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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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 NO. 0-25006
UNITED PETROLEUM CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 13-3103494
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2620 MINERAL SPRINGS ROAD, SUITE A, KNOXVILLE, TN 37917
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: 423-688-6204
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days: Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to
item 405 of Regulation S-B is not contained in this form and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for the most recent fiscal year: $6,179,556
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes [ ] No [X] [Not applicable].
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State the aggregate market value of the voting stock held by
nonaffiliates (based on the most recent reported trade in the "pink sheets" on
May 14, 1999 of $.01): $251,316
State the number of shares outstanding of the registrant's $.01 par
value common stock as of the close of business on the latest practicable date
(May 18, 1999): 30,565,352
Documents incorporated By Reference: None
Transitional Small Business Disclosure Format (check one): Yes [ ]
No [X]
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PART I.
ITEM I. BUSINESS
THE COMPANY
United Petroleum Corporation ("UPC" or the "Company") is a holding company
that has two operating subsidiaries: Calibur Systems, Inc. ("Calibur") and
Jackson-United Petroleum Corporation ("Jackson"). Calibur's primary business
activities consist of the operation of retail car wash and automotive related
service facilities, and Jackson's primary business activities consist of the
acquisition and development of oil and gas properties. As of the date of this
Annual Report, Calibur operates eight car wash facilities in Tennessee and
Georgia and leases two facilities to an independent operator in Georgia. Of
these facilities, three have on-site convenience stores that offer a variety of
automotive products and snack foods, beverages and sundries to customers. Four
of the facilities sell gasoline, diesel fuel and/or other petroleum products and
five provide express lubrication services. In addition, Calibur has three free
standing express lubrication locations. Jackson owns a seventy-five percent
(75%) working interest in sixteen oil and gas wells located in Pennsylvania,
which is the subject of a sales contract. In November 1998, the Company entered
into an agreement with Kastle Resources Enterprises, Inc. ("Kastle") pursuant to
which the Company has agreed to sell its working interest in the sixteen wells
to Kastle. Kastle made an initial payment to the Company of $40,000 and has
agreed to make monthly payments to the Company of $30,000 which includes the
revenue produced by the 16 Pennsylvania wells until November 1999, at which time
Kastle has agreed to pay the Company $650,000 and the Company will sell the
working interests to Kastle. Jackson also has a mineral lease covering
approximately 26,000 acres of real property located in central Kentucky.
RECENT DEVELOPMENTS -- BANKRUPTCY FILING
On January 14, 1999 (the "Petition Date"), the Company filed a voluntary
petition for reorganization under Chapter 11 of Title 11 of the United States
Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). On February 16, 1999, the Company
filed a proposed plan of reorganization (the "Plan") and related disclosure
statement (the "Disclosure Statement") with the Bankruptcy Court. A hearing to
consider the adequacy of the Disclosure Statement was originally scheduled for
April 1, 1999. Two objections were filed to approval of the Disclosure
Statement. The hearing has been adjourned pending the completion of discussions
with the Company's primary secured and unsecured creditors, regarding potential
changes to the structure of the Plan and modifications to the Disclosure
Statement. The changes to the structure of the Plan could be substantial and may
involve an acquisition by the Company, although there can be no assurances in
this regard.
Since the Petition Date, the Company has continued to operate its business
and manage its property as a debtor in possession pursuant to sections 1107(a)
and 1108 of the Bankruptcy Code. During the period immediately following the
Petition Date, the Company sought and obtained authority from the Bankruptcy
Court with respect to a number of matters deemed by the Company to be essential
to its smooth efficient transition into chapter 11 administration and to
stabilize its operations.
In addition to seeking an order relating to the use of cash collateral,
shortly after the commencement of the Chapter 11 Case, the Company sought
certain additional orders, including the following: (a) orders authorizing the
retention of professionals (including accountants and attorneys) in connection
with the Chapter 11 case, (b) an order authorizing the Company to maintain its
prepetition bank account and to continue use of existing business forms and
existing books and records, (c) an order authorizing the payment of certain
pre-petition payroll taxes, and (d) an order extending the Company's time to
file its schedules of assets and statement of financial affairs.
In addition, the Company commenced a declaratory judgment action against
the plaintiffs in the Pisacreta/Tucci action (see Item 3 -- Legal Proceedings)
requesting a preliminary and permanent injunction preventing the plaintiffs from
continuing to prosecute the action. By Order dated April 22, 1999, the Tennessee
Federal Court dismissed the TAJ action (see Item 3--Legal Proceedings) with
respect to TAJ and Mr. Wilbur Jurdine pursuant to Federal Rule of Civil
Procedure 4(m) for failure to serve these parties in a timely fashion.
Additionally, the Tennessee Federal Court has directed the Company to show cause
why the TAJ action should not be dismissed with respect to National for failure
of prosecution. The Company has moved for reconsideration of the Tennessee
Federal Court's Order dismissing in part the TAJ action, and has likewise
responded with respect to maintenance of the TAJ action against National as
well.
The Company can provide no assurances that the Bankruptcy Court will
approve its proposed plan of reorganization.
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Background of the Bankruptcy Filing -- In 1996, the Company undertook a
business strategy of growing through acquisitions. In order to fund anticipated
acquisitions, the Company, in a series of private placement offerings, issued
convertible debentures in the approximate principal amount of $27,500,000 (the
"Debentures"). The anticipated acquisitions, however, did not take place as a
result of the Company's inability to identify suitable acquisition candidates on
acceptable terms, and the Company then used a portion of the proceeds of the
offerings to fund a drilling program. Subsequently, the Company suffered
significant cash losses when amounts advanced to underwriters and consultants
(in order to fund the repurchase of shares of the Company's common stock and to
prevent the disorderly liquidation of a large block of stock held by such
groups) were not utilized as expected or repaid to the Company. See "Item 3 --
Legal Proceedings -- TAJ/National."
Notwithstanding management's efforts, the Company's revenues were
insufficient to satisfy the Company's obligations. In April 1997, the Company
restructured the Debentures, exchanging a substantial portion of such Debentures
for shares of preferred stock (the "Preferred Stock"), and borrowed additional
funds for working capital needs. Despite these efforts, the Company was still
unable to generate sufficient revenues to satisfy its obligations. The Company's
results of operations, combined with the potential conversion of the Debentures
and Preferred Stock depressed the price of the Company's Common Stock and
adversely affected the Company's ability to raise additional needed capital. In
the second quarter of 1998, two holders of Calibur's mortgage notes in the
outstanding principal amount of approximately $2,500,000 declared the notes in
default and demanded payment in full. These notes, as well as Calibur's
remaining mortgage notes, were refinanced in June and August of 1998 through a
line of credit provided by Infinity Investors, Ltd. ("Infinity") which matured
on January 1, 1999. The Company's management and Board of Directors have
determined that the continuing viability of the Company requires the conversion
of a substantial portion of its indebtedness and Preferred Stock to common
equity by means that can only be implemented in Chapter 11.
The Company has proposed the Plan to achieve changes in its financial
structure that the Company believes are necessary to alleviate the problems
caused by the Company's excessive debt levels and fixed charges (including its
obligations to make payments in respect of interest and dividends), to enable
the Company to continue to implement its revised business strategy and to help
assure the Company's long-term viability. The Plan is designed to (a)
substantially reduce the Company's debt service and dividend obligations, (b)
eliminate miscellaneous existing and potential litigation, and (c) create a
capital structure that allows the Company to continue in operation as a going
concern. As noted above, the structure of the Plan may be modified
substantially. Management hopes that ultimately, it will be able to confirm and
implement a chapter 11 plan. Management believes that implementation of the Plan
will allow it to concentrate on improving the Company's business operations
rather than on managing its obligations to debt and Preferred Stock holders and
defending litigation.
HISTORY OF THE COMPANY
The Company was organized under the laws of the State of Delaware on May
19, 1970, under the name "Don Reid Productions, Inc." The Company was formed as
an independent producer of television programs. From 1971 until the early part
of 1977, the Company developed and produced a number of new series and special
programs for television and acquired various interests in scripts and other
original literary rights for stage, television and motion picture production,
all with limited success. The Company was inactive from 1977 until 1982.
Effective November 12, 1982, United Petroleum Corporation, a Delaware
corporation ("United Petroleum-Delaware"), merged with and into the Company, and
the Company changed its name to "United Petroleum Corporation" and commenced to
engage in the business of acquiring and developing oil and gas leases.
The Company was inactive from 1986 until receiving a proposal in the later
part of 1992 from Calibur Systems, Inc., a newly formed Tennessee corporation
("Calibur Systems"), and its sole stockholder, Michael F. Thomas, pursuant to
which the Company eventually acquired Calibur Systems in a transaction viewed as
a "reverse merger". In contemplation of this transaction, the Company organized
a wholly owned subsidiary in December 1992, Calibur-United Petroleum
Corporation, a Tennessee corporation ("Calibur-United Petroleum). On April 22,
1993, an Agreement and Plan of Merger ("Merger Agreement") between the Company,
Calibur-United Petroleum, Calibur Systems and the sole stockholder of Calibur
Systems, Mr. Thomas, was completed; this Merger Agreement was deemed effective
for accounting purposes as of December 31, 1992. Pursuant to the Merger
Agreement, the Company issued 9,795,200 restricted shares of its common stock to
Mr. Thomas, and Calibur-United Petroleum merged with and into Calibur Systems,
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with Calibur Systems being the surviving corporation; Calibur Systems became a
wholly-owned subsidiary of the Company, and the Company succeeded to its
business operations.
In February 1994, trading of the Company's shares of Common Stock resumed
in the over-the-counter market. The Company had two operating subsidiaries:
Calibur Systems, Inc. and Jackson-United Petroleum Corporation.
In June 1995 the Company effected a one for three (1:3) reverse stock split
of the Company's outstanding Common Stock. On June 23, 1995 the Company's Common
Stock began trading on the Nasdaq SmallCap market.
During the period from May 1996 to October 1996 the Company completed the
private placement of thirteen convertible Debentures pursuant to an exemption
from registration afforded by Regulation S ("Regulation S") as promulgated by
the Securities and Exchange Commission ("SEC"), under the Securities Act of
1933, as amended. The Debentures had a maturity of approximately two years with
interest rates of six percent and seven percent. The aggregate face value of the
Debentures issued was $27,500,000 with net proceeds to the Company of
approximately $20,631,500 before expenses of approximately $2,890,000.
Notwithstanding the representations in the Subscription Agreement executed
by the Debenture Holders, commencing in the middle of June 1996 and continuing
throughout the year certain Debenture holders, at the earliest date possible,
converted large amounts of the Debentures into substantial numbers of shares of
the Company's Common Stock and it appears they immediately then sold and in some
cases they sold short prior to converting their Debentures and then upon
conversion, used the shares to cover their short positions.
In June 1996 the Company engaged TAJ Global Equities, Inc. ("TAJ") to act
as the Company's underwriter, stockbroker, agent, depository and fiduciary for
specific transactions. TAJ and its affiliated parties acted wrongfully with the
Company's funds and have caused the Company to incur substantial losses. The
Company has sued TAJ and its affiliates alleging a conspiracy to engage in a
course of misconduct intended to defraud the Company. For additional information
regarding this topic see "Item 3 -- Legal Proceedings" contained in this report.
In March 1997, the Company filed a charter amendment with the State of
Delaware increasing the Company's authorized capital to 60,000,000 shares, of
which 10,000,000 shares are Preferred Stock, par value $.01 per share, issuable
in one or more classes or series, and 50,000,000 shares are Common Stock, par
value $.01 per share. All or any part of the Common Stock and the Preferred
Stock may be issued by the Company from time to time and for such consideration
as the Board of Directors may determine. All such shares, if and when issued,
and upon receipt of such consideration by the Company, shall be fully paid and
non-assessable.
Effective April 30, 1997, the Company entered into an agreement with
holders of $16,822,400 of Debentures. The agreement provided among other things,
for the exchange of $9,912,000 worth of Debentures into 9,912 shares of "Series
A" Preferred Stock, after a reduction of ten percent in the face amount of the
Debentures. The "Series A" Preferred Stock will pay a cumulative dividend of
eighteen percent for a period of one year. Thereafter, at the option of the
preferred shareholder, the dividend shall either be reduced to seven percent for
the second year or, a Preferred shareholder, at his option, may surrender to the
Company ten percent of the Preferred Stock and continue to receive a dividend of
eighteen percent. In April 1998, the holders of the preferred stock elected to
reduce the dividend rate to seven percent. At the option of the Company,
dividends may be paid in cash or in the Company's Common Stock. The Company is
in default under its obligations under the preferred stock.
Preferred shareholders have voting rights equal to those which they would
have if they converted their Preferred shares to Common Stock at the then
current conversion price; provided, however, that no Preferred shareholder or
group of affiliated Preferred shareholders may, at any one time, vote more than
4.99% of the total of the stock entitled to vote.
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Commencing July 1, 1997, one-thirteenth of the Preferred Stock may be
converted each month on a cumulative basis. The conversion price shall be the
lesser of (x) $3.00 (as adjusted by the following clauses) and (y) the greater
of (i) the Fixed Conversion Price and (ii) the Market Price of the Common Stock
shall be the average for the five (5) consecutive trading days immediately
preceding the Conversion date; provided, if the Monthly Price for the preceding
month is greater than $3.00 (the "Ceiling Price"), then the Ceiling Price for
such month shall be the greater of (x) $3.00 and (y) 66-2/3rds% of the Monthly
Price for such preceding month. The "Fixed Conversion Price" shall be equal to
the following: $2.50 per share through September 30, 1997; $2.00 per share from
October 1, 1997 through December 31, 1997; $1.50 per share from January 1, 1998
through March 31, 1998; $1.00 per share after April 1, 1998; in each case
adjusted as follows: if the Market Price for the trading days in the applicable
calendar month (the "Monthly Price") of the Common Stock for any calendar month
commencing October 1997 is greater than the Fixed Conversion Price, then the
Fixed Conversion Price shall be the greater of the Fixed Conversion Price and
66-2/3rds% of the Monthly Price for the for the preceding calendar month.
The Preferred shares may be automatically converted by the Company by
notice given between October 1, 1999 and October 10, 1999 at a price equal to
the average of the closing bid prices for the five trading days prior to giving
of the notice. Each Preferred share shall have liquidation rights equal to
$1,000 and shall have a preference over Common shareholders and junior Preferred
shareholders. The Company may redeem the Preferred shares at any time upon
payment of the liquidation price together with any accrued dividends.
The agreement provides that the Preferred shareholders shall vote their
shares for the continuation of current management and shall not participate in
any proxy contests as long as the Company is not in default with respect to any
of the provisions of the agreement, the Preferred shares or the Debentures.
Because of the existing defaults under the agreement, Preferred Shares and
Debentures, these provisions are not currently binding on the holders.
The agreement provides that the holders of approximately $3,943,466 of the
Debentures shall receive in their place Amended Convertible Debentures in the
amount of approximately $3,549,120 in face value after a reduction of the face
value of the old Debentures equal to ten percent (10%). The maturity date of the
amended debentures is September 1, 1999.
The interest rate on the Amended Debentures is eighteen percent (18%) for
one year and seven percent (7%) thereafter; provided, however, that the Amended
Debenture holders shall have the option at the end of one year to surrender to
the Company, for no consideration, ten percent (10%) of their Amended Debentures
and to receive interest of eighteen percent (18%) on the remaining Amended
Debentures. In April 1998, the holders of the Debentures elected to reduce the
interest rate to seven percent (7%). At the option of the Company, interest may
be paid in cash or in Common Stock. The Company is in default under its
obligations under the Debentures.
One of the Debenture holders subscribed for $666,666 worth of New
Debentures to be issued pursuant to Regulation S. The purchase price for these
New Debentures was $500,000. These funds were used by the Company for working
capital purposes. This New Debenture is convertible under the same terms and
conditions as the Amended Debentures.
As part of the agreement, Debentures with a face value of approximately
$623,500, together with shares issued in payment of interest accrued through
April 30, 1997 were converted into Common Stock at a price of $.50 per share.
The above referenced transactions, effective April 30, 1997, reduced the
liabilities of the Company and increased the equity of the Company for the
following reasons: (1) the conversion of Debentures into Common Stock, (2) the
conversion of Debentures into Preferred Stock and (3) the forgiveness of
Debenture balances with a face value equal to approximately $1,495,680. In the
case of the debenture restructure agreement, the debenture holders received an
increased yield in return for the forgiveness. The Company has recorded the
amount forgiven as "unearned discount" and amortized the amount over the life of
the Debentures, which expired during 1998.
An action, as more fully described in the Company's annual report on Form
10-KSB for the period ended December 31, 1997, entitled Mantel International
Investments, Limited ("Mantel"), Plaintiff, vs. United Petroleum Corporation and
Interwest Transfer Co., Inc., Defendants, was settled on July 1, 1997. The
settlement
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agreement contains, among other items, the following provisions: (1) that
466,667 shares of the Company's Common Stock which were held in escrow pending
the outcome of the action be released to Mantel, (2) the Company authorized the
issuance of 2,000 shares of newly created "Series B" Convertible Preferred
Stock, (3) the Company acknowledge that Mantel retains $1,833,333 in principal
amount of the Company's Convertible Debenture due May 1, 1998 with an original
face amount of $2,666,666 and (4) that the Company allow Mantel to exchange the
$1,833,333 remaining balance of the debenture for 1,833 "Series B" Preferred
Shares and a Warrant to purchase 300,000 shares of the Company's Common Stock at
a price of $1.00 per share. The Preferred shares will bear a dividend rate of
eight percent (8%) per annum with dividends payable quarterly. At the option of
the Company the dividends may be paid in cash or in Common Stock of the Company.
The conversion of the Preferred Shares is limited such that no more than 1/15th
of the "Series B" Preferred Shares may be converted per month commencing July 1,
1997. Further, the Company has the right to automatically convert any remaining
"Series B" Preferred Shares into Common Stock of the Company on October 10,
2000. The mandatory conversion price shall be equal to the average market price
for the five (5) consecutive trading days immediately preceding the conversion
date. Regarding conversion prior to the mandatory conversion, the conversion
price shall be equal to the lesser of (x) $3.00 (as adjusted pursuant to the
following clauses) and (y) the greater of (i) the fixed conversion price and
(ii) the average market price for the five (5) consecutive trading days
immediately preceding the conversion date; provided, if the average monthly
price for the preceding month is greater than $3.00, then the price for such
month shall be the greater of (x) $3.00 and (y) 66-2/3% of the average monthly
price for each preceding month. The "fixed conversion price" shall be equal to
the following: (1) $2.50 per share through September 30, 1997, (2) $2.00 per
share from October 1, 1997 through December 31, 1997, (3) $1.50 per share from
January 1, 1998 through March 31, 1998 and (4) $1.00 per share after April 1,
1998. In each case adjusted as follows: if the average monthly market price for
the trading days in the applicable calendar month of the Common Stock for any
calendar month commencing October 1997 is greater than the fixed conversion
price, then the fixed conversion price shall be the greater of the fixed
conversion price and 66-2/3% of the average monthly price for the preceding
calendar month.
On August 29, 1997 the Company entered into an agreement with one of the
holders of the Company's Preferred Stock and Amended Convertible Debentures to
amend the terms of the Preferred Shares set forth in the Certificate of
Designation by reducing the Fixed Conversion Price after April 1, 1998 from
$1.00 to $.50 per share. The Company further agreed to amend the terms of the
Amended Convertible Debentures by reducing the Fixed Conversion Price after
October 1, 1997 from $2.00 to $.50 per share. In addition, the agreement further
provided that the Company issue a promissory note in the form of a convertible
debenture in the amount of $1,575,000 for a cash purchase price of $1,250,000.
The difference in the amount of the note and the purchase price being a discount
in the amount of $325,000. Said note was funded in two advances. The first
advance was in the amount of $625,000 face value of the note for proceeds of
$500,000. The second advance was in the amount of $950,000 face value of the
note with proceeds of $750,000. The note had a maturity date of February 28,
1998 with interest payable monthly at the rate of 18%. Interest on the two
advances was prepaid through October 31, 1997 at closing. Closing costs equal to
$25,000 were also deducted from the first advance. The note is unsecured. In
conjunction with the issuance of the note the Company issued 400,000 Warrants to
purchase Common Stock with an initial purchase price of $.3688 per share. The
agreement contains provisions such that the number of Warrants could increase
and/or the exercise price of the Warrants could be adjusted subject to specific
anti-dilutive provisions agreed to by the Company. The agreement also contains a
covenant by the Company to file a registration statement regarding the resale of
the Warrants if and when exercised, the resale of their Common Stock issued as
payment of interest regarding the obligation and the resale of the Common Stock
issued by the Company in the event the holder converts all or a portion of the
obligation into Common Stock. The holder is entitled, at its option, at any time
commencing from and after March 31, 1998 to convert up to 100% of the unpaid
principal amount of the Debenture into Common Stock of the Company at a
conversion price equal to the lesser of (i) $1.00 per share and (ii) the average
market price of the Company's Common Stock for the five (5) consecutive trading
days immediately preceding the conversion date.
On October 3, 1997 the Company received notification that the Nasdaq Stock
Exchange had decided to delist the Company's common stock from trading on the
Nasdaq Small Cap market, which delisting was effective at the close of business
on December 8, 1997, creating events of default under the Debentures and
preferred stock. For more information regarding this topic see "Item 5 -- Market
for Common Equity and Related Stockholder Matters" contained in this report.
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The Company's principal executive offices are located at Suite A, 2620
Mineral Springs Road, Knoxville, Tennessee 37917. The Company's telephone number
is (423) 688-6204.
RETAIL CAR WASH AND AUTOMOTIVE RELATED SERVICES SUBSIDIARY - CALIBUR SYSTEMS,
INC.
This business division, formerly Calibur Car Wash Systems, was founded by
Michael F. Thomas in 1977. At the end of fiscal 1998, Calibur operated eight car
wash facilities in Tennessee and Georgia and leased two facilities to an
independent operator in Georgia. Of these facilities, three have on-site
convenience stores that offer a variety of automotive products and snack foods,
beverages and sundries to customers. Four of the facilities sell gasoline,
diesel fuel and/or other petroleum products and five provide express lubrication
services. In addition, Calibur has three free standing express lubrication
locations.
In 1997, the Company operated ten car wash facilities in Tennessee and
Georgia, all of which offered other services, six of which also served as
gasoline stations and six of which also provided express lubrication services.
At the end of 1997, the Company had four free standing lubrication locations
located on properties leased from non-affiliated third parties. In the past,
several Company locations were leased from Michael F. Thomas, the Company's
President and CEO. At year-end 1997, there were no properties being leased from
Michael F. Thomas other than office space at 4867 N. Broadway in Knoxville,
Tennessee. Payments under the office lease were $2,500 per month. In 1998, the
Company relocated its corporate offices and at year-end 1998, the Company did
not lease any properties from Mr. Thomas. For more information related to
acquisitions and divestitures related to this subsidiary, refer to "Item 6 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in this report.
OIL AND GAS SUBSIDIARY - JACKSON-UNITED PETROLEUM CORPORATION
The Company is engaged in activities related to the exploration and
development of oil and gas. This energy products division has all of its assets
in the United States. Jackson owns a seventy-five percent (75%) working interest
in sixteen oil and gas wells located in Pennsylvania, which is the subject of a
sales contract as described below. Jackson also has a mineral lease covering
approximately 26,000 acres of real property located in central Kentucky.
In late 1996 and early 1997 the Company completed a joint venture drilling
program with Kastle Resources Enterprises, Inc. ("Kastle") of Edinboro,
Pennsylvania in which the Company has a seventy-five percent (75%) working
interest in sixteen wells. During 1997, the wells produced a net revenue to the
Company of approximately $252,000. This is well below the anticipated level of
revenues as expected at the onset of the drilling program.
As a result of this level of performance and based on an engineering report
prepared by Wright & Company of Nashville, Tennessee, the Company took a write
off in 1997 associated with these wells. For further information regarding this
issue refer to "Item 6 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this report.
In November 1998, the Company entered into an agreement with Kastle
pursuant to which the Company has agreed to sell its working interest in the
sixteen wells to Kastle. Kastle made an initial payment to the Company of
$40,000 and has agreed to make monthly payments to the Company of $30,000 which
includes the revenues produced from the 16 Pennsylvania wells until November
1999, at which time Kastle has agreed to pay the Company $650,000 and the
Company will sell the working interests to Kastle. The net book value of the 16
wells approximated $1,095,000. Accordingly, the Company has written down the 16
wells to $650,000, less costs to sell, which are estimated to be negligible,
resulting in a $445,000 impairment loss, which is included in the 1998
consolidated statements of operations. The wells are classified as property held
for sale in the consolidated balance sheet.
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In 1997, the Company decided to write down four wells drilled in Eastern
Kentucky to their fair value of $300,000. In 1998, the Company sold these wells
for approximately $411,000, which consisted of cash of $340,000 and forgiveness
of accounts payable of approximately $71,000. In connection therewith, the
Company incurred expenses of approximately $34,000, resulting in a gain of
$77,000, which is included in the 1998 consolidated statements of operations.
For further information regarding this issue refer to "Item 6 -- Management's
Discussion and Analysis of Operations" section of this report.
In 1998, the Company elected not to proceed with its remaining wells and
abandoned the wells, which resulted in a writedown of approximately $296,000,
which is included in the 1998 consolidated statements of operations.
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ENVIRONMENTAL IMPACT
The present and contemplated business operations of the Company are subject
to compliance with numerous federal, state and local environmental laws, rules
and regulations designed to protect the environment and require remediation of
environmental contamination. Many of these risks can not be insured against, and
when insurance is available, the cost is often prohibitive. The Company does not
carry any environmental hazard insurance coverage.
In general the Company is impacted by Federal and State laws, rules and
regulations summarized below:
Federal - The federal government has broad discretion in matters relating
to the enforcement of environmental laws and remediation of environmental
contamination. Under the enabling statutes, the Environmental Protection Agency
(the "EPA") has the discretionary power to conduct investigations into suspected
violations, to enjoin questionable business practices and to bring civil or
criminal proceedings against persons or companies that violate the federal
environmental laws. While the Company believes that its business operations are
conducted in a manner that no laws, rules or regulations are violated, there can
be no assurance that the EPA will not institute enforcement proceedings or
conduct investigations and issue injunctions against the Company, if it reaches
a determination that its practices violate applicable laws, rules or
regulations. Any violations of these regulations could have a material adverse
effect on the business and financial resources of the Company.
State - In addition to the potential for Federal regulation of the Company,
many states have created administrative agencies that have the statutory
authority to regulate operations such as those conducted by the Company, thereby
increasing regulatory burdens on the Company. The adverse impact these
regulations will have on the Company's potential profitability might preclude
the Company from operating in certain markets. Most states, including Georgia
and Tennessee, the two states in which the Company presently conducts its
principal retail business operations, have adopted statutes regulating
installation of underground storage tanks for gasoline, diesel fuel or other
hazardous products, which contain stringent guidelines relative to the location
of such tanks to ground water resources, tank design, tank composition,
installation and leak monitoring. In Georgia, a fine of up to $10,000 per day
per tank may be levied for non-compliance. A tax equal to $.002 per gallon for
all fuel sales is deposited in the Georgia Underground Storage Trust Fund ("GUS
Trust Fund") to help remediate environmental spills. Owners or operators owning
less than one hundred (100) underground storage tanks are required to pay the
first $10,000 in clean-up and remediation expenses, and the total liability of
the GUS Trust Fund is one million dollars ($1,000,000); if the owner or operator
has in excess of two hundred (200) underground storage tanks, the total
liability of the GUS Trust Fund is two million dollars ($2,000,000).
Registration of underground storage tanks is required, but there is no initial
or annual filing fee. In Tennessee, a fine of up to $5,000 per day per tank may
be levied for non-compliance. A tax equal to $.004 per gallon for all fuel sales
is deposited in the Petroleum Storage Tank Environmental Assurance Fund
Commission ("Assurance Fund") to help remediate environmental spills. Owners or
operators owning six (6) or more underground storage are required to pay the
first $25,000 in clean-up and remediation expenses. For owners and operators
owning less than one hundred (100) underground storage tanks, the total
liability of the Assurance Fund is one million dollars ($1,000,000); if the
owner or operator has in excess of two hundred (200) underground storage tanks,
the total liability of the Assurance Fund is two million dollars ($2,000,000).
Tennessee law requires registration of all underground storage tanks and
provides for the owner or operator to pay the first seventy-five thousand
($75,000) and everything over one million dollars ($1,000,000), and the first
one hundred fifty thousand ($150,000) and everything over one million dollars
($1,000,000) on third party claims. Each underground storage tank must be
registered at an annual fee of one hundred dollars ($100); the Company's
estimated annual expense for registration of underground storage tanks is
approximately $1,800 in 1998.
The Company estimates that it expends approximately fifty (50) man-hours
per month on environmental compliance, at an estimated cost of approximately
$1,000 per month. The Company strives to be in compliance with all applicable
federal, state and local environmental laws, rules and regulations. Continued
compliance or failure to comply with future legislation, however, may have a
material adverse impact on the Company's present and contemplated operations.
10
<PAGE> 11
Potential Liability; No Insurance for Environmental Claims - The Company
does not presently maintain insurance and has not posted bonds in material
amounts to compensate for any environmental damage that may occur at any of its
retail business locations, or in the drilling of any oil and gas wells other
than the legally required insurance and/or cash bonds which assure that funds
will be available to plug any dry holes which might be drilled; the cost of
these types of insurance policies are deemed to be prohibitive, even if
available. However, liability may in some instances be limited in connection
with claims made against the GUS Trust Fund and Assurance Fund for environmental
spills. The Company does maintain general liability coverage for personal
injuries and damages occurring at its locations, and will review the possibility
of obtaining similar insurance for any contemplated oil and gas operations. Any
claim filed for environmental contamination at any business location of the
Company could have a materially adverse impact on the Company's financial
condition.
COMPETITION
The Company's oil and gas exploration activities are a highly competitive
and speculative business. In seeking any other suitable oil and gas properties
for acquisition, or drill rig operators and related personnel and equipment, the
Company will be competing with a number of other companies, including large oil
and gas companies and other independent operators with greater financial
resources, and in many cases, management with more experience in this industry.
The Company's competitive position in the oil and gas industry is not
significant. The Company will be in direct competition with numerous oil and gas
companies in the acquisition of oil and gas properties, and the availability of
drilling rigs, including many companies with resources that are substantially
greater than those of the Company. No assurance can be given that the Company
can successfully compete with these companies.
The major competition in the markets where the Company presently has
operating locations generally follow regional guidelines. Exxon, Amoco, Shell
and Texaco are the major competition in the sales of gasoline. Car wash
competition in the Chattanooga area include Eastgate, Hy's and King of Clean;
oil and lube sales competitors are Mastercare, Jiffy Lube, Midas and Valvoline.
EMPLOYEES
As of December 31, 1998, the Company employed 92 full time personnel as
follows: 10 in management and supervision, 76 in sales and service, and 6 in
administrative and clerical. In addition, the Company has approximately 111 part
time employees. Employee turnover is high, but is considered within the norm for
the car wash industry.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's executive offices consist of space located at 2620 Mineral
Springs Road, Suite A, Knoxville, Tennessee 37917. The lease expires on August
31, 2000 and has a monthly lease payment of $1,950.
As of the date of this Annual Report, Calibur operates eight car wash
facilities in Tennessee and Georgia and leases two facilities to an independent
operator in Georgia. Of these facilities, three have on-site convenience stores
that offer a variety of automotive products and snack foods, beverages and
sundries to customers. Four of the facilities sell gasoline, diesel fuel and/or
other petroleum products and five provide express lubrication services. In
addition, Calibur has three free standing express lubrication locations. At the
end of fiscal 1997, the Company operated ten car wash facilities in Georgia and
Tennessee, all of which offered other services. Six of the car wash facilities
also served as gasoline stations and six of the car wash facilities also
provided express lubrication services at the end of fiscal 1997. At the end of
fiscal 1997 the Company had four free standing lubrication locations. All four
of the free standing lubrication locations were on properties leased from
non-affiliated third parties. In the past, several Company locations were leased
from Michael F. Thomas, the Company's President and CEO. At the end of fiscal
1998, there were no properties being leased from Michael F. Thomas. For more
information related to acquisitions and divestitures, see "Item 6 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" section contained in this report. For further information related to
11
<PAGE> 12
the acquisition or divestiture of properties involving Company insiders, see
"Item 12 -- Certain Relationships and Related Transactions" contained in this
report.
The following is summary of the Company's retail locations:
<TABLE>
<CAPTION>
NATURE OF MONTHLY
ADDRESS FACILITIES INTEREST RENT COMMENCED
------------------- ----------------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
No. 1 Full service car wash Fee simple(1) NA 1978
917 Keith Street Express lube center
Cleveland, TN 37311
No. 2 Full service car wash Leased(2) $8,804.09 1984
1291 Oak Ride Turnpike Express Lube Center
Oak Ridge, TN 37830
No. 3 Full service car wash Fee simple(1) NA 1985
1500 E. Stone Dr. Self service gasoline
Kingsport, TN 37660
No. 4 Full service car wash Fee simple(1) NA 1985
4717 Hixon Pike Self service gasoline
Chattanooga, TN 37343 Express lube center
No. 5 Full service car wash Leased and Fee $2,120.00 1995
703 Parkway Express lube center simple(1)(3)
Sevierville, TN 37862
No. 6 Self service gasoline Fee simple(1) NA 1989
1107 W. Market Full service car wash
Johnson City, TN 37601 Convenience store
No. 7 Detail shop Fee simple(1) NA 1989
700 Battlefield Pky. Self service gasoline
Ft. Oglethorpe, GA 37601 Full service car wash
Convenience store
No. 8 Express lube center Fee simple(1) NA 1993
1014 E. Walnut Ave. Full service car wash
Dalton, GA
No. 9 Self service car wash Leased(4) $1,000.00 1995
8016 Kingston Pike Express lube center
Knoxville, TN 37919
No. 10 Express lube center Leased(5) $4,475.00 1996
1039 Crosby Road
Newport, TN 37821
No. 11 Express lube center Leased(6) $4,750.00 1997
2519 E. Morris Blvd.
Morristown, TN 37813
</TABLE>
12
<PAGE> 13
- ----------
(1) All mortgages are held by Infinity, which acquired and refinanced the
mortgages in the second and third quarter of 1998.
(2) During 1997 the Company completed a sale/leaseback regarding this location
(which included the land, the building and the gasoline equipment) with a
non-affiliated third party. This lease has a term of ten years with two
option periods of five years each.
(3) Approximately one-half of the Sevierville property is owned fee simple, the
remaining half is leased. The lease had an original term of five years
(which expired December 31, 1996) and five option periods of five years
each. The first such period is currently in effect.
(4) This lease has a term of twelve years (commencing on February 12, 1996),
with two option periods of ten years each.
(5) This lease has a term of fifteen years (commencing upon completion of
construction) with two option periods of five years each.
(6) This lease has a term of fifteen year (commencing upon completion of
construction) with two option periods of five years each.
The Company's oil and gas subsidiary, Jackson, owns a seventy-five percent
(75%) working interest in sixteen oil and gas wells located in Pennsylvania,
which is the subject of a sales contract as described above under "Item 1 --
Business". Jackson also has a mineral lease covering approximately 26,000 acres
of real property located in central Kentucky.
ITEM 3. LEGAL PROCEEDINGS
1. Chapter 11 Proceedings.
On January 14, 1999, the Company filed a voluntary petition for
reorganization under Chapter 11 of Title 11 of the United States Code in the
United States Bankruptcy Court for the District of Delaware. See "Item 1 --
Recent Developments -- Bankruptcy Filing."
2. NASDAQ Allegations.
In 1997, NASDAQ alleged that the Company (a) had entered into various
consulting agreements with the sole purpose of expanding investor interest in
the Company's shares, which arrangements are said to have led to a deterioration
of stockholder value, (b) facilitated and pursued manipulative transactions in
the Company's stock, and (c) violated various other NASDAQ rules. Despite the
Company's vigorous response and objection to NASDAQ's allegations, NASDAQ
delisted the Common Stock from the NASDAQ SmallCap Market in December 1997.
3. TAJ/National.
In the fall of 1996, the price of the Common Stock began to fall sharply.
Believing that the lower prices were not justified, and in an effort to
stabilize the market in the shares, the Company's Board of Directors authorized
a share buy-back program, which was never successfully implemented. In
connection with this program, the Company deposited some of the proceeds of the
Debenture sale with TAJ Global Securities ("TAJ"), a broker/dealer, for use if
and when purchases were desired. At that time, the Company had engaged TAJ to
act as the Company's underwriter for a planned offering of Common Stock.
13
<PAGE> 14
TAJ, without the Company's knowledge or consent, purchased a large quantity
of shares from its own customers when the price of the shares began to fall.
Those purchases were initially made through the TAJ trading account apparently
maintained by TAJ for its own trading activities. The shares were subsequently
transferred to the account of Strategic Holdings Corporation ("Strategic") from
which TAJ had a power of attorney. Strategic, which had assisted the Company in
connection with the sale of the Debentures and which had a consulting agreement
with the Company, contends that it did not authorize such transaction and that
it did not know they had taken place.
When TAJ and Strategic were unable to pay for the shares they had acquired,
TAJ and National Financial Services Corporation ("National"), TAJ's clearing
broker, demanded payment from the Company, threatening to summarily liquidate
the shares and thereby transform the orderly market in the Company's Common
Stock into a disorderly market, an action which would have damaged the interests
of the Company's stockholders. In an effort to prevent such consequences, the
Company paid for the shares.
In March 1997, the Company commenced a civil action styled United Petroleum
Corporation v. TAJ Global Equities, Inc., et al (the "TAJ Action") against TAJ,
Mr. Wilbur Jurdine (a principal of TAJ) and National, in the United States
District Court for the Eastern District of Tennessee (the "Tennessee Federal
Court"). In it, the Company seeks compensatory and punitive damages arising from
a conspiracy to engage in a course of misconduct intended to defraud the
Company, for conversion of the Company's property, and under theories of unjust
enrichment, breach of fiduciary duty and other causes of action. In April 1999
the court dismissed the Company's lawsuit against TAJ and Mr. Jurdine as a
result of the Company's failure to effect service of process on these defendants
and the Court ordered the Company to show cause as to why its claims against
National should not be dismissed for failure to pursue the lawsuit. The Company
has filed responses to the Court's orders in these cases and the Company
believes that the bankruptcy proceedings should stay the dismissal. Although the
timing, amount and likelihood of any recovery are impossible to predict at this
time, if the Company's Plan of Reorganization is not consummated, it is unlikely
that the Company will have the funds or personnel to pursue the action.
4. Strategic.
On October 6, 1998, the Company was sued by Strategic Holdings Corporation
of Miami, Florida. The suit, styled Strategic Holdings Corporation v. United
Petroleum Corporation, was filed in the Circuit Court of the 11th Judicial
Circuit in and for Dade County, Florida. The action seeks damages of
approximately $550,000 arising from the Company's alleged breach of an
agreement. The Company believes the claims are without merit. As of the date the
Company filed its petition for relief under the bankruptcy laws, the time for
the Company to answer or otherwise respond had not occurred. If Strategic's
claim are determined to have merit, Strategic would have a general unsecured
claim in the Company's bankruptcy proceedings.
5. Ishmael.
In June of 1997, the Company was sued by Kevin Ishmael, a former employee,
alleging that the Company had dismissed him improperly. Ishmael obtained a final
judgment against the Company for back pay and damages totaling $54,422.03. The
Company has also been ordered to reinstate the employee. This matter has been
resolved by the payment of the back pay and damages.
6. In re United Petroleum.
On May 18, 1998, an involuntary bankruptcy petition, styled In re United
Petroleum Corporation d/b/a Jackson-United Petroleum Corporation and Calibur
Systems, Inc. was filed in the United States Bankruptcy Court in the Eastern
District of Tennessee by three preferred stockholders of the Company. This
petition was never served on the Company, and the petitioners' counsel of record
subsequently withdrew and was not replaced. On July 28, 1998, the Company filed
a motion to dismiss the petition for lack of standing. On September 10, 1998,
the plaintiff requested that the court dismiss the petition and on that date the
court entered an order dismissing the case.
14
<PAGE> 15
7. Pisacreta/Tucci.
In March 1997, a putative class action lawsuit (the "Pisacreta Action") was
filed by John Pisacreta, a stockholder of the Company, in the Tennessee Federal
Court, purportedly on behalf of all stockholders who purchased shares of Common
Stock during the period of May 1, 1996 through January 16, 1997. This suit was
filed against Ronald Berkovitz, Infinity Investors Limited, Dan Dotan, Fairway
Capital Limited, Lake Management LDC, Laurel Angela MacDonald, Seacrest Capital
Limited and Mohamed Ghaus Khalifa. In the lawsuit, the plaintiff alleges that
the defendants, in acquiring and disposing of certain of the Company's
debentures, participated in a fraudulent and manipulative scheme in violation of
certain provisions of the securities laws of the United States. The plaintiff
also alleges that the defendants committed fraud and deceit under common law and
breached a contract between the defendants and the Company. The defendants filed
a motion to dismiss the complaint for failure to state a claim upon which relief
can be granted. The Tennessee Federal Court granted the motion in part,
dismissing one of the two federal securities law claims, as well as the claim
for common law fraud. Discovery on the class certification issue is currently
proceeding.
In November 1997, Lisa Tucci, a stockholder of the Company, filed a
putative class action lawsuit (the "Tucci Action") in the Tennessee Federal
Court against Clark K. Hunt ("Hunt"), purportedly on behalf of all persons and
entities who purchased Common Stock from May 1, 1996 through January 16, 1997.
The lawsuit is based on the identical factual allegations set forth in the
Pisacreta Action, described above. The plaintiff claims that Hunt is the
controlling person of certain of the purchasers of the Debentures and is
secondarily liable under the securities laws of the United States for the
violations alleged in the Pisacreta Action.
In January 1998, the defendant filed a motion to dismiss for failure to
state a claim or alternatively to dismiss the complaint for improper venue. In
April 1998, the Tennessee Federal Court dismissed the Tucci Action for improper
venue. In May 1998, the plaintiff filed a notice of her intent to appeal the
court's ruling to the United States Court of Appeals. After the appeal was filed
in the Tucci Action, the plaintiff in the Pisacreta Action filed a motion to
amend his complaint to add Hunt as a defendant under the theory of controlling
person liability. The motion was ultimately granted and Hunt was added as a
defendant in the Pisacreta Action (as amended, the "Pisacreta/Tucci Action").
In December 1998, Hunt answered the complaint in the Pisacreta/Tucci Action
and impleaded the Company as a third-party defendant, alleging that the Company
is liable for any claims of the plaintiffs under theories of indemnity and
contribution. Thereafter, the Tennessee Federal Court entered an agreed order
permitting Infinity, Fairway, and Seacrest to assert similar causes of action
against the Company.
The Company believes that the relief sought in the remaining causes of
action asserted by the plaintiffs in the Pisacreta/Tucci Action are derivative
in nature and that such claims properly belong to the Company. The Company has
asserted that the securities law claim is not premised on unique harm or injury
to my particular stockholder, but rather, is based on the argument that the
defendants' conduct improperly diluted the interests of all stockholders. The
Company has further asserted that the breach of contract claim is based on the
Infinity Parties alleged breach of a contract with the Company, not the
plaintiffs. As a result, the Company believes that the claims asserted in the
Pisacreta/Tucci Action belong to the Company's chapter 11 estate and that the
plaintiffs are stayed from prosecuting the claims. Perhaps more importantly,
based on the Company's assessment of the claims, the Company believes that they
are appropriately resolved pursuant to the settlement between the Company and
the Infinity Parties contained in the Company's proposed bankruptcy plan. On
February 4, 1999, the Company commenced an action in the Bankruptcy Court to
stay the Pisacreta/Tucci Action and for a determination of whether the claims
asserted in such action are derivative in nature. After briefing and a hearing
on February 25, 1999, the Bankruptcy Court ruled largely in favor of the
Company, agreeing to preliminarily enjoin the plaintiff in the Pisacreta/Tucci
Action from continuing to prosecute its action in the Tennessee Federal Court in
any way except (i) continued prosecution of Plaintiff's motion to sever the
Company from the Tennessee litigation, (ii) continued efforts to take certain
discovery and (iii) continuing plaintiffs' efforts to take the deposition of Mr.
Clark K. Hunt. Additionally, the Bankruptcy Court specifically ruled that its
Order would expire on the earlier of May 27, 1999 or confirmation of the
Company's plan of reorganization. On March 15, 1999, Mr. Pisacreta filed a
motion to dismiss the adversary proceeding in lieu of filing an answer therein.
The Company has filed its response in opposition to that Motion to Dismiss, and
the Bankruptcy Court has not yet ruled thereon.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On October 3, 1997 the Company received notification that Nasdaq had
decided to delist its Common Stock from trading on the Nasdaq SmallCap market,
which delisting was effective as of the close of business on December 8, 1997.
The Company is presently trading in the "pink sheets" although there has not
been substantial trading in the Company's stock following the bankruptcy filing.
15
<PAGE> 16
Nasdaq first alleged that the Company had entered into various consulting
agreements with the sole purpose of expanding investor interest in the Company's
shares, which arrangements are said to have led to a deterioration of
shareholder value. It is the Company's position that the consulting arrangements
were not solely or even primarily for the purpose of expanding shareholder
interest, but, rather were for the purpose of obtaining investment banking
assistance, primarily in connection with the location of possible acquisitions
and in arranging financing for those acquisitions and for the development of the
Company's oil and gas properties. Moreover, the Company does not believe that
these arrangements, in any way, led to a deterioration of shareholder value.
Compensation for these services was paid primarily with stock or options and the
number of shares involved did not significantly dilute shareholder equity.
Nasdaq further alleged that the Company facilitated and pursued
manipulative transactions in the Company's stock. This allegation apparently
refers to the sale of convertible debentures and the actions thereafter which
were initiated by virtue of the improper actions of certain of the purchasers of
the debentures. The Debentures contained provisions prohibiting short sales and
contained representations that they were being purchased for investment not for
resale. In fact, certain of the debenture holders apparently sold short
substantial quantities of shares prior to conversion of their debentures placing
downward pressure on the price of the shares. The Company was unaware of these
activities until the price of the shares began to fall sharply. Believing that
the lower prices were not justified, and in an effort to stabilize the market in
the shares, the Company's Board of Directors authorized a share buy-back
program. However, the Company never actually put this program into effect. It
deposited some of the proceeds of the debenture sale with TAJ Global Securities,
a broker/dealer, for use if and when purchases were desired. At that time, the
Company had engaged TAJ to act as an underwriter for a proposed public offering
of shares of the Company's stock.
TAJ, without the Company's knowledge or consent, purchased a large quantity
of shares from its own customers when the price of the shares commenced to drop.
Those purchases were initially made through the TAJ trading account apparently
maintained by TAJ for its own trading activities. Apparently, when that account
became too large, the shares were transferred to the account of Strategic
Holding Corporation ("Strategic") from which TAJ had a power of attorney.
Strategic, which had assisted the Company in connection with the sale of the
Debentures and which had a consulting agreement with the Company, contends that
it did not authorize such transaction and that it did not even know they had
taken place. None of these shares were initially purchased in the Company
account at TAJ.
When TAJ and Strategic were unable to pay for these trades, TAJ and
National Financial Services, TAJ's clearing broker, made demands upon the
Company to pay for those trades, threatening to summarily liquidate the shares
and thereby transform the orderly market in the Company's Common Stock into a
disorderly market, an action which would have clearly damaged the interests of
the shareholders. The Company, with good intentions, but, perhaps unwisely, made
payment for those shares. All these transactions took place over a period of a
little over a month.
There was no intent on the part of the Company to manipulate or facilitate
the manipulation of the price of the Company's stock. Unfortunately, the
Company's activities which were intended to protect the shareholders were
unsuccessful. The price of the stock remained at a very low level which enabled
debenture holders to obtain large quantities of stock upon conversion, which,
according to the terms of the Debentures was at market. It was as a result of
these conversions that the equity of the shareholders was seriously diluted, not
through any fault of the Company.
The 1,834,407 shares which were purchased through the Strategic account
were placed in escrow as collateral for the return of the money which had been
advanced by the Company. They were never transferred to the Company and were
never treated as redeemed stock by the Company. The Company recorded a deferred
tax asset as a result of the loss resulting from the write-off of the advance
for the payment for the Strategic shares. Accordingly, the funds transferred
from the Company for the TAJ/Strategic transactions resulted in the Company
recording a loss of approximately $11 million. Additionally, the loss on the
TAJ/Strategic transactions contributed to the significant net operating loss for
which the Company recognized a deferred tax asset
16
<PAGE> 17
in 1996. There were no disagreements with the Company's auditors with respect to
the accounting treatment of the TAJ/Strategic transactions in the Company's 1996
consolidated financial statements. The Company did not repurchase its shares
through the Strategic account.
The allegations set forth by Nasdaq also relates to the valuation placed
upon the Company's reserves of oil and gas by virtue of the purported doubt
about the Company's abilities to exploit these reserves. In fact, the Company
has been exploiting its reserves. At present the Company has sixteen (16)
producing wells which are producing revenues, as to which the Company has
entered into a sales contract as described above under Item 1.
With respect to the concern expressed over the Company's attempt to enter
into unrelated fields of business, none of the transactions has been
consummated. If and when any of these acquisitions were finalized, the Company
would have first satisfied itself of the availability of competent management.
The financing of these transactions was intended to be accomplished with the
participation of the debenture holders in an agreement which would have reduced
the Company's debt and provide the Company with additional sources of income.
Finally, it was asserted that the Company has violated Marketplace Rule
4330(c) by failing to respond to the staff's requests for information and by
failing to meet the staff's deadlines for responding. The Company did provide
all information requested and provided most of such information in a timely
fashion. A small portion of the responses were provided a short time after the
deadline as a result of work pressure in the Company's offices and the large
effort required to accumulate all of the requested information. The Company
believes that it acted in good faith and to the best of its ability.
In December 1996, the Company entered into an escrow agreement with
Strategic regarding 1,834,407 shares of Company stock acquired by Strategic from
TAJ (the "Shares"). The Shares were pledged by Strategic as collateral on a note
from the Company to Strategic. The Shares were held in escrow as follows:
334,407 of the Shares were held in escrow by counsel for Strategic as security
for management fees due Strategic and the remaining 1,500,000 of the Shares were
held in escrow by Neal Melnick, legal counsel for the Company and a member of
the Board of Directors. The December 1996 agreement provides for Strategic to
receive a minimum of $465,000 or five percent (5%) of the sales price of such
Shares whichever is greater, payable at a minimum of $200,000 in 1997 and
$265,000 in 1998. The agreement further provides that the Company was to pay
Strategic a management fee of $5,000 per month for two months and $7,500 a month
thereafter for a minimum of one year or until such time as all of the collateral
Shares have been sold or transferred whichever is later. For further information
regarding this agreement and the events leading up to the execution of the
agreement refer to the Company's annual report on Form 10-KSB for the period
ended December 31, 1997.
During late 1997 the escrowed Shares were released from escrow and were
distributed as follows: (1) 184,000 shares to Robert Brent dba Royal Pictures,
Inc. in payment of expenses related to the aborted purchase of his company, (2)
900,000 shares to Strategic in settlement of the escrow agreement and (3)
750,000 shares to Equity Management Partners in payment of expenses and pre-paid
commissions associated with acquisitions. The market price of the Company's
common stock at the time of the release was approximately $.25 per share. The
aggregate value of the shares released was approximately $458,600 which was less
than the aggregate balance due Strategic under the terms of the agreement. The
Company has been informed by Strategic that they do not consider the release of
the shares to have satisfied the Company's obligation to Strategic and Strategic
filed suit against the Company on October 6, 1998. See "Item 3 -- Legal
Proceedings."
The range of the high and low bid quotations for the Company's common stock
during the fiscal years ended December 31, 1998 and 1997 are set forth below.
Such bids represent prices between dealers without retail mark-up, mark-down or
commissions, and do not necessarily reflect actual transactions. The bid prices
for the period between January 1, 1997 and December 8, 1997 are as reported by
The Nasdaq Stock Market, and the bid prices for the period from December 9, 1997
to December 31, 1998 are as reported from "pink sheet" transactions subsequent
to the delisting of the Company's common stock.
17
<PAGE> 18
<TABLE>
<CAPTION>
Fiscal Year Ended High Bid Low Bid
December 31, 1997
- ------------------------------------------------------------
<S> <C> <C>
First Quarter $.90625 $.1875
Second Quarter $.46875 $.21875
Third Quarter $.50 $.1875
Fourth Quarter $.3125 $.01
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended High Bid Low Bid
December 31, 1998
- ------------------------------------------------------------
<S> <C> <C>
First Quarter $.06 $.01
Second Quarter $.02 $.01
Third Quarter $.05 $.01
Fourth Quarter $.03 $.01
</TABLE>
As of March 31, 1999, the number of shareholders of record of the Company's
common stock was five hundred thirty-three (533). Management believes that there
are approximately two thousand (2,000) beneficial owners of the Company's common
stock.
The Company has not paid cash dividends on its common stock and does not
anticipate paying cash dividends on its common stock in the foreseeable future.
In addition, the Company's loan agreements prohibit the payment of cash
dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following management's discussion and analysis of results of operations
and financial condition contains certain forward-looking statements with respect
to the Company's future financial performance. These forward-looking statements
are subject to various risks and uncertainties, which could cause actual results
to differ materially from historical results and those currently anticipated.
See "Forward-Looking Statements" contained in this Section.
GENERAL
On January 14, 1999 United Petroleum Corporation (the "Company") filed a
petition for relief under Chapter 11 of the Federal bankruptcy laws in the
United States Bankruptcy Court for the District of Delaware. The petition for
relief does not include the Company's two operating subsidiaries, Calibur
Systems, Inc. and Jackson United Petroleum Corporation. The Company has
continued, as debtor-in-possession in Chapter 11, to conduct its business in
the ordinary course subject to control of the court. The Company intends to
propose a plan of reorganization with its creditors and shareholders that will
provide for the satisfaction of their respective claims and interests on terms
agreed upon with its creditors and stockholders. However, there is no assurance
that the Company will be able to reach an accommodation with its creditors and
stockholders under Chapter 11.
RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations,
financial condition and cash flows should be read along with the Consolidated
Financial Statements and accompanying notes.
RETAIL OPERATIONS
The retail operations segment loss increased to $757,154 in 1998 from
$129,444 in 1997, an increase of $627,710 or 484.9%. The increase is primarily
due to the decrease in sales.
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<PAGE> 19
Retail operations sales decreased to $6,064,357 in 1998 from $9,428,519 in
1997, an decrease of $3,364,162 or 35.7%. The decrease is primarily due to the
sale or closing of six locations.
The table below shows comparable sales by category for 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Gasoline $1,692,877 $2,901,079
Car Wash 2,965,263 4,423,673
Oil & Lube 1,172,635 1,397,871
Grocery 164,975 357,669
Other Sales 68,607 348,227
- ----------------------------------------------------------------------------
Total $6,064,357 $9,428,519
========== ==========
</TABLE>
The gross profit percentage for the retail operations segment decreased to
22.0 % in 1998 from 23.7% in 1997. The decrease is primarily due to the
Company's more aggressive gasoline pricing strategy implemented in 1998.
The table below shows that on a comparable basis, current year same store
sales remained constant for 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Gasoline $1,649,438 $1,465,347
Car Wash 2,727,733 2,827,777
Oil & Lube 720,598 772,583
Other Sales 206,970 234,257
- ----------------------------------------------------------------------------
Total $5,304,739 $5,299,964
========== ==========
</TABLE>
Gasoline sales increased to $1,649,438 in 1998 from $1,465,347 in 1997, an
increase of $184,091 or 12.6%. The increase is primarily due the increase in
volume, which is attributable to the Company's decision to be more price
competitive.
Car wash sales decreased to $2,727,723 in 1998 from $2,827,777 in 1997, a
decrease of $100,054 or 3.5%. The decrease is primarily due to the above average
rainfall in the Southeastern United States.
Oil and lube sales decreased to $720,598 in 1998 from $772,583 in 1997, a
decrease of $51,985 or 6.7%. The decrease is due to the combination of the above
average rainfall that occurred in the Southeastern United States and the lack of
aggressive lube center managers. The Company since has replaced numerous
managers in an attempt to stimulate sales.
OIL AND GAS OPERATIONS
Oil and gas revenues decreased to $115,189 in 1998 from $292,342 in 1997,
an decrease of $177,153 or 60.1%. The decrease is primarily attributable to the
decrease in production of certain wells.
The loss in the oil and gas segment decreased to $734,285 in 1998 from
$3,339,528 in 1997, a decrease of $2,605,243 or 78.0%. The decrease is primarily
due to the Company recording an asset impairment write down of $3,366,730 on
certain oil and gas properties in 1997 compared to a $741,430 write down in
1998.
Selling, general and administrative expenses decreased to $3,299,618 in
1998 from $3,642,102 in 1997, an decrease of $342,484 or 9.4%. The decrease in
selling, general and administrative expenses is due to cost cutting measures
employed by the Company due to its financial position, including a decrease in
administrative payroll.
Lease and other income increased to $187,740 in 1998 from $73,125 in 1997,
an increase of $114,615 or 156.7%. The increase is primarily due to the Company
having entered into lease agreements for two of its retail
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<PAGE> 20
locations that grant the lessee the option to purchase the underlying premises
through the lease term. In 1998 lease income was approximately $100,000.
Interest expense decreased to $1,662,364 in 1998 from $2,846,906 in 1997,
an decrease of $1,184,542 or 41.6%. The decrease is a combination of the
decrease in the number of convertible debentures that were converted into shares
of the Company's common stock in 1998 which led to a decrease in the
amortization of discount and the decrease in notes payable due to the sale of
certain Calibur locations.
In January 1998, the Company sold a subsidiary for $266,500, resulting in a
gain of approximately $132,000.
Generally, the Company's loss before income taxes decreased to $4,320,109
in 1998 from $9,253,042 in 1997, a decrease of $4,932,933 or 53.3%. The decrease
is primarily attributable to the following: (1) a decrease in selling, general
and administrative expenses of $342,484, (2) a decrease in write-downs for asset
impairment of $2,956,321, (3) a decrease in interest expense of $1,184,542 and
(4) a decrease in other expenses of $1,047,811.
LIQUIDITY AND SOURCES OF CAPITAL
During the year ended December 31, 1998, the Company primarily funded its
operating loss through proceeds received from loans and the sale of one of its
subsidiaries.
In April 1998, the Company received a $750,000 bridge loan from a preferred
stockholder. In June 1998, the preferred stockholder purchased an aggregate of
eleven secured loans to Calibur totaling $4,985,385 from the original lenders.
In August 1998, the Company received an additional bridge loan from the
preferred stockholder, which provided for additional financing totaling
$1,236,616. In August 1998, the preferred stockholder and the Company agreed to
refinance and consolidate the loans into a Consolidated Credit Agreement (the
"Credit Agreement"). The Credit Agreement is divided into the A Note and the B
Note. Both notes were scheduled to mature on January 1, 1999 and originally
provided for interest at twelve percent (12%). The Company did not have the
funds to repay the notes and as a result, the Company is in default of its
covenants and as provided in the Credit Agreement, in the event of default the
interest is to be computed at fifteen percent (15%).
In December 1998, the Company received a note for $119,208. The loan bears
interest at twelve percent and is due in December 1999 and guaranteed by a
stockholder.
For the year ended December 31, 1998, the Company used cash for operating
activities of approximately $1,732,000 compared to cash used from operations for
the year ended 1997 of approximately $985,000. Cash used for the year ended
December 31, 1998 resulted from the Company's net loss of approximately
$4,320,000 offset by depreciation and amortization of approximately $945,000,
write-downs for asset impairment of approximately $741,000, common stock issued
for services of approximately $29,000, decrease in accounts receivable of
approximately $6,000, decrease in inventories of approximately $151,000,
increase in other assets of approximately $45,000 and a increase of accounts
payable and accrued expenses of approximately $834,000 offset by gain on sale of
property and equipment of approximately $31,000 and a gain on sale of subsidiary
of approximately $132,000.
For the year ended December 31, 1998, the Company generated cash from
investing activities of approximately $112,000 compared to cash used from
investing activities for the year ended 1997 of approximately $1,009,000. Cash
generated from investing activities used for the year ended December 31, 1998
resulted from the proceeds from sale of property and equipment of approximately
$53,000, proceeds from sale of subsidiary of approximately $266,000, offset by
payments for oil and gas properties of approximately $12,000 and payments for
property and equipment of approximately $195,000.
For the year ended December 31, 1998, the Company generated cash from
financing activities of approximately $1,532,000 compared to cash generated from
financing activities of approximately $2,140,000 for the year ended 1997, of
which approximately $1,800,000 arose from the issuance of convertible
debentures. Cash generated from financing activities resulted from the proceeds
from notes payable of approximately $2,110,000 offset by payments for
reorganization costs of approximately $553,000 and principal payments on notes
payable of approximately $25,000.
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<PAGE> 21
At December 31, 1998, the Company had a working capital deficit of
approximately $17,811,000 and a current ratio deficit of .02 to 1.
The Company has no present plans that will require material capital
expenditures for any of the Company's segments.
INFLATION
There was no significant impact on the Company's operations as a result of
inflation during the current year or prior year.
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<PAGE> 22
YEAR 2000
The year 2000 ("Y2K") problem stems from computer programs written in a way
that differentiates calendar years by utilizing two rather than four digits. As
a result, many information systems may be unable to properly recognize and
process date sensitive information beyond December 31, 1999. The Company is
addressing the Y2K situation by establishing processes for evaluating and
attempting to manage the risks associated with this issue.
The Company intends to replace or upgrade its computer systems to make them
Y2K compliant in the event the Company has sufficient resources following the
confirmation of its bankruptcy plan, and would seek to have remediation
completed by the second half of 1999 for all significant computer systems.
Testing is expected to continue throughout 1999. The new information systems are
estimated to cost approximately $30,000, a substantial portion of which will be
capitalized. Spending for the Y2K project is not expected to have a material
impact on the Company's results of operations or cash flows. Although the
Company does not currently have a complete contingency plan for Y2K compliance,
it intends to develop one during fiscal year 1999.
While the Company believes all necessary work will be completed on a timely
basis if the Company's plan of reorganization is completed in the first half of
1999, there can be no guarantee that all systems will be fully compliant by
December 31, 1999. Estimated time and costs may vary, particularly where
external systems of other companies and government agencies on which the Company
relies must be converted in a timely manner.
The Company will evaluate the Y2K readiness of all purchased hardware and
software systems used within the enterprise and will attempt to obtain, where
feasible, contractual warranties from system vendors that their products (i) are
or will be Y2K compliant by December 31, 1999, or (ii) will be replaced or
updated by a product with similar or improved functional characteristics that
are compliant. The Company will attempt to require Y2K contractual warranties
from all vendors of new software and hardware.
The Company intends to enter communications with its suppliers, banks and
other business partners or vendors seeking assurances they will be Y2K
compliant. Although no method exists for achieving certainty that any
significant business partners will function without disruption after December
31, 1999, the Company's goal is to obtain as much information as possible about
its significant partners' Y2K plans. This process should assist in identifying
those companies that potentially pose a significant risk of failure to perform
their obligations to the Company as a result of the Y2K problem. The Company
plans, where appropriate, to review such significant partners throughout 1999 to
confirm their level of preparedness for 2000, and to make adjustments where
necessary to avoid utilization of those partners who present an unacceptable
level of risk.
The Company currently is not dependent on a single source for any of its
products or services. In the event a significant supplier, bank or other
business partner or vendor were unable to provide services to the Company due to
a Y2K failure, the Company believes it would have adequate alternate sources for
such products or services. There can be no guarantee, however, that similar or
identical products or services would be available on the same terms and
conditions or that the Company would not experience some adverse effects as a
result of switching to such alternate sources.
Like most business enterprises, the Company is dependent upon its own
internal computer technology and relies upon timely performance by its business
partners. A large-scale Y2K program failure could impair the Company's ability
to timely deliver service, or products or administer its accounts payable or
receivable functions, resulting in potential lost sales opportunities and
additional expenses. The Company's Y2K program will seek to identify and
minimize this risk and will include testing of its internal systems and
purchased hardware and software, to ensure, to the extent feasible, all such
systems will be Y2K compliant. The Company intends to refine its understanding
of the risk the Y2K situation poses to its significant business partners.
FORWARD-LOOKING STATEMENTS
From time to time the Company and its representatives may provide
information, whether orally or in writing, including certain statements in this
Form 10-KSB which are deemed to be "forward-looking" within the meaning of
22
<PAGE> 23
the Private Securities Litigation Reform Act of 1995 ("Litigation Reform Act").
These forward-looking statements and other information relating to the Company
are based on the beliefs of management as well as assumptions made by and
information currently available to management.
The words "anticipate," "believe," "estimate," expect," "intend," "will,"
and similar expressions, as they relate to the Company or the Company's
management, are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions. These risks and
uncertainties include, but are not limited to, the Company's emergence from
bankruptcy proceedings; successful execution of internal plans; retention of key
personnel; availability of labor; issues with key suppliers, subcontractors and
business partners; legal proceedings; market risks; weather patterns; prices for
oil and gas; the effect of economic conditions; the impact of competition; Year
2000 compliance; and legislative or regulatory actions. Should one or more of
these risk or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, and estimated or expected.
In accordance with the Litigation Reform Act, the Company is making
investors aware that such "forward-looking" statements, because they relate to
future events, are by their very nature subject to many important factors which
could cause actual results to vary materially from those contained in the
"forward-looking" statements. These factors are detailed from time to time in
the Company's filings with the Securities and Exchange Commission and include
those set forth below.
A. Risks Relating to the Company's Financial Condition
The Company has experienced substantial net losses from operations in
recent years, with a net loss of $4,320,109 and $12,138,042 for the years ended
December 31, 1998 and 1997, respectively. As of December 31, 1998, the Company
had a working capital deficit of $17,811,614, current liabilities of $18,218,705
and approximately $407,091 of current assets. The Company failed to achieve an
operating profit from its business operations during 1997 and 1998. Sales of the
Company declined from $9.7 million for the year ended December 31, 1997 to
$6,179,556 for the year ended December 31, 1998. Even if the Company's
bankruptcy plan is approved and consummated, there can be no assurance that the
Company will not continue to experience losses. The Company's ability to become
profitable and generate cash flow will likely depend upon its ability to raise
additional debt or equity capital and to successfully implement its business
strategy. There can be no assurance that the Company will be able to accomplish
the foregoing.
B. Liquidity Risks
The Company is presently in default under the A Note, the B Note, its
outstanding Debentures and the Preferred Stock. The Company ceased paying
interest on the Debentures and ceased paying dividends on the outstanding
Preferred Stock effective December 31, 1997. Prior to this date, the Company had
been paying interest on the Debentures and dividends on Preferred Stock via the
issuance of shares of Common Stock. As of December 31, 1998, accrued interest on
the Debentures totaled $1,026,030 and accrued dividends on the Preferred Stock
totaled $2,113,362. In addition, the Company is in default under the A Note and
B Note, which matured on January 1, 1999. The terms of the Replacement Loan
Documents to be issued to the holders of the B Note require that the Company pay
60% of its EBITDA to the holders of the B Note for the next three years
following the consummation of the Restructuring, if completed (or until the B
Note is paid in full). There can be no assurance that the Company's
deteriorating financial condition will provide the Company with adequate
resources to continue operations, even after the Plan, if completed, and there
can be no assurance that the Company will be successful in the implementation of
its business strategy.
The Company's proposed bankruptcy plan is intended to convert much of the
debt and Preferred Stock of the Company into shares of new UPC common stock, new
UPC preferred stock or refinanced indebtedness of the post-reorganization
company. However, the Company's historical capital requirements have been
significant and the Company's future capital requirements could vary
significantly and may be affected by general economic conditions, industry
trends, weather conditions and other factors, many of which are not within the
Company's control.
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<PAGE> 24
Historically, the Company has had difficulty financing its operations due, in
part, to its significant losses, and there can be no assurance that the Company
will be able to obtain financing in the future. Even if the Plan is approved and
consummated, there can be no assurance that the Company will not continue to
experience losses. The Company's ability to become profitable and generate cash
flow will likely depend upon its ability to raise additional debt or equity
capital and to successfully implement its business strategy. There can be no
assurance that the Company will be able to accomplish the foregoing. The Company
anticipates that it will need additional capital in January 2002 when the
principal amounts under the B Note will be payable.
C. Ability of the Company to Continue as a Going Concern; Explanatory
Paragraph in Auditors' Report
The Company's independent auditors have included an explanatory paragraph
in their report for the fiscal year ended December 31, 1998, stating that the
consolidated financial statements included in this Annual Report have been
prepared assuming that the Company will continue as a going concern and that the
Company's financial condition raises substantial doubts about its ability to
continue as a going concern. The form and content of future auditors' reports
(including any explanatory paragraphs the auditors deem necessary) will be based
upon, among other factors, the application of their professional judgment to the
facts and circumstances related to the Company and its business at the time any
such report is rendered. Accordingly, there can be no assurance that future
auditors' reports on the Company's financial statements will not include
explanatory paragraphs relating to uncertainties regarding the Company's ability
to continue as a going concern, even if the Plan is consummated. The existence
of an explanatory paragraph may materially adversely affect the Company's
ability to raise additional funds, and its relationships with suppliers and
prospective suppliers, restrict ordinary credit terms or require guarantees of
payment, and therefore could have a material adverse effect on the Company's
business, financial condition and results of operations.
D. Risks Relating to Confirmation of the Plan
Section 1129 of the Bankruptcy Code, which sets forth the requirements for
confirmation of a plan of reorganization, requires, among other things, a
finding by the bankruptcy court (1) that the plan is "feasible" (i.e., that
confirmation of the plan is not likely to be followed by the liquidation, or the
need for further financial reorganization, of the debtor), (2) that all Claims
and Interests have been classified in compliance with the provisions of section
1122 of the Bankruptcy Code, and (3) that, under the plan, holders of Claims and
Interests within Impaired Classes either accept the plan or receive or retain
cash or property of a value, as of the date the plan becomes effective, that is
not less than the value such holders would receive or retain if the debtor was
liquidated under Chapter 7 of the Bankruptcy Code. Although the Company believes
that the Plan complies with all relevant requirements for confirmation, there
can be no assurance that the Bankruptcy Court will agree without first requiring
material modifications which may or may not be acceptable to the Company, the
Infinity Parties and other parties in interest or which would not require a
resolicitation of votes on the Plan.
The confirmation and effectiveness of the Plan are also subject to certain
conditions being satisfied on or prior to the first business day which is ten
days after the entry of the confirmation order by the Bankruptcy Court (the
"Effective Date"). No assurances can be given that these conditions will be
satisfied or waived or that any necessary consent will be obtained.
In the event any Impaired Class of Claims or Interests rejects the Plan,
the Bankruptcy Court, pursuant to section 1129(b) of the Bankruptcy Code (the
"cramdown" provisions), may nevertheless confirm the Plan at the Company's
request if at least one Impaired Class of Claims has accepted the Plan (with
such acceptance being determined without including the acceptance of any
"insider" in such Class) and, as to each Impaired Class which has not accepted
the Plan, the Bankruptcy Court determines that the Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to such Impaired Class and if
all of the other applicable requirement of section 1129(a) of the Bankruptcy
Code are met. The Company reserves the right to request confirmation pursuant to
section 1129(b) of the Bankruptcy Code in the event that any Impaired Class of
Claims or Interests rejects the Plan. If the Plan is not confirmed as a result
of the rejection by any Impaired Class of Claims or Interests and the Plan is
not confirmed pursuant to section 1129(b) of the Bankruptcy Code, then the
Company may be required to continue its bankruptcy case without the agreement of
its major creditors as to the terms of a reorganization plan, possibly resulting
in the complications discussed above.
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<PAGE> 25
E. Risks Relating to Approval of the UPC Trust
Bankruptcy Court approval of the UPC Trust and the channeling of all
Securities Claims against UPC and the Infinity Parties to the UPC Trust is a
condition precedent to Infinity's willingness to support the Plan. Although the
Company believes that a channeling injunction such as that proposed by the Plan
is appropriate and within the equitable power of the Bankruptcy Courts, it is
not certain that the Bankruptcy Court will reach the same conclusion. In making
its decision whether the UPC Trust and channeling injunction should be approved,
it is likely that the Bankruptcy Court will review the following factors: (1)
whether the nondebtor has contributed substantial assets to the reorganization;
(2) whether the injunction is essential to reorganization and, without it, there
is little likelihood of success; (3) whether the plan provides a mechanism for
the payment of the claims of the class or classes affected by the injunction;
and (4) whether there is an identity of interest between the debtor and the
third party (e.g. an indemnity relationship), such that a suit against the
non-debtor either operates as a suit against the debtor or will deplete assets
of the estate. In addition, certain holders of claims or interests and the
Securities and Exchange Commission have filed objections or challenges to the
creation of the UPC Trust and the channeling of the Securities Claims against
UPC and the Infinity Parties. There can be no assurance that the Company will be
able to implement a Plan including these provisions.
F. Risks Relating to the Company
1. Weather Related Risk.
The largest single source of revenues for Calibur is from the operation of
car washes, which represented approximately 48.0% and 46.9% of the Company's
revenues for the years ended December 31, 1998 and 1997, respectively. These
revenues are significantly adversely affected by adverse weather conditions,
since car washes are generally utilized less frequently during wet and/or severe
freezing weather. During 1997 and the first and second quarters of 1998, the El
Nino weather condition has produced unusually wet weather, which has resulted in
decreased usage of the Company's facilities and had a negative effect on
revenues. Long term weather conditions are difficult, if not impossible, to
predict accurately and may have a material adverse effect on the Company's
results of operations and financial condition.
2. Dependence on Economic Factors; Geographic Concentration.
Because the Company derives a substantial portion of its revenues from the
sale of merchandise in its car wash convenience stores, its revenues may be
adversely affected by economic conditions that adversely affect potential
customers and suppliers. Approximately 3.8% and 8.6% of the Company's revenues
were derived from the sales of merchandise for the years ended December 31, 1998
and 1997, respectively. In particular, operating results in individual
geographic markets will be adversely affected by local and or regional economic
downturns. Such economic downturns could have an adverse impact on the Company's
financial condition and results of operations. In addition, the Company's
operations are concentrated geographically and the Company lacks the geographic
diversity that could mitigate such economic downturns.
3. Competition.
The industries in which the Company operates are all highly competitive.
The Company encounters significant competition in all areas of its operations.
The Company's competitors include major integrated convenience store chains and
oil and natural gas companies, numerous independent companies, individuals and
drilling and income programs. Many of its competitors are large,
well-established companies with substantially larger staffs and greater capital
resources than the Company and which, in many instances, have been engaged in
the business for a much longer time than the Company. Such companies may be able
to pay more for productive properties and prospects and to define, evaluate, bid
for and purchase a greater number of properties and prospects than the Company's
financial or human resources permit. Even assuming the reorganization proposed
in the Plan is completed, there can be no assurance that the Company will be
able to compete effectively.
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<PAGE> 26
4. Drilling Risks.
The Company currently anticipates that it will sell its non-producing oil
and gas properties after the Effective Date. Nevertheless, to the extent the
Company undertakes drilling activities, they involve numerous risks, including
the risk that no commercially productive natural gas or oil reservoirs will be
discovered. The cost of drilling, completing and operating wells is often
uncertain, and drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors, including unexpected drilling conditions or
pressure irregularities in formations, equipment failures, accidents, adverse
weather conditions and shortages or delays in the delivery of equipment. The
Company's drilling activities have in the aggregate been historically
unproductive and may be unsuccessful in the future and, if unsuccessful, such
failure will have an adverse effect on Company's future results of operations
and financial condition.
5. Uncertainty of Reserve Information and Future Net Revenue Estimates.
There are numerous uncertainties inherent in estimating oil and natural gas
reserves and their estimated values, including many factors beyond the control
of the producer. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact manner. Estimates of economically recoverable oil and gas reserves and of
future net cash flows necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future oil and gas prices,
future operating costs, severance and excise taxes, development costs and
workover and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected therefrom prepared by different
engineers or by the same engineers at different times may vary substantially and
such reserve estimates may be subject to downward or upward adjustment based
upon such factors. Actual production, revenues and expenditures with respect to
Company's reserves will likely vary from estimates, and such variances may be
material.
6. Volatility of Natural Gas and Oil Prices.
Revenues generated from the sale of the Company's oil and gas properties,
and from the Company's oil and gas exploration and production operations are
highly dependent upon the price of, and demand for, oil and natural gas.
Historically, the markets for oil and natural gas have been volatile and are
likely to continue to be volatile in the future. Prices for oil and natural gas
are subject to wide fluctuations in response to relatively minor changes in the
supply of and demand for oil and natural gas, market uncertainty and a variety
of additional factors that are beyond the control of the Company. These factors
include the level of consumer product demand, weather conditions, domestic and
foreign governmental regulations, the price and availability of alternative
fuels, political conditions in the Middle East, the foreign supply of oil and
natural gas, the price of foreign imports and overall economic conditions.
During the past year, the price of oil per barrel received by the Company has
ranged from a high of approximately $17.00 per barrel to a low of approximately
$9.25 per barrel, with the price in December at an average of $10.25 per barrel.
The impact of lower oil prices is to lower the revenue received by the Company
for its oil production. This is of minimal effect on the Company as a whole due
to the fact that the Company has very little oil production. The Company
considers the price of oil to be low based on the fact that in recent history
prices have been higher. The current price of $11.25 per barrel is $1.00 higher
per barrel than one year ago. This represents an increase of approximately 9.7%
from the price one year ago. It is impossible to predict future oil and natural
gas price movements with any certainty. Declines in oil and natural gas prices
may materially adversely affect Company's financial condition, liquidity and
results of operations. Lower oil and natural gas prices also may reduce the
amount of Company's oil and natural gas that can be produced economically.
7. Replacement of Reserves.
In general, the volume of production from oil and gas properties declines
as reserves are depleted. Except to the
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<PAGE> 27
extent the Company acquires properties containing proved reserves or conducts
successful development and exploration activities, or both, the proved reserves
of the Company will decline as reserves are depleted. The Company's future oil
and natural gas production is, therefore, highly dependent upon its level of
success in finding or acquiring additional reserves. The business of exploring
for, developing or acquiring reserves is capital intensive. Because of the
Company's negative historical and projected cash flows from operations and
limited external sources of capital, the Company's ability to make the necessary
capital investment to maintain or expand its asset base of oil and natural gas
reserves is impaired.
8. Impairment of Oil and Gas Properties; Risks Related to Kastle Sale.
The Company uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved oil and natural
gas reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flows from proved
oil and natural gas reserves, and the lower of cost or fair value of unproved
properties after income tax effects, such excess costs are charged to
operations. Once incurred, a write-down of oil and natural gas properties is not
reversible at a later date even if oil or natural gas prices increase.
Significant downward revisions of reserve estimates or declines in oil and gas
prices which are not offset by other factors could result in a write-down for
impairment of oil and gas properties. In addition, the failure of Kastle to
perform under the sale agreement related to certain of the Company's working
interests in oil and gas properties would have a material adverse effect on the
Company and its financial condition and results of operations.
9. Government Regulation and Environmental Matters.
The Company's business is regulated by certain local, state and federal
laws and regulations relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, oil and natural
gas. The Company's business is also subject to extensive and changing
environmental and safety laws and regulations governing plugging and
abandonment, the discharge of materials into the environment or otherwise
relating to environmental protection. As with any owner of property, Company is
also subject to cleanup costs and liability for hazardous materials, asbestos or
any other toxic or hazardous substance that may exist on or under any of its
properties. The implementation of new, or the modification of existing, laws or
regulations could have a material adverse effect on the Company. The gasoline
sales operations conducted by the Company imposes certain inherent environmental
risks. Each operation utilizes underground storage tanks for its petroleum
products. While the Company has no information and has received no notification
that any of its tanks are leaking, the leakage of underground storage tanks
would impose environmental remediation obligations for the Company under federal
and state environmental laws and could give rise to third party claims. The
Company does not presently maintain insurance and has not posted bonds to
compensate for any environmental damage that may occur.
10. Operating Risks of Oil and Gas Operations.
The oil and gas business involves certain operating hazards such as well
blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pollution, releases of
toxic gas and other environmental hazards and risks, any of which could result
in substantial losses to the Company. The availability of a ready market for the
Company's oil and natural gas production also depends on the proximity of
reserves to, and the capacity of, oil and gas gathering systems, pipelines and
trucking or terminal facilities. In addition, the Company may be liable for
environmental damage caused by previous owners of property purchased and leased
by the Company. As a result, liabilities to third parties or governmental
entities may be incurred, the payment of which could reduce or eliminate the
funds available for development, acquisitions or exploration, or result in the
loss of the Company's properties. The Company does not carry business
interruption insurance. The occurrence of an event not covered by insurance
could have a material adverse effect on the financial condition and results of
operations of the Company.
27
<PAGE> 28
11. Dependence on Personnel.
The business of the Company depends upon the ability and expertise of
certain key employees, including Michael F. Thomas, its President and Chief
Executive Officer. If one or more key employees of the Company terminate their
employment, the Company's operations could be adversely affected. There can be
no assurance that one or more key employees will not resign from employment with
the Company. In addition, the Company depends upon a significant number of
hourly workers to operate its auto service business, and these employees are
often difficult to recruit and retain, especially in markets with lower
unemployment rates.
12. No Active Market for Securities; Possible Volatility of Stock Price.
There is no current active market for the Common Stock or other securities
of the Company and there can be no assurance that an active trading market will
develop or, if developed, that such market will be sustained or that the market
price of the Common Stock or the securities proposed to be issued as a result of
the bankruptcy plan will not decline. The trading price of the Common Stock has
been subject to wide fluctuations, and the trading price of the new securities
could be subject to wide fluctuations in the future in response to variations in
the Company's results of operations, as well as developments that affect the
industry, the overall economy and the financial markets.
13. Control by Principal Stockholder.
If the Company's current bankruptcy plan is implemented, after the
Effective Date, the Infinity Parties will own approximately 74% of the
outstanding shares of New UPC Common Stock. This ownership will give the
Infinity Parties control over any stockholder vote, including a vote for
election of all of the members of the Company's Board of Directors, a vote for
the adoption of amendments to the Company's charter and bylaws and a vote for
the approval of a merger, consolidation, asset sale or other corporate
transaction requiring approval of the stockholders of the Company.
14. Need For Additional Financing
In the event that cash from operations and other available funds prove to
be insufficient to fund the Company's presently anticipated operations, the
Company will be required to seek additional financing. Even if the Company has
no future capital expenditures, the Company's operations could require more cash
than is generated from the Company's operations and other available funds, in
which case the Company would require additional financing. There can be no
assurance that, if additional financing is required, it will be available on
acceptable terms, or at all. Nor can any assurances be given that current
investors would be willing to fund any additional operational requirements of
the Company in the future. Additional financing may involve substantial dilution
to the interests of the Company's then-current stockholders, including the
holders of the New UPC Common Stock.
15. Legal Proceedings.
The Company is involved in certain legal proceedings as described in "Item
3 -- Legal Proceedings." While the Company intends to defend such lawsuits, any
adverse decisions or settlements and the costs of defending such suits, could
have a material adverse effect on the Company. In addition, the Company has
filed a lawsuit seeking the recovery of substantial damages. See "Legal
Proceedings -- TAJ/National." This lawsuit is in the early stages and there can
be no assurances of the timing or amounts of any recovery. In the event the
Company is ultimately successful in such lawsuit, the holders of the Common
Stock of the Company would receive less of the benefits from the recovery, if
any, if the Plan is confirmed and consummated. However, if the Plan is not
approved, the Company would not have sufficient funds to pursue the litigation.
16. Year 2000 Compliance.
Many currently installed computer systems and software products are coded
to accept only two digit entries in
28
<PAGE> 29
the date code field. These date code fields will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. As a result,
in less than twelve months, computer systems and/or software used by many
companies will need to be upgraded to comply with such "Year 2000" requirements.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
Management does not anticipate that the Company will incur significant operating
expenses or be required to invest heavily in computer systems improvements to be
Year 2000 compliant. The occurrence of any of the foregoing could have a
material adverse effect on the Company's business, operating results or
financial condition.
Although the Company believes the software and hardware it uses internally
comply with Year 2000 requirements and is not aware of any material operational
issues or costs associated with preparing its internally used software and
hardware for the Year 2000, there can be no assurances that the Company will not
experience serious, unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems. The occurrence of any of the foregoing could have a material adverse
effect on the Company's business, operating results or financial condition.
17. No Dividends.
The Company does not anticipate that it will be able to pay any dividends
on its currently outstanding securities or the securities proposed to be issued
under the Company's bankruptcy plan for the foreseeable future. The Company is
currently restricted from paying dividends on its Common Stock under the terms
of its indebtedness and Preferred Stock. If the plan is adopted, the Company
will be subject to similar or more stringent restrictions on the payment of
dividends on its securities.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data commence on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
As previously reported by the Company in its Current Report on Form 8-K
filed on March 26, 1999, and an amendment to the Form 8-K filed on April 6,
1999, the Company has changed its independent public accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the name, age and position of each director
and executive officer of the Company:
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS POSITION
------------------------------------------------------------------------------------------------
<S> <C>
MICHAEL F. THOMAS, 46 CEO, President and Director
2620 Mineral Springs Road, Suite A
Knoxville, TN 37917
DWIGHT S. THOMAS, 46 Secretary, Treasurer and Director
2620 Mineral Springs Road, Suite A
Knoxville, TN 37917
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C>
WALTER L. HELTON, 65 Director
c/o Tennessee Tech University
P.O. Box 5062
Cookeville, TN 38505
STEVEN BAUER Director
EUGENIO (ROLANDO) MARTINEZ, 76 Director
Apt. 106 1821 Jefferson
Miami Beach, FL 33139
ANTONIO JULIO GONZALEZ GIMENEZ Director
Av. Diaz Moreno Edif. El Juncal
Piso 3, Oficina 33
Valencia, Edo. Carobobo, Venezuela
L. DOUGLAS KEENE, JR., 45 Executive Vice President and CFO
2620 Mineral Springs Road, Suite A
Knoxville, TN 37917
</TABLE>
Michael F. Thomas and Dwight S. Thomas are cousins. There are no other
family relationships between any directors or executive officers of the Company.
Michael F. Thomas
Mr. Thomas has been a director since January 1993 and received a B.A. Degree
in Accounting in 1975 from Tennessee Technological University in Cookeville,
Tennessee. He was the manager of the finance and billing department for the City
of Cookeville from 1975 to 1976, and from 1976 to 1977, he was the department
manager for Fleetguard, Inc., a manufacturer of heavy duty filters, which is a
division of Cummins Engine. As department manager, he supervised thirty
employees and coordinated production. Mr. Thomas founded Calibur Car Wash
Systems as a sole proprietorship until organizing Calibur on October 1, 1992. In
1984, Mr. Thomas also formed TCS, which designs, manufacturers and sells car
wash equipment and related supplies.
Dwight S. Thomas
Mr. Thomas has been a director since January 1993 and received an A.S.
Degree in Criminology in 1975 and a B.S. Degree in Sociology in 1977 from
Tennessee Technological University in Cookeville, Tennessee. From June, 1981
until March, 1987, he was location manager for Calibur Car Wash Systems,
responsible for approximately twenty hourly employees, hiring, dismissals,
training, labor, inventory controls, daily reports, bank deposits, customer
relations and quality control. From 1987 to April 1999, he has been the District
manager for Calibur Car Wash Systems, responsible for fifteen salaried managers,
hiring and training managers and communicating daily with the Company's
locations. Mr. Thomas was also responsible for implementing training programs
for all phases of operations, setting goal incentives for management programs
and organizing and implementing testing for OSHA guidelines. Effective April 1,
1999, Mr. Thomas became a part-time employee assisting the Company on an
"as-needed" basis.
Walter L. Helton
Mr. Helton has been a director since December 1996 and is the founder of the
geology department at Tennessee Technological University located in Cookeville,
Tennessee and has been a member of the faculty there since 1966. He earned a
Doctorate in Geology from the University of Tennessee in 1967. He has formerly
served as a consultant to other public companies such as Marathon Oil and as a
consultant to numerous private energy companies including B. Ray Thompson Coal
Company. Among his other accomplishments, he is widely published in the energy
field and has authored many university level text books as well as been
contracted to perform mapping services for both the States of Tennessee and
Kentucky Geological departments.
30
<PAGE> 31
Steven Bauer
Mr. Bauer has been a director since August 1997 and is a Cuban born movie
star who made his film debut as "Manolo," Al Pacino's right hand man and
brother-in-law in "Scarface" in 1983. He has substantial contacts in the
entertainment and film industry.
Eugenio (Rolando) Martinez
Mr. Martinez has been a director since August 1997 and was born in Artemisa,
Cuba. After opposing both the Batista and Castro regimes, he came to the United
States in 1959 and joined the Central Intelligence Agency. He is currently a
resident of Miami, Florida engaged in consulting on international trade and
finance.
Antonio Julio Gonzalez Gimenez
Mr. Gimenez has been a director since August 1997 and is President of Hotel
Tacarigua, C.A., which owns the Hotel Inter-Continental in Valencia, Venezuela.
He has extensive experience in international business affairs led to his
appointment to the board. His contacts in South America's oil industry are
extensive and may prove beneficial to future business of the Company.
L. Douglas Keene, Jr.
Mr. Keene received a B.S. Degree in Business Administration, majoring in
Banking and Finance, from the University of Tennessee in 1976. Mr. Keene
graduated from the Tennessee School of banking at Vanderbilt University in 1980,
where he achieved the highest score in the class. He graduated from the National
Commercial Lending School in Norman, Oklahoma in 1981. Mr. Keene's banking
career began in 1976 with the Citizens bank in Pikeville, Kentucky. He remained
in the banking industry until April, 1985, when he resigned as Vice President,
Commercial Loans, at First Tennessee Bank in Knoxville, Tennessee, to establish
Keene Financial Corporation. He was the principal of Keene Financial Corporation
from April 1983 to August 1993, which was established to provide mortgage
banking services and financial consultation to entrepreneurs in the Southeast.
Mr. Keene joined the Company in August 1993, and has served as an Executive Vice
President since August 1993 and as Chief Financial Officer since November 1997.
UPET has a classified board of directors consisting of three classes of
directors, one class of which is elected each year. Messrs. Michael Thomas and
Dwight Thomas are Class A Directors with terms expiring in 1999. The remaining
directors were not assigned to a class upon their election. The officers of the
Company are elected by the Board of Directors and hold office until their
successors are elected and qualified, until their death or until they resign or
have been removed from office. All corporate officers serve at the direction of
the Board of Directors.
Steven Bauer, Antonio Gonzalez Gimenez and Eugenio (Rolando) Martinez were
appointed to the Board of Directors during August 1997 to fill vacant seats and
were not elected by stockholders. Their remaining on the Board of Directors
beyond the next annual meeting of stockholders will depend upon their being
nominated for the board positions and their ratification by stockholders. David
Olinsky was also appointed to the Board of Directors in 1997 to fill a vacant
seat. However, he resigned soon after the appointment and never participated in
any board meetings or actions.
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<PAGE> 32
There is no understanding or arrangement between any director or any other
persons pursuant to which such individual was or is to be selected as a director
or nominee of the Company.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth a summary of all compensation awarded to,
earned by or paid to, the Company's Chief Executive Officer and all other
executive officers who were paid or accrued compensation in excess of $100,000
per annum for such fiscal years (the "Named Executive Officers") for services
rendered in all capacities to the Company and its subsidiaries during fiscal
years ended December 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
NAME/POSITION YEAR SALARY ($) BONUS ($) OTHER COMPENSATION OPTIONS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michael F. Thomas (1) 1998 $200,000 -0- $ 19,299 (2)(3) -0-
Chief Executive Officer 1997 $350,000 -0- $123,780 (2)(3) 1,183,334 (4)
1996 $300,000 -0- $ 98,682 (5) 1,183,334 (6)
L. Douglas Keene, Jr., 1998 $115,083 -0- $ 8,900 (7) -0-
Executive Vice President 1997 $ 87,500 -0- $ 10,700 (7) 250,000 (8)
And CFO 1996 $ 89,500 -0- $ 9,800 (7) 250,000 (8)
</TABLE>
1. As of December 31, 1998, Mr. Thomas held 2,329,214 restricted shares of the
Company's common stock with an aggregate market value of approximately
$23,292.14 based upon the most recent trade in the "Pink Sheets" of $.01 per
share.
2. For fiscal years ended December 31, 1998, December 31, 1997 and December 31,
1996, Mr. Thomas was paid the sum of $0, $177,000 and $356,000, respectively,
which approximates the debt service for the lease of three Calibur retail
locations. See ITEM 12 "Certain Relationships and Related Party Transactions".
3. During 1998, Mr. Thomas' other compensation consisted of health insurance,
life insurance and an auto allowance, all totaling $19,299. During the fiscal
year ended December 31, 1997 the Company issued Michael F. Thomas 200,000
restricted shares of the Company's common stock as payment for services. The
shares were issued with an aggregate value of $37,500 which represented 50% of
the market value of the stock as of the date issued. In addition, during the
year the Company issued Mr. Thomas 20,000 shares for his services related to the
Board of Directors. Said shares were issued at market value as of the date of
issuance which was $.25 for an aggregate amount of $5,000. In addition, during
1997 the Company paid a fee to Mr. Thomas of $81,280 which represents a one
percent (1%) fee charged to the Company for Mr. Thomas' personal guaranty of the
Company's debt.
4. Represents four options granted to Mr. Thomas. All of which have been
replaced with options having a lower exercise price.
5. Represents a one percent (1%) fee charged to the Company for Mr. Thomas'
personal guaranty of the Company's debt.
6. Represents four options granted to Mr. Thomas. All of which have been
replaced with options having a lower exercise price.
7. Represents payment of health insurance premiums and an automobile allowance.
32
<PAGE> 33
8. Represents options granted to Mr. Keene, all of which have been replaced with
options having a lower exercise price.
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
In 1996, the Company entered into employment agreements with both its Chief
Executive Officer and Chief Financial Officer which will expire in September
2001. Compensation under these agreements aggregated approximately $325,000 in
1998 and will be approximately $225,000 annually thereafter, including payments
of $125,000 to the Company's Chief Executive Officer and $100,000 to its Chief
Financial Officer.
COMPENSATION OF DIRECTORS
In January of 1997 replacement options with a lower exercise price of $.26
per share were granted to directors to replace the options granted to directors
in fiscal year 1996. The lower price represents the twenty day average price of
the Company's shares prior to the date of the grant as reported by Nasdaq. The
lower price was granted to all directors with no distinction as to whether the
director was considered inside or outside the Company. The term of the
replacement options remained the same as the options that were replaced. The
replacement options were granted in order to provide the incentive for increased
service to the Company by the option holders, which was negated by the decline
in the market price of the Company's Common Stock.
OPTION GRANTS
The following table sets forth certain information relating to stock option
grants during fiscal 1998 to the Company's Chief Executive Officer and the Named
Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS/SAR'S
UNDERLYING OPTIONS/ GRANTED TO EXERCISE OR
SAR'S EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL 1998 ($, SH.) DATE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael F. Thomas -0- NA NA NA
L. Douglas Keene, Jr. -0- NA NA NA
</TABLE>
OPTION EXERCISES
The following table sets forth certain information relating to option
exercises effected during fiscal year 1998, and the value of options held as of
such date by the Company's Chief Executive Officer and the Named Executive
Officers for 1998:
AGGREGATE OPTION EXERCISES FOR FISCAL 1998
AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED OPTIONS/SAR'S AS OF OPTIONS/SAR'S AS OF
NAME ON EXERCISE VALUE REALIZED DECEMBER 31, 1998 DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael F. Thomas -0- -0- 1,183,334 / 0 -0-
L. Douglas Keene, Jr. -0- -0- 250,000 / 0 -0-
</TABLE>
33
<PAGE> 34
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth, as of May 28, 1999, certain information
concerning ownership of voting securities of the Company by: (i) each person who
is known by the Company to own beneficially more than 5% of the voting
securities of the Company, (ii) each current executive officer, director and
nominee for director individually, and (iii) all current directors, nominees for
director, and executive officers of the Company as a group. Except as described
below, each of the persons and groups listed below has sole voting and
investment power with respect to the securities shown.
<TABLE>
<CAPTION>
AMOUNT OF APPROXIMATE
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
MICHAEL F. THOMAS 4,162,548(2) 13.6%
2620 Mineral Springs Road, Suite A
Knoxville, TN 37917
DWIGHT S. THOMAS 396,384(3) 1.3%
2620 Mineral Springs Road, Suite A
Knoxville, TN 37917
WALTER L. HELTON 118,000(4) Less than 1%
c/o Tennessee Tech University
P.O. Box 5062
Cookeville, TN 38505
L. DOUGLAS KEENE, JR. 281,830(5) Less than 1%
2620 Mineral Springs Road, Suite A
Knoxville, TN 37917
EUGENIO (ROLANDO) MARTINEZ 175,000(6) Less than 1%
Apt. No. 106
1821 Jefferson Avenue
Miami Beach, FL 33139
ANTONIO JULIO GONZALEZ GIMENEZ 150,000(6) Less than 1%
Av. Diaz Moreno Edif. El Juncal
Piso 3, Oficina 33
Valencia, Edo. Carobobo, Venezuela
STEVEN BAUER 150,000(6) Less than 1%
---------------------------------------------------------------- ------------------ -------------------
All directors and officers as a group (7 persons) 5,433,762(7) 17.8%
</TABLE>
- ----------
(1) Unless otherwise stated, all shares of Common Stock are directly held with
sole voting and dispositive power.
(2) Consists of 2,329,214 shares held directly and currently exercisable
options to purchase 1,833,334 shares.
(3) Consists of 60,050 shares held directly and currently exercisable options
to purchase 333,334 shares.
(4) Consists of 68,000 shares held directly and currently exercisable options
to purchase 50,000 shares.
(5) Consists of 31,830 shares held directly and currently exercisable options
to purchase 250,000 shares.
(6) Includes currently exercisable options to purchase 150,000 shares.
(7) Consists of 2,667,094 shares held directly and currently exercisable
options to purchase 2,466,668 shares.
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<PAGE> 35
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions involving Michael F. Thomas. During 1998, the Company did
not engage in any material transactions with its executive officers or
directors, other than as set forth below.
On July 1, 1997, the Company entered into a five year agreement with a
related corporation engaged in manufacturing and distribution which is
controlled by the Company's Chief Executive Officer, Michael F. Thomas. The
agreement provides for the Company to purchase exclusively, in areas served by
the related corporation, its gasoline inventories at a price of $.01 per gallon
above cost plus freight. For the years ended December 31, 1998 and 1997,
purchases under this agreement were approximately $989,000 and $525,000,
respectively. During the year ended December 31, 1997, transactions between the
Company and the related corporation also included equipment sales, chemicals,
supplies and certain ongoing construction activities conducted for the Company
by the related corporation. In 1997, equipment sales and construction activities
and repairs and maintenance were approximately $258,000 and $323,000,
respectively. Amounts included in accounts payable approximated $19,000 as of
December 31, 1998. There were no construction activities in 1998.
In 1996, the Chief Executive Officer entered into certain lease
agreements with the Company which provided for an aggregate monthly rental of
$27,000. In 1997, some of the leases, by mutual agreement, were terminated. In
1998, the Company relocated its corporate headquarters and terminated the
remaining lease agreement with the Chief Executive Officer. For the years ended
December 31, 1998 and 1997, rent expense paid to the Chief Executive Officer
approximated $22,000 and $177,000, respectively.
During 1997, the Company sold a number of retail facilities to Mr. Thomas,
the Company's President and Chief Executive Officer.
One location (Farragut) was sold for $1,140,000 (it had an appraised value
of $1,100,500). This location was declared in default by its lender shortly
before the sale and the Company determined that it was not able to refinance the
location. Mr. Thomas had guaranteed this obligation on behalf of the Company.
The second location (Cookeville) was sold for $879,000 (it had an appraised
value of $961,500). This location had been operating at a cash flow loss to the
Company prior to its sale and the Company was unable to refinance the mortgage
on this location such that the location would contribute to the cash flow of the
Company. The Board therefore determined that it was in the best interests of the
Company to sell the location. Mr. Thomas had guaranteed this obligation on
behalf of the Company.
A third location (Murfreesboro) was transferred to Mr. Thomas in exchange
for Mr. Thomas's assumption and repayment of the debt on the location, for which
he was a guarantor. The Company had received a notice of foreclosure on this
location and the Board determined that it was in the best interests of the
Company to sell this location.
A fourth location (Knoxville) was sold to Mr. Thomas for $300,000 in order
to raise working capital for the Company. This location consisted only of a
lease of the land and buildings occupied by the store and was under
environmental remediation with an estimated cost of $50,000, which Mr. Thomas
assumed. There was no debt on this location.
The Company also transferred a piece of unimproved real estate located in
Knoxville to Mr. Thomas in exchange for Mr. Thomas' assumption of the debt on
the location, for which he was a guarantor. The property had been acquired from
Exxon for approximately $125,000 in 1995. The outstanding debt on the property
was approximately $138,000 and Mr. Thomas paid approximately $150,000 for the
property including the assumption of the debt.
During the third quarter of 1997, the Company sold a location (Oak Ridge) to
a non-affiliated local petroleum distributor in order to repay a loan in the
amount of $300,000 to Mr. Thomas and to raise additional capital. The
35
<PAGE> 36
sale enabled the Company to pay off the existing first mortgage from
NationsBank, pay off the note to Mr. Thomas and raise approximately $144,548 in
working capital. The location continues to be operated by the Company as the
transaction was in the form of a sale/lease back. The Company entered into a ten
year lease with the non-affiliated distributor with monthly payments of $8,804.
At the option of the Company, the lease may be canceled after the first six
months and the Company has the option to repurchase the store during the first
year at a purchase price of $950,000, and during the second year at a purchase
price of $1,000,000.
During the third quarter of 1997, the leases of two locations that were
being leased from Mr. Thomas for a monthly rental of $27,000, were canceled by
mutual agreement between the Company and Mr. Thomas as a result of the Company's
failure to pay 1996 and 1997 property taxes, which had caused loans owed by Mr.
Thomas related to the properties to be in default. The two locations produced a
combined annual cash flow of approximately $100,000, and Mr. Thomas agreed to a
reduction of his annual compensation by $100,000 in exchange for the
cancellation of the leases. The lease payments on these properties, included on
the income statements among general and administrative expenses, amounted to
approximately $177,000 in 1997 and $356,000 in 1996, and the Company had not
paid $91,796 in property taxes for 1996 and 1997 that Mr. Thomas assumed. In
other lease transactions with Mr. Thomas, the Company rented, under month-to-
month operating leases, certain vehicles. Expenses related to these transactions
were approximately $25,000 and $45,000 in 1997 and 1996, respectively.
During the third quarter of 1997, the Company transferred an Exxon
distributorship contract to TCS Systems, Inc. ("TCS"), a corporation controlled
by Mr. Thomas and engaged in the manufacturing and distribution of items related
to the Company's automotive subsidiary. Upon the expiration of the letter of
credit posted by the Company in favor of Exxon in connection with the contract,
Exxon required that the letter of credit be renewed and increased from $100,000
to $200,000. Because the Company was unable to obtain such letter of credit, the
contract was transferred to TCS, which continues to make available to the
Company gasoline for $0.01 per gallon above the wholesale price available to
TCS, plus freight charges.
The above referenced transfers of Company properties and assets to Mr.
Thomas were analyzed and approved by the UPET's Board of Directors, Chief
Financial Officer and accounting department. In order to ensure that the
transactions were fair and equitable to the Company, an assumption agreement was
entered into between the Company and Mr. Thomas on July 3, 1997. The agreement
provided, among other things, that Mr. Thomas would assume or pay the following:
(i) a note payable to Pennzoil in the approximate amount of $219,829, (ii) the
Pennzoil Unearned Discount in the amount of $200,000, (iii) a note payable to
Coffman Oil Company, Inc. in the approximate amount of $25,406, (iv) a note
payable to Sun Trust Bank in the approximate amount of $389,387, (v) a note
payable to First American bank in the approximate amount of $140,000, (vii) real
estate taxes in the approximate amount of $85,529 and (viii) pay cash to the
Company in the sum of $300,000. As a result of the divestitures and the
assumption of numerous debts of the Company, the Company experienced a loss on
the sales of approximately ($22,966.27). These transactions decreased the
liabilities of the Company by approximately $1,137,935. As of August 19, 1998,
these assumptions had been completed.
In August 1998, Mr. Thomas guaranteed the payment of indebtedness of the
Company to Infinity under the A Note referred to in Management's Discussion and
Analysis of Financial Condition and Results of Operations. In fiscal 1997, the
Company paid Mr. Thomas fees for acting as guarantor on Company indebtedness of
$81,280 (one percent of the amount guaranteed).
Transactions involving Dwight S. Thomas. During 1997, the Company sold a
location (Cookeville) to Dwight S. Thomas, the Company's Secretary and a member
of the Company's Board of Directors. The purpose of the sale was to raise
working capital. The location was sold for $516,000 (it had an M.A.I. appraised
value of $536,000) and
36
<PAGE> 37
resulted in net proceeds to the Company of approximately $152,385. The location
was in need of capital improvements, including approximately $80,000 worth of
environmental updates of underground petroleum storage tanks necessary to meet
1998 standards. In exchange for the sale, Dwight Thomas agreed to the
cancellation of his employment contract with the Company dated December 2, 1996.
The foregoing transactions were all approved by the votes of directors not
involved in the applicable related transaction, and the Board believes that the
transactions were on no less favorable terms than would have been available if
the parties were unaffiliated.
37
<PAGE> 38
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------
2.1 -- Agreement and Plan of Merger, dated March 2, 1993,
between Calibur Systems, Inc. and United Petroleum
Corporation, filed as Exhibit 2.1 to the Company's Form 8-K
filed with the Commission on April 22, 1993, and
incorporated herein by reference.
2.2 -- Articles of Merger, filed as Exhibit 30 to the Company's
Transition Report on Form 10-KSB for the period from June
30, 1993 to December 31, 1993, and incorporated herein by
reference.
2.3 -- Agreement and Certificate of Merger, by and between
United Petroleum Corporation and United Petroleum Delaware,
filed as Exhibit 3.4 to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1991, and
incorporated herein by reference.
3.1 -- Articles of Incorporation, filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1991, and incorporated herein by reference.
3.2 -- Certificate of Amendment Authorizing Increase in
Capitalization to 50,000,000 shares, filed as Exhibit 3.8
to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1991, and incorporated herein by
reference.
3.3 -- Certificate of Amendment Authorizing 3 for 4 reverse split,
filed as Exhibit 3 to the Company's Transition Report on
Form 10-KSB for the period beginning June 30, 1993 and
ended December 31, 1993, and incorporated herein by
reference.
3.4 -- Certificate of Amendment dated March 14, 1997, filed as
Exhibit 3.10 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996, and
incorporated herein by reference.
3.5 -- Certificate of Designations of Series A Preferred Stock,
filed as Exhibit A to Exhibit 10.11 to the Company's
Current Report on Form 8-K filed with the Commission on May
13, 1997.
3.6 -- Bylaws of the Company, filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-KSB for the year ended
June 30, 1991, and incorporated herein by reference.
3.7 -- Amendment to the Company's Bylaws, filed as Exhibit 3.9 to
the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1991, and incorporated herein by
reference.
10.3 -- Distribution Agreement, between Pennzoil and the Company
filed as Exhibit 10 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1991, and
incorporated hereby by reference.
10.5 -- 1994 Stock Option and Stock Bonus Plan filed as Exhibit
4 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated
herein by reference.
10.6 -- 1995 Amendment to the Stock Option and Stock Bonus Plan
filed as Exhibit 4.1 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994.
10.7 -- License Agreement dated June 29, 1993, between TCS
Systems, Inc. and Calibur Systems, Inc. filed as Exhibit
10.1 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated
herein by reference.
10.10 -- Employment Agreement, between the Company and Michael F.
Thomas filed as Exhibit 10.8 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996,
and incorporated herein by reference.
38
<PAGE> 39
10.11 -- Promissory Note of Strategic Holdings Corporation to the
order of the Company dated October 18, 1996, filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996, and
incorporated herein by reference.
10.12 -- Security Agreement granted by Strategic Holdings
Corporation in favor of the Company dated December 11,
1996, filed as Exhibit 10.9.1 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December
31, 1996, and incorporated herein by reference.
10.13 -- Escrow Agreement dated December 11, 1996 between the
Company and Strategic Holdings Corporation filed as Exhibit
10.9.3 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996, and incorporated
herein by reference.
10.15* -- Amended, Restated and Consolidated Credit Agreement
dated August 5, 1998 between the Company and Infinity.
10.16* -- A Note dated August 5, 1998 by the Company in favor of
Infinity.
10.17* -- B Note dated August 5, 1998 by the Company in favor of
Infinity.
10.18* -- Guaranty dated August 5, 1998 by Michael Thomas in favor of
Infinity.
10.19* -- Amended and Restated Pledge Agreement dated August 5, 1998
between UPET and Infinity.
10.20* -- Amended and Restated Security Agreement dated August 5,
1998 between the Company and Infinity.
10.21 -- Form of Debentures, filed as Exhibit 10.11 to the
Company's Current Report on Form 8-K filed with the
Commission on May 12, 1997 and incorporated herein by
reference.
16.3 -- Letter dated February 20, 1997 from Morton S. Robson to
Larry Felts of Coopers & Lybrand filed as Exhibit 16.1 to
the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995, and incorporated herein by
reference.
16.4 -- Letter dated February 28, 1997 from Coopers & Lybrand to
the Commission filed as Exhibit 16.2 to the Company's
Annual Report on Form 10-K for year ended 12-31-97.
21* -- Subsidiaries of the Company.
23.3 -- Consent of R.W. Coburn, Registered Petroleum Engineer,
filed as Exhibit 23 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997, and
incorporated herein by reference.
27* -- Financial Data Schedule
- ----------
* Filed herewith.
(b) Financial Statements
Balance Sheets
Statement of Income
Statement's of Stockholders' Equity
Statement of Cash Flows
Financial Statement Schedules:
39
<PAGE> 40
Schedule II - Accounts Receivable from
Related Parties,
Underwriters, Promoters,
and Employees other than
Related Parties
Schedule X - Supplementary Income Statement Information
(c) Reports on Form 8-K
1. There were no reports on Form 8-K filed for the three months ended
December 31, 1998.
2. The Company filed a report on Form 8-K on January 19, 1999, under Item
3. Bankruptcy or Receivership, related to the fact that, on January 14, 1999,
United Petroleum Corporation filed a voluntary petition for relief under Chapter
11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware.
The Company also filed a report on Form 8-K on March 7, 1999, under Item 4,
Changes in Registrant's Certifying Accountants, and an amendment to the Form 8-K
on April 6, 1999, in connection with a change in the Company's accountants and
to include the required exhibits.
40
<PAGE> 41
United Petroleum Corporation
and
Subsidiaries
Consolidated Financial Statements
December 31, 1998 and 1997
41
<PAGE> 42
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
I N D E X
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED:
BALANCE SHEET
DECEMBER 31, 1998 F-3
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997 F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998 AND 1997 F-5
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 F-6/7
NOTES TO FINANCIAL STATEMENTS F-8/26
</TABLE>
* * *
F-1
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
United Petroleum Corporation
We have audited the consolidated balance sheet of UNITED PETROLEUM CORPORATION
AND SUBSIDIARIES as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity (deficiency) 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. The consolidated financial statements
of United Petroleum Corporation and Subsidiaries for the year ended December 31,
1997, were audited by other auditors whose report, dated April 14, 1998, on
those statements included an explanatory paragraph describing conditions that
raised substantial doubt about the Company's ability to continue as a going
concern.
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 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Petroleum Corporation and Subsidiaries as of December 31, 1998, and their
results of operations and 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 shown in the consolidated
financial statements, the Company has suffered recurring losses from operations
and, as more fully discussed in Note 4 to the consolidated financial statements,
at December 31, 1998 the Company is in default of certain loans and debentures.
In addition, as discussed in Note 15 to the consolidated financial statements,
on January 14, 1999, United Petroleum Corporation (the "Parent") filed a
voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy
Code and was authorized to continue managing and operating the business as a
debtor in possession subject to the control and supervision of the Bankruptcy
Court. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
J.H. COHN LLP
Roseland, New Jersey
April 9, 1999
F-2
<PAGE> 44
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 78,216
Accounts receivable 106,719
Inventories 171,362
Prepaid expenses and other current assets 50,794
--------------
Total current assets 407,091
--------------
Property and equipment:
Gas and oil properties, net 3,043,240
Premises and equipment, net 5,812,192
--------------
Total 8,855,432
Deferred costs 553,099
Other assets 97,303
Property held for sale 2,945,047
--------------
Total $ 12,857,972
==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 14,224,544
Accounts payable 319,736
Accrued expenses 78,934
Preferred stock dividends payable 2,113,362
Accrued interest on debentures 1,026,030
Accrued interest on Notes A and B 456,099
--------------
Total liabilities 18,218,705
--------------
Minority interest in subsidiary 50,000
--------------
Commitments and contingencies
Stockholders' deficiency:
Cumulative convertible preferred stock; $.01 par value;
10,000,000 shares authorized:
Series A, 7%; 9,912 shares issued and outstanding 99
Series B, 8%; 1,833 shares issued and outstanding 18
Common stock, $.01 par value; 50,000,000 shares authorized;
30,565,352 shares issued and outstanding 305,653
Additional paid-in capital 24,865,373
Accumulated deficit (30,581,876)
--------------
Total stockholders' deficiency (5,410,733)
--------------
Total $ 12,857,972
==============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 45
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Sales $ 6,179,556 $ 9,720,861
Cost of sales 4,793,367 7,333,910
------------ ------------
Gross profit 1,386,189 2,386,951
------------ ------------
Operating expenses:
Selling, general and administrative 3,299,618 3,642,102
Write-downs for asset impairment 741,430 3,697,751
Gain on sale of property and equipment (31,403)
Other 1,047,811
------------ ------------
Totals 4,009,645 8,387,664
------------ ------------
Loss from operations (2,623,456) (6,000,713)
------------ ------------
Other income (expense):
Lease and other income 187,740 73,125
Write-off of loan costs (354,117) (478,548)
Interest expense, including amortization of loan fees
and discount on convertible debentures of $166,457
and $1,357,229 (1,662,364) (2,846,906)
Gain on sale of subsidiary 132,088
------------ ------------
Totals (1,696,653) (3,252,329)
------------ ------------
Loss before income taxes (4,320,109) (9,253,042)
Provision for deferred income taxes 2,885,000
------------ ------------
Net loss (4,320,109) (12,138,042)
Preferred stock dividends (1,626,686) (1,234,555)
------------ ------------
Net loss available to common stockholders $ (5,946,795) $(13,372,597)
============ ============
Basic net loss per common share $ (.20) $ (.71)
============ ============
Basic weighted average number of common shares
outstanding 30,426,352 18,812,739
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 46
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock
--------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 11,828,156 $ 118,281
Conversion of debentures to
Series A and B preferred stock,
net of related cost of issuance,
discounts and fees of $1,703,962 9,912 $ 99 1,833 $ 18
Conversion of debentures to
common stock, net of related
costs of issuance, discounts
and fees of $321,586 7,129,700 71,297
Dividends declared:
Series A preferred stock at 18%
Series B preferred stock at 8%
Issuance of common stock for:
Payment of dividends on
Series A preferred stock 2,998,100 29,981
Payment of interest on debentures 2,770,000 27,700
Services 4,553,600 45,536
Collections on stockholder note
receivable
Net loss
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 9,912 99 1,833 18 29,279,556 292,795
Dividends declared:
Series A preferred stock at
18% and 7%
Series B preferred stock at 8%
Issuance of common stock for
services 1,285,796 12,858
Write-off of stockholder note
receivable
Net loss
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 9,912 $ 99 1,833 $ 18 30,565,352 $ 305,653
============ ============ ============ ============ ============ ============
<CAPTION>
Additional Stockholder
Paid-in Accumulated Note
Capital Deficit Receivable Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 13,696,878 $(11,262,484) $ (1,237,003) $ 1,315,672
Conversion of debentures to
Series A and B preferred stock,
net of related cost of issuance,
discounts and fees of $1,703,962 8,284,721 8,284,838
Conversion of debentures to
common stock, net of related
costs of issuance, discounts
and fees of $321,586 1,492,287 1,563,584
Dividends declared:
Series A preferred stock at 18% (1,160,619) (1,160,619)
Series B preferred stock at 8% (73,936) (73,936)
Issuance of common stock for:
Payment of dividends on
Series A preferred stock 717,900 747,881
Payment of interest on debentures 1,066,146 1,093,846
Services 778,373 823,909
Collections on stockholder note
receivable 49,571 49,571
Net loss (12,138,042) (12,138,042)
------------ ------------ ------------ ------------
Balance, December 31, 1997 26,036,305 (24,635,081) (1,187,432) 506,704
Dividends declared:
Series A preferred stock at
18% and 7% (1,480,024) (1,480,024)
Series B preferred stock at 8% (146,662) (146,662)
Issuance of common stock for
services 16,500 29,358
Write-off of stockholder note
receivable (1,187,432) 1,187,432
Net loss (4,320,109) (4,320,109)
------------ ------------ ------------ ------------
Balance, December 31, 1998 $ 24,865,373 $(30,581,876) $ -- $ (5,410,733)
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 47
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net loss $ (4,320,109) $(12,138,042)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 945,347 1,578,772
Deferred income taxes 2,885,000
Write-downs for asset impairment 741,430 3,697,751
Gain on sale of property and equipment (31,403)
Write-off of receivables 12,423
Common stock issued for services 29,358 823,909
Common stock issued for payment of interest 1,093,846
Gain on sale of subsidiary (132,088)
Changes in operating assets and liabilities:
Accounts receivable 5,658 347,323
Inventories 150,586 312,317
Other current assets 45,207 (302,332)
Accounts payable and accrued expenses 834,019 704,173
------------ ------------
Net cash used in operating activities (1,731,995) (984,860)
------------ ------------
Investing activities:
Acquisition of gas and oil properties (12,500) (57,452)
Acquisition of property and equipment (194,168) (1,646,192)
Proceeds from sale of property and equipment 52,526 522,527
Proceeds from sale of marketable securities 171,944
Proceeds from sale of subsidiary 266,500
------------ ------------
Net cash provided by (used in) investing activities 112,358 (1,009,173)
------------ ------------
Financing activities:
Proceeds from issuance of convertible debentures,
net of discount of $491,666 1,813,425
Payment of issuance cost of debentures (63,425)
Proceeds from short-term borrowings 100,224
Repayments of short-term borrowings (102,395)
Proceeds from issuance of debt 2,109,353 395,895
Principal payments on debt (24,581) (203,270)
Reorganization costs (553,099)
Proceeds from minority interest 200,000
------------ ------------
Net cash provided by financing activities 1,531,673 2,140,454
------------ ------------
Net increase (decrease) in cash (87,964) 146,421
Cash, beginning of year 166,180 19,759
------------ ------------
Cash, end of year $ 78,216 $ 166,180
============ ============
</TABLE>
F-6
<PAGE> 48
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid $ 52,880 $ 757,493
========== ==========
Interest capitalized $ 62,505
==========
Supplemental disclosure of noncash investing and financing
activities:
Sale of retail outlets under debt assumption agreements $4,601,931
==========
Issuance of preferred stock for debentures $8,284,838
==========
Issuance of common stock for the following:
Debentures $1,563,584
==========
Services $ 29,358 $ 823,909
========== ==========
Payment of interest on debentures $1,093,846
==========
Payment of dividends on preferred stock $ 747,881
==========
Purchase of notes payable by related party $4,985,385
==========
Write-off of stockholder note receivable $1,187,432
==========
Forgiveness of payable, in connection with of sale of wells $ 71,208
==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 49
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of significant accounting policies:
Principles of consolidation:
The consolidated financial statements include the accounts of
United Petroleum Corporation (the "Parent") and its wholly-owned
subsidiaries, Calibur Systems, Inc. ("Calibur") and Jackson-United
Petroleum Corporation ("Jackson"), and its majority owned
subsidiaries, CTV Studios, Inc. and UCI Teleport, Inc.
(collectively, the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Business:
The Company's business activities are conducted through the
subsidiaries and are contained within two primary industry
segments (retail operations and oil and gas operations). Calibur
conducts the retail operations through convenience stores, express
lube centers and car washes providing a variety of car wash and
detailing services, gasoline, automotive, food and beverage and
related products throughout eastern Tennessee and northern
Georgia. Jackson is in the business of developing oil and gas
properties and marketing oil and gas production. Jackson's oil and
gas properties are located within the United States, primarily in
eastern Kentucky and western Pennsylvania, and include producing
properties and properties under development. CTV Studios, Inc. and
UCI Teleport, Inc., which was sold in 1998, were formed to conduct
activities in the broadcasting industry. Neither entity had any
operations in 1998 or 1997.
Use of estimates:
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ
from those estimates.
Inventories:
Inventories are stated at the lower of cost or market. Cost of
gasoline sales is determined using the first-in, first-out method.
Cost of convenience store sales is determined using the average
retail cost method.
Revenue recognition:
The Company recognizes revenue as gas is sold or gathered and
marketed to third parties.
F-8
<PAGE> 50
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of significant accounting policies (continued):
Costs of development and expansion activities:
When the Company undertakes significant development and expansion
activities to add new retail outlets, modernize and expand
existing locations, acquire additional gas and oil properties, and
continue development of existing gas and oil properties,
additional costs of staffing and overhead are allocated to these
assets along with an estimate of incremental overhead costs.
Additionally, it is the Company's policy to capitalize the cost of
the estimated time of employees and independent contractors that
are specifically assigned to these activities to the assets under
construction or development. These costs totaled $372,284 in 1997.
No costs were capitalized in 1998.
Property and equipment:
Property and equipment are recorded at cost and are depreciated
and amortized on the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements 15-40 years
Machinery and equipment 6-10 years
Automobiles 3-4 years
</TABLE>
Oil and gas properties:
The Company follows the full cost method of accounting for oil and
gas properties. Accordingly, all costs associated with
acquisition, exploration and development of gas and oil reserves,
including directly related overhead costs, are capitalized.
All capitalized costs of oil and gas properties, including the
estimated future costs to develop proved reserves, are amortized
on the unit-of-production method using estimates of proved
reserves. Investments in unproved properties and major development
projects are not amortized until proved reserves associated with
the projects can be determined or until impairment occurs.
In addition, the capitalized costs are subject to a "ceiling
test," which basically limits such costs to the aggregate of the
"estimated present value," discounted using a 10% rate on future
net revenue from proved reserves, based on current economic and
operating conditions, plus lower of cost or fair market value of
unproved properties.
Capitalized interest:
The Company capitalizes interest on construction in progress and
expenditures made in connection with exploration and development
projects that are not subject to current amortization. Interest is
capitalized only for the period that activities are in progress to
bring these projects to their intended use and is amortized over
the expected life of the related asset.
F-9
<PAGE> 51
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of significant accounting policies (continued):
Deferred reorganization costs:
The Company has incurred costs relating to its Reorganization Plan
under Chapter 11 of the Federal Bankruptcy Code (see Note 15). If
the Reorganization Plan is approved by the Bankruptcy Court, these
costs will be charged to paid-in capital. If the Reorganization
Plan is not approved, the costs will be charged to operations. At
December 31, 1998, deferred reorganization costs amounted to
$553,099.
Debenture discount and debenture issue costs:
Discount and issue costs associated with the convertible
debentures are being amortized over the terms of the related
debentures, based on the amount of outstanding debt, using the
effective interest method. For the years ended December 31, 1998
and 1997, amortization expense relating to debenture discount and
debenture issue costs amounted to $233,000 and $1,787,000,
respectively.
Deferred loan costs:
Deferred loan costs, included in other assets, associated with
various debt issues are being amortized over the terms of the
related debt using the straight-line method. For the years ended
December 31, 1998 and 1997, amortization expense relating to
deferred loan costs amounted to $118,000 and $50,000,
respectively.
Property held for sale:
It is the Company's policy to make available for sale property
considered by management as excessive and no longer necessary for
the operations of the Company. At December 31, 1998, the net book
value of property and equipment classified as held for sale
consists of the following:
<TABLE>
<S> <C>
Wells (see Note 3) $ 650,000
Retail locations, including equipment (see Note 6) 2,295,047
-----------
Total $ 2,945,047
===========
</TABLE>
Income taxes:
The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred income tax assets and
liabilities be computed annually for differences between the
financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based
on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
F-10
<PAGE> 52
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of significant accounting policies (continued):
Stock options:
In accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, the
Company will recognize compensation costs as a result of the
issuance of stock options to employees based on the excess, if
any, of the fair value of the underlying stock at the date of
grant or award (or at an appropriate subsequent measurement date)
over the amount the employees must pay to acquire the stock.
Therefore, the Company will not be required to recognize
compensation expense as a result of any grants of stock options to
employees at an exercise price that is equivalent to or greater
than fair value. The Company will also make pro forma disclosures,
as required by Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), of net
income or loss as if a fair value based method of accounting for
stock options had been applied, if such amounts differ materially
from the historical amounts.
Loss per common share:
The Company presents "basic" and, if applicable, "diluted"
earnings (loss) per common share pursuant to the provisions of
Statement of Financial Accounting Standards No. 128, Earnings per
Share ("SFAS 128") and certain other financial accounting
pronouncements. Basic earnings (loss) per common share is
calculated by dividing net income or loss by the weighted average
number of common shares outstanding during the period. The
calculation of diluted earnings (loss) per common share is similar
to that of basic earnings (loss) per common share, except that the
denominator is increased to include the number of additional
common shares that would have been outstanding if all potentially
dilutive common shares, principally those issuable upon the
conversion of debentures and preferred shares or the exercise of
stock options, were issued during the period.
Only basic net loss per common share amounts have been presented
in the accompanying consolidated statements of operations since
the Company had a net loss in those years and the assumed effects
of either the conversion of debentures and preferred shares or the
exercise of stock options would be anti-dilutive.
Impairment of long-lived assets:
The Company reviews its long-lived assets, including property,
equipment and gas and oil properties for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the
probability that future undiscounted net cash flows, without
interest charges, will be less than the carrying amount of the
assets. Impairment is measured at fair value.
Segment information:
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information, ("SFAS 131") which
requires disclosures for each segment of a business and the
determination of segments based on its internal management
structure.
F-11
<PAGE> 53
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business summary of significant accounting policies (concluded):
Recent pronouncements:
The Financial Accounting Standards Board had issued certain other
pronouncements as of December 31,1998 that will become effective
in subsequent periods; however, management does not believe that
any of those pronouncements will effect any financial accounting
measurements or disclosures the Company will be required to make.
Reclassifications:
Certain accounts in the 1997 consolidated financial statements
have been reclassified to conform to 1998 presentations.
Note 2 - Basis of presentation:
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. However, the Company's securities have been delisted from
the NASDAQ stock market, the Company has suffered recurring losses
from operations and, at December 31,1998, is in violation of
certain loan and convertible debenture covenants. In addition, the
Company was unable to meet its loan and convertible debenture
obligations as they became due (see Note 4). On January 14, 1999,
the Parent filed a petition in the United States Bankruptcy Court
for the District of Delaware seeking relief under Chapter 11 of
the Federal bankruptcy laws (see Note 15). The Parent has
continued, as debtor in possession in Chapter 11, to conduct its
business in the ordinary course, subject to control of the Court.
The Parent intends to propose a Reorganization Plan with its
creditors and stockholders which will provide for the satisfaction
of their respective claims and interests on terms to be agreed
upon with its creditors and stockholders. However, there is no
assurance that the Parent will be able to reach an accommodation
with its creditors and stockholders under Chapter 11.
The Company's ability to continue as a going concern is dependent
upon the Parent's ability to develop a Reorganization Plan
acceptable to its creditors and stockholders, obtain Court
approval of the plan and ultimately, achieve profitable
operations. The consolidated financial statements do not include
any adjustments relating to the recoverability and classifications
of recorded asset amounts or the amounts and classifications of
liabilities that might be necessary should the Company be unable
to continue as a going concern.
F-12
<PAGE> 54
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Property and equipment:
Premises and equipment:
Premises and equipment consist of the following:
<TABLE>
<S> <C>
Land and buildings $ 4,046,174
Leasehold, paving and other improvements 1,049,242
Fixtures and equipment 3,598,547
--------------
Total 8,693,963
Less accumulated depreciation and amortization 2,881,771
--------------
Total $ 5,812,192
==============
</TABLE>
Depreciation and amortization expense for the years ended December
31, 1998 and 1997 was approximately $541,000 and $577,000,
respectively.
Oil and gas properties:
The Company's oil and gas properties are located within the United
States. Acquisition costs include costs incurred to purchase,
lease or otherwise acquire oil and gas properties. Exploration
costs include the costs of geological and geophysical activity,
carrying and retaining undeveloped properties and drilling and
equipping exploratory wells. Development costs include the costs
of drilling and equipping development wells and facilities to
extract, treat and gather and store oil and gas. Costs incurred,
which include amounts that were expensed and capitalized, are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Proved leasehold properties $ 12,500 $ 10,855
Development costs 46,597
Amortization (51,625) (128,021)
------------ ------------
Totals (39,125) (70,569)
Well sold (325,000)
Write-down for impairment (741,430) (3,366,730)
Reclassification of wells available for sale (650,000)
------------ ------------
Net decrease $ (1,755,555) $ (3,437,299)
============ ============
</TABLE>
Capitalized costs for oil and gas exploration and production
activities and the related accumulated amortization are summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Proved properties not subject to amortization $ 3,043,240 $ 3,055,740
Proved properties being amortized 1,929,132
Less accumulated amortization (186,077)
------------ ------------
Net capitalized costs $ 3,043,240 $ 4,798,795
============ ============
</TABLE>
F-13
<PAGE> 55
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Property and equipment (concluded):
Oil and gas properties (concluded):
Due to the sharp decline in the market value of the Company's
shares along with falling prices for natural gas, the Company's
ability to obtain sufficient financing to further develop its oil
and gas properties is limited. Accordingly, the Company suspended
development activities in its oil and gas business segment and has
abandoned certain properties. For the years ended December 31,
1998 and 1997, the Company recorded an asset impairment loss of
$741,430 and $3,366,730, respectively.
In 1997, the Company decided to write-down certain wells to their
fair value of $300,000. In 1998, the Company sold these wells for
approximately $411,000 which consisted of cash of $340,000 and
forgiveness of accounts payable of approximately $71,000. In
connection therewith, the Company incurred expenses of
approximately $34,000 resulting in a gain of $77,000 which is
included in the 1998 consolidated statement of operations.
In November 1998, the Company entered into a contract to sell
sixteen wells (the "Wells") located in Pennsylvania for $650,000.
The net book value of the Wells approximated $1,095,000.
Accordingly, the Company has written down the Wells to $650,000
less costs to sell, which are estimated to be negligible,
resulting in a $445,000 impairment loss which is included in the
1998 consolidated statement of operations. The Wells are
classified as property held for sale in the consolidated balance
sheet at December 31, 1998. Revenue from the Wells for the years
ended December 31, 1998 and 1997 was approximately $115,000 and
$252,000, respectively.
In 1998, based on the Company's financial condition and the
ability of the remaining wells to generate revenue, the Company
abandoned certain other wells which resulted in a write-down of
approximately $296,000 which is included in the 1998 consolidated
statement of operations.
Initial production from the Company's oil and gas properties
commenced in October 1996. Total revenue in 1998 and 1997 amounted
to approximately $115,000 and $292,000, respectively. Related
associated production costs were approximately $13,000 in 1997.
There were no production costs in 1998.
In November 1993, the Company acquired the interest of Jackson
County Gas in certain oil and gas properties comprised of
approximately 33,000 acres situated in Jackson and Rock Castle
Counties, Kentucky. Total capitalized costs approximated
$3,043,000 at December 31, 1998.
F-14
<PAGE> 56
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Long-term debt:
Long-term debt consists of the following:
<TABLE>
<S> <C>
Convertible debentures in default with coupon rates of 6%
and 7%, net of discount of $235,275 $ 6,213,543
Calibur consolidated loan in default ("A" Note). Principal
was due on January 1, 1999 with interest due monthly at
15%, personally guaranteed by a principal stockholder,
secured by the stock of the subsidiaries and collateralized
by all assets of the Company 4,200,000
Consolidated bridge loan in default ("B" Note). Principal
and interest at 15% was due on January 1, 1999, personally
guaranteed by a principal stockholder, secured by the stock
of the subsidiaries and collateralized by all assets of the
Company 2,775,530
U.S. Small Business Administration note payable in monthly
installments of $6,369 including interest at 8% through
July 2019, personally guaranteed by a principal stockholder
and collateralized by certain property 761,383
U.S. Small Business Administration note payable in monthly
installments of $1,863 including interest at 8% through July
1999, personally guaranteed by a principal stockholder and
collaterlized by certain property 154,880
Unsecured note payable in monthly installments of $10,370
including interest at 8% through December 1999, personally
guaranteed by a principal stockholder 119,208
-------------
14,224,544
Less current portion 14,224,544
-------------
Long-term debt $ --
=============
</TABLE>
As the Company is in default under the majority of the
aforementioned debentures and loans, all of the long-term debt is
classified as a current liability at December 31, 1998.
F-15
<PAGE> 57
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Long-term debt (continued):
In 1996, the Company completed a private placement of convertible
debentures (the "Debentures"). Through the offering, the Company
sold $27,500,000 Debentures generating net proceeds of
approximately $18,000,000 after deducting debt discount and
issuance costs. These Debentures would have expired through
October 1998 and would have provided for interest at 6% and 7%,
payable quarterly. The Debentures were convertible into common
stock at the holders option after passage of the statutory holding
period (generally forty-five days from the date of issuance).
After one year from the date of issuance, the Company could
require conversion of unconverted Debentures. The number of shares
of common stock issuable upon conversion was based on the average
of the closing bid prices as quoted by NASDAQ for the five days
prior to the election to convert.
On April 30, 1997, the Company and certain Debenture holders (the
"Holders") entered into a letter agreement (the "Letter
Agreement") whereby the Company and the Holders agreed to modify
certain terms of the Debentures in settlement of disputes. The
Letter Agreement reduced the face amount of the Debentures by 10%
and increased the interest rates to 18% for a period of one year.
In addition, the Letter Agreement provided for the conversion of
$9,912,000 of Debentures into 9,912 shares of newly authorized 18%
Series A cumulative convertible preferred stock, the conversion of
$623,200 of Debentures into 1,246,400 shares of common stock, and
the issuance of 860,774 shares of common stock in settlement of
all unpaid interest. After one year, at the option of the
preferred stockholders and the Holders, the dividend rate shall
either be reduced from 18% to 7% or the preferred stockholders may
surrender 10% of the preferred stock to the Company and continue
to receive a dividend of 18%. In April 1998, the preferred
stockholders elected to reduce the interest and dividend rates to
7%.
The principal reduction of the Debentures amounted to $1,495,680
which was accounted for in accordance with Statement of Financial
Accounting Standards No. 15, Accounting by Debtors and Creditors
for Troubled Debt Restructurings, ("SFAS 15"). SFAS 15 generally
requires that if the carrying amount of the debentures does not
exceed future cash payments, the carrying amount of the debentures
should not be adjusted and no gain will be recognized but a new
effective interest rate is computed and amortized over the life of
the debentures.
On April 30, 1997, two of the Debentures with carrying values of
$3,549,120 were amended and restated to provide for a maturity
date of September 1, 1999 and interest rates identical to the
terms in the above mentioned Letter Agreement.
In July 1997, in settlement of a claim brought against the Company
in 1996, the plaintiff converted $1,833,333 of Debentures into
1,833 shares of Series B Cumulative Convertible Preferred Stock.
F-16
<PAGE> 58
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Long-term debt (concluded):
During 1997, the Company issued two additional convertible
debentures totaling $2,241,666 generating net proceeds of
$1,750,000 after deducting debt discount and debt issuance costs
of $491,666. The debentures provide for payments of interest
ranging from 6% to 18%. One debenture matures on September 1, 1999
and the other debenture was scheduled to mature on February 28,
1998.
On April 15, 1998, the Company received a $750,000 bridge loan
from a preferred stockholder. In June 1998, the preferred
stockholder purchased an aggregate of eleven secured loans to
Calibur totaling $4,985,385 from the original lenders. On August
5, 1998, the Company received an additional bridge loan from the
preferred stockholder which provided for additional financing
totaling $1,236,616. On August 5, 1998, the preferred stockholder
and the Company agreed to refinance and consolidate the loans into
the Consolidated Credit Agreement (the "Credit Agreement"). The
Credit Agreement is divided into the A Note and the B Note. Both
notes were scheduled to mature on January 1, 1999 and originally
provided for interest at 12%. The interest on the A Note was to be
paid monthly and the interest on the B Note was to be paid on
January 1, 1999. The Company is presently in default under the
terms of the Credit Agreement and, as provided in the Credit
Agreement, in the event of default, interest is to be computed at
15%.
Note 5 - Provision for income taxes:
The provision for deferred income taxes in 1997 consists of the
following:
<TABLE>
<S> <C>
Federal $ 2,972,100
State (credit) (87,100)
------------
Total $ 2,885,000
============
</TABLE>
The provision for income taxes in 1998 and 1997 differs from the
amount computed using the Federal statutory rate of 34% as a
result of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Tax at Federal statutory rate (34)% (34)%
State income taxes, net of Federal tax (4) 1
Reversal of deferred tax assets 64
Valuation allowance 38
------ -----
Effective tax rate --% 31%
====== =====
</TABLE>
F-17
<PAGE> 59
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Provision for income taxes (concluded):
At December 31, 1998, deferred tax assets are attributable to the
following:
<TABLE>
<S> <C>
Depreciation $ 437,000
Intangible drilling costs 1,439,000
Net operating loss carryforwards 9,133,000
Less valuation allowance (11,009,000)
--------------
Total $ --
==============
</TABLE>
At December 31, 1998, the Company has Federal and state net
operating loss carryforwards of approximately $26,000,000 and
$7,000,000, respectively, which, if unused, will expire through
2018. Due to the potential changes in the ownership of the Company
which might result from the Company's Reorganization Plan, the
utilization of these loss carryforwards may be subject to
substantial annual limitations. Valuation allowances have been
recorded since it is more likely than not the Company will not
realize all of the tax benefits.
Note 6 - Commitments:
Leases:
The Company leases some of its retail locations and corporate
headquarters under operating leases which expire in years between
2001 and 2010. Three of the leases provide for two consecutive
five year renewal options, one lease provides for two consecutive
ten year renewal options and one lease is in its first five year
renewal option with four consecutive five year renewal options
remaining. Most of the leases require the Company to pay operating
expenses.
Future minimum lease payments in each of the five years subsequent
to December 31, 1998 and in the aggregate are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ -------------
<S> <C>
1999 $ 270,000
2000 262,000
2001 245,000
2002 221,000
2003 221,000
Thereafter 1,148,000
-----------
Total $ 2,367,000
===========
</TABLE>
Rent expense amounted to $353,408 and $278,124 in 1998 and 1997,
respectively.
F-18
<PAGE> 60
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Commitments (concluded):
Leases (concluded):
In 1998, the Company entered into lease agreements for two of its
retail locations which grant the lessee the option to purchase the
underlying premises throughout the lease term. One of the leases
expires in May 1999 while the other lease expires in June 2003 and
contains three consecutive five year renewal options. At December
31, 1998, premises and equipment totaling $2,295,047 has been
recorded as property available for sale (see Note 1).
Future minimum lease payments to be received under these leases
are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ---------
<S> <C>
1999 $ 113,150
2000 72,000
2001 72,000
2002 72,000
2003 30,000
----------
Total $ 359,150
==========
</TABLE>
Rent income amounted to approximately $100,000 in 1998.
Employment agreements:
In 1996, the Company entered into employment agreements with both
its Chief Financial Officer and Chief Executive Officer which will
expire in September 2001. Compensation under these agreements
aggregated approximately $325,000 in 1998 and will be
approximately $225,000 annually thereafter.
Note 7 - Related party transactions:
On July 1, 1997, the Company entered into a five year agreement
with a related corporation engaged in manufacturing and
distribution which is controlled by the Company's Chief Executive
Officer. The agreement provides for the Company to purchase
exclusively, in areas served by the related corporation, its
gasoline inventories at a price of $.01 per gallon above cost plus
freight. For the years ended December 31, 1998 and 1997, purchases
under this agreement were approximately $989,000 and $525,000,
respectively. During the year ended December 31, 1997,
transactions between the Company and the related corporation also
included equipment sales, chemicals, supplies and certain ongoing
construction activities conducted for the Company by the related
corporation. In 1997, equipment sales and construction activities
and repairs and maintenance were approximately $258,000 and
$323,000, respectively. Amounts included in accounts payable
approximated $19,000 as of December 31, 1998. There were no
construction activities in 1998.
F-19
<PAGE> 61
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Related party transactions (concluded):
During the year ended December 31, 1997, the Company sold certain
existing locations to its Chief Executive Officer and to a member
of its Board of Directors. The Company recognized a gain of
$248,456 on the sale of a retail location to the board member in
exchange for his assumption of related debt of $356,957 and the
payment of $152,385 in cash. The Company recognized a net loss of
$38,944 on the sale of another retail location to the Chief
Executive Officer. In exchange for the location, the Company
accepted a receivable of $300,000 from the officer, who also
assumed liabilities of $3,028,744. In 1998, the receivable was
repaid.
Also in 1997, as shown in Note 12, the Company paid the Chief
Executive Officer a fee of $81,280, approximating 1% of the
Company's debt for which he served as guarantor.
During the year ended December 31, 1997, the Company abandoned
certain leasehold improvements on property the Company leased from
its Chief Executive Officer. The Company recognized a loss of
$236,577 on the abandonment.
In 1996, the Chief Executive Officer entered into certain lease
agreements with the Company which provided for an aggregate
monthly rental of $27,000. In 1997, some of the leases, by mutual
agreement, were terminated. In 1998, the Company relocated its
corporate headquarters and terminated the remaining lease
agreement with the Chief Executive Officer. For the years ended
December 31, 1998 and 1997, rent expense paid to the Chief
Executive Officer approximated $22,000 and $177,000, respectively.
Note 8 - Sale of subsidiary:
In January 1998, the Company sold UCI Teleport, Inc. for
approximately $266,000, net of expenses, resulting in a gain of
approximately $132,000.
Note 9 - Stock options:
The Company has a stock option plan (the "Plan") that provides for
the granting of incentive and nonqualified options to selected key
employees, officers, directors and consultants.
Options granted to employees are nontransferable and are for both
active shares and restricted shares that carry continuing legal
restrictions on transfer upon exercise of the options. Generally,
the options are exercisable upon grant date with expiration dates
ranging from five to ten years from date of grant. There were no
options granted in 1998.
F-20
<PAGE> 62
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Stock options (concluded):
Activity in the Plan is as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------- ----------------------------------------------
Number of Number of
Options Price Average Options Price Average
--------------- ------------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 3,016,608 $ .26-$1.00 $ .34 2,200,004 $2.04-$4.06 $ 2.47
Original options that
were canceled due
to repricing (1,816,668) $2.04-$4.06
Options granted due
to repricing 1,816,668 $ .26-$1.00
Options granted 1,200,000 $ .26-$1.00 .47
Options canceled (383,336) $.38-$3.625 2.25
------------- -------------
Options outstanding,
end of year 3,016,668 $ .26-$1.00 $ .34 3,016,668 $ .26-$1.00 $ .34
============= =============
</TABLE>
The Company has elected to make pro forma disclosures, as required
by Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"), of net loss as if a
fair value based method of accounting for stock options had been
applied if such pro forma amounts differ materially from the
historical amounts. Therefore, the Company accounts for stock
options in accordance with the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees,
and recognize compensation costs as a result of the issuance of
stock options based on the excess, if any, of the fair value of
the underlying stock at the date of grant (or at an appropriate
subsequent measurement date) over the amount the employee must pay
to acquire the stock.
The compensation cost, pro forma loss and loss per common share
for 1998 and 1997 determined using a fair value based method of
accounting for the stock options granted in 1997, as required by
SFAS 123, would not differ materially from the corresponding
historical amounts.
Note 10- Stockholders' equity:
In March 1997, the Company amended its charter by authorizing up
to 10,000,000 shares of $.01 par value preferred stock issuable as
Series A cumulative convertible preferred stock ("Series A") and
Series B cumulative convertible preferred stock ("Series B") each
having a liquidation preference of $1,000 per share. At December
31, 1998 and 1997, the Company has outstanding 9,912 shares of
Series A and 1,833 shares of Series B, with a stated liquidation
preference value of $9,912,000 and $1,833,000, respectively.
F-21
<PAGE> 63
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10- Stockholders' equity (concluded):
Dividends on the Series A, at the option of the Company, are
payable in cash or shares of common stock quarterly at 7%.
Dividends on the Series B, at the option of the Company, are
payable in cash or stock quarterly at 8%. The shares of the Series
A and Series B are on par with each other but rank senior to
common stock.
Series A and Series B are convertible into shares of the Company's
common stock, at the preferred stockholder's option, based on the
liquidation preference plus any unpaid or accrued dividends
divided by a conversion price up to 1/13 and 1/15, respectively,
of the stated value of all shares issued to such holder in each
calendar month, on a cumulative basis, commencing July 1, 1997.
The conversion price for the Series A and B is computed based on
the greater of the average market price for the five consecutive
trading days immediately preceding the conversion date or $1.00
(the fixed conversion price at December 31, 1998) not to exceed
the ceiling price which is generally $3.00. Furthermore, at the
option of the Company, any Series A which is outstanding on
October 10, 1999 may be converted into shares of common stock at
the mandatory conversion price as defined in the Letter Agreement.
Any Series B which is outstanding on October 10, 2000 at the
option of the Company, may be converted into shares of common
stock at the mandatory conversion price as defined in the Letter
Agreement.
On April 30, 1997, $9,912,000 of the convertible debentures were
converted into 9,912 shares of Series A. In addition, 1,833 shares
of Series B were issued in connection with the conversion of
$1,833,333 of convertible debentures in settlement of litigation
with a debenture holder (see Note 4).
During the year ended December 31, 1997, 2,998,100 shares of
common stock were issued in lieu of payment of $747,881 of
dividends on the Series A; 2,770,000 shares of common stock were
issued in lieu of payment of $1,093,846 of interest on the
convertible debentures; 4,553,600 shares of common stock were
issued for $823,909 of services rendered; and 7,129,700 shares of
common stock, net of related cost of issuance, discounts and fees
of $321,586, were issued upon the conversion of $1,900,000 of
convertible debentures.
In connection with Letter Agreement (see Note 4), limitations were
placed on the maximum number of shares of common stock which the
group members, as defined in the Letter Agreement, may receive
with respect to any conversion of convertible debentures or
preferred shares. In addition, voting rights shall be limited to
the extent necessary that no preferred stockholder or group of
affiliated preferred stockholders may vote at any one time more
than 4.99% of the total common shares.
In December 1997, the Company's securities were delisted on the
NASDAQ stock market thereby creating events of default under the
forementioned agreements.
During the year ended December 31, 1998, 1,285,796 shares of
common stock were issued for $29,358 of services rendered.
During the year ended December 31, 1998, the Company wrote off a
stockholder note receivable in the amount of $1,187,432 relating
to the issuance of shares of the Company's common stock prior to
1997.
F-22
<PAGE> 64
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11- Segment and related information:
The Company operates two reportable segments which are comprised
of the retail segment which operates the Company's convenience
stores, express lube and car wash operations, and the oil and gas
segment, which is comprised of oil and gas properties. In 1998,
the Company entered into a contract to sell its remaining wells
for $650,000. As a result of the contract to sell, the Company has
classified the wells as available for sale property.
The accounting policies of the reportable segments are the same as
those described in Note 1. The Company evaluates the performance
of its operating segments based on sales and loss from operations.
Summarized financial information concerning the Company's
reportable segments is shown in the following table:
<TABLE>
<CAPTION>
Retail Oil and Gas Corporate Total
-------------- -------------- -------------- --------------
1998:
<S> <C> <C> <C> <C>
Sales $ 6,064,357 $ 115,199 $ 6,179,556
Segment loss (757,154) (734,285) $ (1,132,017) (2,623,456)
Total assets 8,441,736 3,739,719 676,517 12,857,972
Capital expenditures 185,762 12,500 8,406 206,668
Depreciation and
amortization on
property and equip-
ment 540,767 51,625 592,392
</TABLE>
<TABLE>
<CAPTION>
Retail Oil and Gas Corporate Total
-------------- -------------- -------------- --------------
1997:
<S> <C> <C> <C> <C>
Sales $ 9,428,519 $ 292,342 $ 9,720,861
Segment loss (129,944) (3,339,528) $ (2,531,241) (6,000,713)
Total assets 9,178,715 4,872,010 650,259 14,700,984
Capital expenditures 1,637,814 57,452 8,378 1,703,644
Depreciation and
amortization on
property and equip-
ment 572,241 133,385 4,764 710,390
</TABLE>
Note 12- Other expenses:
Other expenses in 1997 consist of the following:
<TABLE>
<S> <C>
Consulting fees $ 966,531
Guarantee fees (see Note 7) 81,280
--------------
Total $ 1,047,811
==============
</TABLE>
F-23
<PAGE> 65
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12- Other expenses (concluded):
In its efforts to obtain additional capital for its operations,
the Company engaged brokers, investment bankers and other
consultants to assist in obtaining financing and pursuing mergers
and acquisitions. $823,909 of these expenses were paid via the
issuance of 4,553,625 shares of the Company's common stock in
1997.
Note 13- Contingencies:
In June 1996, the Company engaged TAJ Global Equities ("TAJ") to
act as the underwriter for a planned $20,000,000 offering of the
Company's common stock. TAJ and Strategic Holdings, Inc.
("Strategic") also acted as consultants to the Company in
connection with the offering and sale of the convertible
debentures. The planned $20,000,000 offering was subsequently
withdrawn.
During the last two quarters of 1996, unusual and significant
short selling occurred in the Company's common stock. This
activity caused the Company to believe that purchasers of the
debentures were involved in short sales in violation of the terms
of the subscription agreements executed with the Company. The
short sales activity caused the Company's stock prices to fall
significantly. The Company's Board of Directors therefore
authorized the purchase in the open market of up to 1,000,000
shares of the Company's common stock in an attempt to protect
stockholders' interests.
The Company engaged TAJ for this purpose and initially remitted
approximately $1,800,000 to TAJ for the purpose of acquiring
shares. The Company believes 117,000 shares at an approximate cost
of $300,000 were initially purchased by TAJ for the Company, but
the trade was soon thereafter canceled with the Company ultimately
having no position in its stock. However, the Company learned that
TAJ did purchase a significant number of shares (estimated at
approximately 3,200,000 shares) for either its own account or
customers' accounts and the Company believes some portion of those
shares were subsequently resold by TAJ.
It is the Company's position that TAJ acted without authority in
the timing and volume of the share acquisitions. Strategic is one
of the customers for which TAJ acquired shares. Strategic advised
the Company that TAJ was not expressly authorized to acquire the
Company's shares on its behalf. The Company was also advised that
TAJ's acquisitions of the Company's shares were placed through its
clearing broker, National Financial Service Corporation
("National"), and were not paid for. National advised the Company
that if it did not advance to TAJ and Strategic the funds
necessary to cover the unpaid trades, that it would liquidate its
position in the Company's shares, causing a tremendous fall in the
price of the Company's common stock and severe losses to its
stockholders. In response to National's communication, the Company
advanced an additional $1,617,959 and $7,382,703 as payment for
the TAJ and Strategic respective shares.
F-24
<PAGE> 66
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13- Contingencies (concluded):
The total cost to the Company for these transactions was
approximately $11,000,000 which was charged to operations in 1996.
As a result of this matter, the Company has filed an action against
TAJ and National and certain individuals alleging conspiracy to
engage in a course of misconduct intended to defraud the Company,
conversion, unjust enrichment, breach of fiduciary duty and
associated causes of action and claiming compensatory and punitive
damages in excess of $100,000,000. However, the Company does not
have sufficient funds to pursue the litigation.
In October 1998, an action was brought against the Company by
Strategic seeking damages of approximately $550,000 arising from
the Company's alleged breach of an agreement. The Company believes
the claims are without merit. If Strategic's claim are determined
to have merit, Strategic would have a general unsecured claim in
the Company's bankruptcy proceedings.
In addition, the Company is a party to various class action
lawsuits brought against certain debentureholders and stockholders
alleging that the Company is liable for claims sought by the
plaintiffs. The Company believes the plaintiffs are stayed from
pursuing these matters due to the bankruptcy proceedings.
The Company is subject to extensive and evolving Federal, state and
local environmental laws and regulations that have been enacted in
response to technological advances and the public's increased
concern over environmental issues. As a result of changing
governmental attitudes in this area, management anticipates that
the Company will continually modify or replace facilities and alter
methods of operation. The majority of the expenditures necessary to
comply with the environmental laws and regulations are made in the
normal course of business.
The Company participates in a Superfund (the "Superfund")
established to clean-up environmental problems associated with
petroleum caused contamination. Coverage under the Superfund is
conditional on the Company's continued compliance with all Federal
and state regulations regarding the sale and underground storage of
petroleum products. Under the terms of the Superfund program, the
Company's liability is limited to $20,000 per incident, per
location. The Company carries no insurance with respect to
environmental claims not covered by the Superfund. To the best of
its knowledge, the Company is in compliance in all material
respects with laws and regulations affecting its operations.
In addition, the Company is a party to various other legal
proceedings generally incidental to its business and primarily
related to employee matters. The Company does not believe that any
of these lawsuits will have a materially adverse effect on its
consolidated financial position or results of operations.
F-25
<PAGE> 67
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14- Fair value of financial instruments:
As discussed in Note 15, on January 14, 1999, the Parent filed a
petition for relief under Chapter 11 of the Federal bankruptcy laws
in the United States Bankruptcy Court for the District of Delaware.
Accordingly, the fair value of financial instruments cannot
currently be determined.
Note 15- Subsequent event:
On January 14, 1999, the Parent filed a petition for relief under
Chapter 11 of the Federal bankruptcy laws in the United States
Bankruptcy Court for the District of Delaware. The petition for
relief does not include its two operating subsidiaries, Calibur and
Jackson. However, as shown in Note 4, all assets of the Parent,
including the common stock of the subsidiaries, are pledged as
collateral for the debts of the Parent. Under Chapter 11, certain
claims against the Parent in existence prior to the filing of the
petition for relief under the Federal bankruptcy laws are stayed,
while the debtor continues business operations as a debtor in
possession. Additional claims (liabilities subject to compromise)
may arise subsequent to the filing date resulting from rejection of
executory contracts, including leases, and from the determination
by the Bankruptcy Court (or agreed to by parties in interest) of
allowed claims for contingencies and other disputed amounts.
* * *
F-26
<PAGE> 68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
May 28, 1999 on its behalf by the undersigned thereunto duly authorized.
UNITED PETROLEUM CORPORATION
(Registrant)
By: /s/ Michael F. Thomas
Michael F. Thomas, President
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in their capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Michael F. Thomas
- ---------------------------------- Chief Executive Officer May 28, 1999
Michael F. Thomas and Director
/s/ Dwight S. Thomas
- ---------------------------------- Secretary, Treasurer May 28, 1999
Dwight S. Thomas and Director
/s/ Walter L. Helton
- ---------------------------------- Director May 28, 1999
Walter L. Helton
/s/ Eugenio Martinez
- ---------------------------------- Director May 28, 1999
Eugenio Martinez
May 28, 1999
- ---------------------------------- Director
Antonio Julio Gimenez
- ---------------------------------- Director
Steven Bauer
</TABLE>
<PAGE> 69
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
2.1 -- Agreement and Plan of Merger, dated March 2, 1993,
between Calibur Systems, Inc. and United Petroleum
Corporation, filed as Exhibit 2.1 to the Company's Form 8-K
filed with the Commission on April 22, 1993, and
incorporated herein by reference.
2.2 -- Articles of Merger, filed as Exhibit 30 to the Company's
Transition Report on Form 10-KSB for the period from June
30, 1993 to December 31, 1993, and incorporated herein by
reference.
2.3 -- Agreement and Certificate of Merger, by and between
United Petroleum Corporation and United Petroleum Delaware,
filed as Exhibit 3.4 to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1991, and
incorporated herein by reference.
3.1 -- Articles of Incorporation, filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1991, and incorporated herein by reference.
3.2 -- Certificate of Amendment Authorizing Increase in
Capitalization to 50,000,000 shares, filed as Exhibit 3.8
to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1991, and incorporated herein by
reference.
3.3 -- Certificate of Amendment Authorizing 3 for 4 reverse split,
filed as Exhibit 3 to the Company's Transition Report on
Form 10-KSB for the period beginning June 30, 1993 and
ended December 31, 1993, and incorporated herein by
reference.
3.4 -- Certificate of Amendment dated March 14, 1997, filed as
Exhibit 3.10 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996, and
incorporated herein by reference.
3.5 -- Certificate of Designations of Series A Preferred Stock,
filed as Exhibit A to Exhibit 10.11 to the Company's
Current Report on Form 8-K filed with the Commission on May
13, 1997.
3.6 -- Bylaws of the Company, filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-KSB for the year ended
June 30, 1991, and incorporated herein by reference.
3.7 -- Amendment to the Company's Bylaws, filed as Exhibit 3.9 to
the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1991, and incorporated herein by
reference.
10.3 -- Distribution Agreement, between Pennzoil and the Company
filed as Exhibit 10 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1991, and
incorporated hereby by reference.
10.5 -- 1994 Stock Option and Stock Bonus Plan filed as Exhibit
4 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated
herein by reference.
10.6 -- 1995 Amendment to the Stock Option and Stock Bonus Plan
filed as Exhibit 4.1 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994.
10.7 -- License Agreement dated June 29, 1993, between TCS
Systems, Inc. and Calibur Systems, Inc. filed as Exhibit
10.1 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated
herein by reference.
10.10 -- Employment Agreement, between the Company and Michael F.
Thomas filed as Exhibit 10.8 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996,
and incorporated herein by reference.
</TABLE>
<PAGE> 70
<TABLE>
<S> <C> <C>
10.11 -- Promissory Note of Strategic Holdings Corporation to the
order of the Company dated October 18, 1996, filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996, and
incorporated herein by reference.
10.12 -- Security Agreement granted by Strategic Holdings
Corporation in favor of the Company dated December 11,
1996, filed as Exhibit 10.9.1 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December
31, 1996, and incorporated herein by reference.
10.13 -- Escrow Agreement dated December 11, 1996 between the
Company and Strategic Holdings Corporation filed as Exhibit
10.9.3 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996, and incorporated
herein by reference.
10.15* -- Amended, Restated and Consolidated Credit Agreement
dated August 5, 1998 between the Company and Infinity.
10.16* -- A Note dated August 5, 1998 by the Company in favor of
Infinity.
10.17* -- B Note dated August 5, 1998 by the Company in favor of
Infinity.
10.18* -- Guaranty dated August 5, 1998 by Michael Thomas in favor of
Infinity.
10.19* -- Amended and Restated Pledge Agreement dated August 5, 1998
between UPET and Infinity.
10.20* -- Amended and Restated Security Agreement dated August 5,
1998 between the Company and Infinity.
10.21 -- Form of Debentures, filed as Exhibit 10.11 to the
Company's Current Report on Form 8-K filed with the
Commission on May 12, 1997 and incorporated herein by
reference.
16.3 -- Letter dated February 20, 1997 from Morton S. Robson to
Larry Felts of Coopers & Lybrand filed as Exhibit 16.1 to
the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995, and incorporated herein by
reference.
16.4 -- Letter dated February 28, 1997 from Coopers & Lybrand to
the Commission filed as Exhibit 16.2 to the Company's
Annual Report on Form 10-K for year ended December 31,
1997.
21* -- Subsidiaries of the Company.
23.3 -- Consent of R.W. Coburn, Registered Petroleum Engineer,
filed as Exhibit 23 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997, and
incorporated herein by reference.
27* -- Financial Data Schedule
</TABLE>
- ----------
* Filed herewith.
<PAGE> 1
EXHIBIT 10.15
AMENDED, RESTATED AND CONSOLIDATED CREDIT AGREEMENT, dated as of August
5, 1998, among United Petroleum Corporation, a Delaware corporation ("UPET"),
Calibur Systems, Inc., a Tennessee corporation ("Calibur") and Jackson-United
Petroleum Corporation, a Kentucky corporation ("Jackson-United") (each a
"Borrower" and, collectively, the "Borrowers") and Infinity Investors Limited, a
Nevis West Indies corporation (the "Lender").
W I T N E S S E T H :
WHEREAS, on June 5, 1998 and June 8, 1998, the Lender purchased an
aggregate of eleven separate secured loans to Calibur as listed on Schedule I
(the "Existing Calibur Secured Loans") from the original lenders in the
aggregate payoff amount as of August 5, 1998 of $4,985,802.88;
WHEREAS, on April 15, 1998 the Lender made a $750,000 bridge loan (the
"Existing Bridge Loan") to UPET which has accrued interest in the amount
$27,580.64 as of August 5, 1998;
WHEREAS, the Lender intends to provide an additional bridge loan (the
"Additional Bridge Loan") to the Borrowers in the amount of $1,236,616.48;
WHEREAS, the Lender and the Borrowers desire to amend and restate the
various loan obligations between the Borrowers and the Lender by creating this
single amended, restated and consolidated credit agreement which shall set forth
and govern the rights and obligations of the parties with respect to the
Existing Calibur Secured Loans, the Existing Bridge Loan and the Additional
Bridge Loan; and
WHEREAS, subject to and upon the terms and conditions herein set forth,
the Lender is willing to make available to the Borrowers the credit facility
provided for herein;
NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter contained, the parties hereto hereby agree as follows:
Section 1. Definitions and Principles of Construction.
1.1 Defined Terms. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined, except as otherwise provided):
"A Note" shall have the meaning provided in Section 2.4.
"Additional Bridge Loan" shall have the meaning provided to such term
in the recitals hereto.
"Affiliate" shall mean, with respect to any person, any other person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such person. A person shall be deemed to control another
person if such person possesses, directly or indirectly,
<PAGE> 2
the power to direct or cause the direction of the management and policies of
such other person, whether through the ownership of voting securities, by
contract or otherwise.
"Agreement" shall mean this Amended, Restated and Consolidated Credit
Agreement, as modified, supplemented or amended from time to time.
"B Note" shall have the meaning provided in Section 2.4.
"Borrowers" shall have the meaning provided in the first paragraph of
this Agreement.
"Borrowing" shall mean the borrowing of the Consolidated Loans from the
Lender on the Closing Date, or on any date thereafter that Lender makes an
advance to a Borrower hereunder.
"Business Day" shall mean for all purposes any day except Saturday,
Sunday and any day which shall be in New York, a legal holiday or a day on which
banking institutions are authorized or required by law to be closed.
"Calibur Consolidated Loan" shall have the meaning provided in Section
2.1.
"Capital Expenditures" shall have the meaning provided in Section 7.4.
"Cash Collateral Account" shall mean the bank account established and
maintained pursuant to the Cash Collateral Agreement into which all deposits by
the Borrowers shall be made for as long as there are any Obligations which have
not been satisfied in full.
"Cash Collateral Agreement" shall have the meaning provided in Section
4.1(f).
"Cash Equivalents" shall mean, as to any person, (i) securities issued
or directly and fully guaranteed or insured by the United States or any agency
or instrumentality thereof (provided that the full faith and credit of the
United States is pledged in support thereof) having maturities of not more than
six months from the date of acquisition, (ii) time deposits, certificates of
deposit and bankers' acceptances with maturities of not more than six months
from the date of acquisition by such person of any commercial bank having, or
which is the principal banking subsidiary of a bank holding company having, a
long-term unsecured debt rating of at least "A" or the equivalent thereof from
Standard & Poor's Corporation or "A2" or the equivalent thereof from Moody's
Investors Service, Inc., (iii) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clause (i)
above entered into with any bank meeting the qualifications specified in clause
(ii) above, (iv) commercial paper issued by any person rated at least A-1 or the
equivalent thereof by Standard & Poor's Corporation or at least P-1 or the
equivalent thereof by Moody's Investors Service, Inc., maturing not more than
six months after the date of acquisition by such person, and (v) investments in
money market funds substantially all the assets of which are comprised of
securities of the types described in clauses (i) through (iv) above.
-2-
<PAGE> 3
"Change of Control" shall mean UPET shall cease to own and control all
of the economic and voting rights associated with all of the outstanding capital
stock of Calibur and Jackson-United.
"Closing Date" shall mean August 5, 1998.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the regulations promulgated and rulings issued thereunder.
Section references to the Code are to the Code, as in effect at the date of this
Agreement and any subsequent provisions of the Code, amendatory thereof,
supplemental thereto or substituted therefor.
"Consolidated Bridge Loan" shall have the meaning provided in Section
2.1.
"Consolidated Loans" shall have the meaning provided in Section 2.1.
"Consolidated Subsidiaries" shall mean, as to any person, all
Subsidiaries of such person which are consolidated with such person for
financial reporting purposes in accordance with GAAP.
"Consultant" shall have the meaning provided in Section 6.10.
"Contingent Obligation" shall mean, as to any person, any obligation of
such person guaranteeing any Indebtedness, leases, dividends or other
obligations ("primary obligations") of any other person (the "primary obligor")
in any manner, whether directly or indirectly, including, without limitation,
any obligation of such person, whether or not contingent, (i) to purchase any
such primary obligation or any property constituting direct or indirect security
therefor, (ii) to advance or supply funds (x) for the purchase or payment of any
such primary obligation or (y) to maintain working capital or equity capital of
the primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (iii) to purchase property, securities or services primarily
for the purpose of assuring the holder of any such primary obligation of the
ability of the primary obligor to make payment of such primary obligation, or
(iv) otherwise to assure or hold harmless the holder of such primary obligation
against loss in respect thereof; provided, however, that the term Contingent
Obligation shall not include endorsements of instruments for deposit or
collection in the ordinary course of business. The amount of any Contingent
Obligation shall be deemed to be an amount equal to the stated or determinable
amount of the primary obligation in respect of which such Contingent Obligation
is made or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof (assuming such person is required to perform
thereunder) as determined by such person in good faith.
"Credit Documents" shall mean and include (i) this Agreement, (ii) the
Notes, (iii) the Guaranty, (iv) the Security Agreements, (v) the Pledge
Agreement, (vi) the Real Property Instruments, (vii) the Cash Collateral
Agreement and (viii) all other documents and instruments executed and/or
delivered in connection with the transactions contemplated hereby.
"Credit Parties" shall mean the Borrowers, the Guarantor and their
respective Consolidated Subsidiaries.
-3-
<PAGE> 4
"Default" shall mean any event, act or condition which, with notice or
lapse of time, or both, would constitute an Event of Default.
"Default Rate" shall have the meaning provided in Section 2.5(b).
"Dollars" and the sign "$" shall each mean freely transferable, lawful
money of the United States.
"Effective Date" shall have the meaning provided in Section 9.9.
"Environmental Claims" shall mean any and all administrative,
regulatory or judicial actions, suits, demands, demand letters, directives,
claims, liens, notices of non-compliance or violation, investigations or
proceedings relating in any way to any violation of, or liability under, any
Environmental Law or any permit issued, or any approval given, under any such
Environmental Law (hereafter, "Claims"), including, without limitation, (a) any
and all Claims by governmental or regulatory authorities for enforcement,
cleanup, removal, response, remedial or other actions or damages pursuant to any
applicable Environmental Law, and (b) any and all Claims by any third party
seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from Hazardous Materials arising from alleged injury
or threat of injury to health, safety or the environment.
"Environmental Law" shall mean any Federal, state, foreign or local
statute, law, rule, regulation, ordinance, code, policy and rule of common law
now or hereafter in effect and in each case as amended, and any judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to the environment, health, safety
or Hazardous Materials, including, without limitation, CERCLA; RCRA; the Federal
Water Pollution Control Act, as amended, 33 U.S.C. ss. 1251 et seq.; the Toxic
Substances Control Act, 15 U.S.C. ss. 7401 et seq.; the Clean Air Act, 42 U.S.C.
ss. 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. ss. 3803 et seq.; the
Oil Pollution Act of 1990, 33 U.S.C. ss. 2701 et seq.; the Occupational Safety
and Health Act, 29 U.S.C. ss. 651 et seq.; and any applicable state and local or
foreign counterparts or equivalents.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, and the regulations promulgated and rulings issued
thereunder. Section references to ERISA are to ERISA, as in effect at the date
of this Agreement, and to any subsequent provisions of ERISA, amendatory
thereof, supplemental thereto or substituted therefor.
"ERISA Affiliate" shall mean any person (as defined in Section 3(9) of
ERISA) which together with the Borrower or any of its Subsidiaries would be
deemed to be a "single employer" within the meaning of Section 414(b), (c), (m)
or (o) of the Code.
"Event of Default" shall have the meaning provided in Section 8.
"Existing Bridge Loan" shall have the meaning provided in the recitals
hereto.
-4-
<PAGE> 5
"Existing Calibur Secured Loan" shall have the meaning provided in the
recitals hereto.
"Existing Indebtedness" shall have the meaning provided in Section 7.3.
"GAAP" shall mean generally accepted accounting principles then
applicable in the United States.
"Governmental Agency" shall mean any ministry, administrative
department, agency, regulatory authority, instrumentality, corporation or other
governmental body, entity or court (including, without limitation, banking and
taxing authorities) of or owned or controlled by, as the case may be, the United
States or any political subdivision thereof.
"Governmental Approval" shall mean any authorization, approval,
consent, license, order, validation, exemption, waiver, opinion of, or
registration, filing or recording with, any Governmental Agency.
"Guarantor" shall mean Mr. Michael F. Thomas.
"Guaranty" shall have the meaning provided in Section 4.1(e).
"Hazardous Materials" means (a) petroleum or petroleum products,
radioactive materials, asbestos in any form that is friable, urea formaldehyde
foam insulation, transformers or other equipment that contain dielectric fluid
containing levels of polychlorinated biphenyls, and radon gas; (b) any
chemicals, materials or substances defined as or included in the definition of
"hazardous substances," "hazardous waste," "hazardous materials," "extremely
hazardous waste," "restricted hazardous waste," " toxic substances," toxic
pollutants," "contaminants," or "pollutants," or words of similar meaning and
regulatory effect, under any applicable Environmental Law; and (c) any other
chemical, material or substance, exposure to which is prohibited, limited or
regulated under applicable Environmental Laws.
"Indebtedness" shall mean, as to any person, without duplication, (i)
all indebtedness (including principal, interest, fees and charges) of such
person (x) evidenced by any notes, bonds, debentures or similar instruments made
or issued by such person, (y) for borrowed money or (z) for the deferred
purchase price of property or services, (ii) the face amount of all letters of
credit issued for the account of such person, (iii) all indebtedness secured by
any Lien on any property owned by such person, whether or not such Indebtedness
has been assumed by such person, (iv) the aggregate amount required to be
capitalized in accordance with GAAP under leases under which such person is the
lessee and (v) all Contingent Obligations of such person.
"Intellectual Property" shall mean any and all licenses, patents,
copyrights, trademarks, trade names, corporate names, business names, trade
styles, service marks, logos, other source or business identifiers, prints and
labels on which any of the foregoing have appeared and appear, designs and
general intangibles of like nature.
"Law" shall mean any constitution, treaty, convention, statute, rule,
law, code, ordinance, decree, order, injunction, rule, regulation, guideline,
interpretation, direction, policy or request
-5-
<PAGE> 6
(whether or not in any such case having the force of law), or judicial,
administrative or arbitral decision.
"Leasehold Properties" of any Person means all right, title and
interest of such Person as lessee or licensee in, to and under leases or
licenses of land, improvements and/or fixtures.
"Lender" shall have the meaning provided in the first paragraph of this
Agreement.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), preference,
priority or other security agreement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any financing or similar statement or notice filed under any
recording or notice statute, and any lease having substantially the same effect
as any of the foregoing).
"Material Adverse Effect" shall mean, with respect to any person, (a)
any material adverse effect on the condition (financial or otherwise), business,
operations, assets, revenues, properties or prospects of such person and, unless
the context indicates otherwise, such person's Consolidated Subsidiaries, taken
as a whole, and/or (b) any adverse effect on the ability of such person to
perform its obligations under any Credit Document to which it is a party.
"Maturity Date" shall mean January 1, 1999.
"Net Income" shall mean, with respect to any person and for any period,
the net income of such person and its Consolidated Subsidiaries for such period.
"Notes" shall have the meaning provided in Section 2.4.
"Notice of Borrowing" shall have the meaning provided in Section 2.2.
"Obligations" shall mean all present and future obligations,
liabilities and other amounts owing to the Lender pursuant to the terms of this
Agreement or any other Credit Document.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA or any successor thereto.
"Permitted Liens" shall have the meaning provided in Section 7.1.
"Person" shall mean any individual, partnership, limited partnership,
joint venture, firm, corporation, association, trust or other enterprise or any
government or political subdivision or any agency, department or instrumentality
thereof.
"Plan" shall mean any multiemployer plan or single-employer plan as
defined in Section 4001 of ERISA, which is maintained or contributed to by (or
to which there is an obligation to contribute of), or at any time during the
five calendar years preceding the date of this Agreement was maintained or
contributed to by (or to which there was an obligation to contribute of), any
Borrower or by a Subsidiary of any Borrower or an ERISA Affiliate.
-6-
<PAGE> 7
"Pledge Agreement" shall have the meaning provided in Section 4.1(g).
"Real Property" of any Person shall mean all the right, title and
interest of such Person in and to land, improvements and fixtures, including
Leasehold Properties.
"Real Property Instruments" shall mean (i) the Amended, Restated and
Consolidated Deed of Trust, dated as of August 5, 1998 between Calibur and the
Lender; (ii) the Amended Restated and Consolidated Leasehold Deed of Trust with
Security Agreement and Assignment of Rents and Leases, dated as of August 5,
1998 between Calibur and the Lender;. (iii) the Amended, Restated and
Consolidated Deed to Secure Debt and Security Agreement, dated as of August 5,
1998 between Calibur and the Lender; (iv) the Modification of Mortgage and
Assignment, dated as of August 5, 1998 between Calibur and the Lender; (v) the
Modification of Mortgage, dated as of August 5, 1998 between Calibur and the
Lender; and (vi) the Modification of Mortgage, dated as of August 5, 1998
between Calibur and the Lender.
"Reportable Event" shall mean an event described in Section 4043(b) of
ERISA with respect to a Plan as to which the 30-day notice requirement has not
been waived by the PBGC.
"Restructuring" shall mean the transactions contemplated by Exhibit I
hereto.
"Scheduled Repayments" shall have the meaning provided in Section 3.2.
"SEC" shall mean the United States Securities and Exchange Commission.
"Security Agreement" shall have the meaning provided in Section 4.1(h).
"Security Agreement Collateral" shall have the meaning provided in
Section 4.1(h).
"Semi-Monthly Budget Certificate" shall have the meaning provided in
Section 2.6.
"Subsidiary" shall mean, as to any person, (i) any corporation more
than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such person and/or one or
more Subsidiaries of such person and (ii) any partnership, association, joint
venture or other entity in which such person and/or one or more Subsidiaries of
such person has more than a 50% equity interest at the time.
"Taxes" shall have the meaning provided in Section 3.4.
"Unfunded Current Liability" of any Plan means the amount, if any, by
which the present value of the accrued benefits under the Plan as of the close
of its most recent plan year, determined in accordance with Statement of
Financial Accounting Standards No. 35, based upon the actuarial assumptions used
by the Plan's actuary in the most recent annual valuation of the Plan, exceeds
the fair market value of the assets allocable thereto, determined in accordance
with Section 412 of the Code.
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"United States" and "U.S." shall each mean the United States of
America.
"Wholly-Owned Subsidiary" shall mean, as to any person, (i) any
corporation 100% of whose capital stock is at the time owned by such person
and/or one or more Wholly-Owned Subsidiaries of such person and (ii) any
partnership, association, joint venture or other entity in which such person
and/or one or more Wholly-Owned Subsidiaries of such person has a 100% equity
interest at such time.
1.2 Principles of Construction. (a) All references to sections,
schedules and exhibits are to sections, schedules and exhibits in or to this
Agreement unless otherwise specified. The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement.
(b) All accounting terms not specifically defined herein shall be
construed in accordance with GAAP in conformity with those used in the
preparation of the financial statements referred to in Section 5.6.
Section 2. Amount and Terms of Credit.
2.1 The Consolidated Loans. Subject to and upon the terms and
conditions set forth herein, the Lender and the Borrowers hereby agree to
consolidate the several loans to Borrowers currently owed to Lender including
the Existing Calibur Secured Loans and the Existing Bridge Loan, with the
Additional Bridge Loan made hereunder into two consolidated loans (i) an
amended, restated and consolidated loan to Borrowers in the amount of $4,200,000
(the "Calibur Consolidated Loan") and (ii) an amended, restated and consolidated
loan to the Borrowers in the amount of up to $2,800,000 (the "Consolidated
Bridge Loan" and together with the Calibur Consolidated Loan the "Consolidated
Loans"), each governed by the terms and conditions of this Agreement. The
Consolidated Loans are available only on the terms and conditions specified
hereunder, and though repaid, in full or in part, at maturity or by prepayment,
may not be reborrowed in full or in part.
2.2 Notice of Borrowing. Whenever the Borrowers desire to make a
Borrowing hereunder, they shall give the Lender at least two Business Days prior
notice, provided that such notice shall be deemed to have been given on a
certain day only if given before 12:00 noon (New York time) on such day. Each
such notice (a "Notice of Borrowing") shall be in the form of Exhibit A,
appropriately completed to specify the aggregate principal amount of the
Consolidated Loans to be made pursuant such Borrowing, the date of such
Borrowing (which shall be a Business Day) and the specific use of the proceeds
from such Borrowing, which shall be in form and substance acceptable to the
Lender. On the Closing Date, the Lender will pay, on behalf of the Borrowers,
the amounts listed on Schedule X hereof from the Consolidated Bridge Loan. Such
payment will not require a Notice of Borrowing. The initial Notice of Borrowing
shall include only the amounts and uses of proceeds listed on Schedule XI
hereto.
2.3 Disbursement of Funds. Subject to the terms and conditions hereof,
no later than 12:00 Noon (New York time) on the date specified in each Notice of
Borrowing, the Lender will
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make available, or cause to be made available, the amount of such Borrowing
which Lender in its sole discretion determines to make available and for the
purposes which the Lender specifies in immediately available funds, net of fees
and costs payable to, or on behalf of, the Lender, to or to the order of the
Borrowers pursuant to wire instructions provided by the Borrowers to the Lender.
2.4 Notes. (a) (i) The Borrowers' joint and several obligations to pay
the principal of, and interest on, the Calibur Consolidated Loan shall be
evidenced by an amended, restated and consolidated promissory note duly executed
and delivered by the Borrowers substantially in the form of Exhibit B-1 (the "A
Note") and (ii) the Borrowers' joint and several obligation to pay the principal
of, and interest on, the Consolidated Bridge Loan shall be evidenced by an
amended, restated and consolidated promissory note duly executed and delivered
by the Borrowers substantially in the form of Exhibit B-2 hereto (the "B Note,"
and together with the A Note, the "Notes") with blanks appropriately completed
in conformity herewith.
(b) The A Note shall (i) be payable by the Borrowers to the order of
the Lender and be dated the Closing Date, (ii) be in a stated principal amount
of $4,200,000, (iii) mature on the Maturity Date, (iv) bear interest as provided
in Section 2.5, (v) be entitled to the benefits of this Agreement and the other
Credit Documents pari passu with the B Note, and (vi) be guaranteed by the
Guarantor.
(c) The B Note shall (i) be jointly and severally payable by the
Borrowers to the order of the Lender and be dated the Closing Date, (ii) be in a
stated principal amount of up to $2,800,000, (iii) mature on the Maturity Date,
(iv) bear interest as provided in Section 2.5, and (v) be entitled to the
benefits of this Agreement and the other Credit Documents pari passu with the A
Note.
(d) The Lender will note on its internal records the amount of each
payment in respect of each of the A Note and the B Note and will prior to any
transfer of either of the Notes endorse on the reverse side thereof the
outstanding principal amount of the Consolidated Loan evidenced thereby. Failure
to make such notation shall not affect any Borrower's obligations in respect of
the Loan.
2.5 Interest. (a) (i) The Borrowers joint and severally agree to pay
interest in respect of the unpaid principal amount of the A Note from the
Closing Date until the maturity thereof (whether by acceleration or otherwise)
at a rate per annum equal to 12%, and (ii) the Borrowers jointly and severally
agree to pay interest in respect of the unpaid principal amount of the B Note
from the Closing Date until the maturity thereof (whether by acceleration or
otherwise) at a rate per annum of 12%.
(b) Upon the occurrence and during the continuance of an Event of
Default, unpaid principal and, to the extent permitted by law, overdue interest
in respect of each of the A Note and the B Note and any other overdue amount
payable by the Borrowers hereunder or under any other Credit Document shall bear
interest at a rate per annum equal to the lesser of (i) 15% and (ii) the highest
rate allowable by law (the "Default Rate").
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(c) Interest shall be payable (i) in respect of the A Note monthly in
arrears, on the first day of each calendar month, and (ii) in respect of each of
the Notes on any repayment or prepayment (on the amount repaid or prepaid), at
maturity (whether by acceleration or otherwise) and, after such maturity, on
demand.
2.6 Cash Management System. On or prior to the Closing Date, the
Borrowers shall establish and maintain the cash management system provided in
the Cash Collateral Agreement. Schedule XII contains a monthly budget for the
Borrowers. By 10:00 a.m. (Central Time) on the 15th and 30th of each month (or
the first Business Day thereafter if such day is not a Business Day) beginning
August 17, 1998 until the Maturity Date, the Borrowers shall provide to the
Lender a Certificate substantially in the form of Exhibit J hereto (the
"Semi-Monthly Budget Certificate") providing the disbursement run for the prior
semi-month period. If the aggregate amount of the disbursement run for the prior
semi-month period does not exceed, by greater than five percent, the aggregate
expenditures budgeted for such semi-month period (i.e. one half of the monthly
budget as specified on Schedule XII hereto), the Lender will release from the
Cash Collateral Account the lesser of (i) the aggregate amount of expenditures
budgeted for the current semi-month period and (ii) the amount of funds in the
Cash Collateral Account. If the Semi-Monthly Budget Certificate is received by
Lender by 10:00 a.m. (Central Time) the funds shall be released on the date of
receipt. If the Semi-Monthly Budget Certificate is received after 10:00 a.m.
(Central Time) the funds will be released the following Business Day.
2.7 Approval of Use of Proceeds. Lender, in its sole discretion, shall
determine the amount of funds to be advanced pursuant to a Notice of Borrowing
and the appropriateness of any proposed use of funds requested in a Notice of
Borrowing.
Section 3. Prepayments; Payments.
3.1 Voluntary Prepayments. The Borrowers shall have the right to prepay
the Calibur Consolidated Loan or the Consolidated Bridge Loan, as applicable,
without premium or penalty, in whole or in part at any time and from time to
time after the Closing Date.
3.2 Mandatory Repayments. (a) The Borrowers shall make scheduled
repayments of principal on the A Note (the "Calibur Scheduled Repayment") on the
Maturity Date.
(b) The Borrowers shall make scheduled repayments of the principal of
the B Note (the "Scheduled Bridge Repayment") on the Maturity Date.
3.3 Method and Place of Payment. All payments under this Agreement or
one of the Notes shall be made to the Lender not later than 12:00 Noon (New York
time) on the date when due and shall be made in immediately available funds to
Citibank, New York City, ABA No. 021 000 089, Credit to Bear Stearns Acct #
0925-3186, f/c/o Infinity Investors Limited, Acct. No. 102-05092 or to such
other locations as Lender may from time to time specify. Whenever any payment to
be made hereunder or under one of the Notes shall be stated to be due on a day
which is not a Business Day, the due date thereof shall be extended to the next
succeeding Business Day and, with respect to payments of principal, interest
shall be payable at the applicable rate during such extension.
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3.4 Net Payments. All payments made by the Borrowers hereunder or under
the Notes will be made without setoff, counterclaim or other defense. All such
payments will be made free and clear of, and without deduction or withholding
for, any present or future taxes, levies, imposts, duties, fees, assessments or
other charges of whatever nature now or hereafter imposed by the United States
or by any of its political subdivisions or taxing or banking authorities thereof
or therein (but excluding, except as provided below, any tax imposed on or
measured by the net income of the Lender pursuant to the laws of the
jurisdiction (or any political subdivision or taxing or banking authority
thereof or therein) in which the principal office of the Lender is located) and
all interest, penalties or similar liabilities with respect thereto
(collectively, "Taxes"). If any Taxes are so levied or imposed, the Borrowers
agree to pay the full amount of such Taxes and such additional amounts as may be
necessary so that every payment of all amounts due hereunder or under the Notes,
after withholding or deduction for or on account of any Taxes, will not be less
than the amount provided for herein or in the Notes. The Borrowers will furnish
to the Lender within 45 days after the date the payment of any Taxes is due
pursuant to applicable law certified copies of tax receipts evidencing such
payment by the Borrowers. The Borrowers, jointly and severally, will indemnify
and hold harmless the Lender, and reimburse the Lender upon its written request,
for the amount of any Taxes so levied or imposed and paid by the Lender.
3.5 Application of Proceeds from Collateral. Any proceeds from the
Security Agreement Collateral or any Borrower's Real Property received by the
Lender pursuant to this Agreement, the A Note or the B Note shall be applied in
the following manner: FIRST to the fees, if any, incurred in connection with the
A Note, SECOND to accrued and unpaid interest, if any, on the A Note, THIRD to
outstanding principal on the A Note, FOURTH to the fees, if any, incurred in
connection with the B Note, FIFTH to accrued and unpaid interest, if any, on the
B Note and SIXTH to outstanding principal on the B Note, provided, however, that
nothing in this section shall obligate the Lender to proceed against the
Security Agreement Collateral or any Borrower's Real Property prior to any other
available remedy, if at all. All fees in connection with this Agreement shall be
allocated pro rata among the A Note and the B Note based on the principal amount
thereof.
Section 4. Conditions Precedent.
4.1 Conditions to Closing. The obligations of the Lender under this
Agreement including, without limitation, any obligation to make funds available
on the Closing Date, is subject to the satisfaction of the following conditions:
(a) Notes. The Effective Date shall have occurred and there shall have
been delivered to the Lender this Agreement and the Notes, each duly executed by
the Borrowers party thereto.
(b) No Default; Representations and Warranties. As of the Closing Date
(and after giving effect thereto) (i) there shall exist no Default or Event of
Default and (ii) all representations and warranties contained herein and in the
other Credit Documents shall be true and correct in all material respects with
the same effect as though such representations and warranties had been made on
and as of the Closing Date.
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(c) Corporate Documents; Proceedings. The Lender shall have received:
(i) a certificate from each Borrower, dated the Closing Date,
signed by the chief executive officer or chief financial officer of
such Borrower, substantially in the form of Exhibit C with appropriate
insertions, together with the organizational documents, by-laws and
resolutions of the Borrower referred to in such certificate; and
(ii) all corporate and legal proceedings and all instruments
and agreements required to be delivered in connection with the
transactions contemplated by the Credit Documents shall be reasonably
satisfactory in form and substance to the Lender in all respects, and
the Lender shall have received all information and copies of all
documents and papers, including records of corporate and trust
proceedings and Governmental Approvals, if any, which the Lender
reasonably may have requested in connection therewith, such documents
and papers where appropriate to be certified by proper corporate, trust
or governmental authorities.
(d) Opinion of Counsel. The Lender shall have received an opinion
addressed to the Lenders and dated the Closing Date, from Wood, Exall & Bonnett,
LLP, special counsel to the Borrowers, covering the matters set forth in Exhibit
D hereto, each of which shall be in form and substance reasonably satisfactory
to the Lender.
(e) Guaranty. The Guarantor shall have duly authorized, executed and
delivered a guaranty substantially in the form of Exhibit E (as modified,
supplemented or amended, individually, the "Guaranty").
(f) Cash Management Agreement. Each of the Borrowers shall have duly
authorized, executed and delivered Cash Collateral Agreement substantially in
the form of Exhibit F, (as modified, supplemented or amended, the "Cash
Collateral Agreement").
(g) Pledge Agreement. UPET shall have duly authorized, executed and
delivered a Pledge Agreement substantially in the form of Exhibit G (as
modified, supplemented or amended, the "Pledge Agreement").
(h) Security Agreement. Each of the Borrowers shall have duly
authorized, executed and delivered a Security Agreement in the form of Exhibit H
(as modified, supplemented or amended, the "Security Agreement") covering all of
each Borrowers' present and future assets of any kind or nature, wherever
located (as defined in the Security Agreement, (the "Security Agreement
Collateral"), together with:
(i) acknowledgment copies of proper financing statements (Form
UCC-1) duly filed under the UCC of each jurisdiction as may be
necessary or, in the opinion of the Lender, desirable to perfect the
security interests purported to be created by the Security Agreement;
(ii) certified copies of requests for information or copies
(Form UCC-11), or equivalent reports, listing the financing statements
referred to in clause (i) above and all
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other effective financing statements that name any Borrower as debtor
and that are filed in the jurisdictions referred to in said clause (i),
together with copies of such other financing statements (none of which
shall cover the Collateral except to the extent evidencing Permitted
Liens);
(iii) evidence of the completion of all other recordings and
filings of, or with respect to, the Security Agreement as may be
necessary or, in the opinion of the Lender, desirable to perfect the
security interests purported to be created by the Security Agreement;
and
(iv) evidence that all other actions necessary or, in the
opinion of the Lender, desirable to perfect and protect the security
interests purported to be created by the Security Agreement have been
taken.
(i) Real Property Instruments. The Real Property Instruments shall have
been duly authorized, executed and delivered by Calibur and recorded in the
appropriate record offices of the counties in which each respective property is
located.
(j) No Change in Condition. No material adverse change shall have
occurred in the financial condition or business of the Borrowers from those set
forth in the financial statements of the Borrowers dated as of March 31, 1998
and delivered to the Lender.
The execution of this Agreement by the Borrowers and the acceptance of
payment on the Borrower's behalf of the amounts listed on Schedule X hereof from
the Consolidated Bridge Loan shall constitute a representation and warranty by
the Borrowers to the Lender that all of the conditions which are required to be
met as specified in this Section 4.1 have been fulfilled in accordance with
their respective terms.
4.2 Conditions to each Borrowing. The obligation of the Lender to make
funds available under the Consolidated Bridge Loan is subject, at the time of
each Borrowing following the Closing Date, to the satisfaction of the following
conditions:
(a) No Default; Representations and Warranties. At the time of each
such Borrowing and also after giving effect thereto (i) there shall exist no
Default or Event of Default and (ii) all representations and warranties
contained herein and in the other Credit Documents shall be true and correct in
all material respects with the same effect as though such representations and
warranties had been made on and as of the date of such Borrowing.
(b) Notice of Borrowing. The Lender shall have received a Notice of
Borrowing, duly executed by the Borrowers and meeting the requirements of
Section 2.2.
(c) Approval of Amount and Use of Proceeds. The Lender shall have
determined, in its sole discretion, the amount and the appropriateness of any
proposed use of the funds to be made available for such Borrowing in accordance
with Section 2.7.
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(d) Filing of Form S-4. UPET shall have filed with the SEC a
registration statement on Form S-4 (the "Form S-4"), in form and substance
acceptable to the Lender, soliciting acceptances of the Restructuring prior to
such Borrowing and in any event on or before August 14, 1998.
The acceptance of the proceeds of the Consolidated Bridge Loan shall
constitute a representation and warranty by the Borrowers to the Lender that all
of the conditions which are required to be met as specified in this Section 4.2
have been fulfilled in accordance with their respective terms.
Section 5. Representations, Warranties and Agreements. In order to
induce the Lender to enter into this Agreement, to consolidate the Consolidated
Loans and to make the Additional Bridge Loan, each Borrower makes the following
representations, warranties and agreements, all of which shall survive the
execution and delivery of this Agreement and each of the Notes and the
consolidation of the Consolidated Loans and the making of the Additional Bridge
Loan, with the acceptance of the proceeds of the Consolidated Bridge Loan being
deemed to constitute a representation and warranty that the matters specified in
this Section 5 are true and correct in all material respects on and as of the
Closing Date (it being understood and agreed that any representation or warranty
which by its terms is made as of a specified date shall be required to be true
and correct in all material respects only as of such specified date).
5.1 Legal Status. Such Borrower (a) is a duly organized and validly
existing corporation in good standing under the laws of its state of
incorporation, (b) has the power and authority to own its property and assets,
transact the business in which it is engaged, do all things necessary or
appropriate in respect of the business in which it is engaged, and consummate
the transactions contemplated by the Credit Documents, and (c) is duly qualified
and authorized to do business and in good standing in each jurisdiction where
the ownership, leasing or operation of its property or the conduct of its
business requires such qualification.
5.2 Power and Authority. Such Borrower has the power and authority to
execute, deliver and perform the terms and provisions of each of the Credit
Documents to which it is a party and has taken all necessary corporate action to
authorize the execution, delivery and performance by it of each such Credit
Document. Such Borrower has, or in the case of the Credit Documents other than
this Agreement, by the Closing Date will have, duly executed and delivered each
of the Credit Documents to which it is party, and each such Credit Document
constitutes or, when executed and delivered, will constitute, its legal, valid
and binding obligation enforceable in accordance with its terms, except as such
enforcement may be limited by applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization or other similar laws relating to or limiting
creditors' rights generally or by general equity principles.
5.3 No Violation. Neither the execution, delivery or performance by
such Borrower of the Credit Documents to which it is a party, nor compliance by
it with the terms and provisions thereof, nor the use of the proceeds of the
Consolidated Loans as contemplated herein will (i) contravene any material
provision of any law binding on it, (ii) conflict or be inconsistent with or
result in any breach of any of the terms, covenants, conditions or provisions
of, or
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constitute a default in respect of, or result in the creation or imposition of
(or the obligation to create or impose) any Lien upon, any of the property or
assets of such Borrower or pursuant to the terms of any indenture, mortgage,
deed of trust, credit agreement, loan agreement or any other material agreement,
contract or instrument to which such Borrower is a party or by which any of its
properties or assets is bound or to which it may be subject, or (iii) violate
any provision of the charter, bylaws or other organizational documents of such
Borrower.
5.4 Governmental Approvals. No Governmental Approval by any
Governmental Agency is required to authorize, or is required in connection with,
(i) the execution, delivery and performance by such Borrower of any Credit
Document or (ii) the legality, validity, binding effect or enforceability
against such Borrower of any such Credit Document.
5.5 Litigation. There is no litigation, action, suit, investigation,
claim or proceeding pending or threatened with respect to (i) this Agreement or
any other Credit Document, (ii) the transactions contemplated hereby or (iii)
which could reasonably be expected to have a Material Adverse Effect on such
Borrower, other than as listed on Schedule VI hereto.
5.6 Financial Statements. (a) The consolidated statement of financial
conditions of the Borrowers furnished to the Lender and attached hereto as
Schedule VII, presents fairly the financial position of the Borrowers as of and
for the dates indicated and the results of operations and changes in the
financial position and has been prepared in conformity with GAAP, applied on a
consistent basis throughout the periods involved.
(b) Except as reflected on Schedule VII, there were as of the Effective
Date no liabilities or obligations with respect to the Borrowers of any nature
whatsoever (whether absolute, accrued, contingent or otherwise and whether or
not due) which, either individually or in the aggregate would be material to any
Borrower or to the Borrowers taken as a whole. Except as set forth on Schedule
VII, no Borrower knows of any basis for the assertion against any Borrower of
any liability or obligation of any nature whatsoever that is not fully reflected
in the financial statements attached on Schedule VII which either individually
or in the aggregate, could be material to any Borrower or to the Borrowers taken
as a whole.
(c) Since the date of any such financial statements, there has been no
material adverse change or development involving a prospective material adverse
change in the assets, liabilities, condition, financial or otherwise, business,
results of operations or prospects of the Borrowers, taken as a whole.
(d) The Projections delivered on the date hereof and attached hereto as
Schedule VIII (the "Projections") have been prepared by the Borrowers in light
of the past operations of their businesses, but including future payments of
known contingent liabilities reflected on the balance sheet, and reflect
projections for fiscal years 1998, 1999 and 2000 on a month by month basis. The
Projections are based upon estimates and assumptions stated therein, all of
which the Borrowers believe to be reasonable and fair in light of current
conditions and current facts known to the Borrowers and as of the Effective
Date, reflect the Borrowers' good faith and reasonable estimates of future
financial performance of Borrowers and of other information projected therein
for the period set forth therein.
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5.7 Priority of Loan. The Consolidated Loans constitute unconditional
and unsubordinated Indebtedness of each of the Borrowers and, except for
Indebtedness secured by Liens described on Schedule III, rank at least pari
passu in priority of payment and security with all other Indebtedness which
constitutes the direct obligation of such Borrower.
5.8 Properties. Each of the Borrowers has good and marketable title to
all properties owned by it, free and clear of all Liens other than Liens
permitted under Section 7.1 or contemplated by the Credit Documents. Each
Borrower has received all deeds, assignments, bills of sale and other documents,
and has duly effected all recordings, filings and other actions necessary to
establish, protect and perfect such Borrower's right, title and interest in and
to all such Real Property and other properties and assets. With respect to any
lease or rental agreement to which any Borrower is a party, (i) such lease or
rental agreement is in full force and effect, (ii) such Borrower has complied in
all material respects with all of the terms of such lease or rental agreement,
(iii) there exists no event of default or an event, act or condition (other than
defaults or conditions which are not reasonably likely to have a Material
Adverse Effect on the Borrower) which with notice or lapse of time, or both,
would constitute an event of default thereunder by the Borrower or, to the
knowledge of the Borrower, the lessor thereunder, and (iv) the Borrower is in
possession of the premises demised under all such leases and rental agreements
and is conducting business on such premises. The Real Property Instruments, when
recorded, will create a first priority perfected security interests in favor of
the Lender in the applicable Real Property.
5.9 Morristown and Newport Personal Property. None of the Borrowers
owns any personal property, including, without limitation, equipment and
inventory, located at Calibur's store in Morristown, Tennessee (the "Morristown
Store") or Calibur's store in Newport, Tennessee (the "Newport Store").
5.10 Transactions with Affiliates. Except as listed on Schedule IX
hereto, no Borrower has entered into any transaction with an Affiliate. The
Borrowers have provided the Lender with all terms, conditions and documentation
related to the transactions with Affiliates listed on Schedule IX.
5.11 True and Complete Disclosure. All factual information (taken as a
whole) heretofore or contemporaneously furnished by or on behalf of such
Borrower, for purposes of or in connection with this Agreement or any
transaction contemplated herein or in any Credit Document is, and all other such
factual information (taken as a whole) hereafter furnished by or on behalf of
such Borrower to the Lender will be, true and accurate in all material respects
on the date as of which such information is dated or certified and not
materially incomplete by omitting to state any fact necessary to make such
information (taken as a whole) not misleading at such time in light of the
circumstances under which such information was provided.
5.12 Use of Proceeds. All proceeds of the Consolidated Bridge Loan will
be used by the Borrower for the purposes determined by the Lender in accordance
with Section 2.7.
5.13 Tax Returns and Payments. Each of the Borrowers has filed all tax
returns required to be filed by it and has paid all taxes payable by it which
have become due pursuant to
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such tax returns and all other taxes and assessments payable by it which have
become due, other than those not yet delinquent and except for (i) those
contested in good faith and for which adequate reserves have been established
and (ii) those taxes to be paid out of the proceeds of the Additional Bridge
Loan pursuant to the initial Notice of Borrowing, and listed on Schedule XI
hereto.
5.14 Labor Relations. None of the Borrowers is engaged in any unfair
labor practice that would be reasonably likely to have a Material Adverse Effect
on it. There is (i) no unfair labor practice complaint pending against any
Borrower or, to the best knowledge of such Borrower, threatened against any
Borrower, before any court or Governmental Agency with responsibility, authority
or jurisdiction for such matters, and no grievance or arbitration proceeding
arising out of or under any collective bargaining agreement is so pending
against any Borrower or, to the best knowledge of such Borrower, threatened
against any Borrower, (ii) no strike, labor dispute, slowdown or stoppage
pending against any Borrower or, to the knowledge of such Borrower, threatened
against any Borrower, and (iii) to the best knowledge of such Borrower, no union
organizing activities are taking place, except (with respect to any matter
specified in clause (i), (ii) or (iii) above, either individually or in the
aggregate) such as could not have a Material Adverse Effect on any Borrowing.
5.15 Capitalization. The authorized capital stock of such Borrower is
as listed on Schedule V. Such Borrower does not have outstanding (i) any
securities convertible into or exchangeable for its capital stock or (ii) any
rights to subscribe for or to purchase, or any options for the purchase of, or
any agreements, arrangements or understandings providing for the issuance
(contingent or otherwise) of, or any calls, puts, commitments or claims of any
character relating to, its capital stock except as listed on Schedule V.
5.16 Subsidiaries. As of the Effective Date, the entities listed on
Schedule II are the only Subsidiaries of each Borrower. Schedule II correctly
sets forth, as of the Effective Date, the percentage ownership (direct and
indirect) of the Borrowers in each such class of capital stock of each such
Subsidiary and also identifies the direct owner thereof.
5.17 Compliance with Laws. Each Borrower is in compliance in all
material respects with all applicable laws of, and all applicable restrictions
imposed by, all Governmental Agencies in respect of the conduct of its business
and the ownership of its property (including applicable laws and restrictions
relating to environmental standards and controls), except such noncompliance as
would not, in the aggregate, have a Material Adverse Effect on such Borrower.
5.18 Compliance with Material Agreements. Each material contract to
which any Borrower is party (including, without limitation, any indenture,
mortgage, deed of trust, credit agreement, loan agreement or any other
instrument) is in full force and effect, and no Borrower is in default under any
provision thereof where such default could result in a Material Adverse Effect
on such Borrower.
5.19 Fees and Enforcement. No fees or taxes, including, without
limitation, stamp, transaction, registration or similar taxes, are required to
be paid for the legality, validity, or enforceability of this Agreement or any
of the other Credit Documents. This Agreement and
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each other Credit Document are each in proper legal form under the laws of the
State of New York, and under the respective governing laws selected in such
Credit Documents, for the enforcement thereof in such jurisdiction without any
further action by the Borrower or the Lender.
5.20 Withholding Taxes. No withholding or similar taxes are required to
be paid in respect of, or deducted from, any payment required to be made by the
Borrower under this Agreement, the Notes or any other Credit Document.
5.21 Compliance with ERISA. Each Plan is in substantial compliance with
ERISA and the Code; no Reportable Event has occurred with respect to a Plan; no
Plan is insolvent or in reorganization; no Plan has an Unfunded Current
Liability, and no Plan has an accumulated or waived funding deficiency, has
permitted decreases in its funding standard account or has applied for an
extension of any amortization period within the meaning of Section 412 of the
Code; neither such Borrower nor any Subsidiary or ERISA Affiliate has incurred
any material liability to or on account of a Plan pursuant to Section 409,
502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or expects to
incur any liability under any of the foregoing sections with respect to any such
Plan; no proceedings have been instituted to terminate any Plan; no condition
exists which presents a material risk to such Borrower or any of its
Subsidiaries or any ERISA Affiliate of incurring a liability to or on account of
a Plan pursuant to the foregoing provisions of ERISA and the Code; no Lien
imposed under the Code or ERISA on the assets of such Borrower or any of its
Subsidiaries or any ERISA Affiliate exists or is likely to arise on account of
any Plan; and such Borrower and its Subsidiaries may terminate contributions to
any other employee benefit plans maintained by them without incurring any
material liability to any Person interested therein.
5.22 Environmental Matters. (a) Each of the Borrowers has complied
with, and on the dates hereof is in compliance with, in all material respects,
all material applicable Environmental Laws and the requirements of any material
permits issued under such Environmental Laws. There are no past, pending or, to
the best knowledge of each of the Borrowers, threatened Environmental Claims
against any of the Borrowers or any Real Property currently owned or operated by
any of the Borrowers, except for such Environmental Claims as could not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the performance, business, assets, liabilities, operations,
properties, condition (financial or otherwise) or prospects of the Borrowers
taken as a whole. There are no facts, circumstances, conditions or occurrences
on any Real Property owned or operated by any of the Borrowers or, to the best
knowledge of each of the Borrowers, on any property adjoining any such Real
Property that could reasonably be expected (i) to form the basis of an
Environmental Claim against any of the Borrowers or any Real Property currently
owned or operated by the any of the Borrowers or (ii) to cause such currently
owned or operated Real Property to be subject to any restrictions on the
ownership, occupancy, use or transferability of such Real Property under any
Environmental Law except as to each of the foregoing, such Environmental Claims
and restrictions as could not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the performance, business, assets,
liabilities, operations, properties, condition (financial or otherwise) or
prospects of the Borrowers taken as a whole.
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<PAGE> 19
(b) None of the Borrowers has, at any time, generated, used,
treated, stored, transported or released Hazardous Materials on, to or from any
Real Property owned, leased or at any time operated by any of the Borrowers in
any manner, except in material compliance with all applicable Environmental Laws
and so as not to give rise to an Environmental Claim that, individually or in
the aggregate, could reasonably be expected to have a material adverse effect on
the performance, business, assets, liabilities, operations, properties,
condition (financial or otherwise) or prospects of the Borrowers taken as a
whole.
(c) No Real Property owned or at any time operated by any of
the Borrowers is located on any site listed on, or proposed in the Federal
Register for listing on, the Superfund National Priorities List, or listed on
the Comprehensive Environmental Response Compensation and Liability Information
System or their state equivalents.
5.23 Investment Company Act. Neither the Borrower nor any of its
Subsidiaries is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
5.24 Public Utility Holding Company Act. Neither the Borrower nor any
of its Subsidiaries is a "holding company," or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company" within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
5.25 Assets. Each Borrower owns and has the right to use and enjoy all
of the assets utilized by it in connection with the operation of its business.
5.26 Intellectual Property. Each Borrower owns or has rights to use all
Intellectual Property necessary to continue to conduct its business as now or
heretofore conducted by it or proposed to be conducted by it. Each Borrower
conducts its business and affairs without infringement of or interference with
any Intellectual Property of any other person.
5.27 Internal Accounting Controls. Each Borrower and each of their
Subsidiaries maintains a system of internal accounting controls sufficient, in
the judgment of such Borrower's Board of Directors, to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
Section 6. Affirmative Covenants. Each Borrower covenants and agrees
that on and after the Effective Date and until the Notes, together with all
accrued interest thereon and all other Obligations incurred hereunder and
thereunder, are paid in full:
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<PAGE> 20
6.1 Information Covenants. The Borrowers will furnish or cause to be
furnished to the Lender:
(a) Monthly Financial Statements. As soon as available, but, in any
event, within 30 days after the close of each calendar month in each fiscal year
of the Borrowers, a copy of the consolidated balance sheet of the Borrowers and
their Consolidated Subsidiaries for such period, together with the related
statement of income, statement of changes in shareholders' equity and statement
of cash flows of the Borrowers and their Consolidated Subsidiaries for such
period, certified by the chief financial officer of each Borrower, subject to
normal recurring year-end adjustments.
(b) Quarterly Financial Statements. As soon as available, but in any
event within 50 days after the close of each fiscal quarter of the Borrowers, a
copy of the consolidated balance sheet of the Borrowers and their Consolidated
Subsidiaries for such quarter and for the fiscal year to date, together with the
related statement of income, statement of changes in shareholders' equity and
statement of cash flows of the Borrowers and their Consolidated Subsidiaries for
such period, certified by the chief financial officer of each Borrower, subject
to normal recurring year-end adjustments
(c) Annual Financial Statements of the Borrowers. As soon as available,
but, in any event, within 90 days after the close of each fiscal year of the
Borrowers, the consolidated balance sheets of the Borrowers and their
Consolidated Subsidiaries for such fiscal year, together with the related
consolidated statement of income, statement of changes in shareholders' equity
and statement of cash flows of the Borrowers and their Consolidated Subsidiaries
for such period, certified by independent public accountants of recognized
national standing pursuant to an unqualified opinion of such independent public
accountants stating that in the course of its audit of the financial statements
of the Borrowers (which audit was conducted in accordance with GAAP) such
accounting firm obtained no knowledge of any Default or Event of Default which
has occurred and is continuing, or, if in the opinion of such independent public
accounting firm such Default or Event of Default has occurred and is continuing,
a statement as to the nature thereof.
(d) Management Letters. Promptly after any Borrower's receipt thereof,
a copy of any "management letter" or other similar communication received by any
Borrower from its certified public accountants.
(e) Officer's Certificate. At the time of the delivery of the financial
statements provided for in Section 6.1(a), (b) and (c), a certificate of the
chief financial officer of each Borrower to the effect that, to the best of such
person's knowledge, no Default or Event of Default has occurred and is
continuing or, if any Default or Event of Default has occurred and is
continuing, specifying the nature and extent thereof, which certificate shall
set forth the calculations required to establish whether such Borrower was in
compliance with the provisions of Sections 7.4.
(f) Notice of Default or Litigation. Promptly, and in any event within
five Business Days after an officer of any Borrower obtains actual knowledge
thereof, written notice of (i) the
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<PAGE> 21
occurrence of any event which constitutes a Default or Event of Default, (ii)
any litigation or governmental proceeding pending (x) against any Borrower or
any of its Subsidiaries, which could have a Material Adverse Effect on any
Borrower, or (y) with respect to any Credit Document, and (iii) any other event
which is likely to have a Material Adverse Effect on any Borrower.
(g) Other Reports and Filings. Promptly, copies of all financial
information, proxy materials and other information and reports, if any, which
any Borrower shall file with the Securities and Exchange Commission (the "SEC").
(h) Other Information. From time to time, such other information or
documents (financial or otherwise) as the Lender may reasonably request.
6.2 Books, Records and Inspections; Accounting and Audit Matters. Each
Borrower will, and will cause each of its Subsidiaries to, keep proper books of
record and account in which full, true and correct entries in conformity with
GAAP and all requirements of applicable law shall be made of all dealings and
the transactions in relation to its business. Each Borrower will, and will cause
each of its Subsidiaries to, permit officers and designated representatives of
the Lender to visit and inspect, under guidance of officers of such Borrower or
any such Subsidiary, as the case may be, any of the properties of such Borrower
and/or such Subsidiary, as the case may be, and to examine and make copies of
the books of record and account of such Borrower or such Subsidiary and discuss
the affairs, finances and accounts of such Borrower or such Subsidiary, with,
and be advised as to the same by, its and their officers, all at such times and
intervals and to such extent as the Lender may request.
6.3 Compliance with Laws. Each Borrower will, and will cause each of
its Subsidiaries to, comply with all laws and all applicable restrictions
imposed by, all Governmental Agencies in respect of the conduct of its business
and the ownership of its property, except where the failure to so comply would
not be reasonably likely to have a Material Adverse Effect on such Borrower.
6.4 Performance of Obligations. Each Borrower will, and will cause each
of its Subsidiaries to, perform all of its obligations under (i) each Credit
Document to which it is a party, or by which it is bound, and (ii) each
mortgage, indenture, security agreement or other debt instrument to which it is
party or by which it is bound, except such non-performances as could not in the
aggregate have a Material Adverse Effect on such Borrower.
6.5 Taxes. Each Borrower will, and will cause each of its Subsidiaries
to, pay and discharge or cause to be paid and discharged all applicable taxes
(including stamp taxes), assessments and governmental charges or levies imposed
upon it or upon its income or profits or upon any of its property, real,
personal or mixed or upon any part thereof, when due, as well as all lawful
claims for labor, materials and supplies which, if unpaid might by applicable
law become a Lien upon such property.
6.6 Maintenance of Corporate Franchises. Each Borrower will, and will
cause each of its Subsidiaries to, do or cause to be done, all things necessary
to preserve and keep in full force
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<PAGE> 22
and effect its existence and its material rights, franchises, licenses and
patents; provided, however, that nothing in this Section 6.6 shall prevent the
withdrawal by such Borrower or any of its Subsidiaries, of its qualification as
a foreign corporation in any jurisdiction where such withdrawal could not have a
Material Adverse Effect on such Borrower.
6.7 Maintenance of Property, Insurance. Each Borrower will, and will
cause each of its Subsidiaries to, (i) maintain all property useful and
necessary in its business in good working order and condition, (ii) maintain
with financially sound and reputable insurance companies insurance on all its
property in such amounts and against such risks as are reasonably acceptable to
the Lender, and (iii) furnish to the Lender, upon written request therefrom,
full information as to the insurance carried. Each Borrower shall deliver to the
Lender, in form and substance satisfactory to the Lender, endorsements to (i)
all "All Risk" and business interruption insurance naming Lender as loss payee
with respect to the Security Agreement Collateral and any property subject to
any Real Property Instrument, and (ii) all general liability and other liability
policies naming the Lender as additional insured.
6.8 Grant of Security. Borrower will grant to Lender security interests
and mortgages in any assets and Real Property acquired by Borrower from and
after the date hereof. All such security interests and mortgages shall be
perfected within 10 days after Borrowers acquisition of said assets and Real
Property, pursuant to documentation satisfactory in form and substance to
Lender's counsel and shall constitute valid and enforceable perfected security
interests and mortgages superior to and prior to the right of all third persons
and subject to no Liens other than the liens permitted hereunder. The additional
Real Property Instruments or security documents related to the foregoing shall
confirm such representations and warranties as the Lender shall reasonably
request, and shall be duly recorded or filed in such manner and in such places
as are required by law to establish, perfect, preserve and protect the liens in
favor of the Lender hereunder. Borrower agrees to pay all taxes, fees and other
charges payable and execute any other additional documentation necessary in
connection with the foregoing.
6.9 ERISA. As soon as possible and, in any event, within 10 days after
a Borrower or any of its Subsidiaries or ERISA Affiliates knows or has reason to
know any of the following, such Borrower will deliver to each of the Banks a
certificate of the chief financial officer of the Borrower setting forth details
as to such occurrence and such action, if any, which such Borrower, such
Subsidiary or such ERISA Affiliate is required or proposes to take, together
with any notices required or proposed to be given to or filed with or by such
Borrower, the Subsidiary, the ERISA Affiliate, the PBGC, a Plan participant or
the Plan Administrator with respect thereto: that a Reportable Event has
occurred; that an accumulated funding deficiency has been incurred or an
application may be or has been made to the Secretary of the Treasury for a
waiver or modification of the minimum funding standard (including any required
installment payments) or an extension of any amortization period under Section
412 of the Code with respect to a Plan; that a Plan has been or may be
terminated, reorganized, partitioned or declared insolvent under Title IV of
ERISA; that a Plan has an Unfunded Current Liability giving rise to a Lien under
ERISA; that proceedings may be or have been instituted to terminate a Plan; that
a proceeding has been instituted pursuant to Section 515 of ERISA to collect a
delinquent contribution to a Plan; or that the Borrower, any of its Subsidiaries
or ERISA Affiliates will or may incur any
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<PAGE> 23
liability (including any contingent or secondary liability) to or on account of
the termination of or withdrawal from a Plan under Section 4062, 4063, 4064,
4201 or 4204 of ERISA or with respect to a Plan under Section 4971 or 4975 of
the Code or Section 409 or 502(i) or 502(l) of ERISA. Each Borrower will deliver
to each of the Banks a complete copy of the annual report (Form 5500) of each
Plan required to be filed with the Internal Revenue Service. In addition to any
certificates or notices delivered to the Banks pursuant to the first sentence
hereof, copies of annual reports and any other notices received by a Borrower or
any of its Subsidiaries or any ERISA Affiliate required to be delivered to the
Banks hereunder shall be delivered to the Banks no later than 10 days after the
later of the date such report or notice has been filed with the Internal Revenue
Service or the PBGC, given to Plan participants or received by a Borrower or
such Subsidiary or such ERISA Affiliate.
6.10 Board Meetings. Each Borrower will hold regular meetings of its
board of directors not less frequently than once every 60 days.
6.11 Appointment of Consultant. The Borrowers agree that the Lender may
retain the services of a consultant (the "Consultant"), who will assist in the
day to day operations of the business at such time as the Borrowers fail to
timely complete any of the following: (i) file the Form S-4 by August 14, 1998;
(ii) use their best efforts to respond to comments on the Form S-4 provided by
the SEC and have the Form S-4 promptly declared effective by the SEC; (iii) hold
a shareholder meeting to vote upon the transactions described in the Form S-4
and complete solicitation of votes within 35 days of the effective date of the
Form S-4; or (iv) commence a case in chapter 11 within 10 days of the
shareholder meeting described above. As long as the Lender shall retain such
Consultant, all expenditures, transfers of assets and other flows of funds from
the Borrowers shall require the prior approval of such Consultant.
6.12 Transfer of Certain Stores. Calibur agrees to take ownership or
control (at the Lender's option) of certain stores formerly owned by Calibur,
located in Kingston Pike, Tennessee, Farragut, Tennessee, Mufreesboro, Tennessee
and Cookville, Tennessee when and if the Lender reaches agreement with the owner
of such stores regarding the terms and conditions of such transfer.
6.13 Morristown Store and Newport Store. Each of the Borrowers agrees
that it will not locate any personal property, including, without limitation,
equipment or inventory, owned by such Borrower, or allow any such personal
property to be located at the Morristown Store or the Newport Store.
6.14 Restructuring. Each Borrower agrees to fully cooperate with the
Lender and to use its best efforts to consummate the transactions contemplated
by the Term Sheet attached hereto as Exhibit I (the "Restructuring").
6.15 Further Assurances. Each Borrower will make, execute, endorse,
acknowledge, file with and/or deliver, or cause to be made, executed, endorsed,
acknowledged, filed and/or delivered, to the Lender from time to time such
documents and instruments and take such further steps relating to the transfer
of all or any portion of the Loan as the Lender may reasonably require.
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Section 7. Negative Covenants. Each Borrower covenants and agrees that,
on and after the Effective Date and until the Notes, together with all accrued
interest thereon and all other Obligations incurred hereunder and thereunder,
are paid in full:
7.1 Liens. Each Borrower will not, and will not permit any of its
Subsidiaries to, create, agree to create, incur, assume or suffer to exist any
Lien upon or with respect to any property or assets (real, personal or mixed,
tangible or intangible) of such Borrower or any of its Subsidiaries, whether now
owned or hereafter acquired, provided that the provisions of this Section 7.1
shall not prevent the creation, incurrence, assumption or existence of:
(i) Liens for taxes, assessments or governmental charges or
levies not yet due, or Liens for taxes, assessments or governmental
charges or levies being contested in good faith and by appropriate
proceedings for which adequate reserves have been established;
(ii) Liens in respect of property or assets of a Borrower or
any of its Subsidiaries imposed by law, which were incurred in the
ordinary course of business such as carriers', warehousemen's,
materialmen's and mechanics' liens and other similar Liens arising in
the ordinary course of business, and which (x) do not in the aggregate
materially detract from the value of such property or assets or
materially impair the use thereof in the operation of the business of
such Borrower or any of its Subsidiaries or (y) which are being
contested in good faith by the appropriate proceedings, which
proceedings have the effect of preventing the forfeiture or sale of the
property or assets subject to any such Lien;
(iii) Liens in existence on the Effective Date which are
listed, and the property subject thereto described, in Schedule III
hereto (Liens described in this subclause (iii), hereinafter "Permitted
Liens"); and
(iv) pledges or deposits in connection with worker's
compensation, unemployment insurance and other social security
legislation.
7.2 Dividends. (a) No Borrower will declare or pay any dividends, or
return any capital, to its shareholders or authorize or make any other
distribution, payment or delivery of property or cash to its shareholders as
such, or redeem, retire, purchase or otherwise acquire, directly or indirectly,
for any consideration, any shares of any class of its capital stock or interest
of any of its shareholders, in each case now or hereafter outstanding (or any
options or warrants issued by a Borrower with respect to its capital stock) or
set aside any funds for any of the foregoing purposes, or permit any of its
Subsidiaries to purchase or otherwise acquire for a consideration any shares of
any class of the capital stock of a Borrower now or hereafter outstanding (or
any options or warrants issued by a Borrower with respect to its capital stock).
(b) No Borrower will permit any of its Subsidiaries to declare or pay
any dividends, or return any capital, to its stockholders or authorize or make
any other distribution, payment or delivery of property or cash to its
stockholders as such, or redeem, retire, purchase or otherwise acquire, directly
or indirectly, for a consideration, any shares of any class of its capital stock
now or hereafter outstanding (or any options or warrants issued by such
Subsidiary with respect to its
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<PAGE> 25
capital stock), or set aside any funds for any of the foregoing purposes, or
permit any of its Subsidiaries to purchase or otherwise acquire for a
consideration any shares of any class of the capital stock of such Subsidiary
now or hereafter outstanding (or any options or warrants issued by such
Subsidiary with respect to its capital stock).
7.3 Indebtedness. The Borrowers will not, and will not permit any of
their Subsidiaries to, contract, create, incur, assume or suffer to exist any
Indebtedness, except (i) Indebtedness of the Borrowers incurred under the Credit
Documents, (ii) Indebtedness listed on Schedule IV ("Existing Indebtedness"),
(iii) accrued expenses and current trade accounts payable incurred in the
ordinary course of business, and obligations under trade letters of credit
incurred by a Borrower or any of its Subsidiaries in the ordinary course of
business, which expenses, accounts and obligations are to be repaid in full not
more than one year after the date on which such Indebtedness is originally
incurred to finance the purchase of goods by a Borrower or such Subsidiary, and
(iv) obligations under letters of credit incurred by a Borrower or any of its
Subsidiaries in the ordinary course of business in support of obligations
incurred in connection with worker's compensation, unemployment insurance, or
other social security legislation.
7.4 Capital Expenditures. The Borrowers will not, and will not permit
any of their Subsidiaries to, make any expenditure for fixed or capital assets
(including, without limitation, expenditures for maintenance and repairs which
should be capitalized in accordance with GAAP and including capitalized lease
obligations) (each a "Capital Expenditure"), except that the Borrowers and their
Subsidiaries may make Capital Expenditures provided that the aggregate amount of
such Capital Expenditures does not exceed $50,000 in any fiscal year.
7.5 Advances, Investments and Loans. The Borrowers will not, and will
not permit any of their Subsidiaries to, directly or indirectly, lend money or
credit or make advances to any person, or purchase or acquire any stock,
obligations or securities of, or any other interest in, or make any capital
contribution to, any other person, or purchase or own a futures contract or
otherwise become liable for the purchase or sale of currency or other
commodities at a future date in the nature of a futures contract, except that
the following shall be permitted:
(i) a Borrower and its Subsidiaries may acquire and hold
receivables owing to it, if created or acquired in the ordinary course
of business and payable or dischargeable in accordance with customary
commercial practice; and
(ii) a Borrower and its Subsidiaries may acquire and hold cash
and Cash Equivalents.
7.6 Consolidations, Mergers, Purchases, Sales of Assets, etc. A
Borrower will not, and will not permit any of its Subsidiaries to, wind up,
liquidate or dissolve its affairs or enter into any transaction of consolidation
or merger with or into any other person, sell, convey, assign, transfer, lease
or otherwise dispose of (or agree to do any of the foregoing at any future
time), directly or indirectly, all or any material part of its property or
assets (including, without limitation, the capital stock owned by a Borrower as
of the Effective Date in its Subsidiaries), other than purchases or other
acquisitions of inventory, materials and equipment in the ordinary course of
business, of any person, or permit any of its Subsidiaries so to do any of the
foregoing
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<PAGE> 26
unless such transaction provides for payment in full in cash of the Obligations,
provided, however, that a Borrower and its Subsidiaries may, in the ordinary
course of business, (i) make sales of inventory, (ii) sell equipment and other
inventory which is uneconomical or obsolete, and (iii) make Capital Expenditures
in accordance with Section 7.4.
7.7 Limitations on Modifications of Indebtedness; Modifications of
Certain Agreements. A Borrower will not, and will not permit any of its
Subsidiaries to, (i) make any voluntary or optional payment or prepayment on or
redemption or acquisition for value of (including, without limitation, by way of
depositing with the trustee with respect thereto money or securities before due
for the purpose of paying when due) any Existing Indebtedness, (ii) amend,
modify or change, or permit the amendment, modification or change of, any
provision of any Existing Indebtedness or of any agreement (including, without
limitation, any purchase agreement, indenture, loan agreement or security
agreement) relating to any of the foregoing, (iii) amend, modify or change, or
permit the amendment, modification or change of, any provision of its charter,
bylaws or other organizational documents, (iv) amend, modify or change, or
permit the amendment, modification or change of, any provision of any agreement
entered into by it, with respect to its capital stock, or (v) enter into any new
agreement with respect to its capital stock, (vi) amend, modify or change, or
permit the amendment, modification or change of, the Mortgage.
7.8 Limitation on Restrictions on Subsidiary Dividends and other
Distributions. No Borrower will permit any of its Subsidiaries to create,
directly or indirectly, or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any such Subsidiary
to (i) pay dividends or make any other distributions on its capital stock or any
other interest or participation in its profits owned by the Borrower or any
Subsidiary of a Borrower, or pay any Indebtedness owed to a Borrower or
Subsidiary of a Borrower, (ii) make loans or advances to a Borrower, or (iii)
transfer any of its properties or assets to a Borrower, except for such
encumbrances or restrictions existing under or by reason of (x) applicable law,
(y) this Agreement, or (z) customary provisions restricting subletting or
assignment of any lease governing a leasehold interest of a Borrower or its
Subsidiary.
7.9 Transactions with Guarantor and Affiliates. A Borrower will not,
and will not permit any of its Subsidiaries to, enter into any transaction or
series of related transactions with the Guarantor or any Affiliate of such
Borrower, other than in the ordinary course of business and on terms and
conditions substantially as favorable to the Borrower or any such Subsidiary as
would reasonably be obtained at that time in a comparable arm's-length
transaction with a person other than such Guarantor or Affiliate.
7.10 Hazardous Materials. No Borrower shall cause or permit a release
of any Hazardous Material on, at, in, under, above, to, from or about any of the
Real Property where such release would (a) violate in any respect, or form the
basis for any Environmental Claim under any Environmental Law or (b) otherwise
adversely impact the value or marketability of any Real Property or any of the
Security Agreement Collateral other than such violations, liabilities or impacts
which could not reasonably be expected to have a Material Adverse Effect.
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<PAGE> 27
7.11 Limitation on Issuance of Capital Stock by Subsidiaries. A
Borrower shall not permit any of its Subsidiaries to issue any capital stock
(including by way of sales of treasury stock) or any options or warrants to
purchase, or securities convertible into, capital stock, except for (i)
transfers and replacements of then outstanding shares of capital stock and (ii)
stock splits, stock dividends and similar issuances which do not decrease the
percentage ownership of the Borrower or any of its Subsidiaries in any class of
the capital stock of such Subsidiary.
7.12 No Other Business. A Borrower will not, and will not permit any of
its Subsidiaries to, carry on any business other than the business in which it
is engaged on the Effective Date.
7.13 UPET Account Balances. UPET will not, except as required to
immediately pay obligations approved by the Lender under Section 2.7, maintain a
balance in any bank account held by UPET in excess of any minimum balance
required by the bank at which the account is held. If at any time, UPET has a
balance in any bank account in excess of the balance permitted under this
Section 7.13, UPET shall contribute such excess to Calibur or Jackson-United.
Section 8. Events of Default. Upon the occurrence of any of the
following specified events (each an "Event of Default"):
8.1 Payments. Any Borrower shall (i) default in the payment when due of
any principal of any Loan or any Note or (ii) default, and such default shall
continue unremedied for five or more Business Days, in the payment when due of
any interest on any Loan or any Note or any other amounts owing hereunder or
under any other Credit Document; or
8.2 Representations, etc. Any representation, warranty or statement
made by or on behalf of a Borrower herein or in any other Credit Document or in
any certificate delivered pursuant hereto or thereto shall prove to be untrue in
any material respect on the date as of which made or deemed made; or
8.3 Covenants. Any Borrower shall (i) default in the due performance or
observance by it of any term, covenant or agreement contained in Sections
6.1(f), 6.3, 6.4, 6.9, or 7, or (ii) default in the due performance or
observance by it of any term, covenant or agreement (other than those referred
to in Sections 8.1 and 8.2 and clause (i) of this Section 8.3) contained in this
Agreement or any other Credit Document and any such default shall have continued
unremedied for a period of 15 days; or
8.4 Default Under Other Agreements. Any Borrower or any of their
Subsidiaries shall (i) default in any payment of all or any portion of any
Indebtedness (other than the Notes) in a principal amount in excess of
U.S.$10,000, either individually or in the aggregate, when and as the same shall
become due and payable beyond the period of grace (not to exceed 30 days), if
any, provided in the instrument or agreement under which such Indebtedness was
created; or (ii) default in the observance or performance of any agreement,
covenant or condition relating to any such Indebtedness or contained in any
agreement or instrument evidencing, securing, governing or relating thereto, or
any other event shall occur or condition exist, the effect of which default or
other event or condition is to cause, or to permit the holder or holders of such
Indebtedness (or a
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<PAGE> 28
trustee or agent on behalf of such holder or holders) to cause (determined
without regard to whether any notice is required), any such Indebtedness to
become due prior to its stated maturity; or (iii) any such Indebtedness of any
Borrower or any of their Subsidiaries shall be declared to be due and payable,
or required to be prepaid other than by a regularly scheduled required
prepayment, prior to the stated maturity thereof; or
8.5 Bankruptcy, etc. Any Borrower, the Guarantor or any Subsidiary
shall commence a voluntary case concerning itself under any bankruptcy or
similar law of any jurisdiction; or an involuntary case under any such statute
is commenced against any Borrower, the Guarantor or any Subsidiary, and the
petition is not controverted within 10 days after service of such petition on
such Borrower, Guarantor or any such Subsidiary, or is not dismissed within 60
days after service of petition on such Borrower, Guarantor or any such
Subsidiary; or a custodian is appointed for, or takes charge of, all or
substantially all of the property of any Borrower, a Guarantor or any of their
Subsidiaries, or any Borrower, a Guarantor or any of their respective
Subsidiaries commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency,
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to any Borrower, the Guarantor or any Subsidiary, or there is
commenced against the Borrower, the Guarantor or any Subsidiary, any such
proceeding which remains undismissed for a period of 60 days after service of
petition on any Borrower, Guarantor or any such Subsidiary, or any Borrower, the
Guarantor or any Subsidiary is adjudicated insolvent or bankrupt; or any order
of relief or other order approving any such case or proceeding is entered and
continues undischarged or unstayed for a period of 60 days; or any Borrower, the
Guarantor or any Subsidiary suffers any appointment of any custodian or the like
for it or for any substantial part of its property; or any Borrower, the
Guarantor or any Subsidiary makes a general assignment for the benefit of
creditors; or any corporate action is taken by any Borrower, the Guarantor or
any Subsidiary for the purpose of effecting any of the foregoing; or
8.6 Guaranties. Any Guaranty or any provision thereof shall cease to be
in full force and effect, or the Guarantor or any person acting by or on behalf
of the Guarantor shall deny or disaffirm any of the obligations of the Guarantor
under the Guaranty, or the Guarantor shall default in the due performance or
observance of any term, covenant or agreement on its part to be performed or
observed pursuant to the Guaranty; or
8.7 Change of Control. A Change of Control shall occur; or
8.8 Judgments. One or more judgments or decrees shall be entered
against any Borrower or any of its Subsidiaries involving in the aggregate a
liability (not paid or fully covered by insurance) of the equivalent of
U.S.$100,000 or more, and all such judgments or decrees shall not have been
vacated, discharged or stayed or bonded pending appeal within 60 days after the
entry thereof; or
8.9 Governmental Action. Any Governmental Agency shall have condemned,
seized, or otherwise expropriated all or any substantial part of the property,
shares of capital stock or other assets of the Borrower or any of its
Subsidiaries or shall have assumed custody or control
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<PAGE> 29
of such property or other assets or of the business or operations of any
Borrower or any of its Subsidiaries or shall have taken any action for the
dissolution or disestablishment of any Borrower or any of its Subsidiaries or
any action that would prevent such Borrower or any of its Subsidiaries from
carrying on its respective business or a substantial part thereof; or
8.10 Material Adverse Change. Any event or condition (including,
without limitation, any material adverse change in the financial condition or
business of any Borrower, any of their Subsidiaries or any of the Guarantors)
shall occur which gives reasonable grounds to conclude, in the judgment of the
Lender, that a Borrower or the Guarantors will not, or will be unable to,
perform or observe in the ordinary course of business its obligations under any
of the Credit Documents to which it is a party;
then, and in any such event, and at any time thereafter, if any Event
of Default shall then be continuing, the Lender shall have the right, upon
written notice to the Borrower, to take any and all of the following actions,
without prejudice to the rights of the Lender or the holder of any Note to
enforce its claims against a Borrower (provided, that, if an Event of Default
specified in Section 8.5 shall occur with respect to a Borrower or any of its
Subsidiaries, the result which would occur upon the giving of written notice by
the Lender to a Borrower as specified in clause (i) and (ii) below shall occur
automatically without the giving of any such notice): (i) to declare the
principal of and any accrued interest in respect of the Loan, the Notes and all
obligations owing hereunder and thereunder to be, whereupon the same shall
become, forthwith due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by each Borrower; and (ii) to
exercise any other rights available under the Credit Documents or other document
or instrument entered into in connection therewith.
Section 9. Miscellaneous
9.1 Payment of Expenses, etc. The Borrowers shall: (i) whether or not
the transactions herein contemplated are consummated, pay all out-of-pocket
costs and expenses of (x) the Lender (including, without limitation, the fees
and disbursements of White & Case LLP counsel to the Lender), incurred in
connection with the preparation, review, negotiation, execution and delivery of
this Agreement and the other Credit Documents and the documents and instruments
prepared in connection herewith or therewith or in anticipation hereof or
thereof and any amendment, waiver or consent relating hereto or thereto, and (y)
the Lender in connection with the enforcement of this Agreement and the other
Credit Documents and the documents and instruments referred to herein and
therein (including, without limitation, the reasonable fees and disbursements of
counsel for the Lender); (ii) pay and hold the Lender harmless from and against
any and all present and future stamp and other similar taxes with respect to the
foregoing matters and save and hold the Lender harmless from and against any and
all liabilities with respect to or resulting from any delay or omission (other
than to the extent attributable to the Lender) to pay such taxes; and (iii)
indemnify each of the Lender and its respective officers, directors, employees,
representatives and agents (each an "indemnified person") from and hold each of
them harmless against any and all liabilities, obligations, losses, damages,
penalties, claims, actions, judgments, suits, costs, expenses and disbursements
(collectively, "Losses") incurred by any of them as a result of, or arising out
of, or in any way related to, or by reason of, any
-29-
<PAGE> 30
investigation, litigation or other proceeding (whether or not the indemnified
person is a party thereto) related to the entering into and/or performance of
this Agreement or any other Credit Document or the use of the proceeds of the
Consolidated Loans hereunder or the consummation of any transactions
contemplated herein or in any other Credit Document, including, without
limitation, the reasonable fees and disbursements of counsel incurred in
connection with any such investigation, litigation or other proceeding (but
excluding any such Losses, to the extent incurred by reason of the gross
negligence or willful misconduct of the indemnified person).
9.2 Right of Setoff. In addition to any rights now or hereafter granted
under applicable law or otherwise, and not by way of limitation of any such
rights, upon the occurrence of an Event of Default, the Lender is hereby
authorized at any time or from time to time, without presentment, demand,
protest or other notice of any kind to the Borrowers or to any other person, any
such notice being hereby expressly waived, to set off and to appropriate and
apply any and all deposits (general or special) and any other Indebtedness at
any time held or owing by the Lender to or for the credit or the account of any
Borrower against and on account of the Obligations and liabilities of the
Borrowers to the Lender under this Agreement or under any of the other Credit
Documents, and all other claims of any nature or description arising out of or
connected with this Agreement or any other Credit Document, irrespective of
whether or not the Lender shall have made any demand hereunder and although said
Obligations, liabilities or claims, or any of them, shall be unmatured.
9.3 Notices. Except as otherwise expressly provided herein, all notices
and other communications provided for hereunder shall be in writing (including
telegraphic, telex, facsimile, or cable communication) and mailed, telegraphed,
telexed, transmitted by facsimile, cabled or delivered: if to the Borrower, at
its address specified opposite its signature below with a copy to the Guarantor
to Michael F. Thomas, 3624 Rankin Ferry Loop Road, Louisville, Tennessee 37777;
if to the Lender, at its address specified opposite its signature below with a
copy to each of (i) H.W. Partners L.P., 1601 Elm Street, Suite 4000, Dallas,
Texas 75201, Attention: Stuart J. Chasanoff, (ii) White & Case LLP, 200 South
Biscayne Boulevard Miami, Florida 33129, Attention: Jorge L. Freeland and (iii)
the Guarantor to Michael F. Thomas, 3624 Rankin Ferry Loop Road, Louisville,
Tennessee 37777; or at such other address as shall be designated by such party
in a written notice to the other parties hereto. All such notices and
communications shall, when mailed, transmitted by facsimile, telegraphed,
telexed, cabled, or sent by overnight courier, be effective when deposited in
the mails, delivered to any nationally-recognized telegraph company, cable
company, or overnight courier, as the case may be, or transmitted by telex or
facsimile (confirmed by telex answerback or facsimile transmission confirmation,
as the case may be), except that notices and communications to the Lender shall
not be effective until received thereby.
9.4 Benefit of Agreement. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors and
permitted assigns of the parties hereto, provided that no Borrower may assign or
transfer any of its rights or obligations hereunder without the prior written
consent of the Lender.
-30-
<PAGE> 31
9.5 No Waiver; Remedies Cumulative. No failure or delay on the part of
any of the Lender or the holder of the Note in exercising any right, power or
privilege hereunder or under any other Credit Document and no course of dealing
between the Borrowers and the Lender or the holder of the Note shall operate as
a waiver thereof; nor shall any single or partial exercise of any right, power
or privilege hereunder or under any other Credit Document preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder or thereunder. The rights, powers and remedies herein or in any other
Credit Document expressly provided are cumulative and not exclusive of any
rights, powers or remedies which any of the Lender or the holder of the Note
would otherwise have. No notice to or demand on any Borrower in any case shall
entitle such Borrower to any other or further notice or demand in similar or
other circumstances or constitute a waiver of the rights of any of the Lender or
the holder of the Note to any other or further action in any circumstances
without notice or demand.
9.6 Calculations; Computations. (a) The financial statements to be
furnished to the Lender pursuant hereto shall be made and prepared in accordance
with GAAP (except as set forth in the notes thereto or as otherwise disclosed in
writing by the Borrowers to the Lender); provided that except as otherwise
specifically provided herein, all computations determining compliance with
Section 8 shall utilize accounting principles and policies in conformity with
those used to prepare the historical financial statements delivered to the
Lender pursuant to Section 6.1.
(b) All computations of interest hereunder shall be made on the basis
of a year of 360 days for the actual number of days (including the first day but
excluding the last day) occurring in the period for which such interest is
payable.
9.7 Governing Law. (a) This Agreement and the other Credit Documents
and the rights and obligations of the parties hereunder and thereunder shall be
construed in accordance with and be governed by the laws of the State of New
York without giving effect to the principles thereof relating to conflicts of
law except Section 5-1401 of the New York General Obligations Law, except as is
otherwise specifically provided in such Credit Document.
(b) Each Borrower agrees, to the extent permitted by applicable law,
that in any legal action or proceeding arising out of or in connection with this
Agreement or any other Credit Document (the "Proceedings") anywhere (whether for
an injunction, specific performance, damages or otherwise), no immunity (to the
extent that it may at any time exist) from those Proceedings, from attachment
(whether in aid of execution, before judgment or otherwise), or from judgment
shall be claimed by it or on its behalf or with respect to its assets. Each
Borrower agrees, to the extent permitted by applicable law, that it is and its
assets are, and shall be, subject to such Proceedings, attachment or execution
in respect of its obligations under this Agreement and each other Credit
Document to which it is party.
(c) The parties agree that nothing in this agreement shall (i) confer
jurisdiction and venue on a particular jurisdiction or (ii) deny jurisdiction
and venue to a particular jurisdiction.
9.8 Counterparts. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and
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<PAGE> 32
delivered shall be an original, but all of which shall together constitute one
and the same instrument.
9.9 Effectiveness. This Agreement shall become effective on the date
(the "Effective Date") on which the Borrowers and the Lender shall have signed a
copy hereof (whether the same or different copies).
9.10 Headings Descriptive. The headings of the several sections and
subsections of this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.
9.11 Amendment or Waiver. Neither this Agreement nor any other Credit
Document nor any terms hereof or thereof may be changed, waived, discharged or
terminated unless such change, waiver, discharge or termination is in writing
signed by the Lender and the Borrowers.
9.12 Survival. All indemnities set forth herein, including, without
limitation, Section 10.2, shall survive the execution and delivery of this
Agreement and the Note and the making and repayment of the Loan.
9.13 Domicile of Loan. The Lender may transfer and carry the Loan at,
to or for the account of any office, Subsidiary or Affiliate of the Lender.
9.14 WAIVER OF JURY TRIAL. THE LENDER AND THE BORROWER HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT ANY OF THEM MAY HAVE
TO A TRIAL BY JURY OR, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTE OR
ANY OTHER CREDIT DOCUMENT, OR ANY COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
OR WRITTEN) OR ACTIONS OF ANY PARTY RELATING HERETO OR THERETO. THIS PROVISION
IS A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS AGREEMENT.
[SIGNATURES ON NEXT PAGE]
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<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
BORROWERS
United Petroleum Corporation UNITED PETROLEUM CORPORATION
1111 Northshore Drive
Suite N425
Knoxville, Tennessee 37918
Attention:
By:
--------------------------------
Name:
Title:
Calibur System, Inc. CALIBUR SYSTEMS, INC.
4867 N. Broadway
Knoxville, Tennessee 37919
By:
--------------------------------
Name:
Title:
Jackson-United Petroleum Corporation JACKSON-UNITED PETROLEUM
1111 Northshore Drive CORPORATION
Suite N425
Knoxville, Tennessee 37918
Attention:
By:
--------------------------------
Name:
Title:
LENDER
Infinity Investors Limited INFINITY INVESTORS LIMITED
Hunkins Waterfront Plaza
Plain Street
P.O. Box 556
Charlestown, Nevis, West Indies
By:
--------------------------------
Name:
Title:
<PAGE> 34
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Definitions and Principles of Construction......1
1.1 Defined Terms ..................................1
1.2 Principles of Construction .....................8
Section 2. Amount and Terms of Credit .....................8
2.1 The Consolidated Loans .........................8
2.2 Notice of Borrowing ............................8
2.3 Disbursement of Funds ..........................8
2.4 Notes ..........................................9
2.5 Interest .......................................9
2.6 Cash Management System ........................10
2.7 Approval of Use of Proceeds ...................10
Section 3. Prepayments; Payments .........................10
3.1 Voluntary Prepayments .........................10
3.2 Mandatory Repayments ..........................10
3.3 Method and Place of Payment ...................10
3.4 Net Payments ..................................11
3.5 Application of Proceeds from Collateral .......11
Section 4. Conditions Precedent ..........................11
4.1 Conditions to Closing .........................11
4.2 Conditions to each Borrowing ..................13
Section 5. Representations, Warranties and Agreements.....14
5.1 Legal Status ..................................14
5.2 Power and Authority ...........................14
5.3 No Violation ..................................14
5.4 Governmental Approvals ........................15
5.5 Litigation ....................................15
5.6 Financial Statements ..........................15
5.7 Priority of Loan ..............................16
5.8 Properties ....................................16
5.9 Morristown and Newport Personal Property ......16
5.10 Transactions with Affiliates ..................16
5.11 True and Complete Disclosure ..................16
5.12 Use of Proceeds ...............................16
</TABLE>
(i)
<PAGE> 35
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
5.13 Tax Returns and Payments .............................................16
5.14 Labor Relations ......................................................17
5.15 Capitalization .......................................................17
5.16 Subsidiaries .........................................................17
5.17 Compliance with Laws .................................................17
5.18 Compliance with Material Agreements ..................................17
5.19 Fees and Enforcement .................................................17
5.20 Withholding Taxes ....................................................18
5.21 Compliance with ERISA ................................................18
5.22 Environmental Matters ................................................18
5.23 Investment Company Act ...............................................19
5.24 Public Utility Holding Company Act ...................................19
5.25 Assets ...............................................................19
5.26 Intellectual Property ................................................19
5.27 Internal Accounting Controls .........................................19
Section 6. Affirmative Covenants ................................................19
6.1 Information Covenants ................................................20
6.2 Books, Records and Inspections; Accounting and Audit Matters .........21
6.3 Compliance with Laws .................................................21
6.4 Performance of Obligations ...........................................21
6.5 Taxes ................................................................21
6.6 Maintenance of Corporate Franchises ..................................21
6.7 Maintenance of Property, Insurance ...................................22
6.8 Grant of Security ....................................................22
6.9 ERISA ................................................................22
6.10 Board Meetings .......................................................23
6.11 Appointment of Consultant ............................................23
6.12 Transfer of Certain Stores ...........................................23
6.13 Morristown Store and Newport Store ...................................23
6.14 Restructuring ........................................................23
6.15 Further Assurances ...................................................23
Section 7. Negative Covenants ...................................................24
7.1 Liens ................................................................24
7.2 Dividends ............................................................24
7.3 Indebtedness .........................................................25
7.4 Capital Expenditure ..................................................25
7.5 Advances, Investments and Loans ......................................25
7.6 Consolidations, Mergers, Purchases, Sales of Assets, etc .............25
7.7 Limitations on Modifications of Indebtedness; Modifications of Certain
Agreements ...........................................................26
7.8 Limitation on Restrictions on Subsidiary Dividends and other
Distributions ........................................................26
7.9 Transactions with Guarantor and Affiliates ...........................26
</TABLE>
(ii)
<PAGE> 36
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
7.10 Hazardous Materials ........................................26
7.11 Limitation on Issuance of Capital Stock by Subsidiaries.....27
7.12 No Other Business ..........................................27
7.13 UPET Account Balances ......................................27
Section 8. Events of Default ..........................................27
8.1 Payments ...................................................27
8.2 Representations, etc .......................................27
8.3 Covenants ..................................................27
8.4 Default Under Other Agreements .............................27
8.5 Bankruptcy, etc ............................................28
8.6 Guaranties .................................................28
8.7 Change of Control ..........................................28
8.8 Judgments ..................................................28
8.9 Governmental Action ........................................28
8.10 Material Adverse Change ....................................29
Section 9. Miscellaneous ..............................................29
9.1 Payment of Expenses, etc ...................................29
9.2 Right of Setoff ............................................30
9.3 Notices ....................................................30
9.4 Benefit of Agreement .......................................30
9.5 No Waiver; Remedies Cumulative .............................31
9.6 Calculations; Computations .................................31
9.7 Governing Law ..............................................31
9.8 Counterparts ...............................................31
9.9 Effectiveness ..............................................32
9.10 Headings Descriptive .......................................32
9.11 Amendment or Waiver ........................................32
9.12 Survival ...................................................32
9.13 Domicile of Loan ...........................................32
9.14 WAIVER OF JURY TRIAL .......................................32
</TABLE>
(iii)
<PAGE> 1
EXHIBIT 10.16
A NOTE
U.S.$4,200,000.00 August 5, 1998
FOR VALUE RECEIVED, UNITED PETROLEUM CORPORATION, a
corporation organized and existing under the laws of Delaware, CALIBUR SYSTEMS,
INC., a corporation organized and existing under the laws of Tennessee, and
JACKSON-UNITED PETROLEUM CORPORATION, a corporation organized and existing under
the laws of Kentucky (each a "Borrower" and, collectively, the "Borrowers"),
hereby jointly and severally promise to pay to the order of INFINITY INVESTORS
LIMITED, a Nevis West Indies corporation (the " Lender"), in lawful money of the
United States of America in immediately available funds, to Citibank, New York
City, ABA No. 021000089, Credit to Bear Stearns Acct. No. 0925-3186, f/c/o
Infinity Investors Limited, Acct. No. 102-05092 or such other location as the
Lender may from time to time specify, on the Maturity Date (as defined in the
Amended, Restated and Consolidated Credit Agreement, dated as of August 5, 1998
(as modified, supplemented or amended from time to time, the "Credit
Agreement")) the principal sum of U.S.$4,200,000.00 (Four Million, Two-Hundred
Thousand United States Dollars) or, if less, the unpaid principal amount of the
Calibur Consolidated Loan (as defined in the Credit Agreement) made by the
Lender pursuant to the Credit Agreement (or, in either case, so much thereof as
shall not have been repaid or paid).
The Borrowers promise also to pay interest on the unpaid
principal amount of the Calibur Consolidated Loan in like money to said account
from the date such Calibur Consolidated Loan is made until paid at the rates and
at the times provided in Section 2.5 of the Credit Agreement.
This Note is the A Note referred to in the Credit Agreement,
between the Borrowers and the Lender, and is entitled to the benefits of the
Credit Agreement and the other Credit Documents (as defined in the Credit
Agreement). As provided in the Credit Agreement, this A Note is subject to
voluntary prepayments and mandatory repayments, in whole or in part.
In case an Event of Default (as defined in the Credit
Agreement) shall occur and be continuing, the principal of and accrued interest
on this A Note may be declared to be due and payable in the manner and with the
effect provided in the Credit Agreement.
The Borrowers hereby waive presentment, demand, protest or
other notice of any kind in connection with this A Note.
<PAGE> 2
This A Note shall be construed in accordance with and be
governed by the law of the State of New York of the United States of America.
UNITED PETROLEUM CORPORATION,
a Delaware corporation
By:
---------------------------------
Name:
Title:
CALIBUR SYSTEMS, INC.,
a Tennessee corporation
By:
---------------------------------
Name:
Title:
JACKSON-UNITED PETROLEUM
CORPORATION, a Kentucky corporation
By:
---------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.17
B NOTE
$2,800,000 August 5, 1998
FOR VALUE RECEIVED, UNITED PETROLEUM CORPORATION, a
corporation organized and existing under the laws of Delaware, CALIBUR SYSTEMS,
INC., a corporation organized and existing under the laws of Tennessee, and
JACKSON-UNITED PETROLEUM CORPORATION, a corporation organized and existing under
the laws of Kentucky (each a "Borrower" and, collectively, the "Borrowers"),
hereby jointly and severally promise to pay to the order of INFINITY INVESTORS
LIMITED, a Nevis West Indies corporation (the " Lender"), in lawful money of the
United States of America in immediately available funds, to Citibank, New York
City, ABA No. 021000089, Credit to Bear Stearns Acct. No. 0925-3186, f/c/o
Infinity Investors Limited, Acct. No. 102-05092 or such other location as Lender
may from time to time specify, on the Maturity Date (as defined in the Amended,
Restated and Consolidated Credit Agreement, dated as of August 5, , 1998 (as
modified, supplemented or amended from time to time, the "Credit Agreement"))
the principal sum of up to $2,800,000 (Two Million, Eight Hundred Thousand
United States Dollars) or, if less, the unpaid principal amount of the
Consolidated Bridge Loan (as defined in the Credit Agreement) made by the Lender
pursuant to the Credit Agreement (or, in either case, so much thereof as shall
not have been repaid or paid).
The Borrowers jointly and severally promise also to pay
interest on the unpaid principal amount of the Consolidated Bridge Loan in like
money to said account from the date such Loan is made until paid at the rates
and at the times provided in Section 2.5 of the Credit Agreement.
This Note is the B Note referred to in the Credit Agreement
between the Borrowers and the Lender, and is entitled to the benefits of the
Credit Agreement and the other Credit Documents (as defined in the Credit
Agreement). As provided in the Credit Agreement, this B Note is subject to
voluntary prepayments and mandatory repayments, in whole or in part.
In case an Event of Default (as defined in the Credit
Agreement) shall occur and be continuing, the principal of and accrued interest
on this B Note may be declared to be due and payable in the manner and with the
effect provided in the Credit Agreement.
The Borrowers hereby waive presentment, demand, protest or
other notice of any kind in connection with this B Note.
<PAGE> 2
This B Note shall be construed in accordance with and be
governed by the law of the State of New York of the United States of America.
UNITED PETROLEUM CORPORATION,
a Delaware corporation
By:
---------------------------------
Name:
Title:
CALIBUR SYSTEMS, INC.,
a Tennessee corporation
By:
---------------------------------
Name:
Title:
JACKSON-UNITED PETROLEUM
CORPORATION, a Kentucky corporation
By:
---------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.18
GUARANTY
GUARANTY, dated as of August 5, 1998, made by MR. MICHAEL F.
THOMAS (the "Guarantor"). Except as otherwise defined herein, terms used herein
and defined in the Amended, Restated and Consolidated Credit Agreement, dated as
of August 5, 1998 (as modified, supplemented or amended from time to time, the
"Credit Agreement"), shall be used herein as so defined.
W I T N E S S E T H :
WHEREAS, UNITED PETROLEUM CORPORATION, a corporation organized
and existing under the laws of Delaware, CALIBUR SYSTEMS, INC., a corporation
organized and existing under the laws of Tennessee, and JACKSON-UNITED PETROLEUM
CORPORATION, a corporation organized and existing under the laws of Kentucky
(each a "Borrower" and, collectively, the "Borrowers") and INFINITY INVESTORS
LIMITED, a Nevis West Indies corporation (the "Lender") have entered into the
Credit Agreement providing for the making of the Consolidated Loans as
contemplated therein;
WHEREAS, it is a condition to the making of the Consolidated
Loans under the Credit Agreement that the Guarantor shall have executed and
delivered this Guaranty; and
WHEREAS, the Guarantor will obtain benefits as a result of the
Consolidated Loans made to the Borrowers under the Credit Agreement, in
particular the Calibur Consolidated Loan, and, accordingly, desires to execute
and deliver this Guaranty in order to satisfy the condition described in the
preceding paragraph;
NOW, THEREFORE, in consideration of the foregoing and other
benefits accruing to the Guarantor, the receipt and sufficiency of which are
hereby acknowledged, the Guarantor hereby makes the following representations
and warranties to the Lender and hereby covenants and agrees with the Lender as
follows:
1. The Guarantor irrevocably and unconditionally guarantees
the full and prompt payment when due (whether by acceleration or otherwise) of
the principal of and interest on the A Note issued under the Credit Agreement
and of all other obligations and liabilities (including, without limitation,
indemnities, fees and interest thereon) of the Borrowers now existing or
hereafter incurred under, arising out of or in connection with the Calibur
Consolidated Loan under the Credit Agreement or any other Credit Document and
the due performance and compliance with the terms of the Credit Documents by the
Borrowers with respect to the Calibur
<PAGE> 2
Page 2
Consolidated Loan (all such principal, interest, obligations and liabilities,
collectively, the "Guaranteed Obligations"). All payments by the Guarantor under
this Guaranty shall be made on the same basis as payments by the Borrowers under
Sections 3.3 and 3.4 of the Credit Agreement. Upon the cancellation of the A
Note, this Guaranty shall terminate.
2. The Guarantor hereby waives notice of acceptance of this Guaranty
and notice of any liability to which it may apply, and waives presentment,
demand of payment, protest, notice of dishonor or nonpayment of any such
liability, suit or taking of other action by the Lender against, and any other
notice to, any party liable thereon (including such Guarantor or any other
guarantor).
3. The Lender may at any time and from time to time without the consent
of, or notice to the Guarantor, without incurring responsibility to the
Guarantor and without impairing or releasing the obligations of the Guarantor
hereunder, upon or without any terms or conditions and in whole or in part:
(a) change the manner, place or terms of payment of, and/or change or
extend the time of payment of, renew or alter, any of the Guaranteed
Obligations, any security therefor, or any liability incurred directly or
indirectly in respect thereof, and the guaranty herein made shall apply to
the Guaranteed Obligations as so changed, extended, renewed or altered;
(b) sell, exchange, release, surrender, realize upon or otherwise deal
with in any manner and in any order any property by whomsoever at any time
pledged or mortgaged to secure, or howsoever securing, the Guaranteed
Obligations or any liabilities (including any of those hereunder) incurred
directly or indirectly in respect thereof or hereof, and/or any offset
thereagainst;
(c) exercise or refrain from exercising any rights against the
Borrowers or others or otherwise act or refrain from acting;
(d) settle or compromise any of the Guaranteed Obligations, any
security therefor or any liability (including any of those hereunder)
incurred directly or indirectly in respect thereof or hereof, and may
subordinate the payment of all or any part thereof to the payment of any
liability (whether due or not) of the Borrowers to creditors of the
Borrowers other than the Lender and the Guarantor;
(e) apply any sums by whomsoever paid or howsoever realized to any
liability or liabilities of the Borrowers to the Lender regardless of what
liability or liabilities of the Borrowers remain unpaid;
(f) consent to or waive any breach of, or any act, omission or default
under, any of the Credit Documents, or otherwise amend, modify or
supplement any of the Credit Documents or any of such other instruments or
agreements; and/or
<PAGE> 3
Page 3
(g) act or fail to act in any manner referred to in this Guaranty
which may deprive the Guarantor of his rights to subrogation against the
Borrowers to recover full indemnity for any payments made pursuant to this
Guaranty.
4. Obligations of the Guarantor under this Guaranty are absolute and
unconditional and shall remain in full force and effect without regard to, and
shall not be released, suspended, discharged, terminated or otherwise affected
by, any circumstance or occurrence whatsoever, including, without limitation:
(a) any action or inaction by the Lender as contemplated in Section 3 of this
Guaranty; or (b) any invalidity, irregularity or unenforceability of all or part
of the Guaranteed Obligations or of any security therefor. This Guaranty is a
primary obligation of the Guarantor.
5. If and to the extent that the Guarantor makes any payment to the
Lender or to any other Person pursuant to or in respect of this Guaranty, any
claim which the Guarantor may have against the Borrowers by reason thereof shall
be subject and subordinate to the prior payment in full of the Guaranteed
Obligations.
6. In order to induce the Lender to make the Consolidated Loans
pursuant to the Credit Agreement, the Guarantor makes the following
representations, warranties and agreements:
(a) The Guarantor has power and authority to execute, deliver and
perform the terms and provisions of this Guaranty, and has taken all
necessary action to execute, deliver and perform this Guaranty. The
Guarantor has duly executed and delivered this Guaranty, and this Guaranty
constitutes a legal, valid and binding obligation enforceable in accordance
with its terms.
(b) Neither the execution, delivery or performance by the Guarantor of
this Guaranty, nor compliance by him with the terms and provisions hereof,
(i) will contravene any provision of any law, statute, rule or regulation
or any order, writ, injunction or decree of any court or governmental
instrumentality or (ii) will conflict or be inconsistent with or result in
any breach of any of the terms, covenants, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of (or
the obligation to create or impose) any Lien upon any of the property or
assets of the Guarantor pursuant to the terms of any indenture, mortgage,
deed of trust, credit agreement, loan agreement or any other agreement,
contract or instrument to which the Guarantor is a party or by which he or
any of his property or assets is bound or to which it may be subject.
(c) No order, consent, approval, license, authorization or validation
of, or filing, recording or registration with (except as have been obtained
or made prior to the Effective Date), or exemption by, any governmental or
public body or authority, or any subdivision thereof, is required to
authorize, or is required in connection with, (i) the execution, delivery
and performance of this Guaranty or (ii) the legality, validity, binding
effect or enforceability of this Guaranty.
<PAGE> 4
Page 4
(d) There are no actions, suits or proceedings pending or, to the best
knowledge of the Guarantor, threatened (i) with respect to any Credit
Document or (ii) that are reasonably likely to materially and adversely
affect the business, operations, property, assets, condition (financial or
otherwise) of the Guarantor.
(e) All factual information (taken as a whole) heretofore or
contemporaneously furnished by or on behalf of the Guarantor in writing to
any Lender (including, without limitation, all information contained
herein) for purposes of or in connection with this Guaranty or any
transaction contemplated herein is, and all other such factual information
(taken as a whole) hereafter furnished by or on behalf of the Guarantor in
writing to any Lender will be, true and accurate in all material respects
on the date as of which such information is dated or certified and not
incomplete by omitting to state any fact necessary to make such information
(taken as a whole) not misleading at such time in light of the
circumstances under which such information was provided.
(f) The Guarantor has filed all tax returns required to be filed by
him and has paid all income taxes payable by him which has become due
pursuant to such tax returns and all other taxes and assessments payable by
him which have become due, other than those not yet delinquent and except
for those contested in good faith and for which adequate reserves have been
established. The Guarantor has paid, or has provided adequate reserves (in
the good faith judgment of the Guarantor) for the payment of, all federal
and state income taxes applicable for all prior fiscal years and for the
current fiscal year to the date hereof.
7. The Guarantor covenants and agrees that he will fully cooperate and
use his best efforts to cause the consummation of the transactions contemplated
by the Term Sheet attached as Exhibit J to the Credit Agreement:
8. This Guaranty is a continuing one and all liabilities to which it
applies or may apply under the terms hereof shall be conclusively presumed to
have been created in reliance hereon. No failure or delay on the part of the
Lender in exercising any right, power or privilege hereunder and no course of
dealing between the Guarantor and the Lender or the holder of any Note shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights,
powers and remedies herein expressly provided are cumulative and not exclusive
of any rights, powers or remedies which the Lender or the holder of any Note
would otherwise have. No notice to or demand on the Guarantor in any case shall
entitle the Guarantor to any other further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Lender or the holder
of any Note to any other or further action in any circumstances without notice
or demand.
9. This Guaranty shall be binding upon the Guarantor and his
successors and assigns and shall inure to the benefit of the Lender and their
successors and assigns.
10. Neither this Guaranty nor any provision hereof may be changed,
waived, discharged or terminated except as provided in Section 9.11 of the
Credit Agreement.
<PAGE> 5
Page 5
11. In addition to any rights now or hereafter granted under
applicable law or otherwise, and not by way of limitation of any such rights,
upon the occurrence of an Event of Default the Lender is hereby authorized at
any time or from time to time, without presentment, demand, protest, or other
notice of any kind to the Guarantor or to any other Person, any such notice
being hereby expressly waived, to set off and to appropriate and apply any and
all deposits (general or special) and any other Indebtedness at any time held or
owing by the Lender (including, without limitation, by branches and agencies of
the Lender wherever located) to or for the credit or the account of the
Guarantor against and on account of the obligations of the Guarantor to the
Lender under this Guaranty, irrespective of whether or not the Lender shall have
made any demand hereunder and although said obligations, or any of them, shall
be contingent or unmatured.
12. All notices and other communications hereunder shall be made at
the addresses, in the manner and with the effect provided in Section 9.3 of the
Credit Agreement, provided that, for this purpose, the address of the Guarantor
shall be the one specified opposite his signature below.
13. If claim is ever made upon the Lender or the holder of any Note
for repayment or recovery of any amount or amounts received in payment or on
account of any of the Guaranteed Obligations and any of the aforesaid payees
repays all or part of said amount by reason of (a) any judgment, decree or order
of any court or administrative body having jurisdiction over such payee or any
of its property or (b) any settlement or compromise of any such claim effected
by such payee with any such claimant (including the Borrowers), then and in such
event the Guarantor agrees that any such judgment, decree, order, settlement or
compromise shall be binding upon him, notwithstanding any revocation hereof or
the cancellation of any Note or other instrument evidencing any liability of the
Borrowers, and the Guarantor shall be and remain liable to the aforesaid payees
hereunder for the amount so repaid or recovered to the same extent as if such
amount had never originally been received by any such payee
14. Any acknowledgment or new promise, whether by payment or principal
or interest or otherwise and whether by the Borrowers or others (including the
Guarantor), with respect to any of the Guaranteed Obligations shall, if the
statute of limitations in favor of the Guarantor against the Lender or the
holder of any Note shall have commenced to run, toll the running of such statute
of limitations, and if the period of such statute of limitations shall have
expired, prevent the operation of such statute of limitations.
15. This Guaranty and the rights and obligations of the Lender, the
holders of the Notes and the Guarantor hereunder shall be construed in
accordance with and governed by the law of the State of New York, without giving
effect to conflicts of laws principles.
The obligation of the Guarantor to make payment in Dollars of any
Guaranteed Obligations due hereunder shall not be discharged or satisfied by any
tender, or any recovery pursuant to any judgment, which is expressed in or
converted into any currency other than Dollars, except to the extent such tender
or recovery shall result in the actual receipt by the Lender or on behalf of the
holders of the Notes of the full amount of Dollars expressed to be
<PAGE> 6
Page 6
payable in respect of any such Guaranteed Obligations. The obligation of the
Guarantor to make payment in Dollars as aforesaid shall be enforceable as an
alternative or additional cause of action for the purpose of recovery in Dollars
of the amount, if any, by which such actual receipt shall fall short of the full
amount of Dollars expressed to be payable in respect of any such Guaranteed
Obligations, and shall not be affected by judgment being obtained for any other
sums due under this Guaranty.
IN WITNESS WHEREOF, the Guarantor has executed and delivered
this Guaranty as of the date first above written.
<TABLE>
<CAPTION>
Address
-------
<S> <C>
Michael F. Thomas MICHAEL F. THOMAS
3624 Rankin Ferry Loop Road
Louisville, Tennessee 37777
---------------------------
</TABLE>
<PAGE> 7
Page 7
Accepted and Agreed to:
INFINITY INVESTORS LIMITED, a
Nevis West Indies corporation
By
---------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.19
AMENDED AND RESTATED PLEDGE AGREEMENT
AMENDED AND RESTATED PLEDGE AGREEMENT, dated as of August 5,
1998, made by UNITED PETROLEUM CORPORATION, a corporation organized and existing
under the laws of Delaware, (the "Pledgor"), to INFINITY INVESTORS LIMITED, a
Nevis West Indies corporation (the "Pledgee"). Except as otherwise defined
herein, terms used herein and defined in the Amended, Restated and Consolidated
Credit Agreement, dated as of August 5, 1998 (as modified, supplemented or
amended from time to time, the "Credit Agreement") shall be used herein as so
defined.
W I T N E S S E T H : ,
WHEREAS, Pledgor and Pledgee are parties to that certain
Pledge Agreement dated as of April 15, 1998 (the "Original Pledge");
WHEREAS, concurrently with this Agreement, the Pledgor and the
Pledgee are entering into the Credit Agreement providing for the Consolidated
Loans as contemplated therein;
WHEREAS, the Pledgor and the Pledgee collectively desire to
amend and restate the Original Pledge in connection with entering into the
Credit Agreement;
WHEREAS, it is a condition precedent to the effectiveness of
the Credit Agreement that the Pledgor shall have executed and delivered to the
Pledgee this Agreement; and
WHEREAS, the Pledgor desires to execute this Agreement to
satisfy the condition described in the preceding paragraph;
NOW, THEREFORE, in consideration of the benefits accruing to
the Pledgor, the receipt and sufficiency of which are hereby acknowledged, the
Pledgor hereby makes the following representations and warranties to the Pledgee
and hereby covenants and agrees with Pledgee as follows:
1. SECURITY FOR NOTES, ETC. This Agreement is for the benefit
of the Pledgee and the holders of the Notes to secure the payment due of the
principal of and interest on the Notes issued under the Credit Agreement, the
payment of all other obligations and liabilities (including, without limitation,
indemnities, fees and interest thereon) of the Pledgor, now existing or
hereafter incurred under, arising out of or in connection with the Credit
Agreement or
<PAGE> 2
Page 2
any other Credit Document and the due performance and compliance with the terms
of the Credit Documents by the Pledgor (all such principal, interest,
obligations and liabilities, collectively, the "Secured Obligations").
2. DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
"Stock" shall mean all the issued and outstanding shares of
capital stock, at any time owned by the Pledgor, of its direct or indirect
wholly-owned subsidiaries including CALIBUR SYSTEMS, INC. ("Calibur"), a
corporation organized and existing under the laws of Tennessee, JACKSON-UNITED
PETROLEUM CORPORATION ("Jackson-United"), a corporation organized and existing
under the laws of Kentucky, and CTV Studios, Inc. ("CTV"), a corporation
organized and existing under the laws of Florida. The Pledgor represents and
warrants that on the date hereof (i) the Stock consists of the number and type
of shares of the capital stock of the corporations as described in Annex A and
(ii) such Stock constitutes that percentage of the issued and outstanding
capital stock of the issuing corporation as is set forth in Annex A.
All Stock pledged hereunder is hereinafter called the "Pledged
Stock," and the Pledged Stock, together with all proceeds thereof, including any
securities and moneys received and at the time held by the Pledgee hereunder, is
hereinafter called the "Collateral."
3. PLEDGE OF STOCK, ETC.
3.1. Pledge. To secure the Secured Obligations and for the
purposes set forth in Section 1, the Pledgor: (i) hereby grants to the Pledgee a
security interest in all of the Collateral; (ii) hereby pledges and deposits as
security with the Pledgee (except as otherwise permitted below) the Stock owned
by the Pledgor on the date hereof and delivers to the Pledgee certificates
therefor accompanied by stock powers duly executed in blank by the Pledgor or
such other instruments of transfer as are acceptable to the Pledgee; and (iii)
hereby assigns, transfers, hypothecates, mortgages, charges and sets over to the
Pledgee all of the Pledgor's right, title and interest in and to such Stock (and
in and to the certificates or instruments evidencing such Stock), to be held by
the Pledgee upon the terms and conditions set forth in this Agreement.
3.2. Subsequently Acquired Stock. If the Pledgor shall acquire
(by purchase, stock dividend or otherwise) any additional Stock at any time or
from time to time after the date hereof, the Pledgor will forthwith pledge and
deposit such Stock as security with the Pledgee and deliver to the Pledgee
certificates therefor accompanied by stock powers duly executed in blank by the
Pledgor or such other instruments of transfer as are acceptable to the Pledgee,
and will promptly thereafter deliver to the Pledgee a certificate executed by
any of the President, any Vice President, or the Treasurer of the Pledgor
describing such Stock and certifying that the same has been duly pledged with
the Pledgee hereunder.
3.3. Uncertificated Stock. Notwithstanding anything to the
contrary contained in Sections 3.1 and 3.2, if any Stock (whether now owned or
hereafter acquired) is evidenced by an
<PAGE> 3
Page 3
uncertificated security, the Pledgor shall promptly notify the Pledgee thereof
and shall promptly take all actions required to perfect the security interest of
the Pledgee under applicable law. The Pledgor further agrees to take such
actions as the Pledgee deems necessary or desirable to effect the foregoing and
to permit the Pledgee to exercise any of its rights and remedies hereunder, and
agrees to provide opinions of counsel satisfactory to the Pledgee with respect
to any such pledge of uncertificated Stock promptly upon request of the Pledgee.
4. APPOINTMENT OF AGENTS; ENDORSEMENTS, ETC. The Pledgee shall
have the right to appoint one or more agents for the purpose of retaining
physical possession of the Pledged Stock, which may be held (in the discretion
of the Pledgee) in the name of the Pledgor, endorsed or assigned in blank or in
favor of the Pledgee or any nominee or nominees of the Pledgee or an agent
appointed by the Pledgee.
5. VOTING, ETC., WHILE NO EVENT OF DEFAULT. Unless and until
an Event of Default shall have occurred and be continuing, the Pledgor shall be
entitled to vote any and all Pledged Stock and to give consents, waivers or
ratifications in respect thereof, provided that no vote shall be cast or any
consent, waiver or ratification given or any action taken which would violate or
be inconsistent with any of the terms of this Agreement, any other Credit
Document or any other instrument or agreement referred to herein or therein, or
which would have the effect of impairing the position or interests of the
Pledgee or the holder of any Note. All such rights of the Pledgor to vote and to
give consents, waivers and ratifications shall cease in case an Event of Default
shall occur and be continuing, and Section 7 shall become applicable.
6. DIVIDENDS AND OTHER DISTRIBUTIONS. All cash dividends
payable in respect of the Pledged Stock shall be paid to the Pledgee and
retained by it as part of the Collateral, including, without limitation, all
cash dividends payable in respect of the Pledged Stock which are determined by
the Pledgee, in its absolute discretion, to represent in whole or in part an
extraordinary, liquidating or other distribution in return of capital. The
Pledgee shall also be entitled to receive directly, and to retain as part of the
Collateral:
(a) all other or additional stock or securities or property
(other than cash) paid or distributed by way of dividend in respect of the
Pledged Stock;
(b) all other or additional stock or other securities or
property (including cash) paid or distributed in respect of the Pledged Stock by
way of stock-split, spin-off, split-up, reclassification, combination of shares
or similar rearrangement; and
(c) all other or additional stock or other securities or
property which may be paid in respect of the Collateral by reason of any
consolidation, merger, exchange of stock, conveyance of assets, liquidation or
similar corporate reorganization.
7. REMEDIES IN CASE OF EVENT OF DEFAULT. In case an Event of
Default shall have occurred and be continuing, the Pledgee shall be entitled to
exercise all the rights, powers and remedies vested in it (whether vested in it
by this Agreement or any other Credit Document or by law) for the protection and
enforcement of its rights in respect of the
<PAGE> 4
Page 4
Collateral, and the Pledgee shall be entitled, without limitation, to exercise
the following rights, which the Pledgor hereby agrees to be commercially
reasonable:
(a) to transfer all or any part of the Pledged Stock into the
Pledgee's name or the name of its nominee or nominees;
(b) to vote all or any part of the Pledged Stock (whether or
not transferred into the name of the Pledgee) and give all consents, waivers and
ratifications in respect of the Collateral and otherwise act with respect
thereto as though it were the outright owner thereof (the Pledgor hereby
irrevocably constituting and appointing the Pledgee the proxy and
attorney-in-fact of the Pledgor, with full power of substitution to do so); and
(c) at any time or from time to time to sell, assign and
deliver, or grant options to purchase, all or any part of the Collateral, or any
interest therein, at any public or private sale, without demand of performance,
advertisement or notice of intention to sell or of the time or place of sale or
adjournment thereof or to redeem or otherwise (all of which are hereby waived by
the Pledgor), for cash, on credit or for other property, for immediate or future
delivery without any assumption of credit risk, and for such price or prices and
on such terms as the Pledgee in its absolute discretion may determine, provided
that at least 10 days' notice of the time and place of any such sale shall be
given to the Pledgor. The Pledgor hereby waives and releases to the fullest
extent permitted by law any right or equity of redemption with respect to the
Collateral, whether before or after sale hereunder, and all rights, if any, of
marshalling the Collateral and any other security for the Secured Obligations or
otherwise. At any such sale, unless prohibited by applicable law, the Pledgee
and/or the holders of the Notes may bid for and purchase all or any part of the
Collateral so sold free from any such right or equity of redemption. None of the
Pledgee and the holders of the Notes shall be liable for failure to collect or
realize upon any or all of the Collateral or for any delay in so doing nor shall
any of them be under any obligation to take any action whatsoever with regard
thereto.
8. APPLICATION OF PROCEEDS. All moneys collected by the
Pledgee upon any sale or other disposition of the Collateral, together with all
other moneys received by the Pledgee hereunder, shall be applied to the payment
of all costs and expenses incurred by the Pledgee in connection with such sale,
the delivery of the Collateral or the collection of any such moneys (including,
without limitation, attorneys' fees and expenses), and the balance of such
moneys shall be held by the Pledgee and applied by it to satisfy the Secured
Obligations.
9. PURCHASERS OF COLLATERAL. Upon any sale of the Collateral
by the Pledgee hereunder (whether by virtue of the power of sale herein granted,
pursuant to judicial process or otherwise), the receipt of the Pledgee or the
officer making the sale shall be a sufficient discharge to the purchaser or
purchasers of the Collateral so sold, and such purchaser or purchasers shall not
be obligated to see to the application of any part of the purchase money paid
over to the Pledgee or such officer or be answerable in any way for the
misapplication or nonapplication thereof.
<PAGE> 5
Page 5
10. INDEMNITY. The provisions of Article VIII of the Security
Agreement are hereby incorporated herein by reference as if such provisions were
set forth herein in their entirety.
11. FURTHER ASSURANCES. The Pledgor agrees that it will join
with the Pledgee in executing and, at its own expense, file and refile under the
UCC such financing statements, continuation statements and other documents in
such offices as the Pledgee may deem necessary or desirable and wherever
required or permitted by law in order to perfect and preserve the Pledgee's
security interest in the Collateral and hereby authorizes the Pledgee to file
financing statements and amendments thereto relative to all or any part of the
Collateral without the signature of the Pledgor where permitted by law, and
agrees to do such further acts and things and to execute and deliver to the
Pledgee such additional conveyances, assignments, agreements and instruments as
the Pledgee may reasonably require or deem advisable to carry into effect the
purposes of this Agreement or to further assure and confirm unto the Pledgee its
rights, powers and remedies hereunder.
12. TRANSFER BY THE PLEDGOR. The Pledgor will not sell or
otherwise dispose of, grant any option with respect to, or create, incur, assume
or suffer to exist any Lien on any portion of the Collateral (except the Lien
created by this Agreement).
13. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR.
The Pledgor represents and warrants that: (i) it is the legal, record and
beneficial owner of, and have good and marketable title to, the Stock described
in Section 2 hereof, subject to no Lien (except the Lien created by this
Agreement); (ii) it has full power, authority and legal right to pledge all such
Stock pursuant to this Agreement; (iii) all the shares of such Stock have been
duly and validly issued, are fully paid and nonassessable; (iv) this Agreement
creates, as security for the Secured Obligations, a valid and enforceable
perfected Lien on all of the Collateral, in favor of the Pledgee and the holder
of the Notes, subject to no Lien in favor of any other Person; (v) no consent,
filing, recording or registration is required to perfect the Lien purported to
be created by this Agreement; and (vi) each of the representations and
warranties contained in Section 5 of the Credit Agreement is true and correct.
The Pledgor covenants and agrees that it will defend the Pledgee's right, title
and Lien in and to the Collateral against the claims and demands of all Persons;
and the Pledgor covenants and agrees that it will have like title to and right
to pledge any other property at any time hereafter pledged to the Pledgee as
Collateral hereunder.
14. PLEDGOR'S OBLIGATIONS ABSOLUTE, ETC. The obligations of
the Pledgor under this Agreement shall be absolute and unconditional and shall
remain in full force and effect without regard to, and shall not be released,
suspended, discharged, terminated or otherwise affected by, any circumstance or
occurrence whatsoever, including, without limitation: (i) any renewal,
extension, amendment or modification of, or addition or supplement to or
deletion from, any of the Credit Documents or any other instrument or agreement
referred to therein, or any assignment or transfer of any thereof; (ii) any
waiver, consent, extension, indulgence or other action or inaction under or in
respect of any such instrument or agreement or this Agreement or any exercise or
non-exercise of any right, remedy, power or privilege under or
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in respect of this Agreement or any other Credit Document; (iii) any furnishing
of any additional security to the Pledgee or any acceptance thereof or any sale,
exchange, release, surrender or realization of or upon any security by the
Pledgee; or (iv) any invalidity, irregularity or unenforceability of all or part
of the Secured Obligations or of any security therefor.
15. REGISTRATION, ETC. (a)(i) If an Event of Default shall
have occurred and be continuing and the Pledgor shall have received from the
Pledgee a written request or requests that the Pledgor cause any registration,
qualification or compliance under any federal or state securities law or laws to
be effected with respect to all or any part of the Pledged Stock, the Pledgor as
soon as practicable and at its own expense will use its best efforts to cause
such registration to be effected (and be kept effective) and will use its best
efforts to cause such qualification and compliance to be effected (and be kept
effective) as may be so requested and as would permit or facilitate the sale and
distribution of such Pledged Stock, including, without limitation, registration
under the Securities Act of 1933, as then in effect (or any similar statute then
in effect), appropriate qualifications under applicable blue sky or other state
securities laws and appropriate compliance with any other government
requirements, provided that the Pledgee shall furnish to the Pledgor such
information regarding the Pledgee as the Pledgor may request in writing and as
shall be required in connection with any such registration, qualification or
compliance. The Pledgor will cause the Pledgee to be kept reasonably advised in
writing as to the progress of each such registration, qualification or
compliance and as to the completion thereof, will furnish to the Pledgee such
number of prospectuses, offering circulars or other documents incident thereto
as the Pledgee from time to time may reasonably request, and will indemnify the
Pledgee and all others participating in the distribution of such Pledged Stock
against all losses, liabilities, claims or damages caused by any untrue
statement (or alleged untrue statement) of a material fact contained therein (or
in any related registration statement, notification or the like) or by any
omission (or alleged omission) to state therein (or in any related registration
statement, notification or the like) a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as the same may have been caused by an untrue statement or omission
based upon information furnished in writing to the Pledgor by the Pledgee
expressly for use therein.
(b) If at any time when the Pledgee shall determine to
exercise its right to sell all or any part of the Pledged Stock pursuant to
Section 7, such Pledged Stock or the part thereof to be sold shall not, for any
reason whatsoever, be effectively registered under the Securities Act of 1933,
as then in effect, the Pledgee may, in its sole and absolute discretion, sell
such Pledged Stock or part thereof by private sale in such manner and under such
circumstances as Pledgee may deem necessary or advisable in order that such sale
may legally be effected without such registration, provided that at least 10
days' notice of the time and place of any such sale shall be given to the
Pledgor. Without limiting the generality of the foregoing, in any such event the
Pledgee, in its sole and absolute discretion (i) may proceed to make such
private sale notwithstanding that a registration statement for the purpose of
registering such Pledged Stock or part thereof shall have been filed under such
Securities Act, (ii) may approach and negotiate with a single possible purchaser
to effect such sale and (iii) may restrict such sale to a purchaser who will
represent and agree that such purchaser is purchasing for its own account, for
investment, and not with a view to the distribution or sale of such Pledged
Stock or any part thereof. In the
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event of any such sale, the Pledgee shall incur no responsibility or liability
for selling all or any part of the Pledged Stock at a price which the Pledgee,
in its sole and absolute discretion, may in good faith deem reasonable under the
circumstances, notwithstanding the possibility that a substantially higher price
might be realized if the sale were deferred until after registration as
aforesaid.
16. TERMINATION; RELEASE. After all Obligations have been paid
in full, this Agreement shall terminate, and the Pledgee, at the request and
expense of the Pledgor, will execute and deliver to the Pledgor a proper
instrument or instruments acknowledging the satisfaction and termination of this
Agreement, and will duly assign, transfer and deliver to the Pledgor (without
recourse and without any representation or warranty) such of the Collateral as
may be in the possession of the Pledgee and has not theretofore been sold or
otherwise applied or released pursuant to this Agreement, together with any
moneys at the time held by the Pledgee hereunder.
17. NOTICES, ETC. All notices and other communications
hereunder shall be made at the addresses, in the manner and with the effect
provided in Section 9.3 of the Credit Agreement.
18. MISCELLANEOUS. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided, however, that the Pledgor may not
assign or transfer any of their rights or obligations hereunder without the
prior written consent of the Pledgee. This Agreement may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Agreement shall be construed in accordance with and governed by the
law of the State of New York, without giving effect to conflict of law
principles. The headings of the several sections and subsections in this
Agreement are inserted for convenience only and shall not in any way affect the
meaning or construction of any provision of this Agreement. This Agreement may
be executed in any number of counterparts and by the different parties hereto on
separate counterparts, each of which when so executed and delivered shall be an
original, but all of which together shall constitute one and the same
instrument. The provisions of Section 1.2(a) of the Credit Agreement shall apply
to this Agreement as if the reference therein to "Agreement" were to this
Agreement.
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IN WITNESS WHEREOF, the Pledgor and the Pledgee have caused
this Agreement to be executed by their duly elected officers duly authorized as
of the date first above written.
UNITED PETROLEUM CORPORATION,
as Pledgor
By:
---------------------------------
Name:
Title:
INFINITY INVESTORS LIMITED,
as Pledgee
By
---------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.20
AMENDED AND RESTATED SECURITY AGREEMENT
AMENDED AND RESTATED SECURITY AGREEMENT, dated as of August 5,
1998, between UNITED PETROLEUM CORPORATION ("UPET"), a corporation organized and
existing under the laws of Delaware, CALIBUR SYSTEMS, INC. (Calibur"), a
corporation organized and existing under the laws of Tennessee, and
JACKSON-UNITED PETROLEUM CORPORATION ("Jackson-United"), a corporation organized
and existing under the laws of Kentucky (each an "Assignor" and, collectively,
the "Assignors")and INFINITY INVESTORS LIMITED, a Nevis West Indies corporation
(the "Lender"), a party to the Amended, Restated and Consolidated Credit
Agreement, dated as of August 5, 1998, among each of the Assignors and the
Lender (as modified, supplemented or amended from time to time, the "Credit
Agreement"). Unless otherwise defined herein, terms used herein and defined in
the Credit Agreement shall be used herein as so defined.
W I T N E S S E T H :
WHEREAS, UPET, Jackson-United and the Lender are parties to
that certain Security Agreement dated as of April 15, 1998 (the "Original
Security Agreement");
WHEREAS, each of the Assignors desire to incur the
Consolidated Loans under the Credit Agreement;
WHEREAS, each of the Assignors and Lender collectively desire
to amend and restate the Original Security Agreement in connection with the
closing of the Credit Agreement;
WHEREAS, it is a condition precedent to the incurrence of
Loans under the Credit Agreement that each of the Assignors shall has executed
and delivered to the Lender this Agreement; and
WHEREAS, each of the Assignors desires to execute this
Agreement to satisfy the condition described in the preceding paragraph;
NOW, THEREFORE, in consideration of the benefits to each of
the Assignors, the receipt and sufficiency of which are hereby acknowledged,
each of the Assignors hereby makes the following representations and warranties
to the Lender and hereby covenants and agrees with the Lender as follows:
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SECTION 1. SECURITY INTERESTS
1.1. Grant of Security Interests. (a) As security for the
prompt and complete payment and performance when due of all of its Obligations
(all capitalized terms used herein and defined in Section 9.1 shall be used
herein as so defined), each of the Assignors does hereby sell, assign and
transfer unto the Lender, and does hereby grant to the Lender a continuing
security interest of first priority in, all of the right, title and interest of
each of such Assignor in, to and under all of the following, whether now
existing or hereafter from time to time acquired: (i) each and every Receivable;
(ii) all Contracts, together with all Contract Rights arising thereunder; (iii)
all Inventory; (iv) all Equipment; (v) all Marks, together with the
registrations and right to all renewals thereof, and the goodwill of the
businesses of each of the Assignors symbolized by the Marks; (vi) all Patents
and Copyrights; (vii) all computer programs of each of the Assignors and all
intellectual property rights therein and all other proprietary information of
each of the Assignors, including, but not limited to, trade secrets; (viii) the
Cash Collateral Account and all monies, securities and instruments deposited or
required to be deposited in the Cash Collateral Account; (ix) all other Goods,
General Intangibles, Chattel Paper, Documents and Instruments (other than
Pledged Stock); and (x) all Proceeds and products of any and all of the
foregoing (all of the above, collectively, the "Collateral").
(b) The security interest of the Lender under this Agreement
extends to all Collateral of the kind described in preceding clause (a) which
each of the Assignors may acquire at any time during the continuation of this
Agreement.
1.2. Power of Attorney. Each of the Assignors hereby
constitutes and appoints the Lender its true and lawful attorney, irrevocably,
with full power after the occurrence of an Event of Default (in the name of each
of the Assignors or otherwise) to act, require, demand, receive, compound and
give acquittance for any and all monies and claims for monies due or to become
due to each of the Assignors under or arising out of the Collateral, to endorse
any checks or other instruments or orders in connection therewith and to file
any claims or take any action or institute any proceedings which the Lender may
deem to be necessary or advisable in the premises, which appointment as attorney
is coupled with an interest.
SECTION 2. GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS
Each of the Assignors represents, warrants and covenants,
which representations, warranties and covenants shall survive execution and
delivery of this Agreement, as follows:
2.1. Necessary Filings. All filings, registrations and
recordings necessary or appropriate to create, preserve, protect and perfect the
security interest granted by each of the Assignors to the Lender hereby in
respect of the Collateral have been accomplished and the security interest
granted to the Lender pursuant to this Agreement in and to the Collateral
constitutes a valid and enforceable perfected security interest therein superior
and prior to the rights of all other Persons therein and subject to no other
Liens (except that the Collateral may be subject to Liens permitted under
Section 7.1 of the Credit Agreement) and is entitled to all the
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rights, priorities and benefits afforded by the Uniform Commercial Code or other
relevant law as enacted in any relevant jurisdiction to perfected security
interests.
2.2. No Liens. Each of the Assignors is, and as to Collateral
acquired by them from time to time after the date hereof each of the Assignors
will be, the owners of all Collateral free from any Lien or other right, title
or interest of any Person (other than Liens created hereby or permitted under
Section 7.1 of the Credit Agreement), and each of the Assignors shall defend the
Collateral against all claims and demands of all Persons at any time claiming
the same or any interest therein adverse to the Lender.
2.3. Other Financing Statements. There is no financing
statement (or similar statement or instrument of registration under the law of
any jurisdiction) covering or purporting to cover any interest of any kind in
the Collateral except as disclosed in Annex A and so long as any of the
Obligations remain unpaid, none of the Assignors will execute or authorize to be
filed in any public office any financing statement (or similar statement or
instrument of registration under the law of any jurisdiction) or statements
relating to the Collateral, except financing statements filed or to be filed in
respect of and covering the security interests granted hereby by any of the
Assignors.
2.4. Chief Executive Office; Records. The chief executive
office of each of the Assignors is located at 1111 Northshore Drive, Suite N425,
Knoxville, Tennessee 37918 except Calibur which is at 4867 North Broadway,
Knoxville Tennessee 37919. Each of the Assignors will not move their chief
executive office except to such new location as any of the Assignors may
establish in accordance with the last sentence of this Section 2.4. The
originals of all documents evidencing all Receivables and Contract Rights of the
Assignors and the only original books of account and records of the Assignors
relating thereto are, and will continue to be, kept at such chief executive
office or at the locations disclosed in Annex B, or at such new locations as the
Assignors may establish in accordance with the last sentence of this Section
2.4. All Receivables and Contract Rights of the Assignors are, and will continue
to be, maintained at, and controlled and directed (including, without
limitation, for general accounting purposes) from, such office locations shown
above, or such new locations as the Assignors may establish in accordance with
the last sentence of this Section 2.4. None of the Assignors shall establish a
new location for such offices until (i) such assignor shall have given to the
Lender not less than 45 days' prior written notice of its intention so to do,
clearly describing such new location and providing such other information in
connection therewith as the Lender may reasonably request and (ii) with respect
to such new location, they shall have taken all action, satisfactory to the
Lender, to maintain the security interest of the Lender in the Collateral
intended to be granted hereby at all times fully perfected and in full force and
effect.
2.5. Location of Inventory and Equipment. (a) All Inventory
and Equipment held on the date hereof by any of the Assignors is located at one
of the locations shown on Annex C. Each of the Assignors agrees that (i) all
Inventory and Equipment now held or subsequently acquired by any of them shall
be kept at (or shall be in transport to) any one of the locations shown on Annex
C, or such new location as any of the Assignors may establish in accordance with
the last sentence of this Section 2.5. Each of the Assignors may establish a new
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location for Inventory and Equipment only if (i) it shall have given to the
Lender prior written notice of its intention so to do, clearly describing such
new location and providing such other information in connection therewith as the
Lender may reasonably request and (ii) with respect to such new location, they
shall have taken all action reasonably satisfactory to the Lender to maintain
the security interest of the Lender in the Collateral intended to be granted
hereby at all times fully perfected and in full force and effect.
2.6. Recourse. This Agreement is made with full recourse to
each of the Assignors and pursuant to and upon all the warranties,
representations, covenants and agreements on the part of each of the Assignors
contained herein, in the Credit Agreement and otherwise in writing in connection
herewith or therewith.
SECTION 3. SPECIAL PROVISIONS CONCERNING RECEIVABLES; CONTRACT
RIGHTS; INSTRUMENTS
3.1. Additional Representations and Warranties. As of the time
when each of its Receivables arises, each of the Assignors shall be deemed to
have represented and warranted that such Receivables, and all records, papers
and documents relating thereto (if any) are genuine and in all respects what
they purport to be, and that all papers and documents (if any) relating thereto
(i) will represent the genuine, legal, valid and binding obligation of the
account debtor evidencing indebtedness unpaid and owed by the respective account
debtor arising out of the performance of labor or services or the sale or lease
and delivery of the merchandise listed therein, or both, (ii) will be the only
original writings evidencing and embodying such obligation of the account debtor
named therein (other than copies created for general accounting purposes), (iii)
will evidence true and valid obligations, enforceable in accordance with their
respective terms and (iv) will be in compliance and will conform with all
applicable federal, state and local laws and applicable laws of any relevant
foreign jurisdiction.
3.2. Maintenance of Records. Each of the Assignors will keep
and maintain at its own cost and expense satisfactory and complete records of
its Receivables and Contracts, including, but not limited to, the originals of
all documentation (including each Contract) with respect thereto, records of all
payments received, all credits granted thereon, all merchandise returned and all
other dealings therewith, and each of the Assignors will make the same available
to the Lender for inspection, at such Assignor's own cost and expense, at any
and all reasonable times upon demand. Each of the Assignors shall, at its own
cost and expense, deliver all tangible evidence of its Receivables and Contract
Rights (including, without limitation, all documents evidencing the Receivables
and all Contracts) and such books and records to the Lender or to its
representatives (copies of which evidence and books and records may be retained
by each of the Assignors) at any time upon its demand. If the Lender so directs,
each of the Assignors shall legend, in form and manner reasonably satisfactory
to the Lender, the Receivables and Contracts, as well as books, records and
documents of each of the Assignors evidencing or pertaining to the Receivables
or Contracts with an appropriate reference to the fact that the Receivables and
Contracts have been assigned to the Lender and that the Lender has a security
interest therein.
<PAGE> 5
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3.3. Direction to Account Debtors; Contracting Parties; etc.
Each of the Assignors agrees (i) to cause all payments on account of the
Receivables and Contracts to be made directly to one of the Cash Collateral
Accounts and (ii) that the Lender may, at its option, directly notify the
obligors with respect to any Receivables and/or under any Contracts to make
payments with respect thereto as provided in preceding clause (i). Without
notice to or assent by the Assignors, the Lender may apply any or all amounts
then in, or thereafter deposited in, any one of the Cash Collateral Accounts in
the manner provided in Section 7.4 of this Agreement. The costs and expenses
(including attorneys' fees) of collection, whether incurred by any of the
Assignors or the Lender, shall be borne by the Assignors.
3.4. Modification of Terms; etc. None of the Assignors shall
rescind or cancel any indebtedness evidenced by any Receivable or under any
Contract, or modify any term thereof or make any adjustment with respect
thereto, or extend or renew the same, or compromise or settle any dispute,
claim, suit or legal proceeding relating thereto, or sell any Receivable or
Contract, or interest therein, without the prior written consent of the Lender,
except as permitted by Section 3.5. Each of the Assignors will duly fulfill all
obligations on their part to be fulfilled under or in connection with the
Receivables and Contracts and will do nothing to impair the rights of the Lender
in the Receivables or Contracts.
3.5. Collection. Each of the Assignors shall endeavor to cause
to be collected from the account debtor named in each of its Receivables or
obligor under any Contract, as and when due (including, without limitation,
amounts which are delinquent, such amounts to be collected in accordance with
generally accepted lawful collection procedures) any and all amounts owing under
or on account of such Receivable or Contract, and apply forthwith upon receipt
thereof all such amounts as are so collected to the outstanding balance of such
Receivable or under such Contract, except that, prior to the occurrence of an
Event of Default, each of the Assignors may allow in the ordinary course of
business as adjustments to amounts owing under its Receivables and Contracts (i)
an extension or renewal of the time or times of payment, or settlement for less
than the total unpaid balance, which such Assignor finds appropriate in
accordance with sound business judgment and (ii) a refund or credit due as a
result of returned or damaged merchandise or improperly performed services. The
costs and expenses (including, without limitation, attorneys' fees) of
collection, whether incurred by any of the Assignors or the Lender, shall be
borne by the Assignors.
3.6. Instruments. If any of the Assignors own or acquire any
Instrument, such Assignor will within 10 days notify the Lender thereof, and
upon request by the Lender promptly deliver such Instrument to the Lender
appropriately endorsed to the order of the Lender as further security hereunder.
3.7. Further Actions. Each of the Assignors will, at their own
expense, make, execute, endorse, acknowledge, file and/or deliver to the Lender
from time to time such vouchers, invoices, schedules, confirmatory assignments,
conveyances, financing statements, transfer endorsements, powers of attorney,
certificates, reports and other assurances or instruments and take such further
steps relating to its Receivables, Contracts, Instruments and
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other property or rights covered by the security interest hereby granted, as the
Lender may reasonably require.
SECTION 4. SPECIAL PROVISIONS CONCERNING TRADEMARKS
4.1. Additional Representations and Warranties. Each of the
Assignors represents and warrants that it is the true and lawful exclusive owner
of the Marks listed as such in Annex D and that such listed Marks constitute all
the marks registered in the United States Patent and Trademark Office that each
of the Assignors now own or use in connection with their business. Each of the
Assignors represents and warrants that it owns or is licensed to use all Marks
that it uses. Each of the Assignors further warrants that it is aware of no
third party claim that any aspect of the Assignor's present or contemplated
business operations infringe or will infringe any Mark.
4.2. Licenses and Assignments. Each of the Assignors hereby
agrees not to divest itself of any right under a Mark absent prior written
approval of the Lender.
4.3. Infringements. Each of the Assignors agrees, promptly
upon learning thereof, to notify the Lender in writing of the name and address
of, and to furnish such pertinent information that may be available with respect
to, any party who may be infringing or otherwise violating any of such
Assignor's rights in and to any significant Mark, or with respect to any party
claiming that the Assignor's use of any significant Mark violates any property
right of that party. Each of the Assignors further agrees, unless otherwise
directed by the Lender, diligently to prosecute any Person infringing any
significant Mark.
4.4. Preservation of Marks. Each of the Assignors agrees to
use its significant Marks in interstate commerce during the time in which this
Agreement is in effect, sufficiently to preserve such Marks as trademarks or
service marks registered under the laws of the United States.
4.5. Maintenance of Registration. Each of the Assignors shall,
at its own expense, diligently process all documents required by the Trademark
Act of 1946, 15 U.S.C. Sections 1051 et seq. to maintain trademark registration,
including, but not limited to, affidavits of use and applications for renewals
of registration in the United States Patent and Trademark Office for all of its
Marks pursuant to 15 U.S.C. Sections 1058(a), 1059 and 1065, and shall pay all
fees and disbursements in connection therewith, and shall not abandon any such
filing of affidavit of use or any such application of renewal prior to the
exhaustion of all administrative and judicial remedies without prior written
consent of the Required Lender. Each of the Assignors agrees to notify the
Lender six months prior to the dates on which the affidavits of use or the
applications for renewal registration are due that the affidavit of use or the
renewal are being processed.
4.6. Future Registered Marks. If any mark registration issues
hereafter to any of the Assignors as a result of any application now or
hereafter pending before the United States Patent and Trademark Office, within
30 days of receipt of such certificate such Assignors shall deliver a copy of
such certificate, and a grant of security in such mark, to the Lender,
confirming
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the grant thereof hereunder, the form of such confirmatory grant to be
substantially the same as the form hereof.
4.7. Remedies. If an Event of Default shall occur and be
continuing, the Lender may, by written notice to the Assignors, take any or all
of the following actions: (i) declare the entire right, title and interest of
each of the Assignors in and to each of the Marks, together with all trademark
rights and rights of protection to the same, vested, in which event such rights,
title and interest shall immediately vest, in the Lender and the holders of the
Notes, in which case each of the Assignors agrees to execute an assignment in
form and substance satisfactory to the Lender of all its rights, title and
interest in and to the Marks to the Lender and the holders of the Notes; (ii)
take and use or sell the Marks and the goodwill of such Assignor's businesses
symbolized by the Marks and the right to carry on the business and use the
assets of such Assignor in connection with which the Marks have been used; and
(iii) direct each of the Assignors to refrain, in which event each of the
Assignors shall refrain, from using the Marks in any manner whatsoever, directly
or indirectly, and, if requested by the Lender, change such Assignor's corporate
names to eliminate therefrom any use of any Mark and execute such other and
further documents that the Lender may request to further confirm this and to
transfer ownership of the Marks and registrations and any pending trademark
application in the United States Patent and Trademark Office to the Lender.
SECTION 5. SPECIAL PROVISIONS CONCERNING PATENTS AND
COPYRIGHTS
5.1. Additional Representations and Warranties. Each of the
Assignors represents and warrants that it is the true and lawful exclusive owner
of all rights in the Patents listed in Annex E and in the Copyrights listed in
Annex F, that said Patents constitute all the U.S. patents and applications for
U.S. patents that each of the Assignors now owns and that said Copyrights
constitute all the U.S. copyrights that each of the Assignors now owns. Each of
the Assignors represents and warrants that it owns or is licensed to practice
under all Patents and Copyrights that it now owns, uses or practices under. Each
of the Assignors further warrants that it is aware of no third party claim that
any aspect of such Assignor's present or contemplated business operations
infringes or will infringe any Patent or any Copyright.
5.2. Licenses and Assignments. Each of the Assignors hereby
agrees not to divest itself of any right under a Patent or Copyright absent
prior written approval of the Lender.
5.3. Infringements. Each of the Assignors agrees, promptly
upon learning thereof, to furnish the Lender in writing with all pertinent
information available to such Assignors with respect to any infringement or
other violation of such Assignor's rights in any significant Patent or
Copyright, or with respect to any claim that practice of any significant Patent
or Copyright violates any property right of those parties. Each of the Assignors
further agrees, absent direction of the Lender to the contrary, diligently to
prosecute any Person infringing any significant Patent or Copyright.
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5.4. Maintenance of Patents. At its own expense, each of the
Assignors shall make timely payment of all post-issuance fees required pursuant
to 35 U.S.C. Section 41 to maintain in force rights under each Patent.
5.5. Prosecution of Patent Application. At its own expense,
each of the Assignors shall diligently prosecute all applications for U.S.
patents listed on Annex E, and shall not abandon any such application prior to
exhaustion of all administrative and judicial remedies, absent written consent
of the Lender.
5.6. Other Patents and Copyrights. Within 30 days of
acquisition of a U.S. Patent or Copyright, or of filing of an application for a
U.S. Patent or Copyright, each of the Assignors shall deliver to the Lender a
copy of such Patent or Copyright, as the case may be, with a grant of security
as to such Patent or Copyright, as the case may be, confirming the grant thereof
hereunder, the form of such confirmatory grant to be substantially the same as
the form hereof.
5.7. Remedies. If an Event of Default shall occur and be
continuing, the Lender may, by written notice to the Assignors, take any or all
of the following actions: (i) declare the entire right, title and interest of
each of the Assignors in each of the Patents and Copyrights vested, in which
event such right, title and interest shall immediately vest in the Lender and
the holders of the Notes, in which case each of the Assignors agrees to execute
an assignment in form and substance satisfactory to the Lender of all its right,
title and interest to such Patents and Copyrights to the Lender and the holders
of the Notes; (ii) take and practice or sell the Patents and Copyrights; (iii)
direct each of the Assignors to refrain, in which event each of the Assignors
shall refrain, from practicing the Patents and Copyrights directly or
indirectly, and each of the Assignors shall execute such other and further
documents as the Lender may request further to confirm this and to transfer
ownership of the Patents and Copyrights to the Lender.
SECTION 6. PROVISIONS CONCERNING ALL COLLATERAL
6.1. Protection of Lender's Security. Each of the Assignors
will do nothing to impair the rights of the Lender in the Collateral. Each of
the Assignors will at all times keep its Inventory and Equipment insured in
favor of the Lender, at its own expense, to the Lender's reasonable satisfaction
against fire, theft and all other risks to which such Collateral may be subject;
all policies or certificates with respect to such insurance shall be endorsed to
the Lender's satisfaction (including, without limitation, by naming the Lender
as loss payee) and deposited with the Lender. If any of the Assignors shall fail
to insure such Inventory and Equipment to the Lender's reasonable satisfaction,
or if any of the Assignors shall fail to so endorse and deposit all policies or
certificates with respect thereto, the Lender shall have the right (but shall be
under no obligation) to procure such insurance and each of the Assignors agrees
to reimburse the Lender for all costs and expenses of procuring such insurance.
The Lender may apply any proceeds of such insurance when received by it toward
the payment of any of the Obligations to the extent the same shall then be due.
Each of the Assignors assumes all liability and responsibility in connection
with the Collateral acquired by it and the liability of such Assignor to pay its
Obligations shall in no way be affected or diminished by reason of the
<PAGE> 9
Page 9
fact that such Collateral may be lost, destroyed, stolen, damaged or for any
reason whatsoever unavailable to such Assignor.
6.2. Warehouse Receipts Non-negotiable. Each of the Assignors
agrees that if any warehouse receipt or receipt in the nature of a warehouse
receipt is issued with respect to any of its Inventory, such warehouse receipt
or receipt in the nature thereof shall not be "negotiable" (as such term is used
in Section 7-104 of the Uniform Commercial Code as in effect in any relevant
jurisdiction or under other relevant law).
6.3. Further Actions. Each of the Assignors will, at its own
expense, make, execute, endorse, acknowledge, file and/or deliver to the Lender
from time to time such lists, descriptions and designations of its Collateral,
warehouse receipts, receipts in the nature of warehouse receipts, bills of
lading, documents of title, vouchers, invoices, schedules, confirmatory
assignments, conveyances, financing statements, transfer endorsements, powers of
attorney, certificates, reports and other assurances or instruments and take
such further steps relating to the Collateral and other property or rights
covered by the security interest hereby granted, which the Lender deems
reasonably appropriate or advisable to perfect, preserve or protect its security
interest in the Collateral.
6.4. Financing Statements. Each of the Assignors agrees to
assign and deliver to the Lender such financing statements, in form acceptable
to the Lender, as the Lender may from time to time reasonably request or as are
necessary or desirable in the opinion of the Lender to establish and maintain a
valid, enforceable, first priority security interest in the Collateral as
provided herein and the other rights and security contemplated herein, all in
accordance with the Uniform Commercial Code as enacted in any and all relevant
jurisdictions or any other relevant law. Each of the Assignors will pay any
applicable filing fees and related expenses. Each of the Assignors authorizes
the Lender to file any such financing statements without the signature of any of
the Assignors.
SECTION 7. REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT
7.1. Remedies; Obtaining the Collateral Upon Default. Each of
the Assignors agrees that, if any Event of Default shall have occurred and be
continuing, then and in every such case, subject to any mandatory requirements
of applicable law then in effect, the Lender, in addition to any rights now or
hereafter existing under applicable law, shall have all rights as a secured
creditor under the Uniform Commercial Code in all relevant jurisdictions and
may:
(a) personally, or by agents or attorneys, immediately retake
possession of the Collateral or any part thereof, from any of the
Assignors or any other Person who then has possession of any part
thereof with or without notice or process of law, and for that purpose
may enter upon such Assignor's premises where any of the Collateral is
located and remove the same and use in connection with such removal
any and all services, supplies, aids and other facilities of such
Assignor; and
<PAGE> 10
Page 10
(b) instruct the obligor or obligors on any agreement,
instrument or other obligation (including, without limitation, the
Receivables) constituting the Collateral to make any payment required
by the terms of such instrument or agreement directly to the Lender;
and
(c) withdraw all monies, securities and instruments in the
Cash Collateral Account for application to the Obligations; and
(d) sell, assign or otherwise liquidate, or direct any of the
Assignors to sell, assign or otherwise liquidate, any or all of the
Collateral or any part thereof, and take possession of the proceeds of
any such sale or liquidation; and
(e) take possession of the Collateral or any part thereof, by
directing any of the Assignors in writing to deliver the same to the
Lender at any place or places designated by the Lender, in which event
such Assignor shall at its own expense:
(i) forthwith cause the same to be moved to the place or
places so designated by the Lender and there delivered to the
Lender,
(ii) store and keep any Collateral so delivered to the
Lender at such place or places pending further action by the
Lender as provided in Section 7.02, and
(iii) while the Collateral shall be so stored and kept,
provide such guards and maintenance services as shall be
necessary to protect the same and to preserve and maintain them
in good condition;
it being understood that the obligations of each of the Assignors so to deliver
the Collateral is of the essence of this Agreement and that, accordingly, upon
application to a court of equity having jurisdiction, the Lender shall be
entitled to a decree requiring specific performance by any of the Assignors of
such obligation.
7.2. Remedies; Disposition of the Collateral. Any Collateral
repossessed by the Lender under or pursuant to Section 7.1, and any other
Collateral whether or not so repossessed by the Lender, may be sold, assigned,
leased or otherwise disposed of under one or more contracts or as an entirety,
and without the necessity of gathering at the place of sale the property to be
sold, and in general in such manner, at such time or times, at such place or
places and on such terms as the Lender may, in compliance with any mandatory
requirements of applicable law, determine to be commercially reasonable. Any of
the Collateral may be sold, leased or otherwise disposed of, in the condition in
which the same existed when taken by the Lender or after any overhaul or repair
which the Lender shall determine to be commercially reasonable. Any such
disposition which shall be a private sale or other private proceeding permitted
by such requirements shall be made upon not less than 10 days' written notice to
any of the Assignor specifying the time at which such disposition is to be made
and the intended sale price or other consideration therefor, and shall be
subject, for the 10 days after the giving of such notice, to the right of the
Assignors or any nominee of the Assignors to acquire the Collateral involved at
a
<PAGE> 11
Page 11
price or for such other consideration at least equal to the intended sale price
or other consideration so specified. Any such disposition which shall be a
public sale permitted by such requirements shall be made upon not less than 10
days' written notice to any of the Assignors specifying the time and place of
such sale and, in the absence of applicable requirements of law, shall be by
public auction (which may, at the Lender's option, be subject to reserve), after
publication of notice of such auction not less than 10 days prior thereto in two
newspapers in general circulation in Knoxville, Tennessee. To the extent
permitted by any such requirement of law, the Lender and/or the holders of the
Notes may bid for and become the purchaser of the Collateral or any item
thereof, offered for sale in accordance with this Section 7.2 without
accountability to any of the Assignors (except to the extent of surplus money
received as provided in Section 7.4). If, under mandatory requirements of
applicable law, the Lender shall be required to make disposition of the
Collateral within a period of time which does not permit the giving of notice to
any of the Assignors as hereinabove specified, the Lender need give the
Assignors only such notice of disposition as shall be reasonably practicable in
view of such mandatory requirements of applicable law.
7.3. Waiver of Claims. Except as otherwise provided in this
Agreement, EACH OF THE ASSIGNORS HEREBY WAIVES, TO THE EXTENT PERMITTED BY
APPLICABLE LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE LENDER'S
TAKING POSSESSION OR THE LENDER'S DISPOSITION OF ANY OF THE COLLATERAL,
INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY
PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH ASSIGNORS WOULD
OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF
ANY STATE, and each of the Assignors hereby further waives, to the extent
permitted by law:
(i) all damages occasioned by such taking of possession
except any damages which are the direct result of the Lender's gross
negligence or willful misconduct;
(ii) all other requirements as to the time, place and terms
of sale or other requirements with respect to the enforcement of the
Lender's rights hereunder; and
(iii) all rights of redemption, appraisement, valuation, stay,
extension or moratorium now or hereafter in force under any applicable
law in order to prevent or delay the enforcement of this Agreement or
the absolute sale of the Collateral or any portion thereof, and each
of the Assignors, for itself and all who may claim under it, insofar
as it now or hereafter lawfully may, hereby waives the benefit of all
such laws.
Any sale of, or the grant of options to purchase, or any other realization upon,
any Collateral shall operate to divest all right, title, interest, claim and
demand, either at law or in equity, of each of the Assignors therein and
thereto, and shall be a perpetual bar both at law and in equity against each of
the Assignors and against any and all Persons claiming or attempting to claim
the Collateral so sold, optioned or realized upon, or any part thereof, from,
through and under any of the Assignors.
<PAGE> 12
Page 12
7.4. Application of Proceeds. The proceeds of any Collateral obtained
pursuant to Section 7.1 or disposed of pursuant to Section 7.2 shall be applied
as follows:
(i) to the payment of any and all expenses and fees (including
reasonable attorneys' fees) incurred by the Lender in obtaining, taking
possession of, removing, insuring, repairing, storing and disposing of
Collateral and any and all amounts incurred by the Lender in connection
with the A Note;
(ii) next, any surplus then remaining to the payment of the
Obligations in the following order of priority:
(a) all interest accrued and unpaid with respect to the A Note;
(b) the principal amount owing on the A Note;
(c) any and all expenses and fees incurred by the Lender in
connection with the B Note;
(d) all interest accrued and unpaid with respect to the B Note;
(e) the principal amount owing on the B Note; and
(f) all other Obligations then owing;
(iii) if no other Obligation are outstanding, any surplus then
remaining shall be paid to the Assignors, subject, however, to the rights
of the holder of any then existing Lien of which the Lender has actual
notice (without investigation);
it being understood that each of the Assignors shall remain liable to the extent
of any deficiency between the amount of the proceeds of the Collateral and the
aggregate amount of the sums referred to in clauses (i) and (ii) of this Section
7.4 with respect to any of the Assignors. All fees and expenses to be paid
pursuant to this section shall be allocated pro rata among the A Note and the B
Note based on the principal amount thereof.
7.5. Remedies Cumulative. No failure or delay on the part of
the Lender or any holder of any Note in exercising any right, power or privilege
hereunder or under any other Credit Document and no course of dealing between
any of the Assignors and the Lender or the holder of any Note shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder or under any other Credit Document preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder or thereunder. The rights, powers and remedies herein or in any other
Credit Document expressly provided are cumulative and not exclusive of any
rights, powers or remedies which the Lender or the holder of any Note would
otherwise have. No notice to or demand on any of the Assignors in any case shall
entitle any of the Assignors to any other or further notice or demand in similar
or other circumstances or constitute a waiver of the rights of the Lender or the
holder of any Note to any other or further action in any circumstances without
notice or demand.
<PAGE> 13
Page 13
7.6. Discontinuance of Proceedings. In case the Lender shall
have instituted any proceeding to enforce any right, power or remedy under this
Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall
have been discontinued or abandoned for any reason or shall have been determined
adversely to the Lender, then and in every such case each of the Assignors, the
Lender and each holder of any of the Obligations shall be restored to its former
positions and rights hereunder with respect to the Collateral subject to the
security interest created under this Agreement, and all rights, remedies and
powers of the Lender shall continue as if no such proceeding had been
instituted.
SECTION 8. INDEMNITY
8.1. Indemnity. (a) Each of the Assignors agrees to indemnify,
reimburse and hold the Lender, the holder of any Note, and its respective
officers, directors, employees, representatives and agents (hereinafter in this
Section 8.1 referred to individually as "Indemnitee" and collectively as
"Indemnitees") harmless from any and all liabilities, obligations, losses,
damages, penalties, claims, actions, judgments, suits, costs, expenses or
disbursements (including reasonable attorneys' fees and expenses) (for the
purposes of this Section 8.01 the foregoing are collectively called "expenses")
of whatsoever kind or nature which may be imposed on, asserted against or
incurred by any of the Indemnitees in any way relating to or arising out of this
Agreement, any other Credit Document or the documents executed in connection
herewith and therewith or in any other way connected with the administration of
the transactions contemplated hereby and thereby or
the enforcement of any of the terms of or the preservation of
any rights under any thereof, or in any way relating to or arising out of the
manufacture, ownership, ordering, purchase, delivery, control, acceptance,
lease, financing, possession, operation, condition, sale, return or other
disposition or use of the Collateral (including, without limitation, latent or
other defects, whether or not discoverable), the violation of the laws of any
country, state or other governmental body or unit, any tort (including, without
limitation, claims arising or imposed under the doctrine of strict liability, or
for or on account of injury to or the death of any Person (including any
Indemnitee), or for property damage) or any contract claim; provided that no
Indemnitee shall be indemnified pursuant to this Section 8.1(a) for expenses to
the extent caused by the gross negligence or willful misconduct of such
Indemnitee. Each of the Assignors agrees that upon written notice by any
Indemnitee of any assertion that could give rise to an expense, such Assignors
shall assume full responsibility for the defense thereof. Each Indemnitee agrees
to use its best efforts to promptly notify such Assignor of any such assertion
of which such Indemnitee has knowledge.
(b) Without limiting the application of Section 8.1(a), each
of the Assignors agrees to pay, or reimburse the Lender for (if the Lender shall
have incurred fees, costs or expenses because any of the Assignors shall has
failed to comply with its obligations under this Assignment or any other Credit
Document), any and all fees, costs and expenses of whatever kind or nature
incurred in connection with the creation, preservation or protection of the
Lender's Liens on, and security interest in, the Collateral, including, without
limitation, all fees and taxes in connection with the recording or filing of
instruments and documents in public offices,
<PAGE> 14
Page 14
payment or discharge of any taxes or Liens upon or in respect of the Collateral,
premiums for insurance with respect to the Collateral and all other fees, costs
and expenses in connection with protecting, maintaining or preserving the
Collateral and the Lender's interest therein, whether through judicial
proceedings or otherwise, or in defending or prosecuting any actions, suits or
proceedings arising out of or relating to the Collateral.
(c) Without limiting the application of Section 8.1(a) or (b),
each of the Assignors agrees to pay, indemnify and hold each Indemnitee harmless
from and against any expenses which such Indemnitee may suffer, expend or incur
in consequence of or growing out of any misrepresentation by any of the
Assignors in this Agreement or any of the other Credit Documents or in any
statement or writing contemplated by or made or delivered pursuant to or in
connection with this Agreement or any of the other Credit Documents.
(d) If and to the extent that the obligations of any of the
Assignors under this Section 8.1 are unenforceable for any reason, each of the
Assignors hereby agree to make the maximum contribution to the payment and
satisfaction of such obligations which is permissible under applicable law.
8.2. Indemnity Obligations Secured by Collateral; Survival.
Any amounts paid by any Indemnitee as to which such Indemnitee has the right to
reimbursement shall constitute Obligations secured by the Collateral. The
indemnity obligations of each of the Assignors contained in this Article VIII
shall continue in full force and effect notwithstanding the full payment of all
the Notes issued under the Agreement and all of the other Obligations and
notwithstanding the discharge thereof.
SECTION 9. DEFINITIONS
9.1. The following terms shall have the meanings herein
specified unless the context otherwise requires. Such definitions shall be
equally applicable to the singular and plural forms of the terms defined.
"Agreement" shall mean this Security Agreement, as modified,
supplemented or amended from time to time.
"Assignors" shall have the meaning provided in the first
paragraph of this Agreement.
"Cash Collateral Account" shall mean a restricted non-interest
bearing cash collateral account maintained with the Lender.
"Chattel Paper" shall have the meaning assigned that term
under the Uniform Commercial Code as in effect on the date hereof in the State
of New York.
"Collateral" shall have the meaning provided in Section
1.01(a).
<PAGE> 15
Page 15
"Contracts" shall mean all contracts between any of the
Assignors and one or more additional parties.
"Contract Rights" shall mean all rights of any of the
Assignors (including, without limitation, all rights to payment) under each
Contract.
"Copyrights" shall mean any U.S. copyright to which each of
the Assignors now or hereafter has title, as well as any application for a U.S.
copyright hereafter made by each of the Assignors.
"Credit Agreement" shall have the meaning provided in the
first paragraph of this Agreement.
"Documents" shall have the meaning assigned that term under
the Uniform Commercial Code as in effect on the date hereof in the State of New
York.
"Equipment" shall mean any "equipment," as such term is
defined in the Uniform Commercial Code as in effect on the date hereof in the
State of New York, now or hereafter owned by Assignors and, in any event, shall
include, but shall not be limited to, all machinery, equipment, furnishings,
fixtures and vehicles now or hereafter owned by the Assignors and any and all
additions, substitutions and replacements of any of the foregoing, wherever
located, together with all attachments, components, parts, equipment and
accessories installed thereon or affixed thereto.
"General Intangibles" shall have the meaning assigned that
term under the Uniform Commercial Code as in effect on the date hereof in the
State of New York.
"Goods" shall have the meaning assigned that term under the
Uniform Commercial Code as in effect on the date hereof in the State of New
York.
"Indemnitee" shall have the meaning specified in Section 8.01.
"Instrument" shall have the meaning assigned that term under
the Uniform Commercial Code as in effect on the date hereof in the State of New
York.
"Inventory" shall mean all raw materials, work-in-process, and
finished inventory of each of the Assignors of every type or description and all
documents of title covering such inventory, and shall specifically include all
"inventory" as such term is defined in the Uniform Commercial Code as in effect
on the date hereof in the State of New York, now or hereafter owned by each of
the Assignors.
"Marks" shall mean any trademarks and service marks now held
or hereafter acquired by each of the Assignors, which are registered in the
United States Patent and Trademark Office, as well as any unregistered marks
used by any of the Assignors in the United States and trade dress, including
logos and/or designs, in connection with which any of these registered or
unregistered marks are used.
<PAGE> 16
Page 16
"Obligations" shall mean: (a) all indebtedness, obligations
and liabilities (including, without limitation, guarantees and other contingent
liabilities) of each of the Assignors to the Lender or the holder of any Note
arising under or in connection with any Credit Document; (b) any and all sums
advanced by the Lender in order to preserve the Collateral or preserve its
security interest in the Collateral; and (c) in the event of any proceeding for
the collection or enforcement of any indebtedness, obligations or liabilities of
each of the Assignors referred to in clause (a), after an Event of Default shall
have occurred and be continuing, the reasonable expenses of re-taking, holding,
preparing for sale or lease, selling or otherwise disposing or realizing on the
Collateral, or of any exercise by the Lender of its rights hereunder, together
with reasonable attorneys' fees and court costs.
"Patents" shall mean any U.S. patent to which each of the
Assignors now or hereafter have title, as well as any application for a U.S.
patent now or hereafter made by Assignors.
"Proceeds" shall have the meaning assigned that term under the
Uniform Commercial Code as in effect in the State of New York on the date hereof
or under other relevant law and, in any event, shall include, but not be limited
to, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty
payable to the Lender or any of the Assignors from time to time with respect to
any of the Collateral, (ii) any and all payments (in any form whatsoever) made
or due and payable to any of the Assignors from time to time in connection with
any requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any governmental authority (or any Person acting under
color of governmental authority) and (iii) any and all other amounts from time
to time paid or payable under or in connection with any of the Collateral.
"Receivables" shall mean any "account" as such term is defined
in the Uniform Commercial Code as in effect on the date hereof in the State of
New York, now or hereafter owned by Assignors and, in any event, shall include,
but shall not be limited to, all of each of the Assignor's rights to payment for
goods sold or leased or services performed by each of the Assignors, whether now
in existence or arising from time to time hereafter, including, without
limitation, rights evidenced by an account, note, contract, security agreement,
chattel paper or other evidence of indebtedness or security, together with (i)
all security pledged, assigned, hypothecated or granted to or held by each of
the Assignors to secure the foregoing, (ii) all of each of the Assignor's
rights, titles and interests in and to any goods, the sale of which gave rise
thereto, (iii) all guarantees, endorsements and indemnifications on, or of, any
of the foregoing, (iv) all powers of attorney for the execution of any evidence
of indebtedness or security or other writing in connection therewith, (v) all
books, records, ledger cards, and invoices relating thereto, (vi) all evidences
of the filing of financing statements and other statements and the registration
of other instruments in connection therewith and amendments thereto, notices to
other creditors or secured parties, and certificates from filing or other
registration officers, (vii) all credit information, reports and memoranda
relating thereto and (viii) all other writings related in any way to the
foregoing.
<PAGE> 17
Page 17
SECTION 10. MISCELLANEOUS
10.1. Notices. All notices and other communications hereunder
shall be made at the addresses, in the manner and with the effect provided in
Section 9.3 of the Credit Agreement.
10.2. Waiver; Amendment. This Agreement may be charged,
waived, discharged, or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought.
10.3. Obligations Absolute. The obligations of each of the
Assignors under this Agreement shall be absolute and unconditional and shall
remain in full force and effect without regard to, and shall not be released,
suspended, discharged, terminated or otherwise affected by, any circumstance or
occurrence whatsoever, including, without limitation: (i) any renewal,
extension, amendment or modification of, or addition or supplement to or
deletion from, any of the Credit Documents or any other instrument or agreement
referred to therein, or any assignment or transfer of any thereof; (ii) any
waiver, consent, extension, indulgence or other action or inaction under or in
respect of any such instrument or agreement or this Agreement or any exercise or
non-exercise of any right, remedy, power or privilege under or in respect of
this Agreement or any other Credit Document; (iii) any furnishing of any
additional security to the Lender or any acceptance thereof or any sale,
exchange, release, surrender or realization of or upon any security by the
Lender; or (iv) any invalidity, irregularity or unenforceability of all or part
of the Obligations or of any security therefor.
10.4. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective successors
and assigns of the partners hereto; provided, however, that none of the
Assignors may assign or transfer any of its rights or obligations hereunder
without the prior written consent of the Lender. All agreements, statements,
representations and warranties made by each of the Assignors herein or in any
certificate or other instrument delivered by any of the Assignors or on its
behalf under this Agreement shall be considered to have been relied upon by the
Lender and shall survive the execution and delivery of this Agreement and the
other Credit Documents regardless of any investigation made by the Lender or on
its behalf.
10.5. Headings Descriptive, etc. The headings of the several
sections and subsections of this Agreement are inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of this
Agreement. The provisions of Section 1.2(a) of the Credit Agreement shall apply
to this Agreement as if the reference therein to "Agreement" were to this
Agreement.
10.6. Governing Law. This Agreement and the rights and
obligations of the parties hereunder shall be construed in accordance with and
be governed by the law of the State of New York, without giving effect to
conflict of laws principles.
10.7. Each of the Assignor's Duties. It is expressly agreed,
anything herein contained to the contrary notwithstanding, that each of the
Assignors shall remain liable to perform all of the obligations, if any, assumed
by them with respect to the Collateral and the Lender shall not have any
obligations or liabilities with respect to any Collateral by reason of or
<PAGE> 18
Page 18
arising out of or in connection with this Agreement, nor shall the Lender be
required or obligated in any manner to perform or fulfill any of the obligations
of any of the Assignors under or with respect to any Collateral.
10.8. Termination; Release. When all Obligations have been
paid in full, this Agreement shall terminate, and the Lender, at the request and
expense of each of the Assignors, will execute and deliver to the Assignors the
proper instruments (including Uniform Commercial Code termination statements on
form UCC-3) acknowledging the termination of this Agreement, and will duly
assign, transfer and deliver to the Assignors (without recourse and without any
representation or warranty) such of the Collateral as may be in possession of
the Lender and has not theretofore been sold or otherwise applied or released
pursuant to this Agreement.
10.9. Counterparts. This Agreement may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument.
<PAGE> 19
Page 19
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by its duly authorized officers as of the
date first above written.
Address
1111 Northshore Drive UNITED PETROLEUM CORPORATION,
Suite N425 as assignor
Knoxville, Tennessee
Attention: [ ] By
---------------------------
Name:
Title:
Address
[ ] CALIBUR SYSTEMS, INC.,
[ ] as assignor,
[ ]
Attention: [ ]
By
---------------------------
Name:
Title
Address
1111 Northshore Drive JACKSON-UNITED PETROLEUM
Suite N425 CORPORATION,
Knoxville, Tennessee as assignor
Attention: [ ]
By
---------------------------
Name:
Title
<PAGE> 20
Page 20
Address
Hunkins Waterfront Plaza INFINITY INVESTORS LIMITED,
Main Street as Assignee
P.O. Box 556
Charlestown, Nevis, West Indies
Attention: Stuart J. Chasanoff
By
---------------------------
Name:
Title
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
Jackson-United Petroleum Corporation, a Kentucky corporation
Calibur Systems, Inc., a Tennessee corporation
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<PERIOD-END> DEC-31-1998
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<ALLOWANCES> 0
<INVENTORY> 171,362
<CURRENT-ASSETS> 407,091
<PP&E> 11,737,203
<DEPRECIATION> 2,881,771
<TOTAL-ASSETS> 12,857,972
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<BONDS> 0
0
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<COMMON> 305,653
<OTHER-SE> (5,716,503)
<TOTAL-LIABILITY-AND-EQUITY> 12,857,972
<SALES> 6,179,556
<TOTAL-REVENUES> 6,179,556
<CGS> 4,793,367
<TOTAL-COSTS> 4,793,367
<OTHER-EXPENSES> 4,043,934
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<INTEREST-EXPENSE> 1,662,364
<INCOME-PRETAX> (4,320,109)
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<EXTRAORDINARY> 0
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<NET-INCOME> (4,320,109)
<EPS-BASIC> (.20)
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