FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the fiscal year ended December 31, 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 Number 0-19365
CROWN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 87-0368981
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
215 South State, Suite 650
Salt Lake City, Utah 84111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 537-5610
Securities registered pursuant to Section 12(b) of the Act: (None)
Securities registered pursuant to Section 12(g) of the Act:
$0.02 PAR VALUE COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of common stock, par value $0.02 per share,
held by non-affiliates of the registrant on May 24, 1999 was $10,391,916 using
the average bid and asked price for Registrant's common stock. As of May 24,
1999, registrant had 13,285,581 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(None)
Transitional Small Business Disclosure Format (check one) YES [ ] NO [X]
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PART I.
STATEMENTS MADE OR INCORPORATED IN THIS ANNUAL REPORT INCLUDE A NUMBER OF
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING
THE WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FUTURE", AND WORDS
OF SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS
REGARDING THE COMPANY'S FUTURE PERFORMANCE OR FUTURE EVENTS OR TRENDS. RELIANCE
SHOULD NOT BE PLACED ON FORWARD-LOOKING STATEMENTS BECAUSE THEY INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM
ANTICIPATED FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSLY OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION, THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ITEM 1. BUSINESS
General
Crown Energy Corporation is a Utah corporation that specializes in the
production and distribution of premium asphalt products to meet the new, higher
quality standards for federal and state highways. The Company is based in Salt
Lake City, Utah and operates primarily through two wholly owned subsidiaries,
Crown Asphalt Corporation ("CAC") and Crown Asphalt Products Company ("Capco"),
both of which are Utah corporations. CAC operates the asphalt production
business through its minority interest in Crown Asphalt Ridge, L.L.C., a Utah
limited liability company ("Crown Ridge"), and Capco operates the asphalt
distribution business through its majority interest in Crown Asphalt
Distribution, L.L.C., a Utah limited liability company ("Crown Distribution").
Crown Energy Corporation's consolidated financial statements and
results of operations include the accounts and results of operations of CAC,
Capco and Crown Distribution. Accordingly, references in this Annual Report to
"Crown" or the "Company" include, unless otherwise noted, CAC, Capco and Crown
Distribution.
The Company was formed in 1981 as an oil and gas production company.
The Company changed its business focus to concentrate on the production and
distribution of premium asphalt products in 1995. The Company's results of
operations for the preceding three fiscal years reflect this change in focus. In
particular, for the years ended December 31, 1996 and 1997, the Company reported
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declining revenues from oil and gas sales of $224,855 and $86,781, respectively,
as oil and gas operations were phased out. For the year ended December 31, 1998,
the Company reported revenues from the sale of asphalt products of approximately
$24 million. See "Item 6 - Selected Data." Most of these revenues were recorded
in the last half of 1998 as a result of Crown Distribution's asphalt product
sales.
The Company's recent accomplishments include the formation and ongoing
progress of two joint ventures. One such joint venture, Crown Ridge, constructed
an approximate $22 million Asphalt Oil Sand Production Facility at Asphalt
Ridge, near Vernal, Utah (the "Facility"). Through another joint venture entity,
Crown Distribution, the Company has acquired ownership interests in asphalt
distribution facilities located in Utah, Arizona, Colorado and Nevada.
In August 1997, the Company formed Crown Ridge with MCNIC Pipeline &
Processing Company, a Michigan corporation ("MCNIC"), to construct, own and
operate the Facility at the Company's Asphalt Ridge deposit in northeast Utah.
MCNIC is a wholly-owned subsidiary of MCN Energy Group, Inc. ("MCN") (NYSE:MCN),
a large diversified energy holding company with over $4 billion in assets and
investments throughout North America and India. MCN is involved in oil and gas
exploration and production, natural gas gathering, processing, transmission and
storage, energy marketing, electric power generation and distribution, and other
energy-related businesses and serves 1.2 million customers in more than 500
communities throughout Michigan. Information about MCN Energy Group is available
on the World Wide Web at http://www.mcnenergy.com. The Company has contributed
significant resources, including certain Oil Sand Resources and a technology
sublicense through which Crown Ridge may utilize certain proprietary technology
to extract marketable products from the oil sand reserves, in order to further
the continued development of the Facility by Crown Ridge. To date, Crown Ridge
has invested approximately $22 million in the Facility. The construction of the
Facility has been substantially completed, however the Facility has encountered
certain construction technical difficulties which the Company believes will be
resolved. The Facility has a designed capacity of 100,000 tons of asphalt per
year and the Company believes it will be operational in the second half of 1999.
The Company presently owns a 25% equity interest in Crown Ridge and MCNIC holds
the remaining 75% equity interest. The Company has the right to acquire up to a
60% equity interest in Crown Ridge contingent, however, upon MCNIC's receipt of
certain preferential returns and Crown Ridge's election to pursue certain
expansion opportunities. See "Item 1. Business - Asphalt Production - Crown
Asphalt Ridge, L.L.C." below.
In August 1997, contemporaneous with the Company's Crown Ridge joint
venture with MCNIC, the Company also closed on an agreement for the private sale
of $5 million of the Company's $10 Series A Cumulative Convertible Preferred
Stock (the "Series A Preferred") to Enron Capital & Trade Resources Corp.
("ECT"), a subsidiary of Enron Corp. ("Enron"), (NYSE:ENE). Enron is a major
buyer and seller of natural gas with assets of approximately $20 billion. Enron
also builds and manages worldwide natural gas transportation, power generation,
liquids and clean fuels facilities. Information about Enron is available on the
World Wide Web at http://enron.com. Proceeds from the sale of stock to ECT have
been used for working capital and to finance the Company's share of construction
and start-up costs related to Crown Ridge, which includes the construction of
the Facility. Certain rights, preferences and limitations relating to the Series
A Preferred are detailed in "Item 5. Market Price for the Company's Common
Equity and Related Stockholder Matters" below.
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In June 1998, the Company, through Capco, entered into a joint venture
by forming Cowboy Asphalt Terminal, L.L.C., a Utah limited liability company
("CAT LLC"), with Foreland Asphalt Corporation, a Utah corporation engaged in
the asphalt roofing products business ("Foreland"). CAT LLC was formed to
acquire an asphalt terminal and its underlying real property located in North
Salt Lake City. The asphalt terminal property of CAT LLC was apportioned and
portions designated for the exclusive uses of either Capco or Foreland, each of
which will retain all revenues and profits generated from their respective
exclusive operations. Crown Distribution, through the exercise of an option on
or about December 21, 1998, owns 66.67% of CAT LLC and the remaining 33.33% is
owned by Foreland. CAT LLC is a majority owned and controlled subsidiary of
Crown Distribution and the accounts and results of operations of CAT LLC will be
included within the Company's consolidated financial statements and results of
operations. See "Item 1. Business - Asphalt Distribution - Cowboy Asphalt
Terminal, L.L.C." below.
On July 2, 1998, Crown Distribution was formed as a second joint
venture between the Company (through its Capco subsidiary) and MCNIC. Crown
Distribution is owned 50.01% by the Company and 49.99% by MCNIC. Crown
Distribution was formed to acquire the inventory and assets of Petro Source
Asphalt Company, a Texas corporation. By completing this acquisition, the
Company acquired ownership or leasehold interests in certain asphalt
distribution facilities located in Utah, Arizona, Colorado and Nevada. These
asphalt distribution facilities enable the Company to purchase oil products and
related raw materials from its suppliers and to store, process, blend and
otherwise produce various grades of asphalt and asphalt products for sale to its
customers in the western United States. The Company's revenues during the year
ended December 31, 1998 were generated primarily through Crown Distribution's
asphalt product operations. See "Item 1. Business - Asphalt Distribution - Crown
Asphalt Distribution, L.L.C." below.
The Company's control of Crown Distribution and CAT LLC complement the
Company's interest in Crown Ridge and Crown Ridge's ownership and operation of
the newly constructed Facility. The asphalt distribution capabilities of Crown
Distribution and CAT LLC offer vertical integration for the Company's operations
- - the Company can now produce, process, blend, store, transport, distribute and
sell finished asphalt products in its western United States target market. These
operations rely primarily upon the purchase of oils, hydrocarbons and other raw
materials from third party suppliers. As Crown Ridge's extraction and processing
operations at the Facility produce commercial quantities of asphalt products,
management of the Company expects that all of such products will be marketed,
distributed and sold through Crown Distribution's asphalt terminals, thereby
displacing some of the raw materials purchased by Crown Distribution from third
party suppliers for resale.
On April 17, 1999, the Company acquired fixed terminal assets at Laurel
(Billings), Montana and Williston, North Dakota along with the associated
inventory, and certain contractual agreements of Asphalt Supply & Services, Inc.
and Inoco, Inc. for $4,000,000, consisting of $750,000 in cash and 2,500,000
shares of unregistered common stock. In the event that the bid price of the
common stock is less than $1.10 for 120 consecutive trading days at any time
between April 17, 1999 and December 31, 2000, the seller has the right to
require the Company to purchase all shares for $1.10 per share. The Company has
the right to repurchase up to 2,000,000 of the shares of common stock from the
seller, at any time, for $2.05 per share. The acquisition has been accounted for
as a purchase.
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On May 12, 1999, the Company entered into an agreement to acquire an
asphalt terminal in Rawlins, Wyoming and inventory for $2,291,571 from S&L
Industrial. Upon closing of this transaction, the Company will assume S&L's debt
of approximately $1,800,000, issue a note payable to S&L for $225,000, and make
a cash payment of $266,571 to S&L. Closing of this transaction will occur when
all conditions have been satisfied, such as the delivery of consents of third
parties. The Company expects closing to occur in the near future. Under the
Company's contractual joint venture relationships with MCNIC, MCNIC may have
certain rights to participate in additional business opportunities, if any,
which may be pursued by the Company. See "Item 1. Business - Asphalt
Distribution Crown Asphalt Distribution, L.L.C. - Additional Opportunities."
As the Company increases its asphalt products marketing and
distribution activities at its asphalt terminals, the Company remains open to
other asphalt related business opportunities and is actively seeking to acquire
asphalt terminals which can complement the Company's existing asphalt
distribution capabilities.
More detailed information about the asphalt industry and the Company's
asphalt production and distribution businesses is provided below.
The Asphalt Industry
The United States asphalt market is estimated to be a 30 million-ton
market which historically has been supplied by the large U.S. oil refiners. In
recent years, management of the Company believes that the U.S. asphalt market
has undergone significant changes. In particular, national and international
demand for asphalt has increased. Further, recently established standards which
require the use of higher quality asphalt for federal and state highways in the
United States have increased the demand for higher quality asphalts. At the same
time, recent reductions of heavy crude production have resulted in a decrease in
asphalt supply. The Company believes that these changes are favorable to asphalt
producers and suppliers such as the Company.
Deterioration of the nation's infrastructure has drawn increasing
public attention and concern, and the emphasis in the highway industry is
shifting from construction of new roads and bridges to maintenance and
replacement of aging facilities. As the U.S. government, state and federal
agencies focus on decaying infrastructure and facilities, the need for better
techniques and materials to build longer-lasting roads and to repair existing
ones cost-effectively has developed. Congress authorized the Strategic Highway
Research Program (SHRP) as a coordinated national effort to meet the tough
challenges facing the highway industry. SHRP was a five year, $150 million
research program funded through state-apportioned federal highway aid funds. Its
research was tightly focused on the development of pragmatic products of
immediate use to the highway agencies. Using a wide range of advanced materials
characterization techniques that had not been applied to asphalt previously,
SHRP determined how asphalt material properties affect pavement performance. The
new performance graded (PG) specifications focus on the climate conditions of a
given location and the specific temperature band in which the PG asphalt must
work within. The recommendation for the improved PG asphalt binder
specifications has been adopted by the Federal Highways Administration (FHWA)
and many states. The remaining states are in different stages of implementation
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and will be required to have implemented the new PG specifications by the year
2000. The result of the more stringent SHRP performance grades in the western
United States is that most asphalts used on state and federal projects will need
to be modified with polymers or high performance asphalts, or both, to meet the
required specifications.
The Company believes that the Facility will produce asphalt products
which meet the SHRP performance specifications. However, until the asphalt is
produced at the Facility in commercial quantities there can be no assurance of
its quality or performance.
Through its relationships with producers, refiners, suppliers,
transporters and users of asphalt, including state and federal governmental
departments, asphalt associations, consultants and private sector companies; as
well as its strategically located asphalt distribution terminals, PG asphalt
blending processes and Asphalt Ridge reserves, the Company believes that it is
well positioned to meet the needs of the changing asphalt market. However, the
Company will be competing with several larger companies in the regional asphalt
supply business. Competition in the asphalt supply business is based primarily
on price and quality. Further, the Company will be competing with traditional
refineries with respect to the production of asphalt products. In general, these
competitors have significant financial, technical, managerial and marketing
resources and, both separately and combined, represent significant competition
for the Company in its markets.
The asphalt industry is seasonal. Demand for asphalt decreases
significantly during the winter months when cold weather and snow interferes
with highway construction and repair. Notwithstanding the decrease in demand for
asphalt and asphalt-related products during the winter months, the Company
believes that it can continue producing asphalt, and storing such product, to
meet the peak demands of spring and summer. In addition, the Company expects to
continue purchasing asphalt from outside suppliers in the winter months, when
prices are lower, for storage at its asphalt terminals and resale in the spring
and summer.
Asphalt Distribution
Crown Asphalt Distribution, L.L.C.
Formation and Current Development Status. On July 2, 1998, Crown
Distribution was formed as a second joint venture between the Company and MCNIC.
The Company and MCNIC (sometimes referred to hereafter as the members) possess
sharing ratios ("sharing ratios") of 50.01% and 49.99%, respectively, in the
profits, losses and obligations of Crown Distribution. Accordingly, the Company
holds a majority and controlling interest in Crown Distribution and the accounts
and results of operations of Crown Distribution are included within the
Company's consolidated financial statements.
On July 2, 1998, Crown Distribution purchased the inventory and assets
of Petro Source Asphalt Company, a Texas corporation. The purchased assets
included asphalt supply and marketing contracts, owned and leased equipment,
personal property, fixtures, equipment leases, real estate leases, technology
licenses, other related agreements, certain intellectual property, products
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inventory, ownership interests in and to asphalt distribution facilities in
Utah, Colorado, Nevada and Arizona and certain processing rights at a refinery
in Santa Maria, California (see below).
These assets (excluding products inventory) were purchased for $7.5
million, the amount determined by the parties to be the fair market value of
such assets, with capital contributed to Crown Distribution by MCNIC. The
products inventory was also purchased by Crown Distribution for $6,797,932 and
this portion of the purchase price was funded by a loan to Crown Distribution
from MCNIC.
Collectively, the asphalt distribution facilities purchased from Petro
Source Asphalt Company enable the Company to purchase asphalt products and
related raw materials from third party vendors and to produce various grades of
asphalt for sale to its customers. During the period between July 2, 1998 and
December 31, 1998, these asphalt distribution facilities distributed
approximately 41,000 tons of asphalt and generated revenue of approximately
$6,423,000 (excluding revenues associated with the Santa Maria processing
agreement discussed below.) Company management believes that Crown
Distribution's acquisition of these assets creates excellent vertical
integration for the Company's overall asphalt business and provides a solid
distribution network for the asphalt production from the Company's Facility at
Asphalt Ridge.
Under the Santa Maria Refinery processing agreement, Crown
Distribution's predecessor (and Crown Distribution since July 2, 1998) marketed
and sold the asphalt products and maintained the inventory at this refinery, in
exchange for approximately 50% of the net profit realized upon the sale of the
processed product. During 1998, the refinery processed on average 3,850 barrels
a day of throughput. Revenues from the processing agreement were approximately
$15.9 million (or roughly 65% of the Company's total consolidated revenues) for
the year ended December 31, 1998. In February 1999, however, the Company
received a notice from the refinery owner that this processing agreement will
terminate as of April 30, 1998. The potential loss of revenues associated with
this processing contract was known to the Company prior to the July 2, 1998
acquisition transaction and factored into the purchase price. Management of the
Company believes that revenues generated from the Company's recently acquired
asphalt terminals will offset a significant portion of such revenues. Further,
the Company is presently negotiating and expects to enter into some arrangement
under which the Santa Maria refinery will process asphalt products for the
Company for sale by the Company in the markets served by the refinery.
Therefore, the Company does not expect the termination of this processing
agreement to have a material adverse impact upon the Company's financial
condition. Subsequent to the termination of the processing contract, the
refinery owner purchased asphalt products located at the refinery from the
Company for a sum, after offsetting certain expense reimbursements owed to the
refinery, of roughly $1.7 million, of which $1,000,000 has been paid to the
Company.
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The Company and MCNIC are joint venture partners in both Crown Ridge
and Crown Distribution (the Company is in control of Crown Distribution and
MCNIC is in control of Crown Ridge). Although there can be no assurance,
management of the Company expects that Crown Distribution will distribute the
asphalt products extracted and produced by Crown Ridge. Crown Distribution's
asphalt distribution facilities will allow the Company to store, transport,
distribute, market and sell the asphalt products extracted by and produced at
the Facility owned and operated by Crown Ridge, assuming acceptable transfer
pricing and other payment terms will be agreed upon by Crown Distribution and
Crown Ridge.
The Company's original capital contribution to Crown Distribution of a
nominal amount was paid on or about the date of formation of Crown Distribution.
Thereafter, on December 21, 1998, Crown Distribution exercised an option under
its Operating Agreement such that the Company was required to transfer and
assign to Crown Distribution, as an additional capital contribution, its 66.67%
membership interest in CAT LLC. The Company was credited with a $1.5 million
capital contribution to Crown Distribution as a result of the assignment of the
CAT LLC membership interests to Crown Distribution. Subsequent to year end,
Crown Distribution also assumed CAT LLC's payment obligations under a $1,282,070
promissory note. As a result of this assignment, Crown Distribution now holds
66.67% of the ownership interests of CAT LLC, and the remaining 33.33% ownership
interests are owned by Foreland. Crown Distribution's proportionate share of the
accounts and results of operations of CAT LLC are therefore included within the
consolidated financial statements of the Company. See "Item 1. Business Asphalt
Distribution - Cowboy Asphalt Terminal, L.L.C." below for further information
regarding CAT LLC.
MCNIC originally contributed the amount of $100 to the capital of Crown
Distribution. MCNIC also made a capital contribution in the amount of $6 million
(the "Preferential Capital Contribution"). The Preferential Capital
Contribution, together with working capital loans in the amounts of $1,500,000
and $7,141,930 respectively, were used by Crown Distribution to acquire the
assets of Petro Source Asphalt Company and pay related closing and other
acquisition costs. When Crown Distribution elected to take by assignment the
Company's interest in CAT LLC, MCNIC was obligated to, and did, contribute
additional capital in the amount of $1.5 million. That sum, however, was
immediately used by Crown Distribution to pay down the working capital loan
previously advanced by MCNIC. See "Item 1. Business - Asphalt Distribution Crown
Asphalt Distribution, L.L.C. - Working Capital Loans" below.
Management of Crown Distribution; Major Decisions. Crown Distribution
is governed by a management committee consisting of three managers. The Company
is entitled to appoint two managers and MCNIC is entitled to appoint one
manager. Management decisions are generally made by the management committee.
However, one of the managers appointed by the Company shall serve as the
operating manager and have the powers, authority, duties and obligations
specified in the operating agreement, which generally requires the operating
manager to implement the policies and pursue the objectives specified in the
annual operating plan.
The annual operating plan is adopted by the management committee on an
annual basis and addresses all aspects of Crown Distribution's operations for
the coming year, including the nature and extent of the proposed activities,
marketing plans, capital expenditure plans and similar matters. In the event the
management committee is unable to unanimously approve an annual operating plan
for any given calendar year, a majority of the managers shall have the authority
to continue to maintain Crown Distribution's operations at levels comparable to
those approved in its most recent annual operating plan.
Additional Opportunities. The Crown Distribution operating agreement
provides that certain additional business opportunities which are the same as or
similar to Crown Distribution's then current business must be first offered to
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Crown Distribution by its members. Crown Distribution will have a 30-day period
after receipt of notice of any additional opportunity within which to exercise
its right to pursue the additional business opportunity. If this right is
exercised, the Company and MCNIC have agreed to negotiate an appropriate
business structure under which the Company and MCNIC, or their respective
affiliates, have the option, but not the obligation, to acquire up to a 50%
sharing ratio or equity interest in any new opportunity.
Working Capital Loans. MCNIC has extended two working capital loans to
Crown Distribution, each of which bears interest at the rate of 8% per annum.
MCNIC extended the first working capital loan in order for Crown
Distribution to fund the purchase price and related acquisition costs with
respect to the Petro Source Asphalt Company acquisition. The entire outstanding
principal balance of this working capital loan (the outstanding balance as of
December 31, 1998 was $5,810,581), together with all accrued interest thereon,
is due and payable in full on or before December 31, 1999.
MCNIC extended a working capital line in order for Crown Distribution
to fund its inventory purchases and general working capital needs. The entire
outstanding principal balance of this working capital line as of December 31,
1998 was $3,124,640. As of June 10, 1999, the principal balance owed MCNIC for
the working capital line was $7,124,641.
Under related provisions of Crown Distribution's Operating Agreement,
Crown Distribution is obligated to provide MCNIC advance written notice of any
proposed borrowing of additional working capital to fund its operations.
However, MCNIC has verbally indicated its desire and agreement to fund any
additional borrowings of Crown Distribution on terms and conditions acceptable
to both parties and generally prevailing in the market. MCNIC's first working
capital loan and its Preferential Capital Contribution are both secured by a
first priority lien, security interest in and pledge of all the property of
Crown Distribution including, without limitation, Crown Distribution's rights,
title and interest in and to the membership interests in CAT LLC. MCNIC's second
working capital loan is secured by Crown Distribution's inventory and accounts
receivable.
Distributions; Allocations of Profits and Losses. Until such time as
MCNIC has received the return of its Preferential Capital Contribution and a 15%
internal rate of return on its investment in Crown Distribution, Crown
Distribution is obligated to distribute to MCNIC 50% of the net cash flow from
operations. The remaining cash flow balance is distributed roughly 50% to MCNIC
and 50% to the Company (in accordance with their respective sharing ratios).
During 1998, Crown Distribution made distributions of $1,090,989 to MCNIC for
its Preferential Capital Contribution and additional distributions of $545,494
to each of MCNIC and the Company. Upon liquidation, MCNIC would receive 100% of
any and all amounts available for distribution up to its outstanding
Preferential Capital Contribution balance and remaining amounts would be
distributed in proportion to the members capital account balances. Profits and
losses are generally allocated in accordance with the members' respective
sharing ratios. However, after profits are allocated to offset any previous
allocations of losses made to members, in the event of a complete liquidation of
Crown Distribution profits will be allocated 100% to MCNIC until its
Preferential Capital Contribution and 15% rate of return has allocated to it in
the form of profits.
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Management Agreement. Pursuant to an Operating and Management
Agreement, the Company provides management, supervision and operational services
to Crown Distribution in relation to its annual Operating Plan for Crown
Distribution. As compensation for the services rendered under the Management
Agreement, the Company receives (i) a monthly fee of $5,000, (ii) the payment of
all out-out-pocket expenses incurred through the performance of its duties;
(iii) the reimbursement of the reasonable salaries, wages, overtime and other
similar compensation paid to employees of the Company who are employed full-time
in connection with and dedicated to the management services under the Management
Agreement; and (iv) a monthly home office overhead charge of $10,000.
The term of the Management Agreement is five years, which term will be
automatically extended for unlimited successive one-year periods unless either
party furnishes the other with written notice at least ninety (90) days prior to
the expiration of any such initial or extended period. During the initial term
of the Management Agreement, the Company can be removed only for good cause by
the affirmative vote of the management committee. The Management Agreement also
contains provisions allowing the replacement of the Company as the manager on
economic grounds if Crown Distribution notifies the Company that it believes the
operations may be conducted more efficiently and is willing to become the
operating manager or has a commitment from a third party to do so. Following the
receipt of an economic challenge, the Company will have thirty (30) days to
notify Crown Distribution that it elects to allow Crown Distribution or its
designee to become the operator under the proposed terms or that the Company
elects to continue as the operator under the proposed terms.
Cowboy Asphalt Terminal, L.L.C.
Formation and Acquisition of Assets. CAT LLC is a joint venture between
the Company (through its Capco subsidiary) and Foreland. Foreland is engaged in
the asphalt roofing products business. On June 16, 1998, CAT LLC was formed to
acquire an asphalt terminal and related refinery assets and real estate located
in North Salt Lake City (the "Cowboy Terminal Assets"). The real property
acquired by CAT LLC as part of the Cowboy Terminal Assets is referred to
hereinafter as the "Cowboy Terminal Property." Refinery Technologies, Inc., a
Utah corporation ("Refinery Technologies"), held the rights to acquire the
Cowboy Terminal Assets under a purchase contract with their former owner.
On September 11, 1998, CAT LLC, Capco, Foreland and Refinery
Technologies entered into an Assignment and Agreement (the "Assignment
Agreement") under which Refinery Technologies assigned all of its ownership
rights in and to the Cowboy Terminal Assets purchase contract to CAT LLC. In
turn, CAT LLC agreed to assume all of the obligations under the real property
purchase contract and issued a promissory note in connection with the purchase
in the amount of $1,067,111 to the former owner. The Company's primary objective
in forming this joint venture was to acquire control of the Cowboy Terminal
Property for use as an asphalt storage and terminal facility. The Cowboy
Terminal Property has been divided into portions dedicated (i) to the exclusive
uses of the Company for its asphalt paving products business and (ii) to the
exclusive uses of Foreland for its asphalt roofing products business. Revenues
or profits generated by such exclusive uses will belong to the Company or
Foreland, as the case may be, and the other party will have no right to
participate in the revenues, profits or income generated by the business of the
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other with respect to such exclusive uses. Further, the use of the Cowboy
Terminal Property by the Company and by Foreland is free of charge or other
cost. The Company anticipates that its exclusive portion of the Cowboy Terminal
Property can be used by the Company to store, process and transport up to
roughly 60,000 tons of throughput per year.
The Company and Foreland initially owned sharing ratios ("sharing
ratios") of 66.67% and 33.33%, respectively, in the profits, losses and
obligations of CAT LLC. However, the Company has assigned its sharing ratios and
ownership interests in CAT LLC to Crown Distribution. See "Item 1. Business -
Asphalt Distribution - Crown Asphalt Distribution, L.L.C."
The Cowboy Terminal Assets were purchased on January 9, 1999 for
$1,477,070. CAT LLC paid $195,000 in cash at closing and executed and delivered
a promissory note in the amount of $1,282,070. This promissory note is payable
in 84 equal monthly installments of $20,627 beginning on February 1, 1999 and
ending on January 1, 2006. The note bears interest at the rate of 9% and is
secured by a deed of trust encumbering the Cowboy Terminal Property. In
connection with the transfer of the 66.67% interest in CAT LLC to Crown
Distribution, Crown Distribution assumed payment obligations under this
promissory note.
The CAT LLC Operating Agreement obligates both the Company and Foreland
to make additional capital contributions equal to one-half of any additional
amounts needed for (i) CAT LLC to fulfill its obligations, not to exceed
$650,000, under any corrective action plan that may be accepted by CAT LLC and
the Utah Department of Environmental Quality with respect to certain
environmental conditions at the Cowboy Terminal Property and (ii) legal costs
incurred in the purchase or related to the environmental matters in (i) of this
paragraph. The CAT LLC Operating Agreement also obligates the Company and
Foreland to make additional capital contributions, in proportion to their
ownership percentages, in order to fund any additional amounts required for CAT
LLC to fulfill its obligations under the purchase contract for the Cowboy
Terminal Assets, for environmental management and containment costs, expenses
for operations, or the construction of certain approved capital improvements to
the Cowboy Terminal Property. None of the foregoing additional contributions
will result in an increase in the number of units or percentage interests held
by the Company or Foreland.
As noted above, CAT LLC has title to the Cowboy Terminal Property and
the Company has the exclusive right to use portions thereof for its asphalt
terminal operations. Refinery Technologies did, however, retain certain contract
rights with respect to the Cowboy Terminal Assets, including rentals generated
from a portion of the Cowboy Terminal Property, certain rights to receive
payments upon any liquidation of CAT LLC and a right of first refusal to
purchase the Cowboy Terminal Property or membership interests in CAT LLC under
certain conditions.
Management of Cowboy Asphalt Terminal, LLC; Major Decisions. CAT LLC is
managed by the Company. The manager generally has authority to conduct the
day-to-day business and affairs of the Company. Certain matters must be approved
by members holding 75% or more of the outstanding units of CAT LLC. The Company
is not compensated for its services as manager.
Asphalt Production
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Crown Asphalt Ridge, L.L.C.
Formation and Current Development Status. Effective August 1, 1997, the
Company jointly formed Crown Ridge with MCNIC to construct and operate an oil
sand processing facility for the production of premium asphalt oil at Asphalt
Ridge in Uintah County, Utah. The Company believes that the Asphalt Ridge oil
sand reserves constitute one of Utah's largest and most accessible deposits.
There are three "pit" areas along Asphalt Ridge where the recoverable reserves
are principally located. These areas are referred to as the "A", "D" and "South"
tracts. The Company controls, through numerous operating leases, approximately
7,000 acres of private and state land encompassing these tracts, which the
Company believes contains in excess of 100 million barrels of surface minable
reserves (the "Oil Sand Resources").
The Facility constructed by Crown Ridge is located at the "A" tract of
the Oil Sand Resources. The "A" tract contains in excess of 18 million barrels
of surface minable reserves with an average oil saturation of 11% by weight.
This pit is partially opened as a result of prior small scale mining operations
for the production of local asphalt road base. The pit has been mined since the
1940's and provides a natural site to commence operations as overburden has been
removed and an open pit area exists for waste sand storage. The production
process entails three major steps: (1) mining, (2) extraction (separation of the
oil from the sand), and (3) distillation (recovery of the solvent and separation
of light fractions from the asphalt). The "D" and "South" tracts have not yet
been opened for asphalt production by the Company. The "D" tract contains in
excess of 30 million barrels of surface minable reserves with an average oil
saturation of 8.5% by weight. The "South" tract contains in excess of 65 million
barrels of surface minable reserves with an average oil saturation of 7.5% by
weight. Crown Ridge and the Company's joint venture partner in Crown Ridge,
MCNIC, have certain rights to develop the asphalt resources found in the "D" and
"South" tracts. See "Item 1. Business - Asphalt Production - Crown Asphalt
Ridge, L.L.C. - Additional Opportunities Within the Project Area and Areas of
Mutual Interest." MCNIC and the Company (sometimes referred to hereafter as the
"Members") own sharing ratios ("sharing ratios") of 75% and 25%, respectively,
in the profits, losses and obligations of Crown Ridge. However, the Company has
the right to acquire up to a 60% equity interest in Crown Ridge, contingent upon
MCNIC's receipt of certain preferential financial returns (as described below)
and Crown Ridge's election to pursue certain expansion opportunities. The
Company currently owns 25% of Crown Ridge and operates the business pursuant to
an Operating and Management Agreement. The Company holds only a minority
interest in Crown Ridge and the Company's consolidated financial statements and
results of operations only include its net interest in the accounts and results
of operations of Crown Ridge.
Once the economic operations of Crown Ridge are successful to the
extent of paying out to MCNIC an amount equal to 115% of its cash investment in
Crown Ridge, excluding tax benefits, the Company's sharing ratio in Crown Ridge
will increase to 50%. Thereafter, the Members may build other plants to further
develop the Oil Sand Resources. These plants will require additional capital
contributions from the Members, which are described in more detail below. The
Company may participate up to 50% in the additional facilities and up to 60%
after payout of the cash investment in such facilities. There are provisions for
the Company to retain an interest in these facilities after the recoupment of
certain amounts in the event the Company does not participate in the costs of
such additional facilities, as provided in the "Back-In Option."
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Crown Ridge has been and will be developed in phases in order to
minimize the risks and leverage the resources of the Members. Each phase calls
for the Members to contribute new capital to move Crown Ridge through the next
phase. The first phase called for detailed engineering and verification of the
Oil Sand Resources of the Company. MCNIC and the Company both contributed
capital of $300,000 and $100,000, respectively, to Crown Ridge to cover the
engineering and verification costs and complete the first phase. The second
phase required the Company to contribute the following to Crown Ridge:
1. The Company's rights as a future lessee under certain
equipment leases on mining equipment with a fair market value
of up to $3.5 million dollars. Such equipment will be
contributed to Crown Ridge when the mining requirements for
the project are conclusively known. This contribution was
agreed to have a capital contribution value of $3.5 million;
2. A sublicense of Crown's license of proprietary oil sands
refining technology from Park Guymon Enterprises, Inc., which
is accorded only a nominal value under Crown Ridge's Operating
Agreement (the "Operating Agreement"). Crown Ridge is
responsible for paying the 2-5% royalty required by the
sublicense;
3. Tract "A" of the Oil Sand Resources (these properties are
initially valued by Crown Ridge at $500,000); and
4. An amount of cash needed to bring the Company's new capital
contributions up to 25% capital to construct the Facility,
giving full credit to the $3.5 million of equipment leases and
the $500,000 of property rights in 1 and 3 above.
Under the Crown Ridge Operating Agreement, MCNIC will initially fund
75% of the amounts required by Crown Ridge to construct the Facility and to
operate Crown Ridge. Both Members may make such additional contributions as may
be required or agreed in the course of building the Facility. As of December 31,
1998, the Company has made cash contributions of approximately $1,651,000 to
Crown Ridge and MCNIC has contributed approximately $17,397,000. To date, the
Company has invested a total of approximately $4,600,000 in the development of
Asphalt Ridge, which includes costs incurred prior to the joint venture with
MCNIC.
The Company initially projected that Crown Ridge would be operational
by June, 1998. However, construction of the Facility was delayed as a result of
certain construction technical difficulties. Management of the Company believes
that the construction difficulties experienced are of the type anticipated in
the construction of this type of project, which is a sophisticated asphalt
processing facility utilizing new or evolving processes. The Company believes
the Facility will be operational in the second half of 1999. However, continued
difficulties or the inability to commercially operate the Facility economically
could significantly impact Crown Ridge's ability to continue as a going concern
and would have a materially adverse impact on the Company's operations and
financial condition.
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The Facility is designed to initially process approximately 3,000 tons
of oil sands daily for an average production of 1,700 barrels of asphalt per
day. The estimated annual production of asphalt is approximately 100,000 tons.
The Company believes that the asphalt produced at the Facility will meet new
stringent highway specifications and will have high durability at lower cost.
However, there can be no assurance that the Facility will be fully operational
within the expected time frame or that the Facility will produce premium asphalt
at lower cost than is presently available in the market.
Crown Ridge may market, distribute and sell its asphalt products
independent of the Company and has no obligation to utilize the asphalt
distribution facilities of the Company. However, it is expected that Crown Ridge
will utilize the asphalt distribution terminals and facilities of Crown
Distribution, subject to acceptable pricing and other compensation arrangements.
Subsequent Plants. Under the Crown Ridge Operating Agreement, the
Members may construct up to two subsequent plants (the "Subsequent Plants")
similar to the Facility if the economics of Crown Ridge's oil sands processing
business so permit. In sum, a Subsequent Plant may be constructed if certain
economic returns (approximately 18% on 50% of its Capital Contributions to Crown
Ridge or any successor joint venture during any 12 month period) have been
experienced by MCNIC from the Facility and if the Members believe or are
independently advised that a sufficient market exists to allow for the operation
of the Subsequent Plants without damaging the competitive position or returns of
the Facility or any other then-existing asphalt processing plants owned or
operated by Crown Ridge or any Successor Entity (as defined below). The
agreement of MCNIC and the Company is that any Subsequent Plant will be held and
operated by a separate legal entity (a "Successor Entity") formed by the Members
with governing terms and provisions similar to Crown Ridge. The Company may
elect to participate in either of the Subsequent Plants and may obtain, at its
option, between 10% and 50% of the interests in the newly-formed entity. A
portion of the Company's obligations to contribute to the Successor Entity may
be satisfied through the value of the contributed properties which the Company
may be credited with, as described below.
Following the determination by both Members or one Member to proceed
with the construction of a Subsequent Plant, Crown Ridge will convey to the
Successor Entity sufficient Oil Sand Resources or other property and water
rights to enable it to sustain operations in accordance with the applicable
projections and market study. If, during the twelve months prior to the sale of
products from the first Subsequent Plant, MCNIC has realized a return of
approximately 30% on 50% of its Capital Contributions to Crown Ridge, the
Company will be credited with a value for these Oil Sand Resources and
properties equal to $.10 per barrel for the products estimated to be produced
from the Subsequent Plant over a 20 year period.
If the Company elects not to proceed with any Subsequent Plant, and to
not make the needed capital contributions to build and operate the Subsequent
Plant, Crown will have a reduced interest in the Subsequent Plant (but will
still be credited with an interest equal to the value of the contributed
properties as described below, if the requisite return is achieved), subject to
an escalation under the Back-In Option described below.
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Whether or not the Company elects to proceed with either Subsequent
Plant, if the Subsequent Plants reach certain levels of economic success
(approximately 115% of MCNIC's investment in plant 2 without giving effect to
any tax benefits), the Company will receive an increased interest of 10% in the
Subsequent Plant as a result of its oil sand properties and technology being
used by the Subsequent Plant(s).
Management of Crown Ridge; Major Decisions. Crown Ridge is governed by
a management committee consisting of five managers. The Company is entitled to
appoint one manager and MCNIC is entitled to appoint four managers. Management
decisions are generally made by the management committee. However, one of the
managers appointed by the Company shall serve as the operating manager and have
the powers, authority, duties and obligations specified in the operating
agreement, which generally requires the operating manager to implement the
policies and pursue the objectives specified in the annual operating plan. Any
Manager may be removed or replaced from time to time by the Member which
appointed such Manager. If any adjustment is made in the Members' respective
sharing ratios both the Company and MCNIC will be entitled to appoint one
Manager for each 20% of Crown Ridge interest held by that Member (rounded to the
nearest 20% level), provided, that MCNIC and the Company shall each be entitled
to at least one Manager at all times that they are Members of Crown Ridge. The
size of the Management Committee may be increased to six Managers if the
foregoing calculation requires it.
Management decisions shall generally be made through a majority vote of
the Managers. However, certain "Major Decisions," such as: (i) the approval of
the detailed engineering for the Facility; (ii) the approval of, or substantial
amendment to, the annual operating plan described below; and (iii) calls for
additional Capital Contributions (except for calls contemplated by the EPC
Contract as defined in Crown Ridge's Operating Agreement and those required to
maintain Crown Ridge in emergencies), require unanimous approval of all
Managers. Most distributions to the Members require unanimous approval of the
Managers.
Crown Ridge's operations shall be conducted each year pursuant to the
annual operating plan. The annual operating plan shall address all aspects of
Crown Ridge's operations for the coming year, including budgeting for
operations, the mining of oil sand products and the marketing of those products.
In the event the Management Committee is unable to unanimously approve an annual
operating plan for any given calendar year, a majority of the Managers shall
have the authority to continue to maintain Crown Ridge's operations at levels
comparable to those approved under the last annual operating plan.
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Additional Opportunities Within the Project Area and Area of Mutual
Interest. Crown Ridge may elect to pursue additional opportunities ("Additional
Opportunities") within the Asphalt Ridge project area ("Project Area") which are
brought to its attention by one of its Members. Should Crown Ridge elect to
pursue such an Additional Opportunity, it may do so either through Crown Ridge
or by forming a new company containing terms and provisions substantially
similar to those of Crown Ridge. In the event that Crown Ridge does proceed with
any Additional Opportunity, the Company shall have the right, but not the
obligation, to obtain an equity interest in each such Additional Opportunity of
no less than 10% and no greater than 50% (with MCNIC obtaining the remaining
interest). If the Management Committee determines not to proceed with the
Additional Opportunity, any Member of Crown Ridge may then do so alone, subject
to the Back-In Option, discussed below, of the nonparticipating Member.
If either Member desires to develop any interests in real property,
fixtures or improvements within the State of Utah relating to the processing of
oil sands, bitumen, asphaltum or other minerals or mineral resources into
asphalt, performance grade asphalt, synthetic crude oil, diesel fuel, or any
other product produced using the intellectual property sublicensed by the
Company to Crown Ridge or any derivation thereof (an "AMI Opportunity"), the AMI
Opportunity must first be offered to Crown Ridge. The Company, shall then have
the option, but not the obligation, of acquiring (i) up to a 50% equity interest
if the AMI Opportunity relates to, or is designed for, the production and sale
of asphalt or performance grade asphalt; or (ii) up to a 66% equity interest if
the AMI Opportunity relates to the production of synthetic crude oil, diesel
fuel or any other similar products.
If Crown Ridge elects not to proceed with the AMI Opportunity, the
Member who brought the opportunity to Crown Ridge may proceed alone and the
nonparticipating Member shall have no further interest in the activity covered
by such opportunity. Except as limited in the discussion above, each Member of
Crown Ridge shall have the right to independently engage in any business
activities except that MCNIC shall not be entitled to use the Company's
technology provided to Crown Ridge in connection with such activities.
The Back-In Option. The Back-in Option is a means by which the Member
which initially elects not to participate in a plant may subsequently
participate at a later date upon favorable terms. The Back-in Option applies if:
(i) The Company elects not to proceed with construction of the
Facility following the completion of the detailed engineering
(and MCNIC elects to proceed);
(ii) either Member elects not to participate in the construction of
a Subsequent Plant; or
(iii) either Member elects not to participate in an Additional
Opportunity.
In the case of the Company's election not to participate in Subsequent
Plants or Additional Opportunities, the Company shall be entitled to a 60%
interest in the particular plant or opportunity if it is the non-participating
Member, and MCNIC shall be entitled to a 40% interest if it is the
non-participating Member, after the participating Member has achieved a 200%
payout of the costs of the respective facility.
Distributions; Allocations of Profits and Losses. The Management
Committee shall cause Crown Ridge to distribute Available Cash, as defined
within the Operating Agreement, to the Members quarterly, within 30 days
following the end of each quarter. Distributions will be made in connection with
the respective capital account balances after taking into account all
allocations.
Management Agreement. Pursuant to an Operation and Management Agreement
(the "Management Agreement"), the Company is the "Operator" of the Facility upon
commencement of operations. Under the Management Agreement, the Company will act
as an independent contractor to Crown Ridge and will (i) manage, supervise and
conduct the operations of Crown Ridge; (ii) carry out the terms of the Annual
Operating Plan adopted and approved by the Management Committee of Crown Ridge;
(iii) implement the decisions made and instructions given from time to time by
the Management Committee. As compensation for the services rendered under the
Management Agreement, the Company will receive (i) a monthly fee of $3,000; (ii)
the payment of all out-of-pocket expenses incurred through the performance of
its duties; (iii) the payment of the reasonable salaries, wages, overtime and
other similar compensation paid to employees who are employed full time in
connection with the operations of Crown Ridge; and (iv) a monthly home office
overhead charge of $10,000.
During the first two years, the Company may be removed as Operator only
for "good cause" as defined within the Management Agreement. After this initial
term, the agreement will automatically renew for unlimited succeeding one-year
terms unless either party indicates its desire to not renew within 90 days of
the expiration of the term. Also following the expiration of the initial term,
Crown Ridge may challenge the Company's status as Operator on economic grounds
by serving written notice to the Company that it believes that the operations of
the Facility may be conducted more efficiently and cheaply and that it is
willing to become the Operator (or has a bona fide commitment from a third party
to do so) on a reduced charge basis. Following the receipt of the economic
challenge, the Company will have 30 days to notify Crown Ridge that it elects to
(i) allow Crown Ridge, or its designee, to become the Operator under the
proposed terms, or (ii) continue as the Operator under the proposed terms.
Environment
The Company and its subsidiaries are subject to federal, state and
local requirements regulating the discharge of materials into the environment,
the handling and disposal of solid and hazardous wastes, and protection of
health and the environment generally (collectively "Environmental Laws").
Governmental authorities have the power to require compliance with these
Environmental Laws, and violators may be subject to civil or criminal penalties,
injunctions or both. Third parties may also have the right to sue for damages
and/or enforce compliance and to require remediation or contamination.
The Company and its subsidiaries are also subject to Environmental Laws
that impose liability for costs of cleaning up contamination resulting from past
spills, disposal and other releases of substances. In particular, an entity may
be subject to liability under the Federal Comprehensive Environmental Response,
Compensation and Liability Act and similar state laws that impose liability
without a showing of fault, negligence, or regulatory violations - for the
generation, transportation or disposal of hazardous substances that have caused
or may cause environmental contamination. In addition, an entity could be liable
for cleanup of property it owns or operates even if it did not contribute to
contamination of such property.
The Company expects that it may be required to expend funds to comply
with federal, state and local provisions and orders which relate to the
environment. Based upon information available to the Company at this time, the
Company believes that compliance with such provisions will not have a material
effect on the capital expenditures, earnings and competitive position of the
Company.
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Subsidiaries of the Company
Crown Asphalt Corporation was formerly known as Buena Ventura Resources
Corporation, a Utah Corporation. Crown Asphalt Corporation was organized October
24, 1985 and was acquired by the Company on September 30, 1992. Crown Asphalt
Corporation is a member of and holds roughly 25% of the membership interests in
Crown Ridge. The Company includes its net share of the net assets and results of
operations of Crown Ridge in its consolidated financial statements.
Crown Asphalt Products Company ("Capco") was formerly known as Energy
Technologies Corporation. Capco was formed in 1991, but until 1998 has been a
dormant entity. The Company recently activated Capco for the purpose of
developing an asphalt marketing and distribution business. Capco is a member of
and holds 50.01% of the membership interests in Crown Distribution. Crown
Distribution is a member of and holds 66.67% of the membership interests in CAT
LLC. The Company includes within its consolidated financial statements the
accounts and results of operations of both Crown Distribution and CAT LLC.
On July 2, 1998, Crown Distribution was formed as a second joint
venture between the Company and MCNIC. Crown Distribution is owned 50.01% by the
Company and 49.99% by MCNIC. Crown Distribution was formed to acquire the
inventory and assets of Petro Source Asphalt Company, a Texas corporation.
Applied Enviro Systems, Inc. is a dormant Oregon corporation.
Employees
As of May 31, 1999, the Company had 88 full and part-time employees.
None of the Company's employees are represented by a union or other collective
bargaining group. Management believes that its relations with its employees are
good.
ITEM 2. PROPERTIES
The Company conducts its business operations at 215 South State, Suite
650, Salt Lake City, Utah, where it has approximately 6,571 square feet of
office space under lease until July 30, 2003. Under the terms of the lease, the
Company pays $9,172 per month through July 30, 1999; $9,493 per month through
July 30, 2000; $9,825 per month through July 30, 2001; $10,169 per month through
July 30, 2002; and $10,525 through the lease expiration date of July 30, 2003.
There is no renewal option under the terms of this lease. Management of the
Company believes that its current office lease is sufficient for its needs and
believes that it will either be able to negotiate a new lease on its existing
space or obtain suitable other space in the Salt Lake City area upon the
expiration of the existing lease. As described above in the section captioned
"Item 1. Business - Asphalt Production - Crown Asphalt Ridge, L.L.C.," the
Company controls through operating leases certain Oil Sand Resources consisting
of approximately 7,000 acres of private and state land encompassing at Asphalt
Ridge in Uintah County, Utah. The Asphalt Ridge oil sand deposit is located in
the Uintah Basin in eastern Utah near the town of Vernal.
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Extensive reserve studies, including core drilling performed by Bechtel
and Sohio between the late 1950's and mid-1980's, estimate surface minable
reserves to be in excess of 100 million barrels. The Company controls the Oil
Sand Resources through certain long term operating leases and the Company has
the right to extract mineral reserves on these tracts so long as the Company
continues to conduct active operations under such leases, pay required royalties
and otherwise comply with the terms of the leases.
In connection with the formation and development of Crown Ridge, the
Company contributed the operating leases related to the "A" tract to Crown Ridge
and Crown Ridge holds certain rights to develop the "D" and "South" tracts. The
Company believes it and Crown Ridge are in compliance with, and not in material
default under, such operating leases. Further information regarding the Oil Sand
Resources controlled by the Company is found at "Item 1. Business - Asphalt
Production - Crown Asphalt Ridge, L.L.C." above.
Crown Distribution owns asphalt distribution facilities located in
Utah, Colorado, Nevada and Arizona. These properties are used by Crown
Distribution to process, blend, store, transport, distribute and sell finished
asphalt products, and may be used with respect to the asphalt products produced
from the oil sands ore expected to be extracted by Crown Ridge's Facility
constructed at Asphalt Ridge. All of Crown Distribution's assets are encumbered
by the lien and security interest of MCNIC, which advanced the purchase price
for such assets and has made certain working capital loans to Crown
Distribution. See "Item 1. Business - Asphalt Distribution - Crown Asphalt
Distribution, L.L.C."
CAT LLC's asphalt distribution and storage facility is located just
north of Salt Lake City, Utah. CAT LLC owns all of the underlying Cowboy
Terminal Property, which is encumbered by a Deed of Trust in favor of the
seller.
ITEM 3. LEGAL PROCEEDINGS
On May 21, 1998, Road Runner Oil, Inc. ("Road Runner") and Gavilan
Petroleum, Inc. ("Gavilan") filed an action in the Third Judicial District
Court, Salt Lake County, State of Utah, as Civil Number 98-0905064 against the
Company and its President. The action relates to the purchase by Road Runner of
100% of the stock of Gavilan in 1997, and generally seeks to (i) obtain
corporate records of Gavilan in the Company's possession relating to the amount
of oil and gas royalties potentially owed to third parties prior to the
aforementioned stock sale, and (ii) to determine the amount of royalties owed.
The action further alleges, on behalf of Gavilan, claims of breach of fiduciary
duty, professional negligence and mismanagement against the Company's President
for alleged mismanagement of Gavilan's affairs. The Plaintiffs seek injunctive
relief requiring the tendering by the Company of the referenced records and such
damages as may be proven at trial. The Company believes that the Plaintiffs
claims are groundless and that it is entitled to payment of the $75,000 plus
interest still owed by Road Runner as part of the purchase price for Gavilan. In
addition, since the action was filed, the Company has tendered substantial
quantities of corporate records to the Plaintiffs for their review. On June 17,
1998, an order was entered granting an open extension to the Company of its
obligation to file an answer to the above-described Complaint so that the
parties may informally pursue a settlement, if any, of the matter. The Company
is aware that the new principals of Gavilan have experienced extensive legal
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difficulties and the law firm which previously represented Gavilan has withdrawn
as counsel in this matter. Gavilan has taken no action to prosecute this matter
for some months, and the Company has not been notified that Gavilan has engaged
new legal counsel. Accordingly, the Company expects, although there can be no
assurance, that Gavilan will fail or refuse to prosecute this matter further.
The Company is not certain as to whether or not the outstanding balance under
the promissory note is collectible by the Company.
On February 10, 1999 CEntry Constructors and Engineers L.L.C.
("CEntry") filed a demand for arbitration with the American Arbitration
Association for claims arising out of the November 5, 1997 Engineering,
Construction and Procurement Agreement between Crown Ridge and CEntry (the
"Contract") for the design and construction of Crown Ridge's Facility near
Vernal, Utah. CEntry seeks damages in excess of $1.0 million for amounts
allegedly due to CEntry under the Contract, including a retention or liquidated
damages amount ($803,660), as well as amounts for modifications to the Contract
allegedly made by Crown Ridge. Crown Ridge has denied the claims and filed its
own counterclaims against CEntry. Crown Ridge asserts, among other things, that
Crown Ridge is entitled to the retention amount based upon certain breaches of
the Contract by CEntry and that Crown Ridge is entitled to liquidated damages
for CEntry's failure to meet a mechanical completion deadline specified in the
Contract. An arbitration panel has been selected and arbitration will begin
August 2, 1999. The arbitration will take place in Salt Lake City, Utah and the
case is currently in the discovery phase. Due to the uncertainties inherent in
any litigation or arbitration proceeding, there can be no assurance that Crown
Ridge will or will not prevail or that significant damages will not be awarded
against Crown Ridge.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 18, 1998, the Company held an annual meeting of its
shareholders to elect members of the Company's Board of Directors and to approve
the appointment of Deloitte & Touche LLP as independent accountants for the
Company. Proxies for the meeting were solicited pursuant to Regulation 14A under
the Securities and Exchange Act of 1934. At the meeting, 7,201,011 shares of
common stock of the Company were represented in person or by proxy out of a
total of 12,668,512 shares issued and outstanding as of the record date
established with respect to such meeting.
All three of the Company's directors were re-elected to successive
terms as directors of the Company. With respect to the election of James A.
Middleton, 6,746,686 shares were voted in favor of his election, 429,450 shares
were voted against and 24,925 either abstained from voting or were broker
non-votes.
With respect to the election of Jay Mealey, 6,588,180 shares were voted
in favor of his election, 587,956 shares were voted against and 24,875 either
abstained from voting or were broker non votes. Lastly, with respect to the
election of Richard S. Rawdin, 6,528,430 shares were voted in favor of his
election, 647,706 shares were voted against and 24,875 either abstained from
voting or were broker non votes. The Company's shareholders also voted in favor
of appointing the accounting firm of Deloitte & Touche LLP as the Company's
independent auditors for the next fiscal year, with 7,188,939 shares voting in
favor of the appointment, 9,372 shares voting against, and 2,700 shares
abstaining or were broker non-votes.
No other matters were presented to the Company's shareholders for their
approval in the fourth quarter of the Company's 1998 fiscal year.
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PART II.
ITEM 5. MARKET PRICE FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded in the over-the-counter
market since 1980. The common stock is currently listed on the NASD OTC Bulletin
Board under the symbol CROE. At the present time, only the common stock is
publicly traded. The following table sets forth the range of high and low bid
quotations, as adjusted for stock splits, of the Company's common stock as
reported by the National Quotation Bureau for each full quarter during the two
most recent fiscal years. The table represents prices between dealers, and does
not include retail markups, markdowns or commissions, and may not represent
actual transactions:
CALENDAR QUARTER ENDED HIGH BID LOW BID
March 31, 1998 1.56 1.19
June 30, 1998 2.13 1.47
September 30, 1998 2.16 1.25
December 31, 1998 1.50 0.97
March 31, 1997 1.25 0.63
June 30, 1997 1.03 0.53
September 30, 1997 1.50 0.63
December 31, 1997 2.00 1.22
As of May 25, 1999, the high bid and low offer quotations reported by
the National Quotation Bureau were $.97 and $1.00, respectively. On May 23,
1999, approximately 748 shareholders of record held the Company's common stock.
The Company declared and paid in 1999 the 8% dividend on the Company's Series A
Preferred Stock which accumulated and was due with respect to the 1998 calendar
year. The Company paid this dividend by issuing 317,069 shares of its common
stock on or about February 2, 1999 to Sundance Assets, L.P., a controlled
affiliate of ECT which now owns the Company's Series A Preferred stock. The
Company relied upon the exemption from registration afforded by Section 4(2) of
the Securities Act of 1933, as amended, and other available exemptions.
The Company has not paid any dividends or made any other distributions
on its common shares. It is the present policy of the Board of Directors of the
Company to retain any earnings for use in the business, and therefore, the
Company does not anticipate paying any cash dividends on its common stock in the
foreseeable future. The terms of the Company's Series A Preferred Stock prohibit
the payment of dividends on common stock at any time that dividends on the
Series A Preferred Stock are due yet unpaid.
By letter agreement dated April 3, 1998, the Company retained Ladenburg
Thalmann & Co., Inc. ("Ladenburg") as its financial advisor to provide corporate
finance assistance, review Company operations and financial condition, analyze
financing alternatives and strategies, evaluate potential transactions and
20
<PAGE>
enhance the market for the Company's stock. In exchange for these services, the
Company is obligated to issue to Ladenburg warrants to acquire 400,000 shares of
the Company's common stock. The warrants will be exercisable for five years from
the date of issuance at the following prices: 150,000 shares at $1.50 a share,
150,000 shares at $2.00 per share and 100,000 shares at $2.50 per share. The
Company relied upon the exemption from registration afforded by Section 4(2) of
the Securities Act of 1933, as amended, and other available exemptions.
The Series A Preferred shares are convertible at the option of its
holder(s) into approximately 24% of the common stock of the Company. The number
of shares of common stock issuable upon conversion of the Series A Preferred is
subject to adjustment upon the issuance of additional shares of the Company's
common stock resulting from stock splits, share dividends and other similar
events as well as upon the issuance of additional shares or portions which are
issued (i) in connection with the Company's venture with MCNIC in Crown Ridge,
or (ii) as compensation to any employee, director, consultant or other service
provider of the Company or any subsidiary (other than options to acquire up to
5% of the Company's common stock at or less than the then fair market value).
Dividends accrue on the outstanding Series A Preferred shares at the rate of 8%
per annum and may be paid through cash or common shares of the Company at the
option of the holder(s) of such stock. Subject to the holder(s)' right to
convert the Series A Preferred, the Company may redeem such stock at any time
from the date on which it was issued at a percentage of the Series A Preferred's
stated value ($10) which will vary depending on when the Company exercises such
right. The holder(s) of the Series A Preferred may also require the Company to
redeem its Series A Preferred under certain circumstances after the eighth
anniversary of the issuance of such stock.
The holder(s) of the Series A Preferred have the right, but not the
obligation, to appoint 20% of the Company's Board of Directors. To date, the
holders(s) have not appointed any Directors. In addition, the holder(s) of the
Series A Preferred have certain voting rights upon any attempt by the Company to
alter the rights and preferences, redemption, voting or dividend rights senior
to the Series A Preferred, increase the number of Series A Preferred, reclassify
the Company's securities or enter into specified extraordinary events. All
voting rights of the Series A Preferred expire upon the issuance by the Company
of a notice to redeem such shares.
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in the following table has been derived
from the financial statements for the periods indicated. The financial
statements as of and for the years ended December 31, 1994 through 1997 were
audited by Pritchett, Siler & Hardy, P.C., independent public accountants. The
financial statements as of and for the year ended December 31, 1998 were audited
by Deloitte & Touche, LLP, independent public accountants. The following
financial data should be read in conjunction with the financial statements and
related notes and with management's discussion and analysis of financial
conditions and results of operations included elsewhere herein.
21
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands except per share)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Revenues $23,836 $87 $225 $214 $326
Income (Loss from
Continuing Operations) ($498) ($1,153) ($422) ($234) ($230)
Income (Loss) Per Share
From Continuing Operations ($0.07) ($0.11) ($0.04) ($0.03) ($0.03)
Total Assets $23,571 $6,610 $4,591 $4,344 $4,351
Total Long-Term Obligations $4,326 $0.00 $182 $794 $964
Redeemable Preferred Stock $4,783 $4,726 -0- -0- -0-
Cash Dividends Per Common Share $0.00 $0.00 $0.00 $0.00 $0.00
Common Stockholders' Equity $767 $1,749 $3,018 $2,611 $2,940
</TABLE>
The foregoing selected financial data is presented on a historical
basis and may not be comparable from period to period due to changes in the
Company's operations. Common Stockholders' Equity was restated as of January 1,
1996 to reflect the amortization of $453,649 in research and development
expenditures previously capitalized by the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
The following discussion and analysis of the Company's financial
condition, results of operations and related matters includes a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include, by way of illustration and not limitation,
statements containing the works "anticipates," "believes," "expects," "intends,"
"future" and words of similar import which express, either directly or by
implication, management's beliefs, expectations or intentions regarding the
Company's future performance or future events or trends which may affect the
Company or its results of operations.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors, including but not limited to changes in
economic conditions generally or with respect to the Company's asphalt products
market in particular, new or increased governmental regulation, increased
competition, shortages in labor or materials, delays or other difficulties in
shipping or transporting the Company's products, technical or operational
difficulties at the Facility of Crown Ridge, difficulties in integrating the
Company's recent joint venture and acquisition related businesses and other
similar risks inherent in the Company's operations or in business operations
generally. Any such risks or uncertainties, either alone or in combination with
other factors, may cause the actual results, performance or achievements of the
Company to differ materially from its anticipated future results, performance or
achievements (which may be expressed or implied by such forward looking
statements). Consequently, the following management's discussion and analysis,
including all forward-looking statements contained therein, is qualified and
22
<PAGE>
limited by the foregoing cautionary factors. Interested persons are advised to
consider all forward-looking statements within the context of such cautionary
factors.
Liquidity and Capital Resources
At December 31, 1998, the Company had cash and other current assets of
$11,044,600 as compared to cash and other current assets of $3,288,989 at
December 31, 1997. The increase of $7,755,611 was primarily due to the Company's
formation and the related capitalization of its majority owned subsidiary, Crown
Distribution. Crown Distribution had current assets of $10,104,000 as of
December 31, 1998 which includes approximately $2.8 million in cash, $4.4
million in inventory and $2.8 million in accounts receivable. Crown Distribution
operations require a working capital line for inventory purchases and other
operating expenses. MCNIC, the minority interest owner, has established such
line, in addition to a working capital loan provided, at an interest rate of 8%.
At December 31, 1998, the line had a balance of $3,124,641 and the working
capital loan had a balance of $5,810,581.
The Company also owed MCNIC an additional $5,325,723 at December 31,
1998 with respect to the Preferential Capital Contribution which funded Crown
Distribution's acquisition of the assets of Petro Source Asphalt Company. See
"Item 1. Business Asphalt Distribution - Crown Asphalt Distribution, L.L.C." The
Preferential Capital Contribution requires payment of a 15% rate of return and
is payable solely from 50% of the cash flow from Crown Distribution's
operations. At December 31, 1998, the Company has estimated $1,000,000 of this
balance to be current.
The Company believes its asphalt distribution business, which is
operated through Capco, is a growth business whose success is not dependent on
the Company's interest in the Crown Ridge Project. However, the asphalt
distribution business is capital intensive and requires substantial investments
to acquire terminal storage, blending and raw material assets. The Company
recently acquired several terminals in transactions requiring substantial
capital commitments. On April 17, 1999, the Company acquired the asphalt
terminal fixed assets in Laurel, Montana and Williston, North Dakota along with
certain contractual agreements of Asphalt Supply & Services, Inc. and Inoco,
Inc. for $4,000,000, consisting of $750,000 in cash and 2,500,000 shares of
unregistered common stock. On May 12, 1999, the Company acquired an asphalt
terminal in Rawlins, Wyoming along with inventory for $2,291,571 from S&L
Industrial. The purchase price consisted of the Company assuming S&L's debt of
approximately $1,800,000, entering into a note payable to S&L for $225,000, and
a cash payment of $266,571. The Company remains open to other asphalt related
business opportunities to complement its existing asphalt distribution
capabilities. There can be no assurance that the Company can obtain additional
capital financing required to finance such transactions on acceptable terms and
conditions.
Under the Company's contractual relationships with MCNIC, MCNIC may
have certain rights to participate in additional business opportunities, if any,
which may be pursued by the Company. In the event MCNIC participates in these
business opportunities, the Company expects that MCNIC will fund its
23
<PAGE>
proportionate share of the capital expenditures needed to pursue such
opportunities.
The Company believes it has sufficient capital to meet all of its
current working capital requirements from its cash reserve, working capital line
and other financing sources. However, the Company is required to fund 25% of
Crown Ridge's capital costs, start-up costs and operating expenses. As of
December 31, 1998, the Company has made cash contributions of approximately
$1,651,000. Crown Ridge has experienced certain technical difficulties which the
Company believes will be resolved. However, should such delays continue, or
should the facility be unable to operate economically, the Company believes this
would significantly impact Crown Ridge's ability to continue as a going concern
and would adversely impact the Company's operations and financial condition. See
- - "Item 1. Business - Asphalt Production - Crown Asphalt Ridge, L.L.C."
Results of Operations
1998 vs. 1997
During the 1998 fiscal year, the Company made significant progress in
the development of Crown Distribution and its asphalt terminal, blending,
emulsion and distribution facilities. In particular, the Company acquired
facilities located in Utah, Arizona, Colorado, Nevada, Wyoming, Montana and
North Dakota. These asphalt distribution facilities enable the Company to
purchase oil products and related raw materials from its suppliers and to store,
process, blend and otherwise produce various grades of asphalt and asphalt
products for sale to its customers in the western United States. As a result,
the Company's revenues during the year ended December 31, 1998 were generated
primarily from the asphalt product operations of Crown Distribution. Management
of the Company expects these operations to increase in importance as the Company
pursues it business plans. See "Item 1. Business."
The Company's results for the year ended December 31, 1998 include
expenses of $880,186 relating to the Company's early adoption of Statement of
Position (SOP) No. 98-5 which requires expensing of start-up costs. The Company
could have deferred this expense until 1999 but elected to record this change in
accounting principle in 1998. Of this amount, $615,323 relates to expenses
incurred in prior years and $264,863 relates to the current period. Also
included in 1998 results is the value of certain warrants issued totaling
$186,256. These warrants have exercise prices of $1.50, $2.00 and $2.50 per
share. The total of these expenses of $1,066,442 represents approximately 96% of
the Company's loss for 1998.
Total revenue increased from $86,781 for the year ended December 31,
1997 to $23,835,734 for the year ended December 31, 1998, an increase of
$23,748,953. The increase was due to revenue from the Company's recently
acquired subsidiary, Crown Distribution. Crown Distribution is an asphalt
distribution business that was formed to acquire the assets of Petro Source
Asphalt Company, a Texas corporation. Crown Distribution sold approximately
151,000 tons of asphalt during the period.
24
<PAGE>
Cost of sales increased from $54,653 for the year ended December 31,
1997 to $21,916,816 for the year ended December 31, 1998, an increase of
$21,862,163. This increase was due to the cost of asphalt sold from the
Company's recently acquired asphalt distribution business. Cost of sales
includes asphalt costs of $17,465,416 and asphalt terminal operating costs of
$4,451,400.
General and administrative expenses increased from $815,401 for the
year ended December 31, 1997 to $1,253,953 for the year ended December 31, 1998,
an increase of $438,552 (54%). This change was due to an increase in the
Company's overhead related to its asphalt distribution business.
Interest and other income/expenses increased from net expenses of
$803,290 for the year ended December 31, 1997 to net expenses of $922,283 for
the year ended December 31, 1998, a decrease of $118,993. The 1998 total was
comprised of interest costs related to the Company's working capital line and
preferential loan for its asphalt distribution business of $851,917, start-up
costs of $264,863 related to Crown Ridge which were expensed pursuant to a
change in accounting principle and $186,256 of expenses related to the valuation
of warrants issued. These amounts were partially offset by interest and other
income of $380,753. The 1997 total was comprised primarily of an $801,461
expense related to a loss on the sale of a subsidiary.
Minority interest of $300,971 represents MCNIC's approximate 49%
interest in Crown Distribution.
1996 vs. 1997
Oil and gas revenue decreased from $224,855 for the year ended December
31, 1996 to $86,781 for the year ended December 31, 1997, a decrease of $138,074
(61%). This decrease was due to the sale of the Company's oil and gas producing
subsidiary, Gavilan Petroleum, Inc. in July, 1997.
Oil and gas production costs decreased from $137,340 for the year ended
December 31, 1996 to $54,653 for the year ended December 31, 1997, a decrease of
$82,687 (60%). This decrease was due to the sale of the Company's oil and gas
producing subsidiary, Gavilan Petroleum, Inc. in July, 1997.
General and administrative expenses increased from $631,463 for the
year ended December 31, 1996 to $815,401 for the year ended December 31, 1997,
an increase of $189,938 (29%). This increase was primarily due to an increase in
expenses relating to the Asphalt Ridge oil sand project financing.
Other income/expenses increased from total expenses of $6,682 for the
year ended December 31, 1996, to total expenses of $803,290 for the year ended
December 31, 1997, an increase of $796,608. This increase was due to the loss
recorded on the sale of Gavilan Petroleum, Inc.
25
<PAGE>
Year 2000 Assessment
Like many other companies, the "Year 2000 problem" creates risks for
the Company. The "Year 2000 problem" is the result of computer systems and other
equipment with embedded chips or processors using two digits, rather than four,
to define a specific year and potentially being unable to accurately process,
provide and/or receive date and time data from, into and between the twentieth
and twenty-first centuries, including the years 1999 and 2000, and leap year
calculations. The Year 2000 problem, if not identified and corrected in a timely
manner, could result in system failures or miscalculations, causing disruptions
to various Company activities and operations and adversely impact its financial
condition and results of operations.
The Company is addressing the Year 2000 problem in three overlapping
phases: (i) the identification and assessment of all critical equipment,
hardware and software systems requiring modification or replacement prior to
2000; (ii) the remediation and testing of modifications to critical items; and
(iii) the development of contingency and business continuation plans to mitigate
the extent of any disruption to the Company's operations arising from the Year
2000 problem.
The Company began its assessment of Year 2000 issues in the first
quarter of 1999 and the Company continues to assess the Year 2000 problem and
its potential impact on its information technology ("IT") and non-IT systems.
These activities are intended to encompass all major categories of systems in
use by the Company, including oil sands extraction functions, asphalt
processing, transportation and logistics systems, sales and finance and
accounting. The Company is also actively working with critical suppliers of
products and services to determine that the suppliers' operations and the
products and services they provide are Year 2000 compliant or to monitor their
progress toward year 2000 compliance. The Company expects that assessment,
remediation and contingency planning activities will continue throughout 1999
with the goal of appropriately resolving all material internal systems and third
party issues. However, there can be no assurance that the Company will be able
to complete its assessment, remediate problems or implement effective
contingency plans before the end of 1999. Further, the Company's recent
acquisitions of asphalt terminals, and the Company's continuing efforts to
integrate these assets and new personnel into the Company's overall operations,
present additional difficulties in the Company's assessment and remediation
efforts.
The Company and its affiliated joint venture entity, Crown Ridge,
employ a number of IT systems in their operations, including, without
limitation, computer networking systems, financial systems and other similar
systems. In 1998, the Company and its subsidiaries began conversion of their
principal computer software systems to a new integrated system to support future
growth and improve productivity. Although no independent assessment has been
conducted, management of the Company believes that the new computer system is
Year 2000 compliant based upon indications from its computer systems vendors
that the new computer systems incorporate current technology and software which
are Year 2000 compliant.
26
<PAGE>
The Facility constructed by Crown Ridge incorporates state of the art
technology and the Company believes that its IT and non-IT systems are Year 2000
compliant. However, the sophisticated nature of this Facility and the fact that
it is in its initial operational phase requires that the Company continue to
assess its Year 2000 readiness.
The Company is also assessing its non-IT systems containing embedded
electronic circuits. The Company's has identified the operations of Crown Ridge,
Crown Distribution and CAT LLC, the Company's joint venture operating companies,
as having the most non-IT Year 2000 operational risks since the Company's
revenues and income are or will be derived primarily from these operations. As
of March 15, 1999, the Company has not identified any material non-IT systems
that are not Year 2000 compliant, although the Company's assessment efforts are
ongoing.
The Company is highly dependant upon electric power, natural gas,
asphalt, petroleum based products and chemicals, as well as the delivery of such
items by all forms of transportation, including, pipeline, shipping, rail and
truck. A shortage of any of the foregoing products or a failure of or delays in
one or more methods of transportation could have a material adverse affect on
the Company and Crown Ridge and their respective operations.
Although the Company has obtained assurances from some of its key
suppliers, it has not independently evaluated whether its key suppliers are or
will be Year 2000 compliant, and therefore the Company's contingency plans will
assume that at least some of these suppliers will have disruptions in their
deliveries and services to the Company or Crown Ridge. Given that assumption
(and the risk that some of the Company's IT or non-IT systems will experience
unidentified or unremediated Year 2000 problems), some of the worst case Year
2000 scenarios the Company might experience include a complete shut-down of
Crown Ridge's Facility and one or more of the asphalt terminals of Crown
Distribution, or a failure or substantial delay in the transportation of the
Company's asphalt products. The occurrence of any of these events could result
in lost revenues, lost customers, increased processing, storage or
transportation costs, increased financing costs related to inventory shortages
or sales order backlogs, substantial remediation costs and other similar costs
and expenses.
The potential costs, if any, to remediate direct or indirect Year 2000
problems the Company may have or identify has not been determined, nor can such
costs, if any, be accurately predicted or determined given the ongoing nature of
the Company's assessment efforts. At present, the Company has spent
approximately $96,000 upgrading its IT systems and has spent roughly $5,000 to
assess or remediate non-IT issues (excluding salaries of Company personnel). The
Company currently expects that the total cost of these programs, including both
incremental spending and redeployed resources, will not be in excess of
$150,000. The total cost estimate is based on the current assessment of the
projects and is subject to change as the project's progress.
The Company has not yet developed any contingency plans in the event
that it or its subsidiaries' IT or non-IT systems fail or in the event that
material suppliers of goods or services fail or have significant disruptions in
deliveries to the Company and its subsidiaries.
The foregoing disclosure is based on the Company's current
expectations, estimates and projections, which could ultimately prove to be
27
<PAGE>
inaccurate. Because of uncertainties, the actual effects of the Year 2000
problem on the Company may be different from the Company's current assessment.
Factors, many of which are outside the control of the Company, that could affect
the Company's ability to be Year 2000 compliant by the end of 1999 include the
failure of customers, suppliers, governmental entities and others to achieve
compliance; the inability or failure to identify all critical Year 2000 issues
or to develop appropriate contingency plans for all Year 2000 issues that
ultimately may arise.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE
The financial statements required by this item are set forth following
Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 2, 1998, the Company terminated its independent auditor
relationship with Pritchett, Siler & Hardy, P.C. ("Pritchett").
Pritchett's report on the financial statements of the Company for the
fiscal year ended December 31, 1997 did not contain an adverse opinion or a
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles. The Pritchett report for the fiscal year
ended December 31, 1996 contained a statement as to the ability of the Company
to continue as a going concern. Other than the foregoing, there were no adverse
opinions or disclaimers of opinion, or qualifications or modifications as to
uncertainty, audit scope or accounting principles.
The decision to change accountants was approved by the Company's Board
of Directors.
During the fiscal years ended December 31, 1997, 1996 and 1995, and the
period January 1, 1998 through June 2, 1998, there were no disagreements with
Pritchett on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures or any reportable events.
On June 2, 1998, the Company engaged Deloitte & Touche LLP ("Deloitte")
as its independent auditors to audit and report on the financial statements of
the Company for the fiscal year ended December 31, 1998. During the audit for
the year ended December 31, 1998, certain prior period R & D expenditures
totaling $453,649 have been reclassified as an expense as of January 1, 1996.
Prior to engaging Deloitte, neither the Company nor anyone acting on
its behalf consulted with Deloitte regarding the application of accounting
principles to any specified transaction or the type of audit opinion that might
be rendered on the Company's financial statements. In addition, during the
Company's fiscal years ended December 31, 1997 and 1996, and during the period
January 1, 1998 through June 2, 1998, neither the Company nor anyone acting on
28
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its behalf consulted with Deloitte with respect to any matters that were the
subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K)
or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company, their ages and
their positions are set forth below:
NAME AGE POSITION
James A. Middleton 63 Chairman of the Board of Directors
Jay Mealey 42 Chief Executive Officer
President, Treasurer, Director
Alexander L. Searl 56 Chief Operating and Financial Officer
Richard S. Rawdin 40 Vice President, Secretary, Director
James A. Middleton has served as a director since February 1996 and
served as Chief Executive Officer from December 1996 until his resignation on
April 16, 1999. Mr. Middleton will continue to serve as a director until a new
director is duly elected and qualified. Mr. Middleton was an Executive Vice
President and director of Atlantic Richfield Co. from October 1987 to September
1994 and is presently a director of Texas Utilities Co.
Jay Mealey has served as President and Chief Operating Officer and as a
director of the Company since 1991. Mr. Mealey was appointed as Chief Executive
Officer on April 16, 1999 and will serve as Chief Executive Officer, President
and Treasurer and as a director, until a new officer and director, respectively,
are elected and qualified. Mr. Mealey has been actively involved in the oil and
gas exploration and production business since 1978. Prior to employment with the
Company, Mr. Mealey served as Vice President of Ambra Oil and Gas Company and
prior to that worked for Belco Petroleum Corporation and Conoco, Inc. in their
exploration divisions. Mr. Mealey is responsible for managing the day-to-day
operations of the Company.
Alexander L. Searl was appointed as Chief Operating Officer and Chief
Financial Officer of the Company on June 4, 1999. Prior to joining the Company,
Mr. Searl was Senior Vice President and Chief Financial Officer of TheraTech,
Inc., a publicly-held pharmaceutical drug delivery company. Prior to joining
Theratech, Mr. Searl was employed by American Stores Company, one of the
nation's leading food and drug retailers, where he was Executive Vice President
and Treasurer. He previously served 21 years in management positions of
increasing responsibility with Hercules Incorporated, including several years as
the international chemical manufacturer's corporate vice president and
treasurer.
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<PAGE>
Richard S. Rawdin has served as a Vice President and Secretary and as a
director of the Company since 1991 and will serve as Vice-President and
Secretary and as a director, until a new officer and director, respectively, are
elected and qualified. From February 1986 to September 1991, Mr. Rawdin served
as Controller and Vice President of Finance for Kerry Petroleum Company, Inc.
Prior to that, he was employed as a senior consultant with Deloitte and Touche.
Mr. Rawdin is a Certified Public Accountant.
Compliance with Section 16(a) of the Securities and Exchange Act of 1934
Section 16(a) of the Securities and Exchange Act of 1934 (the "Exchange
Act") requires the Company's executive officers and directors and certain
shareholders to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission (the "Commission"). Such
persons are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on a review of the
copies of such forms furnished to the Company and written representations from
the Company's executive officers and directors, the Company notes that James A.
Middleton, a director of the Company and it former Chief Executive Officer, was
late in reporting that he was granted, on February 6, 1998, options to acquire
75,000 shares of Company common stock at an exercise price of $1.50 per share.
Mr. Middleton filed a Form 5 on February 16, 1999 reporting the grant of such
options.
ITEM 11. EXECUTIVE COMPENSATION
The compensation of James A. Middleton, the Company's Chief Executive
Officer and the Company's two highly paid executive officers (collectively, the
"Named Officers") is discussed in the following tables.
Summary Compensation Table
The following table contains information regarding compensation paid to
the Company's Named Officers for the fiscal years listed. No other executive
officer of the Company earned compensation in excess of $100,000 in fiscal year
1998. <TABLE> <CAPTION>
=============================== ===================================================== ========================================
Annual Compensation Long Term
Compensation
=============================== ===================================================== ========================================
Name and Principal Position Salary Bonus ($) Other Annual Securities All Other
Year ($) Compensation ($) Underlying Compensation ($)
Options/SARS (#)
- ------------------------------- ---------- ------------ ---------- ------------------ --------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
James A. Middleton, Chief 1998 $0 $0 $0 0 0
Executive Officer(1) 1997 $0 $0 $0 0 0
1996(1) $0 $0 $0 0 0
- ------------------------------- ---------- ------------ ---------- ------------------ --------------------- ------------------
Jay Mealey, President 1998 $155,000 $0 $48,539(4) 0 $539(5)
1997 $100,000 $56,250 $0 450,000 (3) 0
1996 $78,000 $0 $0 0 0
- ------------------------------- ---------- ------------ ---------- ------------------ --------------------- ------------------
Richard S. Rawdin, Vice 1998 $78,000 $0 $31,672(4) 0 0
President and Secretary 1997 $52,500 $56,250 $0 0(3) 0
1996(2) * * * * *
=============================== ========== ============ ========== ================== ===================== ==================
</TABLE>
30
<PAGE>
(1) Mr. Middleton resigned as Chief Executive Officer on April 16, 1999.
(2) Although employed by the Company, Mr. Rawdin did not earn compensation in
excess of $100,000 in 1996.
(3) Does not include 148,148 options to purchase Common Stock of the Company at
the purchase price of $.5625 per share which were previously granted to both Mr.
Mealey and Mr. Rawdin in May 1995 and which became exercisable upon satisfaction
of a condition precedent to vesting and exercise, namely, the receipt and
completion of financing on the Company's Asphalt Ridge project.
(4) Includes non-cash compensation expense in the amounts of $40,139 and $31,672
for Mr. Mealey and Mr. Rawdin, respectively, recorded by the Company in
connection with their exercise of options to acquire Company common stock. The
foregoing sums represent the value of such options, generally determined by the
difference between the fair market value of the stock subject to the options and
the exercise price paid for the common stock. Mr. Mealey's amount also includes
a car allowance of $8,400.
(5) Represents life insurance paid for Mr. Mealey.
Option/SAR Grants Table
The following table sets forth information with respect to individual
grants of stock options made by the Company to the Named Officers during the
fiscal year ended December 31, 1998. The Company did not grant any stock
appreciation rights during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
============================ ============= ==================== =================== ============== ===========================
Number of % of Total Options Exercise or Base Expiration Potential Realizable Value
Securities Granted to Price ($/Sh) Date for at Assumed Annual Rates of
Name Underlying Employees in Fiscal Option Term Stock Price Appreciation
Options year for Option Term
Granted (#)
============================ ============= ==================== =================== ============== ===========================
<S> <C> <C> <C> <C> <C>
James A. Middleton (1) 75,000 100% $1.50 per share 1/29/03 $22,500
Jay Mealey 0 N/A N/A N/A N/A
Richard S. Rawdin 0 N/A N/A N/A N/A
============================ ============= ==================== =================== ============== ===========================
</TABLE>
(1) Granted as of February 6, 1998 under Mr. Middleton's Employment Agreement
dated January 26, 1996, which obligated the Company to grant such options as
additional compensation for services during the period February 6, 1997
- -February 6, 1998.
31
<PAGE>
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
The following table contains information regarding the fiscal year-end
value of unexercised options held by the Named Officers. The aggregate value of
the options was calculated using the average bid and asked price for the
Company's Common Stock on December 31, 1998. <TABLE> <CAPTION>
========================= ================= =============== ================================== ==================================
Number of securities underlying Value of unexercised in-the-money
unexercised options/SARs at options/SARs at fiscal year end
fiscal year end ($)
(#)
---------------------------------- ----------------------------------
Shares Value
Name Acquired Realized
on Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
========================= ================= =============== ================================== ==================================
<S> <C> <C> <C> <C> <C> <C>
James A. Middleton 0 0 450,000 0 $0 $0
Jay Mealey 548,148 $40,139(1) 0 450,000 (2) $0 $0
Richard S. Rawdin 398,148 $31,672(1) 0 398,148 $0 $0
========================= ================= =============== ================================== ==================================
</TABLE>
(1) Includes non-cash compensation expense in the amounts of $40,139 and $31,672
for Mr. Mealey and Mr. Rawdin, respectively, recorded by the Company in
connection with their exercise of options to acquire Company common stock. The
foregoing sums represent the value of such options, generally determined by the
difference between the fair market value of the stock subject to the options and
the exercise price paid for the common stock.
(2) Represents three tranches of 150,000 options granted in a single grant to
Mr. Mealey in November of 1997. The first tranche of options vested on November
1, 1997, but is not exercisable until the average offer price of the Company's
Common Stock equals or exceeds $2.00 per share for thirty days. The second
tranche of options vested in November 1, 1998, provided that Mr. Mealey is
employed by the Company, but will not be exercisable until the average offer
price of the Company's Common Stock equals or exceeds $3.00 per share for thirty
days. The third tranche of options will vest on November 1, 1999, provided that
Mr. Mealey is employed by the Company, but will not be exercisable until the
average offer price of the Company's Common Stock equals or exceeds $4.00 per
share for thirty days.
Director Compensation
The Company does not presently offer any compensation to its directors
for their service as members of the Company's Board of Directors. Directors,
however, are reimbursed for their expenses in attending Board meetings and are
not precluded from serving the Company in any other capacity and receiving
compensation therefor. Following his resignation as Chief Executive Officer of
the Company on April 16, 1999, James A. Middleton serves the Company only in the
capacity as a director and is therefore the Company's only outside director.
32
<PAGE>
Employment Contracts
On January 26, 1996, the Company entered into an employment agreement
with James A. Middleton, the Chief Executive Officer and Chairman of the Board
of the Company. Mr. Middleton's employment agreement terminated on February 6,
1999. The agreement provided for a base salary equal to five percent of the
Company's net profits from operations before depletion, depreciation, tax
credits and amortization, but after interest on debt, with a salary cap of
$1,000,000 per calendar year. Under his employment agreement, Mr. Middleton was
granted options to purchase 300,000 shares of the Company's Common Stock at an
exercise price of $.66 per share pursuant to the employment agreement. Mr.
Middleton was also granted, on February 6, 1998 and 1999, additional options to
purchase 75,000 shares of the Company's Common Stock (when combined, these
options allow Mr. Middleton to acquire 150,000 shares of Common Stock). Mr.
Middleton has resigned his position as Chief Executive Officer of the Company
and now serves only as a director.
On November 1, 1997, the Company entered into an employment agreement
with Jay Mealey, the Company's President and Treasurer. Mr. Mealey's employment
agreement expires on December 31, 1999, but will automatically be extended until
December 31, 2002, unless the Company gives written notice of non-renewal during
the year 2000, in which case the agreement will terminate 12 months after
delivery of the written notice of non-renewal. The employment agreement provided
for an initial base salary of $150,000, which amount was increased to $180,000
on November 1, 1998 and will be further increased to $210,000 on November 21,
1999. Thereafter, the agreement increases each subsequent year by 20% per annum
effective as of January 1 of each successive year beginning January 1, 2001. In
addition to the base salary, Mr. Mealey is entitled to compensation bonuses
based on (1) the Company's earnings per share and (2) the price of the Company's
Common Stock. Mr. Mealey is also eligible to receive a discretionary bonus each
fiscal year during the term or renewed terms of the agreement in amounts
determined by the Board of Directors of the Company in its sole discretion.
Under the terms of the employment agreement, Mr. Mealey was also issued options
pursuant to the Company's Long Term Equity-Based Incentive Plan to purchase
450,000 shares of the Company's Common Stock at an exercise price of $1.62 per
share. The options vest in three equal tranches. The first tranche of options to
purchase 150,000 shares vested on November 1, 1997, the second tranche of
150,000 options vests on November 1, 1998 and the final tranche vests on
November 1, 1999. None of the options, however, can be exercised until the offer
price of the Company's Common Stock, for thirty days, equals or exceeds $2.00
per share with respect to the first tranche of options, $3.00 per share with
respect to the second tranche and $4.00 per share with respect to the final
tranche.
Mr. Mealey's employment agreement is terminable upon his death or
disability, terminable for cause and terminable by Mr. Mealey for Good Reason
(as defined in the Employment Agreement) following a Change of Control (as
defined in the Employment Agreement). If terminated for "cause" as defined in
the Employment Agreement, Mr. Mealey is not entitled to receive compensation or
benefits beyond that which has been earned or has vested on the date of
termination. If terminated by Mr. Mealey's death or disability, Mr. Mealey's
legal representatives or beneficiaries are entitled to receive continued
payments in an amount equal to 70% of his base salary in effect at the time of
his death or disability until the end of the term of the Employment Agreement or
for a period of twelve months, whichever is longer, plus a prorated amount of
33
<PAGE>
any Bonus payable under the Employment Agreement. In the event of the
termination of Mr. Mealey's employment without cause or upon termination of
employment by Mr. Mealey for Good Reason following a Change of Control, Mr.
Mealey is entitled to payment of his unpaid base salary, plus a lump sum payment
equal to three times the sum of his base salary and bonuses. Further, all
options granted to Mr. Mealey vest and become fully exercisable and, at Mr.
Mealey's option, can be surrendered to the Company for cash in an amount equal
to the fair market value of a share of the Company's common stock minus the
exercise price of the option times the number of options surrendered. Mr. Mealey
is also entitled to receive any and all fringe benefits offered to employees of
the Company for a certain period of time. In addition, if the benefit payments
are subject to excise taxes, the Company is required to pay Mr. Mealey an amount
sufficient to cover such taxes.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of May 31, 1999 for (i)
each executive officer of the Company, (ii) each director of the Company, (iii)
each person known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of any class of the Company's stock, and (iv) all
directors and officers as a group.
Name and Address (1) Number of Shares Percentage of Class (2)
Beneficially Owned
- ------------------------------ ------------------- -----------------------
Common Stock
Sundance Assets, L.P. (3) 4,602,069(4) 26.19%
Jay Mealey 2,337,699(5) 17.26%
Thomas W. Bachtell 2,124,100(6) 15.35%
Richard S. Rawdin 589,308 4.44%
James A. Middleton 505,000(7) 3.68%
Alexander L. Searl 0 0%
Executive Officers and
Directors as Group (4 persons) 3,432,007 24.52%
================================ ==================== ======================
(1) The address for Sundance Assets, L.P. is 1400 Smith, Houston,
Texas, 77002. The address for Messrs. Middleton, Mealey and Rawdin is c/o Crown
Energy Corporation, 215 South State Suite 650, Salt Lake City, Utah 84111. The
address for Mr. Bachtell is 3245 Big Spruce Way, Park City, Utah 84060.
(2) Based on 13,285,581 shares of the Company's Common Stock issued and
outstanding on May 23, 1999. Under Rule 13d-3 of the Exchange Act, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire the shares (for example, upon exercise of an option) within 60 days of
the date as of which the information is provided. In computing the percentage
34
<PAGE>
ownership of any person, the amount of shares outstanding is deemed to include
the amount of shares beneficially owned by such person (and only such person) by
reason of these acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in this table does not necessarily reflect the
person's actual ownership or voting power with respect to the number of shares
of Common Stock actually outstanding.
(3) Sundance Assets, L.P., a Delaware limited partnership ("Sundance"),
is a controlled affiliate of Enron Corp., an Oregon corporation. The general
partner of Sundance is Ponderosa Assets, L.P., a Delaware limited partnership
("Ponderosa") and wholly-owned subsidiary of Enron Corp. and certain of it
subsidiaries. The general partner of Ponderosa is Enron Ponderosa Management
Holdings, Inc., a Delaware corporation ("EPMH") and wholly-owned subsidiary of
Enron Corp. Because of its control of Ponderosa, EPMH and Sundance, Enron Corp.
may be deemed to be the beneficial owner of all securities of the Company
beneficially owned by Sundance. However, Enron Corp., Ponderosa and EPMH
disclaim beneficial ownership of all such securities of the Company.
(4) Includes 317,069 shares of Company common stock issued to Sundance
on February 2, 1999, and 4,285,000 common stock shares issuable upon exercise of
500,000 shares of the Company's $10 Class A Convertible Preferred Stock (which
are convertible into shares of the Company's Common Stock at the rate of 8.57
shares of common stock for each share of preferred stock, subject to adjustment
as set forth in the Certificate of Designations of the Class A Preferred Stock).
(5) Includes 2,077,699 shares owned directly by Mr. Mealey, 150,000
shares underlying options to acquire common stock exercisable within 60 days and
110,000 shares gifted by Mr. Mealey to Glenn Mealey as custodian for Mr.
Mealey's children, Cameron and Andrew Mealey. Mr. Mealey expressly disclaims
beneficial ownership of the shares held by Glenn Mealey.
(6) Includes 548,148 shares underlying options to acquire common stock
which are exercisable within 60 days.
(7) Includes 450,000 shares underlying options to acquire common stock
which are exercisable within 60 days.
Change in Control Contracts
In November 1997, the Company entered into an Employment Agreement with
Mr. Jay Mealey which contains "change of control" provisions providing for the
payment of compensation and benefits upon the Company's termination of Mr.
Mealey's employment without cause or termination by Mr. Mealey for Good Reason
(as defined in that agreement). The change of control terms of Mr. Mealey's
contract are more fully discussed above in Item 11. "Executive
Compensation--Employment Contracts." The Company's Long Term Equity-Based
Incentive Plan ("Plan") also contains change-in-control provisions.
Specifically, the Plan provides that upon a change-in-control as defined in the
35
<PAGE>
Plan, that all options issued pursuant to the Plan will automatically vest and
all periods or conditions of restriction will be deemed to have been completed
or fulfilled, as the case may be.
In addition, Jay Mealey, the Company's President has entered into a
Right to Co-Sale Agreement (the "Co-Sale Agreement") with ECT wherein he agreed
not to sell any securities of the Company which he owns, or any interests in
such securities, to any person for a period of five years except in accordance
with the terms of the Co-Sale Agreement which generally requires that upon
receipt of a bona fide offer to purchase more than 50% of the shares of the
Company's stock held by Mr. Mealey or more than 50% of the outstanding
securities of the Company, Mr. Mealey shall give ECT notice of the offer and an
opportunity to sell all or a pro-rata portion of the shares of the Company's
stock held by ECT. The sale of 50% or more of the shares held by Mr. Mealey
together with the sale of a similar number of the shares held by ECT could
result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective as of January 2, 1998, the President and Treasurer of the
Company, Jay Mealey, and the Vice President and Secretary of the Company,
Richard Rawdin, both of whom are also directors of the Company, executed
Promissory Notes in the amounts of $319,583 and $229,583, respectively, as
consideration for the purchase of shares of Common Stock of the Company through
the exercise of options previously granted to each of them. The notes bear
interest at an adjustable rate of interest equal to the prime rate of interest
as published by the Wall Street Journal on the first business day of each
calendar quarter. The notes are secured by respective stock pledge agreements
granting the Company a security interest in the shares of stock purchased upon
the exercise of the options. Each note is payable on a pro rata basis upon the
sale of the underlying stock securing repayment thereof or January 2, 2003,
whichever occurs first.
As of December 31, 1998, there existed certain payables and receivables
between the Company and Crown Ridge. In particular, Crown Ridge owed $3,290 to
CAC and $69,711 to the Company and Capco owed $3,227 to Crown Ridge. The Company
has also paid various construction costs, start-up expenses and royalties for
and on behalf of Crown Ridge. MCNIC holds a majority interest in Crown Ridge.
On August 1, 1997, Capco entered into a two-year Operating and
Management Agreement to manage, supervise and conduct the operations of Crown
Ridge. See "Item 1. Business of the Company - Asphalt Production - Crown Ridge,
L.L.C." MCNIC holds a majority interest in Crown Ridge.
During 1998, the Company issued 300,000 shares of its common stock at
the price of $1.34 per share to Asphalt Ridge, L.P. in exchange for certain
research and development services provided to the Company. Certain owners of
Asphalt Ridge, L.P. own shares of the Company's common stock, although such
interests in the aggregate are believed to be less than 5% of the Company's
issued and outstanding stock.
In July 1998, Capco entered into an Operating and Management Agreement
to manage, supervise and conduct the operations of Crown Distribution. See "Item
36
<PAGE>
1. Business of the Company - Asphalt Distribution - Crown Distribution, L.L.C."
MCNIC holds a minority interest in Crown Distribution.
The Company serves as manager of CAT LLC. See "Item 1. Business of the
Company - Asphalt Distribution - Cowboy Asphalt Terminal, L.L.C." MCNIC holds
a minority interest in CAT LLC through its interest in Crown Distribution.
37
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial statements, as set forth on the attached Index to Financial
Statements.
(2) Exhibits, as set forth on the attached Exhibit Index.
(b) On November 18, 1998, the Company filed an amendment to its Form 8-K
filed on July 17, 1998 to include certain pro forma financial
statements regarding Petro Source Asphalt Company. During the quarter
ended December 31, 1998, the Company did not file any other reports on
Form 8-K.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
CROWN ENERGY CORPORATION
(Registrant)
/s/ Jay Mealey
---------------------------
Jay Mealey
Chief Executive Officer,
Director
Date: June 14, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Jay Mealey
/s/ Jay Mealey
---------------------------
Chief Executive Officer and
director
Date: June 14, 1999
Richard S. Rawdin
/s/ Richard S. Rawdin
---------------------------
Vice President, Director
and Secretary
Date: June 14, 1999
39
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT
2.1 Purchase and Sale Agreement regarding Petro Source Asphalt
Company, dated July 2, 1998 (15)
2.2 Memorandum of Closing regarding Refinery Technologies, Inc.*
2.3 Assignment and Agreement with Refinery Technologies, Inc.*
3.1 Articles of Incorporation (6)
3.2 Certificate of Voting Powers, etc. of the Company's Preferred
Stock (10)
3.3 Amended Bylaws (1)
4.1 Convertible Debenture - Agreement dated May 6, 1997, between
Crown Energy Corporation and
Oriental New Investments, Ltd. (7)
4.2 Warrant with Encap Investments, L.C. (12)
4.3 Form of Stock Option Agreements between the Company and (1)
Jay Mealey, (2) Richard Rawdin
and (3) Thomas Bachtell (12)
4.4 The Crown-Energy Long Term Equity Basic Incentive Plan (13)
4.5 Common Stock Purchase Warrant dated November 4, 1997
issued to Enron Capital & Trade
Resources Corp. (10)
4.6 Form of Warrant issued to principals of IBEX Group, Inc. and
Hoffman Partners, Inc.
4.7 May 1998 Warrant issued to Ladenburg Thalmann
10.1 License Agreements with Park Guymon Enterprises, Inc., dated
January 20, 1989, June 1, 1990
and June 1, 1990 (3)
10.2 Amendment to License Agreement with Park Guymon Enterprises,
Inc. (6)
10.3 Employment Agreement with Jay Mealey (12)
10.4 Consulting Agreement with IBEX Group, Inc. and Hoffman
Partners, Inc. (6)
10.5 Promissory Note issued to Jay Mealey 12/31/95 (6)
10.6 Promissory Note issued to Thomas W. Bachtell 12/31/95 (6)
10.7 Promissory Note issued to Thomas W. Bachtell 12/31/95 (6)
10.8 Oil and Gas Minerals Lease, dated September 1, 1991 with
Wembco, Inc. (4)
10.9 Crown Office Space Lease (5)
10.10 First Amendment to Crown Office Space Lease (12)
10.11 Investment Banking Agreement with Fortress Financial Group,
Ltd. (12)
10.12 Promissory Note from Jay Mealey (12)
10.13 Promissory Note from Rich Rawdin (12)
10.14 Stock Pledge Agreement with Jay Mealey (12)
10.15 Stock Pledge Agreement with Rich Rawdin (12)
10.16 Assignment of Assets to Crown Asphalt Ridge, L.L.C. by Crown
Asphalt Corporation (12)
10.17 Assignment to Crown Asphalt Ridge, L.L.C. by Crown Asphalt
Corporation (12)
10.18 Asphalt Ridge Project Operating and Management Agreement with
Crown Asphalt Ridge L.L.C., dated August 1, 1997 (12)
10.19 Sublicense and Agreement between Crown Asphalt Ridge, L.L.C.
and Crown Asphalt Corporation (12)
10.20 Stock Purchase Agreement with Enron Capital & Trade Resources
Corp. (10)
40
<PAGE>
10.21 Engineering, Construction and Procurement Agreement with
CEntry Constructors & Engineers, LLC (12)
10.22 Revised Right of Co-Sale Agreement between Jay Mealey and
Enron Capital & Trade Resources Corp. (11)
10.23 Guaranty Agreement in favor of MCNIC Pipeline & Processing
Company (12)
10.24 Crown Office Space Sublease (12)
10.25 Stock Purchase Agreement dated July 2, 1997, between Crown
Energy Corporation and Road Runner Oil, Inc. (8)
10.26 Letter Agreement with EnCap Investments L.C. (12)
10.27 Purchase and Sale Agreement dated July 2, 1998 between
Petro Source Asphalt Company and
Crown Asphalt Distribution LLC (15)
10.28 Saba Petroleum Processing Agreement for Santa Maria
Refinery in California dated May 1, 1997 between Petro
Source Refining Corporation and Santa Maria Refining
Company and Saba Petroleum Company, which was assigned
to the Company on or about July 2, 1998. (16)
10.29 MetLife Equipment Lease dated May 1, 1997 between Petro
Source Refining Corporation and MetLife Capital
Corporation, which was assigned to the Company on or
about July 2, 1998. (16)
10.30 PacifiCorp Property Lease dated April 1, 1996 between
Petro Source Refining Corporation and PacifiCorp, which
was assigned to the Company on or about July 2, 1998. (16)
10.31 GATX Rail Car Lease dated December 10, 1987 between Petro
Source Corporation and General American Transportation
Corporation, which was assigned to the Company on or about
July 2, 1998 (16)
10.32 Office Space Lease (16)
10.33 Operating Agreement for Crown Asphalt Ridge, L.L.C. (17)
10.34 Operating Agreement for Crown Asphalt Distribution L.L.C.*
10.35 Operating and Management Agreement for Crown Asphalt
Distribution L.L.C.*
10.36 Operating Agreement for Cowboy Asphalt Terminal L.L.C. *
10.37 April 3, 1998 Agreement regarding investment banking services
with Ladenburg Thalmann*
10.38 Indemnification Agreement with Ladenburg Thalmann*
10.39 Asset Purchase Agreement - Asphalt Supply & Services, Inc.
and Inoco, Inc. (18)
11 Statement regarding computation of per share earnings (the
information required for Exhibit 11 is set forth on page F-5
of the Financial Statements of this Form 10-K)
16 Letter of Pritchett, Siler & Hardy, P.C. dated June 5,
1998 (14)
21 Subsidiaries of the Company (the information required for
Exhibit 21 is set forth in "Item 1 - Subsidiaries of the
Company")
27 Financial Data Schedule
- ---------------------------------
(1) Incorporated by reference from the Company's Registration Statement on
Form 10 filed with the Commission on July 1, 1991, amended August 30,
1991 and bearing Commission file number 0-19365.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1991 bearing Commission file number
0-19365.
41
<PAGE>
(3) Incorporated by reference from the Company's Report on Form 8-K filed
with the Commission on or about September 30, 1992, bearing Commission
file number 0-19365.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1992, bearing Commission file number
0-19365.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1992, bearing Commission file number
0-19365.
(6) Incorporated by reference from the Company's Registration Statement on
Form S-1 filed with the Commission on or about March 13, 1996, bearing
Commission file number 0-19365.
(7) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about June 12, 1997, bearing Commission file number
0-19365.
(8) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about July 21, 1997, bearing Commission file number
0-19365.
(9) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about November 18, 1997, bearing Commission file
number 0-19365.
(10) Incorporated by reference from Enron Capital & Trade Resources Corp.
Form 13D filed with the Commission on or about October 10, 1997.
(11) Incorporated by reference from Enron Capital & Trade Resources Corp.
Form 13D/A filed with the Commission on or about November 12, 1997.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, filed with the Commission on or
about March 31, 1998, bearing Commission file number 0-19365.
(13) Incorporated by reference from the Company's Amended Annual Report on
Form 10-K for the year ended December 31, 1997, filed with the
Commission on or about April 30, 1998, bearing Commission file number
0-19365.
(14) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about June 9, 1998, bearing Commission file number
0-19365.
(15) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about July 17, 1998, bearing Commission file number
0-19365
(16) Incorporated by reference of the Company's Amended Form 10-Q filed with
the Commission for the period ending September 30, 1998, filed with the
Commission on November 25, 1998.
(17) Incorporated by reference from the Company's Amended Form 8-K filed
with the Commission on or about November 18, 1997, bearing Commission
file number 0-19365.
(18) Incorporated by reference from the Company's Form 8-K filed with the
Commission on or about May 3, 1999, bearing Commission file number
0-19365.
* The Company agrees to furnish supplementally to the Commission a copy of any
omitted schedule or exhibit to such agreement upon request by the Commission.
42
<PAGE>
CROWN ENERGY CORPORATION
FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report of Deloitte & Touche LLP F-1
Independent Auditors' Report of Pritchett, Siler and Hardy, P.C. F-2
Consolidated Balance Sheets, December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity, for the years
ended December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows, for the years ended
December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-10
43
<PAGE>
CROWN ASPHALT RIDGE, LLC
FINANCIAL STATEMENTS
Independent Auditors' Report of Deloitte & Touche LLP F-27
Independent Auditors' Report of Pritchett, Siler and Hardy, P.C. F-28
Balance Sheets, December 31, 1998 and 1997 F-29
Statements of Operations for the year ended
December 31, 1998 and Inception through December 31, 1997 F-30
Statement of Member's Equity, for the years
ended December 31, 1998 and 1997 F-31
Statement of Cash Flows, for the years ended
December 31, 1998 and Inception through December 31, 1997 F-32
Notes to Consolidated Financial Statements F-34
44
<PAGE>
CROWN ENERGY CORPORATION
Consolidated Financial Statements as of December 31, 1998 and 1997 and for
Each of the Three Years in the Period Ended December 31, 1998 and
Independent Auditors' Report
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Crown Energy Corporation
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Crown Energy
Corporation and Subsidiaries (the Company) at December 31, 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1998 the
Company and an unconsolidated equity method affiliate changed their method of
accounting for the costs of start-up activities to conform with Statement of
Position No. 98-5, Reporting on the Costs of Start-Up Activities.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 26, 1999
(May 12, 1999 as to the last
two paragraphs of Note 16)
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
CROWN ENERGY CORPORATION
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Crown Energy
Corporation at December 31, 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1997 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the consolidated financial position of Crown
Energy Corporation as of December 31, 1997, and the results of its operations
and its cash flows for the years ended December 31, 1997 and 1996, in conformity
with generally accepted accounting principles.
/s/ Pritchett, Siler and Hardy, P.C.
March 5, 1997, except as to Note 1 as to which the date is June 8, 1999 Salt
Lake City, Utah
F-2
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,735,632 $3,100,765
Accounts receivable, net of allowance for uncollectible
accounts of $100,475 and $75,000 at December 31, 1998
and 1997, respectively 2,823,778 10,808
Inventory 4,445,819
Prepaid and other current assets 39,371 177,416
----------- ----------
Total current assets 11,044,600 3,288,989
PROPERTY, PLANT, AND EQUIPMENT, Net 3,013,792 7,383
INVESTMENT IN AND ADVANCES
TO AN EQUITY AFFILIATE 4,551,441 3,149,045
GOODWILL, Net 4,040,231
OTHER INTANGIBLE ASSETS, Net 225,000
OTHER ASSETS 696,200 164,591
----------- ----------
TOTAL $23,571,264 $6,610,008
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 1,857,407 $ 9,535
Preferred stock dividends payable 467,433 65,414
Accrued expenses 180,116 59,567
Long-term debt to related party - estimated current portion 1,000,000
Line-of-credit to related party 8,935,221
---------- ----------
Total current liabilities 12,440,177 134,516
COMMITMENTS AND CONTINGENCIES
(Notes 3, 6, 8, 9, 11, 12, and 16)
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURE 1,255,477
CAPITALIZATION:
Long-term debt to related party 4,325,723
Redeemable preferred stock 4,783,019 4,726,415
Common stockholders' equity 766,868 1,749,077
---------- ----------
Total capitalization 9,875,610 6,475,492
----------- ----------
TOTAL $23,571,264 $ 6,610,008
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
SALES, Net of demerits $23,835,734 $ 86,781 $224,855
COST OF SALES 21,856,171 54,653 137,340
----------- ---------- ---------
GROSS PROFIT 1,979,563 32,128 87,515
GENERAL AND ADMINISTRATIVE EXPENSES 1,253,953 815,401 631,463
----------- -------- --------
INCOME (LOSS) FROM OPERATIONS 725,610 (783,273) (543,948)
----------- ---------- ---------
OTHER INCOME (EXPENSE):
Interest income 132,225 35,451 20,589
Interest expense (851,917) (37,280) (27,271)
Equity in start-up costs of unconsolidated equity affiliate (264,863)
Other income 248,528
Other expenses related to valuation of warrants (186,256)
Loss on sale of subsidiary (801,461)
----------- -------- --------
Total other expense, net (922,283) (803,290) (6,682)
----------- ---------- ---------
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (196,673) (1,586,563) (550,630)
DEFERRED INCOME TAX BENEFIT 434,056 129,044
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE (300,971)
----------- ---------- ---------
LOSS BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE (497,644) (1,152,507) (421,586)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE - Expensing of
start-up costs (615,323)
----------- ---------- ---------
NET LOSS $(1,112,967) $1,152,507) $(421,586)
=========== ========== =========
LOSS PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - Basic and diluted $ (0.07) $ (0.11) $ (0.04)
=========== ========== =========
CUMULATIVE EFFECT OF EXPENSING
START-UP COSTS - Basic and diluted $ (0.05) NONE NONE
=========== ========== =========
NET LOSS PER COMMON SHARE -
Basic and diluted $ (0.12) $ (0.11) $ (0.04)
=========== ========== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock Common
Warrants Stock
Common Stock Additional Outstanding Subscrip-
-------------------- Paid-in --------------------- tions Retained
Shares Amount Capital Warrants Amount Receivable Deficit Total
------ ------ ------- -------- ------ ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1996 (as previously
reported) 9,861,069 $197,220 $4,701,193 183,750 NONE NONE $(1,833,541) $ 3,064,872
To record various
expenses incurred in
prior years (453,649) (453,649)
---------- -------- ---------- ------- -------- --------- ----------- ---------
BALANCE, January 1,
1996 (as restated,
see Note 1) 9,861,069 197,220 4,701,193 183,750 NONE NONE (2,287,190) 2,611,223
Shares issued for
cash at $.50 per
share, net of
placement costs
of $65,000 800,000 16,000 319,000 335,000
Shares issued for
commissions 80,000 1,600 38,400 40,000
Shares issued for
services at $.79 to
$1.00 per share 241,547 4,832 224,542 229,374
Shares issued for
payment of note payable 47,955 959 22,637 23,596
Shares issued for
cash at $.50 per share 400,000 8,000 192,000 200,000
Net loss (421,586) (421,586)
---------- -------- ---------- ------- -------- --------- ----------- ---------
BALANCE, December 31,
1996 as restated (Note 1) 11,430,571 228,611 5,497,772 183,750 NONE NONE (2,708,776) 3,017,607
Shares issued for
non-cash consideration
at $1.00 per share 35,000 700 34,300 35,000
Shares issued for
payables at $.86 per share 10,000 200 8,406 8,606
Shares issued for
payment of note payable 56,877 1,138 24,847 25,985
Shares issued upon
conversion of convertible
debentures at $.90 per share 173,101 3,462 152,441 155,903
Cancellation of
shares previously issued (25,000) (500) (19,188) (19,688)
Issuance of common
stock upon exercise
of stock options 41,667 833 (833)
Preferred shares
offering cost (587,318) 100,000 $ 57,318 (530,000)
Allocation of proceeds
from issuance of
preferred stock to estimated
fair value of
detachable stock warrant 283,019 283,019
Accretion of preferred
stock to stated value (9,434) (9,434)
Dividends on redeemable
preferred stock (65,414) (65,414)
Net loss (1,152,507) (1,152,507)
---------- -------- ---------- ------- -------- --------- ----------- ---------
BALANCE, December 31,
1997 as restated (Note 1) 11,722,216 234,444 5,318,598 283,750 57,318 NONE (3,861,283) 1,749,077
Issuance of common
stock upon exercise of
stock options in
exchange for notes
receivable 946,296 18,926 530,240 $(549,166)
Shares issued at
$1.34 per share 300,000 6,000 397,125 403,125
Dividends on redeemable
preferred stock (402,019) (402,019)
Warrants issued for
consulting services 400,000 186,256 186,256
Accretion of preferred
stock to stated value (56,604) (56,604)
Net loss (1,112,967) (1,112,967)
---------- -------- ---------- ------- -------- --------- ----------- ---------
BALANCE, December 31, 1998 12,968,512 $259,370 $5,787,340 683,750 $243,574 $(549,166) $(4,974,250) $ 766,868
========== ======== ========== ======= ======== ========= =========== =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (1,112,967) $(1,152,507) $(421,586)
----------- ----------- ---------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation, depletion, and amortization 235,374 39,857 80,062
Provision for uncollectible accounts receivable 25,475
Equity in start-up costs of unconsolidated equity affiliate 376,693
Distributions to minority interest net of minority
interest in earnings of consolidated joint venture (244,523)
Deferred income tax benefit (434,056) (129,044)
Loss on sale of subsidiary 801,461
Other expenses paid through equity instruments 589,381 117,738 474,082
Changes in operating assets and liabilities (net of effect
of acquisition, see Note 4):
Accounts receivable (2,838,445) (12,529) 7,318
Inventory 3,187,170
Prepaid and other current assets 138,045 35,464
Other assets (544,355) 1,792 (102,981)
Accounts payable 1,847,872 (78,576) (151,651)
Accrued expenses 120,549 (140,209) (52,072)
----------- ----------- ---------
Total adjustments 2,893,236 330,942 125,714
----------- ----------- ---------
Net cash provided by (used in) operating activities 1,780,269 (821,565) (295,872)
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (904,277) (6,960)
Acquisition of Petro Source Asphalt Company (14,235,726)
Investment in and advances to Crown
Asphalt Ridge, LLC (1,766,343) (433,219)
Proceeds from sale of oil and gas investments 75,000
Additions to mining properties (25,060) (185,997)
Payment for reclamation deposit (138,701)
----------- ----------- ---------
Net cash used in investing activities (16,906,346) (528,940) (185,997)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line-of-credit to related party 8,935,221
Proceeds from long-term debt 6,000,000
Payments on long-term debt (674,277) (311,502) (7,606)
Sale of equity interest in subsidiary to a
minority shareholder 1,500,000
Proceeds from convertible debentures 150,000
Net proceeds from issuance of preferred stock 4,470,000
Net proceeds from issuance of common stock 535,000
----------- ----------- ---------
Net cash provided by financing activities 15,760,944 4,308,498 527,394
----------- ----------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 634,867 2,957,993 45,525
CASH AT BEGINNING OF YEAR 3,100,765 142,772 97,247
----------- ----------- ---------
CASH AT END OF YEAR $ 3,735,632 $ 3,100,765 $ 142,772
=========== =========== =========
</TABLE>
(Continued)
F-7
<PAGE>
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 678,870 $ 27,131 $ 7,744
========= ======== =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the year ended December 31, 1998:
o The Company issued 946,296 shares of common stock upon the exercise of
stock options in exchange for notes receivable totaling $549,166.
o The Company issued 300,000 shares of common stock in payment of
research and development expenses of $403,125.
o The Company issued 400,000 common stock warrants, valued at $186,256,
in payment of consulting fees.
o The Company accrued dividends totaling $402,019 on the redeemable
preferred stock.
For the year ended December 31, 1997:
o The Company accrued dividends totaling $65,414 on the redeemable
preferred stock.
o The Company issued 41,667 shares of common stock upon the exercise of
stock options in consideration for the individual canceling 83,333
stock options.
o The Company issued 45,000 shares of common stock in payment of $43,606
in licensing fees and other accounts payable.
o The Company issued 56,877 shares of common stock in payment of a
promissory note and accrued interest totaling $25,985.
o The Company contributed extraction technology, oil sand properties, and
a license agreement, with a combined net book value of $2,715,428, to
Crown Ridge.
o The Company issued 10,000 and 35,000 shares of common stock in payment
of $8,606 in accounts payable and $35,000 in oil sand extraction
licensing fees. The Company also canceled 25,000 previously issued
shares valued at $19,688.
o The Company issued a $150,000, 9%, convertible debenture which matured
November 13, 1997. The debenture was converted into 173,101 shares of
the Company's common stock, valued at $.901 per share, which was 65% of
the average closing bid price for the ten days prior to the date of
conversion.
o The Company issued 100,000 common stock warrants valued at $57,318 in
payment of offering costs on the issuance of preferred stock.
(Continued)
F-8
<PAGE>
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
For the year ended December 31, 1996:
o The Company issued 51,547 shares of unregistered common stock in
payment of a $50,000 finders fee included in accounts payable, 10,000
shares of unregistered common stock in connection with the
renegotiations of oil sand leases, 50,000 shares of common stock in
payment of accrued liabilities, and 130,000 shares of common stock in
payment of consulting and engineering work performed.
o The Company issued 241,547 shares of common stock in payment of
$229,375 in consulting fees.
o The Company issued 47,955 shares of common stock in payment of $23,596
for payment on a promissory note.
o Accounts payable in the amount of $78,708 were converted to a note
payable.
o The Company renewed certain notes payable and accrued interest of
$17,032 was added to the principal of the new notes.
See notes to consolidated financial statements. (Concluded)
F-9
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Crown Energy Corporation (CEC) and its wholly-owned
subsidiaries, Crown Asphalt Corporation (CAC) and Crown Asphalt Products
Company (Capco) (collectively referred to as the "Company"), are engaged
in the mining, production, and selling of asphalt products. Prior to 1998,
the Company was engaged in the production and selling of oil and gas from
leases it operated in the state of Utah through its previously owned
subsidiary, Gavilan Petroleum, Inc. (Gavilan). By December 31, 1997, the
Company had divested itself of all oil and gas properties and related
operations. The accompanying 1997 consolidated financial statements have
not been reclassified to reflect the discontinued operations because such
operations were not considered significant and do not affect
comparability.
Majority-Owned Subsidiaries - Capco is the majority-owner of Crown Asphalt
Distribution, LLC (Crown Distribution) and Cowboy Asphalt Terminal, LLC
(CAT LLC). Crown Distribution is a joint venture formed on July 2, 1998,
between Capco and MCNIC Pipeline and Processing Company (MCNIC) for the
purpose of acquiring certain assets of Petro Source Asphalt Company (Petro
Source) (see Note 4). Capco owns 50.01% and MCNIC owns 49.99% of Crown
Distribution. Capco is the general manager and operating agent of Crown
Distribution. CAT LLC is a joint venture formed on June 16, 1998 between
Capco and Foreland Asphalt Corporation (Foreland). CAT LLC is an asphalt
terminal and storage facility. On December 21, 1998, Capco assigned its
interest in CAT LLC to Crown Distribution. Crown Distribution owns 66.67%
and Foreland owns 33.33% of CAT LLC.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated in
consolidation.
Investment in and Advances to Equity Affiliate -The Company's investment
in Crown Asphalt Ridge LLC (Crown Ridge) is accounted for using the equity
method (see Note 3). Accordingly, the Company's investment is recorded at
cost and adjusted by the Company's share of undistributed earnings and
losses. The excess of the Company's investment in Crown Ridge over its
equity in the related underlying net assets (approximately $2,168,000) is
being amortized over 40 years.
Restatement - Subsequent to the issuance of the Company's 1997 financial
statements, the Company determined that it had not expensed certain
amounts, primarily related to research and development, which were
incurred in developing the technology utilized by Crown Ridge in the
extraction of premium grade asphalt from tar sands. In addition, the
Company had not amortized costs incurred in acquiring such technology.
Accordingly, retained earnings as of January 1, 1996 has been restated
from the amount previously reported to reflect these expenses totaling
$453,649.
Basis of Presentation - The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal course
of business. The consolidated financial statements do not include any
adjustments relating to the recoverability and classifications of recorded
F-10
<PAGE>
amounts of assets or the amounts and classifications of liabilities that
might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern depends upon its
ability to generate sufficient cash flows to meet its obligations on a
timely basis and to obtain additional financing or refinancing as may be
required.
At December 31, 1998, the Company's current liabilities exceeded current
assets by $1,395,577 and the Company has had recurring net losses and a
retained deficit of $4,974,250 as of December 31, 1998. However, for the
year ended December 31, 1998, the Company generated cash flows from
operating activities of $1,780,269. The Company has a line-of-credit with
a related party for working capital purposes, under which $8,935,221 had
been drawn as of December 31, 1998. The line-of-credit is available to
cover additional estimated working capital requirements. With the
anticipated completion of the Crown Ridge Facility in 1999 (see Note 3)
and a full year of operations of Crown Distribution in 1999, management
expects to achieve a higher level of operational efficiency in 1999.
Management believes that the Company's cash flows will continue to be
adequate to meet its obligations as they become due.
Property, Plant, and Equipment - Property, plant, and equipment are
recorded at cost and are depreciated over the estimated useful lives of
the related assets. Depreciation is computed using the straight-line
method for financial reporting purposes. The estimated useful lives of
property, plant, and equipment are as follows:
Plant and improvements 10-30 years
Tankage 25 years
Equipment 7 years
Computer equipment, furniture, and fixtures 3 years
Revenue Recognition - Revenues are recognized when the related product is
shipped.
Income Taxes - The Company utilizes an asset and liability approach for
financial accounting and reporting for income taxes. Deferred income taxes
are provided for temporary differences in the bases of assets and
liabilities as reported for financial statement and income tax purposes.
As of December 31, 1998, all deferred tax assets were offset by a
valuation allowance.
Loss Per Share - Effective for the year ended December 31, 1997, the
Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, Earnings Per Share. Accordingly, net loss per common share computed
under the basic method uses the weighted average number of the Company's
common shares outstanding. The effect of common shares from stock options,
warrants, and convertible securities is not considered in the loss per
share computations as such common stock equivalents are anti-dilutive.
Cash and Cash Equivalents - For purposes of the statements of cash flows,
the Company considers all highly liquid debt investments purchased with a
maturity of three months or less to be cash equivalents.
Use of Estimates in Preparing Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.
Inventory - Inventories consist principally of asphalt hydrocarbons and
chemical supplies which are valued at the lower of cost (computed on a
first-in, first-out basis) or market.
F-11
<PAGE>
Long-Lived Assets - The Company evaluates the carrying value of long-term
assets including intangibles based on current and anticipated undiscounted
cash flows and recognizes impairment when such cash flows will be less
than the carrying values. Measurement of the amount of impairments, if
any, is based upon the difference between carrying value and fair value.
There were no impairments as of December 31, 1998 and 1997.
Goodwill - The Company has recorded the amount paid for Petro Source
Asphalt Company (see Note 4) in excess of the fair value of the net
tangible assets acquired at the date of acquisition as goodwill. Such
goodwill is amortized using the straight-line method over 20 years.
Asphalt Demerits - Crown's subsidiary, Capco, blends asphalt for sale to
contractors and state agencies. The asphalt sold must meet certain
specifications for a particular application. If the asphalt sold does not
meet these specifications for whatever reason, the asphalt supplier may be
held liable for possible damages (asphalt demerits) therefrom. Management
believes that the Company's product liability insurance would cover any
significant damages.
Environmental Expenditures - Environmental related restoration and
remediation costs are recorded as liabilities when site restoration and
environmental remediation and clean-up obligations are either known or
considered probable, and the related costs can be reasonably estimated.
Other environmental expenditures, that are principally maintenance or
preventative in nature, are recorded when expended and expensed or
capitalized as appropriate.
Comprehensive Income - In 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from additional paid-in capital, retained
earnings, and stockholders' equity. The Company does not currently have
any components of comprehensive income other than net loss.
Segment Reporting - In 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information",
which redefined how business enterprises report information about
operating segments in annual financial statements. The statement also
establishes standards for related disclosures about products and services,
geographical areas, and major customers. During 1998, the Company operated
primarily in the production and distribution of asphalt. The Company's
operations and sales are dispersed throughout Utah, Arizona, California,
Nevada, and Colorado and could be adversely affected by economic downturns
in these states and by federal or state funding policies related to road
construction or improvements.
Derivative Instruments and Hedging - In June 1998, the FASB issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities,
which supersedes SFAS No. 80, Accounting for Futures Contracts, SFAS No.
105, Disclosure of Information About Financial instruments with
Off-Balance-Sheet Risk and Financial instruments with Concentration of
Credit Risk, and SFAS No. 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments, and also amends
certain aspects of other SFAS's previously issued. SFAS No. 133
establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. SFAS No. 133 is effective for the
Company's financial statements for the year ending December 31, 2001. The
Company does not expect the impact of SFAS No. 133 to be material in
relation to its financial statements.
F-12
<PAGE>
Stock-Based Compensation - The Company has elected to continue to apply
Accounting Principles Board (APB) Opinion 25 (as permitted by SFAS No.
123, Accounting for Stock-Based Compensation). The appropriate disclosures
required by SFAS No. 123 are included in Note 8.
Change in Accounting Principle - In 1998, the Company early adopted
Statement of Position (SOP) No. 98-5, Reporting on the Costs of Start-Up
Activities, which requires costs of start-up activities to be expensed as
incurred. In addition, Crown Ridge, an unconsolidated affiliate of the
Company, adopted SOP No. 98-5. The effect on 1998 of adopting SOP No. 98-5
resulted in additional expenses of $204,218. The cumulative effect on
years prior to 1998 of the accounting change totaled $615,323 and relates
to the following entities:
Start-up costs expensed by the Company $503,493
Equity in start-up costs of CAR 111,830
--------
Total cumulative effect of change in accounting principle $615,323
========
Reclassifications - Certain amounts in the 1997 and 1996 consolidated
financial statements have been reclassified to conform with
classifications adopted in the current year.
2. PROPERTY, PLANT, AND EQUIPMENT
The following is a summary of property, plant, and equipment as of
December 31, 1998 and 1997:
1998 1997
Land $ 100,000
Plant and improvements 70,742
Tankage 1,390,016
Equipment 1,160,221
Computer equipment, furniture, and fixtures 241,723 $ 73,506
Construction in progress 223,991
---------- --------
Total property, plant, and equipment 3,186,693 73,506
Less accumulated depreciation (172,901) (66,123)
Total $3,013,792 $ 7,383
========== ========
3. INVESTMENT IN AND ADVANCES TO AN EQUITY AFFILIATE
In August 1997, the Company through its wholly owned subsidiary, CAC,
entered into a joint venture with MCNIC for the purpose of developing,
mining, processing, and marketing asphalt, performance grade asphalt,
diesel fuel, hydrocarbons, bitumen, asphaltum, minerals, mineral
resources, and other oil sand products. The joint venture resulted in the
formation of Crown Ridge, which is a development stage company. During the
year ended December, 31, 1997, the Company contributed cash of $433,219
and the right to its oil sand properties and a license agreement, which
allows the Company to use certain patented oil extraction technology and
oil sand property leases, with a book value of $2,715,428 to CEC. This
technology was recorded at $500,001 by Crown Ridge. During the year ended
December 31, 1998, the Company contributed cash of $1,217,449 to Crown
F-13
<PAGE>
Ridge. MCNIC and the Company initially own interests of 75% and 25%,
respectively, in the profits and losses of Crown Ridge. Once operations of
Crown Ridge are generating sufficient cash flows to pay specific returns,
as defined, to MCNIC then CAC's interest in Crown Ridge will increase to
50%. The excess of the Company's investment in Crown Ridge over its share
in the related underlying equity in net assets (approximately $2,168,000
at December 31, 1998) is being amortized over 40 years. In addition, as of
December 31, 1998, the Company had made advances to Crown Ridge totaling
$548,894, which amount has been reflected as investment in and advances to
equity investment in the accompanying balance sheet.
During the year ended December 31, 1997, Crown Ridge entered into an
engineering, construction, and procurement agreement to construct a mining
and production plant which is projected to be completed in the second
quarter of 1999. The Company has incurred approximately $20 million of
construction and mine development costs as of December 31, 1998. The
Company's ability to realize its investment in and advances to Crown Ridge
is dependent upon Crown Ridge's successful construction and operation of
the production plant on a full scale basis. In connection with Crown Ridge
acquiring the rights to use patented oil extraction technology, Crown
Ridge is required to pay royalties of 2% to 5% of future revenues, as
defined.
Crown Ridge has experienced certain construction difficulties relating to
its production plant. Management of the Company believes that the
construction difficulties experienced were of the type anticipated in the
construction of the facility, which is a sophisticated asphalt processing
facility utilizing new or evolving processes. However, continued
difficulties or the inability to commercially operate the facility
economically could significantly impact Crown Ridge's ability to continue
as a going concern and would have a materially adverse impact on the
Company's operations and financial condition.
The following summarizes the separate financial information of Crown Ridge
at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets $ 20,351,151 $ 4,985,212
Liabilities 2,067,947 812,293
Equity 18,283,199 4,172,919
Revenues None None
Net loss (1,264,194) None
The Company's equity in net assets $ 1,834,619 $ 933,220
Excess of investment over the Company's
equity in net assets 2,167,928 2,215,825
Advances to affiliate 548,894 None
------------ -----------
Total investment in and advances to an equity affiliate $ 4,551,441 $ 3,149,045
============ ===========
The Company's 25% equity in net loss plus
amortization of excess of investment over the
Company's equity in net assets totaling $60,645 $ (376,693) None
============ ===========
Reported in the accompanying consolidated statement of operations as follows:
Equity in start-up costs of unconsolidated equity affiliate $ (264,863)
Cumulative effect of change in accounting principle (111,830)
------------ -----------
Total $ (376,693) None
============ ===========
</TABLE>
4. ACQUISITION OF PETRO SOURCE ASPHALT COMPANY
On July 2, 1998, Crown Distribution acquired the inventory and assets of
Petro Source Asphalt Company (Petro Source) for $14,235,726. The
acquisition was accounted for as a purchase. In conjunction with the
acquisition, the Company recorded goodwill of $4,143,827. The assets
F-14
<PAGE>
acquired relate to the refining, production, and distribution of asphalt
products. The sale of the equity interest of $1.5 million as reported in
the consolidated statement of cash flows represents MCNIC's contribution
toward the purchase of their interest in Crown Distribution.
Crown Distribution is governed by a management committee consisting of
three managers. The Company is entitled to appoint two managers and MCNIC
is entitled to appoint one manager. Management decisions are generally
made by the management committee. However, one of the managers appointed
by the Company serves as the operating manager and has the powers,
authority, duties, and obligations specified in the operating agreement,
which generally requires the operating manager to implement the policies
and pursue the objectives specified in the annual operating plan.
The annual operating plan is adopted by the management committee on an
annual basis and addresses all aspects of Crown Distribution's operations
for the coming year, including the nature and extent of the proposed
activities, marketing plans, capital expenditure plans, and similar
matters. In the event the management committee is unable to unanimously
approve an annual operating plan for any given calendar year, a majority
of the managers shall have the authority to continue to maintain Crown
Distribution's operations at levels comparable to those approved in its
most recent annual operating plan.
Unaudited pro-forma financial information of the Company as if the
acquisition of Petro Source had occurred on January 1, 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Sales, net $ 38,017,677 $ 38,880,874
Net loss (1,163,013) (1,330,587)
Dividend requirement of preferred stock (402,019) (65,414)
Net loss applicable to common stock (1,565,032) (1,396,001)
Net loss per common share - basic and diluted $ (0.13) $ (0.12)
Weighted average common shares outstanding -
basic and diluted 12,506,125 11,524,822
</TABLE>
5. OIL AND GAS PROPERTIES
Upon placing oil and gas properties and productive equipment in use, the
unit-of-production method, based upon estimates of proven developed and
undeveloped reserves was used in the computation of depletion. Depletion
expense for the years ended December 31, 1997 and 1996 amounted to $23,817
and $61,332, respectively. Because the Company has elected to value its
properties under the "full cost" method of accounting for oil and gas
properties, it has a maximum allowance value which is related to the
underlying oil and gas reserves. Where the capitalized value of its
properties exceeds the fair market value of the oil and gas reserves, the
Company is required to adjust the value of properties to the cost center
ceiling by increasing the valuation allowance. The Company did not record
a valuation adjustment for the years ended December 31, 1997 or 1996.
On July 2, 1997, the Company sold Gavilan Petroleum, Inc. with all the
remaining oil and gas interests for $150,000.
F-15
<PAGE>
6. LONG-TERM DEBT AND LINE-OF-CREDIT TO RELATED PARTY
Long-term debt to related party consists of the following at December 31,
1998:
Preferential debt with MCNIC,
interest at 15%, with annual
principal and interest
installments equal to 50% of the
net cash flows (as defined) of
Crown Distribution. This debt is
secured by all of the assets of
Crown Distribution $ 5,325,723
Less estimated current portion (1,000,000)
Long-term portion $ 4,325,723
===========
The line-of-credit to related party of $8,935,221 represents a working
capital line to Crown Distribution, extended by MCNIC, to finance the
Company's asphalt purchases and accounts receivable. The line, which is
secured by inventory, accrues interest at 8% and is payable in full on
December 31, 1999.
7. COMMON STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
At December 31, 1998 and 1997, common stockholders' equity and redeemable
preferred stock consists of the following:
1998 1997
Redeemable preferred stock - $.005
par value; 1,000,000 shares
authorized; $10.00 stated value;
500,000 Series A cumulative
convertible shares issued and
outstanding; original estimated
fair value of $4,716,981,
accretion of $56,604 and $9,434
for the years ended December 31,
1998 and 1997, respectively,
toward the stated value of
$5,000,000 $ 4,783,019 $ 4,726,415
----------- -----------
Common stockholders' equity:
Common stock, $.02 par value;
50,000,000 shares authorized;
12,968,512 and 11,722,216 shares
issued and outstanding at December
31, 1998 and 1997, respectively $ 259,370 $ 234,444
Additional paid-in capital 5,787,340 5,318,598
Stock warrants outstanding; 683,750
and 283,750 at
December 31, 1998 and 1997, respectively 243,574 57,318
Common stock subscription receivable
from officers (549,166)
Retained deficit (4,974,250) (3,861,283)
----------- -----------
Total $ 766,868 $ 1,749,077
=========== ===========
8. CAPITAL TRANSACTIONS
During February 1996, the Company successfully completed a private
placement of 800,000 shares of unregistered common stock for $400,000. In
connection with the private placement, the Company issued 80,000 shares of
unregistered common stock in commissions.
On November 7, 1996, the Company sold 400,000 shares of unregistered
common stock in a private placement offering at $.50 per share. Total
proceeds amounted to $200,000.
F-16
<PAGE>
Stock Options- The Company has an incentive stock option plan for salaried
employees. Options are granted at a price not less than the fair market
value on the date of grant, become exercisable between one to two years
following the date of grant, and generally expire in ten years. Fair
market value is determined based on quoted market prices.
Changes in stock options are as follows for the years ended December 31,
1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,294,444 $ 0.80 1,860,444 $ 0.60 1,560,444 $ 0.59
Granted 117,800 1.50 450,000 1.62 300,000 0.66
Exercised (946,296) 0.58
Forfeited (16,000) 0.51
--------- ------ --------- ------ --------- ------
Outstanding at end of year 1,465,948 $ 1.00 2,294,444 $ 0.81 1,860,444 $ 0.60
========= ====== ========= ====== ========= ======
Options exercisable at year end 1,123,148 1,416,000 1,391,000
========= ========= =========
Weighted average fair value of
options granted during year $0.93 $0.12 $0.04
========= ========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- -----------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
------ ----------- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.56 - $0.60 573,148 1.7 $ 0.58 573,148 $ 0.58
0.66 - 1.44 352,000 2.5 0.74 325,000 0.69
1.50 - 1.62 528,800 8.4 1.60 225,000 1.58
1.66 - 1.72 12,000 9.5 1.69
------------- --------- --- ------ --------- ------
$0.56 - $1.72 1,465,948 4.4 $ 1.00 1,123,148 $ 0.81
============= ========= === ====== ========= ======
</TABLE>
F-17
<PAGE>
The Corporation has adopted the disclosure-only provisions of SFAS No.
123, Accounting for Stock-Based Compensation. Accordingly, no compensation
cost has been recognized for the stock option plans. Had compensation cost
for the Company's stock option plans been determined based on the fair
value at the grant date for awards in 1998, 1997, and 1996 consistent with
the provisions of SFAS No. 123, the Company's net loss and loss per common
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
Net loss:
<S> <C> <C> <C>
As reported $(1,112,967) $(1,152,507) $(421,586)
Pro forma (1,521,872) (1,166,606) (428,760)
Net income per common share - basic and diluted:
As reported $ (0.12) $ (0.11) $ (0.04)
Pro forma (0.15) (0.11) (0.04)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997, and 1996
dividend yield of 0%, respectively; expected volatility of 76%, 111%, and
110%, respectively; risk-free interest rate of 4.80%, 5.5%, and 5.9%,
respectively; and expected lives of approximately 4.1, 10, and 6.1 years,
respectively.
Stock Warrants - In addition, the Company has issued stock warrants which
become exercisable at the date of issuance or in the year following
issuance and generally expire in five years. The fair value of warrants
issued is credited to warrants outstanding and charged to the appropriate
expense account. Changes in warrants are as follows for the years ended
December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 283,750 $ 0.84 183,750 $ 0.75 183,750 $ 0.75
Granted 400,000 1.94 100,000 1.00
Exercised
Canceled
------- ------ ------- ------ ------- ------
Outstanding at end of year 683,750 $ 1.48 283,750 $ 0.84 183,750 $ 0.75
======= ====== ======= ====== ======= ======
Warrants exercisable at year end 283,750 283,750 183,750
======= ======= =======
Weighted average fair value of
warrants granted during year $0.47 $0.57 $0.64
======= ======= =======
</TABLE>
F-18
<PAGE>
The following table summarizes information about warrants outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
- ---------------------------------------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
------ ----------- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.75 - $1.00 283,750 1.83 $ 0.84 283,750 $ 0.84
1.50 150,000 4.33 1.50
2.00 150,000 4.33 2.00
2.50 100,000 4.33 2.50
------------- ------- ---- ------ ------- ------
$0.75 - $2.50 683,750 3.29 $ 1.48 283,750 $ 0.84
</TABLE>
The fair value of each warrant was computed on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997 dividend yield of 0%,
respectively; expected volatility of 76% and 111%, respectively; risk-free
interest rate of 5.5% and 5.8%, respectively; and expected lives of
approximately 1.5 years.
Preferred Stock - The Company is authorized to issue 1,000,000 preferred
shares, par value $.005 per share. On November 4, 1997, the Company
completed the sale of 500,000 shares of its Series A Cumulative
Convertible Preferred Stock ("Series A Preferred") pursuant to a stock
purchase agreement dated September 25, 1997 for an aggregate sales price
of $5,000,000. Each share of Series A Preferred is convertible at the
option of its holder, at any time, into 8.57 shares of common stock of the
Company. At the date of the issuance of the preferred stock, the embedded
conversion price was $1.17 and the estimated fair value of the common
stock was $1.03. Dividends accrue on the outstanding Series A Preferred at
the rate of 8% per annum and may be paid through cash or common shares of
the Company at the option of the holder. Subject to the holder's right to
convert the Series A Preferred, the Company may redeem the Series A
Preferred at any time from the date on which it is issued at a percentage
of the Series A Preferred's stated value of $10 per share; 130% of stated
value if redemption occurs within thirty-six months of the date of
issuance, 115% of stated value if redemption occurs between thirty-six and
forty-eight months after the date of issuance, 110% of stated value if
redemption occurs between forty-eight and sixty months after the date of
issuance, and 100% if redemption occurs thereafter. The holder of the
Series A Preferred may also require the Company to redeem the Series A
Preferred after the eighth anniversary of the Series A Preferred's
issuance. The holders of the Series A Preferred shall have the right, but
shall not be obligated, to appoint 20% of the Company's Board of
Directors. The Company may not alter the rights and preferences of the
Series A Preferred, authorize any security having liquidation preference,
redemption, voting or dividend rights senior to the Series A Preferred,
increase the number of Series A Preferred, reclassify its securities or
enter into specified extraordinary events without obtaining written
consent or an affirmative vote of at least 75% of the holders of the
outstanding shares of the Series A Preferred stock. All voting rights of
the Series A Preferred expire upon the issuance by the Company of its
notice to redeem such shares. The shares of common stock issuable upon
conversion of the Series A Preferred are subject to adjustment upon the
issuance of additional shares of the Company's common stock resulting from
stock splits, share dividends, and other similar events as well as upon
the issuance of additional shares or options which are issued in
connection with the Company's equity investment (see Note 3) or as
compensation to any employee, director, consultant, or other service
provider of the Company or any subsidiary, other than options to acquire
up to 5% of the Company's common stock at or less than fair market value.
Common Stock Warrant - In conjunction with the issuance of the preferred
stock described above, the Company issued a warrant to the holders of the
preferred stock. The fair value of the warrant at the date of issuance was
estimated to be $283,019 and was recorded to additional paid-in capital
and as a reduction to the stated value of the preferred stock. The
reduction in preferred stock is being accreted over the five-year period
from the date of issuance to the earliest exercise date of the warrant.
Upon the fifth anniversary of the issuance of the preferred stock, the
warrant becomes exercisable, at $.002 per share, into the number of common
shares of the Company equal to (a) [$5,000,000 plus the product of (i)
($5,000,000 multiplied by (ii) 39% (internal rate of return) multiplied by
(iii) 5 years] (14,750,000), minus (b) the sum of (i) all dividends and
other distributions paid by the Company on the preferred stock or on the
common stock received upon conversion of the preferred stock plus (ii) the
greater of the proceeds from the sale of any common stock received by the
holder upon the conversion of the preferred stock prior to the fifth
anniversary date or the terminal value (as defined below) of such common
stock sold before the fifth anniversary plus (iii) the terminal value of
the preferred stock and common stock received upon conversion of the
preferred stock then held, divided by (c) the fair market value of the
Company's common stock on a weighted average basis for the 90 days
immediately preceding the fifth anniversary date of the issuance of the
preferred stock. Terminal value is defined as the sum of (i) the shares of
common stock into which the preferred stock then held is convertible, plus
F-19
<PAGE>
(ii) shares of common stock received upon conversion of preferred stock,
multiplied by the fair market value of the Company's common stock on a
weighted average basis for the 90 days immediately preceding the fifth
anniversary date of the issuance of the preferred stock. The warrants will
expire in 2007.
9. LEASES
Operating Leases - The Company leases certain premises and equipment under
operating leases. Future minimum lease payments under non-cancelable
operating leases as of December 31, 1998 are as follows:
Year ending December 31:
1999 $ 638,626
2000 532,045
2001 521,824
2002 495,094
2003 444,960
Thereafter 362,460
----------
Total $2,995,009
==========
Lease expense for the years ended December 31, 1998, 1997, and 1996,
totaled $899,452, $36,437, and $31,778, respectively.
10. INCOME TAXES
The Company has recorded net deferred tax assets and liabilities at
December 31, 1998 and 1997 which consisted of the following temporary
differences and carryforward items:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
Long- Long-
Current Term Current Term
Deferred tax assets:
<S> <C> <C> <C> <C>
Net operating loss carryforwards $ 1,212,387 $ 1,184,675
Allowance for uncollectible
accounts receivable $ 37,176
Start-up costs 60,646 242,584
Capital loss carryforwards 203,332 133,144
Other 27
-------- ---------- ---------- ----------
Total deferred tax assets 97,822 1,658,303 NONE 1,317,846
-------- ---------- ---------- ----------
Deferred income tax liabilities:
Amortization of goodwill (15,673)
Differences between tax basis
and financial reporting basis of
property, plant and equipment (12,558)
Other (24,050)
-------- ---------- ---------- ----------
Deferred tax liabilities (24,050) (28,231) NONE NONE
-------- ---------- ---------- ----------
Valuation allowance (73,772) (1,630,072) NONE (1,317,846)
-------- ---------- ---------- ----------
Net deferred tax assets NONE NONE NONE NONE
======== ========== ========== ==========
</TABLE>
The components of income tax (benefit) for the years ended December 31,
1998, 1997, and 1996 are summarized as follows:
1998 1997 1996
Current NONE NONE NONE
---- --------- ---------
Deferred:
Federal NONE $(398,862) $(118,581)
State NONE (35,194) (10,463)
---- --------- ---------
NONE (434,056) (129,044)
---- --------- ---------
Total NONE $(434,056) $(129,044)
==== ========= =========
F-20
<PAGE>
Income tax expense (benefit) differed from amounts computed by applying
the federal statutory rate to pretax loss as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Loss before income taxes and minority
interest - computed tax at the expected
federal statutory rate, 34% $ (66,869) $ (539,431) $(187,214)
State income taxes, net of federal
income tax benefits (14,929) (47,597) (16,519)
Minority interest (102,330)
Expiration of net operating losses 31,042
Excess of book over tax basis
depletion in oil & gas properties (201,624) 20,193
Excess of book over tax basis
depletion in oil sand properties (968,283) 40,521
Other (5,242) 5,033 13,975
Change in valuation reserve 385,998 1,317,846
Change in valuation reserve related
to cumulative effect of a change in
accounting principle (227,670)
-------- ---------- ---------
Total income tax (benefit) NONE $ (434,056) $(129,044)
======== ========== =========
</TABLE>
The Company has available at December 31, 1998, unused tax operating loss
carryforwards of approximately $3,277,000 which may be applied against
future taxable income and expire in varying amounts through 2012. The
Company also has unused capital loss carryforwards of approximately
$550,000 which may be applied against future taxable income and expire in
2002.
11. RELATED PARTY TRANSACTIONS NOT OTHERWISE DISCLOSED
The Company entered into an employment agreement, effective November 1,
1997, with a director who is also an officer of the Company. The agreement
covers the three year period ending December 31, 2000, with the option to
extend the agreement through December 31, 2002. The agreement includes a
base salary of $150,000 subject to various increases as of November 1 of
each year provided that the Company achieves positive cash flows from
operations before interest, debt service, taxes, depreciation,
amortization, extraordinary, and non-recurring items and dividends. In
addition to the base salary, the director is entitled to receive a bonus
for each fiscal year of the agreement provided certain earnings levels are
obtained or the underlying price of the Company's stock increases to
determined levels. An earnings per share (EPS) bonus, which is computed as
50% of the officers salary, will be paid to the director based upon the
year's EPS. If the earnings per share is positive and increase from the
preceding fiscal year, the director shall be paid a bonus of 20% of the
applicable EPS bonus payment for each $.01 per share increases. However,
the amount of this payment is subject to certain limitations. In addition,
the director and officer shall be paid a bonus if the average bid price
for the Company's common stock for all of the trading days in the month of
October in each applicable year exceeds $2.62 and $3.62 for the years
ending December 31, 1999 and 2000. The director, for each applicable year,
shall be paid a bonus equal to 10% of the base salary for each $.20
increase in the average stock price over the predetermined levels. In the
event the stock price exceeds the determined levels, the director and
officer shall receive a bonus equal to the pro rata portion of the stock
bonus payment for additional increases which are less than $.20. In
F-21
<PAGE>
addition to the bonuses, the director and officer shall be granted an
option to purchase 450,000 shares of the Company's common stock at an
exercise price of $1.62 per share. These options were granted in 1997.
The Company entered into an employment agreement, effective January 26,
1996 with the Chief Executive Officer who is also the Chairman of the
Board of Directors of the Company. The agreement extends through February
26, 1999. The agreement includes a base salary of 5% of the Company's net
profits from operations before depletion, depreciation, tax credits, and
amortization, but after interest expense on debt; not to exceed $1,000,000
per year. The agreement also calls for the Company to grant 300,000 stock
options to purchase the Company's unregistered common stock at $.66 per
share and an additional 75,000 options for each year of executive
employment which is completed after funding is achieved. In 1996, 300,000
options were issued at $.66 per share. In 1998, 75,000 options were issued
at $1.50 per share. Additionally, other benefits are provided including
participation in certain insurance, vacation, and expense reimbursements.
Pursuant to the operating agreement of Crown Distribution, the Company
receives monthly payments of $5,000 and $10,000 for management services
and overhead charges, respectively. Pursuant to the operating agreement of
Crown Ridge, the Company receives monthly payments of $3,000 and $10,000
for management services and overhead charges, respectively. The Company
eliminates the portion of such payments which relate to its ownership
percentages in consolidation.
12. COMMITMENTS AND CONTINGENCIES
The Company may become or is subject to investigation, claim, or lawsuits
ensuing out of the conduct of its business, including those related to
environmental, safety and health, commercial transactions, etc. Management
of the Company is currently not aware of any investigations, claims, or
lawsuits which it believes could have a material adverse affect on its
financial position.
Construction Arbitration - On February 10, 1999, CEntry Constructors and
Engineers, L.L.C. (CEntry) filed a demand for arbitration with the
American Arbitration Association for claims arising out of the November 5,
1997 Engineering, Construction and Procurement Agreement between Crown
Ridge and CEntry (the Contract) for the design and construction of Crown
Ridge's facility near Vernal, Utah. CEntry seeks damages in excess of $1.0
million for amounts allegedly due to CEntry under the Contract, including
a retention or liquidated damages amount of $803,660, as well as amounts
for modifications to the Contract allegedly made by Crown Ridge. Crown
Ridge has denied the claims and filed its own counterclaims against
CEntry. Crown Ridge asserts, among other things, that Crown Ridge is
entitled to the retention amount based upon certain breaches of the
Contract by CEntry and that Crown Ridge is entitled to liquidated damages
for CEntry's failure to meet a mechanical completion deadline specified in
the Contract. An arbitration panel has been selected and arbitration will
begin August 2, 1999. The arbitration will take place in Salt Lake City,
Utah and the case is currently in the discovery phase. Due to the
uncertainties inherent in any litigation or arbitration proceeding, there
can be no assurance that Crown Ridge will or will not prevail or that
significant damages will not be awarded against Crown Ridge.
13. CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentration of credit
risk consist principally of trade receivables. The Company's policy is to
evaluate, prior to shipment, each customer's financial condition and
determine the amount of open line credit to be extended. It is also the
Company's policy to obtain adequate letters of credit or other acceptable
security as collateral for amounts in excess of the open line.
F-22
<PAGE>
14. SERVICES AGREEMENT
During April 1995, the Company entered into an agreement with a third
party to obtain services, which included professional, technical, and
project development services in connection with the planned oil sand
processing facility, identification of potential investors for the project
financing, and assisting the Company in negotiating and closing project
financing terms and agreements. The terms of the agreement provided for
the Company to pay monthly amounts of $5,000 in cash or $7,500 in common
stock of the Company and to issue monthly 15,000 warrants to purchase one
share per warrant of the Company's common stock at $.75 per share. These
warrants are exercisable for seven years after their issuance. These
warrants allow the organization to purchase one common share of the
Company's stock at $0.75 per share and are exercisable for a period of
seven years from the date of issuance. A total of 183,750 warrants valued
at $9,665 were issued under the agreement. The agreement was terminated
during 1997 at no additional cost to the Company.
15. LOSS PER SHARE
The following table is a reconciliation of the net loss numerator of basic
and diluted net loss per common share for the years ended December 31,
1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- ---------------------------
Loss Loss Loss
Loss Per Share Loss Per Share Loss Per Share
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Loss before cumulative
effect of a change in
accounting principle $ (497,644) $ (1,152,507) $ (421,586)
Redeemable preferred
stock dividends (402,019) (65,414)
---------- ------------ ----------
Loss attributable to
common stockholders
before cumulative effect
of a change in
accounting principle (899,663) $ (0.07) (1,217,921) $ (0.11) (421,586) $ (0.04)
Cumulative effect of a
change in accounting
principle (615,323) (0.05)
-------- ------- ---------- ------- -------- -------
Net loss attributable to
common stockholders $ (1,514,986) $ (0.12) $ (1,217,921) $ (0.11) $ (421,586) $ (0.04)
============ ======= ============ ======= ========== =======
Weighted average common
shares outstanding -
basic and diluted 12,506,125 11,524,822 10,932,091
============ ============ ==========
</TABLE>
The Company had at December 31, 1998, 1997, and 1996 incremental options
and warrants to purchase, computed under the treasury stock method,
668,256, 2,103,194, and 1,535,444 shares of common stock, respectively
that were not included in the computation of diluted earnings per share
because their effect was anti-dilutive. The Company also has preferred
stock outstanding at December 31, 1998 and 1997 which is convertible into
approximately 4,300,000 shares of common stock that was not included in
the computation of diluted earnings per share as its effective was
anti-dilutive. Accordingly, diluted earnings per share does not differ
from basic earnings.
16. SUBSEQUENT EVENTS
Processing Agreement Expiration - The Company, through its subsidiary,
Crown Distribution had an agreement with Santa Maria Refining Company
(SMRC) and SABA Petroleum whereby Crown Distribution purchased crude oil
for processing at the Santa Maria Refinery, and markets the slate of
products produced, primarily asphalt. This agreement was acquired through
the Petro Source asset acquisition described in Note 4. Revenues resulting
from the agreement were approximately $15.9 million in 1998, which
accounts for approximately 65% of total consolidated revenues. Gross
profits for the year ended December 31, 1998 from operations at the Santa
Maria Refinery totaled approximately $1.2 million. SMRC extended the
agreement, which expired on December 31, 1998, to April 30, 1999. The
agreement was not extended subsequent to April 30, 1999.
F-23
<PAGE>
Acquisition of Cowboy Terminal Property - On January 9, 1999, CAT LLC
acquired the Cowboy Terminal Property for $1,973,511. CAT LLC paid
deposits totaling $496,441 during 1998. In addition, CAT LLC paid $195,000
in cash at closing and executed and delivered a promissory note in the
amount of $1,282,070. This promissory note is payable in 84 equal monthly
installments of $20,627 beginning on February 1, 1999 and ending on
January 1, 2006. The note bears interest at the rate of 9% and is secured
by a deed of trust encumbering the Cowboy Terminal Property. The
acquisition was accounted for as a purchase.
The CAT LLC Operating Agreement obligates both the Company and Foreland to
make additional capital contributions equal to one-half of any additional
amounts, not to exceed $650,000, required for (i) CAT LLC to fulfill its
obligations under any corrective action plan that may be accepted by CAT
LLC and the Utah Department of Environmental Quality with respect to
certain environmental conditions at the Cowboy Terminal Property and (ii)
any additional amounts required to cover legal costs incurred in obtaining
title to the Cowboy Terminal Property or otherwise relating to the
environmental remediation work potentially needed.
The CAT LLC Operating Agreement also obligates the Company and Foreland to
make additional capital contributions, in proportion to their ownership
percentages, in order to fund any additional amounts required for CAT LLC
to fulfill its obligations under the purchase contract for the Cowboy
Terminal Assets, for environmental management and containment costs,
expenses for operations, or the construction of certain approved capital
improvements to the Cowboy Terminal Property. None of the foregoing
additional contributions will result in an increase in the number of units
or percentage interests held by the Company or Foreland.
CAT LLC is managed by the Company. The Company has authority to conduct
the day-to-day business and affairs of the Company. However, certain
matters must be approved by members holding 75% or more of the outstanding
units of CAT LLC. The Company is not compensated for its services as
manager.
Conversion of Preferred Dividends to Common Stock - On January 27, 1999,
the Company issued 317,069 shares of common stock to its preferred
stockholders as payment in full of preferred stock dividends payable
totaling $467,433.
Other Acquisitions - On April 17, 1999, the Company acquired the fixed
assets, the associated inventory, and certain contractual agreements of
Asphalt Supply & Services, Inc. and Inoco, Inc. (collectively, the Seller)
for $4,000,0000, consisting of $750,000 in cash and 2,500,000 shares of
unregistered common stock valued at $1.30 per share. In the event that the
bid price of the common stock is less than $1.10 for 120 consecutive
F-24
<PAGE>
trading days at any time between April 17, 1999 and December 31, 2000, the
Seller has the right to require the Company to repurchase all shares
issued for $1.10 per share. The Company has the right to repurchase up to
2,000,000 of the shares of common stock from the Seller, at any time, for
$2.05. Per the agreement, the Seller may only sell up to 500,000 shares of
the Company's common stock per calendar quarter. The acquisition has been
accounted for as a purchase.
On May 12, 1999, the Company acquired the Rawlins Asphalt Terminal and
inventory for $2,291,571 from S&L Industrial (S&L). The purchase price
consists of the Company assuming S&L's debt of approximately $1,800,000,
entering into a note payable to S&L for $225,000, and a cash payment of
$266,571.
******
F-25
<PAGE>
CROWN ASPHALT RIDGE, LLC
(A Development Stage Company)
Financial Statements for the Year Ended December 31, 1998 and the Period August
1, 1997 through December 31, 1997 and Independent Auditors' Report
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Members of
Crown Asphalt Ridge, LLC
Salt Lake City, Utah
We have audited the accompanying balance sheet of Crown Asphalt Ridge, LLC (a
development stage company) (the Company) as of December 31, 1998 and the related
statements of operations, members' equity, and cash flows for the year then
ended and for the period August 1, 1997 (date of incorporation) through December
31, 1998. 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 Company's financial statements as of December
31, 1997, and for the period August 1, 1997 (date of incorporation) through
December 31, 1997 were audited by other auditors whose report, dated March 5,
1998, expressed an unqualified opinion on those statements. The financial
statements for the period August 1, 1997 (date of incorporation) through
December 31, 1997 reflect no revenues, expenses, or income. The other auditors'
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for such prior period, is based solely on the report of such
other auditors.
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 statements presentation.
We believe that our audit and the report of other auditors provides a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 1998, and the results of its
operations and its cash flows for the year then ended, and for the period from
August 1, 1997 (date of incorporation) to December 31, 1998, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1998 the Company changed
its method of accounting for the costs of start-up activities to conform with
Statement of Position No. 98-5, Reporting on the Costs of Start-Up Activities.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 26, 1999
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
Members
CROWN ASPHALT RIDGE, LLC
Salt Lake City, Utah
We have audited the accompanying balance sheet of Crown Asphalt Ridge, LLC (a
Utah Limited Liability Company) [a development stage company] at December 31,
1997 and the related statement of operations, and cash flows from inception on
August 1, 1997 through December 31 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements audited by us presents fairly, in all
material respects, the financial position of Crown Asphalt Ridge, LLC (a Utah
Limited Liability Company) as of December 31, 1997 and the results of its
operations and its cash flows for the period from inception through December 31,
1997 in conformity with generally accepted accounting principles.
/s/ Pritchett, Siler and Hardy, P.C.
March 5, 1997
Salt Lake City, Utah
F-28
<PAGE>
<TABLE>
<CAPTION>
CROWN ASPHALT RIDGE, LLC
(A Development Stage Company)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 5,080 $ 47,530
Accounts receivable 3,227
Deposits 138,701
Prepaid royalties 213,194 174,384
Other assets 37,865
----------- ----------
Total current assets 398,067 221,914
PLANT AND EQUIPMENT 18,819,170 4,263,299
CAPITALIZED MINE DEVELOPMENT COSTS 633,908
INTANGIBLE ASSETS 500,001 500,001
----------- ----------
TOTAL $20,351,146 $4,985,214
=========== ==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 715,393 $ 489,671
Retention payable 803,660 189,720
Due to member 548,894 132,902
----------- ----------
Total current liabilities 2,067,947 812,293
----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 4)
MEMBERS' EQUITY:
Crown Asphalt Corporation 1,834,619 933,220
MCNIC Pipeline and Processing Company 16,448,580 3,239,701
----------- ----------
Total members' equity 18,283,199 4,172,921
----------- ----------
TOTAL LIABILITIES AND MEMBERS' EQUITY $20,351,146 $4,985,214
=========== ==========
</TABLE>
See notes to financial statements.
F-29
<PAGE>
<TABLE>
<CAPTION>
CROWN ASPHALT RIDGE, LLC
(A Development Stage Company)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD FROM AUGUST 1, 1997 (DATE OF INCORPORATION) THROUGH DECEMBER 31,
1997 AND FOR THE PERIOD FROM AUGUST 1, 1997 THROUGH DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
August 1, August 1,
1997 1997
(Incorporation) (Incorporation)
through through
December 31, December 31,
1998 1997 1998
---------- --------------- --------------
<S> <C> <C> <C>
OPERATING EXPENSES - Start-up costs $ (801,264) $ (801,264)
LEASE EXPENSE (15,609) (15,609)
---------- ---------- ----------
LOSS BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (816,873) (816,873)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE - Expensing of
start-up costs (447,321) (447,321)
----------- ---------- -----------
NET LOSS $(1,264,194) NONE $(1,264,194)
=========== ========== ===========
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
CROWN ASPHALT RIDGE, LLC
(A Development Stage Company)
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 FOR THE PERIOD FROM
AUGUST 1, 1997 (DATE OF INCORPORATION) THROUGH DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
MCNIC
Crown Pipeline and
Asphalt Processing
Corporation Company Total
<S> <C> <C> <C>
BALANCE, August 1, 1997 NONE NONE NONE
Member contributions $ 933,220 $ 3,239,701 $ 4,172,921
BALANCE, December 31, 1997 933,220 3,239,701 4,172,921
Net loss (316,049) (948,145) (1,264,194)
Member contributions 1,217,448 14,157,024 15,374,472
--------- ---------- ----------
BALANCE, December 31, 1998 $1,834,619 $16,448,580 $18,283,199
---------- ----------- -----------
</TABLE>
See notes to financial statements.
F-31
<PAGE>
<TABLE>
<CAPTION>
CROWN ASPHALT RIDGE, LLC
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD FROM AUGUST 1, 1997 (DATE OF INCORPORATION) THROUGH DECEMBER 31,
1997 AND FOR THE PERIOD FROM AUGUST 1, 1997 THROUGH DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------------
August 1, August 1,
1997 1997
(Incorporation) (Incorporation)
through through
December 31, December 31,
1998 1997 1998
CASH FLOWS FROM DEVELOPMENT ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (1,264,194) $ (1,264,194)
------------ ---------- ------------
Adjustments to reconcile net loss to net cash
used in development activities:
Changes in assets and liabilities:
Accounts receivable (3,227) (3,227)
Deposits (138,701) (138,701)
Prepaid royalties (38,810) $ (41,482) (80,292)
Other assets (37,865) (37,865)
Due to member 415,992 415,992
------------ ---------- ------------
Total adjustments 197,389 (41,482) 155,907
------------ ---------- ------------
Net cash used in development activities (1,066,805) (41,482) (1,108,287)
------------ ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment (13,716,209) (3,583,908) (17,300,117)
Capital expenditures for mine development (633,908) (633,908)
------------ ---------- ------------
Net cash used in investment activities (14,350,117) (3,583,908) (17,934,025)
============ ========== ============
CASH FLOWS FROM FINANCING ACTIVITIES -
Members' contributions 15,374,472 3,672,920 19,047,392
------------ ---------- ------------
NET INCREASE (DECREASE) IN CASH (42,450) 47,530 5,080
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 47,530 NONE NONE
------------ ---------- ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 5,080 $ 47,530 $ 5,080
============ ========== ============
</TABLE>
(Continued)
F-32
<PAGE>
CROWN ASPHALT RIDGE, LLC
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD FROM AUGUST 1, 1997 (DATE OF INCORPORATION) THROUGH DECEMBER 31,
1997 AND FOR THE PERIOD FROM AUGUST 1, 1997 THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1998 1997
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest NONE NONE
==== ====
Income taxes NONE NONE
==== ====
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the year ended December 31, 1998:
o Plant and equipment was purchased through increases in accounts payable
of $225,722 and retention payable of $613,940. At December 31, 1998,
accounts payable and retention payable totaled $715,393 and $803,660,
respectively, as a result of the purchase of plant and equipment.
For the period August 1, 1997 through December 31, 1997:
o A member of the Company contributed rights to oil sand properties and a
license agreement valued at $500,001 in accordance with the Company's
operating agreement, and is included in property, plant, and equipment.
o Plant and equipment was purchased through increases in accounts payable
of $489,671 and retention payable of $189,720.
o A member advanced prepaid royalties of $132,902 to the Company.
See notes to financial statements. (Concluded)
F-33
<PAGE>
CROWN ASPHALT RIDGE, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Ownership - Crown Asphalt Ridge, LLC (the
Company) was organized under the laws of the State of Utah as a Limited
Liability Company on August 1, 1997 and will cease to exist on January 1,
2090. The Company is owned 25% by Crown Asphalt Corporation (CAC) and 75%
by MCNIC Pipeline and Processing Company (collectively referred to as the
"Members"). The Company was organized for the purpose of developing,
mining, processing, and marketing asphalt, performance grade asphalt,
diesel fuel, hydrocarbons, bitumen, asphaltum, minerals, mineral resources
and other oil sand products through the patented oil extraction process
from tar sands located in eastern Utah.
Basis of Presentation - During 1997, the Company entered into an
engineering, construction, and procurement agreement to construct a mining
and production plant. Operations are projected to commence in the second
half of 1999. The Company has incurred approximately $20 million of
construction and mine development costs as of December 31, 1998. The
Company's ability to realize its investment in the project is dependent
upon the successful construction and operation of the production plant on
a full scale basis. The Company has experienced certain construction
difficulties relating to its production plant. Management of the Company
believes that the construction difficulties experienced were of the type
anticipated in the construction of the facility, which is a sophisticated
asphalt processing facility utilizing new or evolving processes. However,
continued difficulties or the inability to commercially operate the
facility economically could significantly impact the Company's ability to
continue as a going concern and would have a materially adverse impact on
the Company's operations and financial condition.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the
recoverability and classifications of recorded amounts of assets or the
amounts and classifications of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's
continuation as a going concern depends upon its ability to generate
sufficient cash flows to meet its obligations on a timely basis and to
obtain additional financing or refinancing as may be required.
At December 31, 1998, the Company's current liabilities exceeded current
assets by approximately $1,670,000. During 1998, the Members contributed
approximately $15,374,000 to the Company. Management believes that the
Members will continue to provide sufficient cash flows to enable the
Company to meet its current obligations as they become due.
Organization - On August 1, 1997, CAC and MCNIC made initial member
contributions of $100,000 and $300,000 respectively. The operating
agreement requires additional capital contributions from the members in
amounts proportionate to the sharing ratios to cover expenses of the
Company. During 1997, CAC and MCNIC made additional contributions of
$333,219 and $2,939,701. In 1997, CAC also contributed the rights to the
oil sand properties and a license agreement that allows the Company to use
certain patented oil extraction technology and oil sand property leases
(the Oil Sand Properties). The Oil Sand Properties had a carrying value of
F-34
<PAGE>
approximately $2,715,000 at the date of the contribution. The Company
assigned a value of $500,001 to the Oil Sand Properties. During 1998, CAC
and MCNIC made additional cash contributions of $1,217,448 and
$14,157,024, respectively. In addition, CAC will be required to contribute
certain mining equipment with an estimated value of $3,500,000 to the
Company when operations commence.
The operating agreement provides for profits and losses of the Company to
be shared 25% to CAC and 75% to MCNIC until the Company has paid specific
returns to MCNIC (Initial Plant Payout) as defined in the operating
agreement. When the Initial Plant Payout has been achieved, CAC's
ownership and distribution percentage will increase to 50% and MCNIC's
ownership will decrease to 50%.
Use of Estimates in Preparing Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, the disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.
Plant and Equipment - Plant and equipment is stated at cost. When the
property begins commercial production and planned principal operations
commence, depreciation will be computed using a unit of production method
based on the estimated reserves to be recovered. Mining and other
equipment that have useful lives shorter than the life of the mine will be
depreciated on a straight-line basis over their estimated useful lives
which range from 5 to 15 years.
Carrying Value of Long-Lived Assets - The Company evaluates the carrying
value of long-lived assets based upon current and anticipated undiscounted
cash flows, and recognizes an impairment when such estimated cash flows
will be less than the carrying value of the asset. Measurement of the
amount of impairment, if any, is based upon the difference between
carrying value and fair value. There were no impairments as of December
31, 1998 and 1997.
Intangible Assets - The Company has recorded the $500,001 assigned value
of the contributed Oil Sand Properties as an intangible asset. The
intangible asset will be amortized over 40 years, using the straight-line
method, once operations commence.
Capitalized Mine Development Costs - Capitalized mine development costs
include costs of overburden removal to uncover asphalt reserves. Such
costs are deferred and will be amortized when asphalt is extracted using a
units of production method based on estimated reserves to be recovered.
Final Reclamation and Mine Closure Costs - Final reclamation and mine
closure costs will be estimated (based primarily on environmental and
regulatory requirements) and accrued over the expected life of each site
using a unit of production method. On-going environmental and reclamation
expenditures will be expensed as incurred.
Revenue Recognition - Once planned principal operations commence, sales
revenue will be recognized upon shipment of product in fulfillment of a
customer order.
Income Taxes - The Company is a limited liability company. Under the
provisions of the Internal Revenue Code, the members of the Company will
be taxed on their proportionate share of the income of the Company.
Therefore, no current or deferred income taxes have been included in the
accompanying financial statements.
Cash and Cash Equivalents - For purposes of the statements of cash flows,
the Company considers all highly liquid debt investments with an original
maturity of three months or less to be cash equivalents.
F-35
<PAGE>
Deposits - The Company has a deposit totaling $138,701 with the Bureau of
Land Management pertaining to the use of land for the removal of tar
sands.
Change in Accounting Principle - In 1998, the Company early adopted
Statement of Position (SOP) No. 98-5, Reporting on the Costs of Start-Up
Activities, which requires costs of start-up activities to be expensed as
incurred. The effect on 1998 of adopting SOP No. 98-5 resulted in
additional expenses of $801,264. The cumulative effect on years prior to
1998 of the accounting change totaled $447,321.
Recently Issued Financial Accounting Standards - In June 1998, the
Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. SFAS No. 133 is effective for the
Company's financial statements for the year ending December 31, 2001. The
Company is currently evaluating the effects of SFAS No. 133 on its
financial statements.
Reclassifications - Certain 1997 amounts have been reclassified to conform
to the 1998 presentation.
2. PLANT AND EQUIPMENT
Plant and equipment consists of the following at December 31, 1998 and
1997:
1998 1997
Construction in progress $18,819,175 $4,263,299
Less accumulated depreciation and depletion None None
----------- ----------
Total $18,819,175 $4,263,299
=========== ==========
There was no depreciation or amortization expense for the years ended
December 31, 1998 and 1997 as the property had not yet been placed in
service.
3. RELATED PARTY TRANSACTIONS
Accounts receivable at December 31, 1998 represents amounts due from Crown
Asphalt Products Company (an affiliated company). Accounts payable at
December 31, 1998 includes $3,290 owed to CAC and $69,711 owed to Crown
Energy Corporation (CEC), the parent company of CAC. In addition, CEC and
CAC paid various construction costs, start-up expenses, and royalties (see
Note 4) for and in behalf of the Company. Such amounts totaling $548,894
have been reflected as Due to Member in the accompanying balance sheets.
4. COMMITMENTS AND CONTINGENCIES
Mineral Lease Agreement - In connection with certain oil sand mineral
leases the Company has agreed to pay a royalty of $.50 per ton mined. The
Company is required to pay a minimum royalty of $40,000 per year that will
be used to reduce future royalties when mining operations commence. As of
December 31, 1998, CAC had paid minimum royalties of approximately
$133,000 on behalf of the Company. In connection with these minimum
royalties, the Company has recorded prepaid royalties of approximately
$213,000 as of December 31, 1998.
F-36
<PAGE>
Operating and Management Agreement - On August 1, 1997, the Company
entered into a two year operating and management agreement with CAC to
manage, supervise, and conduct the operations of the Company. The term of
the agreement shall be automatically extended for unlimited successive one
year periods. The Company shall compensate CAC $3,000 a month for
management fees, $10,000 a month for office and administrative costs and
for all reasonable direct costs actually paid in the performance of this
agreement. During the year ended December 31, 1998, the Company accrued
and/or paid $143,000 to CAC for the management fee and other direct costs.
No amount was accrued during 1997.
Oil Sand Oil Extraction License Agreement - In connection with the rights
to use patented oil extraction technology, the Company will be required to
pay royalties of 2% to 5% based on revenues adjusted for certain
production costs and taxes once planned principal operations commence.
Lease Commitments - The Company leases certain property under long-term
lease arrangements. The total expense recorded under operating lease
arrangements in the accompanying statement of operations is $15,609 for
the year ended December 31, 1998.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1998 are as follows:
Year ending December 31:
1999 $ 9,562
2000 8,705
2001 8,705
2002 8,705
2003 7,924
Thereafter 9,336
-------
Total minimum lease payments $52,937
=======
******
F-37
MEMORANDUM OF CLOSING
THIS MEMORANDUM OF CLOSING (the "Agreement") is made and entered into
as of this 7th day of January 1999, by and between HANCOCK-GEISLER R.I.C., INC.,
an Idaho corporation ("Seller") and COWBOY ASPHALT TERMINAL, L.L.C., a Utah
limited liability company ("Buyer"), the sole members of which are CROWN ASPHALT
PRODUCTS COMPANY, a Utah corporation ("CAP") and FORELAND ASPHALT CORPORATION, a
Utah Corporation ("FAC")
RECITALS
A. Seller is the owner of certain real property located in Davis
County, Utah as more particularly described in Exhibit "A" attached hereto and
incorporated herein by this reference, together with the buildings, fixtures and
improvements located thereon (the "Real Property") and certain items of personal
property as described in Exhibit "B" attached hereto (the "Personal Property")
(the Real Property and Personal Property shall be collectively referred to as
the "Property").
B. Buyer wishes to purchase the Property from Seller and Seller is
willing to sell the Property to Buyer for the purchase price and subject to the
terms and conditions hereinafter set forth.
C. Except as otherwise set forth herein and for the purpose of
formalizing and closing their agreement for the purchase and sale of the
Property, the parties hereto desire to enter into this Agreement.
<PAGE>
AGREEMENT
NOW THEREFORE, in consideration of the foregoing premises
and the mutual covenants, promises and agreements set forth herein, the
parties hereto agree as follows:
1. The Closing. The closing (the "Closing") of the sale of the Property
by Seller to Buyer will occur January 4, 1999, effective January 1, 1999, at the
offices of Parry Lawrence & Ward, at which Closing the following will occur and
has been agreed to between Buyer and Seller.
2. Documents to be Exchanged at Closing. Seller will deliver to Buyer
the following instruments executed by Seller transferring the assets described:
2.1. Special Warranty Deed. Special Warranty Deed conveying to
Buyer the Real Property, free and clear of all liens and encumbrances except for
exceptions contained in that certain Commitment for Title Insurance issued by
Bonneville Title Company of Utah dated June 17, 1996, (the "Commitment"), and
the lien created by that certain Deed of Trust provided for in Section 3.2.
2.2. Bill of Sale. Bill of Sale conveying to Buyer the
personal Property, free and clear of all liens and encumbrances.
2.3. Assignment of Lease. An Assignment of Leases conveying
and assigning to Buyer all of Seller's interest as lessor in all leases on the
Real Property.
2.4. Buyer will deliver to Seller. The following instruments
executed by Buyer purchasing the assets acquired:
a. Check for the down payment.
b. Trust Deed Note
c. Trust Deed
2
<PAGE>
3. Purchase Price. Buyer shall pay to Seller for the Property the sum
of ONE MILLION FOUR HUNDRED SEVENTY-SEVEN THOUSAND SEVENTY AND 11/100 DOLLARS
($1,477,070.11) (the "Purchase Price"), payable as follows:
3.1. Down Payment. At closing Buyer shall pay to Seller ONE
HUNDRED NINETY-FIVE THOUSAND AND NO/100 DOLLARS ($195,000.00).
3.2. Promissory Note. The remainder of the Purchase Price ONE
MILLION TWO HUNDRED EIGHTY-TWO THOUSAND SEVENTY AND 11/100 DOLLARS
($1,282,070.11) shall be paid by Buyers' execution and delivery to Seller at
Closing of a Promissory Note (the "Note") in the amount equal to the Purchase
Price less the amounts specified in Section 3.1. The Note shall provide for
interest at nine percent (9%) per annum, with eighty-four (84) equal monthly
payments in the amount of Twenty Thousand Six Hundred Twenty-Seven and 33/100
Dollars ($20,627.33) beginning on February 1, 1999, and concluding January 1,
2006, payable on or before the first day of each month. Buyer shall pay a late
charge of five percent (5%) of any installment not paid on or before the 10th
day of the calendar month when due. All monthly payments shall be mailed or hand
delivered payable to Seller c/o Dick Geisler, Seller's agent at:
Mr. Dick Geisler
PO Box 313
Kaysville, UT 84037
3.3. Deed of Trust. Said Note shall be secured by a standard
form Deed of Trust covering the Real Property, executed and delivered by Buyer
to Trustee, at Closing. Each party agrees that it will not take a position on
3
<PAGE>
any income, capital gain or sales tax returns before any governmental agency
charged with the collection of any such tax, or on any judicial proceeding, that
is in any manner inconsistent with the terms of such allocation.
4. Title Insurance. Seller shall provide for Buyer, at Seller's cost,
from the Title Company, an ALTA standard form owner's policy of title insurance
covering the Real Property, insuring title as of the date of closing in the
amount of TWO MILLION AND 00/100 ($2,000,000.00), subject only to the exceptions
described in Section 2.1 above.
5. Closing Statements. Buyer and Seller shall execute closing
statements reflecting the following:
5.1. Taxes and Rents. 1998 real property taxes and assessments
relating to the Real Property shall be paid by Buyer.
5.2. Costs. Seller and Buyer shall each pay one-half of the
cost of recording all Closing documents required to be recorded. Seller shall
pay the cost of the owner's title insurance policy.
5.3. Representations and Warranties of Seller. As a condition
of Closing, Seller has made and hereby makes to Buyer the following
representations and warranties that shall survive Closing.
a. Seller is a corporation duly organized, validly
existing and in good standing under Idaho law, has the corporate power and
authority and has obtained all necessary approvals to sell the Property and
enter into this Agreement and perform the transactions contemplated hereby.
b. The sale of the Property to Buyer and the
execution and performance by Seller of this Agreement, have been duly authorized
4
<PAGE>
by Seller, will not violate, conflict with, or result in a breach of or default
or liability under Seller's Articles of Incorporation or Bylaws, or any
agreement or instrument to which Seller is a party.
c. Seller is, at the time of Closing, to the best of
its knowledge, the sole, fee simple owner of the Property, with good legal and
equitable title thereto, free and clear of all liens, encumbrances and security
interests, except as disclosed herein.
6. Representations and Warranties of Buyer, CAP AND FAC. Buyer, CAP and
FAC have made and hereby make to Seller the following representations and
warranties that shall survive Closing:
6.1. Buyer is a limited liability company duly organized,
validly existing and in good standing under Utah law, and has the power and
authority to enter into this Agreement and perform the transactions contemplated
hereby.
6.2. CAP is a corporation duly organized, valid existing and
in good standing under Utah law, and as a member of Buyer, has a corporate power
and authority to authorize Buyer to enter into this Agreement and perform
transactions contemplated hereby.
6.3. FAC is a corporation duly organized, validly existing and
in good standing under Utah law, and as a member of Buyer, has the corporate
power and authority to authorize Buyer to enter into this Agreement and perform
the transactions contemplated hereby.
6.4. Buyer has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, and this Agreement has
been executed by duly authorized manager(s).
7. Tenants. The parties acknowledge that there are six tenants on the
Property on the date hereof. Five of those tenants, Genesis Petroleum - Salt
Lake, L.L.C., Mascero Trucking, AV Fuel, Crest Distributing, and Texaco, have
executed or will yet execute leases with Buyer or its designee or assignee, and
5
<PAGE>
Buyer agrees to hold Seller harmless with respect to such tenants and leases.
The sixth tenant is Seller, who has executed a lease with Buyer or its designee
or assignee, concurrently with the execution of this Agreement. Seller
represents and warrants that it has not executed any leases involving the
Property with any other tenants since the date of the Letter of Intent of 1990,
and that Seller-has no actual knowledge of any other existing tenants on the
Property or any other party in possession of any portion of the Property.
8. Environmental. Matters. Wasatch Geotechnical prepared an
Investigation Report (the "Report") in August of 1991, with respect to the
Property, which included a proposed Corrective Action Plan. In addition, in
1998, a potential release of asbestos from the boilers or other buildings or
facilities on the Property was reported. The matters reported in the Report and
the potential release of asbestos shall be hereafter collectively described as
the "Environmental Events." Seller represents and warrants that except for the
Environmental Events, as of the date hereto Seller has no actual knowledge of
any release or disposal of a hazardous waste or hazardous or toxic substance on
the Property and has no actual knowledge of any violation of environmental law
or order relating to the Property or of any contamination or condition of the
property which could form the basis for a violation of any environmental law or
Order relating to the Property. Buyer and its members hereby agree to waive,
release, and forever discharge Seller of and from any liabilities, obligations,
losses, damages, claims, actions, costs and expenses, including without
limitation, attorneys' fees and costs, of whatever kind or nature, which Buyer
or its members may have against Seller arising from or in any way related to the
Environmental Events set forth above, and from any environmental condition
6
<PAGE>
relating to Seller's use or ownership of the Property during the period of
November 1991, until the date of Closing. Buyer also hereby agrees to assume
responsibility for removal of the asbestos and of performing the Wasatch
Corrective Action Plan ("WCAP"), as that plan may be modified or of a new CAP
addressing the contamination addressed in the WCAP. Other than the Environmental
Events defined above, Buyer does not agree to waive, release, and discharge
Seller of or from any liabilities, obligations, losses, damages, claims,
actions, costs and expenses, including attorneys' fees which Seller may incur
under any environmental law as the owner or operator of the Property prior to
November 1, 1991. "Environmental law" as used herein shall mean all federal,
state and local laws and regulations relating to pollution or protection of
human health or the environment in effect as of the date of this Agreement,
including without limitation, laws and regulations relating to emission,
discharge, release or threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of such matters or products.
9. Release. Hancock-Geisler, R.I.C., Inc., Cowboy Oil Company, their
officers and directors, including Dick Geisler, and Dale Hancock, except as
specifically set forth herein and except for any and all obligations arising out
of any and all agreements and/or documents signed or entered into as part of the
sale and purchase of the Property contemplated by this Memorandum of Closing,
7
<PAGE>
jointly and severally do hereby release, remise and forever discharge Cowboy
Asphalt Terminal, L.L.C., Crown Asphalt Products, Foreland Asphalt Corporation,
and Refinery Technologies, Inc., and their directors, officers and employees
from any and all claims, demands, liabilities, damages, costs, attorney's fees,
expenses, actions and causes of action of any kind, nature or description, known
or unknown arising from any act or occurrence on account of their acquisition,
ownership or operation of the Property.
10. General Provisions.
10.1. Further Assurances. Each of the parties hereto shall
execute and deliver any and all additional papers, documents, instruments and
other assurances, and shall do any and all acts and things necessary and
reasonable in connection with the performance of their obligations hereunder and
to carry out the intent of the parties hereto.
10.2. Attorneys' Fees. In the event any action is instituted
by a party to enforce any of the terms and provisions contained herein, the
prevailing party in such actions shall be entitled to receive from the other
party reasonable attorneys' fees, costs and expenses incurred in enforcing this
Agreement.
10.3. Assignment. This Agreement may not be transferred or
assigned without the prior written consent of Hancock-Geisler, which consent
shall not be unreasonably withheld.
10.4. Successors and Assigns. All of the terms and provisions
contained herein shall inure to the benefit of and shall be binding on the
parties hereto and their respective heirs, successors and assigns.
10.5. Counterparts. This Agreement may be executed in one or
more counterparts, each of which, when so executed, shall be deemed to be an
original. Such counterparts shall, together, constitute and be one and the same
instrument.
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10.6. Captions. The captions and headings appearing at the
commencement of the sections hereof are descriptive only and for convenience in
reference.
10.7. Applicable Law. This Agreement shall, in all respects,
be governed by and construed in accordance with the laws of the State of Utah.
10.8. Brokers. Neither Buyer nor Seller has dealt with a
broker or finder in connection with the sale or purchase of the Property, and
accordingly, there will be no brokerage commissions payable by Seller or Buyer
in connection with the transactions contemplated by this Agreement. Each party
agrees to indemnify and hold the other harmless with respect to any claims for
fees or commissions made by any person with whom such party dealt in connection
with this transaction.
10.9. Survival of Representations and Warranties. All
warranties, covenants and agreements made by Seller or Buyer in this Agreement
or pursuant hereto are continuing and survive the execution and performance of
any Closing under this Agreement, and the delivery of any documents and
instruments required hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
SELLER: BUYER:
HANCOCK-GEISLER, R.I.C., INC. COWBOY ASPHALT TERMINAL, LLC
an Idaho corporation a Utah Limited Liability Company
By_______________________________________ By:__________________________________
Its:_____________________________________ Its:_________________________________
9
<PAGE>
CAP:
CROWN ASPHALT PRODUCTS COMPANY
A Utah corporation
By:__________________________________
Its:_________________________________
FORELAND ASPHALT CORPORATION
a Utah corporation
By:__________________________________
Its:_________________________________
----------------------------------
DALE HANCOCK, Individually
----------------------------------
DICK GEISLER, Individually
Pursuant to Securities and Exchange Commission (the "Commission") Regulation S-K
Item 601(b)(2), the registrant agrees to file supplementally, if requested by
the Commission, the following schedules and similar attachments which have been
omitted:
A Real Property Legal Description
B Personal Property Description
10
ASSIGNMENT AND AGREEMENT
THIS ASSIGNMENT AND AGREEMENT (this "Agreement") is entered into this
11th day of September, 1998, by and among COWBOY ASPHALT TERMINAL, L.L.C., a
Utah limited liability company ("CAT"); CROWN ASPHALT PRODUCTS COMPANY, a Utah
corporation ("Capco") and wholly owned subsidiary of Crown Energy Corporation
("Crown"); FORELAND ASPHALT CORPORATION, a Utah corporation ("Foreco") and
wholly owned subsidiary of Foreland Corporation ("Foreland"); and REFINERY
TECHNOLOGIES, INC., a Utah corporation ("RTI".).
Premises
A. Capco and Foreco have caused CAT to be organized, own all of the
membership interests in CAT, and are entering into an Operating Agreement that
will govern the operation of CAT and the relationship of Capco and Foreco as its
members.
B. CAT has been formed for the purpose of acquiring certain real
property (including the buildings, fixtures and improvements located thereon)
and personal property (collectively, the "Property") currently owned by
Hancock-Geisler R.I.C., Inc., an Idaho corporation ("Seller"), which has
previously entered into that certain Letter of Intent dated November 12, 1990,
attached as Exhibit "A-1" hereto, for the sale of the Property to Crysen
Refining, Inc. ("Crysen")(the "Purchase Arrangement"). The rights of Crysen
under the Purchase Arrangement have been assigned to RTI, all as more
particularly set forth in that certain Assignment and Assumption Agreement,
dated December [blank], 1997, attached as Exhibit "A-2" hereto. RTI has used
advances from Capco and Foreco to make the monthly payments under the Purchase
Arrangement during 1998. In consideration of CAT's assumption of the payment of
the balance of the purchase price for the Property and other good and valuable
consideration, RTI now desired to make such Property available to Capco and
Foreco for the purpose of operating a paving asphalt business and roofing
asphalt business, respectively.
C. Since January 1998, Capco and Foreco have paid an aggregate of
$167,433, which RTI has used to make the monthly payments required of RTI under
the terms of the Purchase Arrangement.
D. CAT desires to acquire from RTI and RTI desires to assign to CAT,
pursuant to the terms and conditions set forth in this Agreement, certain of the
right, title and interest of RTI in and to the Purchase Arrangement as set forth
herein.
<PAGE>
Agreement
NOW, THEREFORE, based on the stated premises, which are incorporated
herein by reference, and for and in consideration of the mutual covenants and
agreements hereinafter set forth and the mutual benefit to the parties to be
derived herefrom, it is hereby agreed as follows:
1. Effective on such date as CAT may elect, but in any event on or
before December 31, 1998, as evidenced by CAT's submittal for recordation in the
office of the Recorder in and for Davis County, Utah, of the Notice of
Assignment attached hereto as Exhibit "B," RTI shall and does hereby ASSIGN,
TRANSFER, and CONVEY to CAT all of RTI's right, title, and interest in and to
the Purchase Arrangement and any and all negotiations, courses of dealing,
rights, and remedies arising in connection therewith (the "Interest"), except as
expressly excluded in paragraphs 3 and 4 below. to have and to hold the Interest
in the Purchase Arrangement unto CAT, its successors and assigns, forever, and
RTI expressly warrants and represents to CAT that (a) RTI has not previously
assigned, pledged, hypothecated, transferred, or conveyed any interest in the
Purchase Arrangement; (b) such Interest in the Purchase Arrangement is owned by
the Assignor free of any claims by any third parties except pursuant to the
terms of the Purchase Arrangement; and (c) to the best of RTI's actual
knowledge, such Purchase Arrangement is in full force and effect and there
exists no event that, with the passage of time or notice or both, would
constitute an event of default by RTI thereunder. RTI agrees to indemnify and
hold CAT harmless for any damages, loss, cost, or expense resulting from a
breach of such representation and warranty. The failure to execute any further
assignments or amendments shall not invalidate, in whole or in part, the
assignment, transfer, and conveyance, of the Interest or in the Purchase
Arrangement contained herein, and it shall be sufficient for purposes of
evidencing such assignment, transfer, and conveyance, for CAT to deliver a copy
of this Agreement to the Seller or any other party.
2. CAT hereby accepts such transfer and agrees to, and does hereby,
assume the entire obligation of RTI under the Purchase Arrangement, together
with all of the rights and obligations appurtenant thereto and discharges RTI
from any and all further obligations in connection therewith other than in
respect of a breach of any provision hereof.
3. RTI shall retain its interest as purchaser in the real property,
including the building, fixtures and improvements thereon, located at the south
end of the Property along 2600 South consisting of approximately 2 acres, all as
more fully described in Exhibit "C" hereto, subject to the mortgage or deed of
trust securing payment of the purchase price in favor of the Seller but free and
clear of any obligation to pay any amount due under the Purchase Arrangement.
4. RTI shall also retain the interest of Lessor in the lease to Genesis
Petroleum (the "Genesis Lease"), all as more fully described on Exhibit "D," and
in any extension or renewal thereof as provided herein. RTI shall notify CAT
immediately of (i) Genesis' intent to sublease its rights under such lease to a
third party (which must be reasonably satisfactory to both RTI and CAT), or (ii)
Genesis' or RTI's intent to terminate the Genesis Lease and of RTI's intended
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<PAGE>
use of the improvements located on the Genesis leasehold following such
termination. At the termination or expiration of the Genesis Lease, RTI, or a
designee reasonably acceptable to CAT, shall have the right to renew and/or
assume a lease of the entire Genesis facility including the refinery and tanks
under the same terms and conditions as the existing lease, or, at RTI's option,
to continue or renew the lease or any portion thereof, except for the petroleum
tanks located at the north end of the Property (which shall become the property
of CAT, at its option, without the payment of further consideration). In the
event RTI does lease any portion of the Genesis facility, it shall be
responsible for the removal of such facilities from the Property and the
restoration thereof (except as stated herein) at the expiration of any renewal
or extension and shall provide reasonable assurances to CAT of its financial
ability to effect such removal. All improvements to be abandoned, except for the
petroleum tanks located at the south end of the Property that RTI may elect to
retain., shall, at CAT's option, become the property of CAT. RTI shall be
responsible for the removal from the Property of any portion of the Genesis
facility not leased by RTI or its designee and not acquired by CAT or RTI. If
improvements are to be sold by RTI, CAT shall have the right to acquire without
further consideration the two petroleum tanks presently leased by Genesis
located at the north end of the Property. If RTI or its designee continues to
operate the entire Genesis facility and the materials produced therefrom are or
may be used
(a) exclusively for paving asphalt, Capco shall have the right
of first refusal to purchase and/or market the production from the
Genesis facility;
(b) exclusively for roofing asphalt, Foreco shall have the
right of first refusal to purchase and/or market the production from
the Genesis facility;
(c) for both paving and roofing asphalt, Capco shall have the
right to purchase the products used for paving asphalt and Foreco shall
have the right to purchase the products used for roofing asphalt. as
they may agree, or, in the absence of such agreement, Capco and Foreco
shall each have the right to purchase one-half of the materials
produced; or
(d) for neither paving or roofing asphalt, Capco and Foreco
shall have the joint equal right of first refusal to purchase and/or
market the production from the Genesis facility, either (i) if they
then agree, through CAT for their joint benefit as their interests in
CAT may then appear or (ii) otherwise for their separate accounts
outside CAT.
5. Upon a dissolution of CAT, distributions on liquidation will be
made:
(a) in the order of priority as may be required by law and set
forth in the CAT operating agreement, as the same may be amended from
time to time, to the extent of funds legally available therefor;
(b) thereafter, to the Members in accordance with their
applicable sharing ratios up to $2,500,000 plus the value of any
capital improvements added to the Property by either Capco or Foreco,
all as set forth in such operating agreement; and
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(c) then, in equal portions to RTI, Capco, and Foreco.
6. In the event that CAT ever elects to sell the Property for value,
each of Capco, Foreco and RTI shall have a right of first refusal, exercisable
in the foregoing order of priority and succession, to purchase the Property (i)
at a price and on terms that are acceptable to all of the parties hereto, or
(ii) at a price and on terms that match those proposed by an independent third
party in a bona fide, arms length purchase offer, all in accordance with the
separate agreement of Capco and Foreco.
7. In the event that Capco and/or Foreco desire to withdraw from CAT
and the other member of CAT does not exercise its right to purchase the units of
membership interest in CAT from the withdrawing member, RTI shall have a right
of first refusal to acquire all of the units of membership interest in CAT of
the withdrawing member either (i) at a price and on terms that are acceptable to
the parties, or (ii) at a price and on terms that match those proposed by an
independent third party in a bona fide, arms length purchase offer, all in
accordance with the separate agreement of Capco and Foreco.
8. Prior to or contemporaneously with the execution of this Agreement,
David McSwain and Mark McSwain are entering into mutually acceptable employment
agreements with Capco. Such employment agreements provide for salary,
incentives, and stock option participation and contain noncompete provisions
typical in employment agreements in the asphalt industry and acceptable to the
respective parties thereto. Crown shall guaranty the obligations of Capco under
the employment agreement with David McSwain, who shall be primarily responsible
for duties to Capco, and Foreco will guaranty the obligations of Capco under the
employment agreement with Mark McSwain, who shall be primarily responsible for
duties to Foreco.
9. This Agreement shall be governed by, enforced, and construed under
and in accordance with the laws of the United States of America, and, with
respect to other matters of state law, the laws of the state of Utah.
10. The parties hereto covenant and agree that they will execute such
other and further instruments and documents which are or may become necessary or
convenient to effectuate and carry out the purposes of this Agreement.
11. In the event that any party institutes any action or suit to
enforce this Agreement or to secure relief from any default hereunder or breach
hereof, the breaching party or parties shall reimburse the nonbreaching party or
parties for all costs, including reasonable attorneys' fees, incurred in
connection therewith and in enforcing or collecting any judgment rendered
therein.
12. This Agreement embodies the entire agreement between the parties
hereto and supersedes any prior understandings or written or oral agreements
between the parties with respect to the subject matter of this Agreement. No
term, condition or provision of this Agreement shall be altered, amended or
modified without the prior written consent of all parties, except as provided to
the contrary in this Agreement.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed in several
original counterparts, each of which shall be deemed an original, effect as of
the date first above written.
Cowboy Asphalt Terminal, L.L.C. Crown Asphalt Products Company
By /s/ Jay Mealey By /s/ Jay Mealey
-------------------------------- ---------------------------
Jay Mealey, Manager Jay Mealey, President
By /s/ Bruce C. Decker Refinery Technologies, Inc.
--------------------------------
Bruce C. Decker, Manager
Foreland Asphalt Corporation By /s/ David McSwain
---------------------------
David McSwain, President
By /s/ Bruce C. Decker
--------------------------------
Bruce C. Decker, Vice President
Pursuant to Securities and Exchange Commission (the "Commission") Regulation S-K
Item 601(b)(2), the registrant agrees to file supplementally, if requested by
the Commission, the following schedules and similar attachments which have been
omitted:
A-1 Letter of Intent dated November 12, 1990
A-2 Assignment and Assumption Agreement
B Notice of Assignment
C Real Property Description
D Genesis Petroleum Lease
5
Certificate No.1
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED,
PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THE
SECURITIES, SUCH OFFER, SALE, OR TRANSFER, PLEDGE, OR HYPOTHECATION IS IN
COMPLIANCE THEREWITH.
WARRANT
(Void after 5:00 p.m., Mountain Time on March 17, 2004, or
earlier as provided below)
This certifies that, for value received, William B. Derrickson
("Derrickson"), or registered assigns (collectively, the "Holder"), is entitled
at any time before 5:00 p.m., on March 17, 2004 (the "Expiration Date") to
purchase from Crown Energy Corporation, a Utah corporation (the "Company"),
twenty thousand (20,000) shares of the Common Stock of the Company (the "Warrant
Shares") at a price of Seventy-Five Cents ($.75) per share (such price, as
adjusted from time to time pursuant to Section 6, is hereafter referred to as
the "Exercise Price"). The number of Warrant Shares to be received upon the
exercise of this Warrant and the Exercise Price may be adjusted from
time-to-time as hereinafter set forth.
1. Exercise of Warrant. This Warrant may be exercised, in whole or in
part, at any time after March 17, 1997, but not later than 5:00 p.m., Mountain
Time, on March 17, 2004, by presentation and surrender of this Warrant
certificate (the "Warrant Certificate") to the Company at its principal office
(or at the office of its stock transfer agent, if any), with the Purchase Form
annexed hereto duly executed and accompanied by payment of the Exercise Price in
cash or by check, payable to the order of the Company, together with all taxes
applicable upon such exercise. Upon receipt by the Company of this Warrant
Certificate at its office (or at the office of its stock transfer agent, if any)
in proper form for exercise and accompanied by payment as herein provided, the
Company shall promptly issue and cause to be delivered to the Holder a
certificate, issued in the name of the Holder, for the full number of Warrant
Shares so purchased, together with cash in respect of any fractional shares,
calculated as provided in Section 3 below. Upon proper exercise of this Warrant,
the Holder shall be deemed to be the holder of record of the Warrant Shares
issuable upon such exercise, notwithstanding that the stock transfer books of
the Company shall then be closed or that certificates representing such shares
shall not then be actually delivered to the Holder.
2. Reservation of Shares. The Company hereby covenants and agrees that,
at all times during the period this Warrant is outstanding, it will reserve for
issuance and delivery upon exercise of this Warrant such number of shares of its
Common Stock (and/or other securities) as shall be required for issuance and
delivery upon exercise of this Warrant. The number of shares of Common Stock
that the Company shall initially reserve for issuance hereunder shall be 20,000
<PAGE>
shares. If it becomes necessary at any time to increase the number of reserved
shares for this purpose, the Board of Directors of the Company shall promptly
increase the number of authorized and/or reserved shares to a number sufficient
to provide for the number of shares that may be at that time issuable to the
Holder as described above. If it is necessary to increase the number of
authorized shares for this purpose, the Board of Directors will use its best
efforts to obtain any required approval of this increase by the shareholders.
3. Fractional Shares. No fractional shares or stock representing
fractional shares shall be issued upon the exercise of this Warrant. In lieu of
any fractional shares which would otherwise be issuable, the Company shall pay
to the Holder cash equal to the product of such fraction multiplied by the then
current fair market value of one share of Common Stock, computed to the nearest
whole cent. The then current fair market value of such shares shall be as
determined in good faith by the Board of Directors of the Company.
4. Transfer, Exchange, Assignment, or Loss of Warrant.
(a) This Warrant and the Warrant Shares may be assigned or
transferred only to an affiliate of the Holder. Any purported transfer
or assignment made other than in accordance with this paragraph 4(a)
shall be null and void and of no force and effect.
(b) Any assignment permitted hereunder may be in whole or in
part and shall be made by surrender of this Warrant Certificate to the
Company at its principal office with the Assignment Form annexed hereto
duly executed, together with funds sufficient to pay any transfer tax.
In such event the Company shall, without charge, execute and deliver a
new Warrant Certificate in the name of the assignee named in such
Assignment Form and this Warrant Certificate shall promptly be
cancelled (and a new Warrant Certificate issued to the Holder if the
assignment is in part).
(c) Upon receipt by the Company of evidence satisfactory to it
of the loss, theft, destruction, or mutilation of this Warrant
Certificate, and, in the case of loss, theft, or destruction, upon
reasonably satisfactory indemnification, and, in the case of
mutilation, upon surrender and cancellation of this Warrant
Certificate, the Company will execute and deliver a new Warrant
Certificate of like tenor and date, and any such lost, stolen,
destroyed, or mutilated Warrant Certificate shall thereupon become
void. Any such new Warrant Certificate executed and delivered shall
constitute an additional contractual obligation on the part of the
Company, whether or not the Warrant Certificate that was so lost,
stolen, destroyed, or mutilated shall be at any time enforceable by
anyone.
5. Rights of the Holder. The Holder shall not, by virtue of ownership
of this Warrant, be entitled to any rights as a shareholder of the Company,
either at law or equity, and the rights of the Holder are limited to those
expressed in this Warrant and are not enforceable against the Company except to
the extent set forth herein.
6. Adjustments. The Exercise Price and the number of shares of Common
Stock issuable upon the exercise of the Warrant shall be subject to adjustment
from time-to-time as follows:
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(a) Recapitalization. In the event the Company should at any
time or from time to time while this Warrant remains in force, effect a
recapitalization of such character that the securities covered hereby
shall be changed into or become exchangeable for a larger or smaller
number of such securities, then thereafter, the number of securities of
the Company which the Holder of this Warrant shall be entitled to
purchase hereunder, shall be increased or decreased, as the case may
be, in direct proportion to the increase or decrease in the number of
shares of the Company, by reason of such recapitalization, and the
Exercise Price hereunder, per share, shall in the case of an increase
in the number of shares be proportionally reduced, and in the case of a
decrease in the number of shares, be proportionally increased.
(b) Asset Distributions. In the event the Company shall at any
time prior to the exercise of this Warrant make any distribution of its
assets to holders of its Common Stock by liquidating or partial
liquidating dividend or by way of return of capital, or other than as a
dividend payable out of earnings or any surplus legally available for
dividends under the laws of the State of Utah, then the Holder of this
Warrant who exercises the same after the date of record for the
determination of those holders of Common Stock entitled to receive such
distribution of assets, shall be entitled to receive for the Exercise
Price, in addition to each share, the amount of such assets (or at the
option of the Company a sum equal to the value thereof at the time of
such distribution to holders of Common Stock as such value is
determined by the Board of Directors of the Company in good faith)
which would have been payable to such Holder had it been the holder of
record of the Warrant Shares on the record date for the determination
of those entitled to such distribution.
(c) Merger, Consolidation, Etc. In case of any consolidation
or merger of the Company with or into another company or the conveyance
of all or substantially all of the assets of the Company to another
company, this Warrant shall thereafter be exercisable into the number
of shares of stock or other securities or property to which a holder of
the number of shares of Common Stock of the Company issuable upon
exercise of the Warrant would have been entitled upon such
consolidation, merger or conveyance; and, in any such case, appropriate
adjustment (as determined by the Board of Directors) shall be made in
the application of the provisions herein set forth with respect to the
rights and interest thereafter of the Holder of the Warrant to the end
that the provisions set forth herein (including provisions with respect
to changes in and other adjustments of the Exercise Price) shall
thereafter be applicable, as nearly as reasonably may be, in relation
to any shares of stock or other property thereafter deliverable upon
the exercise of this Warrant.
7. Registration Rights.
(a) Demand Registration. The Company hereby agrees that any
time prior to the Expiration Date, that upon written receipt of a
demand for registration in the form of a written request from the
Holder of this Warrant or a majority of the Warrant Shares, it will
prepare and file under the Securities Act of 1933, as amended (the
"Act"), a registration statement on Form S-8 (if counsel for the
Company should reasonably determine that such shares are eligible for
inclusion on such Form) to register the Warrant Shares and will use its
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<PAGE>
reasonable business efforts to cause such registration statement or
notification to become effective at the earliest practicable date and
to remain effective for a reasonable period of time. The Company will
bear the costs of such registration statement, including, but not
limited to, counsel fees of the Company and disbursements, accountants'
fees and printing costs, if any, but excluding the fees of counsel and
others hired by the Holder. The foregoing demand registration right by
the Holder at the expense of the Company shall be on a one-time request
basis only.
(b) Piggy-back Registration. If at any time prior to the
Expiration Date the Company or any successor proposes to file a
registration statement under the Act relating to a public offering of
its equity securities under the Act (whether for its own benefit or for
the holders of any of its equity securities or otherwise), it shall
offer, upon 30 days written notice to the Holder of this Warrant or the
holders of the underlying securities, to include and shall include, at
the Holder's option(s) all or any portion of this Warrant and the
securities underlying this Warrant in such registration statement at
the expense of the Company.
(c) Volume Limitation. In the event that an underwriter
selected by the Company to effect a registration pursuant to which the
Holder of the Warrant or the Warrant Shares would be entitled to
registration rights pursuant to subsection 7(b) of this Section 7
should reasonably advise the Company that all of the Warrant Shares
which the Holder desires to include within such registration may not be
included due to marketing factors, the Company shall be entitled, upon
written notice to the Holder, to exclude such number of Warrant Shares
from such registration statement as its underwriter shall reasonably
advise and the Holder of the Warrant or Warrant Shares shall be
entitled to subsequently register such excluded shares pursuant to the
provisions of subsections 7(a) or 7(b) in a subsequent offering
according to the provisions of such subsections.
(d) Exchange of Information; Indemnification. In the event
that the Holder of the Warrant or Warrant Shares shall elect to
exercise its rights under subsections 7(a) or 7(b) of this Warrant,
such Holder agrees to provide all information reasonably requested by
the Company (in the event no underwriter is used with regard such
registration) or by any underwriter conducting such registration or by
any underwriter which the Company has engaged to conduct the
registration.
(1) In addition, in connection with the foregoing
registration, to the extent permitted by law, the Company will
indemnify the Holder, each of its officers, directors,
partners, shareholders or any such person controlling such
Holder or such Holder's successors or heirs (collectively, the
"Indemnified Person(s)"), from and against any and all losses,
damages, claims, liabilities, reasonable costs and expenses
(including any amounts paid in any settlement effected with
the Company's consent) to which the Holder or such other
Indemnified Persons may become subject under the Act, State
securities or blue sky laws, common law or otherwise, insofar
as such losses, damages, claims, liabilities (or actions or
proceedings in respect thereof), costs or expenses which arise
out of or are based upon (i) any untrue statement, or alleged
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untrue statement, of any material fact contained in the
registration statement or the prospectus included therein, as
amended or supplemented or, (ii) the omission, or alleged
omission, to state therein a material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances in which they are made, not
misleading, and the Company will reimburse the Holder, or
other Indemnified Persons, promptly upon demand for any legal
or any other expenses incurred by them in connection with
investigating, preparing to defend or defending against such
loss, damage, claim, liability, action or proceeding; provided
that the Company will not be liable in any case for amounts
paid as part of the settlement of any claim, loss, damage,
liability or action if such settlement is effected without the
reasonable consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable to the
extent any such claim, loss, damage, liability, or expense
arises out of, or is based upon any untrue statement, or
alleged untrue statement, omission, or alleged omission,
contained within written information furnished to the Company
or its underwriter by such Holder or any Indemnified Person to
be used within such registration statement.
(2) In addition, in connection with the foregoing
registration, to the extent permitted by law, the Holder will
indemnify the Company, each of its officers, directors,
shareholders, underwriters, any such person controlling the
Company (collectively, the "Company Indemnified Person(s)"),
from and against any and all losses, damages, claims,
liabilities, reasonable costs and expenses (including any
amounts paid in any settlement effected with the Holder's
consent) to which the Company or such other Company
Indemnified Person may become subject under the Act, State
securities or blue sky laws, common law or otherwise, insofar
as such losses, damages, claims, liabilities (or actions or
proceedings in respect thereof, costs or expenses arise out of
or are based upon (i) any untrue statement, or alleged untrue
statement, of any material fact contained in the registration
statement or the prospectus included therein, as amended or
supplemented or, (ii) the omission, or alleged omission, to
state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading,
contained within the written information furnished to the
Company or any Company Indemnified Person by the Holder or any
Indemnified Person to be used within such registration
statement, and the Holder will reimburse the Company, or other
Company Indemnified Persons, promptly upon demand for any
legal or any other expenses incurred by them in connection
with investigating, preparing to defend or defending against
such loss, damage, claim, liability, action or proceeding.
8. No Impairment. The Company will not, by amendment of its articles of
incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions of
this Warrant and in the taking of all such action as may be necessary or
appropriate in order to protect the exercise rights of the Holder of the Warrant
against impairment.
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9. Notices Generally. Notices and other communications to be given to
the Holder of the Warrant evidenced by this Warrant Certificate shall be
delivered by hand or mailed, postage prepaid, to William B. Derrickson,
Attention: Louis Lozeau, Esq., Warner, Fox, Wackeen, Dungey, Seeley, Sweet &
Wright, 1100 South Federal Highway, Post Office Drawer No. 6, Stuart, Florida
34995-0006 or such other address as the Holder shall have designated by written
notice to the Company as provided herein. Notices or other communications to the
Company shall be delivered by hand or mailed, postage prepaid, to the Company at
215 South State Street, Suite 650, Salt Lake City, Utah 84111, Attention: Jay
Mealey, or such other address as the Company shall have designated by written
notice to such registered owner as herein provided. Notice by mail shall be
deemed given when deposited in the United States mail, postage prepaid, as
herein provided.
10. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Utah applicable to contracts entered
into and to be performed wholly within such State.
11. Amendments; Waivers; Termination; Headings. This Warrant and any
term hereof 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. The headings in this Warrant
are for convenience of reference only and are not part of this Warrant.
IN WITNESS WHEREOF, the Company has executed this Warrant Certificate
as of the 17th day of March, 1997.
CROWN ENERGY CORPORATION
By:/s/ Jay Mealey
----------------------
Jay Mealey, President
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PURCHASE FORM
The undersigned hereby elects to exercise the Warrant represented by
the attached Warrant Certificate to the extent of purchasing
______________________________ (__________) shares of the Common Stock of Crown
Energy Corporation, a Utah corporation (the "Company"), and herewith presents to
the Company cash or a check in the amount of
________________________________________________________ ($__________) in
payment of the Exercise Price thereof.
-----------------------------------------------
Name of Holder (please print)
By:____________________________________________
Signature of Authorized Representative
-----------------------------------------------
Name of Authorized Representative
(please print)
-----------------------------------------------
Date
7
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
400,000 Shares
FOR VALUE RECEIVED, Crown Energy Corporation (the "Company"), a Utah
corporation, hereby certifies that Ladenburg Thalmann & Co. Inc., or its
permitted assigns are entitled to purchase from the Company, at any time or from
time to time commencing May 18, 1999, and prior to 5:00 p.m., New York City time
then current, on May 18, 2003, (i) 150,000 fully paid and non-assessable shares
of the common stock. $0.02 par value, of the Company at an aggregate purchase
price of $225,000 (computed on the basis of $1.50 per share, "Per Share Warrant
Price A"), (ii) 150,000 fully paid and non-assessable shares of the common
stock, $0.02 par value, of the Company at an aggregate purchase price of
$300,000 (computed on the basis of $2.00 per share, "Per Share Warrant Price B")
and (iii) 100,000 fully paid and non-assessable shares of the common stock,
$0.02 par value, of the Company at an aggregate purchase price of $250,000
(computed on the basis of $2.50 per share, "Per Share Warrant Price C").
(Hereinafter, (i) said common stock, together with any other equity securities
which may be issued by the Company with respect thereto or in substitution
therefor, is referred to as the "Common Stock," (ii) the shares of the Common
Stock purchasable hereunder are referred to as the "Warrant Shares," (iii) the
overall aggregate purchase price payable hereunder for all of the Warrant Shares
is referred to as the "Aggregate Warrant Price," (iv) the prices payable
hereunder for each of the shares of the Warrant Shares are referred to,
respectively, as "Per Share Warrant Price A," "Per Share Warrant Price B" and
"Per Share Warrant Price C" (collectively, the "Per Share Warrant Prices") and
(v) this warrant and all warrants hereafter issued in exchange or substitution
for this warrant are referred to as the "Warrants.") The Aggregate Warrant Price
is not subject to adjustment. The Per Share Warrant Prices are subject to
adjustment as hereinafter provided; in the event of any such adjustment, the
number of Warrant Shares shall be adjusted by dividing each of the individual
aggregate purchase prices ($225,000, $300,000 and $250,000, respectively) by
each respective Per Share Warrant Price in effect immediately after such
adjustment.
1. Exercise of Warrant.
(a) This Warrant may be exercised, in whole at any time or in part from time to
time, commencing May 18, 1999 (the "Commencement Date"), and prior to 5:00 p.m.,
New York City time then current, on May 18, 2003 (the "Expiration Date"), by the
holder of this Warrant (the "Holder") by the surrender of this Warrant (with the
subscription form at the end hereof duly executed) at the address set forth in
Subsection 10(a) hereof, together with proper payment of the Aggregate Warrant
Price, or the proportionate part thereof if this Warrant is exercised in part.
Except as indicated below, payment for the Warrant Shares shall be made by
certified or official bank check, payable to the order of the Company. If this
Warrant is exercised in part, this Warrant must be exercised for a number of
whole shares of the Common Stock, and the Holder is entitled to receive a new
Warrant covering the number of Warrant Shares in respect of which this Warrant
has not been exercised and setting forth the proportionate part of the Aggregate
<PAGE>
Warrant Price and the Per Share Warrant Prices applicable to such Warrant Shares
as well as the number of Warrant Shares that applies to each Per Share Warrant
Price. Upon such exercise and surrender of this Warrant, the Company will (i)
issue a certificate or certificates in the name of the Holder for the number of
whole shares of the Common Stock to which the Holder shall be entitled and, if
this Warrant is exercised in whole, in lieu of any fractional share of the
Common Stock to which the Holder shall be entitled, pay cash equal to the fair
value of such fractional share (determined in such reasonable manner as the
Board of Directors of the Company shall determine), and (ii) deliver the other
securities and properties receivable upon the exercise of this Warrant, or the
proportionate part thereof if this Warrant is exercised in part, pursuant to the
provisions of this Warrant.
(b) In lieu of exercising this Warrant in the manner set forth in Subsection
1(a) above, this Warrant may be exercised between the Commencement Date and the
Expiration Date by surrender of the Warrant without payment of any other
consideration, commission or remuneration, together with the cashless exercise
subscription form at the end hereof, duly executed. The number of shares to be
issued in exchange for the Warrant shall be the product of (x) the excess of the
average of the market price, as defined in Subsection 5(f), of the Common Stock
for the ten (10) days preceding the date of surrender of the Warrant and the
exercise subscription form over each of Per Share Warrant Price A, Per Share
Warrant Price B and Per Share Warrant Price C, as the case may be, and (y) the
number of shares subject to issuance upon exercise of the Warrant at each of the
Per Share Warrant Prices, divided by the market price of the Common Stock as
calculated in clause (x). Upon such exercise and surrender of this Warrant, the
Company will (i) issue a certificate or certificates in the name of the Holder
for the number of whole shares of the Common Stock to which the Holder shall be
entitled and, in lieu of any fractional share of the Common Stock to which the
Holder shall be entitled, pay cash equal to the fair value of such fractional
share (determined in such reasonable manner as the Board of Directors of the
Company shall determine), and (ii) deliver the other securities and properties
receivable upon the exercise of this Warrant, pursuant to the provisions of this
Warrant.
2. Reservation of Warrant Shares.
The Company agrees that, prior to the expiration of this Warrant, the
Company will at all times have authorized and in reserve, and will keep
available, solely for issuance or delivery upon the exercise of this Warrant,
such number of shares of the Common Stock and such amount of other securities
and properties as from time to time shall be deliverable to the Holder upon the
exercise of this Warrant, free and clear of all restrictions on sale or transfer
(except such as may be imposed under applicable federal and state securities
laws) and free and clear of all preemptive rights and all other rights to
purchase securities of the Company.
3. Protection Against Dilution.
(a) If, at any time or from time to time after the date of this Warrant, the
Company shall distribute to all of the holders of its outstanding Common Stock,
(i) securities other than shares of Common Stock, or (ii) property, other than
cash dividends without payment therefor, with respect to Common Stock, then, and
in each such case, the Holder, upon the exercise of this Warrant, shall be
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<PAGE>
entitled to receive the securities and property which the Holder would have held
on the date of such exercise if, on the date of this Warrant, the Holder had
been the holder of record of the number of shares of the Common Stock subscribed
for upon such exercise and, during the period from the date of this Warrant to
and including the date of such exercise, had retained such shares and the
securities and properties receivable by the Holder during such period. Notice of
each such distribution shall be forthwith mailed to the Holder.
(b) If, at any time or from time to time after the date of this Warrant, the
Company shall (i) pay a dividend or make a distribution on its capital stock in
shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock
into a greater number of shares, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares or (iv) issue by reclassification of its
Common Stock any shares of capital stock of the Company, the Per Share Warrant
Prices in effect immediately prior to such action shall be adjusted so that the
Holder of any Warrant thereafter exercised shall be entitled to receive the
number of shares of Common Stock or other capital stock of the Company which he
would have owned or been entitled to received immediately following the
happening of any of the events described above had such Warrant been exercised
immediately prior thereto. An adjustment made pursuant to this Subsection 3(b)
shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
If, as a result of an adjustment made pursuant to this Subsection 3(b), the
holder of any Warrant thereafter surrendered for exercise shall become entitled
to receive shares of two or more classes of capital stock or shares of Common
Stock and other capital stock of the Company, the Board of Directors (whose
determination shall be conclusive and shall be described in a written notice to
the Holder of any Warrant promptly after such adjustment) shall determine the
allocation of the adjusted Per Share Warrant Prices between or among shares of
such classes of capital stock or shares of Common Stock and other capital stock.
(c) Except as provided in Subsection 3(e) hereof, in case the Company shall
hereafter issue or sell any shares of Common Stock for a consideration per share
less than any of the Per Share Warrant Prices in effect immediately prior to
such issuance or sale, Per Share Warrant Prices for such class of warrant shall
be adjusted as of the date of such issuance or sale so that the same shall equal
the price determined by dividing (i) the sum of (A) the number of shares of
Common Stock outstanding immediately prior to such issuance or sale multiplied
by such Per Share Warrant Price plus (B) the consideration received by the
Company upon such issuance or sale by (ii) the total number of shares of Common
Stock outstanding after such issuance or sale.
(d) Except as provided in Subsection 3(e) hereof, in case the Company shall
hereafter issue or sell any rights, options, warrants or securities convertible
into Common Stock entitling the holders thereof to purchase the Common Stock or
to convert such securities into Common Stock at a price per share (determined by
dividing (i) the total amount, if any, received or receivable by the Company in
consideration of the issuance or sale of such rights, options, warrants or
convertible securities plus the total consideration, if any, payable to the
Company upon exercise or conversion thereof (the "Total Consideration") by (ii)
the number of additional shares of Common Stock issuable upon exercise or
conversion of such securities) less than any of the Per Share Warrant Prices
then in effect on the date of such issuance or sale, Per Share Warrant Prices
for such class of warrant shall be adjusted as of the date of such issuance or
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<PAGE>
sale so that the same shall equal the price determined by dividing (i) the sum
of (A) the number of shares of Common Stock outstanding on the date of such
issuance or sale multiplied by such Per Share Warrant Price plus (B) the Total
Consideration by (ii) the number of shares of Common Stock outstanding on the
date of such issuance or sale plus the maximum number of additional shares of
Common Stock issuable upon exercise or conversion of such securities.
(e) No adjustment in the Per Share Warrant Prices shall be required in the case
of (i) the issuance of shares of Common Stock upon the exercise of options which
have been granted under the Company's Stock Option Plan as in effect on the date
hereof. (ii) the issuance of shares pursuant to the exercise of this Warrant, or
(iii) shares of Common Stock issuable upon the exercise or conversion of any
rights, options, warrants or securities convertible into Common Stock which are
outstanding as of the date of this Warrant or which the Company is contractually
obligated to issue as of the date of this Warrant.
(f) In case of any consolidation or merger to which the Company is a party other
then a merger or consolidation in which the Company is the continuing
corporation or in case of any sale or conveyance to another entity of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another entity (including
any exchange effectuated in connection with a merger of any other corporation
with the Company), the Holder of this Warrant shall have the right thereafter to
convert such Warrant into the kind and amount of securities, cash or other
property which he would have owned or have been entitled to receive immediately
after such consolidation, merger, statutory exchange, sale or conveyance had
this Warrant been exercised immediately prior to the effective date of such
consolidation, merger, statutory exchange, sale or conveyance and in any such
case, if necessary, appropriate adjustment shall be made in the application of
the provisions set forth in this Section 3 with respect to the rights and
interests thereafter of the Holder of this Warrant to the end that the
provisions set forth in this Section 3 shall thereafter correspondingly be made
applicable, as nearly as may reasonably be, in relation to any shares of stock
or other securities or property thereafter deliverable on the exercise of this
Warrant. The above provisions of this Subsection 3(f) shall similarly apply to
successive consolidations, mergers, statutory exchanges, sales or conveyances.
Notice of any such consolidation, merger, statutory exchange, sale or
conveyance, and of said provisions so proposed to be made, shall be mailed to
the Holder not less than twenty (20) days prior to such event. A sale of all or
substantially all of the assets of the Company for a consideration consisting
primarily of securities shall be deemed a consolidation or merger for the
foregoing purposes.
(g) No adjustment in the Per Share Warrant Prices shall be required unless such
adjustment would require an increase or decrease of at least $0.05 per share of
Common Stock; provided, however, that any adjustments which by reason of this
Subsection 3(g) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment; and provided further, however, that
adjustments shall be required and made in accordance with the provisions of this
Section 3 (other than this Subsection 3(g)) not later than such time as may be
required in order to preserve the tax-free nature of a distribution to the
Holder of this Warrant or Common Stock. All calculations under this Section 3
shall be made to the nearest cent or to the nearest 1/100th of a share, as the
case may be. Anything in this Section 3 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in each of the Per Share
4
<PAGE>
Warrant Prices, in addition to those required by this Section 3, as it in its
discretion shall deem to be advisable in order that any stock dividend,
subdivision of shares or distribution of rights to purchase stock or securities
convertible into or exchangeable for stock hereafter made by the Company to its
shareholders shall not be taxable.
(h) Whenever any of the Per Share Warrant Prices is adjusted as provided in this
Section 3 and upon any modification of the rights of the Holder of this Warrant
in accordance with this Section 3, the Company shall, at its own expense, within
ten (10) days of such adjustment or modification, deliver to the holder of this
Warrant a certificate of the Principal Financial Officer of the Company setting
forth the Per Share Warrant Prices and the number of Warrant Shares after such
adjustment or the effect of such modification, a brief statement of the facts
requiring such adjustment or modification and the manner of computing the same.
In addition, within thirty (30) days of the end of the Company's fiscal year
next following any such adjustment or modification, the Company shall, at its
own expense, deliver to the Holder of this Warrant a certificate of a firm of
independent public accountants of recognized standing selected by the Board of
Directors (who may be the regular auditors of the Company) setting forth the
same information as required by such Principal Financial Officer Certificate.
(i) If the Board of Directors of the Company shall declare any dividend or other
distribution in cash with respect to the Common Stock, the Company shall mail
notice thereof to the Holder not less than ten (10) days prior to the record
date fixed for determining shareholders entitled to participate in such dividend
or other distribution.
(j) In the case of the issuance of Common Stock for consideration in whole or in
part other than for cash, the consideration other than cash shall be deemed to
be the fair value thereof determined in accordance with Generally Accepted
Accounting Practices ("GAAP").
(k) In the case of the issuance of Common Stock for cash, the consideration paid
shall be deemed to be the amount of cash paid therefore before deducting any
reasonable commissions or other expenses allowed, paid or incurred by the
Company for any underwriting or otherwise in connection with the issuance and
sale thereof.
4. Fully Paid Stock; Taxes.
The Company agrees that the shares of the Common Stock represented by each and
every certificate for Warrant Shares delivered on the exercise of this Warrant
in accordance with the terms hereof shall, at the time of such delivery, be
validly issued and outstanding, fully paid and non-assessable and not subject to
preemptive rights or other contractual rights to purchase securities of the
Company, and the Company will take all such actions as may be necessary to
assure that the par value or stated value, if any, per share of the Common Stock
is at all times equal to or less than the then Per Share Warrant Prices. The
Company further covenants and agrees that it will pay, when due and payable, any
and all federal and state stamp, original issue or similar taxes which may be
payable in respect of the issue of any Warrant Share or certificate therefor.
5
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5. Registration Under Securities Act of 1933.
(a) The Company agrees that twice during the period commencing on May 18, 1999
and ending on May 18, 2003, the Holder and/or the Holders of the Warrants and/or
Warrant Shares who or which shall hold not less than 50% of the Warrants and/or
Warrant Shares outstanding at such time and not previously sold pursuant to this
Section 5, request (the "Registration Request") that the Company file a
registration statement under the Securities Act of 1933 (the "Act") covering all
or any of the Warrant Shares, the Company will (i) promptly notify the Holder
and all other registered holders, if any, of other Warrant and/or Warrant Shares
that such registration statement will be filed and that the Warrant Shares which
are then held, and/or which may be acquired upon the exercise of Warrants, by
the Holder and such holders will be included in such registration statement at
the Holder's and such Holders' request, (ii) cause such registration statement
to cover all Warrant Shares which it has been so requested to include, (iii) use
its best efforts to cause such registration statement to become effective as
soon as practicable and to remain effective and current for a period of at least
ninety (90) days and (iv) take all other action necessary under any federal or
state law or regulation of any governmental authority to permit all Warrant
Shares which it has been so requested to include in such registration statement
to be sold or otherwise disposed of and will maintain such compliance with each
such federal and state law and regulation of any governmental authority for the
period necessary for the Holder and such Holders to effect the proposed sale or
other disposition. The Registration Request shall (i) express the Holders'
present intent to offer such Warrant Shares for distribution, (ii) describe the
nature or method of the proposed offer and sale thereof, and (iii) undertake to
provide all such information and materials and to take all such action as may be
required in order to permit the Company to comply with all applicable
requirements of the Securities and Exchange Commission (the "Commission").
Following receipt of the Registration Request in writing, the Company shall
promptly notify in writing the remaining Holders, if any, of its receipt of the
Registration Request and advising them that they shall have twenty (20) days to
notify the Company of their intention to participate in the Registration under
Subsection 5(a) and to provide the same information as those Holders initiating
the Registration Request. After giving the Holders not less than 48 hours prior
written notice, the Company shall be entitled to cause the offering of such
amount of other securities for sale to the public on its own behalf or on behalf
of other shareholders of the Company as the Company shall request to be
included, upon the same terms (including the method of distribution) of any such
offer; provided, however, that the Company shall not be entitled to include such
additional shares in any registration if the Holders initiating the Registration
Request are advised by their investment banking firm that the inclusion of such
other securities will, in its reasonable judgment, interfere with the orderly
sale and distribution of the Warrant Shares being offered by the Holders or will
materially and negatively affect the marketability or pricing of such Warrant
Shares.
(b) Notwithstanding any provision to the contrary contained herein, the
Company's obligations to file any registration statement pursuant to Subsection
5(a) shall be limited as follows:
(i) The Company shall not, under any circumstances, be required to
register fewer than 100,000 Warrant Shares pursuant to a Registration Request
made under Subsection 5(a).
(ii) The Company's Board of Directors may elect not to register any
shares if the Holders can then immediately sell all the Warrant Shares subject
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<PAGE>
to the Registration Request publicly pursuant to Rule 144, promulgated under the
Act (or another similar exemption permitting resale in the United States);
(iii) If the Company shall have effected a registration, the Company
shall not be required to effect a registration pursuant to this Section 5 until
a period of ninety (90) days shall have elapsed from the effective date of the
most recent such previous registration;
(iv) If, in the reasonable judgment of the Board of Directors of the
Company, a registration at the time and on the terms requested would materially
adversely affect any financing, acquisition, merger or similar transaction
(collectively, a "Transaction") by the Company under consideration by the Board
of Directors, as demonstrated by an agreement or other writing signed by the
subject of the proposed Transaction, prior to the Registration Request, the
Company shall not be required to effect the registration pursuant to Subsection
5(a) until the earliest of (x) ninety (90) days after the completion of such
financing, (y) the termination of any "blackout" required by the underwriters,
initial purchasers or placement agents, if any, in connection with such
financing, or (z) promptly after abandonment or termination of such financing,
provided, however, this Subparagraph (iv) shall not allow the Company to delay
filing a registration statement pursuant to a Registration Request made within
one (1) year before the expiration date of the Warrant;
(v) If the underwriter, if any, engaged in managing the subject
registration reasonably advises the Holders initiating the Registration Request
in writing that marketing factors require a limitation of the Warrant Shares to
be underwritten, then the number of shares of Warrant Shares that may be
included within the registration shall be allocated among all Holders desiring
registration pro rata, according to the number of Warrant Shares owned by each
registering Holder; provided, however, that the number of Warrant Shares to be
included within the underwriting shall not be reduced unless all other
securities are first entirely excluded from the underwritings and the Holders of
any excluded Warrant Shares shall subsequently be entitled to request
registration of such shares pursuant to Subsection 5(a). In such event, the
Holders have the right to require the Company to file a post effective amendment
to the registration statement, covering the remaining Warrant Shares in this
Registration Request, within ninety (90) days after the effective date of this
offering.
(c) The Company agrees that if, at any time, and from time to time during the
period ending on May 18, 2005, the Board of Directors of the Company shall
authorize the filing of a registration statement excluding registrations on Form
S-8, Form S-4 or similar Forms (any such registration statement being sometimes
hereinafter called a "Subsequent Registration Statement") under the Act
(otherwise than pursuant to Subsection 5(a) hereof) in connection with the
proposed offer of any of its securities by it or any of its shareholders, the
Company will (i) promptly notify the Holder and all other registered Holders, if
any, of other Warrants and/or Warrant Shares that such Subsequent Registration
Statement will be filed and that the Warrant Shares which are then held, and/or
which may be acquired upon the exercise of the Warrants, by the Holder and such
Holders will be included in such Subsequent Registration Statement at the
Holders and such Holder's request, (ii) cause such Subsequent Registration
Statement to cover all Warrant Shares which it has been so requested to include,
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<PAGE>
(iii) cause such Subsequent Registration Statement to become effective as soon
as practicable and to remain effective and current for a period of at least
ninety (90) days and (iv) take all other action necessary under any federal or
state law or regulation of any governmental authority to permit all Warrant
Shares which it has been so requested to include in such Subsequent Registration
Statement to be sold or otherwise disposed of and will maintain such compliance
with each such federal and state law and regulation of any governmental
authority for the period necessary for the Holder and such Holders to effect the
proposed sale or other disposition:
(i) If the managing underwriters of a registration undertaken pursuant
to this Subsection 5(c) reasonably determine and advise the Company in writing
that marketing factors require a limitation of the number of Warrant Shares to
be included in the registration, the Company shall include in such registration
(x) first, the securities the Company proposes to sell, (y) second, the Warrant
Shares requested to be included in the registration, pro rata among the Holders
desiring to register shares, and (z) third, any other securities requested to be
included in such registration pursuant to other piggy-back registration rights.
In such event, the Holders have the right to require the Company to file a post
effective amendment to the registration statement, covering the remaining
Warrant Shares in this Registration Request, within ninety (90) days after the
effective date of this offering;
(ii) The Company's obligation to register the Warrant Shares under this
Subsection 5(c) shall be dependent upon the Holders desiring registration
providing undertakings to provide all such information and materials and to take
all such action as may be required in order to permit the Company to comply with
the applicable requirements of the Commission;
(iii) In connection with any such registration, the Company shall have
the right to select the managing underwriters to administer any offering of the
Company's securities provided that such managing underwriters shall be
qualified; and
(iv) Notwithstanding anything in this Warrant to the contrary, (x) the
Company may withdraw any registration statement at any time before it becomes
effective, or postpone the offering of the securities, without obligation or
liability to the Holders desiring registration and (y) all rights provided
within this Subsection 5(c) shall terminate when the Holders may sell all
Warrant Shares immediately under Rule 144, promulgated under the Act.
(d) Whenever the Company is required pursuant to the provisions of this Section
5 to include Warrant Shares in a registration statement, the Company shall (i)
furnish each Holder of any such Warrant Shares and each underwriter of such
Warrant Shares with such copies of the prospectus, including the preliminary
prospectus, conforming to the Act (and such other documents as each such Holder
or each such underwriter may reasonably request) in order to facilitate the sale
or distribution of the Warrant Shares, (ii) use its best efforts to register or
qualify such Warrant Sharers, under the blue sky laws (to the extent applicable)
of such jurisdiction or jurisdictions as the Holders of any such Warrant Shares
and each underwriter of Warrant Shares being sold by such Holders shall
reasonably request and (iii) take such other actions as may be reasonably
necessary or advisable to enable such Holders and such underwriters to
consummate the sale or distribution in such jurisdiction or jurisdictions in
which such Holders shall have reasonably requested that the Warrant Shares be
sold.
8
<PAGE>
(e) The Company shall pay all expenses incurred in connection with any
registration or other action pursuant to the provisions of this Section 5 of the
Warrant Shares covered by such registration incurred in connection with such
registration or other action, other than underwriting discounts and applicable
transfer taxes relating to the Warrant Shares and the attorneys' fees and
expenses of the Holders.
(f) The market price of Common Stock shall mean the price of a Share of Common
Stock on the relevant date, determined on the basis of the last reported sale
price of the Common Stock as reported on the NASDAQ National Market System
("NASDAQ"), or, if there is no such reported sale on the day in question, on the
basis of the average of the closing bid and asked quotations as so reported, or,
if the Common Stock is not listed on NASDAQ, the last reported sale price of the
Common Stock on such other national securities exchange upon which the Common
Stock is listed, or, if the Common Stock is not listed on any national
securities exchange, on the basis of the average of the closing bid and asked
quotations on the day in question in the over-the-counter market as reported by
the National Association of Securities Dealers' Automated Quotations System, or,
if not so quoted, as reported by National Quotation Bureau, Incorporated or a
similar organization.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless each selling holder of
Warrant Shares and each person who controls any such selling holder within the
meaning of Section 15 of the Act, and each and all of them, from and against any
and all losses, claims, damages, liabilities or actions, joint or several, to
which any selling holder of Warrant Shares or they or any of them may become
subject under the Act or otherwise and to reimburse the persons indemnified as
above for any legal or other expenses (including the cost of any investigation
and preparation) incurred by them in connection with any litigation or
threatened litigation, whether or not resulting in any liability, but only
insofar as such losses, claims, damages, liabilities or actions arise out of, or
are based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in any registration statement pursuant to which Warrant
Shares were registered under the Act (hereinafter called a "Registration
Statement"), any preliminary prospectus, the final prospectus or any amendment
or supplement thereto (or in any application or document filed in connection
therewith) or document executed by the Company based upon written information
furnished by or an behalf of the Company filed in any jurisdiction in order to
register or qualify the Warrant Shares under the securities laws thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or (ii) the employment
by the Company of any device, scheme or artifice to defraud, or the engaging by
the Company in any act, practice or course of business which operates or would
operate as a fraud or deceit, or any conspiracy with respect thereto, in which
the Company shall participate, in connection with the issuance and sale of any
of the of the Warrant Shares; provided, however, that (i) the indemnity
agreement contained in this Subsection 6(a) shall not extend to any selling
holder of Warrant Shares in respect if any such losses, claims, damages,
liabilities or actions arising out of, or based upon, any such untrue statement
or alleged untrue statement or any such omission or alleged omission, if such
statement or omission was based upon and made in conformity with information
furnished in writing to the Company by a selling holder of Warrant Shares
specifically for use in connection with the preparation of such Registration
Statement, any final prospectus, any preliminary prospectus or any such
amendment or supplement thereto. The Company agrees to pay any legal and other
expenses for which it is liable under this Subsection 6(a) from time to time
(but not more frequently than monthly) within thirty (30) days after its receipt
of a bill therefor.
(b) Each selling holder of Warrant Shares, severally and not jointly, will
indemnify and hold harmless the Company, its directors, its officers who shall
have signed the Registration Statement consultants, underwriters or agents and
each person, if any, who controls the Company within the meaning of Section 15
of the Act to the same extent as the foregoing indemnity from the Company, but
in each case to the extent, and only to the extent, that any statement in or
omission from or alleged omission from such Registration Statement, any final
prospectus, any preliminary prospectus or any amendment or supplement thereto
was made in reliance upon information furnished in writing to the Company by
such selling holder specifically for use in connection with the preparation of
the Registration Statement, any final prospectus or the preliminary prospectus
or any such amendment or supplement thereto; provided, however, that the
obligation of any holder of Warrant Shares to indemnify the Company under the
provisions of this Subsection 6(b) shall be limited to the product of the number
9
<PAGE>
of Warrant Shares being sold by the selling holder and the market price of the
Common Stock on the date of the sale to the public of these Warrant Shares. Each
selling holder of Warrant Shares agrees to pay any legal and other expenses for
which it is liable under this Subsection 6(b) from time to time (but not more
frequently than monthly) within thirty (30) days after receipt of a bill
therefor.
(c) If any action is brought against a person entitled to indemnification
pursuant to the foregoing Subsections 6(a) or 6(b) (an "indemnified party") in
respect of which indemnity may be sought against a person granting
indemnification (an "indemnifying party") pursuant to such Sections, such
indemnified party shall promptly notify such indemnifying party in writing of
the commencement thereof, but the omission so to notify the Indemnifying party
of any such action shall not release the indemnifying party from any liability
it may have to such indemnified party otherwise than on account of the indemnity
agreement contained in the foregoing Subsections 6(a) or 6(b). In case any such
action is brought against an indemnified party and it notifies an indemnifying
party of the commencement thereof, the indemnifying party against which a claim
is to be made will be entitled to participate therein at its own expense and, to
the extent that it may wish, to assume at its own expense the defense thereof,
with counsel reasonably satisfactory to such indemnified party, provided,
however, that (i) if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded based upon advice of counsel that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party shall have the right to select separate counsel to assume such legal
defenses and otherwise to participate in the defense of such action on behalf of
such indemnified party or parties and (ii) in any event, the indemnified party
shall be entitled to have counsel chosen by such indemnified party participate
in, but not conduct, the defense at the expense of the indemnifying party. Upon
receipt of notice from the indemnifying party to such indemnified party of its
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 6 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with proviso (i) to the next
10
<PAGE>
preceding sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate counsel), (ii)
the indemnifying party shall not have employed counsel reasonably satisfactory
to the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action or (iii) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. An indemnifying party shall not be liable for
any settlement of any action or proceeding effected without its written consent.
(d) In order to provide for just an equitable contribution in circumstances in
which the indemnity agreement provided for in Subsection 6(a) hereof is
unavailable to a selling holder of Warrant Shares in accordance with its terms,
the Company and the selling holder of Warrant Shares shall contribute to the
aggregate losses, claims, damages and liabilities, of the nature contemplated by
said indemnity agreement, incurred by the Company and the selling holder of
Warrant Shares, in such proportions as is appropriate to reflect the relative
benefits received by the Company and the selling holder of Warrant Shares from
any offering of the Warrant Shares; provided, however, that if such allocation
is not permitted by applicable law or if the indemnified party failed to give
the notice required under Subsection 6(c) hereof, then the relative fault of the
Company and the selling holder of Warrant Shares in connection with the
statements or omissions which resulted in such losses, claims, damages and
liabilities and other relevant equitable considerations will be considered
together with such relative benefits. Notwithstanding anything within this
Warrant to the contrary, no party found liable for fraudulent misrepresentation
shall be entitled to contribution from any person who is not also found liable
for such fraudulent misrepresentation.
(e) The respective indemnity and contribution agreements by the Company and the
selling holder of Warrant Shares in Subsections 6(a), 6(b), 6(c) and 6(d) hereof
shall remain operative and in full force and effect regardless of (i) any
investigation made by any selling holder of Warrant Shares or by or on behalf of
any person who controls such selling holder or by the Company or any controlling
person of the Company or any director or any officer of the company, (ii)
payment for any of the Warrant Shares or (iii) any termination of this
Agreement, and shall survive the delivery of the Warrant Shares, and any
successor of the Company, or of any selling holder of Warrant Shares, or of any
person who controls the Company or of any selling holder of Warrant Shares, as
the case may be, shall be entitled to the benefit of such respective indemnity
and contribution agreements. The respective indemnity and contribution
agreements by the Company and the selling holder of Warrant Shares contained in
Subsections 6(a), 6(b), 6(c) and 6(d) hereof shall be in addition to any
liability which the Company and the selling holder of Warrant Shares may
otherwise have.
7. Limited Transferability.
(a) This Warrant is not transferable or assignable by the Holder except (i) to
Ladenburg Thalmann & Co. Inc., any successor firm or corporation of Ladenburg
Thalmann & Co. Inc. (ii) to any of the officers or employees of Ladenburg
Thalmann & Co. Inc. or of any such successor firm or (iii) in the case of an
11
<PAGE>
individual, pursuant to such individual's last will and testament or the laws of
descent and distribution and is so transferable only upon the books of the
Company which it shall cause to be maintained for the purpose. The Company may
treat the registered holder of this Warrant as he or it appears on the Company's
books at any time as the Holder for all purposes. The Company shall permit any
holder of a Warrant or his duly authorized attorney, upon written request during
ordinary business hours, to inspect and copy or make extracts from its books
showing the registered holders of Warrants. All Warrants will be dated the same
date as this Warrant.
(b) By acceptance hereof, the Holder represents and warrants that this Warrant
is being acquired, and all Warrant Shares to be purchased upon the exercise of
this Warrant will be acquired, by the Holder solely for the account of such
Holder and not with a view to the fractionalization and distribution thereof and
will not be sold or transferred except in accordance with the applicable
provisions of the Act and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder, and the Holder agrees that neither
this Warrant nor any of the Warrant Shares may be sold or transferred except
under cover of a Registration Statement under the Act which is effective and
current with respect to such Warrant Shares or pursuant to an opinion, in form
and substance reasonably acceptable to the Company's counsel, that registration
under the Act is not required in connection with such sale or transfer. Any
Warrant Shares issued upon exercise of this Warrant shall bear the following
legend:
"The Securities represented by this certificate have not been registered under
the Securities Act of 1933 and are restricted securities within the meaning
thereof. Such securities may not be sold or transferred except pursuant to a
Registration Statement under such Act which is effective and current with
respect to such securities or pursuant to an opinion of counsel reasonably
satisfactory to the issuer of such securities that such sale or transfer is
exempt from the registration requirements of such Act."
8. Loss, etc., of Warrant.
Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and of indemnity reasonably
satisfactory to the Company, if lost, stolen or destroyed, and upon surrender
and cancellation of this Warrant, if mutilated, and upon reimbursement of the
Company's reasonable incidental expenses, the Company shall execute and deliver
to the Holder a new Warrant of like date, tenor and denomination.
9. Warrant Holder Not Shareholders.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder any right to vote or to consent to or receive notice as a shareholder of
the Company, as such, in respect of any matters whatsoever, or any other rights
or liabilities as a shareholder, prior to the exercise hereof.
12
<PAGE>
10. Communication.
No notice or other communication under this Warrant shall be effective unless,
but any notice or other communication shall be effective and shall be deemed to
have been given if, the same is in writing and is mailed by first-class mail,
postage prepaid, addressed to:
(a) the Company at 215 South State, Suite 550, Salt Lake City, UT 84111 or such
other address as the Company has designated in writing to the Holder; or
(b) the Holder at 690 Madison Avenue, New York, NY 10022 or such other address
as the Holder has designated in writing to the Company.
11. Headings.
The headings of this Warrant have been inserted as a matter of convenience and
shall not affect the construction hereof.
12. Applicable Law.
This Warrant shall be governed by and construed in accordance with the laws of
the State of New York,
IN WITNESS WHEREOF, Crown Energy Corporation has caused this Warrant to be
signed by its President and its corporate seal to be hereunto affixed and
attested by its Secretary this _______ day of May 1998.
ATTEST:
/s/ Richard S. Rawdin By: /s/ Jay Mealey
- --------------------- --------------
Secretary Jay Mealey
President
[Corporate Seal]
13
OPERATING AGREEMENT
FOR
CROWN ASPHALT DISTRIBUTION L.L.C.
<PAGE>
OPERATING AGREEMENT
FOR
CROWN ASPHALT DISTRIBUTION L.L.C.
TABLE OF CONTENTS
Page
ARTICLE I....................................................................1
THE LIMITED LIABILITY COMPANY................................................1
1.1 Formation..................................................1
1.2 Name.......................................................1
1.3 Articles of Organization...................................1
1.4 Registered Office, Registered Agent........................2
1.5 Principal Place of Business................................2
1.6 Character of Business......................................2
1.7 The Members................................................2
1.8 Term.......................................................2
1.9 No State-Law Partnership...................................2
ARTICLE II...................................................................3
DEFINITIONS..................................................................3
ARTICLE III.................................................................10
CAPITAL CONTRIBUTIONS.......................................................10
3.1 Capital Contribution of Crown.............................10
3.2 Capital Contribution of MCNIC.............................12
3.3 Additional Capital Contributions..........................13
3.4 Failure to Contribute.....................................13
3.5 Return of Contributions...................................15
3.6 Advances by Members.......................................16
3.7 Conditions Precedent to Capital Contributions by MCNIC....16
3.8 Conditions Precedent to Capital Contributions by Crown....17
ARTICLE IV..................................................................17
REPRESENTATIONS, WARRANTIES AND COVENANTS...................................17
4.1 Capacity of Members.......................................17
4.2 Litigation................................................18
4.3 Compliance with Laws; No Defaults.........................18
4.4 Investment Representations................................18
4.5 Additional Representations, Warranties and Covenants
of Crown..................................................19
4.6 Survival..................................................20
i
<PAGE>
ARTICLE V...................................................................20
MANAGERS; MANAGEMENT POWERS; OFFICERS.......................................20
5.1 Managers..................................................20
5.2 Management Authority......................................20
5.3 Annual Operating Plan.....................................23
5.4 Duties....................................................25
5.5 Reliance by Third Parties.................................25
5.6 Resignation...............................................25
5.7 Vacancies.................................................26
5.8 Information Relating to the Company.......................26
5.9 Insurance.................................................26
5.10 Tax Matters Partner.......................................26
5.11 Exculpation...............................................26
5.12 Officers..................................................27
ARTICLE VI..................................................................28
MANAGEMENT FEES AND REIMBURSEMENTS; COMPANY OPPORTUNITIES; CONFLICTS........28
6.1 Management Fee............................................28
6.2 Reimbursements............................................28
6.3 Company Opportunities; Conflicts of Interest..............28
6.4 Making of CAT Election....................................29
6.5 Other Business Opportunities..............................29
ARTICLE VII.................................................................29
FINANCING OF COMPANY OPERATIONS.............................................29
7.1 Working Capital Loan......................................29
7.2 Additional Loans;Right of First Refusal to Provide
Financing.................................................30
ARTICLE VIII................................................................31
DISTRIBUTIONS TO THE MEMBERS................................................31
8.1 Repayment of Preferential Capital Contribution............31
8.2 Non-Liquidating Distributions.............................31
8.3 Distributions in Kind.....................................32
8.4 Liquidating Distributions.................................32
ARTICLE IX..................................................................32
ALLOCATIONS OF PROFITS AND LOSSES...........................................32
9.1 Allocation of Profits and Losses..........................32
9.2 Regulatory Allocations and Curative Provisions............33
9.3 Other Allocation Rules....................................34
ii
<PAGE>
ARTICLE X...................................................................35
ALLOCATION OF TAXABLE INCOME AND TAX LOSSES.................................35
10.1 In General................................................35
10.2 Allocation of Section 704(c) Items........................35
10.3 Integration With Section 754 Election.....................35
10.4 Allocation of Tax Credits.................................36
ARTICLE XI..................................................................36
MEMBERS 36
11.1 Limited Liability.........................................36
11.2 Quorum....................................................36
11.3 Informal Action...........................................36
11.4 Meetings..................................................36
11.5 Place of Meeting..........................................36
11.6 Notice of Meeting.........................................36
11.7 Proxies...................................................37
11.8 Conduct of Meeting........................................37
ARTICLE XII ................................................................37
ACCOUNTING AND REPORTING....................................................37
12.1 Books.....................................................37
12.2 Capital Accounts..........................................37
12.3 Transfers During Year.....................................38
12.4 Reports...................................................38
12.5 Section 754 Election......................................39
12.6 Independent Audit.........................................39
ARTICLE XIII................................................................39
TRANSFER OF MEMBER' S INTEREST--RIGHT OF FIRST OFFER........................39
13.1 Restrictions on Transfer..................................39
13.2 Right of First Refusal; Right of First Offer..............40
13.3 Tag-Along Rights..........................................41
13.4 Cash Equivalents..........................................42
13.5 Direct and Indirect Transfers.............................42
13.6 Substitution of a Member..................................42
13.7 Conditions to Substitution................................43
ARTICLE XIV.................................................................43
DISSOLUTION AND TERMINATION.................................................43
14.1 Dissolution...............................................43
14.2 Liquidation...............................................44
14.3 Waiver of Right to Court Decree of Dissolution............45
14.4 Articles of Dissolution...................................45
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ARTICLE XV..................................................................45
INDEMNIFICATION.............................................................45
15.1 Indemnification...........................................45
15.2 Implementation............................................46
ARTICLE XVI.................................................................47
ARBITRATION.................................................................47
16.1 Submission to Arbitration.................................47
16.2 Initiation of Arbitration and Selection of Arbitrators....47
16.3 Arbitration Procedures....................................48
16.4 Enforcement...............................................48
16.5 Fees and Costs............................................48
16.6 Capital Contributions.....................................49
ARTICLE XVII................................................................49
NOTICES 49
17.1 Method of Notices.........................................49
17.2 Computation of Time.......................................50
ARTICLE XVIII...............................................................50
GENERAL PROVISIONS..........................................................50
18.1 Confidentiality...........................................50
18.2 Public Announcements......................................51
18.3 Entire Agreement..........................................51
18.4 Amendment.................................................51
18.5 Applicable Law............................................51
18.6 References................................................51
18.7 U.S. Dollars..............................................51
18.8 Counterparts..............................................51
18.9 Additional Documents......................................51
18.10 Written Consents..........................................51
iv
<PAGE>
OPERATING AGREEMENT
FOR
CROWN ASPHALT DISTRIBUTION L.L.C.
THIS OPERATING AGREEMENT (this "Agreement") dated as of June 30, 1998,
is between MCNIC PIPELINE & PROCESSING COMPANY, a Michigan corporation
("MCNIC"), and CROWN ASPHALT PRODUCTS COMPANY, a Utah corporation ("Crown"),
which is a wholly owned subsidiary of Crown Energy Corporation, a Utah
corporation ("Crown Parent"). MCNIC and Crown are sometimes referred to herein
collectively as the "Members" and each individually as a "Member."
In consideration of the mutual covenants contained herein, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE I
THE LIMITED LIABILITY COMPANY
1.1 Formation. The Members hereby form a limited liability company
pursuant to the Utah Limited Liability Company Act (the "Act") upon the terms
and conditions set forth in this Agreement. To the fullest extent permitted by
the Act, this Agreement shall control as to any conflict between this Agreement
and the Act or as to any matter provided for in this Agreement that is also
provided for in the Act.
1.2 Name. The name of the limited liability company shall be Crown
Asphalt Distribution L.L.C. (the "Company").
1.3 Articles of Organization. The Operating Manager shall cause
articles of organization that comply with the requirements of the Act to be
properly filed with the Utah Division of Corporations and Commercial Code. In
the future, the Operating Manager shall execute such further documents
(including amendments to the articles of organization) and take such further
action as shall be appropriate or necessary to comply with the requirements of
law for the formation, qualification or operation of a limited liability company
in all states and counties where the Company may conduct its business.
1.4 Registered Office, Registered Agent. The location of the registered
office of the Company shall be 50 West Broadway, Salt Lake City, Utah 84111, or
such other location as the Members may designate. The Company's registered agent
at such address shall be.
<PAGE>
1.5 Principal Place of Business. The location of the principal place of
business of the Company shall be 215 South State, Suite 650, Salt Lake City,
Utah 84111, or at such other place as the Members from time to time may select.
1.6 Character of Business. The business of the Company shall be to (a)
acquire, process, blend, store, market, sell and deliver Products; (b) if the
Company makes the CAT Election pursuant to Section 3.1(b), receive an assignment
of the CAT Member Interest as provided for herein and exercise all of its rights
and privileges as the holder of the CAT Member Interest; (c) enter into the PSAC
Purchase Agreement and receive an assignment of or otherwise acquire the PSAC
Assets under the terms and conditions of the PSAC Purchase Agreement; (d)
operate, improve and maintain the properties constituting or subject to the PSAC
Assets; (e) acquire or construct other properties and facilities for the purpose
of engaging in the activities described in the immediately preceding clause (a);
(f) perform any other activity necessary, appropriate or incidental to any of
the foregoing; and (g) transact any and all other businesses for which limited
liability companies may be formed under the Act.
1.7 The Members. The name and business address of each Member are as
follows:
Name Address
---- -------
MCNIC 150 West Jefferson Avenue
Suite 1700
Detroit, Michigan 48226
Crown 215 South State
Suite 650
Salt Lake City, Utah 84111
Additional Members shall not be admitted to the Company without the prior
written consent of all of the Members.
1.8 Term. The Company shall continue until the happening of the first
to occur of January 1, 2097 or one of the events set forth in Section 14.1.
1.9 No State-Law Partnership. The Members intend that the Company not
be a partnership (including, without limitation, a limited partnership or a
mining partnership) or joint venture, and that no Member or Manager be a partner
or joint venturer of any other Member or Manager, for any purposes other than
federal and state tax purposes, and this Agreement may not be construed to
suggest otherwise.
2
<PAGE>
ARTICLE II
DEFINITIONS
The following terms shall have the indicated meaning:
"AAA" shall mean the American Arbitration Association.
"Acquiring Member" shall have the meaning set forth in Section 6.3(a).
"Additional Opportunity" shall have the meaning set forth in Section
6.3.
"Adjusted Capital Account Deficit" shall mean with respect to any
Member, the deficit balance, if any, in such Member's Capital Account as of the
end of the fiscal year after giving effect to the following adjustments:
(a) Credit to such Capital Account any addition thereto
pursuant to ss.ss. 1.704-2(g)(1) and ss. 1.704-2(i)(5) of the Treasury
Regulations, after taking into account thereunder any changes during such year
in partnership minimum gain (as determined in accordance with ss. 1.704-2(d) of
the Treasury Regulations) and in the minimum gain attributable to any Member for
non-recourse debt (as determined under ss. 1.704-2(i)(3) of the Treasury
Regulations); and
(b) Debit to such Capital Account the items described in
ss.ss. 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Treasury Regulations.
This definition of Adjusted Capital Account Deficit is
intended to comply with the provisions of Treasury Regulation ss.ss.
1.704-1(b)(2)(ii)(d).
"Adjusted Properties" shall have the meaning set forth in Section 10.2.
"Additional Capital Contribution" shall mean, with respect to any
Member, the aggregate amount of cash to be contributed by such Member to the
Company in respect of any capital call pursuant to Section 3.3.
"Affiliate" shall mean with respect to a Member (a) any Person directly
or indirectly owning, controlling or holding with power to vote 50% or more of
the outstanding voting securities, membership interests or partnership interests
of the Member, (b) any Person 50% or more of whose outstanding voting
securities, membership interests or partnership interests are directly or
indirectly owned, controlled or held with power to vote by the Member or a
Person or group described in "(a)", and (c) any officer, director, member,
manager or partner of the Member or any Person described in subsections (a) or
(b) of this paragraph.
"Annual Operating Plan" shall have the meaning set forth in Section
5.3(a).
3
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"Available Cash" shall mean the cash or cash equivalent items held by
the Company, less cash reserve accounts established by the Management Committee
and less amounts required to make current Preferential Distributions. The
Management Committee shall be authorized to set up such cash reserve accounts as
it reasonably determines are necessary including cash reserve accounts for
future capital expenditures.
"Capital Accounts" shall mean the account established for each Member
pursuant to Section 12.2.
"Capital Contribution" shall mean for any Member at the particular time
in question the aggregate of the dollar amounts of any cash or cash equivalents
contributed to the capital of the Company, or, if the context in which such term
is used so indicates, the agreed value of any property agreed to be contributed
or requested to be contributed by a Member to the capital of the Company.
"Carrying Value" The initial "Carrying Value" of property contributed
to the Company by a Member shall mean the agreed value of such property at the
time of contribution as determined by the Managers and the contributing Member.
The initial Carrying Value of any other property shall be the adjusted basis of
such property for federal income tax purposes at the time it is acquired by the
Company. The initial Carrying Value of a property shall be reduced (but not
below zero) by all subsequent depreciation, cost recovery, depletion and
amortization deductions with respect to such property as taken into account in
determining profit and loss. The Carrying Value of any property shall be
adjusted from time to time in accordance with Sections 12.2(b) and 12.2(c), and
to reflect changes, additions or other adjustments to the Carrying Value for
dispositions, acquisitions or improvements of Company properties, as deemed
appropriate by the Managers.
"CAT" shall mean Cowboy Asphalt Terminal L.L.C., a Utah limited
liability company, of which Crown and Foreland are the only members.
"CAT Member Interest" shall mean all right, title and interest of Crown
in its capacity as a member of CAT, which right, title and interest includes at
least a 65 percent interest in the profits and losses of CAT.
"CAT Member Interest Contribution" shall have the meaning set forth in
Section 3.1(b).
"CAT Purchase Agreement" shall mean the Cowboy Memorandum of Closing,
as supplemented by the Cowboy Assignment and Agreement.
"CAT Operating Agreement" shall mean the Operating Agreement to be
adopted by and between Foreland and Crown, in their capacities as members of
CAT.
"CAT Election Notice" shall have the meaning set forth in Section
3.1(b).
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"CAT Election" shall have the meaning set forth in Section 3.1(b).
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation, and Liability Act of 1986, as amended.
"Claim Notice"shall have the meaning set forth in Section 15.2(b).
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time. Any reference herein to a specific section or sections of the Code
are deemed to include a reference to any corresponding provision of future law.
"Company" shall have the meaning set forth in Section 1.2.
"Confidential Information" shall have the meaning set forth in Section
18.1.
"Cowboy Assignment and Agreement" shall mean that certain Assignment
and Agreement, to which Crown, Foreland and RTI are parties.
"Cowboy Memorandum of Closing" means that certain Memorandum of Closing
to which RTI and Hancock-Geisler shall be the parties when the same is executed
and delivered.
"Cowboy Promissory Note" shall mean that certain promissory note, if
and when the same is executed and delivered, made by CAT in favor of
Hancock-Geisler pursuant to Section 3.3 of the Cowboy Memorandum of Closing.
"Cowboy Terminal" shall mean that certain real and personal property
located in North Salt Lake, Utah, and further described on Exhibit A and Exhibit
B attached hereto.
"Crown" shall have the meaning set forth in the preamble to this
Agreement.
"Crown Parent" shall have the meaning set forth in the preamble to this
Agreement.
"Date of Notice" shall have the meaning set forth in Section 5.11(b).
"Default Interest Rate" shall mean a rate per annum equal to the lesser
of (a) 6% plus the General Interest Rate, and (b) the maximum rate permitted by
applicable law.
"Delinquent Member" shall have the meaning set forth in Section 3.4(a).
"Effective Date" shall mean June 1, 1998.
"Environmental Laws" shall mean Laws aimed at reclamation or
restoration of the Properties; abatement of pollution; protection of the
environment; protection of wildlife, including endangered species; ensuring
public safety from environmental hazards; protection of cultural or historic
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resources; management, storage or control of hazardous materials and substances;
releases or threatened releases of pollutants, contaminants, chemicals or
industrial, toxic or hazardous substances or hazardous wastes into the
environment, including without limitation, ambient air, soil, surface water and
groundwater, and all other Laws relating to the manufacturing, processing,
distribution, use, treatment, storage, disposal, handling or transport of
pollutants, contaminants, chemicals or industrial, toxic or hazardous substances
or wastes, including, by way of example and without limitation, CERCLA and RCRA.
"Encumbrances" shall mean mortgages, deeds of trust, security
interests, pledges, liens, or other burdens of any nature.
"Foreland" shall mean Foreland Refining Corporation, a Nevada
corporation.
"General Interest Rate" shall mean a rate per annum equal to the lesser
of (a) an annual rate of interest which equals the floating commercial loan rate
as published in the Wall Street Journal from time to time as the "Prime Rate,"
adjusted in each case as of the banking day in which a change in the Prime Rate
occurs, as reported in the Wall Street Journal; provided, however, that if such
rate is no longer published in the Wall Street Journal, then it shall mean an
annual rate of interest which equals the floating commercial loan rate of
Citibank, N.A., or its successors and assigns, announced from time to time as
its "base rate," adjusted in each case as of the banking day in which a change
in the base rate occurs; and (b) the maximum rate permitted by applicable law.
"Hancock-Geisler" means Hancock-Geisler R.I.C., Inc., an Idaho
corporation.
"Law" or "Laws" shall mean all applicable federal, state and local laws
(statutory or common), rules, ordinances, regulations, grants, concessions,
franchises, licenses, orders, directives, judgments, decrees, and other
governmental restrictions, including Permits and other similar requirements,
whether legislative, municipal, administrative or judicial in nature.
"Loan" shall have the meaning set forth in Section 7.2.
"Loss" shall have the meaning set forth in Section 15.2(a).
"Major Decision" shall have the meaning set forth in Section 5.2(c).
"Management Agreement" shall mean that certain Operating and Management
Agreement dated as of the Effective Date between the Company and Crown.
"Management Committee" shall have the meaning set forth in Section
5.2(b).
"Managers" shall have the meaning set forth in Section 5.1.
"Matching Capital Contribution" shall have the meaning set forth in
Section 3.2(c).
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"Material Adverse Effect" shall mean, with respect to any Member, a
material adverse effect on (i) the condition (financial or otherwise), business,
assets or results of operations of that Person and its Affiliates (excluding
those Persons included within subsection (c) of the definition of "Affiliate"),
taken as a whole, or (ii) the ability of that Person to perform its obligations
under this Agreement.
"MCNIC" shall have the meaning set forth in the preamble to this
Agreement.
"Minimum Budget" shall have the meaning set forth in Section 5.3(b).
"Net Cash Flow" shall mean, with respect to a particular calendar
month, all revenues received by the Company during such month from any source,
including, without limitation, from the sale of Products, but excluding Capital
Contributions and the proceeds of any loans obtained by the Company, less:
(i) all reasonable and necessary costs and expenses paid by
the Company during such calendar month with respect to the conduct, in the
ordinary course, of the Company's business and the operation, maintenance and
protection of the Company's properties, but excluding any costs and expenses
that constitute capital expenditures, or any costs or expenses, such as
depreciation or depletion, that do not represent cash outlays by the Company;
(ii) income, excise, sales, property and other taxes assessed
against or imposed on the Company or its properties and paid by the Company
during such calendar month;
(iii) if the Company makes the CAT Election, any amounts paid
by the Company to CAT during such calendar month that, pursuant to the CAT
Operating Agreement, are required to be contributed by the Company with respect
to the CAT Member Interest for application to the payment of principal of or
interest on the Cowboy Note; and
(iv) any amounts paid by the Company during such calendar
month relating to the Company's interest in the Santa Maria Contract, as defined
in the PSAC Purchase Agreement.
The above items shall be determined in accordance with generally accepted
accounting principles consistently applied after giving effect to the express
terms of this Agreement.
"Nonacquiring Member" shall have the meaning set forth in Section
6.3(a).
"Non-Defaulting Member" shall have the meaning set forth in Section
3.4(a).
"Notice of Additional Capital Contributions" shall mean, with respect
to any call for Additional Capital Contributions from the Members, a notice from
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the Operating Manager setting forth (a) the Required Capital, (b) the Additional
Capital Contribution required from each Member, and (c) the date on which such
Additional Capital Contributions are required to be made to the Company.
"Operating Manager" shall have the meaning set forth in Section 5.1.
"Permit" shall have the meaning set forth in definition of Laws.
"Person" shall mean an individual, natural person, corporation, joint
venture, partnership, limited liability partnership, limited partnership,
limited liability limited partnership, limited liability company, trust, estate,
business trust, association, governmental authority or any other entity.
"Preferential Capital Contribution" shall have the meaning set forth in
Section 3.2(b).
"Preferential Distributions" shall mean the distributions made to MCNIC
pursuant to Article VIII.
"Preferential Contribution Payout" shall mean such time as MCNIC shall
have received Preferential Distributions with an aggregate present value,
calculated pursuant to the following sentence, equal to the amount of the
Preferential Capital Contribution. For purposes of determining the present value
of any Preferential Distribution, the present value of such Preferential
Distribution shall be calculated as of the date upon which the Preferential
Capital Contribution is made to the Company, using a discount rate of 15% per
annum.
"Products" shall mean all hydrocarbons, crude oil, polymers, bitumen
and asphalt and all products produced therefrom, and chemicals used in
association therewith, including without limitation asphalt, performance grade
asphalts, synthetic crude oil and diesel fuel.
"Product Inventory" shall have the meaning set forth in Section 7.1(a).
"Profits" or "Losses" shall mean the income or loss of the Company as
determined under the capital accounting rules of Treasury Regulation ss.
1.704-1(b)(2)(iv) for purposes of adjusting the Capital Accounts of Members
including, without limitation, the provisions of paragraphs 1.704-1(b)(2)(iv)(g)
and 1.704-1(b)(4) of those regulations relating to the computation of items of
income, gain, deductions and loss.
"Proposed Borrowing Notice" shall have the meaning set forth in Section
7.2.
"PSAC" means Petro Source Asphalt Company, a Texas corporation.
"PSAC Assets" means the Assets, as defined in the PSAC Purchase
Agreement.
"PSAC Purchase Agreement" means that certain Purchase and Sale
Agreement dated July 2, 1998, between PSAC, as seller, and the Company, as
buyer.
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"RCRA" shall mean the Resource Conservation and Recovery Act.
"RTI" shall mean Refinery Technologies, Inc., a Utah corporation.
"Regulatory Allocations" shall have the meaning set forth in Section
9.2(g).
"Required Capital" shall mean, with respect to any capital call
pursuant to Section 3.3 or the aggregate amount of cash to be contributed by
both Members to the Company.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Sharing Ratios" shall mean each Member's membership interest in the
Company. The Member's "Sharing Ratios" shall be determined as follows:
(i) The Sharing Ratios shall initially be as follows:
MCNIC 49.99 percent
Crown 50.01 percent
(ii) The Sharing Ratios shall be subject to adjustment as
provided in Section 3.4.
"TMP" shall have the meaning set forth in Section 5.10.
"Total Capital Contributions by All Members" shall have the meaning set
forth in Section 3.4(a)9(ii)(B).
"Treasury Regulations" shall mean regulations issued by the Department
of Treasury under the Code. Any reference herein to a specific section or
sections of the Treasury Regulations shall be deemed to include a reference to
any corresponding provision of future regulations under the Code.
"Voting Interest" Each Member shall have a "Voting Interest" equal to
the following percentage of all outstanding Voting Interests:
MCNIC 49.99 percent
Crown 50.01 percent
"Working Capital Loan" shall have the meaning set forth in Section 7.1.
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ARTICLE III
CAPITAL CONTRIBUTIONS
3.1 Capital Contribution of Crown.
(a) Concurrently with the execution and delivery of this
Agreement, Crown is making a capital contribution to the Company in the amount
of $100.
(b) The Company may elect to require Crown to assign to the
Company, as an additional Capital Contribution of Crown, the CAT Member Interest
and all privileges, rights and obligations associated therewith (such election
is referred to in this Agreement as the "CAT Election" and the assignment of the
CAT Member Interest to the Company as a Capital Contribution of Crown if the
Company makes the CAT Election as referred to in this Agreement as the "CAT
Member Interest Contribution"). In order to make the CAT Election, the Company
shall, on or before December 31, 1999, provide to Crown and the Operating
Manager written notice (the "CAT Election Notice") of the Company's decision to
make the CAT Election. If the Company fails to timely provide such notice, then
the CAT Election shall automatically expire.
(c) The following provisions shall apply if, and only if, the
Company duly and timely makes the CAT Election:
(i) Within 30 days after the date the CAT Election
Notice is given, Crown shall assign to the Company, pursuant to an assignment in
form and substance reasonably acceptable to MCNIC, the CAT Member Interest, free
and clear of all Encumbrances, together with such other documents, in form and
substance reasonably acceptable to MCNIC, necessary or desirable to cause the
Company to be admitted as a member of CAT with respect to the CAT Member
Interest, which other documents shall include, without limitation, a duly
executed and delivered consent of Foreland to such admission of the Company as a
member of CAT and a duly executed and delivered amendment to the CAT Operating
Agreement effectuating such admission and vesting in the Company all management
rights with respect to CAT to which Crown shall be entitled under the CAT
Operating Agreement;
(ii) If CAT has not previously closed its purchase of
the Cowboy Terminal, Crown shall cause CAT to exercise its option to purchase
the Cowboy Terminal and to consummate its purchase thereof upon the terms and
conditions of the CAT Purchase Agreement;
(iii) Crown shall make and shall use its reasonable
business efforts to cause Foreland to make capital contributions to CAT which,
in the aggregate, are sufficient to pay all amounts due with respect to the
closing of the purchase of the Cowboy Terminal by CAT under the terms of the CAT
Purchase Agreement and with respect to such remediation and other actions as may
be required in order to cause the Cowboy Terminal to be in compliance with all
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Environmental Laws, which capital contributions shall be made on a pro rata
basis, based upon the respective percentage member interests of Crown and
Foreland in CAT;
(iv) Following the date of the CAT Election, the
Company shall be entitled to receive all distributions from CAT and attributable
to the CAT Membership Interest (including any distributions made to Crown prior
to such date), effective as of the Effective Date and shall assume
responsibility for all capital contributions or other expenditures of any kind
relating to CAT or the CAT Member Interest required to be made after such date
(specifically including payments due under the Cowboy Promissory Note) or made
or owed by Crown as of the Effective Date and shall promptly reimburse Crown for
any such documented capital contributions or expenditures incurred since the
Effective Date.
(v) All inventory of paving asphalt which is located
on the Cowboy Terminal on the date of the CAT Election and which was purchased
by Crown prior to the Effective Date shall remain the sole property of Crown and
the Company shall have no rights to, or interests in, such paving asphalt unless
the Company purchases such paving asphalt from Crown at its documented costs. If
the Company does not elect to purchase the foregoing paving asphalt from Crown,
after the date of the CAT Election, Crown shall be free to market such asphalt
in the ordinary course of its business on a "first in - first out" basis; and
(vi) Crown's Capital Account shall be increased by
$1,500,000, which the Members agree, for purposes of this Agreement, is the
value of the CAT Member Interest Contribution.
(d) If Crown has made the CAT Member Interest Contribution and
subsequently either CAT's title to Cowboy Terminal fails or CAT otherwise ceases
to operate the Cowboy Terminal because of title related issues, then Crown shall
make an additional Capital Contribution to the Company in an amount equal to (a)
$1,500,000 minus (b) the "after-tax value" to the Members of the income received
by the Company from operations conducted at the Cowboy Terminal after the
Effective Date; and (iii) plus the amount, if any, that the Company has paid, or
is obligated to refund or pay, to any third party in connection with the failure
of title to the Cowboy Terminal. For purposes of determining such after-tax
value, the Members shall be deemed to have paid tax on such income at the
maximum combined federal and State of Utah income tax rates then in effect for
"C" corporations.
3.2 Capital Contribution of MCNIC.
(a) Concurrently with the execution and delivery of this
Agreement, MCNIC is making a capital contribution to the Company in the amount
of $100.
(b) Concurrently with the closing of the Company's purchase of
the PSAC Assets, MCNIC shall make a Capital Contribution to the Company in the
amount of $6,000,000 (the "Preferential Capital Contribution"), which together
with the Working Capital Loan shall be used by the Company solely to pay the
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purchase price of the PSAC Assets, and which shall be returned to MCNIC,
together with a return thereon as provided in this Agreement, in the form of
Preferential Distributions. In the event that the Company does not make the CAT
Election in a timely fashion, $1,500,000 shall be deducted from the Working
Capital Loan and shall be deemed added to the Preferential Capital Contribution
and MCNIC shall be entitled to a return on such amount in the form of the
Preferential Distribution described in the preceding sentence. Concurrently with
the payment of the Preferential Capital Contribution by MCNIC to the Company,
the Company shall grant to MCNIC a first priority lien, security interest and
pledge of all of the property of the Company, whether real or personal, tangible
or intangible, then owned or thereafter acquired, including, without limitation,
the CAT Member Interest if the Company makes the CAT Election and the PSAC
Assets, but excluding the Product Inventory, to secure the payment by the
Company to MCNIC of the Preferential Distributions, in accordance with the terms
of Article VIII. Notwithstanding the foregoing, so long as the Working Capital
Loan is outstanding, such lien, security interest and pledge shall be on a
parity with the lien, security interest and pledge encumbering the same property
to secure the Working Capital Loan. Such grant shall be made pursuant to a deed
of trust, security agreement and pledge agreement in form and substance
acceptable to MCNIC. Upon making the Preferential Capital Contribution to the
Company (including the $1,500,000 converted from the Working Capital Loan if the
CAT Election is not made), MCNIC's Capital Account shall be increased by the
amount of the Preferential Capital Contribution.
(c) If the Company makes the CAT Election, MCNIC shall,
concurrently with Crown's assignment of the CAT Member Interest to the Company
pursuant to Section 3.1(c)(i), make a Capital Contribution to the Company in the
amount of $1,500,000 (the "Matching Capital Contribution"). Upon making the
Matching Capital Contribution to the Company, MCNIC's Capital Account shall be
increased by the amount of the Matching Capital Contribution. The Company shall
use the Matching Capital Contribution solely for the purpose of promptly paying
or prepaying the Working Capital Loan; provided, if any portion of the Matching
Capital Contribution remains after the Working Capital Loan has been paid in
full, the Company may use such portion for other proper Company purposes.
3.3 Additional Capital Contributions. The Managers shall have the right
to call for Additional Capital Contributions from the Members, pro rata to their
respective Sharing Ratios. Any such call shall constitute a Major Decision. If
the Management Committee approves an Additional Capital Contribution pursuant to
this Section 3.3, the Operating Manager shall, as soon as practicable
thereafter, deliver to each Member a Notice of Additional Capital Contribution
at least 30 business days in advance of the time such Additional Capital
Contribution is required to be made to the Company. The required Additional
Capital Contribution for each Member shall be calculated by multiplying the
Required Capital by that Member's percentage Sharing Ratio. The Members shall be
obligated to make such Additional Capital Contributions to the Company in
immediately available funds on or before the date specified in the applicable
Notice of Additional Capital Contributions.
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3.4 Failure to Contribute.
(a) If a Member (the "Delinquent Member") does not contribute
by the time required all or any portion of a Capital Contribution that such
Member is required to make as provided in this Agreement, the Company, at the
direction of the other Member (the "Non-Defaulting Member"), or the
Non-Defaulting Member, may exercise, on notice to the Delinquent Member, one or
more of the remedies set forth in the immediately following clauses (i) and
(ii). The Company or the Non-Defaulting Member, as the case may be, may plead
for relief under one or more of such remedies in any arbitration or judicial
proceeding; provided, however, to the extent the Company or the Non-Defaulting
Member exercises one of such remedies as to all or a portion of the Capital
Contribution that is in default and receives the payment, adjustment or other
relief provided for in connection with such remedy, the Delinquent Member shall
not be liable in any event for more than the obligation that is owed.
(i) Taking such action, including, without
limitation, exercising any rights and remedies provided for under this Agreement
or otherwise available at law or in equity, as the Non-Defaulting Member may
deem appropriate to obtain payment to the Company by the Delinquent Member of
the portion of the Delinquent Member's Capital Contribution that is in default,
together with interest thereon at the Default Interest Rate from the date that
the Capital Contribution was due until the date that it is made, all at the cost
and expense of the Delinquent Member; or
(ii) the Non-Defaulting Member may advance, in the
Non-Defaulting Member's sole discretion, the portion of the Delinquent Member's
Capital Contribution that is in default and designate whether such contribution
is made under the loan provisions of Section 3.4(a)(ii)(A) or is made as a
Capital Contribution by the Non-Defaulting Member under the provisions of
Section 3.4(a)(ii)(B);
(A) A Capital Contribution made to the
Company and designated under this Section 3.4(a)(ii)(A) shall
constitute a loan from the Non-Defaulting Member to the Delinquent
Member and a Capital Contribution of that sum to the Company by the
Delinquent Member pursuant to the applicable provisions of this
Agreement, with the following results:
(1) the principal balance of the
loan and all accrued unpaid interest thereon shall be due and payable
in whole on the tenth day after written demand therefor by the
Non-Defaulting Member to the Delinquent Member, provided, however, that
the demand for payment of such loan may not be made until after the
date that is 6 months after the date such loan is made;
(2) the amount loaned shall bear
interest at the Default Interest Rate from the day that the advance is
deemed made until the date that the loan, together with all interest
accrued on it, is repaid to the Non-Defaulting Member;
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(3) all distributions from the
Company that otherwise would be made to the Delinquent Member (whether
before or after dissolution of the Company and whether before or after
demand for payment is made pursuant to the immediately preceding
subparagraph (1) ) instead shall be paid to the Non-Defaulting Member
until the loan and all interest accrued on it have been paid in full to
the Non-Defaulting Member (with payments being applied first to accrued
and unpaid interest and then to principal); and
(4) the payment of the loan and
interest accrued on it shall be secured by a security interest in the
Delinquent Member's membership interest, as more fully set forth in
Section 3.4(b).
(B) A Capital Contribution made to the
Company and designated under this Section 3.4(a)(ii)(B) shall be
treated as a Capital Contribution by the Non-Defaulting Member and
shall be credited to the Capital Account of the Non-Defaulting Member
making the contribution. If MCNIC is the Non-Defaulting Member, the
Preferential Capital Contribution shall be deemed increased by the
amount of the Capital Contribution made pursuant to this Section
3.4(a)(ii)(B) and the Preferential Contribution Payout shall not be
deemed to have occurred until MCNIC shall have received an additional
aggregate amount of Preferential Distributions equal to the present
value of such additional Capital Contribution in accordance with the
definition of Preferential Contribution Payout, with the exception that
the present value of such additional Capital Contribution shall be
calculated as of the date such contribution is made by MCNIC on behalf
of the Delinquent Member. The Sharing Ratio of the Delinquent Member
shall be reduced by the following (expressed as a percentage number):
Unpaid Capital Contribution of Delinquent Member
Total Capital Contributions By All Members
For purposes of this Section 3.4(a)(ii)(B) "Total Capital Contributions By All
Members" means the aggregate Capital Contributions of the Members (including the
Capital Contribution made by the Non-Defaulting Member pursuant to this Section
3.4(a)(ii)). The Sharing Ratio of the Non-Defaulting Member that makes the
contribution shall be increased by a percentage number equal to the reduction in
the Sharing Ratio of the Delinquent Member. Appropriate adjustments shall be
made in the Capital Accounts of the Members and the Carrying Value of Company
property as provided in Section 12.2(b) to reflect actual cash contributions;
(b) Each Member grants to the Company, and to the
Non-Defaulting Member with respect to any loans made by the Non-Defaulting
Member to that Member as a Delinquent Member pursuant to Section 3.4(a)(ii)(A),
as security, for the payment of all Capital Contributions that Member has agreed
to make and the payment of all loans and interest accrued on them made by the
Non-Defaulting Member to that Member as a Delinquent Member pursuant to Section
3.4(a)(ii)(A), a security interest in and a general lien on all of its interest
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in the Company and the proceeds thereof, all under the Uniform Commercial Code
of Utah. On any default in the payment of a Capital Contribution or in the
payment of such a loan or interest accrued on it, the Company or the
Non-Defaulting Member, as applicable, is entitled to all the rights and remedies
of a secured party under the Uniform Commercial Code of the State of Utah with
respect to the security interest granted in this Section 3.4(b), subject to
Article XVI. Each Member shall execute and deliver to the Company and the other
Members all financing statements and other instruments that the Company or the
Non-Defaulting Member, as applicable, may request to effectuate and carry out
the preceding provisions of this Section 3.4(b). At the option of the Company or
a Non-Defaulting Member, this Agreement or a carbon, photographic, or other copy
hereof may serve as a financing statement.
3.5 Return of Contributions. Except as provided in Article VIII with
respect to the Preferential Capital Contribution, a Member is not entitled to
the return of any part of its Capital Contributions or to be paid interest in
respect of either its Capital Account or its Capital Contributions. Except as
provided in Article VIII with respect to the Preferential Capital Contribution,
any unrepaid Capital Contribution is not a liability of the Company or of any
Member. A Member is not required to contribute or to lend cash or property to
the Company to enable the Company to return any Member's Capital Contributions.
The provisions of this Section 3.5 shall not limit a Member's rights under
Article XIV.
3.6 Advances by Members. If at any time the cash available to the
Company is less than: (i) the Company's then current obligations, and (ii)
expenses and amounts necessary for the Company to conduct its business and
operations according to its ordinary and usual course of business, preserve
intact its business organization, keep available the services of its officers
and employees and maintain satisfactory relationships with persons having
business relationships with the Company, the Members may, if requested by the
Management Committee, but shall not be obligated to, advance all or any portion
of such cash deficiency to the Company. Such request and the acceptance of such
advance by the Company shall constitute a Major Decision. If more than one
Member elects to make such advance, they shall make the advances in proportion
to their respective Sharing Ratios. All advances made pursuant to this Section
3.6 shall constitute a loan from the advancing Member(s) to the Company, shall
bear interest at the General Interest Rate and shall not be considered as part
of the Company's equity or Members' Capital Contributions. Any such loan shall
be subordinate to: (i) any loans from any then existing third-party lender to
the Company if required by such lender, and (ii) the Preferential Distributions,
and shall be repaid prior to any other distributions to the Members.
3.7 Conditions Precedent to Capital Contributions by MCNIC.
Notwithstanding anything to the contrary contained in this Agreement, the
obligation of MCNIC to make any Capital Contribution to the Company pursuant to
Section 3.2 is subject to the satisfaction of the following conditions precedent
to such Capital Contribution at and as of the time such contribution is to be
made:
(a) All representations and warranties of Crown contained in
this Agreement shall be true and correct, and Crown shall have performed and
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satisfied all agreements required by this Agreement to be performed and
satisfied by Crown through the date of such MCNIC Capital Contribution.
(b) With respect to the Preferential Capital Contribution
only, the Company shall have performed all of its obligations under Section
3.2(b).
(c) MCNIC shall have received one or more opinions from
counsel to Crown, in form and substance reasonably satisfactory to MCNIC, which
opinions shall address: (i) the due formation, valid existence and good standing
of Crown in the State of Utah, (ii) the due execution and delivery of this
Agreement and the Management Agreement, (iii) the due authorization of this
Agreement and the Management Agreement, and the performance of the transactions
contemplated herein and therein, including specifically an opinion that this
Agreement and the Management Agreement have been duly authorized by all
necessary corporate and shareholder action, (iv) the enforceability of this
Agreement and the Management Agreement, in accordance with their respective
terms except as enforcement may be limited by bankruptcy, insolvency, moratorium
and similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity, (v) that the investment by Crown in the Company
constitutes a private placement by the Company to a single accredited investor
and is exempt from registration under all applicable federal and state
securities laws, and (vi) such other matters as MCNIC reasonably requires.
3.8 Conditions Precedent to Capital Contributions by Crown.
Notwithstanding anything to the contrary contained in this Agreement, the
obligation of Crown to make any Capital Contribution to the Company pursuant to
Sections 3.1 is subject to the satisfaction of the following conditions
precedent to such Capital Contribution at and as of the time such contribution
is to be made:
(a) All representations and warranties of MCNIC contained in
this Agreement shall be true and correct, and MCNIC or its Affiliates shall have
performed and satisfied all agreements required by this Agreement to be
performed and satisfied by MCNIC or its Affiliates as of the date of such
Capital Contributions.
(b) Crown shall have received one or more opinions from
counsel to MCNIC (which may be MCNIC's in-house counsel and may be limited to
Michigan law), in a form satisfactory to Crown, which opinions shall address:
(i) the due formation, valid existence and good standing of MCNIC in the state
of Michigan, (ii) the due execution and delivery of this Agreement, (iii) the
due authorization of this Agreement, including specifically an opinion that this
Agreement has all necessary MCNIC shareholder and board of directors approvals
that may be required pursuant to Law, (iv) the enforceability of this Agreement
against MCNIC in accordance with its terms, except as enforcement may be limited
by bankruptcy, insolvency, moratorium and similar laws affecting the enforcement
of creditor's rights generally and by general principles of equity, (v) that the
investment by MCNIC in the Company constitutes a private placement by the
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Company to a single accredited investor and is exempt from registration under
all applicable federal and state securities laws, and (vi) such other matters as
Crown reasonably requires.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
4.1 Capacity of Members. Each Member represents and warrants to the
other Member as follows:
(a) such Member is a corporation duly incorporated and in good
standing under the laws of the jurisdiction of its incorporation and is
qualified to do business and is in good standing in those jurisdictions where
necessary in order to carry out the purposes of this Agreement;
(b) the execution, delivery and performance by it of this
Agreement and all transactions contemplated herein are within its corporate
powers and have been duly authorized by all necessary corporate actions;
(c) this Agreement constitutes its valid and binding
obligation, enforceable against it in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, moratorium and similar
laws affecting the enforcement of creditors' rights generally and by general
principles of equity; and
(d) the execution, delivery and performance by it of this
Agreement will not conflict with, result in a breach of or constitute a default
under any of the terms, conditions or provisions of (i) any applicable law,
regulation, order, writ, injunction or decree of any court or governmental
authority, (ii) its articles or certificate of incorporation or bylaws, or (iii)
any agreement or arrangement to which it or any of its Affiliates is a party or
which is binding upon it or any of its Affiliates or any of its or their assets.
4.2 Litigation. Except as disclosed in Schedule 4.2, each Member
represents and warrants to the other Member that as of the date of this
Agreement there is no action, suit or proceeding pending against, or to its
knowledge threatened against or affecting, such Member or any of its Affiliates
before any court or any arbitrator, governmental department, agency, official or
instrumentality that would reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect on such Member or its Affiliates.
4.3 Compliance with Laws; No Defaults. Except as disclosed in Schedule
4.3, each Member represents and warrants to the other Member that as of the date
of this Agreement such Member and its Affiliates (i) are not in violation of any
applicable law, rule, regulation, judgment, injunction order or decree except
for violations that have not had and would not reasonably be expected to have a
Material Adverse Effect and (ii) are not in default under, and no condition
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exists that with the giving of notice or the passage of time or both would
constitute a default under any agreement or other instrument binding upon them,
or any license, franchise, Permit or similar authorization held by them, except
for defaults or potential defaults that have not had and would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect.
4.4 Investment Representations.
(a) In acquiring an interest in the Company, each Member
represents and warrants to the other Member that it is acquiring such interest
for its own account for investment and not with a view to its sale or
distribution. Each Member recognizes that investments such as those contemplated
by this Agreement are speculative and involve substantial risk. Each Member
further represents and warrants that the other Member has not made any guaranty
or representation upon which it has relied concerning the possibility or
probability of profit or loss as a result of its acquisition of an interest in
the Company.
(b) Each Member recognizes that (i) the membership interests
in the Company have not been registered under the Securities Act, in reliance
upon an exemption from such registration, and covenants not to sell, offer for
sale, transfer, pledge or hypothecate all or any part of its interest in the
Company in the absence of an effective registration statement covering such
interest under the Securities Act unless such sale, offer of sale, transfer,
pledge or hypothecation is exempt from registration under the Securities Act
(ii) the Company has no obligation to register any Member's interest for sale,
or to assist in establishing an exemption from registration for any proposed
sale, and (iii) the restrictions on transfer contained in this Agreement and
under the Securities Act may severely affect the liquidity of a Member's
investment.
4.5 Additional Representations, Warranties and Covenants of Crown.
Crown represents and warrants to (as of the date of this Agreement and, in the
case of the representations and warranties set forth in the immediately
following clauses (b) through (g) and, if the Company makes the CAT Election, as
of the date Crown makes the CAT Member Interest Contribution), and covenants
with, MCNIC that as of the date of this Agreement and hereafter, as applicable:
(a) The "total assets" and "net sales" of Crown Parent and
Crown, as such terms are used in 16 C.F.R. ss. 801.40(b), are each less than
$10,000,000.
(b) Crown is a member of CAT, entitled to all the rights and
benefits of a member under the CAT Operating Agreement, as adopted by Crown and
Foreland, and shall not have placed any Encumbrances on such membership
interest.
(c) CAT is a limited liability company, duly organized and in
good standing under the laws of the State of Utah.
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(d) The CAT Operating Agreement shall be in full force and
effect in the form provided by Crown to MCNIC, and shall constitute the valid
and binding obligation of Crown and Foreland, enforceable against them in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, moratorium and similar laws affecting the enforcement of creditors'
rights generally and by general principles of equity.
(e) CAT has been assigned all of RTI's interests in the CAT
Purchase Agreement, free and clear of all Encumbrances.
(f) The execution, delivery and performance by CAT and its
members of the CAT Purchase Agreement shall be within their limited liability
company or corporate, as applicable, powers and shall have been duly authorized
by all necessary limited liability company or corporate, as applicable, action.
(g) Crown and CAT shall have complied in all material respects
with the terms of the CAT Purchase Agreement and have not committed any act or
omission which presently, or with the passage of time or giving of notice or
both, constitutes a default or breach of such agreement.
4.6 Survival. The representations and warranties set forth in Sections
4.1 through 4.5 above shall survive the execution and delivery of any documents
of transfer or conveyance provided under this Agreement.
ARTICLE V
MANAGERS; MANAGEMENT POWERS; OFFICERS
5.1 Managers. The Company shall have three Managers (the "Managers,"
and each individually a "Manager"). By notice to the other Member, MCNIC shall
appoint one Manager and Crown shall appoint two Managers. One of the Managers
appointed by Crown from time to time shall serve as the Operating Manager (the
"Operating Manager") and shall have the powers, authority, duties and
obligations of the Operating Manager as provided in this Agreement. Each of the
Managers may be removed and replaced, with or without cause, from time to time
by the Member who appointed such Manager(s). The Members agree to vote their
Voting Interests as necessary from time to time to give effect to the foregoing
provisions for appointment of Managers. If a Member transfers all of its
interest in the Company and the transferee is admitted as a substitute Member
pursuant to Section 13.6, the transferee of such interest shall succeed to all
rights of the transferor with respect to the appointment and removal of
Manager(s). If a Member transfers a portion of its interest in the Company, the
transferor and transferee shall agree on the procedure to be used to remove and
replace the Manager(s) appointed by the transferor. No transfer or partial
transfer shall increase the number of Managers.
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5.2 Management Authority.
(a) The Members hereby delegate management of the business and
affairs of the Company to the Management Committee, as defined below, except
decisions not relating to the ordinary course of the Company's business which
(i) require the approval of the Members pursuant to the Act or this Agreement;
or (ii) constitute Major Decisions as defined in Section 5.2(c). Except as
limited by the foregoing sentence, the Management Committee shall act through
the approval of a majority of Managers. In connection with the governance or
administration of the Company's business, the Operating Manager is authorized,
upon the approval of the Management Committee, to execute and deliver on behalf
of the Company contracts, instruments, conveyances, checks, drafts and other
documents of any kind or character to the extent the Management Committee deems
it necessary or desirable. The Management Committee may delegate to other agents
or representatives any or all of the foregoing powers by written authorization
identifying specifically or generally the powers delegated or acts authorized.
(b) The "Management Committee" shall be composed of all the
Managers. All members of the Management Committee are hereby required to approve
all Major Decisions, as defined in Section 5.2(c) with respect to the Company's
business and to take all actions to carry out such decisions. The Management
Committee shall have regular meetings at least quarterly with the timing and
agenda to be determined by the Operating Manager. The Operating Manager shall
give 15 days' notice to the other Managers of such regular meetings. Any Manager
may, upon 72 hours notice to the other Managers, call a special meeting. In case
of emergency, reasonable notice of a special meeting shall suffice. Such
meetings may be conducted in person or by conference telephone call where each
Manager can hear the other. Minutes shall be kept of all meetings and copies
distributed to the Managers within ten days of each meeting. Any action that may
be taken at a meeting may be taken without a meeting if a consent in writing,
setting forth the action so taken, is signed by all the Managers.
(c) Each of the matters listed in this Section 5.2(c) shall
constitute a "Major Decision." Any expenditure or other action or item
constituting a Major Decision that is covered by an approved Annual Operating
Plan shall not require separate approval.
(i) adoption of the initial Annual Operating Plan for
the Company and any subsequent Annual Operating Plan which exceeds five percent
(5%) of the prior years Annual Operating Plan. If an Annual Operating Plan
requiring approval hereunder is not approved, then the Annual Operating Plan for
the immediately preceding period as adjusted for inflation shall become the
Annual Operating Plan for the current period;
(ii) commencement or settlement of any suit or other
legal action against or by (in the case of settlement) any Person, involving
amounts in excess of $50,000;
(iii) entering into any futures, swap or other
hedging arrangements of any type or financial derivative instruments or
agreements of any type;
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(iv) any guarantee of any amount owed to a non-member
of the Company other than a Person wholly owned by the Company;
(v) pledging, mortgaging, or granting a security
interest in the property or assets of the Company other than (i) purchase money
security interests and other liens created or existing at the time of the
acquisition of an asset, but only to the extent the aggregate indebtedness of
the Company secured by all such purchase money interests or other liens does not
exceed $25,000; and (ii) material provider, mechanics' contractors', operators',
tax and similar liens or charges arising in the ordinary course of business or
by operation of laws;
(vi) incurrence of any indebtedness other than trade
payables incurred in the ordinary course of business in an aggregate amount not
to exceed at any time $50,000;
(vii) making any election or exercise of any option
with regard to any Federal, State or local income, franchise, gross receipts,
property, sales or other tax;
(viii) the form and substance of each tax return the
Company is required to file with any Federal, State or local taxing authority,
which approval shall be required before each such tax return is filed;
(ix) any purchase, lease or other acquisition of real
or personal property with a value of greater than 20% of the Company's assets
prior to such acquisition;
(x) any call for additional Capital Contributions;
(xi) except as provided in Article VIII, any
distribution to the Members;
(xii) any merger, reorganization, consolidation,
dissolution or similar restructuring of the Company;
(xiii) the sale, lease or other disposition of any
assets of the Company other than the sale of inventory in the ordinary course of
business exceeding 20% of the Company's assets prior to the transaction;
(xiv) the approval of any contract or transaction
between the Company and any Member, Manager or their respective Affiliates, or
any amendment or modification of any such contract or transaction; provided, the
approval of any such contract or transaction shall not be deemed a Major
Decision so long as: (a) the aggregate monetary obligations of the Company under
such contract or transaction, together with the aggregate monetary obligations
of the Company under all other such contracts or transactions entered into by
the Company during the same calendar year (other than such contracts or
transactions as were approved as Major Decisions by the Management Committee)
does not exceed $50,000; and (b) the terms and conditions of such contract or
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transaction are no less favorable to the Company than the best terms and
conditions that could reasonably be obtained from an unrelated third party
dealing at arm's length in the competitive market;
(xv) any material change in the Company's business
from that of storing, blending, refining and marketing Products;
(xvi) any amendment to this Operating Agreement or
the Articles of Organization;
(xvii) the Company's entering into any Additional
Opportunity, as defined in Section 6.3; or
(xviii) any other decision or matter relating to the
Company or its business which MCNIC elects to treat as a Major Decision by
providing written notice of each election to Crown; provided, however, such
election shall only be effective if MCNIC obtains an opinion from either the
accounting firm which, as of the date MCNIC provides such notice, was most
recently selected pursuant to the immediately preceding clause (xviii) to
perform the audit described in Section 12.6 or MCNIC's present accounting firm
that the inclusion of such decision or matter as a Major Decision will not,
under generally accepted accounting principles, prevent Crown from consolidating
the Company's financial statements with those of Crown and those of any other
Affiliate of Crown that is then consolidating its financial statements with
those of Crown.
(c) All contracts, instruments, conveyances, checks, drafts
and other documents in connection with the implementation, consummation or
administration of any matter within the scope of a Major Decision must be
executed on behalf of the Company by such person or persons as may be designated
by the Management Committee, or, in the absence of such a designation, by all
Managers.
(d) At all meetings of the Management Committee and for
purposes of action taken without a meeting under Section 5.2(b), a Manager may
vote in person or by proxy executed in writing by the Manager or the Manager's
duly authorized attorney-in-fact. Such proxy shall be filed before or at the
meeting with the person keeping minutes of the meeting or, in the case of action
taken without a meeting, attached to the written consent setting forth the
action taken.
5.3 Annual Operating Plan.
(a) At least 120 days prior to the beginning of each calendar
year the Operating Manager shall submit to the Management Committee a proposed
Annual Operating Plan for the coming calendar year (and such longer period as
may be necessary to cover projects that will not be completed within the coming
calendar year). Such proposed Plan shall describe in reasonable detail the
nature and extent of proposed activities and operations of the Company and the
cost thereof for the coming calendar year including, without limitation:
(i) an operating cost budget broken down by line item
and nature of cost;
(ii) basic pro forma financial reports including an
income statement, balance sheet and statement of cash flows prepared in
accordance with generally accepted accounting principles consistently applied;
(iii) a marketing plan for such calendar year
addressing, among other things, the projected market and prices for each
Product, potential purchasers and the terms of existing and anticipated
contracts for sale of Products, and potential new markets.
(iv) a plan for capital expenditures;
(v) a plan for any expansion of the Company's
facilities, including, without limitation, any expansion of existing facilities
or the acquisition or construction of facilities at any new location;
(vi) proposed maintenance and improvements, with
respect to the Company's properties; and
(vii) a plan for financing the activities of the
Company, if any.
To the extent practicable, the proposed annual operating plan shall separately
identify capital and expense items.
The Management Committee shall meet and consider such proposed Annual Operating
Plan and alternatives thereto to make the proposed plan and budget acceptable to
the Management Committee. The plan and budget, if any, approved by the
Management Committee shall be the "Annual Operating Plan."
(b) The Management Committee shall diligently and in good
faith seek to approve an Annual Operating Plan for each calendar year prior to
the commencement of such calendar year, which such approval shall be unanimous.
If the Management Committee has been unable to unanimously agree upon and
approve the Annual Operating Plan for a calendar year prior to the commencement
thereof, the Management Committee shall diligently and in good faith seek to
approve an amended Operating Plan for the remainder of such year and the
following year, provided that a Manager's vote to approve any Annual Operating
Plan shall be within the sole discretion of such Manager. If, prior to the
commencement of any calendar year, an Annual Operating Plan has not been
approved for such calendar year, the Management Committee shall agree upon a
budget necessary to maintain the Company's existing assets as would a prudent
similarly situated company, including, without limitation, making any necessary
repairs to and otherwise maintaining the Company's properties (the "Minimum
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Budget"). If the Management Committee is unable to unanimously agree on the
Minimum Budget, the Annual Operating Plan from the prior year shall be extended
with adjustments made for any increase during the preceeding 12 months realized
in the general Consumer Price Index as reported by the United States Department
of Labor. The Minimum Budget shall be redetermined from year to year using the
procedure described above until the Management Committee approves an Annual
Operating Plan. During the periods covered by a Minimum Budget, the Company
shall make quarterly distributions of all Available Cash (determined using the
Minimum Budget) to the Members pursuant to Article VIII.
(c) In case of an actual emergency, the Operating Manager may
take on behalf of the Company any reasonable action he deems necessary to
protect life or property, to protect the assets of the Company or to comply with
applicable law, without approval of a Major Decision or any other necessary
approval of the Management Committee if time does not permit obtaining such
approval. The Operating Manager shall promptly notify the other Manager and the
Members of the emergency or unexpected expenditure. MCNIC may dispute the
reasonableness or necessity of any expenditure incurred by the Operating Manager
for any such action by giving written notice of such dispute to Crown.
Thereupon, Crown and MCNIC shall negotiate in good faith to resolve such
dispute. If MCNIC determines that such dispute is unlikely to be resolved by the
agreement of the parties, MCNIC may submit the matter to arbitration pursuant to
Article XVI. Crown shall promptly pay or reimburse the Company for any such
expenditure to the extent Crown and MCNIC agree, or it is determined pursuant to
such arbitration, that such expenditure was not reasonable or necessary. Any
such payment or reimbursement by Crown shall not be considered a Capital
Contribution by Crown.
5.4 Duties. Each Manager shall carry out his duties in good faith, in a
manner that it believes to be in the best interests of the Company, and with
such care as an ordinarily prudent person in a like position would use under
similar circumstances. Each Manager shall devote such time to the business of
the Company as he, in his discretion, deems necessary for the efficient carrying
on of the Company's business.
5.5 Reliance by Third Parties. No third party dealing with the Company
shall be required to ascertain whether the Operating Manager is acting in
accordance with the provisions of this Agreement. All third parties may rely on
a document executed by the Operating Manager as binding the Company. The
foregoing provisions shall not apply to third parties who are Affiliates of a
Member or a Manager. A Manager acting without authority shall be liable to the
Members for any damages arising out of its unauthorized actions.
5.6 Resignation. A Manager may resign at any time by giving written
notice to the other Managers and to the Members. Unless otherwise specified in
the notice, the resignation shall take effect upon receipt by the other Managers
and Members, and the acceptance of the resignation shall not be necessary to
make it effective.
5.7 Vacancies. Vacancies occurring for any reason shall be
filled by the Member who appointed the vacating Manager. A Manager appointed to
fill a vacancy shall hold office for the unexpired term of his predecessor.
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5.8 Information Relating to the Company. Upon request, the Operating
Manager shall supply to the Members any information requested regarding the
Company or its activities, provided that obtaining the information is not unduly
burdensome to the Operating Manager. During ordinary business hours, any Member
or its authorized representative shall have access to all books, records and
materials in the Company's offices regarding the Company or its activities.
5.9 Insurance. The Company shall maintain or cause to be maintained in
force at all times, for the protection of the Company and the Members to the
extent of their insurable interests, such insurance as the Operating Manager
believes is warranted for the operations being conducted and taking into
consideration any separate insurance maintained for the projects of the Company.
5.10 Tax Matters Partner.
(a) The tax matters partner ("TMP") as defined in section
6231(a)(7) of the Code shall be designated by the Management Committee and Crown
is hereby designated as the initial TMP. Subject to the provisions hereof, the
TMP is authorized and required to represent the Company in connection with all
examinations of the Company's affairs by tax authorities, including resulting
administrative and judicial proceedings, and to expend Company funds for
professional services and costs associated therewith. Notwithstanding the
foregoing, the TMP shall promptly notify all Members of the commencement of any
audit, investigation or other proceeding concerning the tax treatment of Company
tax items, shall keep all Members adequately informed of such proceedings, and
upon the request of any Member shall promptly take appropriate action to cause
such Member to be a "notice partner" as defined in section 6231(a)(8) of the
Code.
(b) The TMP and the Operating Manager shall make or cause to
be made all available elections as are necessary to cause the Company to be
classified as a partnership for federal income tax purposes.
5.11 Exculpation.
(a) In carrying out their duties hereunder, the Managers shall
not be liable to the Company nor to any Member for their good faith actions, or
failure to act, nor for any errors of judgment, nor for any act or omission
believed in good faith to be within the scope of authority conferred by this
Agreement, but shall be liable for fraud, willful misconduct or gross negligence
in the performance of their duties under this Agreement.
(b) Subject to the limitations of the Act, the Company shall
indemnify and hold harmless each of the Managers and officers from and against
third party claims arising as a result of any act or omission of such Manager or
officer believed in good faith to be within the scope of authority conferred in
accordance with this Agreement, except for fraud, willful misconduct or gross
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negligence, but not in excess of the value of the net assets of the Company as
of the date the Company learns of the act or omission on which the third party
claim is based (the "Date of Notice"). In all cases, indemnification shall be
provided only out of and to the extent of the net assets of the Company as of
the Date of Notice, and no Member shall have any personal liability whatsoever
on account thereof. In no event shall the Company be obligated under this
Section 5.11 for the amount of any additional contributions made to the Company
after the Date of Notice or for the amount of any increase in value of any
Company assets after the Date of Notice. Notwithstanding the foregoing, the
Company's indemnification of the Managers and officers as to third party claims
shall be only with respect to such loss, liability or damage that is not
otherwise compensated by insurance carried for the benefit of the Company.
5.12 Officers.
(a) The Operating Manager may, from time to time, designate
one or more persons to be officers of the Company. Any officers so designated
shall have such authority and perform such duties as the Operating Manager may,
from time to time, delegate to them. The Operating Manager may assign titles to
particular officers. If the title is one commonly used for officers of a
business corporation formed under the Utah Revised Business Corporation Act, the
assignment of such title shall constitute the delegation to such officer of the
authority and duties that are normally associated with that office, subject to
any specific delegation of authority and duties made to such officer, or
restrictions placed thereon, by the Operating Manager. Each officer shall hold
office until his or her successor is duly designated, until his or her death or
until he or she resigns or is removed in the manner hereinafter provided. Any
number of offices may be held by the same person. The salaries or other
compensation, if any, of the officers of the Company shall be fixed from time to
time by the Operating Manager. Notwithstanding anything in this Section 5.12 to
the contrary, the Operating Manager may not delegate to any such officer any
authority not held by the Operating Manager.
(b) Any officer may resign at any time by giving written
notice thereof to the Operating Manager. Any officer may be removed, either with
or without cause, by the Operating Manager whenever in his or her judgment the
best interests of the Company will be served thereby; provided, however, that
such removal shall be without prejudice to the contract rights, if any, of the
person so removed. Designation of an officer shall not, by itself, create
contract rights.
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ARTICLE VI
MANAGEMENT FEES AND REIMBURSEMENTS;
COMPANY OPPORTUNITIES; CONFLICTS
6.1 Management Fee. The Managers shall not receive any fee or salary.
6.2 Reimbursements. Each Manager shall be reimbursed by the Company for
any reasonable out-of-pocket costs incurred by such Manager on the Company's
behalf upon the submission of reasonable documentation of such costs.
6.3 Company Opportunities; Conflicts of Interest. Any activity by
either Member to conduct any business utilizing Products in any manner the same
as or similar to the then current business of the Company (an "Additional
Opportunity") shall be offered to the Company for the purposes of allowing the
Company to pursue and engage in such Additional Opportunity should it elect to
do so. Any Additional Opportunity not relating to the use of Products in a
manner the same as or similar to the then current business of the Company may,
but shall not be required to, be offered to the Company. The following
procedures shall apply to the offer of each Additional Opportunity to the
Company:
(a) Within 15 days after a Member (the "Acquiring Member") or
any of its Affiliates proposes to proceed with an activity that constitutes an
Additional Opportunity such Acquiring Member shall notify the Company and the
other Member (the "Nonacquiring Member") thereof. The Acquiring Member's notice
shall describe in detail the activity, the acquiring party if that party is an
Affiliate, activities and facilities covered thereby, the cost thereof, and the
reason, if any, why the Acquiring Member believes that the activity is or is not
in the best interests of the Members and the Company. In addition to such
notice, the Acquiring Member shall make any and all information concerning the
activity available for inspection by the Company and Nonacquiring Member,
including, without limitation, any proposed contracts, term sheets, letters of
intent or other similar documents relating to the Additional Opportunity.
(b) The Company shall have 30 days after receiving the
Acquiring Member's notice pursuant to the immediately preceding clause (i) to
notify the Acquiring Member of the Company's election to accept the Additional
Opportunity; the Company shall elect to accept the Additional Opportunity if the
Nonacquiring Member notifies the Company to do so within 25 days after receiving
the Acquiring Member's notice under the immediately preceding clause (i).
Promptly upon such notice, the Members shall negotiate to select an appropriate
business structure within which to conduct the Additional Opportunity upon
mutually agreeable terms in which either Member or an Affiliate shall have the
option, though not the obligation, of acquiring (and making a like share of all
capital contributions) up to (i) a 50% sharing ratio or equity interest in such
entity. Following the formation of the foregoing mutually agreeable business
entity, the Acquiring Member shall convey or cause its Affiliate to convey to
the newly formed entity all of the Acquiring Member's (or its Affiliate's)
interest in the Additional Opportunity, free and clear of all Encumbrances
arising by, through or under the Acquiring Member (or its Affiliate) other than
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those to which the Nonacquiring Member has agreed. The newly formed entity shall
promptly pay to the Acquiring Member the latter's actual out-of-pocket
acquisition costs.
(c) If the Company does not give such notice within such
30-day period set forth in Section 6.3 (b), no Member (other than the Acquiring
Member) shall thereafter have any interest in the activity or Additional
Opportunity.
6.4 Making of CAT Election. If the CAT Election is not duly made by the
Company because the Manager appointed by MCNIC refuses to approve the Company's
making of the CAT Election, then Crown shall be free to continue to own the CAT
Member Interest and to exercise its rights and privileges with respect thereto,
regardless of whether such exercise would be competitive with the operations of
the Company or any Member or its Affiliates. If, however, the Manager appointed
by MCNIC approves, and the Managers appointed by Crown refuse to approve, the
making of the CAT Election by the Company, then: (i) Crown shall not exercise
any of its rights or privileges with respect to the CAT Member Interest in any
manner that is competitive with the business or operations of the Company or any
Member or its Affiliates; and (ii) within 6 months after the CAT Option expires,
Crown shall fully divest itself of the CAT Member Interest, which divestiture
shall be to a Person other than an Affiliate of Crown, and shall not thereafter,
and shall cause its Affiliates to not thereafter, acquire or reacquire any
interest in or to CAT or the Cowboy Terminal.
6.5 Other Business Opportunities. Except as expressly provided in
Section 6.3 or Section 6.4, each Member and its Affiliates shall have the right
independently to engage in and receive full benefits from business activities,
whether or not competitive with the operations of the Company or any Member or
its Affiliates, without consulting the others.
ARTICLE VII
FINANCING OF COMPANY OPERATIONS
7.1 Working Capital Loan. Subject to the terms and conditions of this
Section 7.1, MCNIC shall loan to the Company and the Company shall borrow from
MCNIC the sum of $7,141,930. Such loan is referred to in this Agreement as the
"Working Capital Loan". MCNIC shall make available the Working Capital Loan to
the Company concurrently with the Closing (as defined in the PSAC Purchase
Agreement) and the funds advanced by MCNIC pursuant to the Working Capital Loan
shall be used by the Company to pay to PSAC a portion of the Purchase Price (as
defined in the PSAC Purchase Agreement) and for the Company's working capital
needs, including, without limitation, the purchase of inventory and the payment
of operating expenses. The Working Capital Loan shall be subject to the
following terms and conditions:
(a) Concurrently with the funding of the Working Capital Loan,
the Company shall execute and deliver, in form and substance acceptable to MCNIC
and otherwise consistent with this Section 7.1: (i) a promissory note evidencing
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the Company's obligation to repay the Working Capital Loan; (ii) a deed of
trust, security agreement and collateral assignment granting MCNIC a first
priority perfected security interest in the Product Inventory (as defined in the
PSAC Purchase Agreement) purchased by the Company pursuant to PSAC Purchase
Agreement and a first priority perfected lien, security interest and pledge
(which, until the Preferential Contribution Payout occurs, shall be on a parity
with the lien, security interest and pledge securing the Preferential
Distributions) in all of the other property of the Company, whether real or
personal, tangible or intangible, then owned or thereafter acquired, including,
without limitation, the CAT Member Interest if the Company makes the CAT
Election and the PSAC Assets; and (iii) such other documents as MCNIC may
reasonably require to evidence and secure the Working Capital Loan.
(b) The Company shall pay to MCNIC interest on the outstanding
principal balance of the Working Capital Loan at the rate of 8% per annum.
(c) As set forth on Schedule 7.1(c), the Members have agreed
upon an appropriate per unit value of the Product Inventory, the acquisition of
which has been financed by the Working Capital Loan. Proceeds in the amount of
such agreed upon value of the Product Inventory shall be paid and applied as
such Product Inventory is sold to (and the proceeds thereof collected) the
repayment of the Working Capital Loan, with such proceeds being applied first to
interest and then to principal.
(d) Immediately upon the making of the Matching Capital
Contribution by MCNIC, a payment of principal and interest with respect to the
Working Capital Loan shall become due and payable in an amount equal to the
lesser of (i) the Matching Capital Contribution; or (ii) the entire outstanding
balance of the Working Capital Loan. The Matching Capital Contribution shall be
applied first to interest and then to principal.
(e) The entire outstanding principal balance of the Working
Capital Loan, together with all unpaid accrued interest thereon, shall be due
and payable in full on December 31, 1999.
7.2 Additional Loans; Right of First Refusal to Provide Financing. The
Members acknowledge that the operations of the Company will require the
procurance of additional loans, financing, a credit facility, a line of credit
or other similar credit (collectively, a "Loan"). Prior to obtaining a Loan
sufficient to fund the Company's needs, the Company shall first offer to obtain
such Loan from MCNIC in accordance with the provisions of this Section 7.2.
Before obtaining any Loan, the Company shall provide to MCNIC written notice (a
"Proposed Borrowing Notice") stating the Company's intention to obtain the Loan,
and setting forth in detail the terms and conditions upon which the Company
proposes to obtain the Loan, including, without limitation, the name of the
proposed lender, the principal amount of the Loan, all fees and costs associated
with the Loan, the rate at which interest shall accrue on the Loan, the Loan
repayment terms, and any collateral or security arrangements to secure the Loan.
MCNIC shall have a period of 15 days after receiving each such Proposed
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Borrowing Notice to elect, by providing written notice of such election to the
Company, to make the Loan to the Company upon the terms and conditions set forth
in the Proposed Borrowing Notice. The decision to elect to make any such Loan
shall be solely at the discretion of MCNIC. If MCNIC fails within such 15 day
period to elect to make the Loan, the Company may obtain the Loan from the
proposed lender identified in the Proposed Borrowing Notice, upon terms and
conditions no less favorable to the Company than those set forth in the Proposed
Borrowing Notice; provided, however, if the Loan is not consummated within 60
days after the date of the Proposed Borrowing Notice, the Company shall be
required to again provide MCNIC a Proposed Borrowing Notice with respect to the
Loan and MCNIC shall again have the right to elect to make the Loan in
accordance with the provisions of this Section 7.2. If MCNIC timely elects to
make to the Company any Loan, MCNIC shall provide such Loan to the Company and
the Company shall obtain such Loan from MCNIC upon the terms and conditions set
forth in the Proposed Borrowing Notice. MCNIC and the Company shall negotiate,
in good faith, all loan documentation relating to any Loan that MCNIC elects to
make to the Company, which loan documentation shall contain the terms and
conditions set forth in the Proposed Borrowing Notice, and any other terms and
conditions not contrary to the Proposed Borrowing Notice as are customarily
included in loan documentation for similar loans. In the event MCNIC should
elect not to provide the Loan as described herein, MCNIC agrees to, together
with Crown, take such reasonable and practicable actions as are necessary to
assist the Company in obtaining the Loan from a non-affiliated Lender.
ARTICLE VIII
DISTRIBUTIONS TO THE MEMBERS
8.1 Repayment of Preferential Capital Contribution. Until the
Preferential Contribution Payout, the Company shall pay to MCNIC the following
distributions:
(a) On or before the 15th day of each calendar month, an
amount equal to fifty percent (50%) of the Net Cash Flow, if any, for the prior
calendar month; and
(b) One hundred percent (100%) of any and all amounts
available for distribution to Members in connection with any partial liquidation
of the Company.
8.2 Non-Liquidating Distributions. The Management Committee shall cause
the Company to distribute Available Cash to the Members quarterly, within 30
days after the end of each calendar quarter. In addition, the Company may make
distributions of Available Cash at such times and in such amounts as the
Management Committee shall determine. Distributions pursuant to this Section 8.2
shall be made to the Members in accordance with their Sharing Ratios.
8.3 Distributions in Kind. During the existence of the Company, no
Member shall be entitled to receive as distributions from the Company any
Company asset other than money. Upon the dissolution and winding-up of the
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Company the assets of the Company may be distributed to the Members in kind in
accordance with Article XIV. For purposes of Article XIV, distribution of an
asset in kind to a Member shall be considered a distribution of an amount equal
to the asset's fair market value.
8.4 Liquidating Distributions. Notwithstanding anything contained in
this Agreement to the contrary, except as provided in Section 14.2(d), all
distributions made in connection with the sale or exchange of all or
substantially all of the Company's assets and all distributions made in
connection with the liquidation of the Company shall be made to the Members in
accordance with their respective positive Capital Account balances at the time
of distribution after taking into account all allocations of Profit and Loss
pursuant to Article IX.
ARTICLE IX
ALLOCATIONS OF PROFITS AND LOSSES
9.1 Allocation of Profits and Losses. Profits and Losses will be
allocated among the Members as follows:
(a) Except as provided in Section 9.2, all Losses shall be
allocated as follows:
(i) First, in accordance with the Members' respective
Sharing Ratios until any Member's capital account has been reduced to
zero;
(ii) Second, to the other Member until its capital
account also has been reduced to zero; and
(iii) The balance, if any, in accordance with the
Members' respective Sharing Ratios.
(b) Except as provided in Section 9.2, any Profits shall be
allocated as follows:
(i) First, to the Members who have previously
received allocations pursuant to Section 9.1(a)(iii), to the extent of
such allocations;
(ii) Second, to the Members who have previously
received allocations pursuant to Section 9.1(a)(ii), to the extent of
such allocations; and
(iii) The balance, if any, to the Members in
accordance with their respective Sharing Ratios; provided, however,
that if allocation of Profits is being made immediately prior to, or in
connection with, a complete liquidation of the Company, and if the
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Preferential Contribution Payout has not been reached, then Profits
shall be allocated one hundred percent (100%) to MCNIC until the
Preferential Contribution Payout has been reached.
9.2 Regulatory Allocations and Curative Provisions. Notwithstanding
Sections 9.1 and 9.3 hereof:
(a) Loss Limitation. The Losses allocated pursuant to Section
9.1 shall not exceed the maximum amount of Losses that can be so allocated
without causing any Member to have an Adjusted Capital Account Deficit at the
end of any fiscal year. In the event some but not all of the Members would have
Adjusted Capital Account Deficits as a consequence of an allocation of Losses
pursuant to Section 9.1, the limitation set forth in this Section 9.2(a) shall
be applied on a Member-by-Member basis so as to allocate the maximum permissible
Losses to each Member under section 1.704-1(b)(2)(ii)(d) of the Treasury
Regulations. All Losses in excess of the limitations set forth in this Section
9.2(a) shall be allocated to the Members in proportion to their Sharing Ratios.
(b) Minimum Gain Chargeback. Except as otherwise provided in
Treasury Regulation ss. 1.704-2(f), if there is a net decrease in partnership
minimum gain (as defined in Treasury Regulation ss.ss. 1.704-2(b)(2) and
1.704-2(d)) during any fiscal year, each Member shall be specially allocated
items of Company income and gain for such fiscal year (and, if necessary,
subsequent fiscal years) in an amount and in the manner required by Treasury
Regulation ss.ss. 1.704-2(f) and 1.704-2(j)(2).
(c) Member Minimum Gain Chargeback. Except as otherwise
provided in Treasury Regulation ss. 1.704-2(i)(4), if there is a net decrease in
Member non-recourse debt minimum gain (as defined in Treasury Regulation ss.ss.
1.704-2(i)(2) and 1.704-2(i)(3)) attributable to a Member non-recourse debt (as
defined in Treasury Regulation ss. 1.704-2(b)(4)) during any fiscal year, each
Member who has a share of the Member non-recourse debt minimum gain attributable
to such Member's non-recourse debt, determined in accordance with Treasury
Regulation ss. 1.704-2(i)(5), shall be specially allocated items of Company
income and gain for such fiscal year (and, if necessary, subsequent fiscal
years) in an amount and in the manner required by Treasury Regulation ss.ss.
1.704-2(i)(4) and 1.704-2(j)(2).
(d) Qualified Income Offset. In the event any Member
unexpectedly receives any adjustments, allocations, or distributions described
in Treasury Regulation ss.ss. 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5)
or 1.704-1(b)(2)(ii)(d)(6), items of Company income and gain shall be specially
allocated to each such Member in an amount and manner sufficient to eliminate,
to the extent required by the Regulations, the Adjusted Capital Account Deficit,
if any, of such Member as quickly as possible.
(e) Member Non-Recourse Deductions. Any Member non-recourse
deductions (as defined in Treasury Regulation ss.ss. 1.704-2(i)(1) and
1.704-2(i)(2)) for any fiscal year shall be specially allocated to the Member
who bears the economic risk of loss with respect to the Member non-recourse debt
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(as defined in Treasury Regulation ss. 1.704-2(b)(4)) to which such Member
non-recourse deductions are attributable in accordance with Treasury Regulation
ss. 1.704-2(i)(1).
(f) Section 754 Adjustments. To the extent an adjustment to
the adjusted tax basis of any Company asset is required pursuant to Code section
732(d), Code section 734(b) or Code section 743(b), the Capital Accounts of the
Members shall be adjusted pursuant to Treasury Regulation ss.
1.704-1(b)(2)(iv)(m).
(g) Curative Allocations. The allocations under Sections
9.2(a) through (f) (the "Regulatory Allocations") are intended to comply with
certain requirements of the Treasury Regulations. It is the intent of the
Members that, to the extent possible, all Regulatory Allocations shall be offset
either with other Regulatory Allocations or with special allocations of other
items of Company income, gain, loss or deduction pursuant to this Article IX.
Therefore, notwithstanding any other provision of this Article IX (other than
the Regulatory Allocations), the Managers shall make such offsetting special
allocations of Company income, gain, loss or deduction in whatever manner they
determine appropriate so that, after such offsetting allocations are made, each
Member's Capital Account balance is, to the extent possible, equal to the
Capital Account balance such Member would have had if the Regulatory Allocations
were not part of this Agreement and all Company items were allocated pursuant to
Section 9.1. In exercising their discretion under this Section 9.2(g), the
Managers shall take into account future Regulatory Allocations under Sections
9.2(a) through 9.2(g) that are likely to offset other Regulatory Allocations
previously made.
9.3 Other Allocation Rules.
(a) For purposes of determining the Profits, Losses, or any
other items allocable to any period, Profits, Losses, and any such other items
shall be determined on a daily, monthly, or other basis, as determined by the
Managers (or the transferring Member as provided in Section 12.3) using any
permissible method under Code section 706 and the Regulations thereunder.
(b) Solely for purposes of determining a Member's
proportionate share of the "excess non-recourse liabilities" of the Company
within the meaning of Treasury Regulation ss. 1.752-3(a)(3), the Members'
interests in Profits shall be their Sharing Ratios.
(c) To the extent permitted by Treasury Regulation ss.
1.704-2(b)(3), the Manager shall treat distributions of cash flow as having been
made from the proceeds of a non-recourse liability (as defined in Treasury
Regulation ss. 1.704-2(b)(3)) or a Member non-recourse debt only to the extent
that such distributions would not cause or increase an adjusted Capital Account
deficit for any Member.
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ARTICLE X
ALLOCATION OF TAXABLE INCOME AND TAX LOSSES
10.1 In General. Except as provided in Section 10.2, each item of
income, gain, loss and deduction of the Company for federal income tax purposes
shall be allocated among the Members in the same manner as such item is
allocated for book purposes under Article IX.
10.2 Allocation of Section 704(c) Items. The Members recognize that
with respect to property contributed to the Company by a Member and with respect
to property revalued in accordance with Treasury Regulation ss.
1.704-1(b)(2)(iv)(f) (referred to as "Adjusted Properties"), there will be a
difference between the agreed values or Carrying Values, as the case may be, of
such property at the time of contribution or revaluation, as the case may be,
and the adjusted tax basis of such property at that time. All items of tax
depreciation, cost recovery, depletion, amortization and gain or loss with
respect to such contributed properties and Adjusted Properties shall be
allocated among the Members to take into account the book-tax disparities with
respect to such properties in accordance with the provisions of sections 704(b)
and 704(c) of the Code and Treasury Regulation ss. 1.704-3(b)(1). Any gain or
loss attributable to a contributed property or an Adjusted Property (exclusive
of gain or loss allocated to eliminate such book-tax disparities) shall be
allocated in the same manner as such gain or loss would be allocated for book
purposes under Article XII.
10.3 Integration With Section 754 Election. All items of income, gain,
loss, deduction and credits recognized by the Company for federal income tax
purposes and allocated to the Members in accordance with the provisions hereof
and all basis allocations to the Members shall be determined without regard to
any election under section 754 of the Code that may be made by the Company;
provided, however, such allocations, once made, shall be adjusted as necessary
or appropriate to take into account the adjustments permitted by sections 734
and 743 of the Code.
10.4 Allocation of Tax Credits. The tax credits, if any, with respect
to the Company's property or operations shall be allocated among the Members in
accordance with their Sharing Ratios for the period during which the
expenditures, production, sale, or other event giving rise to the tax credit
occurred. If there is no Profit during such period, such tax credits shall be
allocated as if there had been Profit during such Period.
ARTICLE XI
MEMBERS
11.1 Limited Liability. The liability of each Member shall be limited
as set forth in section 48-2b-109 of the Act. Except as permitted under this
Agreement, a Member shall take no part in the control, management, direction or
operation of the affairs of the Company and shall have no power to bind the
Company.
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11.2 Quorum. A majority of the outstanding Voting Interests,
represented in person or by proxy, shall be necessary to constitute a quorum at
meetings of the Members. Each of the Members hereby consents and agrees that one
or more Members may participate in a meeting of the Members by means of
conference telephone or similar communication equipment by which all persons
participating in the meeting can hear each other at the same time, and such
participation shall constitute presence in person at the meeting. If a quorum is
present, the affirmative vote of the majority of the Voting Interests
represented at the meeting and entitled to vote on the subject matter shall be
the act of the Members, unless a greater number is required by the Act. In the
absence of a quorum, those present may adjourn the meeting for any period, but
in no event shall such period exceed 60 days.
11.3 Informal Action. Any action required or permitted to be taken at a
meeting of the Members may be taken without a meeting if the action is evidenced
by a written consent describing the action taken, signed by each Member entitled
to vote. Action taken under this section shall be effective when all Members
entitled to vote have signed the consent, unless the consent specifies a
different effective date.
11.4 Meetings. Meetings of the Members for any purpose or purposes may
be called by any Manager or by holders of not less than one-tenth of all Voting
Interests.
11.5 Place of Meeting. The Managers may designate the place for any
meeting. If no designation is made, the place of meeting shall be the principal
place of business of the Company.
11.6 Notice of Meeting. Written notice stating the place, day and hour
of the meeting, and the purpose or purposes for which the meeting is called,
shall be delivered either personally or by mail, by or at the direction of any
Manager or other person calling the meeting, to each Member of record entitled
to vote at such Meeting. Each of the Members hereby consents and agrees that
meetings of the Members may be called upon four days' written notice.
11.7 Proxies. At all meetings of Members, a Member may vote in person
or by proxy executed in writing by the Member or by his duly authorized
attorney-in-fact. Such proxy shall be filed with a Manager of the Company before
or at the time of the meeting. No proxy shall be valid after eleven months from
the date of its execution, unless otherwise provided in the proxy.
11.8 Conduct of Meeting. At each meeting of the Members, a chairman for
that particular meeting shall be elected. The chairman shall be the Member in
attendance who has received the vote of the majority of the Voting Interests
represented at the meeting. The Chairman shall preside over and conduct the
meeting and shall appoint someone in attendance to make accurate minutes of the
meeting. Following each meeting, the minutes of the meeting shall be sent to
each Manager and Member.
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ARTICLE XII
ACCOUNTING AND REPORTING
12.1 Books. The Operating Manager shall maintain complete and accurate
books of account of the Company's affairs at the principal office of the
Company. The Company's books shall be kept in accordance with generally accepted
accounting principles, consistently applied, and on a calendar year-accounting
period.
12.2 Capital Accounts.
(a) The Operating Manager shall maintain a separate capital
account for each Member and such other Member accounts as may be necessary or
desirable to comply with the requirements of applicable laws and regulations
("Capital Accounts"). Capital Accounts shall be maintained in accordance with
the provisions of Treasury Regulations ss. 1.704-1(b)(2)(iv) and, among other
adjustments, shall be: (i) increased by the amount of all cash capital
contributions and the net agreed value of all capital contributions of property
other than cash (with such net agreed value determined by the unanimous
agreement of the contributing Member and the other Members) made by such Member
to the Company; (ii) increased by all profit allocated to such Member pursuant
to Article IX; (iii) decreased by all items of loss allocated to such Member
pursuant to Article IX; and (iv) decreased by the amount of all distributions of
cash and the net value of all distributions of property made to such Member
pursuant to this Agreement.
(b) Consistent with the provisions of Treasury Regulation ss.
1.704-1(b)(2)(iv)(e) and (f), upon an issuance of additional interests in the
Company for cash or property (other than de minimis amounts) and prior to the
actual or deemed distribution of any Company property (other than cash), the
Capital Accounts of all Members and the Carrying Values of all Company
properties shall be adjusted upwards or downwards to reflect any unrealized gain
or unrealized loss with respect to each Company property (as if such unrealized
gain or unrealized loss had been recognized upon an actual sale of each such
property immediately prior to such issuance or distribution, and had been
allocated among the Members, at such times, pursuant to Article VIII). In
determining such unrealized gain or unrealized loss, the aggregate fair market
value of Company properties as of the date of determination shall be determined
by the Managers using such method of valuation as they deem appropriate taking
into account the provisions of Treasury Regulation ss. 1.704-1(b)(2)(iv)(f).
(c) A transferee of a Company interest shall succeed to the
Capital Account attributable to the Company interest transferred, except that if
the transfer causes a termination of the Company under section 708(b)(1)(B) of
the Code, Treasury Regulation ss. 1.708-1(b) as then in effect shall apply.
12.3 Transfers During Year. In order to avoid an interim closing of the
Company's books, the allocation of Profits and Losses under Article IX between a
Member who transfers part or all of its interest in the Company during the
Company's accounting year and his transferee may be determined pursuant to any
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method chosen by the transferring Member and agreed to by the TMP, which
agreement will not be unreasonably withheld; provided, however, that any Net
Capital Income or Loss shall be allocated to the owner of the interest in the
Company at the time such Net Capital Income or Loss was realized.
12.4 Reports. The Operating Manager shall deliver to the Members the
following financial statements and reports at the times indicated below:
(a) Monthly, within two business days after the end of each
calendar month, a statement setting forth in reasonable detail an estimate of
the Company's revenues, costs and expenses for, the volume of each Product sold
by the Company during, and the volume of each Product held by the Company in
inventory as of the end of, such calendar month.
(b) Monthly, within thirty business days after the end of each
calendar month, a written report which shall include (i) a balance sheet and a
statement of each Member's Capital Account, each as of the last day of such
calendar month, (ii) statements of income and cash flows for such calendar
month, (iii) a schedule showing the status of the Preferential Contribution
Payout which details the total Preferential Distributions to date and related
expenses (both on a cumulative basis and for the prior calendar month) as
recorded on the books of the Company, and (iv) such other information as deemed
reasonably necessary by any Member for purposes of advising such Member properly
about its investment in the Company.
(c) The books of account shall be closed promptly after the
end of each calendar year. As soon as practicable thereafter, the Operating
Manager shall make a written report to each Member, which shall include a
statement of receipts, expenditures, profits and losses for the previous year, a
statement of each Member's Capital Account as of the last day of the previous
calendar year and such additional statements with respect to the state of the
Company as are necessary to advise the Members properly about their investment
in the Company. Such report shall consist in part of a copy of the Company's
United States income tax return. On or before June 30, of each year, each Member
shall be provided with the information, to the extent then in the possession of
the Company, necessary to allow such Member to file its own income tax return
for the preceding year.
(d) Such other reports, audits and financial statements as the
Management Committee shall determine or as a Member shall reasonably request
from time to time; provided that the requesting Member shall bear the actual and
reasonable costs incurred by the Operating Manager in complying with such
special request or in conducting any other special accounting procedures for the
company, other than those expressly provided for in this Agreement. The cost of
such reporting paid to third parties shall be paid by the Company as a Company
expense except as expressly provided otherwise above.
12.5 Section 754 Election. If requested by a Member, the Company shall
make the election provided for under section 754 of the Code.
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12.6 Independent Audit. Within 60 days after the end of each calendar
year the Operating Manager shall provide each Member with audited financial
reports prepared by a "Big Six" public accounting firm selected by the Managers.
ARTICLE XIII
TRANSFER OF MEMBER' S INTEREST--RIGHT OF FIRST REFUSAL
13.1 Restrictions on Transfer.
(a) Additional Members shall not be admitted to the Company
without the prior written consent of all of the Members. Neither Member shall
transfer, assign, mortgage, pledge or grant a security interest in all or any
part of its interest in the Company except as permitted by this Article XIII.
(b) Notwithstanding any other provision of this Agreement, no
Member may dissolve and transfer its membership interest in the Company to the
Member's equity owners prior to the date that is 13 months after the date on
which the Company was formed, except with an opinion of counsel satisfactory in
form and substance to the other Member and from a firm acceptable to the other
Member to the effect that such dissolution and transfer would not (i) cause the
initial issuance of such membership interest pursuant to this Agreement to be in
violation of the Securities Act of 1933 or any applicable state securities law
(the "Securities Act"), or (ii) otherwise be in violation of such laws.
13.2 Right of First Refusal; Right of First Offer.
(a) (i) If at any time Crown proposes to sell, assign, or
otherwise dispose of all or any part of its interest in the Company to a third
party, Crown shall make a written offer to sell such interest in the Company to
MCNIC on the same terms and conditions as those on which Crown proposes to
transfer the interest in the Company. Such offer shall state the name of the
proposed transferee and all the terms and conditions of the proposed transfer,
including the price to the proposed transferee.
(ii) MCNIC shall have the right for a period of 30
days after receipt of the offer from Crown to elect to purchase all of
the interest in the Company offered. To exercise its right to purchase,
MCNIC shall give written notice to Crown. Upon the exercise of a right
to purchase and provided the right is exercised with respect to all of
the interest in the Company offered, the purchase shall be closed and
payment made on the same terms and conditions as those on which Crown
proposed to transfer the interest in the Company.
(iii) If MCNIC does not elect to purchase all of the
interest in the Company offered, Crown may transfer the offered
interest to the proposed transferee named in the offer to the Company.
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However, if that transfer is not made within 90 days after the end of
the period provided for in Section 13.2(a(ii)), a new offer shall be
made to MCNIC and the provisions of Section 13.2(a) shall again
apply.(iv) If the proposed offer under Section 13.2(a)(i) is for
consideration other than cash or cash plus deferred payments of cash,
MCNIC may pay the cash equivalent of such other consideration. Crown
and MCNIC shall attempt to agree upon a cash equivalent of such other
consideration. If they cannot agree within 20 days after the beginning
of the 30-day period under Section 13.2(a)(ii), such disagreement shall
be resolved in accordance with Section 13.4.
(b) (i) If at any time MCNIC proposes to sell, assign, or
otherwise dispose of all or any part of, or to solicit bids from any third party
to purchase or otherwise acquire, all or any portion of its interest in the
Company (other than sales or dispositions to Affiliates of such Member), MCNIC
shall first notify Crown in writing of MCNIC's desire to sell such interest in
the Company.
(ii) Crown shall have 30 days to make a first cash
offer to purchase, and negotiate for the purchase of, the interest in
the Company that MCNIC desires to sell. If MCNIC does not accept a bona
fide first cash offer made by Crown to purchase MCNIC's interest in the
Company, MCNIC shall not sell, assign or otherwise dispose of, or enter
into any binding agreement to sell, assign or otherwise dispose of all
or any part of MCNIC's interest in the Company during the 90-day period
following such 30-day first offer period, unless the cash value of the
consideration to be received by MCNIC from a third party purchaser is
greater than the cash offer made by Crown. If MCNIC does not sell or
enter into a binding agreement to sell its interest in the Company
within such 90-day period, it shall again afford Crown the opportunity
to make a first offer with respect to proposed sales of MCNIC's
interest in the Company as provided below.
(iii) If Crown does not elect to make a first cash
offer to purchase all of the Company interest offered by MCNIC during
the 30-day period provided for in Section 13.2(b)(ii), MCNIC may sell
the interest within 90 days after the expiration of the 30-day period
provided for in Section 13.2(b(ii). If MCNIC does not sell or enter
into a binding agreement to sell its interest in the Company within
such 90-day period, it shall again afford Crown the opportunity to make
a first offer with respect to proposed sales of MCNIC's interest in the
Company as provided in this Section 13.2(b).
13.3 Tag-Along Rights. In the event Crown proposes to sell all or any
part of its interest in the Company and MCNIC does not elect to purchase such
interest pursuant to Section 13.2, then within two business days after entering
into a binding agreement to sell all or any part of its interest in the Company
(other than sales or other dispositions to Affiliates of Crown), Crown shall
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deliver a copy of such binding agreement to MCNIC. MCNIC shall have 20 business
days to elect, by providing written notice to Crown, to require the purchaser of
Crown's interest to purchase a percentage of MCNIC's interest (determined as set
forth below) in the Company on the same terms and conditions (including, without
limitation, the same purchase price per percentage point of ownership interest
in the Company) set forth in the agreement between Crown and the purchase
("Tag-Along Rights"). For purposes of the preceding sentence, in connection with
any proposed sale MCNIC may exercise Tag-Along Rights with respect to a
percentage of its membership interest equal to the product of (i) the percentage
of Crown's membership interest to be sold in the contemplated transfer and (ii)
MCNIC's Sharing Ratio (e.g., if Crown has a 70% Sharing Ratio and is selling all
of its membership interest, 100% of Crown's membership interest is being sold,
and MCNIC is entitled to sell its entire 30% membership interest (30% Sharing
Ratio multiplied by 100%). If the payment for Crown's interest includes
consideration other than cash, Crown, MCNIC and the purchaser shall agree upon
the cash value of the sale and all consideration paid from the purchaser to
Crown for MCNIC's interest shall be in cash. Any disagreement between Crown and
MCNIC concerning the cash value of the sale shall be resolved in accordance with
Section 13.4. In the event MCNIC elects to exercise its Tag-Along rights
pursuant to this Section 13.3 and the purchaser refuses to purchase MCNIC's
interest in the Company as provided above, Crown shall not sell its interest to
the purchaser without the written consent of MCNIC, which consent may be
withheld in the sole discretion of MCNIC. Notwithstanding anything to the
contrary within this Section 13.3 or this Agreement, the Tag-Along Rights
conferred by this Section 13.3 shall not apply if the Preferential Contribution
Payout shall have been previously achieved.
13.4 Cash Equivalents. The cash value of any sale to a third party
shall be determined by agreement among the Members. If they cannot agree and
such disagreement continues for a period of seven days, either of such Members
may, by five days' written notice to the other, initiate arbitration proceedings
under Article XVI for determination of the cash equivalent of such purchase
price. The arbitrator shall determine the cash equivalent without regard to
income tax consequences to Crown, or the Offeror, as applicable, as a result of
receiving cash in lieu of other consideration.
13.5 Direct and Indirect Transfers. The restrictions on transfer set
forth in Sections 13.1 through 13.2 shall not apply to a transfer as a result of
merger, consolidation or similar action that results in sale of all or
substantially all of the assets of the Member, or a transfer of an equity
interest in a Member that is a corporation, partnership or other entity if the
transfer of the equity interest does not result in a change in control of such
corporation, partnership or other entity; provided that the restrictions on
transfer set forth in Section 13.1(b) shall apply to such transfer. A Member may
transfer its interest in the Company to an Affiliate of such Member with the
written consent of the other Members, which consent shall not be unreasonably
withheld, and such transfer shall not be subject to Sections 13.1 through 13.2;
provided that the restrictions on transfer set forth in Section 13.1(b) shall
apply to such transfer.
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13.6 Substitution of a Member.
(a) No transferee (by conveyance, operation of law or
otherwise) of the whole or any portion of a Member's interest in the Company
shall become a substitute Member without the written consent of all of the
Members, which consent may be withheld in the sole discretion of each Member. A
transferee of a Member who receives unanimous consent to become a Member shall
succeed to all the rights and interest of his transferor in the Company. A
transferee of a Member who does not receive unanimous consent to become a Member
shall be entitled only to the distributions to which his transferor would
otherwise be entitled and shall have no right to participate in the management
of the business and affairs of the Company or to become a Member.
(b) If a Member shall be dissolved, merged or consolidated,
its successor in interest shall have the same obligations and rights to profits
or other compensation that such Member would have had if it had not been
dissolved, merged or consolidated, except that the representative or successor
shall not become a substituted Member and shall not have any right to
participate in the management of the business and affairs of the Company without
the written consent of all of the other Members as provided in Section13.6(a).
(c) No transfer of any interest in the Company otherwise
permitted under this Agreement shall be effective for any purpose whatsoever
until the transferee shall have assumed the transferor's obligations to the
extent of the interest transferred and shall have agreed to be bound by all the
terms and conditions hereof, by written instrument, duly acknowledged, in form
and substance reasonably satisfactory to the Managers. Without limiting the
foregoing, any transferee (including but not limited to a transferee under
Sections 13.2, 13.5 and 13.6(b)) that has not become a substituted Member shall
nonetheless be bound by the provisions of this Article XIII with respect to any
subsequent transfer. Upon admission of the transferee as a substitute member,
the transferor shall have no further obligations under this Agreement with
respect to that portion of its interest transferred to the transferee.
13.7 Conditions to Substitution. As conditions to its admission as a
Member (a) any assignee, transferee or successor of a Member shall execute and
deliver such instruments, in form and substance satisfactory to the Management
Committee, as the Management Committee shall deem necessary, and (b) such
assignee, transferee or successor shall pay all reasonable expenses in
connection with its admission as a substituted Member. No person shall be
admitted to the Company as a Member unless (i) either (A) the Member interest or
part thereof acquired by such person has been registered under the Securities
Act, and any applicable state securities laws or (B) the Company has received a
favorable opinion of the Company's legal counsel or of other legal counsel
acceptable to the Members to the effect that the transfer of the Member interest
to such person is exempt from registration under those laws. The Management
Committee, however, may waive the requirements of this Section 13.7.
ARTICLE XIV
DISSOLUTION AND TERMINATION
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14.1 Dissolution. The Company shall be dissolved upon the occurrence of
any of the following:
(a) The consent in writing of all Members.
(b) The election of any Member by written notice to the
Company and the other Member if the other Member is in default in the
performance of any material obligation hereunder, and such default has continued
in whole or in part for not less than 90 days after written notice thereof given
by the Company has been received by the defaulting Member (or, if such default
is not capable of being cured during such 90-day period, the defaulting Partner
has failed to commence all reasonable curative efforts during such 90-day period
and diligently prosecuted such curative efforts to a successful conclusion).
(c) The sale of all or substantially all of the assets of the
Company.
(d) The occurrence of any event that under the Act causes the
dissolution of a limited liability company.
(e) In any event, January 1, 2097.
14.2 Liquidation. Upon dissolution of the Company, the Management
Committee shall appoint in writing one or more liquidators (who may be Members)
who shall have full authority to wind up the affairs of the Company and make
final distribution as provided herein. The liquidator shall continue to operate
the Company properties with all of the power and authority of the Management
Committee. The steps to be accomplished by the liquidator are as follows:
(a) As promptly as possible after dissolution and again after
final liquidation, the liquidator shall cause a proper accounting to be made by
the Company's independent accountants of the Company's assets, liabilities and
operations through the last day of the month in which the dissolution occurs or
the final liquidation is completed, as appropriate.
(b) The liquidator shall pay all of the debts and liabilities
of the Company or otherwise make adequate provision therefor (including, without
limitation, the establishment of a cash escrow fund for contingent liabilities
in such amount and for such term as the liquidator may reasonably determine).
The liquidator shall then by payment of cash or property (at the election of
each Member and, in the case of property, valued as of the date of termination
of the Company at its fair market value by an appraiser selected by all of the
Members) distribute to the Members such amounts as are required to distribute
all remaining amounts to the Members in accordance with Article VIII. If a
Member elects to take its distribution in cash, and sufficient cash is not
available to make the full cash distribution to each Partner, the liquidator
shall sell at fair market value Company property as necessary to make such
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distribution in cash. The other Member may purchase the property sold at its
fair market value. Each Member shall have the right to designate another Person
to receive any property that otherwise would be distributed in kind to that
Member pursuant to this Section 14.2.
(c) Any real property distributed to the Members shall be
assigned by special warranty assignment and shall be subject to the operating
agreements and all encumbrances, contracts and commitments then in effect with
respect to such property, which shall be assumed by the Members.
(d) Except as expressly provided herein, the liquidator shall
comply with any applicable requirements of the Act and all other applicable laws
pertaining to the winding up of the affairs of the Company and the final
distribution of its assets.
(e) The distribution of cash and/or property to the Members in
accordance with the provisions of this Section 14.2 shall constitute a complete
return to the Members of their respective Capital Contributions and a complete
distribution to the Member's or their respective interests in the Company and
all Company property.
14.3 Waiver of Right to Court Decree of Dissolution. The Members agree
that irreparable damage would be done to the Company if a Member brought an
action in court to dissolve the Company. Care has been taken in this Agreement
to provide what the parties believe are fair and just payments to be made to a
Member whose relationship with the Company is terminated for any reason.
Accordingly, each of the Members accepts the provisions of this Agreement as its
sole entitlement on termination of its membership in the Company. Each Member
hereby waives and renounces its right to seek a court decree of dissolution or
to seek the appointment by a court of a liquidator for the Company.
14.4 Articles of Dissolution. Upon the completion of the distribution
of the Company's assets as provided in this Article XIV, the Company shall be
terminated and the person acting as liquidator shall file articles of
dissolution and shall take such other actions as may be necessary to terminate
the Company.
ARTICLE XV
INDEMNIFICATION
15.1 Indemnification. Crown shall indemnify MCNIC and the Company, and
MCNIC shall indemnify Crown and the Company as follows:
(a) If the Company makes the CAT Election, Crown shall defend,
indemnify and save and hold harmless MCNIC and the Company for, from and against
and shall promptly reimburse each of the indemnified parties with respect to any
and all claims, demands, causes of action, losses, damages (including exemplary
and punitive damages), liabilities, costs (including property, ad valorem,
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severance, net proceeds and other taxes) and expenses (including attorney's,
consultant's and expert's fees and expenses and court costs) incurred by such
indemnified party with respect to the CAT Member Interest and that relate to the
business or affairs of CAT which accrue or relate to the period after Crown and
Foreland first began to utilize the Cowboy Terminal and prior to the time Crown
assigns the CAT Member Interest to the Company pursuant to Section 3.1.
(b) Subject to Section 5.3(c), Crown shall indemnify MCNIC
against any cost overrun of the total budget, by more than 10% in the aggregate
or any cost overrun of any particular budget account set forth in such budget by
more than 10% (in each such case, inclusive of expenditures that would not
otherwise constitute Major Decisions under Section 5.2(c). The indemnity
provided for in this Section 15.1(b) will not apply to any overrun consented to
by MCNIC.
(c) Crown shall defend, indemnify and save and hold harmless
MCNIC and the Company for, from and against and shall promptly reimburse each
indemnified party with respect to any and all claims, demands, causes of action,
losses, damages, liabilities, costs and expenses (including reasonable
attorney's, consultant's and expert's fees and expenses and court costs)
incurred by such party that result from or are attributable to any
representation or warranty of Crown contained in this Agreement being untrue, or
any warranty, agreement or covenant of Crown contained in this Agreement being
breached.
(d) MCNIC shall defend, indemnify and save and hold harmless
Crown and the Company for, from and against and shall promptly reimburse each
indemnified party with respect to any and all claims, demands, causes of action,
losses, damages, liabilities, costs and expenses (including reasonable
attorney's, consultant's and expert's fees and expenses and court costs)
incurred by such party that result from or are attributable to any
representation or warranty of MCNIC contained in this Agreement being untrue or
any warranty, agreement or covenant of MCNIC contained in this Agreement being
breached.
15.2 Implementation. The indemnification contained in Section 15.1
shall be implemented as follows:
(a) Such indemnity shall extend to any actual loss, cost,
expense, liability, obligation or damage ("Loss") incurred or suffered by the
indemnified party, its officers, directors, shareholders, partners, members and
managers, including reasonable fees and expenses of attorneys, technical experts
and expert witnesses reasonably incident to matters indemnified against.
(b) The amount of each payment claimed by an indemnified party
to be owing and the basis for such claim, together with a list identifying to
the extent reasonably possible each separate item of Loss for which payment is
so claimed, shall be set forth by such party in a statement delivered to the
indemnifying party ("Claim Notice"). The amount claimed shall be paid by such
indemnifying party as and to, and only to the extent required herein within 30
days after receipt of such statement or after the amount of such payment has
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been finally established, whichever last occurs. In the event the indemnifying
party contests the reasonableness of the payments sought, it shall be entitled
to submit such dispute to arbitration pursuant to Article XVI.
(c) Promptly after notification to an indemnified party with
respect to any claim or legal action or other matter that may result in a Loss
for which indemnification may be sought under this Article XV, but in any event
in time sufficient for the indemnifying party to contest any action, claim
proceeding or other matter that has become the subject of proceedings before any
court or tribunal, such indemnified party shall give written notice of such
claim, legal action or other matter to the indemnifying party and, at the
request of such indemnifying party, shall furnish the indemnifying party or its
counsel with copies of all pleadings and other information with respect to such
claim, legal action or other matter and shall, at the election of the
indemnifying party made within 60 days after receipt of such notice, permit the
indemnifying party to assume control of such claim, legal action or other matter
(to the extent only that such claim, legal action or other matter relates to a
Loss for which the indemnifying party is liable), including the determination of
all appropriate actions, the negotiation of settlements on behalf of the
indemnified party, and the conduct of litigation, through attorneys of the
indemnifying party's choice; provided, however, that no such settlement can
result in any liability or cost to the indemnified party without its consent. In
the event of such an election by the indemnifying party to assume control, (A)
any expense incurred by the indemnified party thereafter for investigation or
defense of the matter shall be borne by the indemnified party, and (B) the
indemnified party shall give all reasonable information and assistance, other
than pecuniary, that the indemnifying party shall deem necessary to the proper
defense of such claim, legal action, or other matter. In the absence of such an
election, the indemnified party will use its best efforts to defend, at the
indemnifying party's expense, any claim, legal action or other matter to which
such other party's indemnification under this Article XV applies until the
indemnifying party assumes such defense, and, if the indemnifying party fails to
assume such defense within the time period provided above, settle the same in
the indemnified party's reasonable discretion at the indemnifying party's
expense.
ARTICLE XVI
ARBITRATION
16.1 Submission to Arbitration. The parties hereby submit all
controversies, claims and matters of difference arising under this Agreement to
arbitration. Without limiting the generality of the foregoing, the following
shall be considered controversies for this purpose: (a) all questions relating
to the interpretation or breach of this Agreement, (b) all questions relating to
any representations, negotiations and other proceedings leading to the execution
hereof, and (c) all questions as to whether the right to arbitrate any such
question exists.
16.2 Initiation of Arbitration and Selection of Arbitrators. The party
desiring arbitration shall so notify the other party, identifying in reasonable
detail the matters to be arbitrated and the relief sought. Arbitration hereunder
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shall be before a three-person panel of neutral arbitrators, consisting of one
person from each of the following categories: (i) An attorney with at least ten
years experience in general commercial law; (ii) an attorney with at least ten
years experience in oil and gas law; and (iii) a person with at least ten years
experience with asphalt production. The AAA shall submit a list of persons
meeting the criteria outlined above for each category of arbitrator, and the
parties shall select one person from each category in the manner established by
the AAA. In the event that any party or the arbitrators fail to select
arbitrators as required above, the AAA shall select such arbitrators. The
arbitrators shall be entitled to a fee commensurate with their fees for
professional services requiring similar time and effort. If the arbitrators so
desire they shall have the authority to retain the services of a neutral judge
or attorney (whose fees shall be treated as an arbitrator's fees) to assist them
in administering the arbitration and conducting any hearings and taking evidence
at such hearings or otherwise.
16.3 Arbitration Procedures. All matters arbitrated hereunder shall be
arbitrated in Denver, Colorado pursuant to Utah law, and shall be conducted in
accordance with the Commercial Arbitration Rules of the AAA, except to the
extent such Rules conflict with the express provisions of this Article XVI
(which shall prevail in the event of such conflict); provided, however, that all
substantive law issues relating to the rights and obligations of the parties
under this Agreement shall be governed by Section 18.5 below. The arbitrators
shall conduct a hearing no later than 45 days after submission of the matter to
arbitration, and a decision shall be rendered by the arbitrators within 10 days
of the hearing. At the hearing, the parties shall present such evidence and
witnesses as they may choose, with or without counsel. Adherence to formal rules
of evidence shall not be required but the arbitration panel shall consider any
evidence and testimony that it determines to be relevant, in accordance with
procedures that it determines to be appropriate. Any award entered in an
arbitration shall be made by a written opinion stating the reasons for the award
made.
16.4 Enforcement. This submission and agreement to arbitrate shall be
specifically enforceable. Arbitration may proceed in the absence of any party if
notice of the proceedings has been given to such party. The parties agree to
abide by all awards rendered in such proceedings. Such awards shall be final and
binding on all parties to the extent and in the manner provided by Utah law. All
awards may be filed with the clerk of one or more courts, state, federal or
foreign having jurisdiction over the party against whom such award is rendered
or its property, as a basis of judgment and of the issuance of execution for its
collection. No party shall be considered in default hereunder during the
pendency of arbitration proceedings specifically relating to such default.
16.5 Fees and Costs. The arbitrators' fees and other costs of the
arbitration and the reasonable attorney fees, expert witness fees and costs of
the prevailing party shall be borne by the non-prevailing party. In its written
opinion, the arbitration panel shall, after comparing the respective positions
asserted in the arbitration claim and answer thereto, declare as the prevailing
party the party whose position was closest to the arbitration award (not
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necessarily the party in favor of which the award on the arbitration claim is
rendered) and declare the other party to be the non-prevailing party. The
arbitration award shall include an award of the fees and costs provided by this
Section 16.5 against the non-prevailing party.
16.6 Capital Contributions. Subject to Section 3.1 (c)(vi), the
obligation of the Members to make capital contributions to the Company under
Article III shall not be required to be submitted to arbitration, but the
Company or any Non-Defaulting Member may elect to submit the matter to
arbitration pursuant to this Article XVI or may elect to pursue throughout
litigation any other remedy provided in Article III or available at law or in
equity to enforce such obligations.
ARTICLE XVII
NOTICES
17.1 Method of Notices. All notices required or permitted by this
Agreement shall be in writing and shall be hand delivered or sent by registered
or certified mail addressed as set forth below (except that any Member may from
time to time give notice changing his address for that purpose), or by facsimile
if confirmed by return facsimile, and shall be effective when personally
delivered, or, if mailed, on the date set forth on the receipt of registered or
certified mail, or if sent by facsimile, upon receipt of confirmation:
If to MCNIC:
MCNIC Pipeline & Processing Company
150 West Jefferson Avenue
Suite 1700
Detroit, Michigan 48226
Attention: William E. Kraemer
Facsimile: (313) 256-6918
with a copy to:
MCN Energy Group
500 Griswold
10th Floor
Detroit, Michigan 48226
Attention: Daniel L. Schiffer, Esq.
Facsimile: (313) 965-0009
If to Crown:
Crown Asphalt Products Company
215 South State
Suite 650
Salt Lake City, Utah 84111
Attention: Mr. Jay Mealey
Facsimile: (801) 537-5609
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17.2 Computation of Time. In computing any period of time under this
Agreement, the day of the act, event or default from which the designated period
of time begins to run shall not be included. The last day of the period so
computed shall be included, unless it is a Saturday, Sunday or legal holiday, in
which event the period shall run until the end of the next day which is not a
Saturday, Sunday or legal holiday.
ARTICLE XVIII
GENERAL PROVISIONS
18.1 Confidentiality. Each Member and Manager will keep confidential
and not use, reveal, provide or transfer to any third party any Confidential
Information it obtains or has obtained concerning the Company, except (a) to the
extent that disclosure to a third party is required by applicable law or
regulation; (b) information which, at the time of disclosure, is generally
available to the public (other than as a result of a breach of this Agreement or
any other confidentiality agreement to which such person is a party or of which
it has knowledge), as evidenced by generally available documents or
publications; (c) information that was in its possession prior to disclosure (as
evidenced by appropriate written materials) and was not acquired directly or
indirectly from the Company; (d) to the extent disclosure is necessary or
advisable, to its employees, consultants or advisors for the purpose of carrying
out their duties hereunder; (e) to banks or other financial institutions or
agencies or any independent accountants or legal counsel or investment advisors
employed by the Company or the Members, to the extent disclosure is necessary or
advisable to obtain financing; (f) to the extent necessary, disclosure to third
parties to enforce this Agreement, or (g) to a Member, Manager, or their
Affiliates; provided, however, that in each case of disclosure pursuant to (d),
(e) or (g), the persons to whom disclosure is made agree to be bound by this
confidentiality provision. The obligation of each Member and Manager not to
disclose Confidential Information except as provided herein shall not be
affected by the termination of this Agreement or the replacement of either of
the Members. As used in this paragraph, the term "Confidential Information"
shall mean information concerning the properties, operations, business, trade
secrets, technical know-how and other non-public information and data of or
relating to the Company, its properties and any technical information with
respect to any project of the Company.
18.2 Public Announcements. Except as required by Law or regulation,
neither Member shall make any press release or other public announcement or
public disclosure relating to this Agreement, the subject matter of this
Agreement or the activities of the Company without the written consent of the
other Members, which consent shall not be unreasonably withheld.
18.3 Entire Agreement. This Agreement embodies the entire understanding
and agreement among the parties concerning the Company and supersedes any and
all prior negotiations, understandings or agreements in regard thereto.
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18.4 Amendment. This Agreement may not be amended except by an
instrument in writing signed by all the Members, nor may any rights hereunder be
waived except by an instrument in writing signed by the party sought to be
charged with such waiver.
18.5 Applicable Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of Utah, excluding its conflict of
laws rules.
18.6 References. References to a Member, including by use of a pronoun,
shall be deemed to include masculine, feminine, singular, plural, individuals,
partnerships or corporations where applicable. References in this Agreement to
terms in the singular shall include the plural and vice versa.
18.7 U.S. Dollars. References herein to "Dollars" or "$" shall refer to
U.S. dollars and all payments and all calculations of amount hereunder shall be
made in Dollars.
18.8 Counterparts. This instrument may be executed in any number of
counterparts each of which shall be considered an original.
18.9 Additional Documents. The Members hereto covenant and agree to
execute such additional documents and to perform additional acts as are or may
become necessary or convenient to carry out the purposes of this Agreement.
18.10 Written Consents. All consents or approvals required or permitted
under this Agreement shall be in writing.
IN WITNESS WHEREOF the parties have executed this Agreement on the
dates stated below their signatures.
MCNIC PIPELINE & PROCESSING COMPANY
By: __________________________
Name: __________________________
Title: __________________________
Date: __________________________
48
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CROWN ASPHALT PRODUCTS COMPANY
By: __________________________
Name: __________________________
Title: __________________________
Date: __________________________
49
CROWN ASPHALT DISTRIBUTION L.L.C.
OPERATING AND MANAGEMENT AGREEMENT
with
CROWN ASPHALT PRODUCTS COMPANY,
as Operator and Manager
dated as of
June 30, 1998
<PAGE>
Table of Contents
Page
RECITALS.....................................................................1
AGREEMENT....................................................................1
1. Definitions...........................................................1
2. Engagement of Crown Asphalt as the Operator; Representations and
Warranties............................................................5
2.1 Engagement of the Operator...................................5
2.2 Ownership and Custody of Company Assets......................5
2.3 Representations and Warranties...............................6
3. Responsibilities of the Company.......................................6
4. Authority of the Operator.............................................6
4.1 Conduct of Business..........................................6
4.2 No Assumption of Obligations Outside Authority...............7
4.3 Other Authority..............................................7
5. Duties of the Operator................................................8
5.1 Presentation of Annual Operating Plan........................8
5.2 Conduct of Operations........................................8
5.3 Specific Powers and Duties of the Operator...................8
5.4 Books and Records...........................................11
5.5 Audits......................................................11
6. Reports..............................................................11
6.1 Reports.....................................................11
6.2 Results of Operations.......................................12
6.3 Access to Records...........................................12
6.4 Inspection of Property......................................12
7. Standard of Care.....................................................12
8. Company Liability for Costs; Indemnification of the Operator.........13
8.1 Reimbursement...............................................13
8.2 Indemnification.............................................13
9. Compensation of the Operator.........................................13
9.1 Reimbursement of Costs......................................13
9.2 Management Fee..............................................15
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10. Presentation of Annual Operating Budget..............................15
10.1 Scope of Annual Operating Budget............................15
10.2 Content of Annual Operating Plan............................15
10.3 Amendments and Supplements..................................15
10.4 Approval by Management Committee............................15
11. Performance of Approved Annual Operating Plan........................16
11.1 Conformance with Annual Operating Plan......................16
11.2 Overruns....................................................16
11.3 Emergencies.................................................16
12. Activities During Deadlock...........................................16
13. Accounts and Settlements.............................................16
14. Purchase and Sale of Products........................................17
15. Term of Agreement....................................................17
16. Force Majeure........................................................17
17. Default..............................................................18
17.1 Failure to Perform..........................................18
17.2 Negotiation of Disputes.....................................18
17.3 Responsibility for Default..................................18
17.4 Measure of Compensation.....................................18
18. Successors and Assigns...............................................18
19. Removal or Resignation of the Operator...............................18
19.1 Removal of the Operator.....................................18
19.2 Resignation; Deemed Offer to Resign.........................19
19.3 Continuity of Operations....................................20
19.4 Replacement of Operator on Economic Grounds.................20
19.5 Conduct of Business of Operator Following Removal
or Resignation......................20
19.6 Non-solicitation............................................21
20. Arbitration..........................................................21
20.1 Submission to Arbitration...................................21
20.2 Initiation of Arbitration and Selection of Arbitrators......21
20.3 Arbitration Procedures......................................21
20.4 Enforcement.................................................22
20.5 Fees and Costs..............................................22
21. Notice; Representatives..............................................22
21.1 Representatives.............................................22
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21.2 Notices.....................................................22
22. Confidentiality......................................................23
23. General Provisions...................................................24
23.1 Section Headings............................................24
23.2 Severability................................................24
23.3 Governing Law...............................................24
23.4 Entire Agreement; Amendments................................24
23.5 No Partnership..............................................24
23.6 Waiver......................................................24
iii
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List of Exhibits
EXHIBIT A CONTRACTS
EXHIBIT B DESCRIPTION OF THE FACILITIES
EXHIBIT C FIRST ANNUAL OPERATING PLAN
SCHEDULE 1 ACCOUNTING PROCEDURES
iv
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OPERATING AND MANAGEMENT AGREEMENT
THIS OPERATING AND MANAGEMENT AGREEMENT (this "Agreement"), dated as of
June 30, 1998, is between CROWN ASPHALT DISTRIBUTION L.L.C., a Utah limited
liability company (the "Company"), and CROWN ASPHALT PRODUCTS COMPANY, a Utah
corporation ("Crown Asphalt" or, when acting as such, the "Operator").
RECITALS
A. The Company has been organized by its sole members, Crown Asphalt
and MCNIC Pipeline & Processing Company, a Michigan corporation ("MCNIC"), for
the purpose of purchasing, processing, blending, and marketing "Products" (as
defined in Section 1 of this Agreement).
B. Crown Asphalt has substantial experience and expertise in
purchasing, processing, blending, and marketing Products and Crown Asphalt has
access to the information, knowledge, experience, and proven technical
capability and other resources to undertake the personal services required for
the management of the Company's business.
C. The Company and Crown Asphalt desire to enter into this Agreement to
allow Crown Asphalt to act as the operator and manager of the Company's business
in accordance with and subject to the terms and provisions of this Agreement.
AGREEMENT
In consideration of the mutual benefits to be obtained hereby and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Definitions. For purposes of this Agreement and all Exhibits and
Schedules attached to this Agreement, the following terms have the meanings set
forth below:
"AAA" means the American Arbitration Association.
<PAGE>
"Accounting Procedures" means the Accounting Procedures attached as
Schedule I to this Agreement.
"Affiliate" of a party means (a) any Person or entity directly or
indirectly owning, controlling, or holding with power to vote 50% or more of the
outstanding voting securities, membership interests, or partnership interests of
the party; (b) any entity 50% or more of whose outstanding voting securities,
membership interests, or partnership interests are directly or indirectly owned,
controlled, or held with power to vote by the party or a Person or group
described in (a); and (c) any officer, director, member, manager, or partner of
the party or any Person described in subsections (a) or (b) of this paragraph.
For purposes of the preceding sentence, "control" means possession, directly or
indirectly, of the power to direct or cause direction of management and policies
through ownership of voting securities, contract, voting trust, or otherwise.
"Agreement" means this Operating and Management Agreement, including
all amendments and modifications, and all Exhibits and Schedules attached to the
Agreement, which are incorporated into the Agreement by this reference.
"Annual Operating Plan" has the meaning set forth in Section 5.3(a) of
the LLC Operating Agreement.
"Assets" means, collectively, the Facilities, Products, Contracts,
Intellectual Property, inventory, equipment and all other moveable and
immoveable, corporeal and incorporeal property of the Company, including
property presently owned by the Company or hereafter acquired by the Company,
whether owned or leased by the Company.
"Confidential Information" means information concerning the properties,
operations, business, trade secrets, technical know-how, and other non-public
information and data of the other party and any technical information with
respect to the business of the Company.
"Continuing Obligations" means obligations or responsibilities that are
reasonably expected to continue or arise after Operations on any part of the
Facilities or Operation of a Plan have ceased or are suspended, such as future
Environmental Compliance.
"Contracts" means the contracts described in Exhibit A and any and all
other contract rights of the Company, now existing or hereafter arising, and any
and all amendments thereto.
"Employees" shall have the meaning set forth in Section 9.1.
"Encumbrances" means mortgages, deeds of trust, security interests,
pledges, liens, net profits interests, royalties or overriding royalty
interests, other payments out of production, or other burdens of any nature.
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"Environmental Compliance" means actions performed during or after
Operations to comply with the requirements of all Environmental Laws, Licenses,
or other contractual commitments or obligations of the Company.
"Environmental Laws" means Laws aimed at reclamation or restoration of
property; abatement of pollution; protection of the environment; protection of
flora, fauna, or wildlife, including endangered species; ensuring public safety
from environmental hazards; protection of cultural or historic resources;
management, storage, or control of hazardous materials or substances; releases
or threatened releases of pollutants, contaminants, chemicals or industrial,
toxic or hazardous substances as wastes into the environment, including without
limitation, ambient air, surface water and groundwater, and all other Laws
relating to the manufacturing, processing, distribution, use, treatment,
storage, disposal, handling, or transport of pollutants, contaminants, chemicals
or industrial, toxic or hazardous substances or wastes, including without
limitation CERCLA and RCRA.
"Environmental Liabilities" means any and all claims, actions, causes
of action, damages, losses, liabilities, obligations, penalties, judgments,
amounts paid in settlement, assessments, costs, disbursements, or expenses
(including without limitation attorneys' fees and costs, experts' fees and
costs, and consultants' fees and costs) of any kind or of any nature whatsoever
that are asserted against any Person, by any Person or entity alleging liability
(including without limitation liability for study, testing, or investigatory
costs, cleanup costs, response costs, removal costs, remediation costs, natural
resource damages, property damages, business losses, personal injuries,
penalties, or fines) arising out of, based on, or resulting from (i) the
presence, release, threatened release, discharge, or emission into the
environment of any hazardous materials or substances existing or arising on,
beneath, or above the Facilities or emanating or migrating or threatening to
emanate or migrate from the Facilities to off-site properties, (ii) physical
disturbance of the environment, or (iii) the violation or alleged violation of
any Environmental Laws.
"Facilities" means any plant, refinery, storage terminal or other
facility or facilities owned, constructed, leased, or in which the Company
otherwise has an interest from time to time for the handling, processing,
refining, blending or other beneficiation of Products, or for the acquisition,
storage and marketing of Products, together with all of the fee or leasehold
property interests related thereto, including without limitation the Facilities
described in Exhibit B.
"Intellectual Property" shall mean all of the patents, trade secrets,
proprietary information, processes, copyrights, trademarks, software, know-how,
technology, operating manuals and technical information owned by the Company,
including without limitation Melt Pac technology patents, the asphalt "blends"
used by the Company and all developments, improvements and enhancements to such
items of intellectual property occurring after the date of this Agreement, and
all pending applications for patents or other intellectual property rights.
"Law" or "Laws" means all applicable federal, state, and local laws
(statutory or common), rules, ordinances, regulations, grants, concessions,
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franchises, licenses, orders, directives, judgments, decrees, and other
governmental restrictions, including permits and other similar requirements,
whether legislative, municipal, administrative, or judicial in nature.
"LLC Operating Agreement" means the Operating Agreement for Crown
Asphalt Distribution L.L.C. of even date with this Agreement.
"Management Committee" means the Management Committee of the Company
established pursuant to the LLC Operating Agreement.
"Marketing Plan" means a plan approved by the Management Committee for
the marketing of Products and shall address, among other things, the projected
market and prices for each Product, potential purchasers and terms of
anticipated contracts for the sale of Products, and potential new markets.
"Member" means any Person owning a membership interest in the Company.
"Operating Manager" means the individual defined as Operating Manager
in the LLC Operating Agreement.
"Operations" means the activities and operations carried out by or on
behalf of the Company pursuant to the terms of this Agreement.
"Operations Account" means the account maintained in accordance with
this Agreement showing the charges and credits incurred or obtained by the
Operator that are chargeable or credited to the Company.
"Operator" means Crown Asphalt and any successor to Crown Asphalt
authorized by the Management Committee having the responsibilities of the
Operator pursuant to this Agreement.
"Person" means a natural person, corporation, joint venture,
partnership, limited partnership, limited liability company, trust, estate,
business trust, association, governmental authority, or any other entity.
"Permitted Investments" has the meaning set forth in Section 5.3(d).
"Petro Source Agreement" means the Purchase and Sale Agreement dated as
of June 30, 1998, between the Company and Petro Source Asphalt Corporation.
"Prime Rate" means the annual rate of interest that equals the floating
commercial rate as published in the "Money Rates" section of the Wall Street
Journal from time to time, adjusted in each case as of the banking day in which
a change in the Prime Rate occurs; provided, however, that if such rate is no
longer published in the Wall Street Journal, then "Prime Rate" shall mean an
annual rate of interest that equals the floating commercial loan rate of
Citibank, N.A., or its successor, announced from time to time as its "base
rate," adjusted in each case as of the banking day in which a change in the base
rate occurs.
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"Products" means all hydrocarbons, crude oil, polymers, bitumen,
asphalt, and all products produced therefrom and chemicals used in association
therewith, including without limitation asphalt, performance grade asphalt,
synthetic crude oil, and diesel fuel.
All capitalized terms not defined herein have the meanings ascribed to
them in the LLC Operating Agreement.
2. Engagement of Crown Asphalt as the Operator; Representations and
Warranties.
2.1 Engagement of the Operator. The Company hereby engages
Crown Asphalt to act as an independent contractor to (i) manage, supervise, and
conduct the Operations of the Company on behalf of the Company in accordance
with the terms of this Agreement, (ii) carry out the Annual Operating Plan and
any other plan adopted and approved by the Management Committee, and (iii)
implement the decisions made and instructions given from time to time by the
Management Committee, all as provided and subject to the restrictions and
limitations set forth herein. Crown Asphalt hereby accepts such engagement and
responsibilities and agrees that it shall perform the obligations and duties
described herein as an independent contractor in accordance with the authority
granted to the Operator herein and the terms and conditions of this Agreement.
Crown Asphalt may perform its duties as the Operator directly or through Crown
Parent, the parent company of Crown Asphalt, or other Affiliates of Crown
Asphalt, but Crown Asphalt shall remain responsible for performing its
obligations hereunder.
2.2 Ownership and Custody of Company Assets.
(a) All property, real and personal, held, developed,
constructed, or acquired by or on behalf of the Company pursuant to this
Agreement, the Petro Source Agreement, or the LLC Operating Agreement shall be
owned by the Company, and the Operator shall not have any ownership, title, or
interest therein except to the extent that the Operator has an interest as a
Member under the LLC Operating Agreement. All equipment, (including the
Company's interest as lessee under equipment leases) buildings, improvements,
Products, Facilities, Contracts, Licenses, and other things acquired by the
Operator for the Company shall be Assets of the Company irrespective of whether
the Operator or the Company actually holds title.
(b) The Operator shall have possession, custody, and
control of the Assets for the use and benefit of the Company in accordance with
the terms of this Agreement.
(c) Except as permitted by this Agreement or unless
authorized by the Management Committee or by an approved Annual Operating Plan,
the Operator shall not mortgage, pledge, charge, encumber, create any lien upon
or trust in, lease, sublease, or otherwise dispose of any Assets or any other
real or personal property whatsoever or any contractual or other rights in which
any Member or the Company has an interest, or acquire or contract to acquire any
property for any Member or the Company under any conditional sales agreement or
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other title retention agreement or any property which is subject to any
Encumbrance (other than any charge permitted by the LLC Operating Agreement) at
the time of acquisition thereof; and the Operator shall take prompt action
within the limits of available funds in the Operations Account to remove any
Encumbrance arising or existing by operation of Law on or over any such right or
property of any Member or the Company.
(d) In no event shall the Operator commingle Company
funds with its funds or anyone else's funds.
2.3 Representations and Warranties. Each of the parties hereby
represents and warrants to the other that: (a) in the case of Crown Asphalt, it
is a corporation validly existing under the Laws of Utah and is authorized to
transact business in Arizona, California, Colorado, Idaho and Nevada, and, in
the case of the Company, it is a limited liability company formed under the Laws
of Utah and is authorized to transact business in Arizona, California, Colorado,
Idaho and Nevada; (b) it is duly authorized to execute this Agreement and to
carry out all its duties and obligations hereunder; (c) the execution and
delivery of this Agreement will not violate or conflict with any provision of
the Laws of Utah or of any organizational instrument governing or relating to
the party; and (d) assuming due execution of this Agreement by all parties, this
Agreement constitutes the legal, valid, and binding obligations of each party,
enforceable against that party in accordance with its terms.
3. Responsibilities of the Company. The Company shall:
(a) Obtain and maintain all Licenses from competent
governmental authorities or third parties necessary for the Operator to carry
out its duties and responsibilities to conduct its business; and
(b) Timely review proposed Annual Operating Plans
and, in the Company's discretion, approve, adopt and implement Annual Operating
Plans to allow the Operator to perform its obligations and duties under this
Agreement.
The obligations of the Operator shall be excused to the extent that its ability
to perform its obligations are impaired by the Company's failure to perform the
above described actions; provided that the Company shall have no liability for
failure to perform such actions.
4. Authority of the Operator.
4.1 Conduct of Business. In the performance of its duties and
obligations hereunder, the Operator shall act as an independent contractor in
accordance with its best judgment. The Operator shall obtain the approval of the
Company prior to undertaking any of the following unless such actions are
provided for in the Annual Operating Plan or other approved plan:
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(a) any group of related capital additions or
improvements to the Company's Facilities estimated to cost more than $25,000,
including without limitation the acquisition of transportation facilities of a
capital nature;
(b) the surrender or abandonment of any License,
interest in land, or interest in Intellectual Property constituting a part of
the Assets held in the name of the Operator;
(c) any material amendment, modification, extension
or termination of any Contract or the execution of any new Contract involving a
consideration in excess of $25,000.
(d) the sale, assignment, or transfer of all or part
of the Assets, provided that the Operator may dispose of any item or group of
related items of tangible personal property included in the Assets for the
account of the Company at fair market value if in the opinion of the Operator
the property is no longer useful in the business of the Company and its original
acquisition cost did not exceed $25,000; and upon such disposition, such
personal property shall be deemed excluded from the Assets;
(e) engaging in derivative activities or investment
in other than Permitted Investments;
(f) retaining or entering into contracts with, or
engaging as an agent or independent contractor under this Agreement, any
Affiliate of the Operator or Person affiliated with any Member; provided
further, that if the Operator engages any of its Affiliates to provide services
hereunder as provided above, it shall do so on terms comparable to and
competitive with those available to the Operator from others dealing at
arm's-length on terms that are approved unanimously by the Management Committee;
(g) retaining any consulting firms, engineering
firms, accounting firms, and law firms to assist it in carrying out its
obligations hereunder if such retainage can reasonably be expected to cost over
$25,000 for any 12-month period;
(h) subcontracting for any labor or operational
services if the aggregate amount payable, or reasonably estimated to be payable,
under all such subcontracts is greater than $25,000 for any 12-month period; and
(j) any contract for the acquisition, processing or
marketing of Products having a term of longer than three years or involving more
than 10% of the Company's Product needs for any one year period.
4.2 No Assumption of Obligations Outside Authority. The
Operator has no authority to act for or to assume any obligation or liability on
behalf of the Company except for such authority as is expressly conferred on the
Operator by this Agreement or by the Company pursuant to this Agreement or the
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Annual Operating Plan; and the Operator shall indemnify and hold the Company,
the Members, their respective successors and assigns, and their respective
directors, officers, employees, and agents harmless from and against any and all
losses, claims, damages, and liabilities arising out of any unauthorized act or
assumption of any obligation or liability by the Operator on behalf of the
Company in bad faith or in circumstances constituting willful misconduct by the
Operator.
4.3 Other Authority. The Operator shall have authority to
undertake all other activities reasonably necessary to fulfill its duties
pursuant to Section 5.
5. Duties of the Operator. The Operator shall perform all actions
reasonably necessary or advisable for the conduct of the business of the Company
and the operation and maintenance of the Assets, including, without limitation,
the following:
5.1 Presentation of Annual Operating Plan. In accordance with
Section 10 and this Section 5.1, the Operator will each year develop and present
to the Management Committee for approval a proposed Annual Operating Plan for
the Company during the next succeeding calendar year in accordance with Section
5.3 of the LLC Operating Agreement. After approval by the Company of an Annual
Operating Plan in accordance with the LLC Operating Agreement, the Operator will
carry out the approved Annual Operating Plan, in cooperation with the Management
Committee and in accordance with the terms of this Agreement.
5.2 Conduct of Operations. Consistent with the Annual
Operating Plan approved by the Management Committee, the Operator shall:
(a) manage the business of the Company for the
production and sale of Products; and
(b) purchase and market Products on behalf of the
Company pursuant to annual purchasing plans and marketing plans approved by the
Management Committee as part of the Annual Operating Plan.
5.3 Specific Powers and Duties of the Operator. The Operator
will have the following specific powers, obligations, and duties, which it will
perform as would a prudent operator in accordance with good industry practices
and in accordance with the approved Annual Operating Plan:
(a) The Operator shall implement the decisions of the
Management Committee, and shall make all expenditures necessary to carry out
approved Annual Operating Plans within the limits set forth therein. The
Operator shall promptly advise the Management Committee if it lacks sufficient
funds, or anticipates that it will lack sufficient funds, to carry out its
responsibilities under this Agreement.
(b) In consultation with the Operating Manager, the
Operator shall develop an annual purchasing plan for the purchase of Products
and an annual marketing plan for the marketing and sales of Products to enable
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the Operating Manager to submit the purchasing plan and marketing plan to the
Management Committee for approval at least 90 days before the beginning of the
year to which the plan relates.
(c) The Operator shall assure the custody,
maintenance, operation, and protection of the Assets and any other property of
any Member in the Operator's possession.
(d) The Operator shall deposit and prudently invest
in Investments pre-approved by the Management Committee ("Permitted
Investments") all funds it receives from or on behalf of the Company in excess
of funds maintained in the Operations Account for current operations; and
disburse such funds as are necessary to carry out Operations, including payment
of all sums payable by the Operator for: its employment of employees, agents,
representatives, engineers, advisers, independent contractors, and other
personnel; its acquisition of services, supplies, utilities, materials,
equipment, and other property necessary or appropriate in connection therewith
as provided for in the Annual Operating Plan; all fees payable to the Operator
under this Agreement; and remittance to the Company of the proceeds from the
sale of Products as provided in this Agreement.
(e) The Operator shall maintain full and accurate
accounts of all business transactions entered into pursuant to this Agreement.
(f) The Operator may sell or dispose of any tools,
equipment, supplies, or facilities included in the Assets that wear out or are
no longer useful; provided, however, that in any year the Operator may not sell
or dispose of such tools, equipment, supplies, and facilities whose original
acquisition costs exceed $25,000 in the aggregate, without the prior approval of
the Management Committee.
(g) The Operator shall oversee the preparation and
evaluation of proposals for the further development of the business of the
Company to increase the efficiency or capacity of the Facilities by providing
facilities for the blending or processing of additional Products as the
Management Committee may deem necessary or desirable in connection therewith.
(h) Except to the extent limited by this Agreement,
the Operator shall (i) purchase or otherwise acquire all material, supplies,
equipment, vehicles, fuel, tools, supplies, power, water, utility, and
transportation services required for Operations, and such purchases or
acquisitions shall be made on the best terms reasonably available to the
Operator, taking into account all the circumstances; and (ii) use its reasonable
efforts to obtain such customary warranties and guarantees as are available in
connection with such purchases and acquisitions.
(j) Except to the extent limited by this Agreement,
the Operator shall (i) make or arrange for all payments required by Licenses,
Encumbrances, Contracts, and other agreements relating to the Company and its
Operations; and (ii) do all other acts reasonably necessary to maintain the
Licenses and other Assets and carry out the obligations of the Company. If
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authorized by the Management Committee, the Operator shall have the right to
contest in the courts, by arbitration, or otherwise, the validity or amount of
any taxes or assessments if the Operator deems them to be unlawful, unjust,
unequal, or excessive, or to undertake such other steps or proceedings as the
Operator may deem reasonably necessary to secure a cancellation, reduction,
readjustment, or equalization thereof before the Company shall be required to
pay them, and the Operator shall use reasonable efforts to prevent any Assets
from being lost as a result of the nonpayment of any taxes, assessments, or
similar charges.
(k) The Operator shall prepare and file reports or
returns (except returns with respect to taxes based upon or measured by income)
required by Law, by the LLC Operating Agreement, or by the Licenses, or any
other agreements to be filed in connection with the Operations or the Assets.
(l) The Operator shall: (i) apply for and obtain all
necessary Licenses in the name of the Company; (ii) maintain all necessary
Licenses in accordance with their terms and all applicable Laws; (iii) conduct
all Operations in compliance with applicable Laws; (iv) promptly notify the
Operating Manager and the Management Committee of any allegations of substantial
violation of Laws; and (v) prepare and file all reports or notices required for
Operations of the Company. All reasonable costs incurred by the Operator in
contesting and complying with any asserted violations of applicable Laws,
including without limitation any fines or penalties, shall be charged to the
Operations Account, except to the extent that any such costs result from the
gross negligence or willful misconduct of the Operator, its Affiliates or
subcontractors, or any of their employees or agents.
(m) The Operator shall prosecute and defend, but
shall not initiate without consent of the Management Committee, all litigation
or administrative proceedings arising out of Operations and shall keep the
Company advised regarding the status thereof; provided that the Company may
elect to participate in or assume control of any such proceeding. Prior
Management Committee approval shall be required for any settlement involving
payments, commitments, or obligations in excess of $25,000 in cash or value.
(n) The Operator shall secure and maintain, for the
benefit of the Company and the Operator in connection with the Operations and
the Assets, adequate and reasonable insurance with coverage, limits, and
deductible amounts as approved by the Management Committee if available at
reasonable cost, including the covering of risks of personal injury to or death
of employees or others and risk of fire. The Operator shall obtain and furnish
to the Company certificates of insurance obligating the insurers to notify the
Operator and the Company in writing 30 days prior to any cancellation or
modification thereof, and shall, with the approval of the Management Committee,
adjust losses and claims pertaining to or arising out of such insurance.
(o) The Operator shall dispose of Assets, whether by
sale, abandonment, surrender, or transfer in the ordinary course of business;
provided, however, that without prior authorization from the Management
Committee or the Operating Manager, the Operator shall not dispose of assets in
any one transaction having a value in excess of $25,000.
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(p) The Operator shall furnish, or, subject to the
approval of the Company pursuant to Section 4.1, subcontract for, sufficient
labor forces to assure the performance of its obligations hereunder. The
Operator shall obtain such management and technical personnel, including without
limitation engineers, financial planning, accounting and marketing personnel,
superintendents, advisers, experts and employees of the Operator, as it
reasonably deems necessary or advisable.
(q) The Operator shall procure from outside experts
and consultants special engineering, design, legal, accounting, advertising,
public relations, and other professional and advisory services and shall
supervise such independent contractors as the Operator may retain.
(r) The Operator shall review all invoices for
approval, pay all approved invoices, and keep and maintain all required
accounting and financial records pursuant to the Accounting Procedures and in
accordance with customary accounting practices in the U.S. asphalt industry. In
addition, the Operator shall provide assistance to the Operating Manager in the
preparation and maintenance of financial and tax accounts of the Company.
(s) The Operator shall take such actions in an
emergency affecting safety or life or the conduct of Operations or the
preservation of Assets and any other property and assets of the Members in the
Operator's possession without special instructions or authorizations as the
Operator may deem necessary or advisable to prevent loss, injury, or damage or
to maintain or restore Operations or the Assets.
(t) The Operator shall undertake all other activities
reasonably necessary to fulfill the foregoing.
5.4 Books and Records. The Operator shall properly maintain
adequate books and records relating to its activities hereunder in accordance
with generally accepted accounting principles consistently applied and the
Accounting Procedures attached as Schedule I. All statements of transactions and
accounts rendered by the Operator to the Company under this Agreement shall be
rendered in United States Dollars.
5.5 Audits. The books and records maintained pursuant to
Section 5.4 shall be open to the inspection by the Company and the Members at
all reasonable times and shall be audited as of the end of each calendar year
within 60 days after the end of the calendar year by a "Big Six" firm of public
accountants selected by Operator as may be selected by the Management Committee;
provided, however, that if the Management Committee adopts an accounting period
other than the calendar year, audits shall be performed after the end of each
such period, rather than at the end of the calendar year. All written exceptions
to and claims against the Operator for discrepancies disclosed by any such audit
shall be made not more than three months after receipt of the audit report by
the Members. Failure to make any exception or claim within the three-month
period shall mean the audit is correct and binding upon the Company and the
Operator.
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6. Reports.
6.1 Reports. The Operator shall use reasonable efforts to keep
the Management Committee advised of all material aspects of the Operations by
submitting in writing to the Management Committee:
(a) Within 30 days after the end of each month,
progress reports that include statements of expenditures and comparisons of
expenditures to the adopted Annual Operating Plan;
(b) Periodic summaries of data acquired;
(c) Copies of reports concerning Operations;
(d) A detailed report within 90 days after completion
of each Annual Operating Plan, which shall include comparisons between actual
and Budgeted expenditures and comparisons between the objectives and results of
projects undertaken by the Company;
(e) As soon as practicable (and not later than 90
days after the close of each calendar year), such additional information or data
concerning any Member that it requires in order to prepare its tax returns; and
(f) Such other reports as the Management Committee
may reasonably request.
6.2 Results of Operations. Within two days after the end of
each calendar month, the Operator shall furnish to each Member a progress report
summarizing the results of Operations during the preceding month as compared
with the results of Operations for the month as forecast in the Annual Operating
Plan approved and adopted by the Management Committee for that month.
6.3 Access to Records. The Operator shall permit each Member
through its duly authorized representatives at all reasonable times to examine
and make copies of all records, reports, accounts, plans, maps, logs, surveys,
assays, analyses, production reports, correspondence, other documents, and all
interpretations thereof under the control of the Operator relating to any of the
Assets or the Operations. Each Member shall have the right to authorize, and the
Operator shall permit, any lending institution to which the Member is or expects
to become indebted (either by employees of the lending institution or
independent accountants employed by it), at all reasonable times, to examine all
such information, as well as the books and records maintained by the Operator
pursuant to Section 5.4 and to discuss the finances and accounts of the Operator
relating to Operations with officers and representatives of the Operator or with
its public accountants.
6.4 Inspection of Property. The Operator shall permit each
Member through its duly authorized representatives, and any lending institution
(including any employees or accountants designated by it) authorized by a Member
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that is or expects to become indebted to the lending institution, at all
reasonable times, to have access to the Facilities, and any other facility of
the Company and to consult with employees of the Operator or any independent
contractor and its employees that have been engaged by the Operator concerning
the Operations and the performance of its services by the Operator under this
Agreement.
7. Standard of Care. The Operator shall conduct all Operations in a
good, workmanlike, and commercially reasonable manner, in accordance with sound
asphalt processing and marketing, and other applicable industry standards and
practices applicable in the area where the Operations are conducted, and in
accordance with the provisions of the Licenses. Notwithstanding the foregoing
sentence, the Operator shall not be liable to the Company for any act or
omission resulting in damage or loss except to the extent caused by or
attributable to the Operator's gross negligence or willful misconduct.
8. Company Liability for Costs; Indemnification of the Operator.
8.1 Reimbursement. The Company shall provide the Operator with
funds in advance or shall reimburse the Operator for any costs or liabilities
incurred by the Operator in carrying out its responsibilities under this
Agreement, including without limitation expenditures made in accordance with an
approved Annual Operating Plan, expenditures otherwise authorized or permitted
under this Agreement, and other expenditures authorized by the Company.
8.2 Indemnification. The Company agrees to indemnify and to
hold harmless the Operator and its Affiliates against any claim of or liability
to any third Person resulting from any act or omission of the Operator, its
agents or employees, in conducting Operations pursuant to this Agreement in good
faith to the extent that the claim or liability is not covered by insurance, and
except to the extent that the claim or liability results from the gross
negligence or willful misconduct of the Operator, its Affiliates, its agents, or
its employees, unless the act or omission of the Operator, its Affiliates,
agents, or employees, is done or omitted at the express instruction, or with the
express concurrence of, the Company.
9. Compensation of the Operator.
9.1 Reimbursement of Costs. Subject to Section 11.1, within 10
days of presentation of appropriate documentation therefor, the Company shall
reimburse the Operator for all reasonable direct costs actually paid in the
performance of this Agreement by the Operator, including without limitation the
costs described in the Accounting Procedures, and the following:
(a) compensation, including all remuneration in
whatever form, for personal services rendered by employees of the Operator or of
any Person that is an Affiliate of the Operator who are employed full time in
connection with and dedicated to the performance of this Agreement
("Employees"), including but not limited to reasonable salaries, wages, premiums
for overtime and extra pay shifts, bonuses, incentives, suggestion and safety
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awards, social security, old age benefit taxes, employee insurance,
contributions to pension and annuity plans and to employment and trade union
plans or funds, superannuation funds, sick leave, long service leave, holiday
pay, severance pay, and other fringe benefits;
(b) travel, lodging, subsistence, and incidental
expenses of Employees incurred in the discharge of duties connected with the
performance of this Agreement;
(c) costs of materials, supplies, and services
required for the performance of this Agreement, including the costs of
inspections, storage, salvage, and other usual expenses incident to the
procurement and use thereof and costs of procurement of or arranging for
shipment of Products and preparation of shipping documents;
(d) rents, royalties, renewal fees, or payments on or
in lieu of production of Products when such payments are made by the Operator
for the account of the Company;
(e) Governmental Fees and taxes of every kind (except
taxes based upon or measured by the income of the Operator) levied, assessed, or
imposed upon or in connection with the Assets or the production of Products or
other Operations, together with any interest or penalties reasonably incurred in
connection with contested payments thereof that are paid by the Operator for the
benefit of the Company;
(f) charges for utility services such as power, gas,
water, and communications, including telephone, facsimile, and radio, and the
cost and expense of installing or rendering any such services;
(g) costs incurred to replace or repair damage or
loss or to satisfy liabilities arising from acts of Employees not compensated
for by insurance or otherwise, unless due to the bad faith, gross negligence, or
willful misconduct of the Operator;
(h) costs of transportation of Employees, materials,
equipment and supplies necessary for the operation of the Project;
(i) charges for legal, accounting, engineering and
consulting services rendered by professionals who are not Employees;
(j) premiums on insurance that the Operator is
required or permitted to carry under the terms of this Agreement;
(k) office expenses, including supplies, equipment,
or other expenses incident to office maintenance and operation;
(l) maintenance and repair expenses necessary or
appropriate to keep the Assets in good condition and repair and in efficient
operating condition;
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(m) costs and expenses incurred in connection with
the purchase and sale of Products, including without limitation, solicitations
of bids and other purchasing activities pursuant to approved Purchasing Plans,
and promotional, advertising, and other selling activity pursuant to approved
Marketing Plans;
(n) costs and expenses incurred in connection with
Environmental Compliance, any required environmental baseline studies, and
engineering, undertaken by the Operator relating to the business of the Company;
(o) except for actions brought against the Operator
by the Company in which the Operator is held liable by reason of its bad faith,
willful misconduct or gross negligence, litigation costs and expenses, including
attorneys' fees and expenses, and the amount of any judgments obtained against
the Operator or the Company (and any agreed settlement) insofar as they relate
to the Assets or the business of the Company; and
(p) amounts payable to independent contractors or
subcontractors, consultants, consulting firms, engineering firms, contractors,
accounting firms, and law firms, retained by the Operator (subject to any prior
approvals of the Company required under this Agreement) to assist the Operator
in carrying out its obligations hereunder.
9.2 Management Fee. The Company will pay the Operator a
monthly fee of $5,000 for managing the Operations in addition to such other
costs as provided for elsewhere in this Agreement.
10. Presentation of Annual Operating Budget.
10.1 Scope of Annual Operating Budget. An Annual Operating
Plan shall be for a period of one calendar year; however, upon approval by the
Management Committee, an Annual Operating Plan may be for a period longer than
one calendar year. The parties shall develop the first Annual Operating Plan
reasonably promptly within a reasonable time period after the execution hereof.
During the period covered by an Annual Operating Plan, and at least 90 days
prior to its expiration, the Operator will submit to the Management Committee a
proposed Annual Operating Plan for the next succeeding period.
10.2 Content of Annual Operating Plan. Each Annual Operating Plan
proposed by the Operator will contain the following information:
(a) A narrative description of the Operations
proposed for the period covered by the proposed Annual Operating Plan.
(b) A separate breakdown of costs for the Operations,
in accordance with the Accounting Procedures. Proposed expenditures will be
shown on a monthly basis.
(c) A sum equaling 10% of all expenditures in the
Annual Operating Plan (excluding the Operator's management fee) as a reserve for
contingencies.
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(d) Provision for the Operator's fees pursuant to
Section 9.2.
(e) Other information required by Section 5.3(a) of
the LLC Operating Agreement.
10.3 Amendments and Supplements. During the period covered by
an Annual Operating Plan, the Operator may propose amendments to the Annual
Operating Plan or a supplemental Annual Operating Plan.
10.4 Approval by Management Committee. Action on a proposed
Annual Operating Plan will be taken by the Management Committee as provided in
the LLC Operating Agreement. If the Management Committee does not approve a
proposed Annual Operating Plan, the Operator will, if feasible, in cooperation
with the Management Committee attempt to make changes that will enable the
Annual Operating Plan to be approved and adopted.
11. Performance of Approved Annual Operating Plan.
11.1 Conformance with Annual Operating Plan. Except as
otherwise provided herein or as otherwise authorized by the Company, the
Operator will conduct Operations, incur expenses, and purchase assets for the
Company only in accordance with Annual Operating Plans approved by the
Management Committee.
11.2 Overruns. Budget overruns of 10% or less may be made
without amendment to the existing Annual Operating Plan or prior approval of the
Company. If the Operator anticipates that an Annual Operating Plan overrun of
greater than 10% will occur and believes that additional expenditures are
warranted prior to the end of the approved Annual Operating Plan, the Operator
shall propose one or more amendments or supplements to the current Annual
Operating Plan for approval by the Management Committee. In calculating
expenditures in excess of an approved Annual Operating Plan, all expenditures
for the entire program covered by the Annual Operating Plan shall be considered
as a whole and compared to the whole of the expenditure reflected in the Annual
Operating Plan.
11.3 Emergencies. In case of emergency, the Operator may take
any reasonable action it deems necessary to protect life, health, safety, or
property, to protect the Assets, to comply with Laws, or to comply with Licenses
governing operation of the Facilities. The Operator may make reasonable
expenditures for such emergencies. The Operator shall promptly notify the
Management Committee of the emergency, and the Company shall reimburse the
Operator for all reasonable resulting costs.
12. Activities During Deadlock. If the Management Committee for any
reason fails timely to adopt any Annual Operating Plan after the First Annual
Operating Plan, the Operator shall have authority to continue Operations
sufficient to maintain the Assets, to comply with and fulfill all the
requirements of all Licenses, to fulfill existing contracts, to comply with
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Laws, and, if production has commenced when the deadlock occurs, to maintain or
initiate production levels consistent with the Annual Operating Plan that has
previously been approved by the Management Committee. The Company shall provide
funding for such Operations during deadlock and reimburse the Operator as
provided in this Agreement.
13. Accounts and Settlements. On the basis of the approved Annual
Operating Plan, the Operator shall submit to the Management Committee prior to
the last day of each month a billing for estimated cash requirements for the
next month to the extent that they are in excess of cash remaining available
from prior advances of cash made by the Company and from sales of Products.
Within 30 days after receipt of each billing, the Company shall advance to the
Operator the amount set forth in the billing. The Operator shall maintain a cash
balance approximately equal to anticipated disbursements for the next 30 days,
and the Operator shall promptly remit to the Company all funds in excess of that
amount. The Operator shall prudently invest all funds in excess of immediate
cash requirements for the benefit of the Project in Permitted Investments.
14. Purchase and Sale of Products. The Operator shall cause Products to
be purchased and sold in accordance with the terms and provisions of a
Purchasing Plan and Marketing Plan approved by the Company or pursuant to such
other direction of the Company to the Operator if no such plans are in effect.
15. Term of Agreement. Unless sooner terminated as provided herein, the
term of this Agreement shall commence on the effective date of this Agreement
and shall expire five years after that date (the "Initial Term"), which term
shall be automatically extended for unlimited successive one year periods unless
it is terminated during the pendency of any such subsequent period by one party
furnishing the other with written notice, at least 90 days prior to the
expiration of the period, of an intent to terminate this agreement upon the
expiration of the period.
16. Force Majeure. Except for the obligation to make payments when due
hereunder, the obligations of the Company or the Operator shall be suspended to
the extent and for the period that performance is prevented by any cause,
whether foreseeable or unforeseeable, beyond its reasonable control ("Force
Majeure"), including without limitation labor disputes (however arising and
whether or not employee demands are reasonable or within the power of the party
to grant); acts of God; Laws, proclamations, instructions, or requests of any
government or governmental entity; judgments or orders of any court; inability
to obtain on reasonably acceptable terms, or unreasonable delays in obtaining,
any License or other authorization, including governmental approvals;
curtailment or suspension of activities to remedy or avoid an actual or alleged,
present or prospective violation of federal, state, or local environmental
standards; acts of war or conditions arising out of or attributable to war,
whether declared or undeclared; riot, civil strife, insurrection, or rebellion;
fire, explosion, earthquake, storm, flood, sink holes, drought, or other adverse
weather condition; delay or failure by suppliers or transporters of materials,
parts, supplies, services, or equipment or by contractors' or subcontractors'
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shortage of, or inability to obtain, labor, transportation, materials,
machinery, equipment, supplies, utilities, or services; accidents; breakdown of
equipment, machinery, or facilities; or any other cause, whether similar or
dissimilar to the foregoing. The performance of the party affected by Force
Majeure shall be suspended only for as long as the event of Force Majeure
continues, and the parties shall consult with each other and use their best
efforts to find alternative means of accomplishing such performance as satisfies
the requirements of this Agreement. Immediately upon cessation of the event of
Force Majeure, the party affected by Force Majeure shall notify the other party
in writing and shall take steps to recommence or continue the performance that
was suspended. Notwithstanding anything to the contrary contained herein, the
computer problem known as the "millennium bug" or the "year 2000 problem", which
can arise because computer software, hardware or other equipment may recognize
the year 2000 to be the year 1900, shall not be deemed to be an act of force
majeure or other excuse for performance under this Agreement if the Operator's
computer system should be affected by this problem. Operator represents and
warrants to the Company that its computer systems are designed to be used prior
to, during and after the calendar year 2000, and that such computer systems will
operate, and all data will be processed, during each such time period without
error. Operator acknowledges that the Company has entered into this Agreement in
reliance on Operator's representations, warranties and abilities to perform the
services described herein.
17. Default.
17.1 Failure to Perform. The failure of any party to perform
any of its obligations in this Agreement and the failure of that party to cure
the default within 14 days after the issuance of written notice thereof (or
initiate efforts to cure if the cure would extend beyond the foregoing period)
shall constitute a default by that party.
17.2 Negotiation of Disputes. The parties shall negotiate in
good faith to resolve amicably any disputed matters relating to alleged
defaults. In addition, the parties shall negotiate in good faith procedures to
be adopted to avoid ongoing defaults by any party.
17.3 Responsibility for Default. A defaulting party shall be
responsible to the non-defaulting party for all direct damages caused by its
default.
17.4 Measure of Compensation. The measure of compensation in
the event of a default by either party shall be limited to compensation for
actual losses incurred by the non-defaulting party, including without limitation
costs of obtaining alternate contractors to perform services, production
expenses, or property losses resulting directly from the failure or
non-performance of the defaulting party, but not lost profits.
18. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their successors and assigns;
provided, however, that neither party shall transfer its rights or obligations
hereunder without the prior written consent of the other party, which consent
shall not be unreasonably withheld. Notwithstanding the foregoing, either party
may assign its rights and delegate its duties hereunder to one of its Affiliates
without the prior consent of the other party. It shall not be unreasonable for
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the Company to withhold its consent to an assignment by the Operator to its
non-Affiliated successor as a Member of the Company and, in such event, the
remaining Member in the Company in accordance with the LLC Operating Agreement
shall have the sole right to designate the successor to the Operator.
19. Removal or Resignation of the Operator.
19.1 Removal of the Operator. During the Initial Term of this
Agreement, the Operator may be removed only for "good cause" by the affirmative
vote of the Management Committee (after excluding the voting interest of the
Operator). For purposes hereof, "good cause" shall mean any of the following (a)
repeated negligence; (b) unremedied negligence; (c) willful misconduct; (d)
material breach of the standards of operation contained in Section 5; or (e)
material failure to perform its obligations under this Agreement. For purposes
hereof, "repeated negligence" shall occur if (i) the Operator is negligent in
performing its obligations under this Agreement; (ii) the Operator receives a
notice in writing from the Management Committee specifying that the Management
Committee has reasonably determined that the Operator has been negligent in the
performance of its duties as the Operator and the basis for such determination
by the Management Committee; and (iii) the Operator receives such written
notices more than three times in any six month period. For purposes hereof,
"unremedied negligence" shall occur if (i) the Operator is negligent in
performing its obligations under this Agreement; (ii) the Operator receives a
notice in writing from the Management Committee specifying that the Management
Committee has reasonably determined that the Operator has been negligent in the
performance of its duties as the Operator and the basis for such determination
by the Management Committee; and (iii) the Operator has not remedied, or
commenced diligent efforts to cure within such period, its negligence within 14
calendar days and continues to pursue such diligent efforts until such matters
are cured after its receipt of the Management Committee's notice.
19.2 Resignation; Deemed Offer to Resign. The Operator may
resign upon not less than 120 days' prior notice to the Company, in which case
the other Member in the Company may elect to become the new Operator by notice
to the resigning Operator within 30 days after receipt of the notice of
resignation. If any of the following shall occur, the Operator shall be deemed
to have resigned upon the occurrence of the event described in each of the
following subsections, with the successor Operator to be appointed by the other
Member at a subsequently called meeting of the Management Committee, at which
the Operator shall not be entitled to vote. The other Member of the Company may
appoint itself or a third party as the Operator. If a third party is appointed
as the Operator, the third party must execute an Operating and Management
Agreement containing terms and conditions substantially similar to the terms set
forth herein, except that the third party operator may be removed at anytime,
with or without cause, by the Management Committee.
(a) The removal of the Operator for "good cause" as
defined within Section 19.1;
(b) A receiver, liquidator, assignee, custodian,
trustee, sequestrator, or similar official for a substantial part of the
Operator's assets is appointed and the appointment is neither made ineffective
nor discharged within 60 days after the making thereof.
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(c) The Operator fails to pay or contest in good
faith its bills and business debts as they become due and such failure would
reasonably be expected to have a material adverse effect on (i) the condition
(financial or otherwise), business, assets or results of operations of the
Operator, or (ii) the ability of the Operator to perform its obligations under
this Agreement;
(d) The Operator commences a voluntary case under any
applicable bankruptcy, insolvency, or similar Law now or hereafter in effect; or
consents to, requests, or acquiesces in the entry of an order for relief in an
involuntary case under any such Law or to the appointment of or taking
possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator, or other similar official of any substantial part of its assets;
or makes a general assignment for the benefit of creditors; or takes corporate
or other action in furtherance of any of the foregoing;
(e) A judgment, decree, or order for relief is
entered against the Operator that materially affects its ability to serve as the
Operator, or materially affects a substantial part of its interest in the
Company or its other assets by a court of competent jurisdiction in an
involuntary case commenced under any applicable bankruptcy, insolvency, or other
similar Law of any jurisdiction now or hereafter in effect; or
(f) A successful challenge of the Operator, as
provided for in Section 19.4.
(g) The Operator sells or transfers to someone other
than an Affiliate its interest in the Company.
Under Subsections (b), (c), or (d) above, the appointment of a successor
Operator shall be deemed to pre-date the event causing the deemed resignation.
19.3 Continuity of Operations. In the event of its removal,
resignation, or deemed resignation, the Operator will cooperate in transferring
files, accounts, data, contract rights, and all other things necessary or
convenient for the conduct of Operations by the new Operator. The Operator will
use its best efforts to provide for continuity of Operations notwithstanding the
transfer of operational responsibility to its successor.
19.4 Replacement of Operator on Economic Grounds. At any time
following the Initial Term (and, in the case of any successor Operator, after it
has acted in that capacity for not less than one year), the Company may give
written notice to the Operator proposing terms and conditions under which the
Company (a) believes that Operations can be conducted more efficiently and (b)
is willing to become the Operator under this Section or has a bona fide
commitment from a third party (including any Member of the Company) to do so.
The notice shall set forth specific changes in operating practices or
procedures, specific reductions in charges or other costs of operation under
this Agreement (including overhead), or both. Within 30 days after receipt of
the Company's notice, the Operator will notify the Company that it elects (x) to
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allow the Company, or the Company's designee, to become the Operator for at
least one year under the terms and conditions contained in the Company's
proposal or (y) to continue as the Operator under the terms and conditions of
the Company's proposal. If the Operator elects to proceed under "(x)," the
change of Operator shall occur effective 7:00 a.m. on the 30th day after receipt
by the Company of the Operator's notice of election. The removed Operator cannot
seek to remove and replace the replacement Operator under this Section 19.4
within six (6) months after the date of removal of the removed Operator.
19.5 Conduct of Business of Operator Following Removal or
Resignation. In the event the Operator is removed or resigns as Operator under
this Agreement for any reason, it shall be free to conduct any business,
whatsoever, subject only to the restrictions placed upon it as a Member of the
Company pursuant to Article VI of the Company's Operating Agreement and the
provisions of Section 22 of this Agreement.
19.6 Non-solicitation. The Company, through its Members,
agrees that during the term of this Agreement, the Company shall not solicit,
divert, hire or induce or attempt to solicit, divert or hire any "non-Petro
Source" employees of the Operator or its affiliates providing substantially
full-time services to the Operator. As used herein, "non-Petro Source" employees
means those employees which were not engaged by the Operator or its affiliates
as a result of the Company's acquisition of the assets of Petro Source Asphalt
Company.
20. Arbitration.
20.1 Submission to Arbitration. The parties hereby submit all
controversies, claims, and matters of difference arising under this Agreement to
arbitration. Without limiting the generality of the foregoing, the following
shall be considered controversies for this purpose: (a) all questions relating
to the interpretation or breach of this Agreement, (b) all questions relating to
any representations, negotiations, and other proceedings leading to the
execution hereof, and (c) all questions as to whether the right to arbitrate any
such question exists.
20.2 Initiation of Arbitration and Selection of Arbitrators.
The party desiring arbitration shall so notify the other party, identifying in
reasonable detail the matters to be arbitrated and the relief sought.
Arbitration hereunder shall be before a three-person panel of neutral
arbitrators, consisting of three attorneys, each of whom has at least 10 years
of experience relevant to the business of the Company. The AAA shall submit a
list of persons meeting the criteria outlined above for each category of
arbitrator, and the parties shall select one person from each category in the
manner established by the AAA. If any party or the arbitrators fail to select
arbitrators as required above, the AAA shall select such arbitrators. The
arbitrators shall be entitled to a fee commensurate with their fees for
professional services requiring similar time and effort. If the arbitrators so
desire, they shall have the authority to retain the services of a neutral judge
or attorney (whose fees shall be treated as an arbitrator's fees) to assist them
in administering the arbitration and conducting any hearings and taking evidence
at such hearings or otherwise.
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20.3 Arbitration Procedures. All matters arbitrated hereunder
shall be arbitrated in Denver, Colorado pursuant to Utah Law, and shall be
conducted in accordance with the Commercial Arbitration Rules of the AAA, except
to the extent such rules conflict with the express provisions of this Section 20
(which shall prevail in the event of such conflict); provided, however, that all
substantive law issues relating to the rights and obligations of the parties
under this Agreement shall be governed by Section 23.3 below. The arbitrators
shall conduct a hearing no later than 45 days after submission of the matter to
arbitration, and a decision shall be rendered by the arbitrators within 10 days
of the hearing. At the hearing, the parties shall present such evidence and
witnesses as they may choose, with or without counsel. Adherence to formal rules
of evidence shall not be required, but the arbitration panel shall consider any
evidence and testimony that it determines to be relevant, in accordance with
procedures that it determines to be appropriate. Any award entered in an
arbitration shall be made by a written opinion stating the reasons for the award
made.
20.4 Enforcement. This submission and agreement to arbitrate
shall be specifically enforceable. Arbitration may proceed in the absence of any
party if notice of the proceedings has been given to such party. The parties
agree to abide by all awards rendered in such proceedings. Such awards shall be
final and binding on all parties to the extent and in the manner provided by
Utah Law. All awards may be filed with the clerk of one or more courts, state,
federal, or foreign, having jurisdiction over the party against which the award
is rendered or its property, as a basis of judgment and of the issuance of
execution for its collection. No party shall be considered in default hereunder
during the pendency of arbitration proceedings specifically relating to such
default.
20.5 Fees and Costs. The arbitrators' fees and other costs of
the arbitration and the reasonable attorney fees, expert witness fees and costs
of the prevailing party shall be borne by the non-prevailing party. In its
written opinion, the arbitration panel shall, after comparing the respective
positions asserted in the arbitration claim and answer thereto, declare as the
prevailing party that party whose position was closest to the arbitration award
(not necessarily the party in favor of which the award on the arbitration claim
is rendered) and declare the other party to be the non-prevailing party. The
arbitration award shall include an award of the fees and costs provided by this
Section 20.5 against the non-prevailing party.
21. Notice; Representatives.
21.1 Representatives. The Operator and the Company shall each
designate an individual, and one or more alternates, who shall be its
representative for purposes of receiving and giving communications with the
other in regard to the performance of this Agreement.
21.2 Notices. All notices, requests, or other communications
("Notices") required to be given or made hereunder shall be in writing and
addressed as follows:
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If to the Company:
Crown Asphalt Distribution L.L.C.
c/o MCNIC
150 West Jefferson Avenue, Suite 1700
Detroit, Michigan 48226
Attention: William E. Kraemer
Facsimile: (313) 256-6918
With copy to:
MCNIC
150 West Jefferson Avenue, Suite 1700
Detroit, Michigan 48226
Attention: William E. Kraemer
Facsimile: (313) 256-6918
and
MCN Energy Group, Inc.
500 Griswold, 10th Floor
Detroit, Michigan 48226
Attention: Daniel L. Schiffer, Esq.
Facsimile: (313) 965-0009
With copy to:
Crown Energy Products Company
215 South State, Suite 650
Salt Lake City, Utah 84111
Attention: Mr. Jay Mealey
Facsimile: (801) 537-5609
If to the Operator, to:
Crown Asphalt Products Company
215 South State, Suite 650
Salt Lake City, Utah 84111
Attention: Mr. Jay Mealey
Facsimile: (801) 537-5609
or to such address as either party may notify the other party in writing.
Notices shall be given (a) by personal delivery to the other party, or (b) by
electronic communication, with answer-back confirmation. All Notices shall be
effective and shall be deemed delivered (a) if by personal delivery on the date
of delivery if delivered during normal business hours, and, if not delivered
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during normal business hours, on the next business day following delivery, or
(b) if by electronic communication on the date the electronic communication is
received if received during normal business hours, otherwise on the next
business day following receipt of the electronic communication.
22. Confidentiality. Each party agrees to keep confidential and not
use, reveal, provide or transfer to any third party other than a Member, or an
Affiliate of a Member, any Confidential Information it obtains or has obtained
concerning the other party, except: (a) to the extent that disclosure to a third
party is required by applicable Law; (b) information that, at the time of
disclosure, is generally available to the public (other than as a result of a
breach of this Agreement or any other confidentiality agreement to which the
party is subject or of which it has knowledge), as evidenced by generally
available documents or publications; (c) information that was in its possession
prior to disclosure (as evidenced by appropriate written materials) and was not
acquired directly or indirectly from the other party; (d) to its employees,
consultants or advisors for the purpose of carrying out their duties hereunder,
to the extent disclosure is necessary or advisable; (e) to banks or other
financial institutions, to the extent disclosure is necessary or advisable to
obtain financing; (f) to third parties to the extent necessary to enforce this
Agreement; provided, however, that in each case of disclosure pursuant to (a),
(d) or (e), the party or parties to whom disclosure is made agree to be bound by
this confidentiality provision. The obligation of each party not to disclose
Confidential Information except as provided herein shall not be affected by the
termination of this Agreement or the replacement of either or both of the
parties.
23. General Provisions.
23.1 Section Headings. The section headings in this Agreement
are for reference purposes only and shall not be used to construe or interpret
or affect in any way the substantive meaning, intent, or interpretation of this
Agreement.
23.2 Severability. If any provision of this Agreement shall be
determined by any relevant legal authority to be unlawful, unenforceable,
invalid, void or voidable, the legality, validity, or enforceability of the
remainder of this Agreement shall not be affected or impaired thereby and the
unlawful, unenforceable, invalid, void, or voidable provision shall be deemed
deleted from this Agreement to the same extent as if never incorporated.
23.3 Governing Law. This Agreement shall be governed by and
construed in accordance with the Laws of Utah, without regard to its conflict of
law rules.
23.4 Entire Agreement; Amendments. This Agreement sets forth
the entire agreement between the parties relating to the subject matter
contained herein and supersedes all prior discussions and understandings among
them. This Agreement may not be amended except by written agreement executed by
both parties.
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23.5 No Partnership. It is not the purpose or intent of this
Agreement to create, and it shall never be construed as creating, a joint
venture, partnership, mining partnership, or agency relationship between the
Company and the Operator.
23.6 Waiver. A waiver by either party of a default hereunder
shall not be deemed to be a waiver of any subsequent default, nor shall any
delay in asserting a right hereunder be deemed a waiver of such right. The
preceding sentence shall not be construed as a waiver of any applicable statute
of limitations. The failure of either party to insist in any one or more
instances upon strict performance of any of the provisions of this Agreement or
to take advantage of any of its rights hereunder, shall not be construed as a
waiver of any such provisions or relinquishment of any such rights, but the same
shall continue and remain in full force and effect. All remedies afforded under
this Agreement shall be cumulative and in addition to every other remedy
provided for herein or by Law.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed in two original counterparts, effective for all purposes as of the date
set forth above.
CROWN ASPHALT PRODUCTS COMPANY,
a Utah corporation
By:
-------------------------------
Jay Mealey, President
CROWN ASPHALT DISTRIBUTION L.L.C.,
a Utah limited liability company
By:
-------------------------------
CROWN ASPHALT PRODUCTS COMPANY,
a Utah corporation, Member
By:
-------------------------------
Jay Mealey, President
and
By:MCNIC PIPELINE & PROCESSING
COMPANY, a Michigan corporation,
a Member
By:_______________________________
Name: ____________________________
Title: ___________________________
26
OPERATING AGREEMENT
OF
COWBOY ASPHALT TERMINAL, L.L.C.
THIS OPERATING AGREEMENT of COWBOY ASPHALT TERMINAL, L.L.C. (this
"Agreement"), is made and entered into effective as of the 12th day of February
1999, by and among CROWN ASPHALT PRODUCTS COMPANY, a Utah corporation ("Capco"),
and FORELAND ASPHALT CORPORATION, a Utah corporation ("Foreco") (collectively
referred to herein as the "Members").
Recitals
A. The parties desire to engage in the business of acquiring, holding,
managing, and operating an asphalt terminal.
B. On or about June 16, 1998, Articles of Organization were filed with
the Division of Corporations and Commercial Code of the Department of Commerce,
state of Utah, to form Cowboy Asphalt Terminal, L.L.C. (the "Company").
C. It is the intent of the parties that additional improvements for the
joint use of the parties will be made by the Company to that portion of the
Property (as defined below) that is designated for the joint use of the parties,
in which case the parties will share in the cost and expense of such
improvements in proportion with their Ownership Percentages (as defined below)
and will receive an increase in each such party's Capital Account in the amount
paid by such party. Further, upon the mutual agreement of the parties, each
party may erect and install equipment and other improvements, as such party's
sole and separate property and at its sole cost and expense, on that portion of
the Property that is designated for such Party's exclusive use, in which case
the cost and expense of such improvements shall not be treated as Capital
Contributions and such improvements will be owned by the party bearing the cost
thereof and not by the Company.
D. The parties hereto desire to provide for the regulation and
management of the affairs of the Company.
Agreement
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
<PAGE>
Article I
Defined Terms
When used in this Agreement, the following terms shall have the
meanings set forth below:
1.1 "Act" shall mean the Utah Limited Liability Company Act, as amended
or revised from time to time.
1.2 "Affiliate" of a Person shall mean a Person, directly or
indirectly, through one or more intermediaries, controlling, controlled by, or
under common control with the Person in question. The term "control," as used in
the immediately preceding sentence, means, respecting a Person that is a
corporation, the right to exercise, directly or indirectly, more than 50% of the
voting rights attributable to the shares of the controlled corporation, and,
respecting a Person that is not a corporation, the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of the controlled Person.
1.3 "Agreement" shall mean this Operating Agreement of Cowboy Asphalt
Terminal, L.L.C., as originally executed and as amended from time to time. Words
such as "herein," "hereinafter," "hereof," "hereto," "hereby," and "hereunder,"
when used with reference to this Agreement, refer to this Agreement as a whole,
unless the context otherwise requires.
1.4 "Available Cash" of the Company shall mean all cash funds of the
Company on hand from time to time (including cash funds obtained as
contributions to the capital of the Company by the Members, loans to the
Company, and net proceeds from Capital Transactions, but excluding cash funds
obtained from Terminating Transactions) after (i) payment of all expenses of the
Company as of such time, including all costs, expenses, or charges respecting
the ownership, operation, development, maintenance, and upkeep of the Company
property, including ad valorem taxes, debt amortization (including interest
payments), advertising expenses, professional fees, wages, and utility costs,
(ii) provision for payment of all outstanding and unpaid current obligations of
the Company as of such time, and (iii) provision for an adequate working capital
reserve as determined by the Manager to be reasonably necessary for operations
of the business of the Company.
1.5 "Capital Account" shall have the meaning set forth in Section
3.3(a).
1.6 "Capital Transaction" shall mean a transaction (i) pursuant to
which the Company borrows funds, (ii) pursuant to which part of the assets of
the Company are sold, condemned, exchanged, abandoned or otherwise disposed of,
(iii) pursuant to which insurance proceeds or other damages are recovered by the
Company in respect of a capital asset of the Company (and, not for such items as
business interruption or similar items), or (iv) that, in accordance with
generally accepted accounting principles, is otherwise considered capital in
nature.
1.7 "Code" shall mean the Internal Revenue Code of 1986, as amended (or
any corresponding provision or provisions of succeeding law).
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1.8 "Company" shall mean the limited liability company operated
pursuant to the terms hereof for the limited purposes and scope set forth
herein.
1.9 "Fiscal Year" of the Company shall mean the calendar year.
1.10 "Liquidation" of a Member's interest shall mean and shall be
deemed to occur upon the earlier of (i) the date upon which the Company is
terminated under section 708(b)(1) of the Code; (ii) the date upon which the
Company ceases to be a going concern (even though it may continue in existence
for the limited purpose of winding up its affairs, paying its debts, and
distributing any remaining Company assets to the Members); or (iii) the date
upon which there is a liquidation of the Member's interest (but the Company is
not terminated) under section 1.761-1(d) of the Regulations.
1.11 "Manager" shall mean the Person designated pursuant to Section 5.3
to manage and operate the business of the Company.
1.12 "Members" shall mean the parties to this Agreement and such other
persons or entities that are admitted to the Company as additional or
substituted Members. Reference to a "Member" shall mean any one of the Members.
1.13 "Net Income or Loss" of the Company for any Fiscal Year (or
portion thereof) shall mean the excess or deficit, as the case may be, of (i)
the gross income of the Company derived from Operations as calculated under
federal income tax accounting principles for such Fiscal Year over (ii) all
items of expense [incurred, in case the Company selects the accrual method of
accounting for tax purposes, or paid, in the case the Company selects the cash
method of accounting for tax purposes,] by the Company respecting Operations
during such Fiscal Year which are allowable as deductions under federal income
tax accounting principles and depreciation, cost recovery or other amortization
deduction allowable to the Company for federal income tax purposes respecting
any Company asset for such Fiscal Year.
1.14 "Operations" shall mean revenue producing activities of the
Company other than (a) activities relating to Capital Transactions; or (b)
activities conducted separately by either Capco or Foreland. It is contemplated
that Operations shall be limited to ownership of the Property and the leasing of
tank capacity as the Members shall agree.
1.15 "Ownership Percentage" means, respecting each Member, the product
of (a) 100%, multiplied by (b) a fraction, the numerator of which shall be the
number of Units held by such Member and the denominator of which shall be the
total number of Units outstanding at that time.
1.16 "Person" shall mean any individual, partnership, corporation,
trust or other entity or association.
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1.17 "Property" shall mean the Cowboy Asphalt Terminal comprising the
real property located in Davis County, Utah, as more particularly described in
Exhibit "A" attached hereto and incorporated herein by this reference, together
with the buildings, fixtures, and improvements and certain items of personal
property from time-to-time located thereon, excluding improvements to the
Property made pursuant to Section 3.2(d).
1.18 "Regulations" shall mean the regulations promulgated by the United
States Department of the Treasury pursuant to and in respect of provisions of
the Code. All references herein to sections of the Regulations shall include any
corresponding provision or provisions of succeeding, similar, substitute
proposed or final Regulations.
1.19 "Terminating Transaction" shall mean a sale, condemnation,
exchange or other disposition, whether by foreclosure, abandonment, or
otherwise, of all or substantially all of the then remaining assets of the
Company which is entered into in connection with the dissolution, termination
and winding up of the Company or that will result in the dissolution of the
Company.
1.20 "Unit" shall mean an interest in the Company consisting of the
rights, covenants, and responsibilities more particularly set forth herein.
Article II
General Provisions
2.1 Formation of the Company. The Members previously formed the Company
as a limited liability company pursuant to the provisions of the Act, by filing
Articles of Organization with the Division of Corporations and Commercial Code
of the Department of Commerce, state of Utah, and hereby adopt this Agreement to
provide for the regulation and management of the affairs of the Company.
2.2 Name. The business of the Company shall be conducted under the name
"Cowboy Asphalt Terminal, L.L.C." or such other name that the Members may
select.
2.3 Purposes and Scope. Subject to the provisions of this Agreement,
the Company is formed to acquire, hold, manage, and operate an asphalt
receiving, processing, storage, and handling terminal, to engage in any activity
necessary or convenient to accomplish its purposes and operate its business as
set forth herein as the Members may from time-to-time determine; and to exercise
all powers permitted thereby. This Agreement does not and shall not be construed
to govern any business relationships between the parties other than those
specified in this Agreement.
2.4 Articles of Organization. The Members further agree and obligate
themselves to execute, acknowledge, file, record and/or publish, as necessary,
such amendments to the Articles of Organization as may be required by the terms
hereof or by law and such other certificates and documents as may be appropriate
to comply with the requirements of law for the continuation, preservation,
and/or operation of the Company as a limited liability company.
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2.5 Fictitious Name. Concurrently with the execution of this Agreement,
the Company shall make any filings or disclosures required by the laws of the
state of Utah respecting its use of a fictitious name, if any.
2.6 Ownership. The interest of each Member in the Company shall be
personal property for all purposes. All property and interests in property, real
or personal, owned by the Company shall be deemed owned by the Company as an
entity, and no Member, individually, shall have any ownership in any property or
interest in property owned by the Company except as a Member in the Company.
Each of the Members irrevocably waives, during the term of the Company and
during any period of its liquidation following any dissolution, any right that
such Member may have to maintain any action for partition respecting any of the
assets of the Company.
2.7 Membership Certificates. Units of membership interest in the
Company shall be represented by certificates which shall state on their face the
name of the Company and that it is organized under the laws of the state of
Utah, the name of the Member to whom the certificate is issued, and the number
and, if applicable, the class or other designation of the series, if any, the
certificate represents. Each share certificate must be signed by the Manager and
may contain such other information as the Manager or the Members consider
necessary or appropriate. The Company shall maintain a membership ledger
indicating the name, address, certificate serial number, and number of units or
other interests held by each Member from time to time, showing the cancellation
of certificates, as appropriate.
2.8 No Individual Authority. Except as otherwise specifically provided
in this Agreement, no Member, acting alone, shall have any authority to act for,
or to undertake or assume any obligation, debt, duty or responsibility on behalf
of, any other Member or the Company.
2.9 Place of Business. The principal place of business of the Company
shall be at 215 South State Street, Suite 650, Salt Lake City, Utah 84111, or at
such other or additional place or places as the Members shall reasonably
determine.
2.10 Term of the Company. The term of the Company shall continue until
terminated pursuant to the provisions of this Agreement or such other date as
the Members shall select in accordance with the provisions of Section 8.1.
2.11 Registered Agent. The registered agent of the Company shall be Jay
Mealey, whose office address is 215 South State Street, Suite 650, Salt Lake
City, Utah 84111.
2.12 Registered Office. The registered office of the Company shall be
215 South State Street, Suite 650, Salt Lake City, Utah 84111.
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Article III
Capital Contributions
3.1 Initial Capital Contributions; Units. In connection with the
formation of the Company, each Member shall be deemed to have contributed to the
capital (the "Capital Contributions") of the Company the approximate amount of
cash paid to Hancock-Geisler R.I.C. through November 30, 1998, respecting the
payments due under that certain amortization schedule regarding the purchase of
the Property, and has been credited with the number of Units, set forth opposite
such Member's name set forth below:
Ownership
Name Contribution Units Held Percentages
- ------------------------------ ------------ ---------- -----------
Crown Asphalt Products Company $174,533 66.67 66.67%
Foreland Asphalt Corporation $87,267 33.33 33.33%
3.2 Additional Contributions.
(a) Each Member shall be obligated to contribute one-half of
(i) such additional amounts as may be required, not to exceed a total
of $650,000, for the Company to fulfill its obligations under such
corrective action plan that may be acceptable to the Company and the
Utah Department of Environmental Quality for environmental management,
remediation, and containment costs of bringing the Property into
compliance with applicable environmental laws respecting conditions
existing as of the date of this Agreement, which such additional
contribution shall be paid within ten (10) days after demand therefor
by the Manager; and (ii) such additional amounts required to cover
legal costs incurred in obtaining title to the Property from Hancock
Geisler R.I.C., or relating to the environmental remediation work
referenced in clause (i).
(b) Each Member shall be obligated to contribute, pro rata in
proportion to its Ownership Percentage, such additional amounts as may
be required for the Company to fulfill its obligations under the
following:
(i) the payment of the balance of the purchase price
for the Property as reflected under that certain Memorandum of
Closing dated January 7, 1999, attached hereto as Exhibit "B"
for by and between Hancock Geisler R.I.C., Inc., and the
Company and the special warranty deed, trust deed note, deed
of trust, and other documents to be executed and delivered in
consummation of the transaction contemplated thereby;
(ii) environmental management and containment costs
other than those described in subparagraph (a) of this Section
3.2, which such additional contribution shall be paid within
ten (10) days after demand therefor by the Manager;
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(iii) the Company's expenses for Operations, which
such additional contribution shall be paid within ten (10)
days after demand therefor by the Manager; and
(iv) the construction of capital improvements to the
Property that, in the judgment of the Manager and, if required
in accordance with the provisions of Section 5.7, the approval
of the Members, will be beneficial to the business interests
and for the joint use of both Members.
(c) Any additional Capital Contributions of a Member shall
increase the Member's Capital Account, but as long as such
contributions are made in proportion to their respective obligations as
set forth in subparagraph (a) and (b) above of this Section 3.2, shall
not result in an increase in the number of Units held by the Members.
No Member shall be required to purchase additional Units or make any
additional Capital Contributions beyond those set forth in Section 3.1
and this Section 3.2, respectively.
(d) In addition to the foregoing, the Members anticipate that
each Member may deem it necessary or desirable to make certain capital
improvements to the Property intended to benefit only such Member in
all material respects and not the other Member, all as more
particularly provided in this Section 3.2(d). To the extent that the
improvement sought to be made is located in the area set forth on
Exhibit "C" as being devoted to the exclusive use of the Member making
such improvement, no approval from any other Member shall be required.
If, however, the subject improvement is to be located on an area not
designated on Exhibit "C" for such Member's exclusive use, any such
improvements shall be made only upon the prior written consent of both
Members, which such consent shall not be unreasonably withheld if, in
the exercise of the Members' reasonable commercial judgment, it does
not appear that it will be likely that the proposed improvements will
materially and interfere on a recurring basis with the continued use of
the remainder of the facility in accordance with then contemporaneous
practice. The Member receiving the principal benefits of such capital
improvements shall fund all related costs and expenses of installation,
construction, and operation of such improvements and shall be entitled
to all revenues and profits in connection therewith. The payment of
such costs and expenses of installation and construction shall in no
event be treated as additional Capital Contributions or loans to the
Company but shall be for the sole account of the Member bearing such
payments. All improvements to the Property made pursuant to this
Section 3.2(d) shall be owned solely by the Member funding the
installation, construction and operation thereof, and shall not be
considered Company property..
3.3 Capital Accounts.
(a) A separate "Capital Account" (herein so called) shall be
maintained for each Member in accordance with the capital accounting
rules of section 1.704-1(b)(2)(iv) of the Regulations. Each Member
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shall have only one Capital Account, regardless of the number or
classes of Units in the Company owned by such Member and regardless of
the time or manner in which such Units were acquired by such Member.
Pursuant to the basic rules of section 1.704-1(b)(2)(iv) of the
Regulations, the balance of each Member's Capital Account shall be:
(i) credited with: (1) the amount of money
contributed by such Member to the Company and the fair market
value of any property contributed by such Member to the
Company (net of liabilities secured by such property that the
Company assumes or takes subject to); (2) except as provided
below, the amount of taxable income or gain allocated to such
Member; and (3) such Member's pro rata share of any tax exempt
income or gain of the Company; and
(ii) debited with: (1) the amount of money (excluding
guaranteed payments) and the agreed fair market value of any
property distributed to such Member (net of liabilities
secured by such property that the Member assumes or takes
subject to); (2) except as provided below, the amount of
taxable loss and deductions (or items thereof) allocated to
such Member; and (3) such Member's pro rata share of any
expenditures of the Company described in section 705(a)(2)(B)
of the Code (or expenditures which are so treated under
section 1.704-(b) of the Regulations); and
(iii) otherwise adjusted in accordance with the other
capital account maintenance rules of section 1.704-1(b)(2)(iv)
of the Regulations.
In addition, if property is distributed in kind by the Company, the
Capital Accounts of the Members shall be adjusted to reflect the manner
in which the unrealized income, gain, loss and deduction inherent in
such property (that has not already been reflected in the Members'
Capital Accounts) would be allocated to the Members if there were a
taxable disposition of such property for its agreed fair market value
on the date of distribution.
(b) Notwithstanding the foregoing, if property is contributed
to the Company by a Member, the Company shall thereafter compute gain,
loss and depreciation in respect of the contributed property separately
for book and tax purposes as required by sections 1.704-1(b)(2)(iv),
1.704-1(b)(4)(i) and 1.704-(b)(4)(iii) of the Regulations. Such items
so computed for book purposes shall be allocated among the Members in
the manner provided in Article IV below and shall be reflected in the
Members' Capital Accounts by appropriate increases or decreases thereto
as required by section 1.704-1(b)(2)(iv)(b) of the Regulations. Such
items so allocated for tax purposes shall not be reflected in the
Members' Capital Accounts.
(c) Notwithstanding the foregoing, it is the intention of the
Members that their Capital Accounts in the Company be maintained
strictly in accordance with the capital account maintenance
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requirements of section 1.704-1(b) of the Regulations, and that their
Capital Accounts be adjusted to the extent required by the provisions
of such Regulations or any successor provisions thereto.
(d) A loan by a Member to the Company shall not be considered
a contribution of money to the capital of the Company, and the balance
of such Member's Capital Account shall not be increased by the amount
so loaned, unless such loan is determined by the Internal Revenue
Service in a final administrative proceeding to be a Capital
Contribution by such Member. No repayment of principal or interest on
any such loan, or reimbursement made to a Member respecting advances or
other payments made by such Member on behalf of the Company, or
payments of fees to a Member or its Affiliates which are made by the
Company shall be considered a return of capital or in any manner affect
the balance of such Member's Capital Account.
(e) Notwithstanding any other provision in this Agreement to
the contrary, in the event that a Member has a negative balance in its
Capital Account following the Liquidation of such Member's interest in
the Company or the occurrence of a Terminating Transaction or other
event resulting in the termination of the Company (such Member's
Capital Account balance to be determined after it has been adjusted to
reflect (i) all Company transactions during the Fiscal Year in
question, including gain or loss realized in connection with a
Terminating Transaction and (ii) the gain or loss which would be
recognized by the Company if it were to sell its remaining assets for
the fair market value thereof), such Member shall contribute to the
Company an amount of money equal to such negative balance by the later
of (1) the end of the Fiscal Year during which the Member's interest is
liquidated or the Terminating Transaction occurs or (2) ninety (90)
days after the date on which the Member's interest is liquidated or the
Terminating Transaction occurs. Amounts contributed to the Company
pursuant to this Section 3.3(e) shall be paid to the Company's
creditors or distributed to the other Members in accordance with the
positive balances in their respective Capital Accounts (after such
Capital Accounts have been adjusted in the manner provided herein).
3.4 Return of Capital. Except to the extent provided in Article IV
below, no Member shall have the right to demand or receive the return of such
Member's Capital Contributions to the Company.
3.5 No Interest on Capital Contributions. Except as otherwise provided
herein, no Member shall receive any interest on such Member's Capital
Contributions to the Company or such Member's Capital Account, notwithstanding
any disproportion therein as between the Members.
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Article IV
Allocations and Distributions
4.1 Distributions of Available Cash. The Manager, in its sole
discretion, shall determine whether the Company should distribute its Available
Cash; provided, however, that the Manager shall use its best efforts to
distribute sufficient Available Cash to allow the Members to meet their
obligations to federal and state taxing authorities. In the event that the
Manager decides that part or all of the Company's Available Cash should be
distributed to the Members, such Available Cash shall be distributed to the
Members pro rata in accordance with their respective Ownership Percentages.
Notwithstanding the foregoing, the net proceeds of a Terminating Transaction
shall be distributed in accordance with Section 8.2 hereof.
4.2 Allocations of Income and Loss. Subject to the provision of Section
4.3, the Company's items of Net Income and Loss from Operations for each Fiscal
Year and gain and loss realized by the Company in connection with each Capital
Transaction, after giving effect to all Capital Account adjustments attributable
to contributions and distributions of money and property made during such Fiscal
Year (but excluding income and loss, if any, that is required to be separately
determined and allocated to the Members for federal income tax purposes in the
same manner as prescribed under section 704(c) of the Code), shall be allocated
to the Members, pro rata in accordance to their respective Ownership
Percentages.
4.3 Limitations and Qualifications Regarding Allocations.
Notwithstanding the provisions of Section 4.2, Net Income and Loss for each
Fiscal Year and gain and loss realized by the Company (or items of income, gain,
loss, deduction, or credit, as the case may be) shall be allocated in accordance
with the following provisions. If the allocation of Net Loss (or items thereof)
as provided in Section 4.2 hereof would cause or increase a deficit balance in a
Member's Capital Account, there shall be allocated to such Member only that
amount of net loss (or items thereof) as will not cause or increase a deficit
balance in the Member's Capital Account. The net loss (or items thereof) that
would, absent the application of the preceding sentence, otherwise be allocated
to such Member shall be allocated (i) first, to other Members having positive
balances in their Capital Accounts, in proportion to such positive balances; and
(ii) second, to all the Members in accordance with their respective Ownership
Percentages. For purposes hereof, each Member's Capital Account shall be reduced
for the items described in clauses (4), (5), and (6) of Regulation section
1.704-1(b)(2)(ii)(d). If any allocation of net loss (or items thereof) is made
under this Section 4.3, any allocation of Net Income and gain (including income
and gain exempt from tax) of the Company allocated thereafter shall first be
allocated as necessary to offset in reverse order the allocation made pursuant
to this Section 4.3.
4.4 Allocation of Income and Loss and Distributions in Respect of Units
Transferred.
(a) If any Units in the Company are transferred, or are
increased or decreased by reason of the admission of a new Member or
otherwise, during any Fiscal Year of the Company, each item of income,
gain, loss, deduction, or credit of the Company for such Fiscal Year
shall be assigned pro rata to each day in the particular period of such
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Fiscal Year to which such item is attributable (i.e., the day on or
during which it is accrued or otherwise incurred) and the amount of
each such item so assigned to any such day shall be allocated to the
Members based upon their respective Units in the Company at the close
of such day. For purposes of accounting convenience and simplicity, the
Company shall treat a transfer of, or an increase or decrease in, Units
in the Company which occurs at any time during a semi-monthly period
(commencing with the semi-monthly period including the date hereof) as
having been consummated on the first day of such semi-monthly period,
regardless of when during such semi-monthly period such transfer,
increase, or decrease actually occurs (i.e., sales and dispositions
made during the first fifteen (15) days of any month will be deemed to
have been made on the first day of the month and sales and dispositions
thereafter will be deemed to have been made on the 16th day of the
month).
(b) Distributions of assets of the Company in respect of Units
in the Company shall be made only to the persons or entities who,
according to the books and records of the Company, are the holders of
record of Units in respect of which such distributions are made on the
actual date of distribution or, if authorized by the record holder of
such Units as evidenced by written notice to the Manager, such holder's
designee. Neither the Company nor the Manager shall incur any liability
for making distributions in accordance with the provisions of the
preceding sentence, whether or not the Company, the Members, or the
Manager have knowledge or notice of any transfer or purported transfer
of ownership of any Units in the Company.
(c) Notwithstanding any provision above to the contrary, gain
or loss of the Company realized in connection with a sale or other
disposition of any of the assets of the Company shall be allocated
solely to the parties owning Units in the Company as of the date such
sale or other disposition occurs.
Article V
Status of Members and Management of the Company
5.1 Participation in Management. Except as otherwise provided herein,
the Members shall not participate in the management or control of the Company's
business nor shall they transact any business for the Company, nor shall they
have the power to act for or bind the Company, said powers being vested solely
and exclusively in the Manager.
5.2 Limited Liability. Except as otherwise provided herein to the
contrary, the Members shall not be bound by, or personally liable for, the
expenses, liabilities, or obligations of the Company, except as provided in the
Act.
5.3 Management. Unless the Articles of Organization have dispensed with
or limited the authority of the Manager, all power of the Company shall be
exercised by or under the authority of, and the business and affairs of the
Company shall be managed under the direction of, the Manager. The Manager shall
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have exclusive power and control over the business of the Company; only the
Manager shall have the power to bind the Company. The initial Manager shall be
Capco. The Manager shall act as such until (a) its resignation, withdrawal,
removal, bankruptcy, or dissolution; or (b) the dissolution of the Company,
whichever occurs first. Manager vacancies shall be filled by the Members.
5.4 Removal of Manager. The Members shall have the right, without
further obligation to the Manager other than for reimbursement of expenses
previously incurred, to remove, with or without cause, the Manager.
5.5 Members, Manner of Acting.
(a) Unless the Articles of Organization provide otherwise, any
or all Members may participate in a meeting by, or conduct the meeting
through the use of, any means of communication by which all Members
participating may simultaneously speak to and be heard by each other
during the meeting. A Member participating in a meeting by this means
is deemed to be present in person at the meeting.
(b) A Member who is present at a meeting of the Members when
an action is taken is deemed to have assented to the action taken
unless: (1) it objects at the beginning of the meeting (or promptly
upon its arrival) to holding it or transacting business at the meeting;
or (2) its dissent or abstention from the action taken is entered in
the minutes of the meeting; or (3) it delivers written notice of its
dissent or abstention to the presiding officer of the meeting before
its adjournment or to the Company immediately after adjournment of the
meeting. The right of dissent or abstention is not available to a
Member who votes in favor of the action taken.
(c) Unless the Articles of Organization provide otherwise, any
action required or permitted to be taken by the Members at a meeting
may be taken without a meeting if the required majority of the Members
as set forth in subparagraph (d) below sign a written consent (unless
the action which is the subject of the consent requires a greater
percentage under the Articles of Organization or this Agreement)
describing the action taken, and the consents are filed with the
records of the Company. Action taken by consents is effective when the
last Member signs the consent, unless the consent specifies a
subsequent effective date. A signed consent has the effect of a meeting
vote and may be described as such in any document.
(d) Unless this Agreement or the Articles of Organization
require a greater percentage, the Members shall determine all matters
based upon the approval or consent of at least 75% in Ownership
Interest in the Company. In the event that, for any reason, at least
75% in Ownership Interest of the Members shall not be able to agree on
a matter under consideration by the Members, within five days after the
matter is submitted to the Members, the resolution thereof shall be
determined by the majority decision of a panel consisting of one
unrelated, independent third party selected by each Member (which
appointment shall have been made within 15 days after the disputed
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matter is submitted to the Members or the Member who shall not have
made such appointment shall have been deemed to have consented to the
disputed matter) and one unrelated, independent third party selected by
the persons so selected. All matters submitted to dispute resolution as
described in this Section 5.5(d) shall have been finally resolved
within 30 days.
5.6 Manager; Specific Powers. Except as otherwise specifically provided
in this Agreement, all matters in connection with the day-to-day conduct of the
Company's business and the use or disposition of its assets shall be decided
solely by the Manager. Without limiting the generality of the foregoing, the
Manager shall have the power and authority on behalf of the Company to:
(a) acquire such tangible and intangible personal property as
may be necessary or desirable to carry on the business of the Company;
(b) negotiate leases for and execute and deliver leases for
office space for the operation of the Company's business;
(c) purchase equipment, supplies, and materials and produce
and market products as, in its sole discretion, it shall deem
advisable;
(d) employ, terminate the employment of, supervise, and
compensate such persons, firms, or corporations as, in its sole
discretion and judgment, it shall deem advisable for the proper
operation and management of the business of the Company;
(e) invest Company funds in interest-bearing accounts,
commercial paper, government securities, certificates of deposit, or
similar investments;
(f) execute promissory notes, deeds of trust, regulatory
agreements, and all other documents, agreements, or certifications;
(g) sell, transfer, exchange (whether or not qualifying as a
tax-free exchange under section 1031 of the Internal Revenue Code),
assign, convey, lease, further encumber, hypothecate or otherwise
dispose of all or any part of the assets of the Company in the ordinary
course of the business of the Company;
(h) execute and file all reports and maintain all records
required by law or by this Agreement; and
(i) coordinate the management and operation of the Company and
perform other normal business functions and otherwise operate and
manage the business and affairs of the Company in accordance with and
as limited by this Agreement.
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5.7 Limitation on Powers and Authority of Manager. Notwithstanding the
provisions of this Article V or any other provisions herein, the Manager shall
not have the right or power to do any of the following without the consent of
Members holding 75% or more of all of the outstanding Units.
(a) Take any action respecting the Company's rights and
obligations as successor in interest to that certain Letter of Intent
dated November 12, 1990, between Hancock-Geisler R.I.C., Inc., an Idaho
corporation, which appears therein as "Seller," for the sale of the
Property to Crysen Refining, Inc., which has thereafter assigned its
rights under the Purchase Arrangement to Refinery Technologies, Inc.,
which has in turn assigned certain of its rights to the Company.
(b) Submit any corrective action plan or other remediation
proposal to the Utah Department of Environmental Quality or any other
governmental authority or bind the Company in any way respecting any
such matter;
(c) Perform any act that would make it impossible to carry on
the ordinary business of the Company;
(d) Confess a judgment against the Company;
(e) Use the Company name, credit or assets for other than
Company purposes;
(f) Perform any act in contravention of this Agreement;
(g) Amend this Agreement;
(h) Commingle the funds of the Company with the funds of any
other person or entity;
(i) Submit any dispute involving the Company to binding
arbitration;
(j) Execute or deliver any assignment for the benefit of the
creditors of the Company;
(i) Cause the Company to borrow any sums for which the Members
have recourse liability;
(k) Transact any business on behalf of the Company in any
jurisdiction, unless the Members would not, as a result thereof, become
Manager and have any liability greater than that provided in this
Agreement;
(l) Cause the Company to borrow or incur any indebtedness, in
the aggregate, in excess of $100,000;
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(m) Obligate the Company to make capital expenditures in
excess of $100,000 in any calendar year;
(n) Dispose of all or any part of the Property described in
Exhibit "A" or the buildings, fixtures, or improvements from time to
time located thereon or dispose of all or substantially all of the
assets or the goodwill of any business of the Company or any of its
businesses, all except for routine sales, leases, other transfers,
replacements, renovations, and repairs in the ordinary course of the
Company's business that do not, singly or in the aggregate, have a
material adverse effect on the business of the Company;
(o) Admit a person or entity as a Member, except as provided
herein, except that Capco shall be entitled to transfer its interest as
a Member in the Company at any time to Crown Asphalt Distribution,
L.L.C., a Utah limited liability company ("CAD") without obtaining the
consent of any Member or Manager of the Company; and
(p) In case of an actual emergency, the Manager may take on
behalf of the Company any reasonable action it deems necessary to
protect life or property, to protect the assets of the Company, or to
comply with applicable law, without the approval of the Members as
required elsewhere within this Section 5.7 if time does not permit
obtaining such approval. The Manager shall promptly notify the Members
of the emergency or unexpected expenditure. Any Member may thereafter
dispute the reasonableness or necessity of an expenditure incurred by
the Manager for any such action by giving written notice of such
dispute to the Manager. Thereafter, the Manager and the Member shall
negotiate in good faith to resolve such dispute. In the event any
dispute is not resolved, the provisions of Section 5.5(d) shall apply.
5.8 Standard of Conduct. The Manager at all times shall operate and
manage the business and affairs of the Company in a reasonable and prudent
manner.
5.9 Compensation of Manager.
(a) Except as agreed to by the Members, the Manager shall not
receive compensation in consideration of the performance of the duties
and responsibilities of the Manager. However, the Manager shall be
reimbursed for all costs and expenses incurred on behalf of the
Company. Except as otherwise provided herein, neither the Manager nor
any other Member shall be entitled to a fee for services to the Company
in its capacity as a Member.
(b) The Company shall be obligated, and the Manager is
authorized, to pay from Company assets all expenses relating to the
organization of the Company. Such expenses may be paid directly by the
Company or paid by the Manager and then reimbursed by the Company.
Without limiting the generality of the foregoing, such organizational
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expenses include legal, accounting, consulting, duplication and
printing, telephone, telex, postage, air freight, travel and
entertainment, and other expenses and fees (including filing fees) paid
or incurred in organizing the Company. No part of the amount so paid
pursuant to this section shall be deemed to be a management fee payable
to the Manager.
(c) The Manager shall devote such time, effort, and skill to
the affairs of the Company as the Members may deem to be reasonably
required for the welfare and success of the Company, but shall not be
obligated to devote all of its business time to the affairs of the
Company.
5.10 Use of Facilities. The Members shall have the right to use the
facilities comprising the Property without cost or the payment of any
consideration other than the Capital Contributions to the Company. Each Member
shall be entitled to the exclusive use of that portion of the Property more
particularly set forth in Exhibit "C" attached hereto and incorporated herein by
this reference. Each Member shall be entitled to make that portion of the
property marked as Reserved for such Member Exclusive to that Member by written
notice to the Company of its intent to utilize such Property in their respective
businesses ninety (90) days prior to such action. Any revenues generated from
the property marked Exclusive shall be the sole property of that respective
Member. Any revenues generated from the property marked Reserved or Joint will
be allocated according to Sharing Ratio subject to the change of certain
property from Reserved to Exclusive. The portions of the Property not designated
for the exclusive use of either Member shall be available for the use of both
Members, as coordinated from time-to-time by the Members.
5.11 Execution of Documents. Except as limited by Section 5.7, the
Manager is hereby authorized to execute on behalf of the Company any and all
documents in connection with the Company's business including, but not limited
to, deeds, deeds of trust, promissory notes, guaranties, leases, certificates,
affidavits, assignments, security agreements and contracts.
5.12 Tax Matters Member.
(a) The Manager is hereby designated the "tax matters partner"
as that term is defined in section 6231(a)(7) of the Code (referred to
herein as the "Tax Matters Member").
(b) The Tax Matters Member shall take no action in such
capacity without the authorization or consent of the other Members,
other than such action as the Tax Matters Member may be required to
take by law. The Tax Matters Member shall use its best efforts to
comply with the responsibilities outlined in sections 6222 through 6232
of the Code and in doing so shall incur no liability to the other
Members. Notwithstanding the Tax Matters Member's obligation to use its
best efforts in the fulfillment of its responsibilities, the Tax
Matters Member shall not be required to incur any expenses for the
preparation for or pursuance of administrative or judicial proceedings
unless the Members agree on a method for sharing such expenses.
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(c) The Tax Matters Member shall not enter into any extension
of the period of limitations for making assessments on behalf of the
other Members without first obtaining the written consent of the other
Members.
(d) No Member shall file, pursuant to section 6227 of the
Code, a request for an administrative adjustment of items for any
Company taxable year without first notifying the other Members. If the
other Members agree with the requested adjustment, then the Tax Matters
Member shall file the request for administrative adjustment on behalf
of the Member. If unanimous consent is not obtained within thirty (30)
calendar days from such notice, or within the period required to timely
file the request for administrative adjustment, if shorter, any Member,
including the Tax Matters Member, may file a request for administrative
adjustment on its own behalf.
(e) Any Member intending to file a petition under sections
6226, 6228, or other section of the Code respecting any item or other
matter involving the Company shall notify the other Members of such
intention and the nature of the contemplated proceeding. In the case
where the Tax Matters Member is the Member intending to file such
petition on behalf of the Company, such notice shall be given within a
reasonable period of time to allow the other Members to participate in
the choosing of the forum in which such petition will be filed. If the
Members do not agree on the appropriate forum, then the appropriate
forum shall be decided by vote of a majority in interest of the
Members. Each Member shall have a vote in accordance with its aggregate
percentage right to distributions of Available Cash for the year under
audit. If such a majority cannot agree, then the Tax Matters Member
shall choose the forum. If any Member intends to seek review of any
court decision rendered as a result of a proceeding instituted under
the preceding provisions of this Section 5.12(e), then such Member
shall notify the other Members of such intended action.
(f) The Tax Matters Member shall not bind any Member to a
settlement agreement without obtaining the written concurrence of such
Member. For purposes of this Section 5.12(f), the term "settlement
agreement" shall include a settlement agreement at either an
administrative or judicial level. Any Member who enters into a
settlement agreement respecting any partnership items, as defined in
section 6231(a)(3) of the Code, shall notify the other Members of such
settlement agreement and its terms within ninety (90) calendar days
from the date of settlement.
(g) The provisions of this Section 5.12 shall survive the
termination of the Company or the termination of any Member's interest
in the Company and shall remain binding on the Members for a period of
time necessary to resolve with the Internal Revenue Service or the
United States Department of the Treasury any and all matters regarding
the United States federal income taxation of the Company.
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5.13 Other Tax Elections. The Manager may, in its sole discretion, make
or revoke the elections referred to in section 754 of the Code or any
corresponding provisions of state tax laws. Each of the Members will upon
request supply the information necessary to properly give effect to such
elections. The Manager shall revalue Company property to its fair market value
(taking into account section 7701(g) of the Code) on the revaluation date in
accordance with section 1.704-1(b)(2)(iv)(f) of the Regulations, and shall
adjust the Capital Accounts of the Members as described herein when any new or
existing Member contributes money or other property (other than a de minimis
amount) to the Company in exchange for an interest in the Company or when the
Company distributes money or other property (other than a de minimis amount) to
a withdrawing or continuing Member in exchange for all or a portion of such
Member's interest in the Company.
5.14 Inconsistent Treatment of Item. If any Member intends to file a
notice of inconsistent treatment under section 6222(b) of the Code, then such
Member shall give reasonable notice under the circumstances to the other Members
of such intent and the manner in which the Member's intended treatment of an
item is (or may be) inconsistent with the treatment of that item by the other
Members.
Article VI
Members' Responsibilities Among Themselves
6.1 Liability of Manager to the Other Members. The Manager, its
directors, officers, shareholders, representatives, employees and agents shall
not be liable to the Company or to the other Members for losses sustained or
liabilities incurred as a result of any good faith error in judgment or mistake
of law or fact, or for any act done or omitted to be done in good faith in
conducting the Company's business, unless such error, mistake, act or omission
was performed or omitted fraudulently, or constituted willful misconduct or a
breach of this Agreement. This provision is not for the benefit of any third
party.
6.2 Company Indemnity to Manager. The Company shall protect, defend,
indemnify and hold harmless the Manager and each of its directors, officers,
shareholders, representatives, employees and agents (collectively, the
"Indemnified Parties"), from and against any loss, expense, damage or injury
suffered or sustained by any of them by reason of any acts, omissions, or
alleged acts or omissions arising out of the activities of any Indemnified Party
on behalf of the Company or in furtherance of the interests of the Company,
including, but not limited to, any judgment, award, settlement, reasonable
attorneys' fees and other costs or expenses incurred in connection with the
defense of any actual or threatened action, proceeding or claim if the acts,
omissions or alleged acts or omissions upon which such actual or threatened
action, proceeding or claim is based were for a purpose believed in good faith
by any Indemnified Party, to be in the best interest of the Company or were not
performed or omitted fraudulently and did not constitute willful misconduct or a
breach of this Agreement by such Indemnified Party. The Company shall further
indemnify and hold harmless each Indemnified Party for losses or liabilities due
to the negligence, including gross negligence, dishonesty, willful misconduct,
or bad faith of any employee, broker, or other agent of the Company if such
employee, broker, or agent was solicited, engaged, or retained and supervised by
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the Manager with reasonable care. The Members each acknowledge that the
intention of the preceding provisions is to cause the Company to indemnify the
Manager respecting the Manager's negligence, but in no event shall the Manager
be indemnified respecting its gross negligence or willful misconduct.
6.3 Conflicts of Interest. This Agreement shall not preclude the
Company from dealing with any Member or any Member's Affiliates in connection
with the business of the Company as independent contractors or as agents for
others, and such Affiliates may receive from such others or the Company normal
profits, compensation, commissions or other income incident to such dealings.
The amount payable by the Company to any Member or any Affiliate of any Member
shall not be greater than the amount which the Company would have to pay under
an arms-length contract with a non-related entity.
6.4 Members Look Solely to Company Assets. Each Member shall look
solely to the assets of the Company for all distributions respecting the Company
and return of its Capital Contributions, and no Member shall have any recourse
in connection therewith against any Member except as provided in Section 6.1.
6.5 Dealings Outside the Company. Neither the Manager nor any Member
shall be required to devote full time to Company business, and the Manager and
Members may, at any time and from time to time, engage in and possess an
interest in other business ventures of any and every type and description,
independently or with others. Specifically, the Members anticipate that Capco
will exploit the facilities and services of the Company, in conjunction with
improvements to the Property made by Capco pursuant to Section 3.2(d), solely to
operate an integrated paving asphalt business and that Foreco will exploit the
facilities and services of the Company, in conjunction with improvements to the
Property made by Foreland pursuant to Section 3.2(d), solely to operate an
integrated roofing asphalt business, Neither the Company nor any Member shall by
virtue of this Agreement have any right, title or interest in or to such
independent venture of any Member.
6.6 Respective Responsibilities for Damages. Each Member agrees to
indemnify and hold harmless the Company and the other Member from any injury,
damages, costs, liability, fines, causes of action or fees (including reasonable
attorney's fees) resulting from, or alleged to result from, the business
activities of such Member as described in Section 6.5 which are conducted upon
the Property or in conjunction with improvements to the Property made by such
Member pursuant to Section 3.2(d),.
6.7 Non-Solicitation. No Member shall solicit, divert, hire, or induce,
or attempt to solicit, divert, or hire any of the other's employees who are
providing substantially full-time services to such party while they are Members
of the Company or affiliated with any Member of the Company.
6.8 Confidentiality. Each Member agrees to keep confidential and not
use, reveal, provide, or transfer to any third party any confidential
information ("Confidential Information") it obtains or has obtained concerning
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any other Member, except (a) disclosure to actual or prospective sources of debt
or equity funding for such Member, including their legal, accounting, and other
advisors, (b) to the extent that disclosure to a third party is required by
applicable law; (c) information that, at the time of disclosure, is generally
available to the public (other than as a result of a breach of this Agreement or
any other confidentiality agreement to which the party is subject or which it
has knowledge), as evidenced by generally available documents or publications;
(d) information that was in its possession prior to disclosure (as evidenced by
appropriate written materials) and was not acquired directly or indirectly from
the other Members; (e) to its employees, consultants, or advisors for the
purposes of carrying out their duty hereunder to the extent disclosure is
necessary or advisable; (f) to third parties to the extent necessary to enforce
this Agreement; provided, however, that in the case of disclosure pursuant to
(e), the party or parties to whom disclosure is made shall agree to be bound by
this confidentiality provision. The obligation of each Member not to disclose
Confidential Information except as provided herein shall not be affected by
either the termination of this Agreement or the resignation or removal of any
Member of the Company.
Article VII
Transfers of Member Interests
7.1 Assignment of Member's Interest. Subject to the provisions of this
Article VII, a Member may assign or transfer that Member's interest in the
Company at any time, either voluntarily by an instrument in writing or
involuntarily by court order or by operation of law. Upon the assignment or
transfer of a Member's interest in the Company, (i) the Company shall not be
required to recognize any such assignment or transfer until the Company has
received written notice of the same; (ii) no such assignment or transfer of an
interest in the Company, whether voluntary or involuntary, shall of itself,
dissolve the Company; (iii) the assignee or transferee of the Member's interest
in the Company shall not thereby become entitled to vote or otherwise
participate in the management of the Company's business and affairs, or to
require any information or accounts of Company transactions, or to inspect the
Company books and records, or to become a Member; (iv) the assignee or
transferee shall only be entitled to receive, in accordance with the contract or
order of assignment or transfer, the share of profits or other compensation by
way of income and the return of contributions to which the assigning Member
would otherwise be entitled under this Agreement and, in case of the winding-up
of the Company, the assignee or transferee shall be entitled to receive such
distributions as would otherwise be made to the assigning Member.
7.2 Admission as Substituted Member. With the exception of permitted
transfers as provided in Section 7.7 of this Agreement, no purchaser, assignee
or other transferee (by conveyance, operation of law or otherwise) of all or any
part of an interest in the Company shall have the right to become a substituted
Member in place of that person's seller, assignor or transferor, and, thereby,
become entitled to vote and participate in the management of the business and
affairs of the Company, unless all of the following conditions are satisfied
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(all subsequent references in this agreement to "assignor" and "assignee" shall
be construed to include sellers and purchasers, transferors and transferees,
donors and donees, and otherwise, as the case may be):
(a) The fully-exercised and acknowledged written instrument or
order of sale, assignment or transfer, which sets forth the intention
of the assignor that the assignee become a substituted Member in that
Member's place, has been filed with the Company;
(b) The assignor and assignee execute and acknowledge such
other instruments as the Members may from time to time reasonably
require, in order to effect such admission, including the written
acceptance and adoption by the assignee of the provisions of this
Agreement;
(c) The assignee shall bear all reasonable expenses incurred
in effecting the substitution; and
(d) Members (other than the assignor) have consented in
writing to the substitution, which consent shall be exercisable in the
Member's sole discretion.
7.3 Right of First Refusal to Purchase Units.
(a) If any Member desires to assign, transfer or otherwise
dispose of all or any portion of such Member's interest in the Company
for value other than in accordance with the provisions of Section 7.4,
the other Member shall have the option to purchase all or any part of
such interest.
(b) The Member(s) desiring to so dispose of its Transferable
Interest (a "Transferring Member") shall give written notice (a
"Transfer Notice") to the other Member setting forth (i) that the
Transferring Member desires to transfer its Units or other interest in
the Company (the "Transferable Interest"); (ii) the identity and
address of the proposed purchaser or other transferee thereof; (iii)
that the Transferring Member has received a bona fide offer for all or
a portion of the Transferable Interest, if a sale is contemplated; (iv)
the cash and other consideration (per Unit and in the aggregate) to be
received by the Transferring Member in connection with such
disposition; (v) a true copy of the offer or agreement, if any, for
such sale or other disposition and a certification by the Transferring
Member that, to the best of his knowledge and belief, the offer or
agreement is genuine and in all respects what it purports to be; (vi)
an offer to sell to the other Member the Transferable Interest in
accordance with this Section 7.3; and (vii) such other information as
may be necessary or desirable in order to afford to the other Member
the benefits intended to be conferred by this Section 7.3. To the
extent the terms of such sale or other transfer provide for the receipt
by the Transferring Member of consideration other than cash or cash
equivalents, the Transfer Notice shall also include a fair market
appraisal of such consideration prepared by a qualified independent
appraiser.
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(c) The other Member shall have ten (10) days after the
effective date of the Transfer Notice to elect to purchase all, but not
less than all, of the Transferable Interest, without regard to whether
the Transferring Member proposed initially to sell only a portion of
such Transferring Member's Units or other interest in the Company.
(d) If the other Member has timely elected to purchase all of
the Transferable Interest, then the other Member shall purchase all,
but not less than all, of the Transferable Interest, on a date and at a
time designated by the other Member in a written notice to be given at
least two (2) days in advance to the Transferring Member by the other
Member, and at the principal place of business of the Company. At the
closing, the Transferring Member shall deliver certificates or other
evidence of ownership representing the Transferable Interest being
purchased, duly endorsed in blank or accompanied by duly executed
transfer documents acceptable to the other Member.
(e) The purchase by the other Member shall be at the price per
Unit or per percentage interest and upon the same terms and conditions
as contained in the Transfer Notice unless the parties shall agree
otherwise; provided, however, that if the Transfer Notice provides for
payment of all or any portion of the purchase price by delivery of
consideration other than cash or cash equivalents, the other Member may
make payment of such portion of the purchase price in cash or cash
equivalents in the amount of the fair market value of such non-cash
consideration as set forth in the appraisal accompanying the Transfer
Notice. If, however, the other Member electing to purchase the
Transferable Interest shall object to such appraisal of the non-cash
consideration within the period set forth above for electing to
purchase the Transferable Interest, the other Member shall within such
period select an independent appraiser to determine such fair market
value. In the event that the independent appraisers selected by each of
the Transferring Member and the other Member cannot agree on the fair
market value, then the two independent appraisers shall mutually select
a third independent appraiser to determine the fair market value, and
the value selected by such third independent appraiser shall be binding
on all of the parties hereto. Each such independent appraiser may use
any customary method of determining fair market value. Each party shall
bear the cost of the independent appraiser selected by that party, and
the cost of the independent appraiser, if any, mutually selected by the
two independent appraisers shall be paid one-half by the Transferring
Member and one-half by the other Member electing to purchase.
(f) If the other Member does not timely elect to purchase all
of the Transferable Interest pursuant to this Section 7.3, the
Transferring Member, within thirty (30) days after the expiration of
the applicable option exercise period, may transfer the Transferable
Interest to the purchaser or other transferee named in the Transfer
Notice for the consideration and on the other terms set forth in the
Transfer Notice and not otherwise. Upon failure of the Transferring
Member to effect such transfer pursuant to the terms and conditions
contained in the Transfer Notice within such thirty (30)-day period,
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the right to transfer such interest shall lapse, and any desired
transfer thereafter shall be made only upon compliance again with the
notice and election procedures of this Section 7.3.
(g) Purchasing Members shall become substituted Members
respecting interests purchased under this Section 7.3 as soon as the
purchase has been accomplished according to the terms hereof. Any other
purchaser or transferee of a Transferring Member's interest shall not
be entitled to become a substitute Member except as provided in Section
7.2.
7.4 Encumbrances.
(a) Notwithstanding any other provision in this Article VII
respecting the transfer of a Member's interest in the Company in other
circumstances, in the event that any Member (an "Encumbering Member")
desires hereafter to encumber in any way all or any part of its Units
or the capital improvements of such Encumbering Member on or
appurtenant to the Property as contemplated by Section 3.2(d), it shall
be able to do so only if it gives written notice (an "Encumbrance
Notice") to the other Member at least 30 days prior to granting or
otherwise creating such encumbrance and obtains the written consent of
the other Member to such encumbrance, which consent may be granted or
withheld at the sole discretion of such other Member. The Encumbrance
Notice shall set forth or otherwise include (i) the number or other
amount of Units or the capital improvements of such Encumbering Member
on or appurtenant to the Property as contemplated by Section 3.2(d)
that the Encumbering Member desires to encumber (the "Collateral");
(ii) a description of the proposed encumbrance; (iii) the identity and
address of the person to whom or for whose benefit such encumbrance is
to be granted or created (the "Secured Party"); (iv) the amount of the
indebtedness (the "Secured Indebtedness") to be secured by such
encumbrance and the principal terms thereof to be secured by such
encumbrance; and (v) a true copy of the definitive Secured Party
Undertaking (hereafter defined) duly executed by the Secured Party.
(b) The Secured Party Undertaking (herein so called) shall
evidence the obligation of the Secured Party (or any assignee or
successor thereof), before taking any action to enforce any right which
the Secured Party may have to execute on such encumbrance, including a
conveyance in lieu of foreclosure, against the Collateral, to (i) give
written notice (a "Sale Notice") to the other Member and Refinery
Technologies, Inc. ("RTI") and (ii) afford to the other Member and RTI
successive options to purchase the Collateral and the right to notice
of any execution or foreclosure sale or conveyance in lieu thereof and
as hereinafter provided in this Section 7.4.
(c) The Sale Notice shall set forth (i) the identity and
address of the Encumbering Member or other then current holder of the
Collateral; (ii) the number or other amount of Units or the capital
improvements of such Encumbering Member on or appurtenant to the
Property as contemplated by Section 3.2(d) then comprising the
Collateral; (iii) the fair market value of such Collateral as
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determined by a qualified independent appraiser engaged by the Secured
Party; and (iv) the identity and address of the Secured Party.
(d) During the period consisting of 30 days after the delivery
of the Sale Notice to the other Member and RTI and the date of the
proposed foreclosure sale or conveyance in lieu thereof as provided in
subparagraph (c) above, first the other Member and, if not exercised by
such other Member, then RTI shall have the right to purchase all, but
not less than all, of the Collateral from the Secured Party at a price
agreed to by them or, in the absence of such agreement, at the fair
market value of such Collateral as set forth in the Sale Notice. If,
however, the other Member or RTI shall object to such appraisal of the
Collateral within five days after receipt of such Sale Notice, the
other Member (but not RTI) shall within such five days appoint an
independent appraiser to determine such fair market value. In the event
that the independent appraisers selected by each of the Secured Party
and the other Member cannot agree on the fair market value, then the
two independent appraisers shall mutually select a third independent
appraiser to determine the fair market value, and the value selected by
such third independent appraiser shall be binding on all of the parties
hereto. Each such independent appraiser may use any customary and
accepted method of determining fair market value. The Secured Party and
the other Member each shall bear the cost of the independent appraiser
selected by it, and the cost of the independent appraiser, if any,
mutually selected by the two independent appraisers shall be paid
one-half by the Secured Party and one-half by the other Member. The
election of the other Member or RTI to purchase the Collateral shall be
evidenced by its timely written notice to the Secured Party at its
address set forth in the Sale Notice. In the event both the other
Member and RTI both elect to purchase the Collateral, the election of
the other Member shall be accepted, and the Collateral shall be sold to
the other Member on the terms and conditions set forth herein. Capco's
and Foreco's rights under this Section 7.4 with respect to any sale of
the Collateral by Secured Party shall be in lieu of, and not in
addition to, Capco's, Foreco's and RTI's respective rights under the
Assignment and Agreement entered into September 11, 1998, a copy of
which is attached hereto as Exhibit "D" (the "Assignment and
Agreement"), which shall otherwise remain in full force and effect.
(e) If the Collateral is not sold to the other Member or RTI
in accordance with subparagraph (d) above, the Secured Party shall have
the right to take a conveyance in lieu of foreclosure or dispose of
such Collateral (w) at either private or public sale, (x) by way of one
or more contracts, (y) as a unit or in parcels, and (z) on any terms,
all as the Secured Party may determine; provided that such disposition,
including the method, manner, time, place and terms of sale are
commercially reasonable. All of the Collateral shall be offered and
sold separate from and not as part of a unit including other collateral
of the Secured Party.
(f) If all or any portion of the Collateral is to be sold to
the other Member or RTI in accordance with this Section 7.4, then such
sale shall be closed not more than 60 days after the determination of
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the purchase price in accordance with Section 7.4(d) on a date and at a
time designated by the Secured Party in a written notice given by the
Secured Party to the purchasing other Member or RTI, as the case may
be. On such date and at such time, payment of such purchase price in
cash or other immediately available funds shall be made to the Secured
Party at its office, against receipt of documents evidencing and
assigning to the purchasing Company, other Members or RTI, as the case
may be, the Collateral being purchased and all encumbrances securing
the same (or corresponding part thereof proportional to the Secured
Indebtedness so purchased), without restriction.
(g) If the sale to the other Member or RTI, as the case may
be, is not closed within the 60-day period provided for in subparagraph
(f) of this Section 7.4, Secured Party shall be entitled to exercise
its rights under paragraph (e) of this Section 7.4; provided that RTI
shall not have the right to exercise its rights under the Assignment
and Agreement more than once. Any transfer of any or all of the
Collateral upon foreclosure by the Secured Party following compliance
with the preceding provisions of this Section 7.4 shall thereafter
continue to be subject to the provisions of this Agreement, and the
transferee shall assume all obligations hereunder.
(h) Upon compliance by the Secured Party with the provisions
of this Article VII, such Secured Party, or the purchaser on any
foreclosure sale, shall be admitted as a Member of the Company on its
written notice to the Company of its election to become a Member,
without the consent of either the Company or any other Member.
7.5 Purchase of Specialized Improvements. If, upon the withdrawal of a
Member from the Company, whether in connection with a transaction described in
Section 7.3 or otherwise but other than as provided in and in accordance with
Section 7.4, the other Member shall have the option to purchase any equipment
and other improvements (the "Specialized Improvements") at the Property that
were funded solely by the withdrawing Member, were treated as owned by such
withdrawing Member and not by the Company, and respecting which the withdrawing
Member was not treated as having made a contribution to the capital of the
Company pursuant to Section 3.2. The price of such purchase shall be determined
by the mutual consent of the withdrawing Member and the other Member. If the
other Member elects not to purchase the Specialized Improvements, the
withdrawing Member shall have the right to (a) if the withdrawal is in
connection with a transaction described in Section 7.3 respecting which the
other Member did not elect to purchase the Transferable Interest, sell the
Specialized Improvements together with the Transferable Interest, (b) remove the
Specialized Improvements from the Property and restore the premises in all
material respects to their condition prior to the construction or installation
of the Specialized Improvements at the sole cost of the withdrawing Member,
without liability for consequential damages, or (c) abandon the Specialized
Improvements to the Company.
25
<PAGE>
7.6 Option to Purchase Interest Upon Certain Events.
(a) If all or any portion of a Member's interest is proposed
to be transferred other than as provided in and in accordance with
Section 7.4 pursuant to (i) an adjudication of the Member as a
bankrupt; (ii) an entry of an order, judgment or decree by any court of
competent jurisdiction appointing a trustee, receiver or liquidator of
the assets of the Member; (iii) an assignment or attempted assignment
by the Member for the benefit of creditors; or (iv) the institution or
attempted institution of voluntary bankruptcy proceedings by the
Member, then, in any such event (an "Option Event"), the Company and,
to the extent the Company does not elect to purchase all of such
interest, the other Member shall have the option, but not the
obligation, to purchase from such Member (or from such Member's legal
successor(s)) (the "Subject Member") all or any portion of the Subject
Member's interest in the Company transferred, as the Company or the
other Member may elect, without respect to whether all or only a
portion of such Member's interest was initially subject to the proposed
transfer.
(b) Not later than ninety (90) days after the occurrence of an
Option Event, the Subject Member (or the Subject Member's successor(s))
shall notify the Company of such occurrence, which notice shall set
forth (i) a description of the Option Event; (ii) the Units (the
"Option Units") that the Company and the other Member have the right to
purchase pursuant to this Section 7.6 by reason of such Option Event;
(iii) the identity of the Subject Member; and (iv) such other
information as may be necessary or desirable in order to afford to the
Company and the other Member the benefits intended to be conferred by
this Section 7.6. Following the receipt of such notice, the Company
shall give like notice to the other Member of the occurrence of the
Option Event and of its option to purchase the Subject Member's
interest pursuant to this Agreement.
(c) The Company shall have ten (10) days after the effective
date of the Option Notice to elect to purchase all or any part of the
Option Units. To the extent the Company does not elect to purchase all
of such interest, the other Member shall have twenty (20) days after
the date of the expiration of the Company's option to elect to purchase
all or any part of the Option Units, such election to be made by
delivering written notice of such election to the Subject Member within
such twenty (20)-day period.
(d) If the Company and/or the other Member have timely elected
to purchase Option Units, then the Company and the electing other
Member shall purchase that part of the Option Units that it has elected
to purchase within five (5) days after expiration of the applicable
option exercise period on a date and at a time designated by the
Company and/or other Member in a written notice to be given at least
two (2) days in advance to the Subject Member by the Company and/or
other Member, and at the principal place of business of the Company.
(e) The purchase price for the Option Units purchased by the
Company or other Member shall be the fair market value ("FMV") of the
interest as of the date of the occurrence of the Option Event as
determined herein. The Company shall pay for and obtain an independent
26
<PAGE>
appraisal of all real estate. Listed securities shall be valued at the
latest closing price for such securities. All other assets shall be
valued at their book value, net of depreciation and amortization. The
FMV of the interest being purchased shall be based on the relative
percentage of ownership of the Company based on the total number of
Units outstanding as of the valuation date multiplied by the sum of (i)
the fair market value of the real estate as determined by appraisal;
plus (ii) the market price for any listed securities; plus (iii) the
book value, net of depreciation and amortization, of all other assets;
minus (iv) total Company liabilities at the valuation date.
(f) Payment by the Company or the Members of the purchase
price for Option Units shall be made in cash or other immediately
available funds at closing.
(g) If and to the extent that the Company and/or the other
Member do not purchase all of the Option Units pursuant to the
preceding provisions of this Section 7.6, then the remaining Option
Units shall be transferred to the person or persons to whom the same
would have passed in the absence of the provisions of this Agreement.
7.7 Option to Purchase Property.
(a) If the Company desires to assign, transfer or otherwise
dispose of the Property for value, Capco and Foreco shall have the
option, exercisable first by Capco and thereafter by Foreco, to
purchase all of the Property desired to be sold by the Company. If the
Company has not received an offer from a third party for the purchase
of the Property, the price and terms of such sale shall be as agreed to
by Capco or Foreco and the Company.
(b) If the Company has received an offer from a third party
purchaser, the Company shall notify Capco and Foreco setting forth (i)
the identity and address of the proposed purchaser or other transferee
thereof; (ii) that the Company has received a bona fide offer therefor,
if a sale is contemplated; (iii) the cash and other consideration to be
received by the Company in connection with such disposition; (iv) a
true copy of the offer or agreement, if any, for such sale or other
disposition and a certification by the Company that, to the best of its
knowledge and belief, the offer or agreement is genuine and in all
respects what it purports to be; (v) an offer to sell the Property to
Capco and Foreco in accordance with this Section 7.7; and (vi) such
other information as may be necessary or desirable in order to afford
to Capco and Foreco the benefits intended to be conferred by this
Section 7.7. To the extent the terms of such sale or other transfer
provide for the receipt by the Company of consideration other than cash
or cash equivalents, the notice shall also include a fair market
appraisal of such consideration prepared by a qualified independent
appraiser.
(c) Capco shall have ten (10) days after the effective date of
the notice to elect to purchase all of the Property. To the extent
Capco does not elect to purchase all of the Property, Foreco shall have
27
<PAGE>
ten (10) days after the date of the expiration of Capco's option to
elect to purchase all of the Property. Any such election to be made by
delivering written notice of such election to the Company within such
applicable ten (10)-day period.
(d) If Capco or Foreco has timely elected to purchase all of
the Property, then such electing party shall purchase the Property
within five (5) days after expiration of the applicable period set
forth herein, on a date and at a time designated by the electing party
in a written notice to be given at least two (2) days in advance to the
Company by the electing party, and at the principal place of business
of the Company. At the closing, the Company shall deliver a special
warranty deed and other transfer documents acceptable to the electing
party duly executed on behalf of the Company.
(e) The purchase by the electing party shall be at the price
and upon the same terms and conditions as contained in the notice
unless the Company and all Members shall agree otherwise; provided,
however, that if the notice provides for payment of all or any portion
of the purchase price by delivery of consideration other than cash or
cash equivalents, the electing party may pay such portion of the
purchase price in cash or cash equivalents in the amount of the fair
market value of such non-cash consideration as set forth in the
appraisal accompanying the notice. If, however, the electing party
shall object to such appraisal of the non-cash consideration within the
period set forth above for electing to purchase the Property, the fair
market value shall be determined as set forth in Section 7.3(f).
(f) If neither Capco nor Foreco timely elects to purchase all
of the Property pursuant to this Section 7.7, the Company, within
thirty (30) days after the expiration of the applicable option exercise
period, may transfer the Property to the purchaser or other transferee
named in the notice for the consideration and on the other terms set
forth in the notice and not otherwise. Upon failure of the Company to
effect such transfer pursuant to the terms and conditions contained in
the notice within such thirty (30)-day period, the right to transfer
such interest shall lapse, and any desired transfer thereafter shall be
made only upon compliance again with the notice and election procedures
of this Section 7.7.
7.8 Permitted Transfers. Nothing in this Agreement shall be deemed to
prohibit or limit the sale, assignment or transfer from a Member of all or any
part of the Member's interest in the Company to
(a) another existing Member of the Company,
(b) either (i) a Member's wholly owned subsidiary corporation
or limited liability company (ii) a limited partnership of which only
entities described in clause (i) hereof are the general partners, (iii)
a limited liability company of which only entities described in clause
(i) hereof are the managers;
28
<PAGE>
(c) a general partnership or joint venture consisting only of
entities described in clauses (i) through (iii) of subparagraph (b),
(d) in the case of Capco, the transfer to CAD; or
(e) any other person to which all other Members consent in
writing;
provided, that in each case the interest in the Company so sold, assigned or
transferred continues to be subject to the provisions of this Agreement in all
respects. No such sale, assignment or transfer shall create a right, interest or
power in any other Member, or in the Company, or any other person, to purchase
or acquire such interest in the Company, nor shall the Member who desires to
sell, assign or transfer all or any part of that Member's interest in the
Company to another Member be required to obtain the prior consent of the other
Members or the Company or to offer such interest to the other Members or to the
Company.
Article VIII
Dissolution and Termination
8.1 Events of Dissolution. The Company shall, without further action of
the Members, be dissolved upon the first to occur of the following:
(a) The dissolution of the Company by judicial decree;
(b) The merger or consolidation of the Company with another
limited liability company or other entity where the Company is not the
surviving entity;
(c) The sale of all or substantially all of the assets of the
Company;
(d) December 31, 2048; or
(e) The written consent to dissolve of Members holding in the
aggregate at least 75% of the outstanding Units.
Unless approved by Members holding, in the aggregate, at least 75% of the
outstanding Units, no Member shall have the right, and all Members hereby agree
not, to dissolve, terminate, partition, or liquidate, or to petition a court for
the dissolution, termination, partition, or liquidation of, the Company except
as provided in this Agreement.
8.2 Winding Up and Liquidation. Upon the occurrence of an event of
dissolution as provided in Section 8.1, the Company shall be wound up and
liquidated as rapidly as business circumstances will permit by selling Company
assets and distributing the proceeds from any such sale or sales of the assets
of the Company as follows and in the following order of priority:
29
<PAGE>
(a) to pay the expenses of winding up and to pay or provide
for payment of all amounts owing by the Company to creditors other than
Members;
(b) to establish any reserves which the Members may deem
necessary for any anticipated, contingent or unforeseen liabilities or
obligations of the Company arising out of, or in connection with, the
conduct of the Company business;
(c) to pay all amounts owing by the Company to any Member as a
creditor;
(d) thereafter to the Members in accordance with their
Ownership Percentages up to the amount of $2,500,000; and
(e) then in equal portions to Capco and Foreland.
8.3 Authority to Wind Up. The winding up of the Company and liquidation
of its assets shall be conducted by the Manager or, if there is no Manager, as
determined by the remaining Members.
Article IX
Books of Account, Accounting, Reports, and Banking
9.1 Books of Account. The Company books and records of account shall be
maintained at the principal office of the Company or at such other location and
by such person or persons as may be designated by the Manager. The Company shall
pay the direct expense of maintaining its books of account.
9.2 Method of Accounting. The Company books of account shall be
maintained and kept on a basis of accounting determined by the Members and
consistently applied.
9.3 Financial Statements. Upon receipt of a written request from any
Member, within ninety (90) days after the close of each Fiscal Year of the
Company, the Company shall provide to each Member either unaudited or audited
(as determined by the Members in their reasonable discretion) financial
statements which fairly represent the financial condition of the Company as of
the end of such Fiscal Year. Such financial statements shall indicate the share
of each Member in the net income, net loss, depreciation and other relevant
fiscal items of the Company for such Fiscal Year. Each Member shall be entitled
to receive copies of all federal, state and local income tax returns and
information returns, if any, which the Company is required to file.
Additionally, quarterly, to the extent both requested by any Member and
regularly prepared by the Company, the Company shall make available to any
Member copies of the Company's financial documentation respecting the prior
quarter, including, without limitation, balance sheets and income statements.
9.4 Bank Accounts. The funds of, and all monies actually received by
the Company shall be deposited in a separate bank account or accounts in a
30
<PAGE>
national or state banking institution in the name of the Company. The Manager or
agent of the Company shall be authorized to draw checks upon such account or
accounts; provided, however, that no funds shall be withdrawn from any such
account or accounts except for Company purposes.
9.5 Tax Returns. The Manager shall, for each Fiscal Year, file or
caused to be filed at the expense of the Company and on behalf of the Company, a
partnership return within the time prescribed by law (including extensions) for
such filing and shall deliver to each Member a copy of such Member's K-1
relating to such return. The Manager shall also file or caused to be filed at
the expense of the Company and on behalf of the Company such state and/or city
income tax returns as may be required by law.
9.6 Audit. Each Member shall have the right at all reasonable times
during usual business hours to audit, examine, and make copies of or extracts
from the books of accounts and other records of the Company. Such right may be
exercised through any agent or employee of such Member designated by such
Member. Each Member shall bear all expenses incurred in any examination made for
such Member's account.
9.7 Meetings. The Company shall hold an annual meeting of the Members
at a time, date and place as determined by the Members. Special meetings of the
Members, for any purpose or purposes described in the meeting notice, may be
called by the Manager or by Members holding in the aggregate at least 33% of the
outstanding Units.
9.8 Records. The Company shall keep at its place of business the
following records: (a) a current list in alphabetical order of the full name and
last known business street address of each Member; (b) a copy of the stamped
Articles of Organization and all certificates of amendment thereto, together
with executed copies of any powers of attorney pursuant to which any certificate
of amendment has been executed; (c) copies of the Company's federal, state, and
local income tax returns and reports, if any, for the three (3) most recent
fiscal years; (d) copies of any financial statements of the Company for the
three (3) most recent fiscal years; (e) a copy of this Agreement plus all
amendments thereto; (f) unless otherwise set forth in the Articles of
Organization or this Agreement, a written statement of (i) the amount of cash
and a description and statement of the agreed value of the other property or
services contributed or agreed to be contributed by each Member, (ii) the times
at which, or events on the happening of which, any additional contributions
agreed to be made by each Member are to be made, (iii) the right of any Member
to receive distributions which include a return of all or any of the Member's
contributions, and (iv) any event upon the happening of which the Company is to
be dissolved and its affairs wound up. These records shall be subject to
inspection and copying at the reasonable request, and at the expense, of any
Member during ordinary business hours.
Article X
Miscellaneous
10.1 Notices. All notices and other communications made or required to
be given pursuant to this Agreement shall be in writing and shall be deemed
given if delivered personally or by facsimile transmission (if receipt is
confirmed by the facsimile operator of the recipient), or delivered by overnight
31
<PAGE>
courier service or mailed by registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice; provided
that notices of a change of address shall be effective only upon receipt
thereof):
If to Capco, to: Crown Asphalt Products Company
215 South State Street, Suite 650
Salt Lake City, Utah 84111
Attention: Jay Mealey, President
Telephone: (801) 537-5610
Facsimile: (801) 537-5609
If to Foreco, to: Foreland Asphalt Corporation
2561 South 1560 West, Suite 200
Woods Cross, Utah 84087
Attention: Bruce C. Decker, President
Telephone: (801) 298-9866
Facsimile: (801) 298-9889
Any notice hereunder delivered in person or by facsimile (if receipt is
confirmed by the facsimile operator of the recipient) shall be deemed given on
the date thereof; any notice by registered or certified mail shall be deemed
given three (3) days after the date of mailing; and any notice by overnight
courier shall be deemed given two (2) days after shipment or the date of
receipt, whichever is earlier.
10.2 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Members, their successors and assigns.
10.3 Duplicate Originals. For the convenience of the Members, any
number of counterparts hereof may be executed, and each of such counterparts
shall be deemed to be an original instrument, and all of which, taken together,
shall constitute one agreement.
10.4 Construction. The title of articles and sections herein have been
inserted as a matter of convenience for reference only and shall not control or
affect the meaning or construction of any of the terms or provisions herein.
10.5 Governing Law. This Agreement is entered into and shall be
governed by the laws of the state of Utah. To the extent permitted by the Act
and other applicable law, the terms and provisions of this Agreement shall
control in the event of any conflict between such terms or provisions and the
Act.
10.6 Other Instruments. The parties hereto covenant and agree that they
will execute such assumed name certificates and other and further instruments
32
<PAGE>
and documents which are or may become necessary or convenient to effectuate and
carry out the purposes of the Company created by this Agreement.
10.7 Legal Construction. In case any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if the invalid, illegal or unenforceable provision had never been
contained herein. Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be automatically added as part of this Agreement a
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
10.8 Gender and Number. Wherever the context shall so require all words
herein in any gender shall be deemed to include the masculine, feminine or
neuter gender, all singular words shall include the plural and all plural words
shall include the singular.
10.9 Reliance. No person dealing with any Manager shall be required to
determine his authority to make any commitment or undertaking on behalf of the
Company, nor to determine any fact or circumstances bearing upon the existence
of such authority. In addition, no purchaser of any asset of the Company from a
Manager shall be required to see to the application or distribution of revenues
or proceeds paid or credited in connection therewith, unless such purchaser
shall have received notice affecting same.
10.10 Entirety and Modifications. This Agreement embodies the entire
agreement between the parties hereto and supersedes any prior understandings or
written or oral agreements between the parties respecting the subject matter of
this Agreement. No term, condition or provision of this Agreement shall be
altered, amended or modified without the prior written consent of Members
holding at least 75% of the issued and outstanding Units, except as provided to
the contrary in this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed by the undersigned
as of the date first above written.
Capco:
CROWN ASPHALT PRODUCTS COMPANY
By ______________________________
Jay Mealey, President
Foreco:
FORELAND ASPHALT CORPORATION
By ______________________________
Bruce C. Decker, President
33
<PAGE>
Exhibit A.........Property Description
Exhibit B.........Memorandum of Closing
Exhibit C.........Use of Facilities
Exhibit D.........Assignment and Agreement
34
<PAGE>
Exhibit "A"
to
Operating Agreement
of
Cowboy Asphalt Terminal, L.L.C.
Property Description
The following described property situated in Davis County, state of Utah:
BEGINNING AT A POINT SOUTH 89(degree)56'09" EAST 777.48 FEET ALONG THE QUARTER
SECTION LINE FROM THE WEST QUARTER CORNER OF SECTION 35, TOWNSHIP 2 NORTH, RANGE
1 WEST, SALT LAKE MERIDIAN, IN THE CITY OF WOODS CROSS, AND RUNNING THENCE NORTH
0(degree)23'18" WEST 236.9 FEET; THENCE ALONG THE BOUNDARY OF SKYPARK INDUSTRIAL
PARK SOUTH 89(degree)56'09" EAST 651.08 FEET AND SOUTH 0(degree)23'18" EAST
1056.4 FEET TO THE NORTH LINE OF A STREET; THENCE WEST 648.3 FEET ALONG THE
NORTH LINE OF SAID STREET TO A POINT SOUTH 0(degree)35' WEST OF THE POINT OF
BEGINNING; THENCE NORTH 0(degree)35' WEST 820.1 FEET, MORE OR LESS, TO THE POINT
OF BEGINNING. 06-085-0019
A-1
<PAGE>
Exhibit "B"
to
Operating Agreement
of
Cowboy Asphalt Terminal, L.L.C.
Memorandum of Closing
B-1
<PAGE>
Exhibit "C"
to
Operating Agreement
of
Cowboy Asphalt Terminal, L.L.C.
Use of Facilities
C-1
<PAGE>
Exhibit "D"
to
Operating Agreement
of
Cowboy Asphalt Terminal, L.L.C.
Assignment and Agreement
D-1
Jay Mealey
President
Crown Energy Corporation
215 South State, Suite 550
Salt Lake City, UT 84111
April 3, 1998
Mr. Mealey:
This letter agreement (this "Agreement") will confirm that Ladenburg
Thalmann & Co. Inc. ("Ladenburg") has been retained as a financial advisor to
Crown Energy Corporation (the "Company") to perform such financial consulting
services as the Company may reasonably request. The term of this agreement (the
"Agreement") shall extend through October 3, 1998, provided, however, that
either the Company or Ladenburg may terminate this Agreement prior to such date
and as of the end of any month upon no less than 30 days prior written notice.
As compensation for Ladenburg's services, the Company will issue to
Ladenburg, or its designees, as the sole compensation payable to Ladenburg
hereunder, warrants to purchase 400,000 shares of the Company's common stock.
The warrants will be exercisable for five years from the date of issue as
follows: (i) 150,000 at $1.50 a share, (ii) 150,000 at $2.00 per share, and
(iii) 100,000 at $2.50 per share. In the event Ladenburg terminates this
Agreement, as provided herein, before six months from the date of the execution
of this Agreement, the warrants will automatically terminate. The Company also
agrees to reimburse Ladenburg for all reasonable out-of-pocket expenses incurred
in carrying out the terms of this Agreement, including travel, telephone,
facsimile, courier, computer time charges, attorney's fees and disbursements.
Any expenses exceeding $15,000 in amount shall require the company's prior
written approval. These out-of-pocket expenses will be payable from time to time
promptly upon invoicing by Ladenburg therefore.
Under this Agreement, Ladenburg will work with the Company as financial
advisor. Including the following services as reasonably requested by the
Company:
A. Provide corporate finance professionals as reasonably required to
assist in potential transaction related issues.
B. Review of Company operations and financial condition.
C. Analyze financing alternatives available to the Company and make
recommendations on appropriate financing strategies.
<PAGE>
Jay Mealey
April 3, 1998
Page 2
D. Evaluate potential transactions and determine appropriate financing
strategies for such transactions.
E. Assist the Company in developing an enhanced market for its stock,
through investor meetings and Ladenburg's sales force.
It is contemplated that from time to time the Company may request
Ladenburg to perform investment banking services (as distinguished from
financial consulting services) in connection with matters involving the Company,
such as the private placement of securities; mergers; acquisitions;
divestitures; valuations; or corporate reorganizations. Any fees which Ladenburg
shall become entitled to receive from the Company in connection with the
performance of any such investment banking services shall be set forth in a
separate agreement between the Company and Ladenburg and shall be in addition to
the compensation provided for under this Agreement. Ladenburg, however, will
have no obligation to enter into any separate agreement, the terms and
conditions of which must be negotiated between Ladenburg and the Company.
The Company agrees that if the Company is to conduct a secondary
offering of private or public equity shares, or an offering of debt or other
securities over the next 12 months from the date of this Agreement, provided
this Agreement had not been terminated by Ladenburg, Ladenburg has a right of
first refusal to lead manage such an offering which it may exercise by serving
written notices to the Company within 30 days of its receipt of the Company's
election to proceed with such a secondary offering. Fees for such an offering
would be commensurate with similar offerings of similar size.
In order to enable Ladenburg to render its services hereunder, the
Company agrees to provide to Ladenburg, among other things, all information
reasonably requested or required by Ladenburg including, but not limited to,
information concerning historical and projected financial results and possible
and known litigations, and environmental and other contingent liabilities.
Ladenburg agrees to keep confidential all information provided to it by the
Company (excluding information as is publicly available due to the Company's
status as a reporting company) and to safeguard such information with the amount
of care used to protect its own proprietary and confidential information. The
Company also agrees to make available to Ladenburg such representatives of the
Company, including, among others, directors, officers, employees, outside
counsel and independent certified public accountants, as Ladenburg may
reasonably request. The Company will promptly advise Ladenburg of any material
changes in its business or finances. The Company represents that all information
made available to Ladenburg by the Company will be complete and correct in all
material fact necessary in order to make the statement therein not misleading in
light of the circumstances under which such statements are made. In rendering
its services hereunder, Ladenburg will be using and relying primarily on such
information without independent verification thereof or independent appraisal of
any of the Company's assets. Ladenburg does not assume responsibility for the
accuracy of completeness of the information to which reference is made hereto.
<PAGE>
Jay Mealey
April 3, 1998
Page 3
The services herein provided are to be rendered solely to the Company.
They are not being rendered by Ladenburg as an agent or as a fiduciary of the
shareholders of the Company and Ladenburg shall not have any liability or
obligation with respect to its services hereunder to such shareholders or any
other person, firm or corporation.
The Company and Ladenburg hereby agree to the terms and conditions of
the indemnification Agreement attached hereto as Appendix A with the same force
and effect as if such terms and conditions were set forth at length here.
The parties acknowledge that one party or the other may desire to issue
a news release or other announcement concerning the execution of this Agreement.
Subject to the requirements of law, the parties agree that any new releases or
other announcements concerning the Agreement, or other transactions contemplated
hereby, shall be approved in writing by both parties prior to release.
This Agreement sets forth the entire understanding of the parties
relating to the subject matter hereof and supersedes and cancels any prior
communications, understandings and agreements between the parties. This
Agreement cannot be terminated or changed, nor can any of the provisions be
waived, except by written agreement signed by all parties hereto or except as
otherwise provided herein. This Agreement shall be binding upon an inure to the
benefit of any successors and assigns of the Company and Ladenburg.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed solely in such state by citizens thereof. Any dispute arising out of
this Agreement shall be adjudicated in the courts of the State of New York in
the federal courts sitting in the Southern District of New York, and the Company
hereby agrees that service of process upon it by registered or certified mail at
its address set forth above shall be deemed adequate and lawful. The parties
hereto shall deliver notices to each other by personal delivery or by registered
or certified mail (return receipt requested) at the addresses set forth above.
Please confirm that the foregoing is in accordance with your
understanding by signing upon behalf of the Company and returning an executed
copy of this Agreement, whereupon after execution by Ladenburg this Agreement
shall become binding between the Company and Ladenburg. A telecopy of a signed
original of this Agreement shall be sufficient to bind the parties whose
signatures appear hereon.
Very truly yours,
LADENBURG, THALMANN & CO. INC.
By: /s/ Benjamin J. Douck
---------------------------
<PAGE>
Jay Mealey
April 3, 1998
Page 4
ACCEPTED AND AGREED TO:
CROWN ENERGY CORPORATION
By: /s/ Jay Mealey
-------------------------------
(Signature)
Name & Title: Jay Mealey, President
-------------------------
(Please Print)
Date: ______________________________
INDEMNIFICATION AGREEMENT
Appendix A to Letter Engagement Agreement (the "Agreement"), dated
March 18, 1998 by and between Crown Energy Corporation (the "Company") and
Ladenburg Thalmann & Co. Inc. ("Ladenburg").
The Company agrees to indemnify and hold Ladenburg and its affiliates, control
persons, directors, officers, employees and agents (each an "Indemnified
Person") harmless from and against all losses, claims, damages, liabilities,
costs or expenses, including those resulting from any threatened or pending
investigation, action, proceeding or dispute whether or not Ladenburg or any
such other Indemnified Person is a party to such investigation, action,
proceeding or dispute, arising out of Ladenburg's entering into or performing
services under this Agreement, or arising out of any matter referred to in this
Agreement. This indemnity shall also include Ladenburg's and/or any such other
Indemnified Person's reasonable attorney's and accountant's fees and
out-of-pocket expenses incurred in, and the cost of Ladenburg's personnel whose
time is spent in connection with, such investigations, actions, proceedings or
disputes which fees, expenses and costs shall be periodically reimbursed to
Ladenburg and/or to any such other Indemnified Person by the Company as they are
incurred: provided, however, that the Indemnity herein set forth shall not apply
to the Indemnified Person where a court of competent jurisdiction has made a
final determination that such Indemnified Person acted in a grossly negligent
manner or engaged in willful misconduct in the performance of the service
hereunder which gave rise to the loss, claim, damage, liability, cost or expense
sought to be recovered hereunder (but pending any such final determination the
indemnification and reimbursement provisions hereinabove set forth shall apply
and the Company shall perform its obligations hereunder to reimburse Ladenburg
and/or each such other Indemnified Person periodically for its, his or their
fees, expenses and costs as they are incurred). The Company also agrees that no
Indemnified Person shall have any liability (whether direct or indirect, in
contract or tort or otherwise) to the Company for or in connection with any act
or omission to act as a result of its engagement under this Agreement except for
any such liability for losses, claims, damages, liabilities or expenses incurred
by the Company that is found in a final determination by a court of competent
jurisdiction to have resulted from such Indemnified Person's gross negligence or
willful misconduct.
If for any reason, the foregoing indemnification is unavailable to
Ladenburg or any such other Indemnified Person or insufficient to hold it
harmless, then the Company shall contribute to the amount paid or payable by
Ladenburg or any such other Indemnified Person as a result of such loss, claim,
damage or liability in such proportion as is appropriate to reflect not only the
relative benefits received by the Company and its shareholders on the one hand
and Ladenburg or any such other Indemnified Person the other hand, but also the
relative fault of the Company and Ladenburg or any such other Indemnified
Person, as well as any relevant equitable considerations; provided that in no
event will the aggregate contribution by Ladenburg and any such other
Indemnified Person hereunder exceed the amount of fees actually received by
Ladenburg pursuant to this Agreement. No person found liable for a fraudulent
<PAGE>
misrepresentation shall be entitled to a contribution from any person who is not
also found liable for such fraudulent misrepresentation. The reimbursement,
indemnity and contribution obligations of the Company hereinabove set forth
shall be in addition to any liability which the Company may otherwise have and
these obligations and the other provisions hereinabove set forth shall be
binding upon and inure to the benefit of any successors, assigns, heirs and
personal representatives of the Company, Ladenburg and any other Indemnified
Person.
The terms and conditions hereinabove set forth in this Appendix A shall
survive the termination and expiration of this Agreement and shall continue
indefinitely thereafter.
LADENBURG THALMANN & CO. INC.
By:
-------------------------
CROWN ENERGY CORPORATION AND ITS AFFILIATES AND RELATED ENTITIES
By:
-------------------------------
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