refinery owner was obligated to deliver certain
of the refined products to the Company and to purchase the balance of the
refined products and crude oil inventories located at the refinery from the
Company. The refinery owner breached the terms of the Processing Agreement and
amendment by, among other things, (1) failing to properly terminate the
Processing Agreement and amendment; (2) failing to deliver the refined products
(including asphalt) to the Company or paying for the refined products (including
asphalt) and (3) interfering with the Company's contractual commitments for the
sale of asphalt. See "Item 3. Legal Proceedings."
The Company agreed to transfer and assign to Crown Distribution, as a
capital contribution, its 66.67% membership interest in CAT LLC. The Company was
credited with a $1.5 million capital contribution to Crown Distribution as a
result of the assignment of the CAT LLC membership interests to Crown
Distribution. Crown Distribution also assumed CAT LLC's payment obligations
under a promissory note. The promissory note assumed by the Company had an
original principal balance of $1,282,070, with a balance as of December 31, 2000
of $1,006,764. The remaining 33.33% ownership interest in CAT LLC is owned by
Foreland. Crown Distribution's proportionate share of the accounts and results
of operations of CAT LLC are therefore included within the consolidated
financial statements of the Company. See "Item 1. Business - Asphalt
Distribution - Cowboy Asphalt Terminal, L.L.C." below for further information
regarding CAT LLC.
MCNIC originally contributed the amount of $100 to the capital of Crown
Distribution. MCNIC also made a capital contribution in the amount of $6,000,000
as a preferential contribution (the "Preferential Capital Contribution"). The
Preferential Capital Contribution, together with the Working Capital Loan, were
used by Crown Distribution to acquire the assets of PSAC and pay related closing
and other acquisition costs. MCNIC made an additional capital contribution in
the amount of $1.5 million when the Company contributed its interest in CAT LLC
to Crown Distribution. That sum was immediately used by Crown Distribution to
pay down the Working Capital Loan previously advanced by MCNIC. The Company
asserts that the Working Capital Loan has been replaced, at the election of
MCNIC, by the Credit Facility, a revolving credit facility, discussed elsewhere
herein. See "Item 1. Business - Asphalt Distribution - Crown Asphalt
Distribution, L.L.C. - Working Capital Facility" below.
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Management Of Crown Distribution; Major Decisions. Crown Distribution is
governed by a management committee consisting of three managers. The Company is
entitled to appoint two managers and MCNIC is entitled to appoint one manager.
Management decisions are generally made by the management committee. However,
one of the managers appointed by the Company serves as the operating manager and
has the powers, authority, duties and obligations specified in the operating
agreement, which generally requires the operating manager to implement the
policies and pursue the objectives specified in the annual operating plan.
Generally, the management committee may act through majority vote. The Crown
Distribution operating agreement, however, requires that certain decisions
("Major Decisions") be undertaken by the unanimous vote of the committee
members.
The operating agreement of Crown Distribution specifies that the adoption
of an annual operating plan is a Major Decision. The annual operating plan is
intended to address all aspects of Crown Distribution's operations for the
coming year, including the nature and extent of the proposed activities,
marketing plans, capital expenditure plans and similar matters. In the event the
management committee is unable to unanimously approve an annual operating plan
for any given calendar year, a majority of the managers shall have the authority
to continue to maintain Crown Distribution's operations at levels comparable to
those approved in its most recent annual operating plan. As of the date of this
Report, the annual operating plan for calendar year 2000 has not been approved
by the management committee and therefore not approved by Crown Distribution.
Consequently operations are being conducted at levels comparable to those of the
initial operating plan adopted at the formation of Crown Distribution.
Additional Opportunities. The Crown Distribution operating agreement
provides that certain additional business opportunities that become available to
any of the members which are the same as or similar to Crown Distribution's then
current business must be first offered to Crown Distribution by such members.
Through amendment to the operating agreement of Crown Distribution certain
limitations on the rights of the Company or MCNIC to pursue additional business
opportunities outside of Crown Distribution continue until June 18, 2001. If
either the Company or MCNIC desires to pursue an additional business
opportunity, the member must first offer the opportunity to Crown Distribution
and, if Crown Distribution does not elect to participate, the participating
member may pursue or acquire the additional business opportunity. However, if
the non-participating member does not consent to the participating member's
pursuit of the opportunity, the non-participating member will retain the right
and option to "back in" to a 50% sharing ratio, without paying any purchase
price, after such time as the participating member has received a 150% payout of
its investment (as calculated under the operating agreement). Following June 18,
2001, the foregoing restrictions will be lifted except that any additional
opportunity must be first offered to Crown Distribution for its possible
participation. If Crown Distribution then chooses not to participate, the
participating member which located the opportunity may pursue it without
restriction.
Credit Facility. The Company maintains that MCNIC, pursuant to its rights
granted under the Crown Distribution Operating Agreement, elected to extend the
Credit Facility, a revolving credit facility, to Crown Distribution to cover its
working capital requirements in lieu of the Company obtaining a line of credit
from an third party financial institution and pursuant to the terms proposed by
such third party institution. Further, the Company asserts that in accordance
with the original intent of the members, MCNIC elected to have the original
Working Capital Loan discussed above replaced and the outstanding balance
transferred to this Credit Facility. As of December 31, 2000, the Company
believes that the Credit Facility had a balance of approximately $14,935,222 and
the Company has accrued interest on the Credit Line at the same interest rate
(approximately 8%) as set forth in the proposed third party financial
institution proposal that the Company. Through the period ended December 31,
2000, $2,356,711 in interest had been accrued.
MCNIC's Working Capital Loan (which the Company maintains was replaced by
the Credit Facility) and its Preferential Capital Contribution was secured by a
first priority lien, security interest in and pledge of all the property of
Crown Distribution including, Crown Distribution's rights, title and interest in
and to the membership interests in CAT LLC, but excluding inventory and
receivables which are used to secure the Credit Facility.
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On March 27, 2000, MCNIC delivered to the Company a notice of default with
respect to the Working Capital Loan, and demanded payment of the outstanding
principal balance plus all interest accrued thereon. Significantly, MCNIC,
immediately following the delivery of its notice of default, proposed an
extension on the Working Capital Loan, provided the Company also relinquished
operational control of Crown Distribution to MCNIC. The Company has endeavored
to resolve these issues with MCNIC on mutually acceptable terms. However, on
June 20, 2000, MCNIC filed a Complaint in the Third Judicial District Court,
Salt Lake County, Utah, against Crown Distribution. The action sought to
foreclose on alleged mortgage and security interest in and to certain real and
personal property of Crown Distribution, which property constitutes a
substantial part of the operating assets of Crown Distribution. In summary, in
its Complaint (the "MCNIC Complaint"), MCNIC does not acknowledge its prior
agreement to extinguish the Working Capital Loan and "roll" such loan into the
Credit Facility. The Complaint alleged that Crown Distribution is in default on
the promissory note evidencing the Working Capital Loan to Crown Distribution in
the amount of $7,141,930.00. MCNIC further alleged that the total amount owed by
Crown Distribution to MCNIC is in excess of $15,000,000, as well as interest at
the rate of 18% from January 1, 2000 until paid in full. The Complaint also
sought the appointment of a receiver to ensure and protect the interests of
MCNIC in the property of Crown Distribution, pending a determination by the
Court of the merits of the Complaint. (See "Item 3. Legal Proceedings").
As indicated above, Management of the Company strongly believes that the
Working Capital Loan was fully satisfied and replaced by the Credit Facility and
no default has occurred under the Working Capital Loan or Credit Facility. The
Company further believes that MCNIC is improperly (i) attempting to demand
repayment of the Working Capital Loan, and (ii) is attempting to gain control of
Crown Distribution and other aspects of the Company's operations. The Company
and Crown Distribution have acted to vigorously defend against MCNIC's actions.
On July 25, 2000, the Company filed suit in the United States District Court for
the state of Utah, Central Division, against MCNIC, MCN and certain officers of
MCN. In its Complaint, (the "Crown Complaint"), the Company alleges claims
against the defendants under a wide variety of causes of action sought damage in
excess of $100 million. An Answer and Counterclaims to the MCNIC Complaint were
filed by the Company on August 1, 2000 and named additional counterclaim
defendants, MCN Energy Group, Inc. ("MCN") and certain officers of MCN and
MCNIC. The Answer and Counterclaims substantially denied all of the allegations
set forth in the MCNIC Complaint and asserted defenses, claims and
counterclaims. The Answer and Counterclaims further argued that certain of
MCNIC's allegations are lacking in either legal or factual basis. Recently, all
of (i) MCNIC's Complaint, (ii) the Company's Answer and Counterclaims to the
MCNIC Complaint, and (iii) the Crown Complaint and the Answers thereto were
submitted to binding arbitration (the "Arbitration"). Because of the importance
of the outcome of the Arbitration to the Company and its shareholders, it is
discussed at length elsewhere within this Report. See "Item 3. Legal
Proceedings; Item 7. Management's Discussion and Analysis."
Distributions; Allocations Of Profits and Losses. Until such time as MCNIC
has received the return of its Preferential Capital Contribution and a 15%
internal rate of return on its investment in Crown Distribution, Crown
Distribution is obligated to distribute to MCNIC 50% of the net cash flow from
operations. The remaining cash flow balance is distributed roughly 50% to MCNIC
and 50% to the Company (in accordance with their respective sharing ratios).
During 2000, no distributions were made. In the event of liquidation, MCNIC
would receive 100% of any and all amounts available for distribution up to its
outstanding Preferential Capital Contribution balance and remaining amounts
would be distributed in proportion to the member's capital account balances.
Profits and losses are generally allocated in accordance with the members'
respective sharing ratios. However, after profits are allocated to offset any
previous allocations of losses made to members, in the event of a complete
liquidation of Crown Distribution, profits will be allocated 100% to MCNIC until
its Preferential Capital Contribution and the 15% rate of return has been
satisfied.
Management Agreement. Pursuant to an Operating and Management Agreement
(the "Management Agreement"), CAPCO manages and conducts the business of Crown
Distribution, including the negotiation and execution of contracts with
customers, the buying and selling of asphalt and the paying of expenses. As
compensation for the services rendered under the Management Agreement, the
Company receives (i) a monthly fee of $5,000, (ii) the payment of all
out-of-pocket expenses incurred through the performance of its duties; (iii) the
reimbursement of the reasonable salaries, wages, overtime and other similar
8
compensation paid to employees of the Company in relation to their management
services under the Management Agreement; and (iv) a monthly home office overhead
charge of $10,000.
The term of the Management Agreement is five years, which term will be
automatically extended for unlimited successive one-year periods unless either
party furnishes the other with written notice at least ninety (90) days prior to
the expiration of any such initial or extended period. During the initial term
of the Management Agreement, the Company can be removed only for good cause by
the affirmative vote of the management committee. The Management Agreement also
contains provisions allowing the replacement, after the initial five year term,
of the Company as the manager on economic grounds if Crown Distribution notifies
the Company that it believes the operations may be conducted more efficiently
and is willing to become the operating manager or has a commitment from a third
party to do so. Following the receipt of an economic challenge, the Company will
have thirty (30) days to notify Crown Distribution that it elects to allow Crown
Distribution or its designee to become the operator under the proposed terms or
that the Company elects to continue as the operator under the proposed terms.
Such a decision would require the majority vote of the management committee of
Crown Distribution. Two of the members of the management committee are nominees
of the Company.
In addition to asphalt distribution, Crown Distribution stores asphalt for
CAPCO in its excess storage facilities in return for the receipt of an industry
standard "throughput fee."
Cowboy Asphalt Terminal, L.L.C.
Formation and Acquisition of Assets. CAT LLC is a joint venture between the
Company and Foreland. Foreland is engaged in the asphalt roofing products
business. On June 16, 1998, CAT LLC was formed to acquire an asphalt terminal
and related refinery assets and real property located in Woods Cross, Utah (the
"Cowboy Terminal Assets"). The real property acquired by CAT LLC as part of the
Cowboy Terminal Assets is referred to hereinafter as the "Cowboy Terminal
Property".
On September 11, 1998, CAT LLC, CAPCO, Foreland and Refinery Technologies,
Inc., a Utah corporation ("Refinery Technologies"), entered into an Assignment
and Agreement (the "Assignment Agreement") under which Refinery Technologies
assigned all of its ownership rights in and to the Cowboy Terminal Assets
purchase contract to CAT LLC. In turn, CAT LLC agreed to assume all of the
obligations under the real property purchase contract and issued a promissory
note in connection with the purchase in the amount of $1,067,111 to the former
owner.
On January 9, 1999 CAT LLC purchased the Cowboy Terminal Assets for
$1,477,070 (net of $496,441 of deposits paid in 1998). CAT LLC paid $195,000 in
cash at closing and executed and delivered a promissory note in the amount of
$1,282,070. This promissory note is payable in 84 equal monthly installments of
$20,627 beginning on February 1, 1999 and ending on January 1, 2006. The note
bears interest at the rate of 9% and is secured by a deed of trust encumbering
the Cowboy Terminal Property.
The Company and Foreland initially owned sharing ratios ("sharing ratios")
of 66.67% and 33.33%, respectively, in the profits, losses and obligations of
CAT LLC. However, the Company has assigned its sharing ratios and ownership
interests in CAT LLC to Crown Distribution. In connection with the transfer of
the 66.67% interest in CAT LLC to Crown Distribution, Crown Distribution assumed
payment obligations under this promissory note. See "Item 1. Business - Asphalt
Distribution - Crown Asphalt Distribution, L.L.C."
The Cowboy Terminal Property has been divided into portions dedicated (i)
to the exclusive uses of the Company for its asphalt paving products business
and (ii) to the exclusive uses of Foreland for its asphalt roofing products
business. Revenues or profits generated by such exclusive uses will belong to
the Company or Foreland, as the case may be, and the other party will have no
right to participate in the revenues, profits or income generated by the
business of the other with respect to such exclusive uses. Further, the use of
the Cowboy Terminal Property by the Company and by Foreland is free of charge or
other cost above the parties' respective operating costs.
9
The CAT LLC Operating Agreement obligates both the Company and Foreland to
make additional capital contributions equal to one-half of any additional
amounts needed for (i) CAT LLC to fulfill its obligations, not to exceed
$650,000, under any corrective action plan that may be accepted by CAT LLC and
the Utah Department of Environmental Quality with respect to certain
environmental conditions at the Cowboy Terminal Property and (ii) legal costs
incurred in the purchase or related to the environmental matters in (i) of this
paragraph. The CAT LLC Operating Agreement also obligates Crown Distribution and
Foreland to make additional capital contributions, in proportion to their
ownership percentages, in order to fund any additional amounts required for CAT
LLC to fulfill its obligations under the purchase contract for the Cowboy
Terminal Assets, for environmental management and containment costs, expenses
for operations, or the construction of certain approved capital improvements to
the Cowboy Terminal Property. None of the foregoing additional contributions
will result in an increase in the number of units or percentage interests held
by Crown Distribution or Foreland.
CAT LLC has title to the Cowboy Terminal Property and the Company has the
exclusive right to use portions thereof for its asphalt terminal operations.
Refinery Technologies did, however, retain certain contract rights with respect
to the Cowboy Terminal Assets, certain rights to receive payments upon any
liquidation of CAT LLC and a right of first refusal to purchase the Cowboy
Terminal Property or membership interests in CAT LLC under certain conditions.
Management of Cowboy Asphalt Terminal, LLC; Major Decisions. CAT LLC is
managed by CAPCO. The manager generally has authority to conduct the day-to-day
business and affairs of CAT LLC. Certain matters must be approved by members
holding 75% or more of the outstanding units of CAT LLC. The Company is not
compensated for its services as manager.
Asphalt Production
Crown Asphalt Ridge, L.L.C.
Formation and Current Development Status. Effective August 1, 1997, the
Company jointly formed Crown Ridge with MCNIC to construct and operate an oil
sand processing facility for the production of premium asphalt oil at Asphalt
Ridge in Uintah County, Utah. The Company believes that the Asphalt Ridge oil
sand reserves constitute one of the country's largest and most accessible
deposits of oil sands. Crown Ridge controls, through numerous mineral leases,
approximately 5,700 acres of private and state land encompassing these tracts,
which the Company believes contains in excess of 100 million barrels of surface
minable reserves (the "Oil Sand Resources").
The Facility constructed by Crown Ridge is located on a portion of the Oil
Sand Resources known as the "A" tract, which is believed to contain in excess of
18 million barrels of surface minable reserves with an average oil saturation of
11% by weight. There is a partially opened pit on this tract that has been mined
since the 1940's for native asphalt material for road surfaces. The production
process entails three major steps: (1) mining, (2) extraction (separation of the
oil from the sand), and (3) distillation (recovery of the solvent and separation
of light fractions from the asphalt). See "Item 1. Business - Asphalt Production
- Crown Asphalt Ridge, L.L.C. - Additional Opportunities Within the Project Area
and Areas of Mutual Interest."
MCNIC and the Company (sometimes referred to hereafter as the "Members")
own sharing ratios ("sharing ratios") of approximately 76% and 24%,
respectively, in the profits, losses and obligations of Crown Ridge. However,
the Company has the right to acquire up to a 60% equity interest in Crown Ridge,
contingent upon MCNIC's receipt of certain preferential financial returns (as
described below) and Crown Ridge's election to pursue certain expansion
opportunities. Since the Company holds only a minority interest in Crown Ridge,
the Company's consolidated financial statements and results of operations only
include its net interest in the accounts and results of operations of Crown
Ridge.
Under the Crown Ridge Operating Agreement, MCNIC initially funded 75% and
the Company 25% of the amounts required by Crown Ridge to construct the
Facility. The Company was initially required to contribute (i) $500,000 of oil
sand leases and technology; and (ii) the obligation to lease certain mining
10
equipment for the Facility up to $3,500,000 in value. Both Members may make such
additional contributions as were required pursuant to the contract for the
construction of the Facility and as otherwise unanimously agreed to by the
Company and MCNIC. As of December 31, 2000, the Company has made cash
contributions of approximately $5,663,985 to Crown Ridge and has invested a
total of approximately $6,904,086 in the development of Asphalt Ridge, which
includes costs incurred prior to the joint venture with MCNIC.
Because operations at Crown Ridge did not yet require it, the Company did
not contribute as part of its capital contribution, the leased mining equipment
contemplated when the entity was formed. To replace the foregoing obligation to
lease certain mining equipment as its required capital contribution, on July 20,
1999 the Company's CAC subsidiary, at the demand of MCNIC, closed a loan
transaction with MCNIC. Under the loan, CAC executed a promissory note in the
amount of $2,991,868, bearing interest at the prime rate plus 1% per annum,
adjusted monthly, and providing for interest only payments of $20,757 per month
through August 20, 2001. Additional payments may be required if CAC's cash flow
exceeds certain thresholds. Beginning on August 20, 2001, the note provides for
principal and interest payments in order to fully pay off the note over a
13-year period. However, if at August 20, 2001, CAC and MCNIC agree that the
Facility will not be able to operate commercially, the interest only period will
be extended and no principal payments will be due until July 20, 2004. The
foregoing loan is secured by that portion of CAC's sharing ratio in Crown Ridge
directly attributable to the proceeds of the loan (approximately 12.29% of its
aggregate sharing ratio). The gross proceeds of the loan ($2,991,868.66) were
treated as a capital contribution by CAC to Crown Ridge. The net cash proceeds
of the loan ($1,891,650.50), after deduction of amounts previously paid by MCNIC
to creditors of Crown Ridge and less certain amounts owed by Crown Ridge and/or
CAC to MCNIC, were paid by MCNIC directly to Crown Ridge. Additional capital
contributions may be required in the future as otherwise provided under the
Crown Ridge operating agreement.
If the economic operations of Crown Ridge are successful to the extent of
paying out to MCNIC an amount equal to 115% of its cash investment in Crown
Ridge, excluding tax benefits, the Company's sharing ratio in Crown Ridge will
increase to 50%. Thereafter, the Members may build other plants to further
develop the Oil Sand Resources. These additional plants will require additional
capital contributions from the Members, which are described in more detail
below. The Company may participate up to 50% in the additional facilities and up
to 60% after payout of the cash investment in such facilities. There are
provisions for the Company to retain an interest in these facilities after the
recoupment of certain amounts in the event the Company does not participate in
the costs of such additional facilities, as provided in the "Back-In Option. See
"Item 1. Business - Crown Asphalt Distribution, L.L.C. - The Back-In Option."
Operating History; Status of Operating and Management Agreement. During the
start-up of the Facility mechanical and process difficulties were experienced
that affected production economics. Extensive research and engineering to
develop a solution to these problems was conducted and tested in a pilot study
at the Facility during 2000. MCNIC, as the majority owner of Crown Ridge, has
solely managed the operation of the pilot plant and study. In order to
facilitate the completion of the pilot plant, the Company entered into an
agreement with MCNIC pursuant to which MCNIC agreed to fund the Company's
portion of certain pilot plant expenses in the aggregate amount, including the
Company's portion, of $714,799. Pursuant to this arrangement, the amounts funded
by MCNIC were treated as additional capital contributions to Crown Ridge. A
similar arrangement was entered into with regard to the payment of other
miscellaneous expenses owed by Crown Ridge. As a result of the foregoing
agreements with MCNIC and the adjustments required thereby, the Company's
sharing ratio in Crown Ridge was reduced from 25% to approximately 24%.
As part of the agreements entered into with MCNIC by the Company for the
purposes of (i) ensuring that the pilot plant study was expeditiously performed,
and (ii) paying the outstanding expenses of Crown Ridge, the Company was also
required by MCNIC to grant it the option, under certain conditions, to remove
the Company as the Operator of Crown Ridge under that certain Operating and
Management Agreement dated August 1, 1997 (the "Crown Ridge Management
Agreement"). The agreements provided that if the foregoing option was exercised
by MCNIC, the Company's (i) right to serve as Operator for any additional plants
built on Crown Ridge's oil sands leases, or (ii) rights as a member of Crown
Ridge would
11
not be impaired. In addition, in the event that MCNIC exercised its option to
remove the Company as Operator under the Crown Ridge Agreements, MCNIC was
required to assume such duties under a newly executed operating and management
agreement.
On May 26, 2000, the Company received notice that MCNIC had elected to
exercise its option to remove the Company as operator of Crown Ridge, effective
June 26, 2000. Although the Company acknowledges that MCNIC possessed the right
to remove it as Operator under certain conditions, it objected to MCNIC's
actions on the grounds that (i) the requirements attached to those rights were
not met by MCNIC (i.e., no substitute operating and management agreement has
been submitted by MCNIC), (ii) no annual operating plan has been prepared by
MCNIC for the operations of Crown Ridge, and (iii) the Company does not believe
that MCNIC has taken other actions consistent with an intention to bring the
Crown Ridge Facility to commercial production as quickly as possible.
Although the Company does not view MCNIC's assumption of operational
control of the Facility as valid, management of the Company has deemed it to be
in the Company's best interest to conserve the Company's resources by formally
and consistently objecting to MCNIC's assumption of control, but not otherwise
seeking to block MCNIC's actions at this time so that the final results of the
pilot plant study can be completed and analyzed. MCNIC has previously reported
to the Company that the previous production problems were not encountered during
the final runs of the pilot plant. While the Management of the Company believes
this initial news is encouraging, it notes that the definitive engineering
procedures needed to incorporate the pilot plant modifications into the existing
Facility and the cost of such modifications have not been determined. In
addition, despite its commitment to the contrary, MCNIC has repeatedly failed to
meet the Company's demands for detailed engineering and financial information
relating to the Facility. Because of the uncertainty created by this lack of
information, the Company has impaired the value of its Crown Ridge interest as
is explained in its Consolidated Financial Statements attached to this Report.
In summary, the future of the Crown Ridge Facility remains uncertain.
Ultimately, commercial production of the Facility will require further
expenditures and may require the consent of both MCNIC and the Company as
members in Crown Ridge. If the pilot plant studies do prove that the commercial
production at the pilot plant is feasible, the Company will still need to obtain
the necessary financing for its proportionate share of the expenses in modifying
the Facility and there is no assurance that such financing can be obtained
giving the current financial condition of the Company. Further, MCNIC's stated
intention to sell its interest in Crown Ridge creates additional uncertainty in
that it is not clear whether the modifications to the Facility will be made
prior to or after such sale. The Company does not anticipate that the necessary
modifications will be made to the Facility prior to the fall of 2001 under any
circumstances. Such continued difficulties at Crown Ridge or the inability to
commercially operate the Facility economically could significantly impact Crown
Ridge's ability to continue as a going concern and could have the materially
adverse impact on the Company's operations and financial condition.
Subsequent Plants. Under the Crown Ridge Operating Agreement, the members
may construct up to two subsequent plants (the "Subsequent Plants") similar to
the Facility if the economics of Crown Ridge's oil sands processing business so
permit. In sum, a Subsequent Plant may be constructed if certain economic
returns (approximately 18% on 50% of its Capital Contributions to Crown Ridge or
any successor joint venture during any 12 month period) have been experienced by
MCNIC from the Facility and if the members believe or are independently advised
that a sufficient market exists to allow for the operation of the Subsequent
Plants without damaging the competitive position or returns of the Facility or
any other then-existing asphalt processing plants owned or operated by Crown
Ridge or any Successor Entity (as defined below). The agreement of MCNIC and the
Company is that any Subsequent Plant will be held and operated by a separate
legal entity (a "Successor Entity") formed by the members with governing terms
and provisions similar to Crown Ridge. The Company may elect to participate in
either of the Subsequent Plants and may obtain, at its option, between 10% and
50% of the interests in the newly formed entity. A portion of the Company's
obligations to contribute to the Successor Entity may be satisfied through the
value of the contributed properties which the Company may be credited with, as
described below.
12
Following the determination by both members or one member to proceed with
the construction of a Subsequent Plant, Crown Ridge will convey to the Successor
Entity sufficient oil sands resources or other property and water rights to
enable it to sustain operations in accordance with the applicable projections
and market study. If, during the twelve months prior to the sale of products
from the first Subsequent Plant, MCNIC has realized a return of approximately
30% on 50% of its Capital Contributions to Crown Ridge, the Company will be
credited with a value for these oil sand resources and properties equal to $.10
per barrel for the products estimated to be produced from the Subsequent Plant
over a 20 year period.
If the Company elects not to proceed with any Subsequent Plant, and to not
make the needed capital contributions to build and operate the Subsequent Plant,
Crown will have a reduced interest in the Subsequent Plant (but will still be
credited with an interest equal to the value of the contributed properties as
described below, if the requisite return is achieved), subject to an escalation
under the Back-In Option described below.
Whether or not the Company elects to proceed with either Subsequent Plant,
if the Subsequent Plants reach certain levels of economic success (approximately
115% of MCNIC's investment in plant 2 without giving effect to any tax
benefits), the Company will receive an increased interest of 10% in the
Subsequent Plant as a result of its oil sand properties and technology being
used by the Subsequent Plant(s).
Management of Crown Ridge; Major Decisions. Crown Ridge is governed by a
management committee consisting of five managers. The Company is entitled to
appoint one manager and MCNIC is entitled to appoint four managers. Management
decisions are generally made by the management committee. Any manager may be
removed or replaced from time to time by the member which appointed such
manager. If any adjustment is made in the members' respective sharing ratios
both the Company and MCNIC will be entitled to appoint one manager for each 20%
of Crown Ridge interest held by that member (rounded to the nearest 20% level),
provided, that MCNIC and the Company shall each be entitled to at least one
manager at all times that they are members of Crown Ridge. The size of the
management committee may be increased to six managers if the foregoing
calculation requires it.
Management decisions shall generally be made through a majority vote of the
managers. However, certain "Major Decisions," such as: (i) the approval of the
detailed engineering for the Facility; (ii) the approval of, or substantial
amendment to, the annual operating plan described below; and (iii) calls for any
additional Capital Contributions (except for calls contemplated by the EPC
Contract for the construction of the original Facility as defined in Crown
Ridge's Operating Agreement and those required to maintain Crown Ridge in
emergencies), require unanimous approval of all managers. Most distributions to
the members require unanimous approval of the managers.
The operating agreement for Crown Ridge states that Crown Ridge's
operations shall be conducted each year pursuant to the annual operating plan
addressing all aspects of Crown Ridge's operations for the coming year,
including budgeting for operations, the mining of oil sand products and the
marketing of those products. In the event the management committee is unable to
unanimously approve an annual operating plan for any given calendar year, a
majority of the Managers shall have the authority to continue to maintain Crown
Ridge's operations at levels comparable to those approved under the last annual
operating plan. As of the date of this Report, the annual operating plan for
calendar years 1999, 2000 and 2001 have not been approved by the management
committee. Consequently operations are to be conducted at levels comparable to
those of the initial operating plan adopted at the formation of Crown Ridge.
Additional Opportunities Within the Project Area and Area of Mutual
Interest. Crown Ridge may elect to pursue additional opportunities ("Additional
Opportunities") within the Asphalt Ridge project area ("Project Area") which are
brought to its attention by one of its members. Should Crown Ridge elect to
pursue such an Additional Opportunity, it may do so either through Crown Ridge
or by forming a new company containing terms and provisions substantially
similar to those of Crown Ridge. In the event that Crown Ridge does proceed with
any Additional Opportunity, the Company shall have the right, but not the
obligation, to obtain an equity interest in each such Additional Opportunity of
no less than 10% and no greater than 50% (with MCNIC obtaining the remaining
interest). If the management committee determines
13
not to proceed with the Additional Opportunity, any member of Crown Ridge may
then do so alone, subject to the Back-In Option, discussed below, of the
nonparticipating member.
If either member desires to develop any interests in real property,
fixtures or improvements within the State of Utah relating to the processing of
oil sands, bitumen, asphaltum or other minerals or mineral resources into
asphalt, performance grade asphalt, synthetic crude oil, diesel fuel, or any
other product produced using the intellectual property sublicensed by the
Company to Crown Ridge or any derivation thereof (an "AMI Opportunity"), the AMI
Opportunity must first be offered to Crown Ridge. The Company, shall then have
the option, but not the obligation, of acquiring (i) up to a 50% equity interest
if the AMI Opportunity relates to, or is designed for, the production and sale
of asphalt or performance grade asphalt; or (ii) up to a 66% equity interest if
the AMI Opportunity relates to the production of synthetic crude oil, diesel
fuel or any other similar products.
If Crown Ridge elects not to proceed with the AMI Opportunity, the member
who brought the opportunity to Crown Ridge may proceed alone and the
nonparticipating member shall have no further interest in the activity covered
by such opportunity. Except as limited in the discussion above, each member of
Crown Ridge shall have the right to independently engage in any business
activities except that MCNIC shall not be entitled to use the Company's
technology provided to Crown Ridge in connection with such activities.
The Back-In Option. The Back-in Option is a means by which the member which
initially elects not to participate in a plant may subsequently participate at a
later date upon favorable terms. The Back-In Option applies if:
(i) The Company elects not to proceed with construction of the Facility
following the completion of the detailed engineering (and MCNIC elects
to proceed);
(ii) either member elects not to participate in the construction of a
Subsequent Plant; or
(iii) either member elects not to participate in an Additional Opportunity.
In the case of the Company's election not to participate in Subsequent
Plants or Additional Opportunities, the Company shall be entitled to a 60%
interest in the particular plant or opportunity if it is the non-participating
member, and MCNIC shall be entitled to a 40% interest if it is the
non-participating member, after the participating member has achieved a 200%
payout of the costs of the respective facility.
Distributions; Allocations of Profits and Losses. The Management Committee
shall cause Crown Ridge to distribute Available Cash, as defined within the
Operating Agreement, to the members quarterly, within 30 days following the end
of each quarter. Distributions will be made in connection with the respective
capital account balances after taking into account all allocations.
Environment
The Company and its subsidiaries are subject to federal, state and local
requirements regulating the discharge of materials into the environment, the
handling and disposal of solid and hazardous wastes, and protection of health
and the environment generally (collectively "Environmental Laws"). Governmental
authorities have the power to require compliance with these Environmental Laws,
and violators may be subject to civil or criminal penalties, injunctions or
both. Third parties may also have the right to sue for damages and/or enforce
compliance and to require remediation for contamination.
The Company and its subsidiaries are also subject to Environmental Laws
that impose liability for costs of cleaning up contamination resulting from past
spills, disposal and other releases of substances. In particular, an entity may
be subject to liability under the Federal Comprehensive Environmental Response,
Compensation and Liability Act and similar state laws that impose liability -
without a showing of fault, negligence, or regulatory violations - for the
generation, transportation or disposal of hazardous substances
14
that have caused or may cause environmental contamination. In addition, an
entity could be liable for cleanup of property it owns or operates even if it
did not contribute to contamination of such property.
The Company expects that it may be required to expend funds to comply with
federal, state and local provisions and orders which relate to the environment.
Based upon information available to the Company at this time, the Company
believes that compliance with such provisions will not have a material effect on
the capital expenditures, earnings and competitive position of the Company.
Subsidiaries of the Company
Crown Asphalt Corporation, a Utah corporation which is a wholly owned
subsidiary of the Company, was organized October 24, 1985 and was acquired by
the Company on September 30, 1992. Crown Asphalt Corporation is a member of and
holds roughly 24% of the membership interests in Crown Ridge. The Company
includes its net share of the net assets and results of operations of Crown
Ridge in its consolidated financial statements.
Crown Asphalt Products Company ("CAPCO"), a Utah corporation which is
wholly owned subsidiary of the Company, was formed in 1991, but until 1998 was a
dormant entity. The Company activated CAPCO for the purpose of conducting an
asphalt marketing and distribution business. CAPCO is a member of and holds
50.01% of the membership interests in Crown Distribution and currently owns the
Rawlins Asphalt Terminal.
On July 2, 1998, Crown Distribution was formed as a second joint venture
between the Company and MCNIC. Crown Distribution is owned 50.01% by the Company
and 49.99% by MCNIC. Crown Distribution was formed to acquire the inventory and
assets of PSAC. Crown Distribution is a member of and holds 66.67% of the
membership interests in CAT LLC. The Company includes within its consolidated
financial statements the accounts and results of operations of both Crown
Distribution and CAT LLC.
Employees
As of March 13, 2000, the Company had 41 full and part-time employees. None
of the Company's employees are represented by a union or other collective
bargaining group. Management believes that its relations with its employees are
good.
Segments
The Company considers its principal business to be within one industry
segment. For information regarding the breakdown of revenues & operating results
for the Company and its operational units, see note 16 to the consolidated
financial statements of Crown Energy Corporation.
ITEM 2. PROPERTIES
The Company conducts its business operations at 215 South State, Suite 650,
Salt Lake City, Utah, where it has approximately 10,284 square feet of office
space under lease until July 31, 2001. On October 30, 2000 the Company notified
the landlord of the lease that it would exercise its option under the lease to
terminate the lease effective July 31, 2001. The Company has an obligation to
pay the landlord the unamortized cost of the tenant improvements and commissions
as of the July 31, 2001 termination date. Under the terms of the lease, the
Company pays $15,024 per month through November 30, 2000; $15,512 per month
through July 31, 2001. There is no renewal option under the terms of this lease.
On November 17, 2000, the Company purchased a building in Woods Cross, Utah
adjacent to the Cowboy Terminal executing a promissory note of $264,750.00
payable over 120 payments for the purchase price. The Company plans to relocate
its offices to this building, and management of the Company believes that
building will be sufficient for its needs and believes that it will be able to
obtain suitable other space in the Salt Lake City area in the alternative.
15
As described above in the section captioned "Item 1. Business - Asphalt
Production - Crown Asphalt Ridge, L.L.C.," the Company controls through mineral
leases certain Oil Sand Resources consisting of approximately 5,700 acres of
private and state land at Asphalt Ridge in Uintah County, Utah. The Asphalt
Ridge oil sands deposit is located in the Uintah Basin in eastern Utah near the
town of Vernal.
Extensive reserve studies, including core drilling performed by Bechtel and
Sohio between the late 1950's and mid-1980's, estimate surface minable reserves
to be in excess of 100 million barrels. Crown Ridge controls the Oil Sands
Resources through certain long term operating leases and the Company has the
right to extract mineral reserves on these tracts so long as the Company
continues to conduct active operations under such leases, pay required royalties
and otherwise comply with the terms of the leases.
In connection with the formation and development of Crown Ridge, the
Company contributed the certain mineral leases to Crown Ridge. Crown Ridge has
been notified by Wembco, Inc. the lessor of the lease upon which the Facility is
located, that it believes the lease is terminated pursuant to the terms of the
lease due to inactivity. The Company believes it and Crown Ridge are in
compliance with, and not in material default under, all of its mineral leases.
Crown Ridge has notified Wembco, Inc. of this fact and its intent to defend its
leasehold interest if Wembco's claims persist. Further information regarding the
oil sand resources controlled by the Company is found at "Item 1. Business -
Asphalt Production - Crown Asphalt Ridge, L.L.C." above. That portion of CAC's
sharing ratio in Crown Ridge directly attributable to the proceeds of the
$2,991,868 loan from MCNIC to CAC is encumbered by a lien and security interest
of MCNIC. See "Item 1. Business - Asphalt Production - Crown Asphalt Ridge,
L.L.C."
Crown Distribution owns asphalt distribution facilities located in Utah,
Colorado, Nevada and Arizona. These properties are used by the Company to store,
process, blend, manufacture and sell finished asphalt products in its western
United States target market. All of Crown Distribution's assets are encumbered
by the lien and security interest of MCNIC, which advanced the purchase price
for such assets and has, the Company asserts, advanced certain funds under the
Credit Line to Crown Distribution. See "Item 1. Business - Asphalt Distribution
- Crown Asphalt Distribution, L.L.C.; Item 3. Legal Proceedings."
The Company, through its subsidiary CAPCO, owns the Rawlins Asphalt
Terminal. These properties are used to store, process, blend, manufacture and
sell finished asphalt products. All of the Rawlins Asphalt Terminal assets are
encumbered by the lien and security interest of Community First National Bank,
which advanced the purchase price for such assets. As described above under Item
1, MCNIC initially indicated that it wished to participate in the purchase and
ownership of the foregoing terminal but has not performed the agreed upon
actions necessary to obtain such ownership. See "Item 1. Business - Asphalt
Distribution - Crown Asphalt Distribution, L.L.C."
CAT LLC's asphalt distribution and storage facility is located in Woods
Cross, Utah, just north of Salt Lake City. CAT LLC owns all of the assets and
underlying real property of the Cowboy Terminal Property, which is encumbered by
a Deed of Trust in favor of the seller.
ITEM 3. LEGAL PROCEEDINGS
On May 21, 1998, Road Runner Oil, Inc. ("Road Runner") and Gavilan
Petroleum, Inc. ("Gavilan") filed an action in the Third Judicial District
Court, Salt Lake County, State of Utah, as Civil # 98-0905064 against the
Company and its President. The action relates to the purchase by Road Runner of
100% of the stock of Gavilan in 1997, and generally seeks to (i) obtain
corporate records of Gavilan in the Company's possession relating to the amount
of oil and gas royalties potentially owed to third parties prior to the
aforementioned stock sale, and (ii) to determine the amount of royalties owed.
The action further alleges, on behalf of Gavilan, claims of breach of fiduciary
duty, professional negligence and mismanagement against the Company's President
for alleged mismanagement of Gavilan's affairs. The Plaintiffs seek injunctive
relief requiring the tendering by the Company of the referenced records and such
damages as may be proven at trial. The Company believes that the Plaintiff's
claims are groundless and that it is entitled to payment of the $75,000, plus
accrued interest, still owed by Road Runner as part of the purchase price for
Gavilan. In addition, since the action was filed, the Company has tendered the
corporate records to the
16
Plaintiffs. On March 8, 2000, the Company filed an answer denying liability and
filed a counterclaim against Road Runner and Gavilan for breach of contract and
declaratory judgment. The Company is not certain as to whether or not the
outstanding balance under the promissory note is collectible by the Company.
On July 12, 1999, Morrison Knudsen Corporation ("MK") filed a Complaint in
the Eighth Judicial District Court, Uintah County, State of Utah, alleging that
CAC had breached an agreement whereby MK would provide certain mining services
for CAC at Crown Ridge's Facility in Uintah County, Utah (the "Project").
Judgment in favor of MK was entered on January 30, 2001 in the principal amount
of $303,873.39, $49,062.33 of pre-judgment interest and $2,033.14 of costs,
which totals $354,968.86. A Notice of Appeal was filed by CAC on March 1, 2001.
Although CAC will attempt to set aside the trial courts judgment, there can be
no assurance that CAC will prevail on its appeal. In addition, CAC has made a
demand on Crown Ridge for payment of the judgment amount and indemnity from any
liability in this matter because CAC was acting as operator for and on behalf of
Crown Ridge in the contractual relationship with MK that was the subject of the
litigation.
On July 14, 1999, Crown Distribution and CAPCO filed an action in the
United States District Court for the Central District of California, Southern
Division, against Santa Maria Refining Company ("SMRC"), SABA Petroleum Company
("SABA") and Greka Energy Corporation ("Greka"). The claims include causes of
action for breach of contract, breach of the covenant of good faith and fair
dealing, conversion, fraud, claim and delivery, unjust enrichment and
constructive trust, unfair competition, declaratory relief and specific
performance. These claims arise out of the Defendant's alleged termination of
the Processing Agreement and subsequent refusal to deliver asphalt to Crown
Distribution. Discovery of facts and testimony related to issues arising in the
lawsuit has been completed. Trial has been scheduled to begin April 24, 2001. It
is anticipated that the damages caused by the Defendant's actions could be
substantial. Although Crown Distribution will attempt to recoup those damages
from SMRC, SABA and Greka, due to the uncertainties inherent in any litigation
proceeding, there can be no assurance that Crown Distribution or CAPCO will
ultimately prevail.
On January 25, 2000, Oriental New Investments, Ltd. ("Oriental") filed a
Complaint against the Company in the Third Judicial District Court, Salt Lake
County, Utah. The action relates to a 1997 convertible debenture and replacement
convertible debenture issued by the Company to Oriental. The action seeks to
recover from the Company $50,000 liquidated damages, plus interest, and
attorneys fees and costs, for alleged breaches of the convertible debentures.
The Company answered the Complaint on March 1, 2000, denying any and all
liability, and believes that Oriental's claims are meritless. The Company will
vigorously defend its position that Oriental's claims are meritless. However,
due to the uncertainties inherent in any litigation proceeding, there can be no
assurance that the Company will ultimately prevail.
On June 20, 2000, MCNIC filed a Complaint in the Third Judicial District
Court, Salt Lake County, Utah, against Crown Distribution. The action sought to
foreclose an alleged mortgage and security interest in and to certain real and
personal property of Crown Distribution, which property constitutes a
substantial part of the operating assets of Crown Distribution. In summary, in
the MCNIC Complaint, MCNIC does not acknowledge its prior commitment to "roll"
the Working Capital Loan into the Credit Facility and alleges that Crown
Distribution is in default on the promissory note evidencing the Working Capital
Loan to Crown Distribution in the amount of $7,141,930.00. MCNIC further alleges
that the total amount owed by Crown Distribution to MCNIC is in excess of
$15,000,000, as well as interest at the rate of 18% from January 1, 2000 until
paid in full. The MCNIC Complaint also sought the appointment of a receiver to
ensure and protect the interests of MCNIC in the property of Crown Distribution,
pending a determination by the Court of the merits of the Complaint. Crown
Distribution has moved to vigorously defend against this litigation and believes
that it has certain available defenses, claims and counterclaims. Crown
Distribution's management further believe that certain of MCNIC's allegations
are lacking in either legal or factual basis.
On July 25, 2000, the Company filed the Crown Complaint against MCN, MCNIC
and certain officers of MCN and MCNIC. The suit was brought in the United States
District Court for the District of Utah, Central Division, and is styled Crown
Energy Corporation, Crown Asphalt Corporation, and Crown
17
Asphalt Products Company v. MCN Energy Group, Inc., MCNIC Pipeline & Processing
Company, Howard L. ("Lee") Dow III, and William E. Kraemer, Civil No.
2:00CV-05873ST. The Company's action arises from the joint ventures between the
Company and MCN with regard to the asphalt business in the western United States
involving the mining, processing, storage, manufacture, and marketing of asphalt
the Company alleges claims against defendants for breach of fiduciary duties,
economic duress, breach of implied covenants of good faith and fair dealing,
breach of contracts, estoppel, intentional interference, and trade libel and
slander of title as a result of defendants' wrongful and bad faith conduct in
the joint venture relationships. Damages of an amount exceeding $100 million are
sought on the Company's claims for breach of fiduciary duties, economic duress,
and breach of implied covenants of good faith and fair dealing, with the full
amount of damages on all claims to be proven at trial.
On August 1, 2000, Crown Distribution filed its Answer and Counterclaims to
the MCNIC Complaint and named additional counterclaim defendants, MCN Energy
Group, Inc., Howard L. ("Lee") Dow III, and William E. Kraemer. Crown
Distribution's Answer and Counterclaims substantially denied all of the
allegations set forth in the MCNIC Complaint and alleged numerous counterclaims,
including breach of fiduciary duty, economic duress, breach of implied covenants
of good faith and fair dealing, breach of contracts, estoppel, intentional
interference, trade libel and slander of title, and abuse of process. Crown
Distribution, pursuant to its counterclaims, has requested a jury trial and is
seeking relief in the way of damages in amounts to be proven at trial, punitive
damages, attorney's fees, interest, costs and any other relief to which they may
be entitled.
On August 31, 2000, MCNIC filed motions to stay both the state court and
federal court actions and have them submitted to an arbitration panel selected
by the American Arbitration Association in accordance with the rules of the
American Arbitration Association. The Company contested whether either lawsuit
should be subject to arbitration and filed an answer to both motions on October
2, 2000 to that effect. However, the state court ultimately ordered arbitration
and the federal court, though it did not compel arbitration, concluded that the
major disputes were arbitrable.
On January 29, 2000, the Company determined that binding arbitration of
all of the claims set forth above before a single retired federal judge would be
in the Company's best interest. Accordingly, an Arbitration Agreement was signed
between all of the parties on January 26, 2001. The arbitration (the
"Arbitration") is being arbitrated before Judge John G. Davies (ret.) in Salt
Lake City, Utah. The arbitration hearing is scheduled for July 23, 2001 through
August 10, 2001, with extensive pre-hearing discovery to occur prior to that
time.
Commencing March 5, 2001, the Company, MCNIC, MCN and various officers
exchanged claims and counterclaims relating to the Arbitration. The claims
contained therein substantially restate the parties' prior positions within the
litigation described above. However, in its claims in arbitration, MCNIC
asserted claims against CAC and CAPCO and also included the Company's chief
executive officer, president and treasurer, Jay Mealey, as a party. The Company
denies MCNIC's claims. Mr. Mealey believes that his inclusion at this point is
highly improper due to the fact that he had not been a party to the pending
actions nor to the Arbitration Agreement pursuant to which the actions were
submitted to the Arbitration. Accordingly, Mr. Mealey has filed a motion with
the arbitrator to be removed from the Arbitration.
The Company believes that it has a strong case on the claims and
counterclaims in the Arbitration. However, because arbitration proceedings are
inherently uncertain, the Company cannot predict the outcome of any such
proceedings. Management of the Company is keenly aware of the importance of the
Arbitration to the Company. If MCNIC prevails in the Arbitration, and depending
upon the extent in nature of any relief granted by the Arbitrator, the Company
may be severely and adversely impacted and may lose possession of some or all of
its primary assets and sources of revenues.
On July 10, 2000 the Company entered into an agreement with Berman,
Gaufin, Tomsic, Savage & Campbell, a law firm in Salt Lake City, Utah
("Berman"), to represent the Company in the legal matters involving MCNIC, its
affiliates and certain officers. This agreement provided for 350,000 shares of
the Company's common stock to be issued to Berman as a retainer. In addition,
the Company will reimburse
18
Berman's costs of litigation and pay a contingency fee of 33.33% of any recovery
from such litigation. The Company agreed upon these terms on the basis that this
was in its best interest in that the Company was able to conserve its available
capital for operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders for vote during the
fourth quarter of fiscal year 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company, their ages and their
positions are set forth below:
NAME AGE POSITION
James A. Middleton 64 Chairman of the Board of Directors
Jay Mealey 44 Chief Executive Officer, President,
Treasurer, Director
Stephen J. Burton 55 Secretary
Andrew W. Buffmire 54 Director
James A. Middleton has served as a director since February 1996 and served
as Chief Executive Officer from December 1996 through April 16, 1999. Mr.
Middleton will continue to serve as Chairman and a director until a new Chairman
and director is duly elected and qualified. Mr. Middleton was an Executive Vice
President and director of Atlantic Richfield Co. from October 1987 to September
1994 and resigned in March 2001, as a director of Texas Utilities Co.
Jay Mealey has served as President and Chief Operating Officer and as a
director of the Company since 1991. Mr. Mealey was appointed as Chief Executive
Officer in April, 1999 treasurer in October, 2000 and will serve as Chief
Executive Officer, President and Treasurer and as a director, until a new
officer and director, respectively, are appointed or elected and qualified. Mr.
Mealey has been actively involved in the oil and gas exploration and production
business since 1978. Prior to employment with the Company, Mr. Mealey served as
Vice President of Ambra Oil and Gas Company and prior to that worked for Belco
Petroleum Corporation and Conoco, Inc. in their exploration divisions. Mr.
Mealey is responsible for managing the day-to-day operations of the Company.
Stephen J. Burton was elected Secretary in October, 2000. Mr. Burton has
held various accounting positions with the Company since 1989. He is currently
responsible for the Company's Human Resources. Mr. Burton graduated from Utah
State University in 1986.
Andrew W. Buffmire is the Vice President Business Development for publicly
traded Ubiquitel, Inc., a wireless telecommunications company headquartered in
Conshohocken, Pennsylvania. Prior to joining Ubiquitel, Buffmire was a Director
in the business development group at Sprint PCS, a national wireless
telecommunications service provider. Before joining Sprint PCS, Buffmire was an
attorney in private legal practice in Salt Lake City, Utah for 16 years, with
the exception of two years (1985-1987), when he was the founder, general counsel
and registered principal of an NASD-registered investment-banking firm.
PART II.
ITEM 5. MARKET PRICE FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been traded in the over-the-counter market
since 1980. The common stock is currently listed on the NASD OTC Bulletin Board
under the symbol CROE. At the
19
present time, only the common stock is publicly traded. The following table sets
forth the range of high and low bid quotations, as adjusted for stock splits, of
the Company's common stock as reported by the National Quotation Bureau for each
full quarter during the two most recent fiscal years. The table represents
prices between dealers, and does not include retail markups, markdowns or
commissions, and may not represent actual transactions:
CALENDAR QUARTER ENDED HIGH BID LOW BID
March 31, 2000 .65625 .5625
June 30, 2000 .21875 .1875
September 30, 2000 .14 .125
December 31, 2000 .075 .0625
March 31, 1999 1.38 1.00
June 30, 1999 1.06 .59
September 30, 1999 .66 .31
December 31, 1999 .41 .26
As of March 29, 2001, the high bid and low offer quotations reported by the
National Quotation Bureau were $.054 and $.05, respectively. On March 29, 2000,
approximately 13,635,581 shareholders of record held the Company's common stock.
The Company declared and paid no dividends in 2000.
The Company has not paid any dividends or made any other distributions on
its common shares. It is the present policy of the Board of Directors of the
Company to retain any earnings for use in the business, and therefore, the
Company does not anticipate paying any cash dividends on its common stock in the
foreseeable future. The terms of the Company's Series A Preferred Stock prohibit
the payment of dividends on common stock at any time that dividends on the
Series A Preferred Stock are due yet unpaid.
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in the following table has been derived from
the financial statements for the periods indicated. The financial statements as
of and for the years ended December 31, 1994 through 1997 were audited by
Pritchett, Siler & Hardy, P.C., independent public accountants. The financial
statements as of and for the year ended December 31, 1998 and December 31, 1999
were audited by Deloitte & Touche, LLP, independent public accountants. The
financial statements as of and for the year ended December 31, 2000 were audited
by Tanner + Co., LLP, independent public accountants. The following financial
data should be read in conjunction with the financial statements and related
notes and with management's discussion and analysis of financial conditions and
results of operations included elsewhere herein.
Year Ended December 31
----------------------
(In thousands except per share)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net Revenues $22,787 $35,519 $23,836 $87 $225
Income (Loss from
Continuing Operations) ($18,361) ($3,054) ($498) ($1,153) ($422)
Income (Loss) Per Share
From Continuing Operations ($1.39) ($0.26) ($0.07) ($0.11) ($0.04)
Total Assets $17,052 $33,114 $23,571 $6,610 $4,591
Total Long-Term Obligations $11,337 $11,333 $4,326 $0.00 $182
Redeemable Preferred Stock $4,896 $4,840 $4,783 $4,726 -0-
Cash Dividends Per Common Share $0.00 $0.00 $0.00 $0.00 $0.00
Common Stockholders' Equity ($21,050) ($2,276) $767 $1,749 $3,018
20
The foregoing selected financial data is presented on a historical basis
and may not be comparable from period to period due to changes in the Company's
operations. Common Stockholders' Equity was restated as of January 1, 1996 to
reflect the amortization of $453,649 in research and development expenditures
previously capitalized by the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
The following discussion and analysis of the Company's financial condition,
results of operations and related matters includes a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
include, by way of illustration and not limitation, statements containing the
words "anticipates," "believes," "expects," "intends," "future" and words of
similar import which express, either directly or by implication, management's
beliefs, expectations or intentions regarding the Company's future performance
or future events or trends which may affect the Company or its results of
operations.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors, including but not limited to changes in
economic conditions generally or with respect to the Company's asphalt products
market in particular, new or increased governmental regulation, increased
competition, shortages in labor or materials, delays or other difficulties in
shipping or transporting the Company's products, technical or operational
difficulties at the Facility of Crown Ridge, difficulties in integrating the
Company's recent joint venture and acquisition related businesses, risks related
to the financing of the Company's operations (including the risk of loss of
certain operating assets serving as collateral to secure such financing), and
other similar risks inherent in the Company's operations or in business
operations generally. Any such risks or uncertainties, either alone or in
combination with other factors, may cause the actual results, performance or
achievements of the Company to differ materially from its anticipated future
results, performance or achievements (which may be expressed or implied by such
forward looking statements). Consequently, the following management's discussion
and analysis, including all forward-looking statements contained therein, is
qualified and limited by the foregoing cautionary factors. Interested persons
are advised to consider all forward-looking statements within the context of
such cautionary factors.
Liquidity and Capital Resources
At December 31, 2000, the Company had cash and other current assets of
$6,761,595 as compared to cash and other current assets of $12,334,750 at
December 31, 1999. The decrease of $5,573,155 was generally due to a decrease in
asphalt sold by the Company. The Company's majority owned subsidiary, Crown
Distribution, accounted for a substantial portion of the Company's current
assets. As of December 31, 2000, Crown Distribution had approximately $2,732,686
million in cash, $2,348,042 million in inventory and $555,166 in accounts
receivable, excluding related party balances. Crown Distribution's business
requires a working capital Credit Facility. MCNIC, the minority interest owner,
elected to provide such Credit Facility in lieu of the Company's pursuing
proposals with it had obtained from banks and to replace a prior loan with this
Credit Facility. The Company has accrued interest on the Credit Facility at an
average interest rate of 8.0%. At December 31, 2000, the line had an outstanding
principal balance of $14,935,222.
On June 20, 2000, MCNIC filed a Complaint in the Third Judicial District
Court, Salt Lake County, Utah, against Crown Distribution. The action seeks to
foreclose on alleged mortgage and security interest in and to certain real and
personal property of Crown Distribution, which property constitutes a
substantial part of the operating assets of Crown Distribution. In summary, in
the MCNIC Complaint, MCNIC does not acknowledge its prior commitment to "roll"
the Working Capital Loan into the Credit Facility and alleges that Crown
Distribution is in default on the promissory note evidencing the Working Capital
Loan to Crown Distribution in the amount of $7,141,930.00. MCNIC further alleges
that the total amount owed
21
by Crown Distribution to MCNIC is in excess of $15,000,000, as well as interest
at the rate of 18% from January 1, 2000 until paid in full. The MCNIC Complaint
also seeks the appointment of a receiver to ensure and protect the interests of
MCNIC in the property of Crown Distribution, pending a determination by the
Court of the merits of the Complaint. Crown Distribution has moved to vigorously
defend against this litigation and believes that it has certain available
defenses, claims and counterclaims. Crown Distribution's management further
believes that certain of MCNIC's allegations are lacking in either legal or
factual basis.
On July 25, 2000, the Company filed the Crown Complaint against MCN, MCNIC
and certain officers of MCN and MCNIC. The suit was brought in the United States
District Court for the District of Utah, Central Division and is styled Crown
Energy Corporation, Crown Asphalt Corporation, and Crown Asphalt Products
Company v. MCN Energy Group, Inc., MCNIC Pipeline & Processing Company, Howard
L. ("Lee") Dow III, and William E. Kraemer, Civil No. 2:00CV-05873ST. The
Company's action arises from the joint ventures between the Company and MCN with
regard to the asphalt business in the Western United States involving the
mining, processing, storage, manufacture, and marketing of asphalt the Company
alleges claims against defendants for breach of fiduciary duties, economic
duress, breach of implied covenants of good faith and fair dealing, breach of
contracts, estoppel, intentional interference, and trade libel and slander of
title as a result of defendants' wrongful and bad faith conduct in the joint
venture relationships. Damages of an amount exceeding $100 million are sought on
the Company's claims for breach of fiduciary duties, economic duress, and breach
of implied covenants of good faith and fair dealing, with the full amount of
damages on all claims to be proven at trial.
On August 1, 2000, Crown Distribution filed its Answer and Counterclaims to
the MCNIC Complaint and named additional counterclaim defendants, MCN Energy
Group, Inc., Howard L. ("Lee") Dow III, and William E. Kraemer. Crown
Distribution's Answer and Counterclaims substantially denied all of the
allegations set forth in the MCNIC Complaint and alleged numerous counterclaims,
including breach of fiduciary duty, economic duress, breach of implied covenants
of good faith and fair dealing, breach of contracts, estoppel, intentional
interference, trade libel and slander of title, and abuse of process. Crown
Distribution, pursuant to its counterclaims, requested a jury trial and sought
relief in the way of damages in amounts to be proven at trial, punitive damages,
attorney's fees, interest, costs and any other relief to which they may be
entitled.
On August 31, 2000, MCNIC filed motions to stay both the state court and
federal court actions and have them submitted to an arbitration panel selected
by the American Arbitration Association in accordance with the rules of the
American Arbitration Association. The Company contested whether either lawsuit
should be subject to arbitration and filed an answer to both motions on October
2, 2000 to that effect. Ultimately, however, arbitration of substantial claims
in the litigation was ordered or required.
On January 29, 2000, the Company agreed that binding arbitration of all of
the claims set forth above before a single retired federal judge would be in the
Company's best interest. Accordingly, an Arbitration Agreement was signed
between all of the parties on January 29, 2001. The arbitration (the
"Arbitration") is being arbitrated before Judge John G. Davies (ret.) in Salt
Lake City, Utah. The arbitration hearing is scheduled for July 23, 2001 through
August 10, 2001, with extensive pre-hearing discovery to occur prior to that
time.
Commencing March 5, 2001, the Company, MCNIC, MCN and various officers
exchanged claims and counterclaims relating to the Arbitration. The claims
contained therein substantially restate the parties' prior positions within the
litigation described above. However, in its claims in arbitration, MCNIC, MCN
and certain of its officers have included the Company's chief executive officer,
president and treasurer, Jay Mealey, as a party to certain claims. Mr. Mealey
believes that his inclusion at this point is highly improper due to the fact
that he had not been a party to the pending actions nor to the Arbitration
Agreement pursuant to which the actions were submitted to the Arbitration.
According, a motion has been filed with the arbitrator to remove Mr. Mealey from
the Arbitration.
The Company believes that it has a strong case on the claims and
counterclaims in the Arbitration. However, because arbitration proceedings are
inherently uncertain, the Company cannot predict the
22
outcome of any such proceedings. Management of the Company is keenly aware of
the importance of the Arbitration to the Company. If MCNIC prevails in the
Arbitration, and depending upon the extent in nature of any relief granted by
the Arbitrator, the Company may be severely and adversely impacted and may lose
possession of some or all of its primary assets and sources of revenues.
Interested persons should also note that, subject of course to available
equitable and other creditor remedies, neither the MCNIC Working Capital Loan
nor Credit Facility to Crown Distribution contain cross-default provisions
giving MCNIC any right to declare a default or to seek control or possession
over the assets or operations of Crown Ridge or the Company's interest in Crown
Ridge.
The Company also owed MCNIC an additional $5,325,723 at December 31, 2000
with respect to the Preferential Capital Contribution that funded Crown
Distribution's acquisition of the assets of PSAC. See -"Item 1. Business -
Asphalt Distribution - Crown Asphalt Distribution, L.L.C. The Preferential
Capital Contribution requires payment of a 15% rate of return and is payable
solely from 50% of the cash flow from Crown Distribution's operations.
The Company believes its asphalt distribution business, which is operated
through CAPCO, is a business whose success is not dependent on the Company's
interest in the Crown Ridge project or Crown Distribution. However, the asphalt
distribution business is capital intensive and requires substantial investments
to acquire terminal storage and blending assets as well as raw material
inventory.
On May 12, 1999, the Company entered into an agreement to acquire an
asphalt distribution terminal in Rawlins, Wyoming and the related asphalt
inventory for $2,291,571 from S&L Industrial, a Wyoming corporation. The
Rawlins, Wyoming asphalt terminal (the "Rawlins Asphalt Terminal") expands the
Company's asphalt manufacturing and distribution operations in the Western
United States. The operating agreement for Crown Distribution required that the
Company present this opportunity to MCNIC in order for it to participate in the
acquisition and the Company did present the transaction (and the acquisition of
two other terminals which were ultimately not acquired) to MCNIC in accordance
with its obligation. Despite its agreement to participate within the ownership
of the Rawlins Asphalt Terminal (and the two other asphalt terminals) through
the formation of a new joint venture, MCNIC failed to take the actions necessary
to complete the transfer of the project to joint ownership and the Company does
not believe at present that MCNIC will perform. Thus, the Rawlins Asphalt
Terminal continues to be owned by CAPCO. The Company believes that it has and
will continue to have adequate working capital to service the obligations
relating to the Rawlins Asphalt Terminal.
The Company remains open to other asphalt related business opportunities to
complement its existing asphalt distribution capabilities. There can be no
assurance that the Company can obtain additional capital financing required to
finance such transactions on acceptable terms and conditions.
The Company has a portion of its accounts receivable subject to the risks
and uncertainties of litigation (See "Item 3. Legal Proceedings") and subject to
related collection risks.
MCNIC has advised the Company it will no longer provide funding under the
Credit Facility as the Company asserts it previously agreed and has refused to
guaranty a third party financed Credit Facility on behalf of Crown Distribution
as the Company believes it had also previously agreed. The Company relies on the
Credit Facility to purchase inventory and fund other working capital
requirements for operations. The Company is seeking other ways to finance its
working capital requirements, but there is no assurance that such working
capital financing can be secured by the Company.
In the event that the Company is unable to collect its current accounts
receivables, or the Company is unable to secure the necessary working capital
line of credit for its operations from third party sources or if the Company's
operating losses and working capital deficits continue, or if the Company is
unable to recoup the losses, the Company may not have sufficient capital to
operate through 2001. Furthermore, if Crown Ridge approves an additional capital
contribution for the modification to the Facility by a unanimous decision of its
members and the Company is unable to finance its approximate 24% of such capital
contribution, its sharing ratio in Crown Ridge may be further diluted.
23
As of December 31, 2000, the Company has made cash contributions of
approximately $5,663,985 to Crown Ridge. During the start-up of the Crown Ridge
Facility mechanical and process difficulties were experienced that affected
production economics. A pilot study to develop a solution to these problems was
conducted during 2000. As discussed elsewhere herein, the ramifications of the
pilot study for the Company are uncertain. This uncertainty arises from the
facts that (i) the costs of the engineering modifications which may need to be
made to the Crown Ridge Facility have not been determined, and (ii) Crown has
been denied access by MCNIC to vital information concerning the pilot study and
the Crown Ridge Facility, generally.
During the year ended December 31, 2000, the Company evaluated the carrying
value of its investment in and advances to Crown Ridge. The evaluation has been
complicated by the fact that MCNIC has effectively taken control of Crown Ridge,
including financial information and engineering and feasibility studies of the
Facility. As discussed elsewhere herein, the Company is in litigation with MCNIC
with a final arbitration trial scheduled to commence July 23, 2001. Based on the
lack of information provided from MCNIC, the inherent risk of litigation and the
lack of a firm business plan for Asphalt Ridge from MCNIC, the Company
determined that its investment in and advances to Crown Ridge are potentially
impaired. Accordingly, an aggregate non-cash expense was recorded for the
impairment of $6,904,085. Should delays continue, or should the Facility be
unable to operate economically, the Company believes this would significantly
impact Crown Ridge's ability to continue as a going concern and would adversely
impact the Company's operations and financial condition resulting in an
impairment of the remainder of the asset. See - "Item 1. Business - Asphalt
Production - Crown Asphalt Ridge, L.L.C."
Results of Operations
2000 vs. 1999
Total revenue decreased from $35,518,541 for the year ended December 31,
1999 to $22,787,103 for the year ended December 31, 2000, a decrease of 35.84%.
This decrease was primarily due to a reduction of the volume of asphalt sold
during 2000. This decrease in sales volume was a direct result of a reduction in
the ability of the Company to purchase inventory in a timely fashion and its
resulting inability to submit competitive bids due to the loss of the working
capital line previously provided by MCNIC and loss of funds and disruption
caused by MCNIC.
The Company's gross margins decreased from approximately 5% for the year
ended 1999 to approximately -4% for the year ended 2000. This decrease was due
to an increase in the Company's cost of basestock asphalt that resulted from a
reduction in the purchase of asphalt inventory during the winter months when the
cost is significantly lower. The Company believes continued cost cutting
procedures will contribute to improved margins in 2001. However, the Company is
prevented in its Operating Agreement with MCNIC from utilizing any hedging
strategies to minimize market risk fluctuations and therefore remains subject to
basestock asphalt price fluctuations.
General, administrative and provision for bad debt expenses increased from
$2,745,029 for the year ended December 31, 1999 to $4,590,523 for the year ended
December 31, 2000, an increase of $1,845,494. This increase was primarily due to
increased legal expenses and an increase in the reserve for doubtful accounts as
a result of the decline in the credit worthiness of account balances. These were
partially offset by cost cutting procedures and a reduction in administrative
staff.
During the year ended December 31, 2000, the Company evaluated the carrying
value of its investments in and advances to Crown Ridge. The evaluation has been
complicated by the fact that the Company's joint venture partner has effectively
taken control of Crown Ridge and has not shared information relative to its
activities pertaining to Crown Ridge, including financial information and
feasibility studies relative to the Asphalt Ridge Project. Based on the lack of
a firm business plan for the Asphalt Ridge Project at this time, the Company
determined that its investment in and advances to Crown Ridge were potentially
impaired. Accordingly, an aggregate non-cash expense for the impairment or
$6,904,085 was recorded.
24
At year-end December 31, 2000 the company also re-assessed the
recoverability of goodwill associated with the PSAC acquisition. Due to the
litigation with MCNIC, the Company has been unable to secure financing needed to
build up inventory at favorable prices. This lack of funding and the ongoing
dispute with MCNIC has resulted in losses from operations in 1999 and 2000.
Because of these circumstances the Company could not estimate the full carrying
value which could be recovered through the undiscounted future cash flows from
products generated from related assets. Accordingly, an impairment of $3,625,848
has been recognized in the statements of operations for the year ended December
31, 2000.
Due to the items discussed above, including the impairments, the loss from
operations increased from $1,907,779 in 1999 to $16,084,230 in 2000.
Interest and other income/expenses decreased from net expenses of
$2,494,073 for the year ended December 31, 1999 to net expenses of $2,315,344
for the year ended December 31, 2000, a decrease of $178,729. The 2000 total was
comprised of $1,999,138 in interest costs related to the Crown Distribution's
Credit Facility and preferential capital contribution owed to MCNIC, other
interest expense of $577,248 on various loans, and $261,042 of interest income
and other incomes
Minority interest of $38,653 represents Foreland's approximate 33% interest
in the loss in CAT LLC.
At December 31, 2000, the Company evaluated the recoverability of goodwill
associated with the acquisition by Crown Distribution of the PSAC assets. As
discussed elsewhere herein, the litigation with MCNIC resulted in the Company's
inability to secure working capital financing and losses from operations for
1999 and 2000. Because of these circumstances and the inherent risk of
litigation, the Company could not estimate the full carrying value which could
be recovered through undiscounted cash flows from products generated from the
related assets. Accordingly, an impairment of $3,625,848 has been recognized in
the statement of operations for the year ended December 31, 2000.
Crown Distribution had losses for the year ended December 31, 2000 of
$11,365,018. The Company, through its wholly owned subsidiary, CAPCO owns 50.01%
and MCNIC owns 49.99% of Crown Distribution. CAPCO is the manager and operating
agent of Crown Distribution. Because there is no agreement requiring the
minority shareholder, MCNIC, to guarantee the subsidiary's debt or such
cumulative losses or a commitment to provide additional capital, other than
working capital, all (100%) of the loss attributable Crown Distribution,
including MCNIC's 49.99% interest in the losses totaling $5,681,372 are included
as a loss in the Company's Financial Statements.
1999 vs. 1998
Total revenue increased from $23,835,734 for the year ended December 31,
1998 to $35,518,541 for the year ended December 31, 1999, an increase of
$11,682,807 (49%). This increase was primarily due to the Company recording a
full year of revenue from its 1998 acquisition of the assets of Petro Source
Asphalt Company and its 1999 acquisition of the Rawlins Asphalt Terminal.
For the year ended December 31, 1998, the Company recorded revenue of
approximately $6,423,000 (41,000 tons) from its distribution facilities and
$15,904,000 (104,000 tons) from the Processing Agreement with Santa Maria
Refinery Corporation. For the same period in 1999, the Company recorded revenue
of approximately $24,963,000 (159,000 tons) from its distribution facilities,
which revenues included $2,584,000 (16,787 tons) from the Rawlins Asphalt
Terminal and $10,555,000 (37,900 tons) from the Processing Agreement with Santa
Maria Refinery Corporation. However, the Processing Agreement expired on April
30, 1999. The Company believes the loss of revenues associated with the now
expired Processing Agreement will be offset by the growth in its asphalt
distribution operations.
The Company's gross margins decreased from approximately 9% for the year
ended 1998 to approximately 5% for the year ended 1999. This decrease was due to
higher operating costs at the Company's distribution facilities, an increase in
the Company's cost of basestock asphalt at the end of 1999
25
and non-recurring costs recorded of $800,000. However, the Company is prevented
in its Operating Agreement with MCNIC from utilizing any hedging strategies to
minimize market risk fluctuations and therefore remains subject to basestock
asphalt price fluctuations. The Company believes that the asphalt production
from Crown Ridge, should it commence commercial operations, will provide its
distribution business a consistent asphalt basestock supply at a fixed price,
assuming that acceptable pricing agreements are reached with Crown Ridge.
General, administrative, and provision for bad debt expenses increased from
$1,250,381 for the year ended December 31, 1998 to $2,745,029 for the year ended
December 31, 1999, an increase of $1,494,648. This increase was primarily due to
the Company recording a full year of general and administrative expenses from
its 1998 acquisition of the assets of PSAC.
Interest and other income/expenses increased from net expenses of $800,420
for the year ended December 31, 1998 to net expenses of $2,494,073 for the year
ended December 31, 1999, an increase of $1,693,653. The 1999 total was comprised
of $2.2 million in interest costs related to the Company's Credit Facility and
preferential capital contribution for its asphalt distribution owed to MCNIC and
other expenses of $290,482.
Minority interest of $1,348,336 represents MCNIC's approximate 49% interest
in the loss of Crown Distribution and Foreland's approximate 33% interest in the
loss in CAT LLC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe it is subject to material risks of loss
related to certain market risks, such as interest rate risks, foreign currency
exchange rate risks or similar risks, and therefore the Company does not engage
in transactions, such as hedging or similar transactions in derivative financial
instruments, intended to reduce its exposure to such risks. However, the Company
is subject to general market fluctuations related to the purchase of its
basestock asphalt and may suffer reduced operating margins to the extent its
increased costs are not passed through to its customers. Such prices generally
fluctuate with the price of crude oil. The Company is prevented in its Operating
Agreement with MCNIC from utilizing any hedging strategies to minimize any
market price changes. The Company believes the inability to protect itself from
market fluctuations negatively impacted its margins for 2000. See "Item 7.
Management's Discussion and Analysis Results of Operations - 2000 vs. 1999".
The Company is also subject to certain price escalation and de-escalation
clauses in its asphalt distribution sales contracts. The Company supplies
asphalt to projects in certain states where regulations provide for escalation
and de-escalation of the price for such asphalt relative to the price difference
from the time the project is awarded to the successful bidding company and the
time the project is completed. The Company includes such de-escalation risk into
its bid prices and does not believe it has material exposure to risk resulting
from these regulations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE
The financial statements required by this item are set forth following Item
14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On June 2, 1998, the Company terminated its independent auditor
relationship with Pritchett, Siler & Hardy, P.C. ("Pritchett"). The decision to
change accountants was approved by the Company's Board of Directors.
26
Pritchett's report on the financial statements of the Company for the
fiscal year ended December 31, 1997 did not contain an adverse opinion or a
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
During the fiscal years ended December 31, 1998, 1997 and 1996, and the
period January 1, 1998 through June 2, 1998, there were no disagreements with
Pritchett on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures or any reportable events.
On June 2, 1998, the Company engaged Deloitte & Touche LLP ("Deloitte") as
its independent auditors to audit and report on the financial statements of the
Company for the fiscal year ended December 31, 1998. On October 23, 2000, the
Company terminated its independent auditor relationship with Deloitte. The
decision to change accountants was approved by the Company's Board of Directors.
Deloitte's report on the financial statements for the fiscal year ended
December 31, 1999 contained a "going concern" qualification. During the fiscal
year ended December 31, 1999, there were no disagreements with Deloitte on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures or any reportable events.
On October 23, 2000, the Company engaged Tanner + Co., LLP ("Tanner") as
its independent auditors to audit and report on the financial statements of the
Company for the fiscal year ended December 31, 2000.
Prior to engaging Tanner, neither the Company nor anyone acting on its
behalf consulted with Tanner regarding the application of accounting principles
to any specified transaction or the type of audit opinion that might be rendered
on the Company's financial statements. In addition, during the Company's fiscal
year ended December 31, 1999 and during the period January 1, 2000 through
October 23, 2000, neither the Company nor anyone acting on its behalf consulted
with Tanner with respect to any matters that were the subject of a disagreement
(as defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as
described in Item 304(a)(1)(v) of Regulation S-K).
27
PART III.
Items 10 through 13 of Part III of this Form 10-K are incorporated by
reference from the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A of the Securities Act of 1933 within 120
days after the close of the Company's most recent fiscal year (the "Proxy
Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers and directors of the Company
is included as Item 4A of Part I of this Form 10-K as permitted by Instruction 3
to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation
S-K will be set forth in the Proxy Statement, which information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation will be set forth in the
Proxy Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management will be set forth in the Proxy Statement, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
will be set forth in the Proxy Statement, which information is incorporated
herein by reference.
28
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
Documents filed as part of this Report:
(1) Financial statements, as set forth on the attached Index to Financial
Statements.
(2) Exhibits, as set forth on the attached Exhibit Index.
Schedule II: Valuation and Qualifying Accounts
The Company filed a form 8-K on October 23, 2000 and a form 8-KA on October
31, 2000 to report a change in the company auditor to Tanner + Co. The Company
believes this change will reduce its required auditing expense.
The Company filed a form 8-K on March 5, 2001 to report the events
relating to the arbitration of claims and counter claims of the Company and
MCNIC and related entities and parties.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
CROWN ENERGY CORPORATION
(Registrant)
/s/ Jay Mealey
---------------------------
Jay Mealey
Chief Executive Officer,
Director
Date: April 12, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Alan L. Parker
---------------------------
Alan L. Parker
Controller
Date: April 12, 2001
/s/ Andrew W. Buffmire
---------------------------
Andrew W. Buffmire
Director
Date: April 12, 2001
30
CROWN ENERGY CORPORATION
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
Balance at Charge to Charge to Balance at
Beginning Cash and Other End of
Description Of Year Expenses Accounts Deductions Year
Year ended December 31, 2000:
Deducted from assets accounts
Accounts receivable:
Allowance $298,000 $ 1,529,896 $1,827,896
Deferred tax assets:
Valuation allowance 2,738,000 4,833,000 7,571,000
Year ended December 31, 1999:
Deducted from assets accounts
Accounts receivable:
Allowance $150,000 $ 77,000 $ 161,000 $ 90,000 $298,000
Deferred tax assets:
Valuation allowance 1,704,000 1,034,000 2,738,000
Year ended December 31, 1998:
Deducted from assets accounts
Accounts receivable:
Allowance 75,000 75,000 150,000
Deferred tax assets:
Valuation allowance 1,318,000 386,000 1,704,000
31
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT
2.1 Purchase and Sale Agreement regarding Petro Source Asphalt Company,
dated July 2, 1998 (15)
2.2 Memorandum of Closing regarding Refinery Technologies, Inc. (18)
2.3 Assignment and Agreement with Refinery Technologies, Inc. (18)
2.4 Asset Purchase Agreement (S&L Industrial) dated May 12, 1999 regarding
S&L Industrial
3.1 Articles of Incorporation (6)
3.2 Certificate of Voting Powers, etc. of the Company's Preferred Stock
(10)
3.3 Amended Bylaws (1)
4.1 Convertible Debenture - Agreement dated May 6, 1997, between Crown
Energy Corporation and Oriental New Investments, Ltd. (7)
4.2 Warrant with Encap Investments, L.C. (12)
4.3 Form of Stock Option Agreements between the Company and (1) Jay Mealey,
(2) Richard Rawdin and (3) Thomas Bachtell (12)
4.4 The Crown-Energy Long Term Equity Basic Incentive Plan (13)
4.5 Common Stock Purchase Warrant dated November 4, 1997 issued to Enron
Capital & Trade Resources Corp. (10)
4.6 Form of Warrant issued to principals of IBEX Group, Inc. and Hoffman
Partners, Inc. (18)
4.7 May 1998 Warrant issued to Ladenburg Thalmann (18)
10.1 License Agreements with Park Guymon Enterprises, Inc., dated January
20, 1989, June 1, 1990 and June 1, 1990 (3)
10.2 Amendment to License Agreement with Park Guymon Enterprises, Inc. (6)
10.3 Employment Agreement with Jay Mealey (12)
10.4 Consulting Agreement with IBEX Group, Inc. and Hoffman Partners, Inc.
(6)
10.5 Promissory Note issued to Jay Mealey 12/31/95 (6)
10.6 Promissory Note issued to Thomas W. Bachtell 12/31/95 (6)
10.7 Promissory Note issued to Thomas W. Bachtell 12/31/95 (6)
10.8 Oil and Gas Minerals Lease, dated September 1, 1991 with Wembco, Inc.
(4)
10.9 Crown Office Space Lease (5)
10.10 First Amendment to Crown Office Space Lease (12)
10.11 Investment Banking Agreement with Fortress Financial Group, Ltd. (12)
10.12 Promissory Note from Jay Mealey (12)
10.13 Promissory Note from Rich Rawdin (12)
10.14 Stock Pledge Agreement with Jay Mealey (12)
10.15 Stock Pledge Agreement with Rich Rawdin (12)
10.16 Assignment of Assets to Crown Asphalt Ridge, L.L.C. by Crown Asphalt
Corporation (12)
10.17 Assignment to Crown Asphalt Ridge, L.L.C. by Crown Asphalt Corporation
(12)
10.18 Asphalt Ridge Project Operating and Management Agreement with Crown
Asphalt Ridge L.L.C., dated August 1, 1997 (12)
10.19 Sublicense and Agreement between Crown Asphalt Ridge, L.L.C. and Crown
Asphalt Corporation (12)
10.20 Stock Purchase Agreement with Enron Capital & Trade Resources Corp.
(10)
10.21 Engineering, Construction, and Procurement Agreement with CEntry
Constructors & Engineers, LLC (12)
10.22 Revised Right of Co-Sale Agreement between Jay Mealey and Enron Capital
& Trade Resources Corp. (11)
10.23 Guaranty Agreement in favor of MCNIC Pipeline & Processing Company (12)
32
10.24 Crown Office Space Sublease (12)
10.25 Stock Purchase Agreement dated July 2, 1997, between Crown Energy
Corporation and Road Runner Oil, Inc. (8)
10.26 Letter Agreement with EnCap Investments L.C. (12)
10.27 Purchase and Sale Agreement dated July 2, 1998 between Petro Source
Asphalt Company and Crown Asphalt Distribution LLC (15)
10.28 Saba Petroleum Processing Agreement for Santa Maria Refinery in
California dated May 1, 1997 between Petro Source Refining Corporation
and Santa Maria Refining Company and Saba Petroleum Company, which was
assigned to the Company on or about July 2, 1998. (16)
10.29 MetLife Equipment Lease dated May 1, 1997 between Petro Source Refining
Corporation and MetLife Capital Corporation, which was assigned to the
Company on or about July 2, 1998. (16)
10.30 PacifiCorp Property Lease dated April 1, 1996 between Petro Source
Refining Corporation and PacifiCorp, which was assigned to the Company
on or about July 2, 1998. (16)
10.31 GATX Rail Car Lease dated December 10, 1987 between Petro Source
Corporation and General American Transportation Corporation, assigned
to the Company on or about July 2,1998 (16)
10.32 Office Space Lease (16)
10.33 Operating Agreement for Crown Asphalt Ridge, L.L.C. (17)
10.34 Operating Agreement for Crown Asphalt Distribution L.L.C. (18)
10.35 Operating and Management Agreement for Crown Asphalt Distribution
L.L.C. (18)
10.36 Operating Agreement for Cowboy Asphalt Terminal L.L.C. (18)
10.37 April 3, 1998 Agreement regarding investment banking services with
Ladenburg Thalmann (18)
10.38 Indemnification Agreement with Ladenburg Thalmann (18)
10.39 Letter Agreement between CAC, CAPCO, and MCNIC Pipeline & Processing
Company dated July 20, 1999 (19)
10.40 Letter Agreement between CAPCO and MCNIC Pipeline & Processing Company
dated July 20, 1999 (19)
10.41 First Amendment to Operating Agreement (Crown Asphalt Distribution,
L.L.C.)(19)
10.42 Loan Agreement: MCNIC Pipeline & Processing Company loan to Crown
Asphalt Corporation dated July 20, 1999 (19)
10.43 CAR Promissory Note (19)
10.44 $1,800,000 Loan Agreement: Community First National Bank to Crown
Asphalt Products Company (19)
10.45 Letter Amendment to Community First National Bank Loan Agreement dated
June 2, 1999 (19)
10.46 Crown Energy Corporation Guaranty of Community First National Bank Loan
(19)
10.47 Assignment & Assumption Agreement (19)
10.48 Offsite Services Agreement (19)
10.49 Amendment to Mealey Employment Agreement (19)
10.50 MCNIC election to proceed with additional pilot plan (1/7/00) (19)
10.51 Settlement Agreement with Zimmerman (19)
10.52 Amendment to Settlement Agreement with Zimmerman (19)
10.53 5th Amendment to Building Lease (19)
10.54 January 20, 2000 Letter to MCNIC (19)
10.55 January 7, 2000 Election to Proceed with Pilot Plant Letter to MCNIC
10.56 January 7, 2000 Additional Costs Letter to MCNIC
10.57 Agreement with Refinery Technologies, Inc.
10.58 Notice of Termination of Building Lease
10.59 Arbitration Agreement
11 Statement regarding computation of per share earnings (the information
required for Exhibit 11 is set forth on page F-25 of the Financial
Statements of Crown Energy Corporation of this Form 10K)
33
16 Letter of Pritchett, Siler & Hardy, P.C. dated June 5, 1998 (14)
21 Subsidiaries of the Company (the information required for Exhibit 21 is
set forth in "Item 1 - Subsidiaries of the Company")
-----------------------
(1) Incorporated by reference from the Company's Registration Statement on
Form 10 filed with the Commission on July 1, 1991, amended August 30,
1991 and bearing Commission file number 0-19365.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1991 bearing Commission file number
0-19365.
(3) Incorporated by reference from the Company's Report on Form 8-K filed
with the Commission on or about September 30, 1992, bearing Commission
file number 0-19365.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1992, bearing Commission file number
0-19365.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1992, bearing Commission file number
0-19365.
(6) Incorporated by reference from the Company's Registration Statement on
Form S-1 filed with the Commission on or about March 13, 1996, bearing
Commission file number 0-19365.
(7) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about June 12, 1997, bearing Commission file number
0-19365.
(8) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about July 21, 1997, bearing Commission file number
0-19365.
(9) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about November 18, 1997, bearing Commission file number
0-19365.
(10) Incorporated by reference from Enron Capital & Trade Resources Corp. Form
13D filed with the Commission on or about October 10, 1997.
(11) Incorporated by reference from Enron Capital & Trade Resources Corp. Form
13D/A filed with the Commission on or about November 12, 1997.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, filed with the Commission on or
about March 31, 1998, bearing Commission file number 0-19365.
(13) Incorporated by reference from the Company's Amended Annual Report on
Form 10-K for the year ended December 31, 1997, filed with the Commission
on or about April 30, 1998, bearing Commission file number 0-19365.
(14) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about June 9, 1998, bearing Commission file number
0-19365.
(15) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about July 17, 1998, bearing Commission file number
0-19365
(16) Incorporated by reference of the Company's Amended Form 10-Q filed with
the Commission for the period ending September 30, 1998, filed with the
Commission on November 25, 1998.
34
(17) Incorporated by reference from the Company's Amended Form 8-K filed with
the Commission on or about November 18, 1997, bearing Commission file
number 0-19365.
(18) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, filed with the Commission on or
about June 14, 1999.
(19) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, filed with the Commission on or
about April 4, 2000.
o The Company agrees to furnish supplementally to the Commission a
copy of any omitted schedule or exhibit to such agreement upon
request by the Commission.
35
CROWN ENERGY CORPORATION
Index to Consolidated Financial Statements
Page
Report of Tanner + Co. F-1
Report of Deloitte & Touche LLP 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-9
36
CROWN ENERGY CORPORATION
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, 2000, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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, 2000, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
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
financial statements, the Company has had substantial recurring losses from
operations, is involved in significant litigation and has relied upon financing
from debt to satisfy its obligations. These conditions raise substantial doubt
about the ability of the Company to continue as a going concern. Management's
plans in regard to that matter are also described in note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
TANNER + CO.
Salt Lake City, Utah
March 2, 2001
________________________________________________________________________________
See accompanying notes to consolidated financial statements. F-1
CROWN ENERGY CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Crown Energy Corporation
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Crown Energy
Corporation and Subsidiaries (the Company) at December 31, 1999 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the two years in the period ended December 31, 1999. Our audits also
included the financial statement schedule for the years ended December 31, 1999
and 1998 listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1999, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, such financial statement schedule for the years ended December
31, 1999 and 1998, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein. The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going
concern. The Company's recurring losses from operations, stockholders'
deficiency, and negative working capital raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, in 1998 the
Company and an unconsolidated equity method affiliate changed their method of
accounting for the costs of start-up activities to conform with Statement of
Position No. 98-5, Reporting on the Costs of Start-Up Activities.
Deloitte & Touche LLP
Salt Lake City, Utah
March 29, 2000
________________________________________________________________________________
See accompanying notes to consolidated financial statements. F-2
CROWN ENERGY CORPORATION
Consolidated Balance Sheet
December 31,
Assets 2000 1999
--------------------------------
Current assets:
Cash and cash equivalents $ 2,878,141 $ 4,978,977
Accounts receivable, net of allowance for doubtful accounts of
$1,827,896 and $298,000 at December 31, 2000 and 1999, respectively 1,419,260 5,186,325
Inventory 2,370,887 2,133,866
Prepaid and other current assets 67,607 35,582
Related party receivable 25,700 -
--------------------------------
Total current assets 6,761,595 12,334,750
Property, plant, and equipment, net 9,661,174 9,237,735
Investment in and advances to an equity affiliate - 7,174,920
Intangible assets, net 404,400 4,302,680
Other assets 225,009 63,768
--------------------------------
Total $ 17,052,178 $ 33,113,853
--------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 1,317,222 $ 1,132,251
Preferred stock dividends payable 800,000 400,000
Accrued expenses 127,366 293,876
Accrued interest 3,987,256 1,988,116
Current portion of long-term debt 273,633 166,204
Working capital loan to related party 14,935,222 14,935,222
--------------------------------
Total current liabilities 21,440,699 18,915,669
--------------------------------
Commitments and contingencies - -
Long-term debt principally due to related party 11,336,861 11,332,681
Redeemable preferred stock 4,896,227 4,839,623
Minority interest in consolidated joint ventures 427,985 301,699
Stockholders' deficit:
Common stock $.02 par value 50,000,000 shares authorized,
13,635,581 and 13,285,581 shares outstanding, respectively 272,711 265,711
Additional paid-in capital 5,371,974 5,791,828
Stock subscriptions receivable from officers (549,166) (549,166)
Stock warrants 243,574 243,574
Accumulated deficit (26,388,687) (8,027,766)
--------------------------------
Stockholders' deficit (21,049,594) (2,275,819)
--------------------------------
Total $ 17,052,178 $ 33,113,853
--------------------------------
________________________________________________________________________________
See accompanying notes to consolidated financial statements. F-3
CROWN ENERGY CORPORATION
Consolidated Statement of Operations
Years Ended December 31,
2000 1999 1998
--------------------------------------------------
Sales, net $ 22,787,103 $ 35,518,541 $ 23,835,734
Cost of sales 23,605,063 33,811,003 21,716,743
--------------------------------------------------
Gross profit (loss) (817,960) 1,707,538 2,118,991
General and administrative expenses (3,060,627) (2,668,011) (1,224,906)
Provision for bad debt expenses (1,529,896) (77,018) (25,475)
Loss on impairment of investment in equity affiliate (6,904,085) - -
Loss on impairment of goodwill (3,625,848) - -
Equity in losses from unconsolidated equity affiliate (145,814) (870,288) (264,863)
--------------------------------------------------
(Loss) income from operations (16,084,230) (1,907,779) 603,747
--------------------------------------------------
Other income (expense):
Interest income 157,042 - 132,225
Interest expense (2,576,386) (2,203,591) (851,917)
Other income (expense) 104,000 (290,482) 105,528
Expense related to valuation of warrants - - (186,256)
--------------------------------------------------
Total other expense, net (2,315,344) (2,494,073) (800,420)
--------------------------------------------------
Loss before income taxes, minority interests and
cumulative effect of a change in accounting principle (18,399,574) (4,401,852) (196,673)
Deferred income tax benefit - - -
Minority Interest in losses (earnings) of
consolidated joint venture 38,653 1,348,336 (300,971)
--------------------------------------------------
Loss before cumulative effect of a change in
accounting principle (18,360,921) (3,053,516) (497,644)
Cumulative effect of a change in accounting
principle - expensing of start-up costs - - (615,323)
--------------------------------------------------
Net loss (18,360,921) (3,053,516) (1,112,967)
Redeemable preferred stock dividends (400,000) (400,000) (402,019)
--------------------------------------------------
Net loss applicable to common shares $ (18,760,921) $ (3,453,516) $ (1,514,986)
--------------------------------------------------
Loss per common share before cumulative effect of
change in accounting principle - basic and diluted $ (1.39) $ (.26) $ (.07)
--------------------------------------------------
Cumulative effect of expensing start-up-costs -
basic and diluted $ - $ - $ (.05)
--------------------------------------------------
Net loss per common share - basic and diluted $ (1.39) $ (.26) $ (.12)
--------------------------------------------------
Weighted average common shares - basic and diluted 13,455,000 13,260,000 12,506,000
--------------------------------------------------
________________________________________________________________________________
See accompanying notes to consolidated financial statements. F-4
CROWN ENERGY CORPORATION
Consolidated Statement of Stockholders' Deficit
Years Ended December 31, 2000, 1999, and 1998
Additional Stock
Common Stock Paid-in Subscription Common Stock Warrants Accumulated
Shares Amount Capital Receivable Warrants Amount (Deficit)
-----------------------------------------------------------------------------------------
Balance, January 1, 1998 11,722,216 $ 234,444 $ 5,318,598 $ - 283,750 $ 57,318 $ (3,861,283)
Stock issued upon exercise of stock
options in exchange for notes receivable 946,296 18,926 530,240 - - - -
Stock issued for cash 300,000 6,000 397,125 (549,166) - - -
Dividends on preferred stock - - (402,019) - - - -
Preferred stock accretion - - (56,604) - - - -
Warrants issued for consulting services - - - - 400,000 186,256 -
Net loss - - - - - - (1,112,967)
-----------------------------------------------------------------------------------------
Balance, December 31, 1998 12,968,512 259,370 5,787,340 (549,166) 683,750 243,574 (4,974,250)
Dividends on preferred stock accrued
from prior years 317,069 6,341 461,092 - - - -
Preferred stock accretion - - (56,604) - - - -
Dividends on preferred stock - - (400,000) - - - -
Net loss - - - - - - (3,053,516)
-----------------------------------------------------------------------------------------
Balance, December 31, 1999 13,285,581 265,711 5,791,828 (549,166) 683,750 243,574 (8,027,766)
Stock issued for legal services 350,000 7,000 36,750 - - - -
Preferred stock accretion - - (56,604) - - - -
Dividends on preferred stock - - (400,000) - - - -
Net loss - - - - - - (18,360,921)
-----------------------------------------------------------------------------------------
Balance, December 31, 2000 13,635,581 $ 272,711 $ 5,371,974 $(549,166) 683,750 $ 243,574 $ (26,388,687)
=========================================================================================
________________________________________________________________________________
See accompanying notes to consolidated financial statements. F-5
CROWN ENERGY CORPORATION
Consolidated Statement of Cash Flows
Years Ended December 31,
2000 1999 1998
-----------------------------------------------
Cash flows from operating activities:
Net loss $ (18,360,921) $ (3,053,516) $ (1,112,967)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation, depletion, and amortization 903,864 746,674 235,374
Provision for doubtful accounts receivable 1,529,896 77,018 25,475
Stock issued for services 43,750 - -
Impairment on investment in equity affiliate 6,904,085 - -
Impairment on goodwill 3,625,848 - -
Equity in losses of unconsolidated joint venture,
net of distributions to minority interest
shareholders 145,814 870,288 376,693
Minority interest in losses of consolidated joint
venture, net of distributions to minority interest
shareholders 126,286 (1,348,336) (244,523)
Other expenses paid through equity instruments - - 589,381
Changes in operating assets and liabilities
(net of effect of acquisitions, see note 6) :
Accounts receivable 2,237,169 (2,439,565) (2,838,445)
Inventory (237,021) 2,528,470 3,187,170
Prepaid and other current assets (32,025) 3,789 138,045
Related party receivable (25,700) - -
Other assets (161,241) 136,021 (544,355)
Accounts payable 184,971 (725,156) 1,847,872
Accrued interest 1,999,140 1,836,305 -
Accrued expenses (166,510) 265,571 120,549
-----------------------------------------------
Net cash (used in) provided by
operating activities (1,282,595) (1,102,437) 1,780,269
-----------------------------------------------
Cash flows from investing activities:
Purchase of property, plant, and equipment (729,477) (2,898,940) (904,277)
Acquisition of Petro Source Asphalt Company - - (14,235,726)
Acquisition of Rawlins Terminal - (266,571) -
Acquisition of Cowboy Terminal - (195,000) -
Investment in and advances to Crown Asphalt Ridge, LLC 64,377 (562,490) (1,766,343)
-----------------------------------------------
Net cash used in
investing activities (665,100) (3,923,001) (16,906,346)
-----------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings on working capital loan from
related party - 6,000,001 8,935,221
Proceeds from borrowings of long-term debt - - 6,000,000
Payments on long-term debt (153,141) (125,776) (674,277)
Sale of equity interest in subsidiary to a minority
shareholder - 394,558 1,500,000
-----------------------------------------------
Net cash (used in) provided by
financing activities (153,141) 6,268,783 15,760,944
-----------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,100,836) 1,243,345 634,867
Cash and cash equivalents at beginning of year 4,978,977 3,735,632 3,100,765
-----------------------------------------------
Cash and cash equivalents at end of year $ 2,878,141 $ 4,978,977 $ 3,735,632
===============================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 587,783 $ 197,135 $ 678,870
===============================================
________________________________________________________________________________
See accompanying notes to consolidated financial statements. F-6
CROWN ENERGY CORPORATION
Consolidated Statement of Cash Flows
Continued
Supplemental disclosure of noncash investing and financing activities:
For the year ended December 31, 2000:
o The Company issued debt of $264,750, in exchange for property
o The Company accrued dividends to preferred stockholders of
$400,000
o The Company increased preferred stock and decreased additional
paid-in capital for $56,604 related to preferred stock accretion.
For the year ended December 31, 1999:
o The Company issued 317,069 shares of common stock totaling
$467,433 as a dividend distribution to preferred stockholders and
accrued dividends totaling $400,000 on the redeemable preferred
stock.
o The Company incurred long-term debt of $1,282,070 in connection
with the acquisition of the Cowboy Terminal (see note 6).
o The Company incurred long-term debt of $2,025,000 in connection
with the acquisition of the Rawlins Terminal (see note 6).
o The Company incurred long-term debt of $2,991,868 to fund its
ongoing capital investment requirements in Crown Asphalt Ridge.
o The Company increased preferred stock and decreased additional
paid-in capital for $56,604 related to preferred stock accretion.
________________________________________________________________________________
See accompanying notes to consolidated financial statements. F-7
CROWN ENERGY CORPORATION
Consolidated Statement of Cash Flows
Continued
During the fiscal year ended December 31, 1998:
o The Company issued 946,296 shares of common stock upon the
exercise of stock options in exchange for notes receivable
totaling $549,166.
o The Company issued 300,000 shares of common stock in payment of
research and development expenses of $403,125.
o The Company issued 400,000 common stock warrants, valued at
$186,256, in payment of consulting fees.
o The Company accrued dividends totaling $402,019 on the redeemable
preferred stock.
o The Company increased preferred stock and decreased additional
paid-in capital for $56,604 related to preferred stock accretion.
________________________________________________________________________________
See accompanying notes to consolidated financial statements. F-8
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
1. Organization Crown Energy Corporation (CEC) and its wholly-owned
subsidiaries, Crown Asphalt Corporation (CAC) and Crown
Asphalt Products Company (CAPCO) (collectively referred
to as the "Company"), are engaged in the mining,
production, and selling of asphalt products. Prior to
1998, the Company was engaged in the production and
selling of oil and gas from leases it operated in the
state of Utah through its previously owned subsidiary,
Gavilan Petroleum, Inc. (Gavilan). By December 31,
1997, the Company had divested itself of all oil and
gas properties and related operations.
Majority-Owned Subsidiaries
CAPCO is the majority-owner of Crown Asphalt
Distribution, LLC (Crown Distribution). Crown
Distribution is a joint venture formed on July 2, 1998,
between CAPCO and MCNIC Pipeline and Processing Company
(MCNIC) for the purpose of acquiring certain assets of
Petro Source Asphalt Company (Petro Source) (see note
6).
CAPCO owns 50.01% and MCNIC owns 49.99% of Crown
Distribution. CAPCO is the general manager and
operating agent of Crown Distribution. Because there is
no agreement requiring the minority shareholder to
guarantee the subsidiary's debt or a commitment to
provide additional capital, other than working capital,
all losses related to Crown Distribution (including
MCNIC's 49.99% interest in the losses totaling
$5,681,372 for the year 2000) are included in the
Company's financial statements.
CAT LLC is a joint venture formed on June 16, 1998
between CAPCO and Foreland Asphalt Corporation
(Foreland). CAT LLC owns an asphalt terminal and
storage facility. On December 21, 1998, CAPCO assigned
its interest in CAT LLC to Crown Distribution. Crown
Distribution owns 66.67% and Foreland owns 33.33% of
CAT LLC. Crown Asphalt Distribution II, LLC (CAD II)
was formed in 1999 for the purpose of acquiring the
Rawlins Terminal and two additional facilities which
were never completed (see note 6). CAD II is a wholly
owned subsidiary of CAPCO. In 2000 the assets and
operations of the Rawlins Terminal have been fully
integrated into CAPCO.
F-9
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
1. Organization Principles of Consolidation
Continued The consolidated financial statements include the
accounts of the Company and its wholly-owned and
majority-owned subsidiaries. All significant
intercompany transactions have been eliminated in
consolidation.
2. Significant Going Concern
Accounting The accompanying consolidated financial statements have
Policies been prepared assuming that the Company will continue
as a going concern. As of December 31, 2000, the
Company had an accumulated deficit and has had
substantial recurring losses. The consolidated
operations of the Company have not had sustained
profitability and the Company has relied upon debt
financing to satisfy its obligations. As described in
note 8, the Company also has significant litigation
which could result in the Company being unable to
sustain profitability or obtain financing. These
conditions raise substantial doubt about the ability of
the Company to continue as a going concern. The
consolidated financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
The Company's ability to continue as a going concern is
subject to the attainment of profitable operations or
obtaining necessary funding from outside sources.
Management's plan with respect to this uncertainty
include inventory purchase strategies, evaluating new
products and markets, increasing sales volume,
improving profit margins, and minimizing overhead and
other costs. However, there can be no assurance that
management will be successful.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, the
Company considers all highly liquid debt investments
purchased with a maturity of three months or less to be
cash equivalents.
Inventory
Inventory consists principally of refined products and
chemical supplies which are valued at the lower of cost
(computed on a first-in, first-out basis) or market.
F-10
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
2. Significant Property, Plant, and Equipment
Accounting Property, plant, and equipment are recorded at cost and
Policies are depreciated over the estimated useful lives of the
Continued related assets. Depreciation is computed using the
straight-line method for financial reporting purposes.
The estimated useful lives of property, plant, and
equipment are as follows:
Plant and improvements 10-30 years
Tankage 25 years
Equipment 7 years
Computer equipment, furniture,
and fixtures 3 years
Investment in and Advances to Equity Affiliate
The Company's investment in Crown Asphalt Ridge LLC
(Crown Ridge) is accounted for using the equity method
(see notes 4 and 5). Accordingly, the Company's
investment is recorded at cost and adjusted by the
Company's share of undistributed earnings and losses.
Due to the circumstances discussed in note 4, an
impairment of the Company's investment in Crown Ridge
was recorded during the year ended December 31, 2000.
Revenue Recognition
Revenues are recognized when the related product is
shipped.
Income Taxes
Income taxes are determined using the asset and
liability method, which requires recognition of
deferred income tax liabilities and assets for the
expected future tax consequences of events that have
been included in the financial statements or tax
returns. Under this method, deferred income tax
liabilities and assets are determined based on the
difference between financial statement and tax bases of
assets and liabilities using estimated tax rates in
effect for the year in which the differences are
expected to reverse. Deferred tax assets are recognized
only if it is more likely than not that the asset will
be realized in future years.
F-11
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
2. Significant Concentration of Credit Risk
Accounting Financial instruments which potentially subject the
Policies Company to concentration of credit risk consist
Continued primarily of receivables. In the normal course of
business, the Company provides credit terms to its
customers. Accordingly, the Company performs ongoing
credit evaluations of its customers and maintains
allowances for possible losses which, when realized,
have been within the range of management's
expectations.
The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such
accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Loss Per Common Share
The computation of basic earnings (loss) per common
share is based on the weighted average number of shares
outstanding during each year.
The computation of diluted earnings per common share is
based on the weighted average number of shares
outstanding during the year, plus the common stock
equivalents that would arise from the exercise of stock
options outstanding, using the treasury stock method
and the average market price per share during the year.
Options and warrants to purchase 3,463,148 shares,
2,911,898 shares, and 2,149,698 shares of common stock
at prices ranging from $.10 to $2.50 per share were
outstanding at December 31, 2000, 1999, and 1998,
respectively, but were not included in the diluted
earnings (loss) per share calculation because the
effect would have been antidilutive.
Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,
the disclosures of contingent assets and liabilities at
the date of the financial statements and the reported
amount of revenues and expenses during the reporting
period. Actual results could differ from those
estimated.
F-12
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
2. Significant Long-Lived Assets
Accounting
Policies The Company evaluates the carrying value of long-term
Continued assets including intangibles based on current and
anticipated undiscounted cash flows and recognizes
impairment when such cash flows will be less than the
carrying values. Measurement of the amount of
impairments, if any, is based upon the difference
between carrying value and fair value.
Goodwill and Intangible Assets
The Company has recorded the amount paid in excess of
the fair value of net tangible assets acquired at the
date of acquisition as goodwill. Goodwill is amortized
using the straight-line method over 20 years. Other
intangible assets consist of a noncompetition agreement
that is being amortized over its five-year term using
the straight-line method.
Asphalt Demerits
Crown's subsidiary, CAPCO, blends asphalt for sale to
contractors and state agencies. The asphalt sold must
meet certain specifications for a particular
application. If the asphalt sold does not meet these
specifications, for whatever reason, the asphalt
supplier may be held liable for possible damages
(asphalt demerits) therefrom. Management believes that
the Company's product liability insurance would cover
any significant damages.
Environmental Expenditures
Environmental related restoration and remediation costs
are recorded as liabilities when site restoration and
environmental remediation and clean-up obligations are
either known or considered probable, and the related
costs can be reasonably estimated. Other environmental
expenditures, that are principally maintenance or
preventative in nature, are recorded when expended and
expensed or capitalized as appropriate.
Comprehensive Income
Comprehensive income is reported in accordance with
SFAS No. 130, "REPORTING COMPREHENSIVE INCOME". SFAS
130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a
financial statement and (b) display the accumulated
balance of other comprehensive income separately from
additional paid-in capital, retained earnings, and
stockholders' equity. The Company does not currently
have any components of comprehensive income other than
net loss.
F-13
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
2. Significant Recent Accounting Pronouncements
Accounting FASB Statement No. 133, as amended by Statement Nos.
Policies 137 and 138, is effective for the Company as of January
Continued 1, 2001. Statement No. 133 establishes accounting and
reporting standards for derivative instruments,
including certain derivative instruments embedded in
other contracts, and for hedging activities. The
Statement requires that the Company recognize all
derivatives on the balance sheet at fair value. The
accounting for changes in the fair value of a
derivative depends on the intended use of the
derivative and the resulting designation. Adoption of
SFAS 133 did not result in a material effect on the
Company's financial statements.
Stock-Based Compensation
The Company has elected to continue to apply Accounting
Principles Board (APB) Opinion 25 (as permitted by SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION). The
appropriate disclosures required by SFAS No. 123 are
included in note 12.
Change in Accounting Principle
In 1998, the Company adopted Statement of Position
(SOP) No. 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES, which requires costs of start-up activities
to be expensed as incurred. The effect on 1998 of
adopting SOP No. 98-5 resulted in additional expenses
of $204,218. The cumulative effect on years prior to
1998 of the accounting totaled $615,323 and relates to
the following activities:
Start-up costs expensed by the Company $ 503,493
Equity in start-up costs of Crown 111,830
Total cumulative effect on change in ----------
accounting principal $ 615,323
==========
Reclassification
Certain amounts in the 1999 and 1998 consolidated
financial statements have been reclassified to conform
with classifications adopted in the current year.
F-14
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
3. Property, The following is a summary of property, plant, and
Plant and equipment as of December 31:
Equipment
2000 1999
--------------- ---------------
Land $ 1,000,000 $ 1,000,000
Plant and improvements 1,277,018 440,406
Equipment 2,640,438 1,984,605
Computer equipment,
furniture, and fixtures 348,098 319,662
Tankage 5,553,780 5,524,572
Construction in progress - 555,862
Total property, plant, and equipment
Less accumulated depreciation 10,819,334 9,825,107
(1,158,160) (587,372)
--------------- ---------------
Total $ 9,661,174 $ 9,237,735
=============== ===============
4. Investments In August 1997, the Company, through its wholly owned
In and subsidiary, CAC, entered into a joint venture with
Advances to MCNIC for the purpose of developing, mining,
an Equity processing, and marketing asphalt, performance grade
Affiliate asphalt, diesel fuel, hydrocarbons, bitumen, asphaltum,
minerals, mineral resources, and other oil sand
products. The joint venture resulted in the formation
of Crown Ridge, which is a development stage company.
During the year ended December, 31, 1997, the Company
contributed cash of $433,219 and the right to its oil
sand properties and a license agreement, which allows
the Company to use certain patented oil extraction
technology and oil sand property leases, with a book
value of $2,715,428 to Crown Ridge. This technology was
recorded at $500,001 by Crown Ridge. During the year
ended December 31, 2000 and 1999, the Company
contributed $0 and $4,013,318, respectively, to Crown
Ridge. MCNIC and the Company initially own interests of
75% and 25%, respectively, in the profits and losses of
Crown Ridge. Once operations of Crown Ridge are
generating sufficient cash flows to pay specific
returns, as defined, to MCNIC then CAC's interest in
Crown Ridge will increase to 50%.
F-15
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
4. Investments Crown Ridge has experienced certain difficulties
In and relating to its production plant. Crown Ridge has
Advances to conducted extensive research and engineering to develop
an Equity a solution to these difficulties which was tested in a
Affiliate pilot study during 2000. The results of the pilot study
Continued are being evaluated to determine if certain
modifications or retrofit of the plant are technically
and economically viable. Certain modifications to the
Facility will be required, provided financing for the
modifications is available and contributed to Crown
Ridge.
During the year ended December 31, 2000, the Company
evaluated the carrying value of its investments in and
advances to Crown Ridge. The evaluation has been
complicated by the fact that the Company's joint
venture partner has effectively taken control of Crown
Ridge and has not shared information relative to its
activities pertaining to Crown Ridge, including
financial information and feasibility studies relative
to the Asphalt Ridge Project. In addition, the Company
and MCNIC are in litigation relative to significant
claims involving the joint venture and other matters.
The Company is vigorously pursuing its claims and a
final arbitration trial is now set to commence on July
23, 2001. Based on the lack of a firm business plan for
the Asphalt Ridge Project at this time, the Company
determined that its investment in and advances to Crown
Ridge were potentially impaired. Accordingly, an
aggregate non-cash expense for the impairment or
$6,904,085 was recorded.
F-16
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
4. Investments Net investments in and advances to Crown Ridge are
In and summarized as follows:
Advances to
an Equity
Affiliate
Continued
2000 1999
--------------- ---------------
The Company's equity in net assets $ 4,878,264 $ 4,977,648
Excess of investment over the Company's equity in net
assets totaling $60,644 and $60,645 in 2000 and 1999,
respectively 2,025,640 2,086,284
(Payments from) advances to affiliate 181 110,988
Impairment on investment in equity affiliate (6,904,085) -
Total investment in and advances to
an equity affiliate $ - $ 7,174,920
=============== ===============
The Company's investment in and advances to Crown Ridge
as of December 31, 1999, accounted for greater than 20%
of the Company's total assets. Accordingly, the
following summarized separate financial information of
Crown Ridge at December 31, 1999 is disclosed as
follows:
1999
---------------
Assets $ 21,160,839
Liabilities 1,130,890
Equity 20,029,949
Revenues -
Net loss (3,481,152)
5. Losses The Company's 24% equity in net loss plus amortization
From Equity of excess of investment over the Company's equity in
Affiliate net assets is reported in the accompanying consolidated
statement of operations as follows:
2000 1999 1998
---------- ---------- ----------
Equity in losses of unconsolidated
equity affiliate $ (145,814) $ (870,288) $ (264,863)
Cumulative effect of change in
accounting principal - - (111,830)
Amortization of excess investment
included in general and
administrative expense (60,644) (60,645) -
---------- ---------- ----------
Total $ (206,458) $ (930,933) $ (376,693)
F-17
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
5. Losses Crown Ridge may have recorded certain expenses, the
From Equity majority of which relate to the pilot project conducted
Affiliate at the Asphalt Ridge facility, that the Company
Continued believes were not approved by the Management Committee
of Crown Ridge and thus are not considered expenses
related to the Company's portion of Crown Ridge. MCNIC,
the majority interest owner and current acting operator
of Crown Ridge, has been unwilling to provide the
Company with sufficient financial information through
December 31, 2000. Consequently, the Company has
prepared estimates to record its share of approved
expenses.
6. Acquisitions Acquisition of Cowboy Terminal
On January 9, 1999, CAT LLC acquired a controlling
interest in the Cowboy Terminal for a total purchase
price of $1,973,511. CAT LLC paid cash deposits on the
purchase price totaling $496,441 during 1998, paid
$195,000 in cash at closing, and executed and delivered
a promissory note in the amount of $1,282,070 in 1999.
The assets acquired were recorded at their estimated
fair values at the date of acquisition and the results
of operations are included in the accompanying
consolidated statement of operations from the date of
acquisition. The acquisition was accounted for as a
purchase. The preliminary purchase price was allocated
entirely to property and equipment.
The CAT LLC Operating Agreement obligates both Crown
Distribution and Foreland to make additional capital
contributions equal to one-half of any additional
requirements, not to exceed $650,000, required for (i)
CAT LLC to fulfill its obligations under any corrective
action plan that may be accepted by CAT LLC and the
Utah Department of Environmental Quality with respect
to certain environmental conditions at the Cowboy
Terminal and (ii) any additional amounts required to
cover legal costs incurred in obtaining title to the
Cowboy Terminal or otherwise relating to the
environmental remediation work potentially needed.
F-18
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
6. Acquisitions Acquisition of Cowboy Terminal - Continued
Continued The CAT LLC Operating Agreement also obligates Crown
Distribution and Foreland to make additional capital
contributions in proportion to their ownership
percentages in order to fund any additional amounts
required for CAT LLC to fulfill its obligations under
the purchase contract for the Cowboy Terminal Assets,
for environmental management and containment costs,
expenses for operations, or the construction of certain
approved capital improvements to the Cowboy Terminal.
None of the foregoing additional contributions will
result in an increase in the number of units or
percentage interests held by Crown Distribution or
Foreland.
CAT LLC is managed by CAPCO. CAPCO has authority to
conduct the day-to-day business and affairs of CAT LLC.
However, certain matters, considered to be protective
rights, must be approved by members holding 75% or more
of the outstanding units of CAT LLC. CAPCO is not
compensated for its services as manager.
Rawlins Asphalt Terminal
On May 12, 1999, the Company acquired the Rawlins
Asphalt Terminal and inventory for $2,291,571 from S&L
Industrial (S&L). The purchase price consists of the
Company assuming S&L's debt of approximately
$1,800,000, entering into a note payable to S&L for
$225,000, and a cash payment of $266,571. The
acquisition was accounted for as a purchase. The assets
acquired were recorded at their estimated fair values
at the date of acquisition and the results of
operations are included in the consolidated statements
of operations from the date of acquisition. The
preliminary purchase price was allocated $1,770,200 to
property, plant, an equipment, $216,571 to inventory,
and $304,800 to goodwill.
F-19
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
6. Acquisitions Petro Source Asphalt Company
Continued On July 2, 1998, Crown Distribution acquired the
inventory and assets of Petro Source Asphalt Company
(Petro Source) for $14,235,726. The acquisition was
accounted for as a purchase. The assets acquired were
recorded at their estimated fair values at the date of
acquisition and the results of operations are included
in the accompanying consolidated statements of
operations from the date of acquisition. In conjunction
with the acquisition, the Company recorded goodwill of
$4,143,827. Due to circumstances described in note 7,
the remaining goodwill balance of $3,625,848 was
impaired and written off as of December 31, 2000. The
assets acquired relate to the refining, production, and
distribution of asphalt products. The sale of the
equity interest of $1.5 million as reported in the
consolidated statement of cash flows represents MCNIC's
contribution toward the purchase of their interest in
Crown Distribution.
Crown Distribution is governed by a management
committee consisting of three managers. The Company is
entitled to appoint two managers and MCNIC is entitled
to appoint one manager. Management decisions are
generally made by the management committee. However,
one of the managers appointed by the Company serves as
the operating manager and has the powers, authority,
duties, and obligations specified in the operating
agreement, which generally requires the operating
manager to implement the policies and pursue the
objectives specified in the annual operating plan.
The annual operating plan is adopted by the management
committee on an annual basis and addresses all aspects
of Crown Distribution's operations for the coming year,
including the nature and extent of the proposed
activities, marketing plans, capital expenditure plans,
and similar matters. In the event the management
committee is unable to unanimously approve an annual
operating plan for any given calendar year, a majority
of the managers shall have the authority to continue to
maintain Crown Distribution's operations at levels
comparable to those approved in its most recent annual
operating plan.
F-20
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
7. Intangibles Intangible assets consist of the following:
December 31,
2000 1999
----------- -----------
Goodwill $ 304,800 $ 4,448,627
Non-compete agreement 250,000 250,000
Accumulated amortization (150,400) (395,947)
----------- -----------
$ 404,400 $ 4,302,680
=========== ===========
At December 31, 2000, the Company re-assessed the
recoverability of goodwill associated with the Petro
Source acquisition (see note 6). Due to litigation with
MCNIC, the Company has been unable to secure financing
needed to build up inventory at favorable prices. This
lack of funding and the ongoing dispute with MCNIC has
resulted in losses from operations in 1999 and 2000.
Because of these circumstances the Company could not
estimate the full carrying value which could be
recovered through undiscounted future cash flows from
products generated from related assets. Accordingly, an
impairment of $3,625,848 has been recognized in the
statement of operations for the year ended December 31,
2000.
8. Litigation and Pursuant to the Crown Distribution operating Agreement,
Borrowings Management believes, MCNIC elected to provide a working
From Related capital revolving line of credit to Crown Distribution
Party in lieu of the Company completing a line with an
outside third party financial institution. As of both
December 31, 2000 and 1999, this working capital line
from MCNIC had a balance of $14,935,222 and accrues
interest at 8%. Management of the Company has indicated
that MCNIC believes the borrowing is a working capital
loan. Through the period ended December 31, 2000,
$2,356,711 in interest had been accrued. This line is
repaid solely out of the cash flow from Crown
distribution.
Presently the foregoing together with all disputes
between the Company and MCNIC have been submitted to
binding arbitration.
F-21
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
8. Litigation and Crown Distribution has received a notice of default of
Borrowings a working capital loan from MCNIC made in conjunction
From Related with the Petro Source asset acquisition. The line was
Party used to extinguish this working capital loan. Further
MCNIC has filed a complaint seeking, among other
things, repayment of the working capital loan Continued
plus all interest accrued thereon. The Company has
answered MCNIC's suit and filed counterclaims and an
additional action of its own relating to MCNIC's
actions with regard to the Company and its ventures
with it (see note 15).
9. Long-term Long-term debt principally due related party consists
Debt of the following at December 31:
2000 1999
----------- -----------
Preferential debt with MCNIC, interest at 15%, with
annual principal and interest installments equal to 50%
of the net cash flows (as defined) of Crown
Distribution. This debt is secured by all of the assets
of Crown Distribution. Total amount is included in the
thereafter portion of the debt maturity schedule below
due to uncertainty of payment terms $ 5,325,723 $ 5,325,723
Note payable to unrelated third party with interest at
9%, payable in 84 equal monthly principal and interest
installments of $20,627, maturing January 1, 2006. The
debt is secured by assets at the Cowboy Terminal
Facility. 1,006,764 1,156,294
Note payable with MCNIC with interest at prime plus 1%
(10.5% at December 31, 2000). Monthly interest payments
of $20,756 through August 2001, with quarterly
adjustments for interest rate fluctuations. Commencing
August 2001, CAC will make monthly principal and
interest payments until the debt matures July 2014. The
debt is secured by CAC's proportional increase in its
interest in Crown Ridge resulting from the loan
proceeds. 2,991,868 2,991,868
Note payable with interest at prime plus 1% (10.5% at
December 31, 2000) to a bank. Monthly interest payments
of $13,600 through May 2001, with quarterly adjustments
for interest rate fluctuations. Commencing May 2001,
CAPCO will make monthly principal and interest payments
until the debt matures in May 2014. The debt is secured
by assets at Rawlins Terminal. 1,798,788 1,800,000
Deferred purchase price on Rawlins Terminal acquisition
(see note 6) with interest at the LIBOR rate (6.6% at
December 31, 2000). The debt is due in monthly
installments through February 2010. Due to a dispute
over certain environmental remediation associated with
the Rawlins Terminal this amount has been included in
the thereafter portion of the debt maturities schedule
below due to the uncertainty of payments 225,000 225,000
F-22
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
9. Long-term Deferred purchase price on the Cowboy Asphalt Terminal
Debt acquisition with interest at 8% per year over a 10-year
Continued term, with the principal and interest payments made to
a company in monthly installments of $3,212. The debt
matures in November 2010. Debt is secured by property
and equipment 262,351 -
----------- -----------
Total 11,610,494 11,498,885
Less estimated current portion (273,633) (166,204)
Long-term portion $11,336,861 $11,332,681
=========== ===========
The schedule maturities of long-term debt at December
31, 2000 are as follows:
Year Ending December 31:
2001 $ 273,633
2002 404,224
2003 442,938
2004 485,487
2005 532,130
Thereafter 9,472,082
-------------
Total $ 11,610,494
=============
10. Redeemable Redeemable preferred stock consists of 500,000 issued
Preferred and outstanding Series A cumulative convertible shares
Stock with a par value of $.005 and a stated value of $10.00.
The Company has authorized 1,000,000 shares of
preferred stock. The original estimated fair value of
the outstanding shares is $4,716,981 with annual
accretion of $56,604 for the years ended December 31,
2000, 1999 and 1998 toward the stated and liquidation
value of $5,000,000. At December 31, 2000 and 1999 the
redeemable preferred stock had a balance of $4,896,227
and $4,839,623.
F-23
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
10. Redeemable The Company is authorized to issue 1,000,000 preferred
Preferred shares, par value $.005 per share. On November 4, 1997,
Stock the Company completed the sale of 500,000 shares of its
Continued Series A Cumulative Convertible Preferred Stock
("Series A Preferred") pursuant to a stock purchase
agreement dated September 25, 1997 for an aggregate
sales price of $5,000,000. Each share of Series A
Preferred is convertible at the option of its holder,
at any time, into 8.57 shares of common stock of the
Company. At the date of the issuance of the preferred
stock, the embedded conversion price was $1.17 and the
estimated fair value of the common stock was $1.03.
Dividends accrue on the outstanding Series A Preferred
at the rate of 8% per annum and may be declared by the
Company and paid through cash or common shares of the
Company at the option of the holder. Subject to the
holder's right to convert the Series A Preferred, the
Company may redeem the Series A Preferred at any time
from the date on which it is issued at a percentage of
the Series A Preferred's stated value of $10 per share;
130% of stated value if redemption occurs within
thirty-six months of the date of issuance, 115% of
stated value if redemption occurs between thirty-six
and forty-eight months after the date of issuance, 110%
of stated value if redemption occurs between
forty-eight and sixty months after the date of
issuance, and 100% if redemption occurs thereafter. The
holder of the Series A Preferred may also require the
Company to redeem the Series A Preferred after the
eighth anniversary of the Series A Preferred's
issuance. The holders of the Series A Preferred shall
have the right, but shall not be obligated, to appoint
20% of the Company's Board of Directors. The Company
may not alter the rights and preferences of the Series
A Preferred, authorize any security having liquidation
preference, redemption, voting or dividend rights
senior to the Series A Preferred, increase the number
of Series A Preferred, reclassify its securities or
enter into specified extraordinary events without
obtaining written consent or an affirmative vote of at
least 75% of the holders of the outstanding shares of
the Series A Preferred stock. All voting rights of the
Series A Preferred expire upon the issuance by the
Company of its notice to redeem such shares. The shares
of common stock issuable upon conversion of the Series
A Preferred are subject to adjustment upon the issuance
of additional shares of the Company's common stock
resulting from stock splits, share dividends, and other
similar events as well as upon the issuance of
additional shares or options which are issued in
connection with the Company's equity investment (see
note 4) or as compensation to any employee, director,
consultant, or other service provider of the Company or
any subsidiary, other than options to acquire up to 5%
of the Company's common stock at or less than fair
market value.
F-24
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
11. Leases The Company leases certain premises and equipment under
operating leases. Approximate future minimum lease
payments under non-cancellable operating leases as of
December 31, 2000 are as follows:
Year Ending December 31:
2001 $ 1,046,000
2002 1,107,000
2003 1,098,000
2004 677,000
2005 64,000
Thereafter 28,000
---------------
Total $ 4,020,000
===============
Lease expense for the years ended December 31, 2000,
1999 and 1998, totaled $1,128,687, $762,251, and
$899,452, respectively.
12. Stock Stock Options
Options and The Company has a stock option plan for directors and
Warrants salaried employees. Options are granted at a price not
less than the fair market value on the date of grant,
become exercisable between one to four years following
the date of grant, and generally expire in ten years.
Fair market value is determined based on quoted market
prices.
F-25
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
12. Stock A summary of the stock option and warrant activity for
Options and fiscal years 2000, 1999, and 1998 is as follows:
Warrants
Continued Options Warrants
--------------------------- ---------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
Outstanding at January 1, 1998 2,294,444 $ 0.82 283,750 $ 0.84
Granted 117,800 1.50 400,000 1.94
Exercised (946,296) 0.58 -
Forfeited -
Outstanding December 31, 1998 1,465,948 1.00 683,750 1.48
Granted 775,000 0.62 -
Exercised - - -
Forfeited (12,800) 1.50 -
Outstanding at December 31, 1999 2,228,148 0.88 683,750 1.48
Granted 1,040,000 0.13 -
Cancelled (208,750) 0.78 -
Forfeited (280,000) 1.05 -
--------- ------ ------- ------
Outstanding at December 31, 2000 2,779,398 $ 0.59 683,750 $ 1.48
========= ====== ======= ======
When accounting for the issuance of stock options and
warrants financial accounting standards allows entities
the choice between adopting a fair value method or an
intrinsic value method with footnote disclosures of the
pro forma effects if the fair value method had been
adopted. The Company has opted for the latter approach.
Had the Company's options and warrants been determined
based on the fair value method, the results of
operations would have been reduced to the pro forma
amounts indicated below:
Years Ended December 31,
2000 1999 1998
Net loss - as reported $ 18,360,921 $ 3,053,516 $ 1,112,967
Net loss - pro forma $ 18,483,982 $ 3,478,954 $ 1,521,872
Diluted income (loss) per share -
as reported $ (1.36) $ (.26) $ (.12)
Diluted loss per share - pro forma $ (1.37) $ (.29) $ (.15)
============ =========== ===========
F-26
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
12. Stock The fair value of each option grant is estimated on the
Options and date of grant using the Black-Scholes option pricing
Warrants model with the following assumptions:
Continued
Years Ended December 31,
2000 1999 1998
---------------------------------------
Expected dividend yield $ - $ - $ -
Expected stock price volatility 73% 76% 111%
Risk-free interest rate 5.75% 5.50% 5.80%
Expected life of options 4 years 1.5 years 1.5 years
======================================
The weighted average fair value of options and warrants
granted during 2000, 1999, and 1998 are $.10, $.43 and
$.93, respectively.
The following table summarizes information about stock
options and warrants outstanding at December 31, 2000:
Outstanding Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
$ .10 - .13 1,540,000 8.86 $ 0.12 560,000 $ 0.12
$ .38 - 1.13 1,448,148 4.48 $ 0.60 1,048,148 $ 0.68
$ 1.50 - 2.50 475,000 2.33 $ 1.87 475,000 $ 1.87
$ .08 to 9.88 3,463,148 6.13 $ 0.56 2,083,148 $ 0.80
F-27
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
12. Stock Common Stock Warrant
Options and In conjunction with the issuance of the preferred stock
Warrants described in note 10, the Company issued a warrant to
Continued the holders of the preferred stock. The fair value of
the warrant at the date of issuance was estimated to be
$283,019 and
was recorded to additional paid-in capital and as a
reduction to the stated value of the preferred stock.
The reduction in preferred stock is being accreted over
the five-year period from the date of issuance to the
earliest exercise date of the warrant. Upon the fifth
anniversary of the issuance of the preferred stock, the
warrant becomes exercisable, at $.002 per share, into
the number of common shares of the Company equal to (a)
[$5,000,000 plus the product of (i) ($5,000,000
multiplied by (ii) 39% (internal rate of return)
multiplied by (iii) 5 years] (14,750,000), minus (b)
the sum of (i) all dividends and other distributions
paid by the Company on the preferred stock or on the
common stock received upon conversion of the preferred
stock plus (ii) the greater of the proceeds from the
sale of any common stock received by the holder upon
the conversion of the preferred stock prior to the
fifth anniversary date or the terminal value (as
defined below) of such common stock sold before the
fifth anniversary plus (iii) the terminal value of the
preferred stock and common stock received upon
conversion of the preferred stock then held, divided by
(c) the fair market value of the Company's common stock
on a weighted average basis for the 90 days immediately
preceding the fifth anniversary date of the issuance of
the preferred stock. Terminal value is defined as the
sum of (i) the shares of common stock into which the
preferred stock then held is convertible, plus (ii)
shares of common stock received upon conversion of
preferred stock, multiplied by the fair market value of
the Company's common stock on a weighted average basis
for the 90 days immediately preceding the fifth
anniversary date of the issuance of the preferred
stock. The warrants will expire in 2007.
Conversion of Preferred Dividends to Common Stock
On January 27, 1999, the Company issued 317,069 shares
of common stock to its preferred stockholders as
payment in full of preferred stock dividends payable
totaling $467,433.
F-28
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
13. Income Taxes The components of income tax benefit for the years
ended December 31 are summarized as follows:
2000 1999 1998
------------------------------------
Current $ - $ - $ -
Deferred:
Federal - - -
State - - -
------------------------------------
- - -
Total $ - $ - $ -
====================================
Income tax expense (benefit) differed from amounts
computed by applying the federal statutory rate to
pretax loss as follows:
Years Ended December 31,
2000 1999 1998
------------ ------------ ---------
Loss before income taxes and minority interest -
computed tax at the expected federal statutory rate,
34% $ (6,332,000) $ (1,496,000) $ (67,000)
State income taxes, net of federal income tax benefits (461,000) (92,000) (15,000)
Minority interest 1,918,000 458,000 (102,000)
Expiration of net operating losses 38,000 42,000 31,000
Other 4,000 54,000 (5,000)
Change in valuation reserve 4,833,000 1,034,000 386,000
Change in valuation reserve related to
cumulative effect of a change in
accounting principle - - (228,000)
-------------------------------------
Total income tax benefit $ - $ - $ -
=====================================
F-29
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
13. Income Taxes Deferred tax assets (liabilities) are comprised of the
Continued following:
December 31,
2000 1999
----------- -----------
Net operating loss carryforwards $ 3,342,000 $ 2,054,000
Impairment of investment in equity affiliate 2,555,000 -
Impairment of goodwill 671,000 -
Allowance for doubtful accounts 817,000 16,000
Start-up costs 99,000 186,000
Capital loss carryforwards 203,000 203,000
Differences between tax basis and
financial reporting basis of investment
in equity affiliate 439,000 439,000
Amortization of goodwill (36,000) (10,000)
Depreciation (573,000) (138,000)
Other 54,000 (12,000)
Valuation allowance (7,571,000) (2,738,000)
----------- -----------
$ - $ -
=========== ===========
The Company has available at December 31, 2000, unused
tax operating loss carryforwards of approximately
$9,000,000 which may be applied against future taxable
income and expire in varying amounts through 2012. The
Company also has unused capital loss carryforwards of
approximately $550,000 which may be applied against
future taxable income and expire in 2002.
F-30
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
14. Related Party The Company has an employment agreement (amended
Transactions November 1, 1999) with a director who is also an
not officer of the Company. The employment agreement
Otherwise expires December 31, 2003. The agreement includes a
Disclosed base salary of $150,000 subject to various increases as
of November 1 of each year provided that the Company
achieves positive cash flows from operations before
interest, debt service, taxes, depreciation,
amortization, extraordinary, and non-recurring items
and dividends. In addition to the base salary, the
director is entitled to receive a bonus for each fiscal
year of the agreement provided certain earnings levels
are obtained or the underlying price of the Company's
stock increases to determined levels subject to certain
limitations. In addition to the bonuses, the director
and officer was granted an option to purchase 450,000
shares of the Company's common stock at an exercise
price of $.125 per share in 1997. With the amended
agreement, the director and officer was granted an
option to purchase an additional 450,000 shares of the
Company's common stock at an exercise price based on
the average fair market price of the Company's common
stock for the three months immediately preceding and
following the options grant date. The option exercise
price approximated the average fair market value of the
Company's common stock at the date of grant. The
options vest over a three year period commencing on May
1, 2001, subject to accelerated vesting should the
Company's common stock market price exceed certain
defined levels.
The Company entered into an employment agreement,
effective January 26, 1996 with the former Chief
Executive Officer and Chairman of the Board of
Directors of the Company. The agreement expired
February 26, 1999. The agreement included a base salary
of 5% of the Company's net profits from operations
before depletion, depreciation, tax credits, and
amortization, but after interest expense on debt; not
to exceed $1,000,000 per year. The agreement also
called for the Company to grant 300,000 stock options
to purchase the Company's unregistered common stock at
$.66 per share and an additional 75,000 options for
each year of executive employment which is completed
after funding is achieved. In 1996, 300,000 options
were issued at $.66 per share. In 1999 and 1998, 75,000
options were issued at $1.15 and $1.50 per share,
respectively. Additionally, other benefits were
provided including participation in certain insurance,
vacation, and expense reimbursements.
F-31
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
14. Related Party During 1998, 946,296 options were exercised by officers
Transactions of the Company through a 8% common stock subscription
not receivable in the amount of $549,166. The respective
Otherwise receivable has been reflected as a reduction in common
Disclosed stockholders' equity (deficit). In addition, in 1999
Continued these officers borrowed approximately $25,000 to pay
the income taxes related to the option exercised.
Pursuant to the operating agreement of Crown
Distribution, the Company receives monthly payments of
$5,000 and $10,000 for management services and overhead
charges, respectively. Pursuant to the operating
agreement of Crown Ridge, while operator of Crown Ridge
the Company received monthly payments of $3,000 and
$10,000 for management services and overhead charges,
respectively. The Company eliminates the portion of
such payments which relate to its ownership percentages
in consolidation.
15. Commitments Litigation
and On May 21, 1998, Road Runner Oil, Inc. ("Road Runner")
Contingencies and Gavilan Petroleum, Inc. ("Gavilan") filed an action
in the Third Judicial District Court, Salt Lake County,
State of Utah, as Civil # 98-0905064 against the
Company and its President. The action relates to the
purchase by Road Runner of 100% of the stock of Gavilan
in 1997, and generally seeks to (i) obtain corporate
records of Gavilan in the Company's possession relating
to the amount of oil and gas royalties potentially owed
to third parties prior to the aforementioned stock
sale, and (ii) to determine the amount of royalties
owed. The action further alleges, on behalf of Gavilan,
claims of breach of fiduciary duty, professional
negligence and mismanagement against the Company's
President for alleged mismanagement of Gavilan's
affairs. The Plaintiffs seek injunctive relief
requiring the tendering by the Company of the
referenced records and such damages as may be proven at
trial. The Company believes that the Plaintiff's claims
are groundless and that it is entitled to payment of
the $75,000, plus accrued interest, still owed by Road
Runner as part of the purchase price for Gavilan. In
addition, since the action was filed, the Company has
tendered the corporate records to the Plaintiffs. On
March 8, 2000, the Company filed an answer denying
liability and filed a counterclaim against Road Runner
and Gavilan for breach of contract and declaratory
judgment. The Company is not certain as to whether or
not the outstanding balance under the promissory note
is collectible by the Company.
F-32
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
15. Commitments On July 12, 1999, Morrison Knudsen Corporation ("MK")
and filed a Complaint in the Eighth Judicial District
Contingencies Court, Uintah County, State of Utah, alleging that CAC,
Continued as operator of Crown Ridge, had breached an agreement
whereby MK would provide certain mining services for
the Crown Ridge Facility in Uintah County, Utah (the
"Project"). Judgment in favor of MK was entered on
January 30, 2001 in the principal amount of
$303,873.39, $49,062.33 of pre-judgment interest and
$2,033.14 of costs, which totals $354,968.86. A Notice
of Appeal was filed by CAC on March 1, 2001. Although
CAC will attempt to set aside the trial courts
judgment, there can be no assurance that CAC will
prevail on its appeal. In addition, CAC has made a
demand on Crown Ridge for payment of the judgment
amount and indemnity from any liability in this matter
because CAC was acting as operator for and on behalf of
Crown Ridge in the contractual relationship with MK
that was the subject of the litigation.
On July 14, 1999, Crown Distribution and CAPCO filed an
action in the United States District Court for the
Central District of California, Southern Division,
against Santa Maria Refining Company ("SMRC"), SABA
Petroleum Company ("SABA") and Greka Energy Corporation
("Greka"). The claims include causes of action for
breach of contract, breach of the covenant of good
faith and fair dealing, conversion, fraud, claim and
delivery, unjust enrichment and constructive trust,
unfair competition, declaratory relief and specific
performance. These claims arise out of the Defendant's
alleged termination of the Processing Agreement and
subsequent refusal to deliver asphalt to Crown
Distribution. Discovery of facts and testimony related
to issues arising in the lawsuit has been completed.
Trial has been scheduled to begin April 24, 2001. It is
anticipated that the damages caused by the Defendant's
actions could be substantial. Although Crown
Distribution will attempt to recoup those damages from
SMRC, SABA and Greka, due to the uncertainties inherent
in any litigation proceeding, there can be no assurance
that Crown Distribution or CAPCO will ultimately
prevail.
F-33
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
15. Commitments On January 25, 2000, Oriental New Investments, Ltd.
and ("Oriental") filed a Complaint against the Company in
Contingencies the Third Judicial District Court, Salt Lake County,
Continued Utah. The action relates to a 1997 convertible
debenture and replacement convertible debenture issued
by the Company to Oriental. The action seeks to recover
from the Company $50,000 liquidated damages, plus
interest, and attorneys fees and costs, for alleged
breaches of the convertible debentures. The Company
answered the Complaint on March 1, 2000, denying any
and all liability, and believes that Oriental's claims
are merit less. The Company will vigorously defend its
position that Oriental's claims are meritless. However,
due to the uncertainties inherent in any litigation
proceeding, there can be no assurance that the Company
will ultimately prevail.
On June 20, 2000, MCNIC filed a Complaint in the Third
Judicial District Court, Salt Lake County, Utah,
against Crown Distribution. The action seeks to
foreclose on alleged mortgage and security interest in
and to certain real and personal property of Crown
Distribution, which property constitutes a substantial
part of the operating assets of Crown Distribution. In
summary, in the MCNIC Complaint, MCNIC does not
acknowledge its prior commitment to "roll" the working
capital loan into the working capital line of credit
and alleges that Crown Distribution is in default on
the promissory note evidencing the Loan to Crown
Distribution in the amount of $7,141,930. MCNIC further
alleges that the total amount owed by Crown
Distribution to MCNIC is in excess of $15,000,000, as
well as interest at the rate of 18% from January 1,
2000 until paid in full. The MCNIC Complaint also seeks
the appointment of a receiver to ensure and protect the
interests of MCNIC in the property of Crown
Distribution, pending a determination by the Court of
the merits of the Complaint. Crown Distribution has
moved to vigorously defend against this litigation and
believes that it has certain available defenses, claims
and counterclaims. Crown Distribution's management
further believe that certain of MCNIC's allegations are
lacking in either legal or factual basis.
F-34
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
15. Commitments On July 25, 2000, the Company filed the Crown Complaint
and against MCN, MCNIC and certain officers of MCN and
Contingencies MCNIC. The suit was brought in the United States
Continued District Court for the District of Utah, Central
Division, and is styled Crown Energy Corporation, Crown
Asphalt Corporation, and Crown Asphalt Products Company
v. MCN Energy Group, Inc., MCNIC Pipeline & Processing
Company, Howard L. ("Lee") Dow III, and William E.
Kraemer, Civil No. 2:00CV-05873ST. The Company's action
arises from the joint ventures between affiliates of
the Company and MCNIC with regard to the asphalt
business in the Western United States involving the
mining, processing, storage, manufacture, and marketing
of asphalt the Company alleges claims against
defendants for breach of fiduciary duties, economic
duress, breach of implied covenants of good faith and
fair dealing, breach of contracts, estoppel,
intentional interference, and trade libel and slander
of title as a result of defendants' wrongful and bad
faith conduct in the joint venture relationships.
Damages of an amount exceeding $100 million are sought
on the Company's claims for breach of fiduciary duties,
economic duress, and breach of implied covenants of
good faith and fair dealing, with the full amount of
damages on all claims to be proven at trial.
On August 1, 2000, Crown Distribution filed its Answer
and Counterclaims to the MCNIC Complaint and named
additional counterclaim defendants, MCN Energy Group,
Inc., Howard L. ("Lee") Dow III, and William E.
Kraemer. Crown Distribution's Answer and Counterclaims
substantially denied all of the allegations set forth
in the MCNIC Complaint and alleged numerous
counterclaims, including breach of fiduciary duty,
economic duress, breach of implied covenants of good
faith and fair dealing, breach of contracts, estoppel,
intentional interference, trade libel and slander of
title, and abuse of process. Crown Distribution,
pursuant to its counterclaims, has requested a jury
trial and is seeking relief in the way of damages in
amounts to be proven at trial, punitive damages,
attorney's fees, interest, costs and any other relief
to which they may be entitled.
On August 31, 2000, MCNIC filed motions to stay both
the state court and federal court actions and have them
submitted to an arbitration panel in accordance with
the rules of the American Arbitration Association. The
Company contested whether either lawsuit should be
subject to arbitration and filed an answer to both
motions on October 2, 2000 to that effect. On November
8, 2000, the state court signed a minute entry stating
that MCNIC's motion to stay proceedings pending
arbitration would be granted. The federal court has yet
to decide on these motions.
F-35
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
15. Commitments On January 29, 2000, the Company agreed that binding
and arbitration of all of the claims set forth above would
Contingencies be in the Company's best interest. Accordingly, an
Continued Arbitration Agreement was signed between all of the
parties on January 29, 2001. The arbitration (the
"Arbitration") is being arbitrated before Judge John G.
Davies (ret.) in Salt Lake City, Utah. The arbitration
hearing is scheduled for July 23, 2001 through August
10, 2001, with extensive pre-hearing discovery to occur
prior to that time.
Commencing March 5, 2001, the Company, MCNIC, MCN and
various officers exchanged claims and counterclaims
relating to the Arbitration. The claims contained
therein substantially restate the parties' prior
positions within the litigation described above.
However, in its claims in arbitration, MCNIC, MCN and
certain of its officers have included the Company's
chief executive officer, president and treasurer, Jay
Mealey, as a party. Mr. Mealey and the Company believe
that this inclusion of Mr. Mealey at this point is
highly improper due to the fact that he had not been a
party to the pending actions nor to the Arbitration
Agreement pursuant to which the actions were submitted
to the Arbitration.
The Company believes that it has a strong case on the
claims and counterclaims in the Arbitration. However,
because arbitration proceedings are inherently
uncertain, the Company cannot predict the outcome of
any such proceedings. Management of the Company is
keenly aware of the importance of the Arbitration to
the Company. If MCNIC prevails in the Arbitration, and
depending upon the extent in nature of any relief
granted by the Arbitrator, the Company may be severely
and adversely impacted and may lose possession of some
or all of its primary assets and sources of revenues.
Other
The Company may become or is subject to other
investigations, claims, or lawsuits ensuing out of the
conduct of its business, including those related to
environmental, safety and health, commercial
transactions, etc. Management of the Company is
currently not aware of any other investigations,
claims, or lawsuits which it believes could have a
material adverse affect on its financial position.
F-36
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
16. Agreements The Company, through its subsidiary, Crown Distribution
had an agreement with Santa Maria Refining Company
(SMRC) and SABA Petroleum whereby Crown Distribution
purchased crude oil for processing at the Santa Maria
Refinery, and markets the slate of products produced,
primarily asphalt. This agreement was acquired through
the Petro Source asset acquisition described in note 6.
Revenues resulting from the agreement were
approximately $15.9 million in 1998, which accounted
for approximately 65% of total consolidated revenues.
Gross profits for the year ended December 31, 1999 from
operations at the Santa Maria Refinery totaled
approximately $1.2 million. SMRC extended the
agreement, which expired on December 31, 1998, to April
30, 1999. The agreement was not extended subsequent to
April 30, 1999.
17. Segment In accordance with the provisions of SFAS No. 131, the
Reporting Company makes key financial decisions based on certain
operating results of certain of its subsidiaries.
Segment information as reviewed by the Company is as
follows:
Year Ended December 31, 2000
Crown
Crown Asphalt
Asphalt Products
Distribution Company CAC CEC Total
------------ ------- --- --- -----
Revenues from
external customers $ 20,464,624 $ 2,322,479 $ - $ - $ 22,787,103
Gross profit (loss) $ (1,119,221) $ 301,261 $ - $ - $ (817,960)
Interest expense $ 2,096,565 $ 180,715 $ 298,067 1,039 $ 2,576,386
Depreciation and
amortization $ 708,614 $ 109,840 $ 62,037 $ 23,373 $ 903,864
Segment net loss $(11,365,018) $ 712,126 $(7,328,766) $ (379,263) $(18,360,921)
Segment total assets $ 13,461,698 $ 3,500,902 $ 15,871 $(15,281,046) $ 1,697,425
Year Ended December 31, 1999
Crown
Asphalt Rawlins
Distribution Terminal CEC Total
------------ -------- --- -----
Revenues from external
customers $ 32,934,592 $ 2,583,949 $ - $ 35,518,541
Gross profit $ 2,458,780 $ 48,758 - $ 2,507,538
Interest expense $ 1,933,359 $ 146,884 $ 123,348 $ 2,203,591
Depreciation and amortization $ 595,168 $ 64,089 $ 87,417 $ 746,674
Segment net loss $ (1,325,229) $ (344,661) $ (1,383,626) $ (3,053,516)
Segment total assets $ 23,341,506 $ 2,454,902 $ 14,979,700 $ 40,776,108
F-37
CROWN ENERGY CORPORATION
Notes to Consolidated Financial Statements
Continued
17. Segment
Reporting Year Ended December 31, 1998
Continued
Crown
Asphalt
Distribution CEC Total
------------ --- -----
Revenues from external customers $ 23,835,734 $ - $ 23,835,734
Segment gross profit $ 2,118,991 $ - $ 2,118,991
Interest expense $ 843,184 $ 8,733 $ 851,917
Depreciation and amortization $ 223,181 $ 72,838 $ 296,019
Segment net income (loss) $ 300,970 $ (1,413,937) $ (1,112,967)
Segment total assets $ 17,809,867 $ 10,895,235 $ 28,705,102
2000 1999
----------- ------------
Reconciliation of assets
Total assets for reportable segments $ 1,697,425 $ 40,776,108
Elimination of investment in subsidiaries 19,609,908 (2,977,790)
Elimination of intercompany receivables (4,255,155) (4,684,465)
----------- ------------
Total consolidated assets $17,052,178 $ 33,113,853
=========== ============
During 2000, 1999 and 1998, the Company operated
primarily in the production and distribution of
asphalt. The Company's operations and sales are
dispersed throughout Utah, Arizona, California, Nevada,
Wyoming, and Colorado and could be adversely affected
by economic downturns in these states and by federal or
state funding policies related to road construction or
improvements.
18. Employee In 1999, the Company established a defined contribution
Benefit Plan plan which qualifies under Section 401(k) of the
Internal Revenue Code. The plan provides retirement
benefits for employees meeting minimum age and service
requirements. Participants may contribute up to the
lesser of $10,000 or 15 percent of their gross wages,
subject to certain limitations. The plan provides for a
discretionary amount to be contributed to the plan each
year. The contribution for the year ended December 31,
2000 and 1999 totaled approximately $36,000 and
$35,000, respectively.
F-38