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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________
Commission File Number 0-19365
CROWN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 87-0368981
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
215 SOUTH STATE, SUITE 650
SALT LAKE CITY, UTAH 84111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 537-5610
Securities registered pursuant to Section 12(b) of the Act:
(None)
Securities registered pursuant to Section 12(g) of the Act:
$0.02 PAR VALUE COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of common stock, par value $0.02 per share, held
by non-affiliates of the registrant on March 27, 2000 was $7,127,230 using the
average bid and asked price for Registrant's common stock. As of March 27, 2000,
registrant had 13,285,581 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be used in connection with
the solicitation of proxies for the Registrant's Fiscal 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Annual Report on
Form 10-K.
Transitional Small Business Disclosure Format (check one) YES [ ] NO [X]
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PART I.
STATEMENTS MADE OR INCORPORATED IN THIS ANNUAL REPORT INCLUDE A NUMBER OF
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING
THE WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FUTURE", AND WORDS
OF SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS
REGARDING THE COMPANY'S FUTURE PERFORMANCE OR FUTURE EVENTS OR TRENDS. RELIANCE
SHOULD NOT BE PLACED ON FORWARD-LOOKING STATEMENTS BECAUSE THEY INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM
ANTICIPATED FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION, THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ITEM 1. BUSINESS
GENERAL
Crown Energy Corporation 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
manufacturing and distribution business through its majority interest in Crown
Asphalt Distribution, L.L.C., a Utah limited liability company ("Crown
Distribution"). Crown Distribution owns a majority interest in Cowboy Asphalt
Terminal, L.L.C., a Utah limited liability company.
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
declining revenues from oil and gas sales of $224,855 and $86,781, respectively,
as oil and gas operations were phased out. For the years ended December 31, 1998
and 1999, the Company reported revenues from the sale of asphalt products of
approximately $24 million and $36 million respectively. See "Item 6 - Selected
Financial Data." Most of the revenues for 1998 were recorded in the last half of
1998 as a result of Crown Distribution's asphalt product sales.
In August 1997, the Company formed Crown Ridge with MCNIC Pipeline &
Processing Company, a Michigan corporation ("MCNIC"), to construct, own and
operate an asphalt oil sand production Facility at Asphalt Ridge, near Vernal,
Utah (the "Facility") at the Company's Asphalt Ridge deposit in northeast Utah.
MCNIC is a wholly-owned subsidiary of MCN Energy Group, Inc. ("MCN") (NYSE:MCN),
a large diversified energy holding company. Information about MCN Energy Group
is available on the World Wide Web at http://www.mcnenergy.com. To date, Crown
Ridge has invested approximately $25 million in the Facility. During the
start-up of the Facility mechanical and process difficulties were experienced
that affected production economics. The Company conducted extensive research and
engineering to develop a solution to these problems. This proposed solution is
currently being tested in a pilot study at the Facility. If the pilot study
indicates that the solution is technically and economically viable, certain
modifications to the Facility will be required. If the decision is made to
proceed with the required modifications, the Company does not anticipate
completing the modifications sooner than the fall of 2000. The Company presently
owns approximately a 25% equity interest in Crown Ridge and MCNIC holds the
remaining approximately 75% equity interest. The Company has the right to
acquire up to a 60% equity interest in Crown Ridge
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contingent, however, upon MCNIC's receipt of certain preferential returns and
Crown Ridge's election to pursue certain expansion opportunities. See "Item 1.
Business - Asphalt Production - Crown Asphalt Ridge, L.L.C." below.
In August 1997, contemporaneous with the Company's Crown Ridge joint
venture with MCNIC, the Company also completed the private sale of $5 million of
the Company's $10 Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred") to Enron Capital & Trade Resources Corp. ("ECT"), a subsidiary of
Enron Corp. ("Enron"), (NYSE:ENE). Enron is a large diversified energy company
with assets of approximately $35 billion. 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.
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 manufacturing and
distribution facilities located in Utah, Arizona, Colorado and Nevada. These
facilities enable the Company to manufacture a broad range of performance
asphalt products for sale to its customers in the western United States. See
"Item 1. Business - Asphalt Distribution - Crown Asphalt Distribution, L.L.C."
below.
On May 12, 1999, the Company entered into an agreement to acquire an
asphalt distribution terminal in Rawlins, Wyoming and the related asphalt
inventory for $2,291,571 from S&L Industrial, a Wyoming corporation. The
Rawlins, Wyoming asphalt terminal (the "Rawlins Asphalt Terminal") expands the
Company's asphalt manufacturing and distribution operations in the Western
United States. The Company (through its Capco subsidiary) and MCNIC have agreed
to jointly own these assets in a new, separate joint venture, Crown Asphalt
Distribution II, L.L.C., a Utah limited liability company controlled by the
Company ("Crown Distribution II"). It is anticipated, once the Company and MCNIC
satisfy their respective obligations regarding the funding of, and contributions
to, the joint venture, that the Company will contribute the Rawlins Asphalt
Terminal to Crown Distribution II and that Crown Distribution II will be owned
50.01% by the Company and 49.99% by MCNIC. However, as of the date of this
Report, Crown Distribution II is a shell entity with no revenues, operations or
assets. Thus, the Rawlins Asphalt Terminal continues to be owned by Capco,
subject to MCNIC's rights to participate in the ownership of the asphalt
terminal through Crown Distribution II.
The Company's revenues during the year ended December 31, 1999 were
generated primarily through Crown Distribution asphalt product operations. See
"Item 1. Business - Asphalt Distribution - Crown Asphalt Distribution, L.L.C."
below. The Company's control of Crown Distribution and the Rawlins Asphalt
Terminal, through Capco, complement the Company's interest in Crown Ridge (more
specifically, its anticipated asphalt production at the newly constructed
Facility). The asphalt manufacturing and distribution capabilities of Crown
Distribution and Capco offer vertical integration for the Company's operations -
the Company can now produce, transport, store, process, blend, manufacture and
sell finished asphalt products in its Western United States target market. These
operations rely primarily upon the purchase of asphalt, additives, modifiers and
other raw materials used to manufacture the finished asphalt products from third
party suppliers. 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 Capco's asphalt terminals, thereby displacing some of the raw materials
purchased by Crown Distribution from third party suppliers for resale. As
reflected elsewhere within this Report,
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however, no assurance can be given when, or if at all, commercially viable
production at Crown Ridge's Facility will commence.
As the Company increases its asphalt manufacturing, marketing and
distribution activities at its asphalt terminals, the Company remains open to
other asphalt related business opportunities and is actively seeking to acquire
asphalt terminals which can complement the Company's existing capabilities. No
assurance can be given at this time that such acquisitions will actually occur.
More detailed information about the asphalt industry and the Company's
asphalt production and distribution businesses is provided below.
THE ASPHALT INDUSTRY
The United States asphalt market is estimated to be a 30 million-ton market
that historically has been supplied by the large U.S. oil refiners. In recent
years, management of the Company believes that the U.S. asphalt market has
undergone significant changes. In particular, national and international demand
for asphalt has increased. Further, recently established standards which require
the use of higher quality asphalt for federal and state highways in the United
States have increased the demand for higher quality asphalts. At the same time,
recent reductions of heavy crude 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. Full
implementation of the new PG specifications by all states is expected by the end
of 2000. The result of the more stringent SHRP performance grades in the western
United States is that most asphalt used on state and federal projects will need
to be modified with polymers or high performance asphalts, or both, to meet the
required specifications.
The Company manufactures a broad range of performance asphalt products
meeting the SHRP specifications. Management believes the Facility will produce
asphalt that meets the SHRP performance specifications and will augment the
current slate of asphalt products. However, until the asphalt is produced at the
Facility in commercial quantities there can be no assurance of its quality or
performance.
Through its relationships with producers, refiners, suppliers, transporters
and users of asphalt, including state and federal governmental departments,
asphalt associations, consultants and private sector companies; as well as its
strategically located asphalt distribution terminals, PG asphalt blending
processes and Asphalt Ridge reserves, the Company believes that it is well
positioned to meet the needs of the changing asphalt market. However, the
Company will be competing with several larger companies in the regional asphalt
supply business. Competition in the asphalt supply business is based primarily
on price and quality. Further, the Company will be competing with traditional
refineries with respect to the production of asphalt products. In general, these
competitors have significant financial, technical, managerial and marketing
resources and, both separately and combined, represent significant competition
for the Company in its markets.
The asphalt industry is seasonal. Demand for asphalt decreases
significantly during the winter months when cold weather and 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
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to continue purchasing asphalt from outside suppliers in the winter months, when
prices are lower, for storage at its asphalt terminals and manufacturing and
distribution during the peak spring and summer months.
ASPHALT 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 inventory, ownership interests in and to
asphalt distribution facilities in Utah, Colorado, Nevada and Arizona and
certain processing rights at a refinery in Santa Maria, California (see below).
These assets (excluding products inventory) were purchased for $7.5 million, the
amount determined by the parties to be the fair market value of such assets. The
products inventory was also purchased by Crown Distribution for $6,797,932 and
this portion of the purchase price was funded by a loan to Crown Distribution
from MCNIC totaling $7,141,930. This loan has been replaced by a working capital
line of credit from MCNIC to Crown Distribution. The outstanding balance of this
working capital line at December 31, 1999 was $14,935,222.
Collectively, the asphalt manufacturing and distribution facilities
purchased from Petro Source Asphalt Company enable the Company to purchase
asphalt and other related raw materials from third party vendors and to
manufacture a broad range of performance asphalt products for sale to its
customers. For the year ended December 31, 1999, these assets, excluding the
revenues associated with the Santa Maria Processing Agreement (discussed below)
and those associated with Rawlins Asphalt Terminal, distributed approximately
142,430 tons of asphalt and generated revenue of approximately $22,379,000.
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 anticipated asphalt
production from the Facility at Asphalt Ridge.
Under the Santa Maria Refinery Corporation processing agreement (the
"Processing Agreement"), Crown Distribution (and it's predecessor, Petro Source
Asphalt Company, prior to July 2, 1998) purchased crude oil, marketed and sold
the refined products (including asphalt) and maintained the inventory at this
refinery, in exchange for approximately 50% of the net profit realized upon the
sale of the processed product. The Processing Agreement had an automatic
termination date of December 31, 1999 at the time it was acquired by the
Company, but was extended by amendment in December, 1999. Pursuant to the terms
of the amendment, the Company was notified in February, 1999 that the Processing
Agreement would terminate effective April 30, 1999. Upon termination of the
Processing Agreement, the refinery owner was obligated to purchase the refined
products and crude oil inventories located at the refinery from the Company. The
refinery owner breached the terms of the Processing Agreement and amendment by,
among other things, (1) failing to properly terminate the Processing Agreement
and amendment; (2) failing to deliver the refined products (including asphalt)
to the Company or paying for the refined product (including asphalt) and (3)
interfering with the Company's contractual commitments for the sale of asphalt.
See "Item 3. Legal Proceedings."
The Company and MCNIC are joint venture partners in Crown Ridge and Crown
Distribution (both operated by the Company). Management of the Company expects
that Crown Distribution, and Crown Distribution II if and when the Rawlins
Asphalt Terminal is contributed to Crown Distribution II, will purchase the
asphalt to be produced by Crown Ridge at acceptable transfer pricing and other
payment terms that will be agreed upon. However, there can be no assurance that
commercially viable production will occur at the Facility. The terms of such
purchase have not been finalized and no purchase agreement has been executed
between the parties.
The Company transferred and assigned to Crown Distribution, as a capital
contribution, its 66.67% membership interest in CAT LLC. The Company was
credited with a $1.5 million capital contribution to Crown Distribution as a
result of the assignment of the CAT LLC membership interests to Crown
Distribution. Crown Distribution also assumed CAT LLC's payment obligations
under a promissory note. The promissory note assumed by the Company had an
original principal balance of $1,282,070, with a balance as of December 31,
1999 of
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$1,156,294. 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 $6,000,000
as a preferential contribution (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. MCNIC made an additional capital
contribution in the amount of $1.5 million when the Company contributed its
interest in CAT LLC to Crown Distribution. That sum was immediately used by
Crown Distribution to pay down the working capital loan previously advanced by
MCNIC. The original working capital loan has been replaced, at the election of
MCNIC, by the working capital line discussed elsewhere herein. See "Item 1.
Business - Asphalt Distribution - Crown Asphalt Distribution, L.L.C. - Working
Capital Line" 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 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 operating agreement of Crown Distribution specifies that 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. As of the date of this
Report, the annual operating plan for calendar year 2000 has not been approved
by the Company or MCNIC.
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
Crown Distribution by its members. Through amendment to the operating agreement
of Crown Distribution, the Company and MCNIC agreed that each member must
consent in order for any member to pursue an additional opportunity. On March
15, 2000, the rights of the Company or MCNIC to veto the other's pursuit of an
additional business opportunity expired. However, certain limitations on the
rights of the Company or MCNIC to pursue additional business opportunities
outside of Crown Distribution continue until June 18, 2001. If either the
Company or MCNIC wants to pursue an additional business opportunity, the member
must first offer the opportunity to Crown Distribution and, if Crown
Distribution does not elect to participate, the participating member may pursue
or acquire the additional business opportunity. However, if the
non-participating member does not consent to the participating member's pursuit
of the opportunity, the non-participating member will retain the right and
option to "back in" to a 50% sharing ratio, without paying any purchase price,
after such time as the participating member has received a 150% payout of its
investment (as calculated under the operating agreement).
WORKING CAPITAL LINE. Pursuant to it's rights granted under the Crown
Distribution Operating Agreement, MCNIC elected to extend a working capital line
of credit to Crown Distribution to cover its working capital requirements in
lieu of the Company obtaining a line of credit from an outside financial
institution. MCNIC also elected to have the original working capital loan of
$7,141,930 discussed above replaced and the outstanding balance transferred to
this working capital line of credit. As of December 31, 1999, this line had a
balance of approximately $14,935,222 and the Company has accrued interest on the
line at 8%. Through the period ended December 31, 1999, $1,158,618 in interest
had been accrued.
MCNIC's first working capital loan (which was replaced by the working
capital line of credit) and its Preferential Capital Contribution was secured by
a first priority lien, security interest in and pledge of all the property
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of Crown Distribution including, without limitation, Crown Distribution's
rights, title and interest in and to the membership interests in CAT LLC.
On March 27, 2000, MCNIC delivered to the Company a notice of default with
respect to the working capital loan, and demanded payment of the outstanding
principal balance, $14,935,221.80, plus all interest accrued thereon. The
Company believes that the working capital loan was fully satisfied and replaced
by the working capital line of credit and no default has occurred under the
working capital loan or working capital line of credit. The Company further
believes that MCNIC is improperly attempting to demand repayment of the working
capital loan. See "Item 7. Management's Discussion and Analysis."
DISTRIBUTIONS; ALLOCATIONS OF PROFITS AND LOSSES. Until such time as MCNIC
has received the return of its Preferential Capital Contribution and a 15%
internal rate of return on its investment in Crown Distribution, Crown
Distribution is obligated to distribute to MCNIC 50% of the net cash flow from
operations. The remaining cash flow balance is distributed roughly 50% to MCNIC
and 50% to the Company (in accordance with their respective sharing ratios).
During 1999, no distributions were made. In the event of liquidation, MCNIC
would receive 100% of any and all amounts available for distribution up to its
outstanding Preferential Capital Contribution balance and remaining amounts
would be distributed in proportion to the 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 the 15% rate of return has been
satisfied.
MANAGEMENT AGREEMENT. Pursuant to an Operating and Management Agreement,
the Company provides management, supervision and operational services to 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 in relation to their
management services under the Management Agreement; and (iv) a monthly home
office overhead charge of $10,000.
The term of the Management Agreement is five years, which term will be
automatically extended for unlimited successive one-year periods unless either
party furnishes the other with written notice at least ninety (90) days prior to
the expiration of any such initial or extended period. During the initial term
of the Management Agreement, the Company can be removed only for good cause by
the affirmative vote of the management committee. The Management Agreement also
contains provisions allowing the replacement, after the initial five year term,
of the Company as the manager on economic grounds if Crown Distribution notifies
the Company that it believes the operations may be conducted more efficiently
and is willing to become the operating manager or has a commitment from a third
party to do so. Following the receipt of an economic challenge, the Company will
have thirty (30) days to notify Crown Distribution that it elects to allow Crown
Distribution or its designee to become the operator under the proposed terms or
that the Company elects to continue as the operator under the proposed terms.
Such a decision would require the majority vote of the management committee of
Crown Distribution. Two of the three members of the management committee are
nominees of the Company.
COWBOY ASPHALT TERMINAL, L.L.C.
FORMATION AND ACQUISITION OF ASSETS. CAT LLC is a joint venture between
Crown Distribution 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."
On September 11, 1998, CAT LLC, Capco, Foreland and Refinery Technologies,
Inc, a Utah corporation ("Refinery Technologies"), entered into an Assignment
and Agreement (the "Assignment Agreement") under which Refinery Technologies
assigned all of its ownership rights in and to the Cowboy Terminal Assets
purchase contract to CAT LLC. In turn, CAT LLC agreed to assume all of the
obligations under the real property purchase contract and issued a promissory
note in connection with the purchase in the amount of $1,067,111 to the former
owner.
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On January 9, 1999 CAT LLC purchased the Cowboy Terminal Assets for
$1,477,070 (net of $496,441 of deposits paid in 1998). CAT LLC paid $195,000
in cash at closing and executed and delivered a promissory note in the amount
of $1,282,070. This promissory note is payable in 84 equal monthly
installments of $20,627 beginning on February 1, 1999 and ending on January
1, 2006. The note bears interest at the rate of 9% and is secured by a deed
of trust encumbering the Cowboy Terminal Property.
The Company and Foreland initially owned sharing ratios ("sharing ratios")
of 66.67% and 33.33%, respectively, in the profits, losses and obligations of
CAT LLC. However, the Company has assigned its sharing ratios and ownership
interests in CAT LLC to Crown Distribution. In connection with the transfer of
the 66.67% interest in CAT LLC to Crown Distribution, Crown Distribution assumed
payment obligations under this promissory note. See "Item 1. Business - Asphalt
Distribution - Crown Asphalt Distribution, L.L.C."
The Cowboy Terminal Property has been divided into portions dedicated (i)
to the exclusive uses of Crown Distribution 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 Crown Distribution or Foreland, as the case may be, and the other
party will have no right to participate in the revenues, profits or income
generated by the business of the other with respect to such exclusive uses.
Further, the use of the Cowboy Terminal Property by Crown Distribution and by
Foreland is free of charge or other cost.
The CAT LLC Operating Agreement obligates both Crown Distribution and
Foreland to make additional capital contributions equal to one-half of any
additional amounts needed for (i) CAT LLC to fulfill its obligations, not to
exceed $650,000, under any corrective action plan that may be accepted by CAT
LLC and the Utah Department of Environmental Quality with respect to certain
environmental conditions at the Cowboy Terminal Property and (ii) legal costs
incurred in the purchase or related to the environmental matters in (i) of this
paragraph. The CAT LLC Operating Agreement also obligates Crown Distribution and
Foreland to make additional capital contributions, in proportion to their
ownership percentages, in order to fund any additional amounts required for CAT
LLC to fulfill its obligations under the purchase contract for the Cowboy
Terminal Assets, for environmental management and containment costs, expenses
for operations, or the construction of certain approved capital improvements to
the Cowboy Terminal Property. None of the foregoing additional contributions
will result in an increase in the number of units or percentage interests held
by Crown Distribution or Foreland.
CAT LLC has title to the Cowboy Terminal Property and Crown Distribution
has the exclusive right to use portions thereof for its asphalt terminal
operations. Refinery Technologies did, however, retain certain contract rights
with respect to the Cowboy Terminal Assets, certain rights to receive payments
upon any liquidation of CAT LLC and a right of first refusal to purchase the
Cowboy Terminal Property or membership interests in CAT LLC under certain
conditions.
MANAGEMENT OF COWBOY ASPHALT TERMINAL, LLC; MAJOR DECISIONS. CAT LLC is
managed by 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
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.
Crown Ridge 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 on a portion of the Oil
Sand Resources known as the "A" tract, which is believed to contain in excess of
18 million barrels of surface minable reserves with an average oil saturation of
11% by weight. There is a partially opened pit on this tract that has been mined
since the 1940's for native asphalt material for road surfaces. The production
process entails three major steps: (1) mining, (2) extraction
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(separation of the oil from the sand), and (3) distillation (recovery of the
solvent and separation of light fractions from the asphalt). See "Item 1.
Business - Asphalt Production - Crown Asphalt Ridge, L.L.C. - Additional
Opportunities Within the Project Area and Areas of Mutual Interest."
MCNIC and the Company (sometimes referred to hereafter as the "Members")
own sharing ratios ("sharing ratios") of approximately 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 approximately 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.
Under the Crown Ridge Operating Agreement, MCNIC initially funded 75% and
the Company 25% of the amounts required by Crown Ridge to construct the Facility
and to operate Crown Ridge. The Company was initially required to contribute (i)
$500,000 of oil sand leases and technology; and (ii) the obligation to lease
certain mining equipment for the Facility up to $3,500,000 in value. Both
Members may make such additional contributions as were required pursuant to the
contract for the construction of the Facility and unanimously agreed to by the
Company and MCNIC. As of December 31, 1999, the Company has made cash
contributions of approximately $5,663,985 to Crown Ridge and MCNIC has
contributed approximately $18,611,311. To date, the Company has invested a total
of approximately $7,174,920 in the development of Asphalt Ridge, which includes
costs incurred prior to the joint venture with MCNIC.
Because operations at Crown Ridge did not yet require it, the Company did
not contribute as part of its capital contribution, the leased mining equipment
contemplated when the entity was formed. To replace the foregoing obligation to
lease certain mining equipment as its required capital contribution, on July 20,
1999 the Company's CAC subsidiary, at the request of MCNIC, closed a loan
transaction with MCNIC. Under the loan, CAC executed a promissory note in the
amount of $2,991,868, bearing interest at the prime rate plus 1% per annum,
adjusted monthly, and providing for interest only payments of $20,757 per month
through August 20, 2001. Additional payments may be required if CAC's cash flow
exceeds certain thresholds. Beginning on August 20, 2001, the note provides for
principal and interest payments in order to fully pay off the note over a 13
year period. However, if at August 20, 2001, CAC and MCNIC agree that the
Facility will not be able to operate commercially, the interest only period will
be extended and no principal payments will be due until July 20, 2004. The
foregoing loan is secured by that portion of CAC's sharing ratio in Crown Ridge
directly attributable to the proceeds of the loan . The gross proceeds of the
loan ($2,991,868.66) were treated as a capital contribution by CAC to Crown
Ridge. The net cash proceeds of the loan ($1,891,650.50), after deduction of
amounts previously paid by MCNIC to creditors of Crown Ridge and less certain
amounts owed by Crown Ridge and/or CAC to MCNIC, were paid by MCNIC directly to
Crown Ridge. Additional capital contributions may be required in the future as
otherwise provided under the Crown Ridge operating agreement.
If the economic operations of Crown Ridge are successful to the extent of
paying out to MCNIC an amount equal to 115% of its cash investment in Crown
Ridge, excluding tax benefits, the Company's sharing ratio in Crown Ridge will
increase to 50%. Thereafter, the Members may build other plants to further
develop the Oil Sand Resources. These additional plants will require additional
capital contributions from the Members, which are described in more detail
below. The Company may participate up to 50% in the additional facilities and up
to 60% after payout of the cash investment in such facilities. There are
provisions for the Company to retain an interest in these facilities after the
recoupment of certain amounts in the event the Company does not participate in
the costs of such additional facilities, as provided in the "Back-In Option. See
"Item 1. Business - Crown Asphalt Distribution, L.L.C. - The Back-In Option."
The Company initially projected that Crown Ridge would be operational by
June, 1998. During the start-up of the Facility mechanical and process
difficulties were experienced that affected production economics and plant start
up. MCNIC and the Company have conducted extensive research and engineering to
develop a solution to these problems. This proposed solution is currently being
tested in a pilot study at the Facility. If the pilot study indicates that
solution is technically and economically viable, certain modifications to the
Facility will be required. The cost of these modifications may be material, and
it is anticipated that the Company and MCNIC will ultimately share such costs in
accordance with their sharing ratios. In order to facilitate the completion of
the pilot study, the
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Company entered into an agreement with MCNIC pursuant to which MCNIC agreed to
fund the Company's portion of the certain approved pilot plant expenses
(approximately $700,000). Pursuant to the arrangement, MCNIC's advances were
treated as additional capital contributions. A similar arrangement was entered
into with regards to the payment of other miscellaneous expenses owed by Crown
Ridge. As a result of the foregoing agreements with MCNIC, the Company's sharing
ratio in Crown Ridge may be reduced from 25% to approximately 24%. . The Company
may need to obtain additional financing for its portion of the costs or may
suffer further dilution of its sharing ratio. If the decision is made to
proceed with the required modifications, the Company does not anticipate
completing the modifications sooner than the fall of 2000. 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.
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 Sands Resources or other property and water rights to
enable it to sustain operations in accordance with the applicable projections
and market study. If, during the twelve months prior to the sale of products
from the first Subsequent Plant, MCNIC has realized a return of approximately
30% on 50% of its Capital Contributions to Crown Ridge, the Company will be
credited with a value for these Oil Sand Resources and properties equal to $.10
per barrel for the products estimated to be produced from the Subsequent Plant
over a 20 year period.
If the Company elects not to proceed with any Subsequent Plant, and to not
make the needed capital contributions to build and operate the Subsequent Plant,
Crown will have a reduced interest in the Subsequent Plant (but will still be
credited with an interest equal to the value of the contributed properties as
described below, if the requisite return is achieved), subject to an escalation
under the Back-In Option described below.
Whether or not the Company elects to proceed with either Subsequent Plant,
if the Subsequent Plants reach certain levels of economic success (approximately
115% of MCNIC's investment in plant 2 without giving effect to any tax
benefits), the Company will receive an increased interest of 10% in the
Subsequent Plant as a result of its oil sand properties and technology being
used by the Subsequent Plant(s).
MANAGEMENT OF CROWN RIDGE; MAJOR DECISIONS. Crown Ridge is governed by a
management committee consisting of five managers. The Company is entitled to
appoint one manager and MCNIC is entitled to appoint four managers. Management
decisions are generally made by the management committee. 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
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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.
The operating agreement for Crown Ridge states that Crown Ridge's
operations shall be conducted each year pursuant to the annual operating plan
addressing all aspects of Crown Ridge's operations for the coming year,
including budgeting for operations, the mining of oil sand products and the
marketing of those products. In the event the Management Committee is unable to
unanimously approve an annual operating plan for any given calendar year, a
majority of the Managers shall have the authority to continue to maintain Crown
Ridge's operations at levels comparable to those approved under the last annual
operating plan.
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.
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MANAGEMENT AGREEMENT. Pursuant to an Operating and Management Agreement
(the "Management Agreement"), the Company is the "Operator" of the Facility.
Under the Management Agreement, the Company acts 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.
On or before August 1, 1999 (the "Initial Term"), the Company could have
been removed as Operator only for "good cause" as defined within the Management
Agreement. After this Initial Term, the agreement automatically renews 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. On January 20, 2000, the Company entered into an agreement with
MCNIC pursuant to which MCNIC, for a period of 18 months, can remove the Company
as the manager of Crown Ridge and appoint a successor manager.
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.
SUBSIDIARIES OF THE COMPANY
Crown Asphalt Corporation, a Utah corporation which is a wholly-owned
subsidiary of the Company, was organized October 24, 1985 and was acquired by
the Company on September 30, 1992. Crown Asphalt Corporation is a member of and
holds roughly 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"), a Utah corporation which is
wholly-owned subsidiary of the Company, was formed in 1991, but until 1998 was 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 and currently
owns the Rawlins Asphalt Terminal.
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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. 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.
The Company (through its Capco subsidiary) and MCNIC have agreed to a new,
separate joint venture, Crown Distribution II. Once the Company and MCNIC
satisfy their respective obligations regarding the funding of, and contributions
to, the joint venture, the Company expects that it will contribute the Rawlins
Asphalt Terminal to Crown Distribution II and that Crown Distribution II will be
owned 50.01% by the Company and 49.99% by MCNIC. However, as of the date of this
Report, Crown Distribution II is a shell entity with no revenues, operations or
assets. The agreements relating to Crown Distribution II, which will have
similar terms and conditions to the Crown Distribution Operating Agreement and
Operating and Management Agreement, have not been completed as of this date.
EMPLOYEES
As of March 13, 2000, the Company had 50 full and part-time employees. None
of the Company's employees are represented by a union or other collective
bargaining group. Management believes that its relations with its employees are
good.
SEGMENTS
The Company considers its principal business to be within one industry
segment. For information regarding the breakdown of revenues & operating
results for the Company and its operational units, see note 16 to the
consolidated financial statements of Crown Energy Corporation.
ITEM 2. PROPERTIES
The Company conducts its business operations at 215 South State, Suite 650,
Salt Lake City, Utah, where it has approximately 10,284 square feet of office
space under lease until November 30, 2004. Under the terms of the lease, the
Company pays $15,024 per month through November 30, 2000; $15,512 per month
through November 30, 2001; $16,017 per month through November 30, 2002; $16,514
per month through November 30, 2003; and $17,097 through the lease expiration
date of November 30, 2004. 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 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.
Extensive reserve studies, including core drilling performed by Bechtel and
Sohio between the late 1950's and mid-1980's, estimate surface minable reserves
to be in excess of 100 million barrels. Crown Ridge controls the Oil Sands
Resources through certain long term operating leases and the Company has the
right to extract mineral reserves on these tracts so long as the Company
continues to conduct active operations under such leases, pay required royalties
and otherwise comply with the terms of the leases.
In connection with the formation and development of Crown Ridge, the
Company contributed the operating leases to Crown Ridge. 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. That portion of CAC's sharing ratio in Crown
Ridge directly attributable to the proceeds of the $2,991,868 loan from MCNIC to
CAC is encumbered by a lien and security interest of MCNIC. See "Item 1.
Business - Asphalt Production - Crown Asphalt Ridge, L.L.C."
Crown Distribution owns asphalt distribution facilities located in Utah,
Colorado, Nevada and Arizona. These properties are used by Crown Distribution to
store, process, blend, manufacture and sell finished asphalt products in its
western United States target market. All of Crown Distribution's assets are
encumbered by the lien and security interest of MCNIC, which advanced the
purchase price for such assets and has made certain working capital loans to
Crown Distribution. See "Item 1. Business - Asphalt Distribution - Crown Asphalt
Distribution, L.L.C."
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The Company, through its subsidiary CAPCO, owns the Rawlins Asphalt
Terminal, which is expected to be contributed to Crown Distribution II as
described above. These properties are used to store, process, blend, manufacture
and sell finished asphalt products. All of the Rawlins Asphalt Terminal assets
are encumbered by the lien and security interest of Community First National
Bank, which advanced the purchase price for such assets. 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 # 98-0905064 against the
Company and its President. The action relates to the purchase by Road Runner of
100% of the stock of Gavilan in 1997, and generally seeks to (i) obtain
corporate records of Gavilan in the Company's possession relating to the amount
of oil and gas royalties potentially owed to third parties prior to the
aforementioned stock sale, and (ii) to determine the amount of royalties owed.
The action further alleges, on behalf of Gavilan, claims of breach of fiduciary
duty, professional negligence and mismanagement against the Company's President
for alleged mismanagement of Gavilan's affairs. The Plaintiffs seek injunctive
relief requiring the tendering by the Company of the referenced records and such
damages as may be proven at trial. The Company believes that the Plaintiff's
claims are groundless and that it is entitled to payment of the $75,000 still
owed by Road Runner as part of the purchase price for Gavilan. In addition,
since the action was filed, the Company has tendered the corporate records to
the Plaintiffs. On March 8, 2000, the Company filed an answer denying liability
and filed a counterclaim against Road Runner and Gavilan for breach of contract
and declaratory judgment. The Company is not certain as to whether or not the
outstanding balance under the promissory note is collectible by the Company.
On July 12, 1999, Morrison Knudsen Corporation ("MK") filed a Complaint in
the Eighth Judicial District Court, Uintah County, State of Utah, alleging that
CAC had breached an agreement whereby MK would provide certain mining services
for CAC at Crown Ridge's Facility in Uintah County, Utah (the "Project"). MK
seeks damages in the amount of $303,873.42 plus interest. MK also seeks
foreclosure of a mechanics' and mining lien on the Project. Crown has denied
MK's allegations and will vigorously oppose the claims of MK. Although Crown
believes that it has substantial and material defenses to the claims of MK,
there can be no assurance that the Company will ultimately prevail or that
judgment will not be entered against it.
On July 14, 1999, Crown Distribution and Capco filed an action in the
United States District Court for the Central District of California, Southern
Division, against Santa Maria Refining Company ("SMRC"), SABA Petroleum Company
("SABA") and Greka Energy Corporation ("Greka"). The claims include causes of
action for breach of contract, breach of the covenant of good faith and fair
dealing, conversion, fraud, claim and delivery, unjust enrichment and
constructive trust, unfair competition, declaratory relief and specific
performance. These claims arise out of the Defendant's alleged termination of
the Processing Agreement and subsequent refusal to deliver asphalt to Crown
Distribution. Discovery of facts and testimony related to issues arising in the
lawsuit has commenced. Trial has been scheduled for November of 2000. It is
anticipated that the damages caused by the Defendant's actions could be
substantial. Although Crown Distribution will attempt to recoup those damages
from SMRC, SABA and Greka, due to the uncertainties inherent in any litigation
proceeding, there can be no assurance that Crown Distribution or Capco will
ultimately prevail.
On July 28, 1999 Robert Ryan Zimmerman, d/b/a Asphalt Supply & Service,
Inc., Robert A. Zimmerman, d/b/a Inoco, Inc., and Connie R. Zimmerman, d/b/a
Interstate Asphalt Company, (collectively, the "Zimmermans") filed an
application for preliminary injunction, temporary restraining order, and
declaratory judgment in the First Judicial District Court, Lewis & Clark County,
State of Montana, against the Company, Capco and the Company's President. The
action relates to Capco's agreement to purchase from the Zimmermans two separate
asphalt terminals located, respectively, in Laurel, Montana and Williston, North
Dakota, as well as their asphalt products related inventory and certain
contractual agreements. The action generally seeks a declaration that the
Zimmermans remain the owners and operators of the purchased asphalt terminals,
as well as a preliminary injunction and temporary restraining order. Without
hearing or opportunity for the Company or Capco to respond, on July 28, 1999,
the First
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Judicial District Court, Lewis & Clark County, State of Montana, issued an order
temporarily and preliminarily enjoining Capco and the Company from participating
in the day-to-day decisions of the purchased asphalt terminals, from collecting
any receivables for the terminal, and from selling, transferring, conveying,
encumbering, or disturbing in any manner, the Zimmermans' assets. The Court
refused to grant a declaratory judgement that the Zimmermans are the rightful
owners of the purchased asphalt terminals, or that they have complete control
and decision-making authority regarding the purchased terminals. On August 9,
1999, the First Judicial District Court issued an order transferring the action
to the Thirteenth Judicial District Court, Yellowstone County (Billings), State
of Montana.
On December 8, 1999, the Company and Capco filed a complaint in the Federal
District Court in Montana alleging that the Zimmerman's breached the asset
purchase agreement by failing to comply with certain terms and conditions,
whereby the Company has been damaged. In February, 2000, the Company and Capco
entered a settlement agreement with the Zimmermans to resolve the foregoing
disputes. Under the settlement agreement, the Zimmermans agreed to pay $320,000
to the Company in exchange for a release of all claims and rescission of the
Company's acquisition of the asphalt terminals. However, the Zimmermans have
failed to make the required payment to the Company pursuant to the terms of the
settlement agreement and have not dismissed their state court action against the
Company. The Company is pursuing all available legal remedies against the
Zimmermans with respect to this dispute. Although the Company will attempt to
recover its damages from the Zimmermans, due to the uncertainties inherent in
any litigation proceeding, there can be no assurance that the Company and Capco
will ultimately prevail.
On January 25, 2000, Oriental New Investments, Ltd. ("Oriental") filed a
Complaint against the Company in the Third Judicial District Court, Salt Lake
County, Utah. The action relates to a 1997 convertible debenture and replacement
convertible debenture issued by the Company to Oriental. The action seeks to
recover from the Company $50,000 liquidated damages, plus interest, and
attorneys fees and costs, for alleged breaches of the convertible debentures.
The Company answered the Complaint on March 1, 2000, denying any and all
liability, and believes that Oriental's claims are meritless. The Company will
vigorously defend its position that Oriental's claims are meritless. However,
due to the uncertainties inherent in any litigation proceeding, there can be no
assurance that the Company will ultimately prevail.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 27, 1999, 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, 11,404,330 shares of common
stock of the Company were represented in person or by proxy out of a total of
13,285,581 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,
10,771,017 shares were voted in favor of his election, no shares were voted
against and 633,500 either abstained from voting or were broker non-votes.
With respect to the election of Jay Mealey, 10,639,945 shares were voted in
favor of his election, no shares were voted against and 764,385 either abstained
from voting or were broker non-votes. With respect to the election of Richard S.
Rawdin, 10,768,517 shares were voted in favor of his election, no shares were
voted against and 635,813 either abstained from voting or were broker non votes.
Also elected as a fourth director of the Company was Alexander L. Searl,
10,771,517 shares were voted in favor of his election, no shares were voted
against and 632,813 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
fiscal year ended 1999, with 11,196,145 shares voting in favor of the
appointment, 172,756 shares voting against, with 35,429 shares abstaining or
being broker non-votes.
15
<PAGE>
No other matters were presented to the Company's shareholders for their
approval in the fourth quarter of the Company's 1999 fiscal year.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company, their ages and their
positions are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
James A. Middleton 63 Chairman of the Board of Directors
Jay Mealey 43 Chief Executive Officer
President, Treasurer, Director
Alexander L. Searl 57 Chief Operating and Financial Officer
Richard S. Rawdin 41 Vice President, Secretary, Director
</TABLE>
James A. Middleton has served as a director since February 1996 and served
as Chief Executive Officer from December 1996 through April 16, 1999. Mr.
Middleton will continue to serve as 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.
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.
16
<PAGE>
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:
<TABLE>
<CAPTION>
CALENDAR QUARTER ENDED HIGH BID LOW BID
<S> <C> <C>
March 31, 1999 1.38 1.00
June 30, 1999 1.06 .59
September 30, 1999 .66 .31
December 31, 1999 .41 .26
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
</TABLE>
As of March 17, 2000, the high bid and low offer quotations reported by the
National Quotation Bureau were $.66 and $.31, respectively. On March 27, 2000,
approximately 744shareholders 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 1999 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
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 (except that no adjustment is made for
key management to acquire up to 5% of the Company's common stock at or less than
the fair market value at the time of conversion). 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
17
<PAGE>
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 and December 31, 1999
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(In thousands except per share)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Revenues $35,519 $23,836 $87 $225 $214
Loss from Continuing Operations ($3,054) ($498) ($1,153) ($422) ($234)
Loss Per Share From Continuing Operations ($0.26) ($0.07) ($0.11) ($0.04) ($0.03)
Total Assets $33,114 $23,571 $6,610 $4,591 $4,344
Total Long-Term Obligations $11,333 $4,326 $0.00 $182 $794
Redeemable Preferred Stock $4,840 $4,783 $4,726 $0 $0
Cash Dividends Per Common Share $0.00 $0.00 $0.00 $0.00 $0.00
Common Stockholders' Equity (Deficit) ($2,276) $767 $1,749 $3,018 $2,611
</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
words "anticipates," "believes," "expects," "intends," "future" and words of
similar import which express, either directly or by implication, management's
beliefs, expectations or intentions regarding the Company's future performance
or future events or trends which may affect the Company or its results of
operations.
18
<PAGE>
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors, including but not limited to changes in
economic conditions generally or with respect to the Company's asphalt products
market in particular, new or increased governmental regulation, increased
competition, shortages in labor or materials, delays or other difficulties in
shipping or transporting the Company's products, technical or operational
difficulties at the Facility of Crown Ridge, difficulties in integrating the
Company's recent joint venture and acquisition related businesses, risks related
to the financing of the Company's operations (including the risk of loss of
certain operating assets serving as collateral to secure such financing), and
other similar risks inherent in the Company's operations or in business
operations generally. Any such risks or uncertainties, either alone or in
combination with other factors, may cause the actual results, performance or
achievements of the Company to differ materially from its anticipated future
results, performance or achievements (which may be expressed or implied by such
forward looking statements). Consequently, the following management's discussion
and analysis, including all forward-looking statements contained therein, is
qualified and limited by the foregoing cautionary factors. Interested persons
are advised to consider all forward-looking statements within the context of
such cautionary factors.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and other current assets of
$12,334,750 as compared to cash and other current assets of $11,044,600 at
December 31, 1998. The increase of $1,290,150 was generally due to the Company's
growth from the acquisition of the Rawlins Asphalt Terminal in Rawlins, Wyoming.
The Company's majority owned subsidiary, Crown Distribution, accounted for
a substantial portion of the Company's current assets. As of December 31, 1999,
Crown Distribution had approximately $5.0 million of cash, $2.1 million in
inventory and $5.2 million in accounts receivable, excluding related party
balances. Crown Distribution's business requires a working capital line of
credit. MCNIC, the minority interest owner, elected to provide such line under
the same terms as had been offered to the Company by a third party bank and to
replace a prior loan with this working capital line. The Company has accrued
interest on the line at an interest rate of 8%. At December 31, 1999, the line
had an outstanding principal balance of $14,935,222.
However, on March 27, 1999, MCNIC delivered to the Company a notice of
default with respect to the working capital loan, and demanded payment of the
outstanding principal balance plus all interest accrued thereon. Management of
the Company believes that the working capital loan was fully satisfied and
replaced by the working capital line of credit and no default has occurred under
the working capital loan or working capital line of credit. The Company further
believes that MCNIC is improperly attempting to demand repayment of the working
capital loan.
MCNIC, immediately following its notice of default, proposed an extension
on the working capital loan, provided the Company also relinquishes operational
control of Crown Distribution to MCNIC. Although there can be no assurance that
the Company will be able to resolve these issues with MCNIC on mutually
acceptable terms, or that the Company will ultimately prevail in the event of
litigation with MCNIC, Company management intends to take all actions necessary
or appropriate to assert the Company's rights and preserve its interests in
Crown Distribution and all other aspects of its operations. Management of the
Company believes that MCNIC is improperly attempting to gain control of Crown
Distribution and other aspects of the Company's operations.
Given these recent developments, interested persons should note that there
can be no assurance that the Company will be able to resolve these issues with
MCNIC on mutually acceptable terms, that the Company will ultimately prevail in
the event of litigation with MCNIC or that such litigation, if any, will not be
unduly costly. Further, Company management intends to take all actions necessary
or appropriate to assert the Company's rights and preserve its rights and assets
in Crown Distribution and other aspects of its operations. In the event MCNIC is
legally able to demand immediate repayment of the working capital loan, the
Company could, and likely would, suffer a material adverse impact upon its
financial liquidity and working capital. For instance, the Company may have to
seek replacement financing on terms and conditions which are less favorable than
it might obtain under other circumstances. Otherwise, it is conceivable that
MCNIC might obtain possession and legal control over critical Company assets,
such as operating assets of Crown Distribution, the Company's interests in Crown
Distribution, etc. Given the wide range of potential actions which MCNIC might
take, and the equally wide range of defenses, counterclaims and other actions
which the Company might assert and/or take, it is difficult to predict possible
outcomes at this time. However, interested persons should note the significant
and material risks facing the Company, as well as the related material, negative
impacts the Company would experience in the event the Company does not prevail
in its view of the recent actions taken by MCNIC. See - "Item 1. Business
Asphalt Distribution - Crown Asphalt Distribution, L.L.C."
19
<PAGE>
On the other hand, interested persons should note that, subject of
course to available equitable and other creditor remedies, neither the MCNIC
working capital loan or working capital line to Crown Distribution contain
cross-default provisions giving MCNIC any right to declare a default or to
seek control or possession over the assets or operations of Crown Ridge or
the Company's interest in Crown Ridge.
The Company also owed MCNIC an additional $5,325,723 at December 31, 1999
with respect to the Preferential Capital Contribution that 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.
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 a terminal in a transaction requiring a substantial capital commitment.
On May 12, 1999, the Company acquired the Rawlins Asphalt Terminal, along with
related 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 cash payment of $266,571.
The Company believes S & L Industrial violated certain representations in the
Purchase Agreement and has notified S & L Industrial that it offset damages of
roughly $153,000 or more against amounts due under the note payable to S & L.
Under the Company's contractual relationship with MCNIC, MCNIC has certain
rights to participate in additional business opportunities, if any, which may be
pursued by the Company. MCNIC has agreed to jointly own the Rawlins Asphalt
Terminal in a new, separate joint venture, Crown Distribution II. Assuming that
both the Company and MCNIC satisfy their respective obligations to contribute
assets to and otherwise fund Crown Distribution II, it is anticipated that Crown
Distribution II will be owned 50.01% by the Company and 49.99% by MCNIC. The
final operating agreement for Crown Distribution II was not completed as of the
date of this Report, and no assets have been contributed to Crown Distribution
II. Accordingly, the Rawlins Asphalt Terminal operations, including an operating
loss of approximately $345,000, was consolidated in the Company's financial
statements as of December 31, 1999. The Company expects that MCNIC will fund its
proportionate share of all costs and losses retroactive to the acquisition date
of May 12, 1999. Additionally, the Rawlins Asphalt Terminal will require a
separate working capital line of credit to operate the business, which line of
credit the Company expects will be jointly funded by MCNIC and the Company.
Therefore, until such time as the Rawlins Asphalt Terminal generates positive
cash flow, the Company expects that the operations at the Rawlins Asphalt
Terminal will require working capital provided by the Company.
The Company remains open to other asphalt related business opportunities to
complement its existing asphalt distribution capabilities. There can be no
assurance that the Company can obtain additional capital financing required to
finance such transactions on acceptable terms and conditions.
The Company has a portion of its accounts receivable subject to the
risks and uncertainties of litigation (See Item 3. Legal Proceedings) and
subject to related collection risks.
In the event that the Company is unable to collect these amounts, or the
Company is unable to secure the necessary working capital line from third party
sources (such as MCNIC) for the Rawlins Asphalt Terminal, or if the Company's
operating losses and working capital deficits continue, the Company may not have
sufficient capital to operate through 2000. Thus, the risk exists that the
Company may not be able to continue as a going concern. Furthermore, if Crown
Ridge approves an additional capital contribution for the modification to the
facility and the Company is unable to finance its approximate 25% of
such capital contribution, its sharing ratio in Crown Ridge may be diluted.
As of December 31, 1999, the Company has made cash contributions of
approximately $5.7 million to Crown Ridge. During the start-up of the Crown
Ridge Facility mechanical and process difficulties were experienced that
affected production economics. Crown Ridge is currently conducting a pilot study
to develop a solution to these problems. 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
20
<PAGE>
impact the Company's operations and financial condition. See - "Item 1. Business
- - Asphalt Production - Crown Asphalt Ridge, L.L.C."
RESULTS OF OPERATIONS
1999 VS. 1998
Total revenue increased from $23,835,734 for the year ended December 31,
1998 to $35,518,541 for the year ended December 31, 1999, an increase of
$11,682,807 (49%). This increase was primarily due to the Company recording a
full year of revenue from its 1998 acquisition of the assets of Petro Source
Asphalt Company and its 1999 acquisition of the Rawlins Asphalt Terminal.
For the year ended December 31, 1998, the Company recorded revenue of
approximately $6,423,000 (41,000 tons) from its distribution facilities and
$15,904,000 (104,000 tons) from the Processing Agreement with Santa Maria
Refinery Corporation. For the same period in 1999, the Company recorded revenue
of approximately $24,963,000 (159,000 tons) from its distribution facilities,
which revenues included $2,584,000 (16,787 tons) from the Rawlins Asphalt
Terminal and $10,555,000 (37,900 tons) from the Processing Agreement with Santa
Maria Refinery Corporation. However, the Processing Agreement expired on April
30, 1999. The Company believes the loss of revenues associated with the now
expired Processing Agreement will be offset by the growth in its asphalt
distribution operations.
The Company's gross margins decreased from approximately 9% for the year
ended 1998 to approximately 5% for the year ended 1999. This decrease was due
to higher operating costs at the Company's distribution facilities, an
increase in the Company's cost of basestock asphalt at the end of 1999 and
non-recurring costs recorded of $800,000. The Company is implementing cost
cutting procedures at its facilities that the Company believes will
contribute to improved margins in 2000. However, the Company is prevented in
its Operating Agreement with MCNIC from utilizing any hedging strategies to
minimize market risk fluctuations and therefore remains subject to basestock
asphalt price fluctuations. The Company believes that the asphalt production
from Crown Ridge, should it commence commercial operations, will provide its
distribution business a consistent asphalt basestock supply at a fixed price,
assuming that acceptable pricing agreements are reached with Crown Ridge.
General and administrative expenses increased from $1,250,381 for the year
ended December 31, 1998 to $2,745,029 for the year ended December 31, 1999, an
increase of $1,494,648. This increase was primarily due to the Company recording
a full year of general and administrative expenses from its 1998 acquisition of
the assets of Petro Source Asphalt Company.
Interest and other income/expenses increased from net expenses of
$1,065,283 for the year ended December 31, 1998 to net expenses of $3,364,361
for the year ended December 31, 1999, an increase of $2,299,078. The 1999 total
was comprised of $2.2 million in interest costs related to the Company's working
capital line and preferential capital contribution for its asphalt distribution
owed to MCNIC, costs of $870,288 related to Crown Ridge and other expenses of
$290,482.
Minority interest of $1,348,336 represents MCNIC's approximate 49% interest
in the loss of Crown Distribution and Foreland's approximate 33% interest in the
loss in CAT LLC.
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."
21
<PAGE>
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.
Cost of sales increased from $54,653 for the year ended December 31, 1997
to $21,716,743 for the year ended December 31, 1998, an increase of $21,662,090.
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
$17,520,069 and asphalt terminal operating costs of $4,196,674.
General and administrative expenses increased from $815,401 for the year
ended December 31, 1997 to $1,250,381 for the year ended December 31, 1998, an
increase of $434,980 (53%). 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 $1,065,283 for the year
ended December 31, 1998, an increase of $261,993. The 1998 total was comprised
of interest costs related to the Company's working capital line and preferential
capital contribution 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 $237,753. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe it is subject to material risks of loss
related to certain market risks, such as interest rate risks, foreign currency
exchange rate risks or similar risks, and therefore the Company does not engage
in transactions, such as hedging or similar transactions in derivative financial
instruments, intended to reduce its exposure to such risks. However, the Company
is subject to general market fluctuations related to the purchase of its
basestock asphalt and may suffer reduced operating margins to the extent its
increased costs are not passed through to its customers. Such prices generally
fluctuate with the price of crude oil. The Company is prevented in its Operating
Agreement with MCNIC from utilizing any hedging strategies to minimize any
market price changes. The Company believes the inability to protect itself from
market fluctuations negatively impacted its margins for 1999. See "Item 7.
Management's Discussion and Analysis Results of Operations - 1999 vs. 1998".
The Company is also subject to certain price escalation and de-escalation
clauses in its asphalt distribution sales contracts. The Company supplies
asphalt to projects in certain states where regulations provide for escalation
and de-escalation of the price for such asphalt relative to the price difference
from the time the project is awarded to the successful bidding company and the
time the project is completed. The Company includes such de-escalation risk into
its bid prices and does not believe it has material exposure to risk resulting
from these regulations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE
The financial statements required by this item are set forth following Item
14 hereof.
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 2, 1998, the Company terminated its independent auditor
relationship with Pritchett, Siler & Hardy, P.C. ("Pritchett"). The decision to
change accountants was approved by the Company's Board of Directors.
Pritchett's report on the financial statements of the Company for the
fiscal year ended December 31, 1997 did not contain an adverse opinion or a
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
During the fiscal years ended December 31, 1998, 1997 and 1996, and the
period January 1, 1998 through June 2, 1998, there were no disagreements with
Pritchett on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures or any reportable events.
On June 2, 1998, the Company engaged Deloitte & Touche LLP ("Deloitte") as
its independent auditors to audit and report on the financial statements of the
Company for the fiscal year ended December 31, 1998.
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 year ended December 31, 1997 and during the period January 1,
1998 through June 2, 1998, neither the Company nor anyone acting on 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.
Items 10 through 13 of Part III of this Form 10-K are incorporated by
reference from the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A of the Securities Act of 1933 within 120
days after the close of the Company's most recent fiscal year (the "Proxy
Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers and directors of the Company
is included as Item 4A of Part I of this Form 10-K as permitted by Instruction 3
to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation
S-K will be set forth in the Proxy Statement, which information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation will be set forth in the
Proxy Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management will be set forth in the Proxy Statement, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
will be set forth in the Proxy Statement, which information is incorporated
herein by reference.
23
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Documents filed as part of this Report:
(1) Financial statements, as set forth on the attached Index to Financial
Statements.
(2) Exhibits, as set forth on the attached Exhibit Index.
Schedule II: Valuation and Qualifying Accounts
24
<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 Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
CROWN ENERGY CORPORATION
(Registrant)
/s/ Jay Mealey
----------------------------------------------
Jay Mealey
Chief Executive Officer,
Director
Date: March 30, 2000
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.
Alexander L. Searl
/s/ Alexander L. Searl
----------------------------------------------
Chief Operating and Financial Officer and
Director
Date: March 30, 2000
Richard S. Rawdin
/s/ Richard S. Rawdin
----------------------------------------------
Vice President, Director and Secretary
Date: March 30, 2000
25
<PAGE>
CROWN ENERGY CORPORATION
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING CASH AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Deducted from assets accounts
Accounts receivable:
Allowance $ 150,000 $ 77,000 $ 161,000 $90,000 $298,000
Deferred tax assets:
Valuation allowance 1,704,000 1,034,000 2,738,000
YEAR ENDED DECEMBER 31, 1998:
Deducted from assets accounts
Accounts receivable:
Allowance 75,000 75,000 150,000
Deferred tax assets:
Valuation allowance 1,318,000 386,000 1,704,000
YEAR ENDED DECEMBER 31, 1997:
Deducted from assets accounts
Accounts receivable:
Allowance 75,000 75,000
Deferred tax assets:
Valuation allowance 0 1,318,000 1,318,000
</TABLE>
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
<S> <C>
2.1 Purchase and Sale Agreement regarding Petro Source Asphalt Company, dated July 2, 1998 (15)
2.2 Memorandum of Closing regarding Refinery Technologies, Inc. (18)
2.3 Assignment and Agreement with Refinery Technologies, Inc. (18)
2.4 Asset Purchase Agreement (S&L Industrial) dated May 12, 1999 regarding S&L Industrial
3.1 Articles of Incorporation (6)
3.2 Certificate of Voting Powers, etc. of the Company's Preferred Stock (10)
3.3 Amended Bylaws (1)
4.1 Convertible Debenture - Agreement dated May 6, 1997, between Crown Energy Corporation and
Oriental New Investments, Ltd. (7)
4.2 Warrant with Encap Investments, L.C. (12)
4.3 Form of Stock Option Agreements between the Company and (1) Jay Mealey, (2) Richard Rawdin
and (3) Thomas Bachtell (12)
4.4 The Crown-Energy Long Term Equity Basic Incentive Plan (13)
4.5 Common Stock Purchase Warrant dated November 4, 1997 issued to Enron Capital & Trade
Resources Corp. (10)
4.6 Form of Warrant issued to principals of IBEX Group, Inc. and Hoffman Partners, Inc. (18)
4.7 May 1998 Warrant issued to Ladenburg Thalmann (18)
10.1 License Agreements with Park Guymon Enterprises, Inc., dated January 20, 1989, June 1, 1990
and June 1, 1990 (3)
10.2 Amendment to License Agreement with Park Guymon Enterprises, Inc. (6)
10.3 Employment Agreement with Jay Mealey (12)
10.4 Consulting Agreement with IBEX Group, Inc. and Hoffman Partners, Inc. (6)
10.5 Promissory Note issued to Jay Mealey 12/31/95 (6)
10.6 Promissory Note issued to Thomas W. Bachtell 12/31/95 (6)
10.7 Promissory Note issued to Thomas W. Bachtell 12/31/95 (6)
10.8 Oil and Gas Minerals Lease, dated September 1, 1991 with Wembco, Inc. (4)
10.9 Crown Office Space Lease (5)
10.10 First Amendment to Crown Office Space Lease (12)
10.11 Investment Banking Agreement with Fortress Financial Group, Ltd. (12)
10.12 Promissory Note from Jay Mealey (12)
10.13 Promissory Note from Rich Rawdin (12)
10.14 Stock Pledge Agreement with Jay Mealey (12)
10.15 Stock Pledge Agreement with Rich Rawdin (12)
10.16 Assignment of Assets to Crown Asphalt Ridge, L.L.C. by Crown Asphalt Corporation (12)
10.17 Assignment to Crown Asphalt Ridge, L.L.C. by Crown Asphalt Corporation (12)
10.18 Asphalt Ridge Project Operating and Management Agreement with Crown Asphalt Ridge L.L.C.,
dated August 1, 1997 (12)
10.19 Sublicense and Agreement between Crown Asphalt Ridge, L.L.C. and Crown Asphalt Corporation
(12)
10.20 Stock Purchase Agreement with Enron Capital & Trade Resources Corp. (10)
10.21 Engineering, Construction and Procurement Agreement with CEntry Constructors & Engineers,
LLC (12)
10.22 Revised Right of Co-Sale Agreement between Jay Mealey and Enron Capital & Trade Resources
Corp. (11)
10.23 Guaranty Agreement in favor of MCNIC Pipeline & Processing Company (12)
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
27
<PAGE>
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. (18)
10.35 Operating and Management Agreement for Crown
Asphalt Distribution L.L.C. (18)
10.36 Operating Agreement for Cowboy Asphalt Terminal L.L.C. (18)
10.37 April 3, 1998 Agreement regarding investment banking services with Ladenburg Thalmann (18)
10.38 Indemnification Agreement with Ladenburg Thalmann (18)
10.39 Letter Agreement between CAC, CAPCO and MCNIC Pipeline & Company dated July 20, 1999
10.40 Letter Agreement between CAPCO and MCNIC Pipeline & Processing Company dated July 20, 1999
10.41 First Amendment to Operating Agreement (Crown Asphalt Distribution, L.L.C.)
10.42 Loan Agreement: MCNIC Pipeline & Processing Company loan to Crown Asphalt Corporation dated
July 20, 1999
10.43 CAR Promissory Note
10.44 $1,800,000 Loan Agreement: Community First National Bank to Crown Asphalt Products Company
10.45 Letter Amendment to Community First National Bank Loan Agreement dated June 2, 1999
10.46 Crown Energy Corporation Guaranty of Community First National Bank Loan
10.47 Assignment & Assumption Agreement
10.48 Offsite Services Agreement
10.49 Amendment to Mealey Employment Agreement
10.50 MCNIC election to proceed with additional pilot plan (1/7/00)
10.51 Settlement Agreement with Zimmerman
10.52 Amendment to Settlement Agreement with Zimmerman
10.53 5th Amendment to Building Lease
10.54 January 20, 2000 Letter to MCNIC
11 Statement regarding computation of per share earnings (the information
required for Exhibit 11 is set forth on page F-25 of the Financial Statements of
Crown Energy Corporation of this Form 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
</TABLE>
- --------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
10 filed with the Commission on July 1, 1991, amended August 30, 1991 and
bearing Commission file number 0-19365.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1991 bearing Commission file number 0-19365.
(3) Incorporated by reference from the Company's Report on Form 8-K filed with
the Commission on or about September 30, 1992, bearing Commission file
number 0-19365.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1992, bearing Commission file number 0-19365.
28
<PAGE>
(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 Annual Report on Form 10-K for
the year ended December 31, 1998, filed with the Commission on or about
June 14, 1999.
* 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.
29
<PAGE>
CROWN ENERGY CORPORATION
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity (Deficit),
for the years ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows, for the years ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Crown Energy Corporation
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheets of Crown Energy
Corporation and Subsidiaries (the Company) at December 31, 1999 and 1998 and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. Our audits also included
the financial statement schedule, listed in the index at Item 14. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company's recurring losses from
operations, stockholders' deficiency, negative working capital and the March
27, 2000 notice received from its minority shareholder, raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
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 29, 2000
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
CROWN ENERGY CORPORATION
Salt Lake City, Utah
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Crown Energy Corporation for the year
ended December 31, 1997. Our audit also included the financial statement
schedule, listed in the index at Item 14. These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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 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 results of operations and
cash flows of Crown Energy Corporation for the year ended December 31, 1997,
in conformity with generally accepted accounting principles. Also in our
opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein for the year ended
December 31, 1997.
PRITCHETT, SILER & HARDY, P.C.
March 5, 1997
Salt Lake City, Utah
F-2
<PAGE>
CROWN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,978,977 $3,735,632
Accounts receivable, net of allowance for uncollectible
accounts and demerits of $298,000 and $150,000 at
December 31, 1999 and 1998, respectively 5,186,325 2,823,778
Inventory 2,133,866 4,445,819
Prepaid and other current assets 35,582 39,371
----------- -----------
Total current assets 12,334,750 11,044,600
PROPERTY, PLANT, AND EQUIPMENT, Net 9,237,735 3,013,792
INVESTMENT IN AND ADVANCES
TO AN EQUITY AFFILIATE 7,174,920 4,551,441
GOODWILL, Net 4,127,680 4,040,231
OTHER INTANGIBLE ASSETS, Net 175,000 225,000
OTHER ASSETS 63,768 696,200
----------- -----------
TOTAL $33,113,853 $23,571,264
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CROWN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,132,251 $ 1,857,407
Preferred stock dividends payable 400,000 467,433
Accrued expenses 293,876 28,305
Accrued interest 1,988,116 151,811
Current portion of long-term debt 166,204 1,000,000
Working capital loan to related party 14,935,222 8,935,221
------------ -----------
Total current liabilities 18,915,669 12,440,177
------------ -----------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 4, 6, 8, 9, 11, 12, 14, 16, and 17)
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 301,699 1,255,477
------------ -----------
CAPITALIZATION:
Long-term debt principally due to related party 11,332,681 4,325,723
Redeemable preferred stock 4,839,623 4,783,019
Common stockholders' equity (deficit) (2,275,819) 766,868
------------ -----------
Total capitalization 13,896,485 9,875,610
------------ -----------
TOTAL $ 33,113,853 $23,571,264
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
SALES, Net of demerits $ 35,518,541 $23,835,734 $ 86,781
COST OF SALES 33,811,003 21,716,743 54,653
------------ ----------- -----------
GROSS PROFIT 1,707,538 2,118,991 32,128
GENERAL AND ADMINISTRATIVE EXPENSES 2,745,029 1,250,381 815,401
------------ ----------- -----------
INCOME (LOSS) FROM OPERATIONS (1,037,491) 868,610 (783,273)
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 132,225 35,451
Interest expense (2,203,591) (851,917) (37,280)
Equity in losses of unconsolidated equity affiliate (870,288) (264,863)
Other income (expense) (290,482) 105,528
Expenses related to valuation of warrants (186,256)
Loss on sale of subsidiary (801,461)
------------ ----------- -----------
Total other expense, net (3,364,361) (1,065,283) (803,290)
------------ ----------- -----------
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (4,401,852) (196,673) (1,586,563)
DEFERRED INCOME TAX BENEFIT 434,056
MINORITY INTEREST IN LOSSES (EARNINGS)
OF CONSOLIDATED JOINT VENTURE 1,348,336 (300,971)
------------ ----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE (3,053,516) (497,644) (1,152,507)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE - Expensing of
start-up costs (615,323)
------------ ----------- -----------
NET LOSS $ (3,053,516) $(1,112,967) $(1,152,507)
============ =========== ===========
LOSS PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - Basic and diluted $ (0.26) $ (0.07) $ (0.11)
============ =========== ===========
CUMULATIVE EFFECT OF EXPENSING
START-UP COSTS - Basic and diluted NONE $ (0.05) NONE
============ =========== ===========
NET LOSS PER COMMON SHARE -
Basic and diluted $ (0.26) $ (0.12) $ (0.11)
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN
SHARES AMOUNT CAPITAL
<S> <C> <C> <C>
BALANCE, January 1, 1997 11,430,571 $ 228,611 $ 5,497,772
Shares issued for non-cash consideration at $1.00 per share 35,000 700 34,300
Shares issued for payables at $.86 per share 10,000 200 8,406
Shares issued for payment of note payable 56,877 1,138 24,847
Shares issued upon conversion of convertible debentures at $.90 per share 173,101 3,462 152,441
Cancellation of shares previously issued (25,000) (500) (19,188)
Issuance of common stock upon exercise of stock options 41,667 833 (833)
Preferred shares offering cost (587,318)
Allocation of proceeds from issuance of preferred stock to estimated
fair value of detachable stock warrant 283,019
Accretion of preferred stock to stated value (9,434)
Dividends on redeemable preferred stock (65,414)
Net loss
BALANCE, December 31, 1997 11,722,216 234,444 5,318,598
---------- ----------- -----------
Issuance of common stock upon exercise of stock options in
exchange for notes receivable 946,296 18,926 530,240
Shares issued at $1.34 per share 300,000 6,000 397,125
Dividends on redeemable preferred stock (402,019)
Warrants issued for consulting services
Accretion of preferred stock to stated value (56,604)
Net loss
---------- ----------- -----------
BALANCE, December 31, 1998 12,968,512 259,370 5,787,340
Common shares issued as payment of dividends on preferred
stock accrued in prior years 317,069 6,341 461,092
Dividends on redeemable preferred stock (400,000)
Accretion of preferred stock to stated value (56,604)
Net loss
---------- ----------- -----------
BALANCE, December 31, 1999 13,285,581 $ 265,711 $ 5,791,828
========== =========== ===========
<CAPTION>
COMMON
COMMON STOCK STOCK
WARRANTS OUTSTANDING SUBSCRIP-
WARRANTS AMOUNT RECEIVABLE DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 183,750 NONE NONE $(2,708,776) $ 3,017,607
Shares issued for non-cash consideration at $1.00 per share 35,000
Shares issued for payables at $.86 per share 8,606
Shares issued for payment of note payable 25,985
Shares issued upon conversion of convertible debentures at
$.90 per share 155,903
Cancellation of shares previously issued (19,688)
Issuance of common stock upon exercise of stock options
Preferred shares offering cost 100,000 $57,318 (530,000)
Allocation of proceeds from issuance of preferred stock to
estimated fair value of detachable stock warrant 283,019
Accretion of preferred stock to stated value (9,434)
Dividends on redeemable preferred stock (65,414)
Net loss (1,152,507) (1,152,107)
BALANCE, December 31, 1997 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 (549,166)
Shares issued at $1.34 per share 403,125
Dividends on redeemable preferred stock (402,019)
Warrants issued for consulting services 400,000 186,256 186,256
Accretion of preferred stock to stated value (56,604)
Net loss (1,112,967) (1,112,967)
-------- -------- --------- ----------- -----------
BALANCE, December 31, 1998 683,750 243,574 (549,166) (4,974,250) 766,868
Common shares issued as payment of dividends on preferred
stock accrued in prior years 467,433
Dividends on redeemable preferred stock (409,000)
Accretion of preferred stock to stated value (56,604)
Net loss (3,053,516) (3,053,516)
-------- -------- --------- ----------- -----------
BALANCE, December 31, 1999 683,750 $243,574 $(549,166) $(8,027,766) $(2,275,819)
======== ======== ========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,053,516) $ (1,112,967) $(1,152,507)
----------- ------------ -----------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation, depletion, and amortization 686,029 235,374 39,857
Provision for uncollectible accounts receivable 77,018 25,475
Equity in losses of unconsolidated equity affiliate
(includes amortization of excess interest) 930,933 376,693
Minority interest in losses of consolidated joint venture,
net of distributions to minority interest shareholders (1,348,336) (244,523)
Deferred income tax benefit (434,056)
Loss on sale of subsidiary 801,461
Other expenses paid through equity instruments 589,381 117,738
Changes in operating assets and liabilities
(net of effect of acquisitions, see Note 4):
Accounts receivable (2,439,565) (2,838,445) (12,529)
Inventory 2,528,470 3,187,170
Prepaid and other current assets 3,789 138,045 35,464
Other assets 136,021 (544,355) 1,792
Accounts payable (725,156) 1,847,872 (78,576)
Accrued interest 1,836,305
Accrued expenses 265,571 120,549 (140,209)
----------- ------------ -----------
Total adjustments 1,951,079 2,893,236 330,942
----------- ------------ -----------
Net cash provided by (used in) operating activities (1,102,437) 1,780,269 (821,565)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (2,898,940) (904,277) (6,960)
Acquisition of Petro Source Asphalt Company (14,235,726)
Acquisition of Rawlins Terminal (266,571)
Acquisition of Cowboy Terminal (195,000)
Investment in and advances to Crown Asphalt Ridge, LLC (562,490) (1,766,343) (433,219)
Proceeds from sale of oil and gas investments 75,000
Additions to mining properties (25,060)
Payment for reclamation deposit (138,701)
----------- ------------ -----------
Net cash used in investing activities (3,923,001) (16,906,346) (528,940)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on working capital loan from
related party 6,000,001 8,935,221
Proceeds from borrowings of long-term debt 6,000,000
Payments on long-term debt (125,776) (674,277) (311,502)
Sale of equity interest in subsidiary to a minority shareholder 394,558 1,500,000
Proceeds from convertible debentures 150,000
Net proceeds from issuance of preferred stock 4,470,000
----------- ------------ -----------
Net cash provided by financing activities 6,268,783 15,760,944 4,308,498
----------- ------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,243,345 634,867 2,957,993
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,735,632 3,100,765 142,772
----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,978,977 $ 3,735,632 $ 3,100,765
=========== ============ ===========
(Continued)
</TABLE>
F-7
<PAGE>
CROWN ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $197,135 $678,870 $27,131
======== ======== =======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
FOR THE YEAR ENDED DECEMBER 31, 1999:
- - The Company issued 317,069 shares of common stock totaling $467,433 as a
dividend distribution to preferred stockholders and accrued dividends
totaling $400,000 on the redeemable preferred stock.
- - The Company incurred long-term debt of $1,282,070 in connection with the
acquisition of the Cowboy Terminal (see Note 4).
- - The Company incurred long-term debt of $2,025,000 in connection with the
acquisition of the Rawlins Terminal (see Note 4).
- - The Company incurred long-term debt of $2,991,868 to fund its ongoing
capital investment requirements in Crown Asphalt Ridge.
FOR THE YEAR ENDED DECEMBER 31, 1998:
- - The Company issued 946,296 shares of common stock upon the exercise of
stock options in exchange for notes receivable totaling $549,166.
- - The Company issued 300,000 shares of common stock in payment of research
and development expenses of $403,125.
- - The Company issued 400,000 common stock warrants, valued at $186,256, in
payment of consulting fees.
- - The Company accrued dividends totaling $402,019 on the redeemable preferred
stock.
FOR THE YEAR ENDED DECEMBER 31, 1997:
- - The Company accrued dividends totaling $65,414 on the redeemable preferred
stock.
- - 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.
- - The Company issued 56,877 shares of common stock in payment of a promissory
note and accrued interest totaling $25,985.
- - 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.
- - 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.
- - 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.
- - The Company issued 100,000 common stock warrants valued at $57,318 in
payment of offering costs on the issuance of preferred stock.
See notes to consolidated financial statements. (Concluded)
F-8
<PAGE>
CROWN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 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 owns an asphalt
terminal and storage facility. On December 21, 1998, CAPCO assigned its
interest in CAT LLC to Crown Distribution. Crown Distribution owns 66.67%
and Foreland owns 33.33% of CAT LLC. Crown Asphalt Distribution II, LLC
(CAD II) was formed in 1999 for the purpose of acquiring the Rawlins
Terminal (see Note 4) and is a wholly owned subsidiary of CAPCO. CAPCO is
currently negotiating a joint venture agreement with MCNIC relating to CAD
II.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly- and majority-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 is being amortized over 40
years.
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
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.
F-9
<PAGE>
At December 31, 1999, the Company's current liabilities exceeded current
assets by $6,580,919. For the three years in the period ended December
31, 1999, the Company had losses of $1,152,507, $1,112,967, and
$3,053,516. In conjunction with the Petro Source acquisition in 1998,
MCNIC provided a loan, as evidenced by a promissory note, of
$7,141,930 to the Company. In addition, MCNIC at its election, has
provided a replacement loan for working capital purposes in lieu of
a third party bank. The initial loan was satisfied and replaced by
the replacement loan in July 1999. The replacement loan had a balance
of $14,935,222 as of December 31, 1999. On March 27, 2000, the Company
was advised by MCNIC that it was in default of the working capital loan.
MCNIC has also demanded immediate payment of the working capital loan
plus accrued interest. Management believes that the Company is not in
default of the working capital loan since only the initial loan had
specified terms and such loan was extinquished by the replacement loan,
which management believes is a line of credit as interpreted in the
Operating Agreement between MCNIC and CAPCO. The Company does not
believe MCNIC will provide additional working capital in excess of the
existing loan. Management believes it will be able to secure additional
working capital through other sources in amounts sufficient for the
Company to continue as a going concern.
As discussed in Note 3, management believes that the pilot operations at
the Crown Ridge production facility will be completed before the end of the
second quarter of 2000. If these pilot operations indicate that a viable
technical and economic solution exists, additional modifications to the
facility will be required. The Company has no assurance that the members of
Crown Ridge are willing to contribute the capital for any required
modifications. Should the modifications be made and the plant become
operational in 2000, management believes the production facility will
provide capital sufficient for Crown Ridge to continue as a going concern.
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:
<TABLE>
<S> <C>
Plant and improvements 10-30 years
Tankage 25 years
Equipment 7 years
Computer equipment, furniture, and fixtures 3 years
</TABLE>
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, 1999 and 1998, all deferred tax assets were offset by a
valuation allowance.
LOSS PER SHARE - 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.
F-10
<PAGE>
INVENTORY - Inventory consists principally of refined products and chemical
supplies which are valued at the lower of cost (computed on a first-in,
first-out basis) or market.
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.
GOODWILL - The Company has recorded the amounts paid in excess of the fair
value of net tangible assets acquired at the dates of acquisition as
goodwill. Such goodwill is amortized using the straight-line method over 20
years. Accumulated amortization is $320,947 and $103,596 at December 31,
1999 and 1998, respectively.
OTHER INTANGIBLE ASSETS - Other intangible assets consist of a
noncompetition agreement that is being amortized over its five-year term
using the straight-line method. Accumulated amortization is $75,000 and
$25,000 at December 31, 1999 and 1998, respectively.
ASPHALT DEMERITS - Crown's subsidiary, CAPCO, blends asphalt for sale to
contractors and state agencies. The asphalt sold must meet certain
specifications for a particular application. If the asphalt sold does not
meet these specifications for whatever reason, the asphalt supplier may be
held liable for possible damages (asphalt demerits) therefrom. Management
believes that the Company's product liability insurance would cover any
significant damages.
ENVIRONMENTAL EXPENDITURES - Environmental related restoration and
remediation costs are recorded as liabilities when site restoration and
environmental remediation and clean-up obligations are either known or
considered probable, and the related costs can be reasonably estimated.
Other environmental expenditures, that are principally maintenance or
preventative in nature, are recorded when expended and expensed or
capitalized as appropriate.
COMPREHENSIVE INCOME - Comprehensive income is reported in accordance with
SFAS No. 130, "REPORTING COMPREHENSIVE INCOME". SFAS 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from additional paid-in capital, retained
earnings, and stockholders' equity. The Company does not currently have any
components of comprehensive income other than net loss.
DERIVATIVE INSTRUMENTS AND HEDGING - In June 1998, the 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, as amended, 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 consolidated financial statements.
STOCK-BASED COMPENSATION - The Company has elected to continue to apply
Accounting Principles Board (APB) Opinion 25 (as permitted by SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION). The appropriate disclosures
required by SFAS No. 123 are included in Note 8.
CHANGE IN ACCOUNTING PRINCIPLE - In 1998, the Company adopted Statement of
Position (SOP) No. 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES,
which requires costs of start-up activities to be expensed as incurred. The
effect on 1998 of adopting SOP No. 98-5 resulted in additional expenses of
F-11
<PAGE>
$204,218. The cumulative effect on years prior to 1998 of the accounting
change totaled $615,323 and relates to the following entities:
<TABLE>
<S> <C>
Start-up costs expensed by the Company $503,493
Equity in start-up costs of Crown Ridge 111,830
--------
Total cumulative effect of change in
accounting principle $615,323
========
</TABLE>
RECLASSIFICATIONS - Certain amounts in the 1998 and 1997 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:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 1,000,000 $ 100,000
Plant and improvements 440,406 70,742
Tankage 5,524,572 1,390,016
Equipment 1,984,605 1,160,221
Computer equipment, furniture, and fixtures 319,662 241,723
Construction in progress 555,862 223,991
----------- ----------
Total property, plant, and equipment 9,825,107 3,186,693
Less accumulated depreciation (587,372) (172,901)
----------- ----------
Total $ 9,237,735 $3,013,792
=========== ==========
</TABLE>
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,
1999, the Company contributed $4,013,318 to Crown Ridge. MCNIC and the
Company initially own interests of 75% and 25%, respectively, in the
profits and losses of Crown Ridge. Once operations of Crown Ridge are
generating sufficient cash flows to pay specific returns, as defined, to
MCNIC then CAC's interest in Crown Ridge will increase to 50%. The excess
of the Company's investment in Crown Ridge over its share in the related
underlying equity in net assets (approximately $2,080,000 at December 31,
1999) is being amortized over 40 years. In addition, as of December 31,
1999, the Company had made advances to Crown Ridge of approximately
$111,000, which amount has been reflected as investment in and advances to
equity investment in the accompanying balance sheet.
F-12
<PAGE>
During the year ended December 31, 1997, Crown Ridge entered into an
engineering, construction, and procurement agreement to construct a mining
and production plant. Crown Ridge has incurred approximately $20 million of
construction and mine development costs as of December 31, 1999. 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, if
such technology is utilized.
Crown Ridge has experienced certain difficulties relating to its production
plant. Crown Ridge has conducted extensive research and engineering to
develop a solution to these difficulties which is currently being tested in
a pilot study. If the pilot study indicates that the solution is
technically and economically viable, certain modifications to the Facility
may be required provided financing for the modifications is contributed to
Crown Ridge. The Company does not anticipate completing the testing and
necessary modifications any sooner than late 2000.
The following summarizes the separate financial information of Crown Ridge
at December 31:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Assets $21,160,839 $ 20,351,146
Liabilities 1,130,890 2,067,947
Equity 20,029,949 18,283,199
Revenues None None
Net loss (3,481,152) (1,264,194)
The Company's equity in net assets $ 4,977,648 $ 1,834,619
Excess of investment over the Company's
equity in net assets 2,086,284 2,167,928
Advances to affiliate 110,988 548,894
----------- ------------
Total investment in and advances to an equity affiliate $ 7,174,920 $ 4,551,441
=========== ============
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 in 1999 and 1998 $ (930,933) $ (376,693)
=========== ============
Reported in the accompanying consolidated statement
of operations as follows:
Equity in losses of unconsolidated equity affiliate $ (870,288) $ (264,863)
Cumulative effect of change in accounting principle (111,830)
Amortization of excess investment included in
selling, general, and administrative expense (60,645)
----------- ------------
Total $ (930,933) $ (376,693)
=========== ============
</TABLE>
Subsequent to year end, CAC and MCNIC entered into an agreement whereby
contributions to fund certain approved expenses related to pilot plant
operations by either party will increase the contributing member's
ownership percentage should the other member not contribute its matching
percentage.
F-13
<PAGE>
4. ACQUISITIONS
ACQUISITION OF COWBOY TERMINAL - On January 9, 1999, CAT LLC acquired the
Cowboy Terminal for a total purchase price of $1,973,511. CAT LLC paid cash
deposits on the purchase price totaling $496,441 during 1998, paid $195,000
in cash at closing, and executed and delivered a promissory note in the
amount of $1,282,070 in 1999. The assets acquired were recorded at their
estimated fair values at the date of acquisition and the results of
operations are included in the accompanying consolidated statement of
operations from the date of acquisition. The acquisition was accounted for
as a purchase. The preliminary purchase price was allocated entirely to
property and equipment.
The CAT LLC Operating Agreement obligates both Crown Distribution and
Foreland to make additional capital contributions equal to one-half of any
additional requirements, not to exceed $650,000, required for (i) CAT LLC
to fulfill its obligations under any corrective action plan that may be
accepted by CAT LLC and the Utah Department of Environmental Quality with
respect to certain environmental conditions at the Cowboy Terminal and (ii)
any additional amounts required to cover legal costs incurred in obtaining
title to the Cowboy Terminal or otherwise relating to the environmental
remediation work potentially needed.
The CAT LLC Operating Agreement also obligates Crown Distribution and
Foreland to make additional capital contributions in proportion to their
ownership percentages in order to fund any additional amounts required for
CAT LLC to fulfill its obligations under the purchase contract for the
Cowboy Terminal Assets, for environmental management and containment costs,
expenses for operations, or the construction of certain approved capital
improvements to the Cowboy Terminal. None of the foregoing additional
contributions will result in an increase in the number of units or
percentage interests held by Crown Distribution or Foreland.
CAT LLC is managed by Crown Distribution. Crown Distribution has authority
to conduct the day-to-day business and affairs of Crown Distribution.
However, certain matters, considered to be protective rights, must be
approved by members holding 75% or more of the outstanding units of CAT
LLC. Crown Distribution is not compensated for its services as manager.
RAWLINS ASPHALT TERMINAL - On May 12, 1999, the Company acquired the
Rawlins Asphalt Terminal and inventory for $2,291,571 from S&L Industrial
(S&L). The purchase price consists of the Company assuming S&L's debt of
approximately $1,800,000, entering into a note payable to S&L for $225,000,
and a cash payment of $266,571. The acquisition was accounted for as a
purchase. The assets acquired were recorded at their estimated fair values
at the date of acquisition and the results of operations are included in
the consolidated statements of operations from the date of acquisition. The
preliminary purchase price was allocated $1,770,200 to property, plant, and
equipment, $216,571 to inventory, and $304,800 to goodwill.
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. The assets
acquired were recorded at their estimated fair values at the date of
acquisition and the results of operations are included in the accompanying
consolidated statements of operations from the date of acquisition. In
conjunction with the acquisition, the Company recorded goodwill of
$4,143,827. The assets acquired relate to the refining, production, and
distribution of asphalt products. The sale of the equity interest of $1.5
million as reported in the consolidated statement of cash flows represents
MCNIC's contribution toward the purchase of their interest in Crown
Distribution.
F-14
<PAGE>
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>
As the Company only purchased certain assets from the Cowboy and Rawlins
Terminals, pro forma information related to the asset acquisitions is not
applicable as operations were not tracked separately for these assets.
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 year ended December 31, 1997 was $23,817. 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 year
ended December 31, 1997.
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:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Preferential debt with MCNIC, interest at 15%, with annual
principal and interest installments equal to 50% of the net
cash flows (as defined) of Crown Distribution. This debt is
secured by all of the assets of Crown Distribution. Total
amount included in thereafter portion of debt matures
schedule below due to uncertainty of payment terms $5,325,723 $5,325,723
Note payable to unrelated third party with interest at 9%,
payable in 84 equal monthly principal and interest installments
of $20,627, maturing January 1, 2006. The debt is secured
by assets at the Cowboy Terminal Facility. 1,156,294
Note payable with MCNIC with interest at prime plus 1% (9.5%
at December 31, 1999). Monthly interest payments of $20,756
through August 2001, with quarterly adjustments for
interest rate fluctuations. Commencing August 2001, CAC
will make monthly principal and interest payments until the
debt matures July 2014. The debt is secured by CAC's
proportional increase in its interest in Crown Ridge
resulting from the loan proceeds. 2,991,868
Note payable with interest at prime plus 1% (9.5% at December
31, 1999) to a bank. Monthly interest payments of $13,600
through May 2001, with quarterly adjustments for interest rate
fluctuations. Commencing May 2001, CAPCO will make monthly
principal and interest payments until the debt matures in
May 2014. The debt is secured by assets at Rawlins Terminal. 1,800,000
Deferred purchase price on Rawlins Terminal acquisition (see
Note 4) with interest at the LIBOR rate (6.5% at December
31, 1999). Interest accrues monthly until February 15,
2000, when the first annual installment will be due. CAPCO
will make annual principal payments until the debt matures
in February 2010. 225,000
----------- ----------
Total 11,498,885 5,325,723
Less estimated current portion (166,204) (1,000,000)
----------- ----------
Long-term portion $11,332,681 $4,325,723
=========== ==========
</TABLE>
F-16
<PAGE>
The schedule maturities of long-term debt at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
2000 $ 166,204
2001 278,506
2002 402,646
2003 441,196
2004 483,463
Thereafter 9,726,870
-----------
Total $11,498,885
===========
</TABLE>
The unsecured working capital loan to MCNIC of $14,935,222 bears interest
at 8%. There is no formal written debt agreement executed and no stated
maturity on the loan. On March 27, 2000, the Company was advised by MCNIC
that it was in default of the working capital loan. MCNIC has also demanded
immediate payment of the working capital loan plus accrued interest.
7. COMMON STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE PREFERRED STOCK
At December 31, 1999 and 1998, common stockholders' equity (deficit) and
redeemable preferred stock consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
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 for the years ended December 31, 1999 and 1998 toward the
stated value and liquidation value of $5,000,000 $4,839,623 $ 4,783,019
=========== ===========
Common stockholders' equity (deficit):
Common stock, $.02 par value; 50,000,000 shares
authorized; 13,285,581 and 12,968,512 shares issued and
outstanding at December 31, 1999 and 1998, respectively $ 265,711 $ 259,370
Additional paid-in capital 5,791,828 5,787,340
Stock warrants outstanding; 683,750 as of
December 31, 1999 243,574 243,574
Common stock subscription receivable from officers (549,166) (549,166)
Accumulated deficit (8,027,766) (4,974,250)
----------- -----------
Total $(2,275,819) $ 766,868
=========== ===========
</TABLE>
8. CAPITAL TRANSACTIONS
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
F-17
<PAGE>
one to four years following the date of grant, and generally expire in ten
years. Fair market value is determined based on quoted market prices.
Changes in stock options are as follows for the three years in the period
ended December 31, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- -------------------- -------------------
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 1,465,948 $ 1.00 2,294,444 $ 0.80 1,860,444 $ 0.60
Granted 775,000 0.62 117,800 1.50 450,000 1.62
Exercised (946,296) 0.58
Forfeited (12,800) 1.50 (16,000) 0.51
--------- ------ --------- ------- --------- ------
Outstanding at end of year 2,228,148 $ 0.88 1,465,948 $ 1.00 2,294,444 $ 0.81
========= ====== ========= ======= ========= ======
Options exercisable at year end 1,498,148 1,123,148 1,416,000
========= ========= =========
Weighted average fair value of
options granted during year $ 0.43 $ 0.93 $ 0.12
========= ========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<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>
$.041 - $.041 450,000 9.7 $0.41
$0.56 - $0.60 573,148 0.6 0.58 573,148 $0.58
$0.66 - $1.13 650,000 4.4 0.86 400,000 0.77
$1.50 - $1.62 555,000 7.1 1.60 525,000 1.60
- ------------- --------- --- ----- --------- -----
$0.41 - $1.62 2,228,148 3.4 $0.88 1,498,148 $0.99
============= ========= === ===== ========= =====
</TABLE>
F-18
<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 1999, 1998, and 1997 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 1998 1997
<S> <C> <C> <C>
Net loss:
As reported $ (3,053,516) $ (1,112,967) $ (1,152,507)
Pro forma (3,478,954) (1,521,872) (1,166,606)
Net loss per common share - basic and diluted:
As reported $ (0.26) $ (0.12) $ (0.11)
Pro forma (0.29) (0.15) (0.11)
</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 1999, 1998, and 1997 dividend yield of 0%,
respectively; expected volatility of 82%, 76%, and 111%, respectively;
risk-free interest rates of 4.86% to 6.00%, 4.80%, and 5.5%, respectively;
and expected lives of approximately 6, 4.1, and 10 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:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- -------------------
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 683,750 $ 1.48 283,750 $ 0.84 183,750 $ 0.75
Granted 400,000 1.94 100,000 1.00
-------- ------ ------- ------ ------- ------
Outstanding at end of year 683,750 $ 1.48 683,750 $ 1.48 283,750 $ 0.84
======== ====== ======= ====== ======= ======
Warrants exercisable at year end 683,750 283,750 283,750
======== ======= =======
Weighted average fair value of
warrants granted during year None $ 0.47 $ 0.57
======== ======= =======
</TABLE>
F-19
<PAGE>
The following table summarizes information about warrants outstanding at
December 31, 1999:
<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 0.83 $0.84 283,750 $ 0.84
1.50 150,000 3.33 1.50 150,000 1.50
2.00 150,000 3.33 2.00 150,000 2.00
2.50 100,000 3.33 2.50 100,000 2.50
- -------------- -------- ------ ------ -------- --------
$0.75 to $2.50 683,750 1.95 $1.48 683,750 $ 1.48
============== ======== ====== ====== ======== ========
</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%; 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,
F-20
<PAGE>
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 (ii) shares of common stock
received upon conversion of preferred stock, multiplied by the fair market
value of the Company's common stock on a weighted average basis for the 90
days immediately preceding the fifth anniversary date of the issuance of
the preferred stock. The warrants will expire in 2007.
CONVERSION OF PREFERRED DIVIDENDS TO COMMON STOCK - On January 27, 1999,
the Company issued 317,069 shares of common stock to its preferred
stockholders as payment in full of preferred stock dividends payable
totaling $467,433.
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, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
2000 $ 631,073
2001 577,702
2002 583,761
2003 506,657
2004 308,292
Thereafter 69,000
----------
Total $2,676,485
==========
</TABLE>
Lease expense for the years ended December 31, 1999, 1998, and 1997,
totaled $762,251, $899,452, and $36,437, respectively.
F-21
<PAGE>
10. INCOME TAXES
The Company has recorded net deferred tax assets and liabilities at
December 31, 1999 and 1998 which consisted of the following temporary
differences and carryforward items:
<TABLE>
<CAPTION>
1999 1998
---------------------------- -----------------------
LONG- LONG-
CURRENT TERM CURRENT TERM
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $2,053,265 $ 1,212,387
Allowance for uncollectible
accounts receivable $ 16,095 $37,176
Start-up costs 186,292 186,292
Capital loss carryforwards 203,332 203,332
Differences between tax basis and
financial reporting basis of
investment in equity affiliate 438,945 116,938
----------- ----------- -------- -----------
Total deferred tax assets 16,095 2,881,834 37,176 1,718,949
----------- ----------- -------- -----------
Deferred tax liabilities:
Amortization of goodwill (9,915) (15,673)
Differences between tax basis
and financial reporting basis of
property, plant and equipment (137,969) (12,558)
Other (12,025) (24,050)
----------- ----------- -------- -----------
Deferred tax liabilities (12,025) (147,884) (24,050) (28,231)
----------- ----------- -------- -----------
Valuation allowance (4,070) (2,733,950) (13,126) (1,690,718)
----------- ----------- -------- -----------
Net deferred tax assets NONE NONE NONE NONE
=========== =========== ======== ===========
</TABLE>
The components of income tax benefit for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ---------
<S> <C> <C> <C>
Current NONE NONE NONE
Deferred:
Federal NONE NONE $(398,862)
State NONE NONE (35,194)
------- ------- ---------
NONE NONE (434,056)
------- ------- ---------
Total NONE NONE $(434,056)
======= ======= =========
</TABLE>
F-22
<PAGE>
Income tax expense (benefit) differed from amounts computed by applying the
federal statutory rate to pretax loss as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Loss before income taxes and minority
interest - computed tax at the expected
federal statutory rate, 34% $(1,496,630) $ (66,869) $ (539,431)
State income taxes, net of federal
income tax benefits (91,605) (14,929) (47,597)
Minority interest 458,434 (102,330)
Expiration of net operating losses 41,603 31,042
Excess of book over tax basis
depletion in oil & gas properties (201,624)
Excess of book over tax basis
depletion in oil sand properties (968,283)
Other 54,022 (5,242) 5,033
Change in valuation reserve 1,034,176 385,998 1,317,846
Change in valuation reserve related
to cumulative effect of a change in
accounting principle (227,670)
----------- ---------- -----------
Total income tax benefit NONE NONE $ (434,056)
=========== ========== ===========
</TABLE>
The Company has available at December 31, 1999, unused tax operating loss
carryforwards of approximately $5,549,000 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 has an employment agreement (amended November 1, 1999) with a
director who is also an officer of the Company. The employment agreement
expires December 31, 2003. 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 subject to
certain limitations. In addition to the bonuses, the director and officer
was granted an option to purchase 450,000 shares of the Company's common
stock at an exercise price of $1.62 per share in 1997. With the amended
agreement, the director and officer was granted an option to purchase an
additional 450,000 shares of the Company's common stock at an exercise
price based on the average fair market price of the Company's common stock
for the three months immediately preceding and following the options grant
date. The option exercise price approximated the average fair market value
of the Company's common stock at the date of grant. The options vest over a
three year period commencing on May 1, 2001, subject to accelerated vesting
should the Company's common stock market price exceed certain defined
levels.
The Company entered into an employment agreement, effective January 26,
1996 with the former Chief Executive Officer and Chairman of the Board
of Directors of the Company. The agreement
F-23
<PAGE>
expired February 26, 1999. The agreement included a base salary of
5% of the Company's net profits from operations before depletion,
depreciation, tax credits, and amortization, but after interest expense on
debt; not to exceed $1,000,000 per year. The agreement also called for the
Company to grant 300,000 stock options to purchase the Company's
unregistered common stock at $.66 per share and an additional 75,000
options for each year of executive employment which is completed after
funding is achieved. In 1996, 300,000 options were issued at $.66 per
share. In 1999 and 1998, 75,000 options were issued at $1.15 and $1.50
per share, respectively. Additionally, other benefits were provided
including participation in certain insurance, vacation, and expense
reimbursements.
During 1998, 946,296 options were exercised by officers of the Company
through a 8% common stock subscription receivable in the amount of
$549,166. The respective receivable has been reflected as a reduction in
common stockholders' equity (deficit). In addition, in 1999 these officers
borrowed approximately $25,000 to pay the income taxes related to the
option exercised.
Pursuant to the operating agreement of Crown Distribution, the Company
receives monthly payments of $5,000 and $10,000 for management services and
overhead charges, respectively. Pursuant to the operating agreement of
Crown Ridge, 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. During 1999,
the lawsuit was settled with no impact to the Company's operations.
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.
14. AGREEMENTS
The Company, through its subsidiary, Crown Distribution had an agreement
with Santa Maria Refining Company (SMRC) and SABA Petroleum whereby Crown
Distribution purchased crude oil for processing at the Santa Maria
Refinery, and markets the slate of products produced, primarily asphalt.
This agreement was acquired through the Petro Source asset acquisition
described in Note 4. Revenues resulting from the agreement were
approximately $15.9 million in 1998, which accounted for
F-24
<PAGE>
approximately 65% of total consolidated revenues. Gross profits for the
year ended December 31, 1999 from operations at the Santa Maria Refinery
totaled approximately $1.2 million. SMRC extended the agreement, which
expired on December 31, 1999, to April 30, 1999. The agreement was not
extended subsequent to April 30, 1999.
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,
1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ------------------------- --------------------------
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 $(3,053,516) $(497,644) $ (1,152,507)
Redeemable preferred
stock dividends (400,000) (402,019) (65,414)
----------- ---------- ------------
Loss attributable to
common stockholders
before cumulative effect
of a change in
accounting principle (3,453,516) $(0.26) (899,663) $ (0.07) (1,217,921) $ (0.11)
Cumulative effect of a
change in accounting
principle (615,323) (0.05)
----------- ------ ----------- -------- ------------ -------
Net loss attributable to
common stockholders $(3,453,516) $(0.26) $(1,514,986) $ (0.12) $ (1,217,921) $ (0.11)
=========== ====== =========== ======= ============ =======
Weighted average common
shares outstanding -
basic and diluted 13,260,389 12,506,125 11,524,822
=========== =========== ============
</TABLE>
The Company had at December 31, 1999, 1998, and 1997 incremental options
and warrants to purchase, computed under the treasury stock method,
1,506,898, 1,283,898, and 2,103,194 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, 1999 and 1998 which is convertible into
approximately 4,300,000 shares of common stock that was not included
F-25
<PAGE>
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. SEGMENT REPORTING
In accordance with the provisions of SFAS No. 131, the Company makes key
financial decisions based on certain operating results of certain of its
subsidiaries. Segment information as reviewed by the Company is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------
CROWN RAWLINS
DISTRIBUTION TERMINAL CEC TOTAL
<S> <C> <C> <C> <C>
Revenues from external
customers $ 32,934,592 $ 2,583,949 $ 35,518,541
Gross profit 2,458,780 48,758 2,507,538
Interest expense 1,933,359 146,884 $ 123,348 2,203,591
Depreciation and amortization 595,168 64,089 87,416 746,673
Segment net loss (1,325,229) (344,661) (1,383,626) (3,053,516)
Segment total assets 23,341,506 2,454,902 14,979,700 40,776,108
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------
CROWN
DISTRIBUTION CEC TOTAL
<S> <C> <C> <C>
Revenues from external customers $ 23,835,734 $ 23,835,734
Segment gross profit 2,118,991 2,118,991
Interest expense 843,184 $ 8,733 851,917
Depreciation and amortization 223,181 72,838 296,019
Segment net income (loss) 300,970 (1,413,937) (1,112,967)
Segment total assets 17,809,867 10,895,235 28,705,102
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION OF ASSETS 1999 1998
<S> <C> <C>
Total assets for reportable segments $40,776,108 $ 28,705,102
Elimination of investment in subsidiaries (2,977,790) (806,902)
Elimination of intercompany receivables (4,684,465) (4,326,936)
----------- ------------
Total consolidated assets $33,113,853 $ 23,571,264
=========== ============
</TABLE>
Prior to 1998, the Company divested itself of its primary operations;
therefore, 1997 segment information has not been presented as it is not
representative of the Company's current operations and the related
operations are not significant to the 1997 consolidated financial
statements.
During 1999 and 1998, the Company operated primarily in the production and
distribution of asphalt. The Company's operations and sales are dispersed
throughout Utah, Arizona, California, Nevada, 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.
F-26
<PAGE>
17. EMPLOYEE BENEFIT PLAN
In 1999, the Company established a defined contribution plan which
qualifies under Section 401(k) of the Internal Revenue Code. The plan
provides retirement benefits for employees meeting minimum age and service
requirements. Participants may contribute up to the lessor of $10,000 or 15
percent of their gross wages, subject to certain limitations. The plan
provides for a discretionary amount to be contributed to the plan each
year. The contribution for the year ended December 31, 1999 totaled
approximately $35,000.
18. SUBSEQUENT EVENTS
On April 17, 1999, the Company entered into an agreement to acquire the
fixed assets and associated inventory of Asphalt Supply & Services, Inc.
and Inoco, Inc. The agreement, though executed, was disputed during 1999,
and on February 4, 2000, the acquisition agreement was cancelled by both
parties. The common stock issued as part of the acquisition (2,500,000
shares) was effectively rescinded as the contract was deemed null and void
as of December 31, 1999. Accordingly, these shares have not been shown as
outstanding in the accompanying financial statements.
On January 20, 2000, the Company entered into an agreement with MCNIC
pursuant to which MCNIC, for a period of 18 months, can remove the Company
as the manager of Crown Ridge and appoint a successor manager.
******
F-27
<PAGE>
CROWN ASPHALT RIDGE, LLC
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP F-28
Independent Auditors' Report of Pritchett, Siler & Hardy, P.C. F-29
Balance Sheets, December 31, 1999 and 1998 F-30
Statements of Operations for the years ended
December 31, 1999 and 1998 and for the period from
August 1, 1997 (Date of incorporation) through
December 31, 1999 F-31
Statements of Member's Equity, for the years ended
December 31, 1999 and 1998 and the period
August 1, 1997 (Date of incorporation)
through December 31, 1999 F-32
Statements of Cash Flows ended December 31, 1999 and
1998 and for the period from August 1, 1997
(Date of incorporation) through December 31, 1999 F-33
Notes to Consolidated Financial Statements F-35
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Members of
Crown Asphalt Ridge, LLC
We have audited the accompanying balance sheets of Crown Asphalt Ridge, LLC
(a development stage company) (the Company) as of December 31, 1999 and 1998
and the related statements of operations, members' equity, and cash flows for
the years then ended and for the cumulative period August 1, 1997 (date of
incorporation) through December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the 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
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999 and
1998, and the results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is a development stage company and the
Company's refining facility has experienced operating difficulties. The
Company's recurring losses from operations and negative working capital raise
substantial doubt about its ability to continue as a going concern. The
Company also relies on its majority member to fund its capital requirements.
The Company is uncertain as to whether such funding will continue.
Management's plans concerning these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
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 29, 2000
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Members of
CROWN ASPHALT RIDGE, LLC
Salt Lake City, Utah
We have audited the statements of operations, and cash flows of Crown Asphalt
Ridge, LLC (a Utah Limited Liability Company) [A DEVELOPMENT STAGE COMPANY] for
the period from inception on August 1, 1997 through December 31, 1997 (these
financial statements are not presented separately herein). 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, such financial statements audited by us presents fairly, in
all material respects, the results of operations and cash flows of Crown
Asphalt Ridge, LLC (a Utah Limited Liability Company) for the period from
inception through December 31, 1997 in conformity with generally accepted
accounting principles.
PRITCHETT, SILER & HARDY, P.C.
March 5, 1997
Salt Lake City, Utah
F-29
<PAGE>
CROWN ASPHALT RIDGE, LLC
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,196 $ 5,080
Accounts receivable 251,031 3,227
Prepaid royalties 203,239 213,194
Other current assets 18,767 37,865
----------- -----------
Total current assets 480,233 259,366
PLANT AND EQUIPMENT 19,027,052 18,819,170
CAPITALIZED MINE DEVELOPMENT COSTS 1,014,852 633,908
INTANGIBLE ASSETS 500,001 500,001
OTHER NON-CURRENT ASSETS 138,701 138,701
----------- -----------
TOTAL $21,160,839 $20,351,146
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 965,133 $ 715,393
Retention payable 803,660
Due to member 110,032 548,894
Current portion long-term debt 12,328
----------- -----------
Total current liabilities 1,087,493 2,067,947
LONG-TERM DEBT 43,397
----------- -----------
Total liabilities 1,130,890 2,067,947
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
MEMBERS' EQUITY:
Crown Asphalt Corporation 4,977,648 1,834,619
MCNIC Pipeline and Processing Company 15,052,301 16,448,580
----------- -----------
Total members' equity 20,029,949 18,283,199
----------- -----------
TOTAL LIABILITIES AND MEMBERS' EQUITY $21,160,839 $20,351,146
=========== ===========
</TABLE>
See notes to financial statements.
F-30
<PAGE>
CROWN ASPHALT RIDGE, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND FOR THE PERIOD FROM AUGUST 1, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 1,
1997 (DATE OF
INCORPORATION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
----------------------
1999 1998 1999
<S> <C> <C> <C>
OPERATING EXPENSES - Start-up costs
(Net of ancillary revenues of $294,000 for the
year ended December 31, 1999) $3,225,764 $ 801,264 $4,027,028
GENERAL AND ADMINISTRATIVE EXPENSES 255,388 15,609 270,997
---------- ---------- ----------
OPERATING LOSS 3,481,152 816,873 4,298,025
---------- ---------- ----------
LOSS BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 3,481,152 816,873 4,298,025
---------- ---------- ----------
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE - Expensing of
start-up costs 447,321 447,321
---------- ---------- ----------
NET LOSS $3,481,152 $1,264,194 $4,745,346
========== ========== ==========
</TABLE>
See notes to financial statements.
F-31
<PAGE>
CROWN ASPHALT RIDGE, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD
AUGUST 1, 1997 (DATE OF INCORPORATION) THROUGH DECEMBER 31, 1997
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
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
Net loss (870,288) (2,610,864) (3,481,152)
Member contributions 4,013,317 1,214,585 5,227,902
------------ ------------ -----------
BALANCE, December 31, 1999 $ 4,977,648 $ 15,052,301 $20,029,949
============ ============ ===========
</TABLE>
See notes to financial statements.
F-32
<PAGE>
CROWN ASPHALT RIDGE, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND FOR THE PERIOD FROM AUGUST 1, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 1,
1997 (DATE OF
INCORPORATION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
-----------------------------
1999 1998 1999
<S> <C> <C> <C>
CASH FLOWS FROM DEVELOPMENT ACTIVITIES:
Net loss $ (3,481,152) $(1,264,194) $ (4,745,346)
------------ ----------- -------------
Adjustments to reconcile net loss to net cash
used in development activities:
Loss on impairment of plant and equipment 350,000 350,000
Changes in assets and liabilities:
Accounts receivable (247,804) (3,227) (251,031)
Deposits (138,701) (138,701)
Prepaid royalties 9,955 (38,810) (70,337)
Other current assets 19,098 (37,865) (18,767)
Accounts payable 249,740 249,740
Due to member (438,862) 415,992 (22,870)
------------ ----------- -------------
Total adjustments (57,873) 197,389 98,034
------------ ----------- -------------
Net cash used in development activities (3,539,025) (1,066,805) (4,647,312)
------------ ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment (1,305,817) (13,716,209) (18,605,934)
Capital expenditures for mine development (380,944) (633,908) (1,014,852)
------------ ----------- -------------
Net cash used in investment activities (1,686,761) (14,350,117) (19,620,786)
------------ ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES -
Members' contributions 5,227,902 15,374,472 24,275,294
------------ ----------- -------------
NET INCREASE (DECREASE) IN CASH 2,116 (42,450) 7,196
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 5,080 47,530 None
------------ ----------- -------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 7,196 $ 5,080 $ 7,196
============ =========== ============
(Continued)
</TABLE>
F-33
<PAGE>
CROWN ASPHALT RIDGE, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
FOR THE PERIOD FROM AUGUST 1, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 1,
1997 (DATE OF
INCORPORATION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
-----------------------------
1999 1998 1999
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for:
Interest $ 449 NONE $ 449
============ =========== ============
Income taxes NONE NONE NONE
============ =========== ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
FOR THE YEAR ENDED DECEMBER 31, 1999:
- - The Company incurred debt of $55,725 related to purchases of plant and
equipment.
- - Reduction of plant and equipment and retention payable of $803,660 from the
settlement of plant and equipment construction billings.
FOR THE YEAR ENDED DECEMBER 31, 1998:
- - 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:
- - 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.
- - Plant and equipment was purchased through increase in accounts payable of
$489,671 and retention payable of $189,720.
- - A member advanced prepaid royalties of $132,902 to the Company.
See notes to financial statements. (Concluded)
F-34
<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 (MCNIC) (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 an 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. 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 production difficulties relating to its production plant and has
undergone a redesign effort to resolve these difficulties. Continued
production 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. At December 31, 1999, the
Company's current liabilities exceed current assets by $607,260; and for
the years ended December 31, 1999 and 1998, the Company has incurred net
losses of $3,481,152 and $1,264,194, respectively, and since date of
incorporation has incurred cumulative losses of $4,745,346. The Company
relies on its member to fund its working capital and development activity
requirements. Management believes that the pilot operations at the Company
production facility will be completed before the end of the second quarter
of 2000. If these pilot operations indicate that a viable technical and
economic solution exists, additional modifications to the facility will be
required. The Company has no assurance that the members of the Company are
willing to contribute the capital for any required modifications. Should
the modifications be made and the plant become operational in 2000,
management believes the production facility will provide capital sufficient
for the Company to continue as a going concern.
ORGANIZATION - On August 1, 1997, CAC and MCNIC made initial member
contributions of $100,000 and $300,000 respectively. The operating
agreement requires secondary capital contributions from the members in
amounts proportionate to the sharing ratios to cover costs of construction
of the facility at Asphalt Ridge per an engineering procurement and
construction contract 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 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
F-35
<PAGE>
made additional cash contributions of $1,217,448 and $14,157,024,
respectively. During 1999, CAC and MCNIC made additional cash contributions
of $4,013,317 and $1,214,585, respectively.
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%.
On January 24, 2000, CAC and MCNIC entered into an agreement whereby
contributions to fund certain approved expenses related to pilot plant
operations by either party will increase the contributing member's
ownership percentage should the other member not contribute its matching
percentage.
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.
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.
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. During 1999, $350,000 of plant and equipment was
determined to be impaired because of the redesign efforts resulting from
the facility production difficulties.
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 once operations commence. On-going
environmental and reclamation expenditures will be expensed as incurred.
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 using a unit of production method based on the
estimated reserves to be recovered once operations commence. At December
31, 1999, there has been no significant mining of tar sands.
REVENUE RECOGNITION - Once planned principal operations commence, sales
revenue will be recognized upon shipment of product in fulfillment of a
customer order. During the year ended December 31, 1999, the Company
recorded approximately $294,000 in revenues related to the incidental sales
of raw
F-36
<PAGE>
materials. These revenues have been recorded as a reduction in operating
expenses in the accompanying statement of operations, as the principal
operations of the facility have not yet commenced.
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.
Accordingly, no current or deferred income taxes have been included in the
accompanying financial statements.
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, as amended, 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 1998 and cumulative amounts have been
reclassified to conform to the 1999 presentation.
2. PLANT AND EQUIPMENT
Plant and equipment consists of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Construction in progress $19,027,052 $18,819,170
=========== ===========
</TABLE>
There was no depreciation or amortization expense for the years ended
December 31, 1999 and 1998 as the property had not yet been placed in
service.
3. LONG-TERM DEBT
The Company has a promissory note payable to a finance company totaling
$55,725 at December 31, 1999. Amounts are payable monthly at $1,424,
including interest at 9.5%. The note matures in November 2003 and is
collateralized by the equipment purchased with the debt. The scheduled
maturities of long-term debt at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
2000 $12,328
2001 13,551
2002 14,896
2003 14,950
-------
Total $55,725
=======
</TABLE>
F-37
<PAGE>
4. RELATED PARTY TRANSACTIONS
Accounts receivable at December 31, 1999 includes approximately $21,000 due
from CAC. Accounts payable at December 31, 1999 includes approximately
$91,000 owed to Crown Asphalt Distribution (CAD) (an affiliated company)
and $111,011 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 5) for and on behalf of the Company. Such
amounts totaling $110,032 and $548,894 as of December 31, 1999 and 1998,
respectively, have been reflected as Due to Member in the accompanying
balance sheets. During the year ended December 31, 1999, CAR recorded
ancillary revenues of approximately $27,000 for product sold to CAD.
5. COMMITMENTS AND CONTINGENCIES
MINERAL LEASE AGREEMENT - In connection with certain oil sand mineral
leases the Company has agreed to pay a royalty equal to the greater of $.50
per ton mined or 10 percent of the net returns of production. 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. In connection
with these minimum royalties, the Company has recorded prepaid royalties of
approximately $203,239 and $213,194 as of December 31, 1999 and 1998,
respectively.
OPERATING AND MANAGEMENT AGREEMENT - The Company had a two year operating
and management agreement with CAC to manage, supervise, and conduct the
operations of the Company which expired August 1999. The term of the
agreement automatically extended for one year and thereafter automatically
extends for unlimited successive one-year periods unless terminated sooner.
The Company compensates 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, 1999 and 1998, the Company accrued and/or paid $143,000
and $156,000, respectively, to CAC for the management fee and other direct
costs.
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, if such
technology is utilized.
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 was approximately
$16,000 for each of the years ended December 31, 1999 and 1998.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1999 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000 $4,945
2001 2,377
2002 2,377
2003 2,377
2004 944
-------
Total minimum lease payments $13,020
=======
</TABLE>
F-38
<PAGE>
6. EMPLOYEE BENEFIT PLAN
In 1999, the Company established a defined contribution plan which
qualifies under Section 401(k) of the Internal Revenue Code. The plan
provides retirement benefits for employees meeting minimum age and service
requirements. Participants may contribute up to the lessor of $10,000 or 15
percent of their gross wages, subject to certain limitations. The plan
provides for discretionary matching contributions by the Company, as
determined by the Board of Directors. The discretionary amount contributed
to the plan for the year ended December 31, 1999 totaled approximately
$17,000.
7. SUBSEQUENT EVENTS
On January 20, 2000, CAC entered into an agreement with MCNIC pursuant
to which MCNIC, for a period of 18 months, can remove CAC as the manager
of the Company and appoint a successor manager.
******
F-39
<PAGE>
EXHIBIT 2.4
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
Dated as of May 12, 1999
among
CROWN ASPHALT PRODUCTS COMPANY
and
S & L INDUSTRIAL
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I ........................................................................................................1
DEFINITIONS.......................................................................................................1
1.1 DEFINED TERMS..........................................................................................1
1.2 OTHER DEFINITIONAL PROVISIONS..........................................................................5
ARTICLE II .......................................................................................................5
CLOSING ..........................................................................................................5
2.1 PURCHASE AND SALE......................................................................................5
2.2 LIMITED ASSUMPTION OF LIABILITIES......................................................................6
2.3 CLOSING................................................................................................7
2.4 CONSIDERATION..........................................................................................7
2.5 CLOSING DELIVERIES.....................................................................................8
2.6 SECURITY INTEREST......................................................................................8
2.7 ALLOCATION OF PURCHASE PRICE...........................................................................8
ARTICLE III......................................................................................................10
REPRESENTATIONS AND WARRANTIES OF SELLERS........................................................................10
3.1 ORGANIZATION AND CAPACITY.............................................................................10
3.2 AUTHORIZATION AND VALIDITY............................................................................10
3.3 NO CONFLICT...........................................................................................10
3.4 GOVERNMENTAL CONSENTS.................................................................................11
3.5 OMITTED...............................................................................................11
3.6 ABSENCE OF MATERIAL ADVERSE EFFECTS...................................................................11
3.7 LEGAL PROCEEDINGS.....................................................................................11
3.8 COMPLIANCE WITH LAWS..................................................................................12
3.9 CERTAIN AGREEMENTS....................................................................................12
3.10 TITLE AND CONDITION OF PROPERTIES.....................................................................12
3.11 INTELLECTUAL PROPERTY.................................................................................14
3.12 EMPLOYEE BENEFIT PLANS................................................................................15
3.13 TAXES ......................................................................................16
3.14 ENVIRONMENTAL LAWS....................................................................................16
3.15 AFFILIATE TRANSACTIONS................................................................................17
3.16 BROKERS, FINDERS, ETC.................................................................................17
3.17 CONTRACTS AND COMMITMENTS.............................................................................17
3.18 LABOR RELATIONS ......................................................................................18
3.19 OMITTED...............................................................................................18
3.20 INSURANCE.............................................................................................18
3.21 CUSTOMERS.............................................................................................19
3.22 OMITTED...............................................................................................19
3.23 PERMITS...............................................................................................19
i
<PAGE>
3.24 REPAIRS, RETURNS AND ALLOWANCES.......................................................................19
3.25 ABSENCE OF CERTAIN PAYMENTS...........................................................................19
3.26 PRODUCTS; PRODUCT WARRANTIES..........................................................................20
3.27 REAL PROPERTY HOLDING CORPORATION.....................................................................20
3.28 PROJECTIONS ..........................................................................................20
3.29 CONDUCT OF BUSINESS...................................................................................20
3.30 LEGAL AND TAX ADVICE..................................................................................20
3.31 FULL DISCLOSURE ......................................................................................21
ARTICLE IV ......................................................................................................21
REPRESENTATIONS AND WARRANTIES OF PURCHASER......................................................................21
4.1 DUE ORGANIZATION AND AUTHORITY OF PURCHASER...........................................................21
4.2 AUTHORIZATION AND VALIDITY OF AGREEMENT...............................................................21
4.3 NO CONFLICT...........................................................................................22
4.4 GOVERNMENTAL CONSENTS.................................................................................22
4.5 BROKERS, FINDERS, ETC.................................................................................22
4.6 FULL DISCLOSURE.......................................................................................22
ARTICLE V .......................................................................................................22
COVENANTS .......................................................................................................22
5.1 NAMES.................................................................................................22
5.2 SELLERS' AND PRINCIPAL'S NON-COMPETITION AND NON-SOLICITATION.........................................22
5.3 COMMUNICATIONS........................................................................................24
5.4 CONFIDENTIALITY.......................................................................................24
5.5 TITLE COMMITMENTS.....................................................................................24
5.6 PURCHASER BANK FINANCING AND GUARANTEES...............................................................24
ARTICLE VI ......................................................................................................25
DELIVERIES AT CLOSING............................................................................................25
6.1 DOCUMENTS TO BE DELIVERED BY SELLER...................................................................25
6.2 DOCUMENTS TO BE DELIVERED BY PURCHASER................................................................26
ARTICLE VII......................................................................................................26
INDEMNIFICATION..................................................................................................26
7.1 INDEMNIFICATION BY SELLERS............................................................................26
7.2 INDEMNIFICATION BY PURCHASER..........................................................................27
7.3 NOTICE AND RESOLUTION OF CLAIM........................................................................27
7.4 OFFSET................................................................................................28
ARTICLE VIII.....................................................................................................28
MISCELLANEOUS....................................................................................................28
8.1 EXPENSES..............................................................................................28
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8.2 ADDITIONAL AGREEMENTS.................................................................................28
8.3 TRANSFER TAXES........................................................................................28
8.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES............................................................29
8.5 EMPLOYEES.............................................................................................29
8.6 NOTICES...............................................................................................29
8.7 INTERPRETATION........................................................................................31
8.8 NO THIRD PARTY BENEFICIARIES..........................................................................31
8.9 AMENDMENT AND WAIVER..................................................................................31
8.10 EXTENSION OR WAIVER...................................................................................31
8.11 ENTIRE AGREEMENT......................................................................................31
8.12 SUCCESSORS AND ASSIGNS................................................................................31
8.13 GOVERNING LAW ........................................................................................32
8.14 NO STRICT CONSTRUCTION................................................................................32
8.15 COUNTERPARTS .........................................................................................32
</TABLE>
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ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement, is entered into as of May 12, 1999, by
and among CROWN ASPHALT PRODUCTS COMPANY, a Utah corporation (the "Purchaser"),
S & L INDUSTRIAL, a Wyoming corporation (the "Seller"), and, for the sole and
limited purpose of Sections 5.2 and 5.6 below, David Rael, principal of Seller
(individually and collectively, "Principal").
Seller desires to sell to Purchaser, and Purchaser desires to purchase
from Seller, substantially all of the assets comprising the Seller's Rawlins,
Wyoming asphalt terminal and related inventory, on the terms and subject to the
conditions set forth in this Agreement. The parties hereto are entering into
this Agreement to provide for such purchase and sale and to establish various
rights and obligations in connection therewith.
In consideration of the foregoing, and of the mutual covenants and
agreements hereinafter set forth, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINED TERMS. For purposes of this Agreement, the following terms
shall have the following meanings:
"AFFILIATE": as to any Person (as hereinafter defined below),
any other Person which, directly or indirectly, is in control of, is
controlled by, or is under common control with, such Person. The term
"control" (including, with correlative meanings, the terms "controlled
by" and "under common control with"), as applied to any Person, means
the possession, whether directly or indirectly, of the power to direct
or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or other ownership
interest, by contract or otherwise.
"AGREEMENT": this Asset Purchase Agreement, together with all
schedules and exhibits referenced herein, as amended, modified or
supplemented from time to time.
"ASSUMED LIABILITIES": the liabilities and obligations to be
assumed by Purchaser as of the Closing Date under certain contracts and
leases identified in Section 2.2 below.
"AUDIT": any audit, assessment of Taxes, other examination by
any Tax Authority, proceeding or appeal of such proceeding relating to
Taxes.
"BOARD OF DIRECTORS": the board of directors of Seller or, to
the extent legally permissible, a duly constituted committee thereof.
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"BUSINESS DAY": a day other than a Saturday or a Sunday or
other day on which commercial banks in Salt Lake City, Utah are
authorized or required by law to close.
"CLOSING": has the meaning set forth in Section 2.3.
"CLOSING DATE": has the meaning set forth in Section 2.3.
"CODE": the Internal Revenue Code of 1986, as amended.
"DAMAGES": has the meaning set forth in Section 7.1.
"DEFERRED PURCHASE PRICE" shall have the meaning set forth in
Section 2.4(d).
"DOLLARS" and "$": dollars in lawful currency of the United
States of America.
"ENVIRONMENTAL LAWS": any and all foreign, federal, state,
local or municipal laws, rules, orders, regulations, statutes,
ordinances, codes, decrees, requirements of any Governmental Authority
or other requirements of law (including common law) regulating,
relating to or imposing liability or standards of conduct concerning
protection of human health or the environment, as now or may at any
time on or prior to the Closing Date be in effect.
"ENVIRONMENTAL PERMIT": any license, permit, order, approval,
concession, registration, authorization, or qualification required
under any Environmental Law.
"ENVIRONMENTAL REPORT": any report, study, assessment, audit,
or other similar document that addresses any issue of actual or
potential non-compliance with, or actual or potential liability under,
any Environmental Law that may in any way affect Seller.
"EXCLUDED ASSETS": (a) automobiles, trucks, tractors, trailers
and other vehicles used in the conduct of Seller's business or the
operation of the Terminal and (b) all assets, properties, rights,
titles and interests of every kind or nature owned or leased by Seller
which are not located at and are not used in the business operations
conducted by Seller at the Terminal.
"FICA": Federal Insurance Contributions Act.
"GAAP": generally accepted accounting principles in the United
States of America in effect from time to time.
"GOVERNMENTAL AUTHORITY": any nation or government, any state
or other political subdivision thereof and any entity (including
without limitation a court) exercising executive, legislative,
judicial, regulatory or administrative functions of, or pertaining to,
government.
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"GOVERNMENTAL ORDER": as to any Person, any judgment,
injunction, decree, order or other determination of an arbitrator or a
court or other Governmental Authority, in each case applicable to or
binding upon such Person or any of its property or to which such Person
or any of its property is subject.
"INDEBTEDNESS": of any Person at any date, (a) all
indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services (other than current trade
liabilities incurred in the ordinary course of business and payable in
accordance with customary practices); (b) any other indebtedness of
such Person which is evidenced by a note, bond, debenture or similar
instrument; (c) all obligations of such Person under financing leases;
(d) all obligations of such Person in respect of acceptances issued or
created for the account of such Person; and (e) all liabilities secured
by any Lien (as hereinafter defined) on any property owned by such
Person even though such Person has not assumed or otherwise become
liable for the payment thereof.
"INVENTORY": the entire inventory of asphalt, oil, chemicals,
raw materials, solvents and similar products owned by Seller and
located at the Terminal as of the Closing Date, as specified in
Schedule 2.4(a) as prepared pursuant to Section 2.4(a)..
"INTELLECTUAL PROPERTY" has the meaning set forth in Section
3.11.
"KNOWLEDGE OF SELLER": actual knowledge after reasonable
investigation of Seller, any Shareholder or any officer of a Seller,
including actual knowledge of facts which should reasonably have placed
such Seller, Shareholder or officer on notice of the matters in
question.
"LIEN": any mortgage, pledge, hypothecation, assignment for
security purposes, deposit arrangement, encumbrance, lien (statutory or
other), claim, charge or other security interest or any preference,
priority or other security agreement or preferential arrangement of any
kind or nature whatsoever (including without limitation any conditional
sale or other title retention agreement and any financing lease having
substantially the same economic effect as any of the foregoing).
"MATERIAL ADVERSE EFFECT": a material adverse effect on (a)
the business, operations, property, financial condition, results of
operations or prospects of Seller relating to the Terminal, the
Purchased Assets or the operations of Seller at the Terminal; (b) the
ability of Seller or Shareholder to consummate any transactions
contemplated by this Agreement or perform its or his obligations under
this Agreement; or (c) the ability of Purchaser to exercise its rights
under this Agreement.
"MATERIALS OF ENVIRONMENTAL CONCERN": any waste, pollutant, or
contaminant (whether or not defined or regulated as such under any
Environmental Law), or any other substance of any kind (including
without limitation petroleum or petroleum products, asbestos or
asbestos-containing materials, urea-formaldehyde insulation,
polychlorinated
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biphenyls, odors and radioactivity) regulated by or under, or which may
otherwise give rise to liability under, any Environmental Law.
"NON-COMPETITION PERIOD": has the meaning set forth in Section
5.2(a).
"PERMITS": as to any Person, all licenses, permits,
franchises, orders, approvals, concessions, registrations,
authorizations and qualifications with and under all federal, state,
local or foreign laws and Governmental Authorities and all industry or
other non-governmental self-regulatory organizations that are issued to
such Person (including without limitation Environmental Permits).
"PERSON": a natural person, partnership, corporation, limited
liability company, business trust, joint stock company, trust,
unincorporated association, joint venture, Governmental Authority or
other entity of whatever nature.
"PURCHASED ASSETS": has the meaning set forth in Section 2.1.
"PURCHASER": Crown Asphalt Products Company a Utah
corporation.
"PURCHASER BANK FINANCING": the liabilities and obligations
owed by the Purchaser to Community First National Bank of Casper,
Wyoming under that certain Loan Agreement dated on or about the Closing
Date and related loan documentation, including any modifications,
amendments, extensions, substitute financings or replacements thereof.
"REQUIREMENT OF LAW": as to any Person, the Articles of
Incorporation and Bylaws or other organizational or governing documents
of such Person, and any law, treaty, rule or regulation or order, writ,
injunction, decree or determination of an arbitrator or a court or
other Governmental Authority, in each case applicable to or binding
upon such Person or any of its property or to which such Person or any
of its property is subject.
"S & L BANK DEBT": the liabilities and obligations owed by
Seller to Community First National Bank of Casper, Wyoming under that
certain Agreement for Modification and Renewal of Loans dated March 3,
1998 and related loan documentation, including all modifications,
amendments or extensions made on or prior to the Closing Date.
"SELLER": S & L Industrial, a Wyoming corporation.
"TAXES": all federal, state, local and foreign taxes, and
other assessments of a similar nature (whether imposed directly or
through withholding), including any interest, additions to tax, or
penalties applicable thereto.
"TAX AUTHORITY": the Internal Revenue Service and any other
domestic or foreign governmental authority responsible for the
administration of any Taxes.
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<PAGE>
"TAX RETURNS": all federal, state, local and foreign tax
returns, declarations, statements, reports, schedules, forms and
information returns and any amendments thereto.
"TERMINAL": all of the assets of Seller which constitute a
part of or are used in the operation of Seller's Rawlins, Wyoming
asphalt terminal, including without limitation all assets located
on the premises of such asphalt terminal and all related Inventory.
1.2 OTHER DEFINITIONAL PROVISIONS.
(a) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this
Agreement, and Section, Schedule and Exhibit references are to this
Agreement unless otherwise specified.
(b) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
ARTICLE II
CLOSING
2.1 PURCHASE AND SALE. On the terms and subject to the conditions of
this Agreement, at the Closing, Seller shall sell, convey, transfer, assign and
deliver to Purchaser, and Purchaser shall purchase, acquire and accept from
Seller, free and clear of all Liens (other than Liens granted by Purchaser in
connection with the Purchaser Bank Financing), by appropriate deeds, bills of
sale, assignments and other instruments satisfactory to Purchaser and its
counsel, all assets, properties, rights, titles and interests of every kind and
nature owned or leased by Seller which constitute a part of or are used in the
operation of the Terminal (including without limitation all assets located on
the premises of such Terminal and all related Inventory), whether tangible,
intangible, real or personal (the "Purchased Assets"), including without
limitation, all of the following assets owned or leased by Seller in connection
with the Terminal or the conduct of Seller's business at the Terminal:
(a) all interests in real estate (including, without
limitation, land, buildings, fixtures, fittings and improvements
thereon, and easements, licenses, rights of way, permits, and the other
appurtenances thereto, including appurtenant rights in and to public
streets, whether or not vacated), whether owned in fee, leased,
subleased or otherwise, including without limitation the leasehold
interest in the real property comprising the Terminal, which is more
particularly described on SCHEDULE 2.1(a) attached hereto;
(b) all Inventory, raw materials, manufactured and purchased
parts, work-in-process, finished goods, inventories and supplies;
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<PAGE>
(c) all machinery, equipment, tools, dies, jigs, molds,
patterns, furniture, spare parts and supplies, computers and all
related equipment, telephones and all related equipment and all other
tangible personal property;
(d) all rights existing (i) under insurance policies, (ii)
under all contracts, agreements and arrangements listed and expressly
specified to be assumed by Purchaser in SCHEDULE 3.17, and (iii) under
all leases and subleases listed and expressly specified to be assumed
by Purchaser in SCHEDULE 3.10(a);
(e) all lists and records pertaining to the Terminal and the
Purchased Assets, including all books, records, ledgers, files,
documents, asphalt and emulsion formulations, correspondence, lists,
studies, reports, business records and other printed or written
materials relating to the Terminal; and
(f) all Permits, including, without limitation, those listed
in SCHEDULE 3.23, but excluding any such permits or licenses which are
specifically identified in SCHEDULE 3.23 as not being transferable, and
all data and records pertaining thereto.
Notwithstanding anything to the contrary in this Agreement, the
Excluded Assets shall not be sold, conveyed, assigned or transferred to
Purchaser.
2.2 LIMITED ASSUMPTION OF LIABILITIES.
(a) Except as expressly provided in Section 2.2(b) below, Purchaser
will not assume or in any way be responsible for any liabilities or obligations
of Seller whatsoever, including without limitation any liabilities or
obligations related to or arising from (i) the operations or condition of the
Terminal or the Purchased Assets arising or attributable to any time prior to
the Closing Date or (ii) the operations or condition of the Excluded Assets or
any of Seller's business operations which are not conducted at the Terminal
arising or attributable to any time, whether prior or subsequent to the Closing
Date.
(b) From and after the Closing Date, Purchaser will assume and agree to
pay, defend, discharge and perform as and when due only the liabilities and
obligations arising after the Closing Date under the contracts and leases which
are specifically identified on SCHEDULE 3.17 or SCHEDULE 3.10(a), respectively,
but only to the extent such contracts and leases are actually assigned to and
assumed by Purchaser at Closing, and specifically excluding any liability or
obligation relating to or arising out of such contracts and leases as a result
of (i) any breach of such contracts or leases occurring on or prior to the
Closing Date, (ii) any violation of law, breach of warranty, tort or
infringement occurring on or prior to the Closing Date, or (iii) with respect to
the foregoing items (i) and (ii), any related charge, complaint, action, suit,
proceeding, hearing, investigation, claim or demand (the "Assumed Liabilities").
(c) Notwithstanding anything to the contrary contained in this
Agreement and regardless of whether such liability is disclosed herein or on any
schedule hereto, Purchaser will
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<PAGE>
not assume or be liable for any liabilities or obligations of Seller other than
the Assumed Liabilities described in Section 2.2(b).
2.3 CLOSING. Subject to the conditions precedent set forth in Article
VI, the closing (the "Closing") of the purchase and sale of the Purchased Assets
shall take place at the offices of Community First National Bank, 300 South
Wolcott, Casper, Wyoming 82602, on the Business Day following the date that each
of the conditions set forth in Article VI will have been satisfied or waived, or
at such other place and time as the parties may mutually agree. The date and
time of such Closing are herein referred to as the "Closing Date."
2.4 CONSIDERATION. Subject to the conditions contained in this
Agreement, the aggregate consideration for the Purchased Assets (the "Purchase
Price") shall be paid as follows:
(a) At the Closing, Purchaser shall pay Seller cash or other
immediately available funds in the amount of the agreed upon value of
the Inventory as set forth in Schedule 2.4(a) (as determined by mutual
agreement of Seller and Purchaser at the Closing and subject to such
reasonable substantiation requirements as Purchaser may require);
provided, however, that for administrative convenience such funds shall
be paid by Purchaser directly to Community First National Bank for the
account of S & L against amounts due under the S & L Bank Debt.
(b) At the Closing, the proceeds of the Purchaser Bank
Financing shall be paid to Seller as contemplated by, and subject to
the limitations set forth in, Section 5.6; provided, however, that for
administrative convenience the proceeds of the Purchaser Bank Financing
shall be paid by Purchaser directly to Community First National Bank
for the account of S & L against amounts due under the S & L Bank Debt.
(c) At the Closing, Purchaser shall pay to Seller $50,000 in
cash ; provided, however, that for administrative convenience the cash
shall be paid by Purchaser directly to Community First National Bank
for the account of S & L against amounts due under the S & L Bank Debt.
(d) Purchaser shall pay to Seller the sum of $225,000 in cash
(the "Deferred Purchase Price") as follows:
(i) Prior to October 1, 1999, interest shall not
accrue on the Deferred Purchase Price. Commencing on October
1, 1999, interest shall accrue on the outstanding balance of
the Deferred Purchase Price at the "LIBOR Rate" (as such
quoted term is defined below). As used herein, the term "LIBOR
Rate" shall mean the London Interbank Offered Rate of
interest, for the shortest quoted loan period, as published in
the October 1, 1999 edition of the WALL STREET JOURNAL.
(ii) Purchaser shall pay the Deferred Purchase Price,
together with interest accrued thereon, in ten equal (except
as otherwise provided below) annual installments. The first
annual installment shall be due and payable on February
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<PAGE>
15, 2000 and the next nine annual installments shall be due
and payable on February 15 of each succeeding calendar year.
(iii) Notwithstanding anything to the contrary in
subparagraph (ii) above, if the amount calculated by
multiplying 25% TIMES "Terminal Net Cash Flow" (as such quoted
term is defined below) in any particular calendar year (the
"Accelerated Amount") is greater than the annual installment
due under subparagraph (ii) above, the Accelerated Amount
shall be due and payable on February 15 of the immediately
succeeding calendar year.
(iv) As used herein, "Terminal Net Cash Flow" for any
calendar year means the gross receipts directly related to the
operating activities of the Terminal for such period less
expenses allocable to the Terminal under generally accepted
cost accounting principles (including but not limited to debt
service payments by Purchaser related to the Purchaser Bank
Financing). Terminal Net Cash Flow shall be determined in the
reasonably exercised judgment of Purchaser's Board of
Directors, the determinations of which shall be final, binding
and conclusive as to Seller.
(v) Purchaser shall have the privilege and option,
without penalty or forfeiture, to pay the Deferred Purchase
Price or any part thereof at any time prior to its due date.
2.5 CLOSING DELIVERIES.
(a) At the Closing, against delivery of the Purchased Assets
as provided in Section 2.5(c), Purchaser shall deliver to Seller: (i)
the Purchase Price in the forms specified in Section 2.4(a), (b) and
(c) above and (ii) the other instruments required to be delivered
pursuant to Section 6.2.
(b ) At the Closing, against delivery of the Purchase Price as
outlined in Section 2.4, Seller shall deliver to Purchaser (i) title to
and possession of the Purchased Assets, and (ii) the instruments
required to be delivered pursuant to Section 6.1.
2.6 SECURITY INTEREST. In order to secure repayment of the Deferred
Purchase Price, Purchaser hereby grants, transfers and assigns to Seller a
security interest in and to the Purchased Assets. The security interest and the
rights and remedies of both Seller and Purchaser in relation thereto shall be
subject to the Wyoming Uniform Commercial Code - Secured Transactions. Seller's
security interest shall be subject and subordinate to the lien and security
interest of Community First Bank or any successor lender.
2.7 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated
among the Purchased Assets, the non-competition agreements and other items as
set forth in SCHEDULE 2.7, which schedule shall be completed by Purchaser prior
to Closing, subject to Seller's consent which will not be unreasonably withheld.
Seller and Purchaser shall make all appropriate tax filings on a basis
consistent with such allocation.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Purchaser as follows:
3.1 ORGANIZATION AND CAPACITY. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Wyoming.
Seller is (a) duly qualified to transact business as a foreign corporation and
in good standing under the laws of each jurisdiction where its ownership, lease
or operation of property or the conduct of its business requires such
qualification and (b) in compliance with all Requirements of Law, except to the
extent that the failure to be in good standing, to qualify as a foreign
corporation or to comply with such requirements would not, individually or in
the aggregate with all such other failures, have a Material Adverse Effect.
Seller has the corporate power and authority and the legal right to own and
operate its property, to lease the property it operates as lessee and to conduct
the business in which it is engaged, except to the extent the failure to have
such power, authority or legal right would not, individually or in the aggregate
with all such other failures, have a Material Adverse Effect. Seller has all
requisite corporate power and authority to enter into and deliver this Agreement
and the other agreements contemplated hereby and to perform its obligations
hereunder and thereunder. Seller has heretofore delivered to Purchaser accurate
and complete copies of its Articles of Incorporation and By-laws as currently in
effect.
3.2 AUTHORIZATION AND VALIDITY. The execution, delivery and performance
by Seller of this Agreement and the other agreements contemplated hereby and the
performance of the transactions contemplated hereby and thereby have been duly
and validly authorized by the Board of Directors of Seller, and no other
corporate action on the part of Seller is necessary for the execution, delivery
and performance of this Agreement and the other agreements contemplated hereby
and the consummation of the transactions contemplated hereby and thereby. This
Agreement and the other agreements contemplated hereby which are to be signed
have been duly executed and delivered by Seller and, assuming due authorization,
execution and delivery by Purchaser, this Agreement and the other agreements
contemplated hereby which are to be executed constitute the legally valid and
binding obligations of Seller, enforceable against Seller in accordance with
their terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
or by an implied covenant of good faith and fair dealing.
3.3 NO CONFLICT. Except as set forth in SCHEDULE 3.3, neither the
execution, delivery or performance by Seller of this Agreement and the other
agreements contemplated hereby nor the consummation of the transactions
contemplated hereby and thereby and compliance by Seller with any of the
provisions hereof or thereof will (a) require any consent, approval or notice
under, violate or result in the violation of, conflict with or result in a
breach of any provisions of, constitute a default (or an event which, with
notice or lapse of time or both, would constitute a
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<PAGE>
default) under, result in the termination of, accelerate the performance
required by or result in a right of termination or acceleration, result in the
loss of a material benefit under or result in the creation of any Lien upon any
of the Purchased Assets or the Terminal under any of the terms, conditions or
provisions of any contract of Seller or (b) violate, or result in the violation
of, any Requirement of Law.
3.4 GOVERNMENTAL CONSENTS. Except as set forth in SCHEDULE 3.4, no
consent, order or authorization of, or registration, declaration or filing with,
any Governmental Authority is required in connection with the execution,
delivery and performance of this Agreement or the other agreements contemplated
hereby or the consummation of the transactions contemplated hereby or thereby by
Seller.
3.5 OMITTED.
3.6 ABSENCE OF MATERIAL ADVERSE EFFECTS. Except as and to the extent
set forth in SCHEDULE 3.6, since December 31, 1998 there has not been any event
that individually or in the aggregate with all other events has had, or could
reasonably be expected to have, a Material Adverse Effect.
3.7 LEGAL PROCEEDINGS. Except as and to the extent described in
SCHEDULE 3.7, no litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority has been formally commenced, is pending or,
to the Knowledge of Seller, threatened by or against Seller or against any of
its properties or revenues. The foregoing includes, without limitation, actions
pending or threatened (on any basis therefor to the Knowledge of Seller)
involving the prior employment of any of Seller's employees, their use in
connection with Seller's business of any information, techniques, patents,
patent applications, copyrights, trade secrets, inventions, technology,
know-how, or other intellectual property rights allegedly proprietary to any of
their former employers, or their obligations under any agreements with prior
employers. Seller is not a party or subject to the provisions of any order or
decree of any Governmental Authority under which any obligation remains to be
performed by Seller. Except as set forth in SCHEDULE 3.7, there is no action,
suit, proceeding, arbitration or investigation by Seller currently pending or
which Seller presently intends to initiate. SCHEDULE 3.7 sets forth a brief
description of each judgment, injunction, decree, order or other determination
of an arbitrator or a court or other Governmental Authority applicable to Seller
or any of its properties which either (i) has been entered since December 31,
1995, or (ii) has continuing effect with respect to Seller or its properties,
and no such judgment, injunctive decree, order or other determination can
reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect. Seller is not in violation of any judgment, decree, injunction
or order outstanding against it. No suit, action or governmental proceeding
before any Governmental Authority has been commenced and is pending or, to the
Knowledge of Seller, threatened by any federal or state Governmental Authority
against Seller or any of its Affiliates, officers or directors seeking to
restrain, prevent or change in any respect the transactions contemplated hereby
or seeking damages in connection with any of such transactions.
3.8 COMPLIANCE WITH LAWS.
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(a) Seller is in compliance with all Requirements of Law,
holds all Permits that are material to the conduct of its business or
the ownership of its properties at the Terminal, and is in material
compliance with each such Permit, except where such failure to comply
with any such Requirements of Law, to hold any such Permits or to
comply with any such Permits could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.
(b) Seller has not received any notice from any Governmental
Authority asserting that it is not in compliance with any Requirement
of Law or any Permit.
(c) Seller has complied with any applicable bulk sales laws.
3.9 OMITTED.
3.10 TITLE AND CONDITION OF PROPERTIES.
(a) LEASED PROPERTIES. SCHEDULE 3.10(a) lists and describes briefly all
leased real property that is used or occupied by Seller at the Terminal and the
leases, subleases and agreements by which such property is used and occupied.
Except as otherwise described on SCHEDULE 3.10(a), with respect to each such
parcel of leased real property:
(i) the leases and subleases described on SCHEDULE
3.10(a) constitute all of the leases, subleases and agreements
under which Seller holds any leasehold interest in real estate
underlying or comprising a part of the Terminal;
(ii) Seller has delivered to Purchaser and its
counsel true, correct and complete copies of all of the
leases, subleases and agreements described on SCHEDULE
3.10(a);
(iii) each such lease, sublease or agreement is
legal, valid, binding, enforceable and in full force and
effect, is fully assignable to Purchaser (or Seller has
obtained the consent of the lessor to such assignment), and
will continue to be legal, valid, binding, enforceable and in
full force and effect on substantially identical terms after
the Closing;
(iv) neither Seller nor, to Seller's Knowledge, any
other party to any such lease, sublease or agreement is in
breach or default thereof, and no event has occurred which,
with notice or the lapse of time, or both, would constitute
such a breach or default or permit termination, modification
or acceleration thereof or thereunder:
(v) no party to any such lease, sublease or agreement
has repudiated any provision thereof:
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(vi) there are no disputes, oral agreements or
forbearance programs in effect as to any such lease, sublease
or agreement; and
(vii) no such lease, sublease or agreement has been
modified in any respect, except to the extent disclosed in
documents delivered to Purchaser and its counsel.
(b) OWNED PROPERTIES. SCHEDULE 3.10(b) lists and contains the
legal description of all real property that is owned by Seller and used
in connection with Seller's business at the Terminal. Except for the
Lien of Community First National Bank related to the S & L Bank Debt
(which shall be discharged at or prior to Closing), Seller owns good
and marketable title, free and clear of all Liens, to all of the real,
personal and intangible personal property and assets included within
the Purchased Assets (including the real property described on SCHEDULE
3.10(b)), rights of licensors and lessors of such Purchased Assets
which are subject to license or lease as described in SCHEDULE 3.10(a)
or SCHEDULE 3.10(b) and Liens for current Taxes not yet due and
payable. At the Closing, Seller will convey good and marketable title
to all of its real and personal property and assets included within the
Purchased Assets, free and clear of all Liens (other than rights of
licensors and lessors of such Purchased Assets which are subject to
license or lease as described in SCHEDULE 3.10(a) or SCHEDULE 3.10(b)
and Liens for current Taxes not yet due and payable for which adequate
reserves have been properly recorded). The Purchased Assets so conveyed
will include all of those assets (real, personal, tangible and
intangible) used during the twelve months prior to the Closing Date
(other than inventory or raw materials used, sold or consumed in the
ordinary course of business and worn out or obsolete fixed assets
disposed of in the ordinary course of business) and will enable
Purchaser to operate the business of the Terminal in the same manner as
operated by Seller prior to and as of the Closing Date.
(c) ALL PROPERTIES. Except as otherwise described on SCHEDULE
3.10(c), with respect to each parcel of leased or owned real property
underlying or comprising a part of the Terminal:
(i) Seller has not assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in any
fee or leasehold interest;
(ii) all buildings, improvements and other property
on the leased or owned properties have received all approvals
of governmental authorities (including certificates of
occupancy, permits and licenses) required in connection with
the operation thereof and have been operated and maintained in
accordance with all applicable legal requirements and are not
in violation of any applicable zoning, building code or
subdivision ordinance, regulation, order or law;
(iii) all buildings, improvements and other property
thereon are supplied with utilities and other services
necessary for the operation thereof
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(including gas, electricity, water, telephone, sanitary and
storm sewers and access to public roads);
(iv) there are no pending (or, to Seller's Knowledge,
threatened) condemnation proceedings, lawsuits, or other
administrative actions relating to such properties or other
matters affecting adversely the current use, occupancy, or
value of such properties;
(v) other than the documents described in SCHEDULE
3.10(a), there are no leases, subleases, licenses,
concessions, or other agreements, written or oral, granting to
any Person the right of use or occupancy of any portion of
such properties; and
(vi) no Person (other than Seller) is in possession
of such properties.
(d) CONDITION OF ASSETS. All buildings and improvements
located on property described in SCHEDULE 3.10(a) and SCHEDULE 3.10(b)
and all of Seller's machinery, equipment and other tangible personal
property and assets which are included in the Purchased Assets are in
good condition and repair in all respects, except for ordinary wear and
tear not caused by neglect, and are useable in the ordinary course of
business. The Purchased Assets include all assets necessary to conduct
Seller's businesses at the Terminal as presently conducted and all
assets which were used to conduct said businesses since the date of the
latest Financial Statements, other than inventory sold or otherwise
disposed of in the ordinary course of business to non-affiliated third
parties in accordance with past custom and practice.
3.11 INTELLECTUAL PROPERTY.
(a) SCHEDULE 3.11(a) sets forth a complete and accurate list
of all patents, patent applications, copyrights, copyright
applications, trademarks, service marks, trade names, slogans, logos,
designs, trade secrets, confidential or proprietary technical
information, designs, processes, research in progress and inventions
(whether patentable or unpatentable), technology, know-how and computer
software used by Seller in connection with the Terminal or the
Purchased Assets (collectively, the "Intellectual Property"), including
a complete and accurate list of all parties from which Seller licenses
the foregoing. Except as set forth in SCHEDULE 3.11(a), Seller owns or
has valid and transferable licenses to use all of the Intellectual
Property in connection with the Terminal and the Purchased Assets.
(b) Seller is the sole and exclusive owner or authorized
licensee of the Intellectual Property, free and clear of all Liens and
free of all licenses except those set forth in SCHEDULE 3.11(a). All of
the Intellectual Property owned by Seller is valid and subsisting and
in full force and effect. No registered Intellectual Property has
lapsed, expired or been abandoned or cancelled, or is subject to any
pending or, to the Knowledge of Seller, threatened opposition or
cancellation proceeding before the United
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States Patent and Trademark Office, the United States Copyright Office
or any other registration authority. All registrations and applications
set forth in SCHEDULE 3.11(a) are in the name of Seller;
(c) Except as set forth in SCHEDULE 3.11(a), (i) neither the
conduct of Seller's business nor the manufacture, marketing, licensing,
sale, distribution or use of its products or services infringes upon
the proprietary rights of any third party, and (ii) to the Knowledge of
Seller, there are no infringements of the Intellectual Property by any
third party. Except as set forth in SCHEDULES 3.11(a) AND 3.11(c),
there are no claims pending or, to the Knowledge of Seller, threatened
(A) alleging that Seller's business as currently conducted or as
presently contemplated to be conducted infringes upon or constitutes an
unauthorized use or violation of the proprietary rights of any third
party; or (B) alleging that the Intellectual Property is being
infringed by any third party; or (C) challenging the ownership,
validity or enforceability of the Intellectual Property.
(d) Except as set forth in SCHEDULE 3.11(d), all consents,
filings, and authorizations by or with Governmental Authorities or
third parties necessary with respect to the consummation of the
transactions contemplated hereby as they may affect the Intellectual
Property, have been obtained;
(e) Seller has not entered into any consent, indemnification,
forbearance to sue, settlement agreement or cross-licensing arrangement
with any person relating to the Intellectual Property or the
intellectual property of any third party other than as may be contained
in the license agreements listed in SCHEDULE 3.11(a) or as set forth in
SCHEDULE 3.11(c);
(f) Seller is not, nor will it be as a result of the execution
and delivery of this Agreement or the performance of its obligations
under this Agreement, in breach of any license, sublicense or other
agreement relating to the Intellectual Property;
(g) No former or present employees, officers or directors of
Seller hold any right, title or interest directly or indirectly, in
whole or in part, in or to any of the Intellectual Property;
3.12 EMPLOYEE BENEFIT PLANS. Seller does not maintain, and has not
maintained during the preceding three-year period, any "employee
benefit plan" (within the meaning of Section 3(3) of ERISA (including
without limitation multiemployer plans within the meaning of ERISA
Section 3(37)), stock purchase, stock option, severance, employment,
change-in-control, fringe benefit, collective bargaining, bonus,
incentive, deferred compensation or other employee benefit plans,
agreements, programs, policies or other arrangements, whether or not
subject to ERISA (including any funding mechanism therefor now in
effect or required in the future as a result of the transaction
contemplated by this Agreement or otherwise), whether formal or
informal, oral or written, legally binding or not, under which any
employee or former employee of Seller has any present
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or future right to benefits or under which Seller has any present or
future liability ("Seller Plans").
3.13 TAXES. Except as set forth in SCHEDULE 3.13:
(a) Seller has timely filed, or will file or cause to be
timely filed, all material Tax Returns required by applicable law to be
filed by it prior to or as of the Closing Date. All such Tax Returns
are or will be true, complete and correct in all material respects.
(b) Seller has paid, or where payment is not yet due, has
established, an adequate accrual for the payment of all material Taxes
due with respect to any period ending prior to or as of the Closing
Date.
(c) No Audit by a Tax Authority is pending or, to the
Knowledge of Seller, threatened with respect to any material Taxes due
from Seller. There are no outstanding waivers extending the statutory
period of limitation relating to the payment of material Taxes due from
Seller for any taxable period ending prior to the Closing Date which
are expected to be outstanding as of the Closing Date.
(d) No issue has been raised by any Tax Authority in any Audit
of Seller that, if raised with respect to any other period not so
audited, could be expected to result in a proposed deficiency for any
period not so audited. Further, no deficiency or adjustment for any
Taxes has been threatened, proposed, asserted or assessed against
Seller.
(e) Seller is not bound by and is not a party to any agreement
related to Taxes, including any agreement with any Tax Authority that
can affect a Tax period commencing after the Closing Date.
(f) There is no contract or agreement, plan or arrangement by
Seller covering any person that, individually or collectively, could
give rise to the payment of any amount that would not be deductible by
Seller by reason of Section 280G of the Code, as now in effect.
3.14 ENVIRONMENTAL LAWS. Except as set forth in SCHEDULE 3.14, with
respect to the Terminal, the Purchased Assets and Seller's business operations
at the Terminal: (a) Seller complies and has complied with all Environmental
Laws, and possesses and complies with and has possessed and complied with all
Environmental Permits required under such laws except where any non-compliance
or failure to possess any Environmental Permit has not had or could not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect; (b) there are no past or present, and to the Knowledge of
Seller, no anticipated future events, conditions, circumstances, practices,
plans or legal requirements that could reasonably be expected to result in
liability under applicable Environmental Laws, prevent, or reasonably be
expected to increase the burden on Seller, complying with applicable
Environmental Laws or of obtaining, renewing, or complying with applicable
Environmental Permits required under such laws; (c) there are and have been no
Materials of Environmental Concern or other conditions at
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the Terminal, except for such liabilities which, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect;
and (d) there are no underground storage tanks that are subject to regulation
under the federal Resource Conservation and Recovery Act, or any equivalent
state law on or under the Terminal. Seller has provided to Purchaser true and
complete copies of all Environmental Reports in its possession or control
related to the Terminal or the Purchased Assets.
3.15 AFFILIATE TRANSACTIONS. Except as disclosed on SCHEDULE 3.15, no
transactions (including without limitation the provision of any services or the
sale of any goods) since December 31, 1995 and no proposed transactions between
Seller, on the one hand, and any shareholder or other Affiliates of Seller on
the other hand, other than employment agreements or arrangements and employee
benefit plans had, or could reasonably be expected to have, a Material Adverse
Effect on the Terminal or the Purchased Assets.
3.16 BROKERS, FINDERS, ETC. Seller has not employed, nor is it subject
to the valid claim of, any broker, finder or other financial intermediary or
incurred any liability that would be payable by Seller for any brokerage,
finder's or other fees or commissions in connection with the transaction
contemplated by this Agreement.
3.17 CONTRACTS AND COMMITMENTS. Except as set forth in SCHEDULE 3.17,
with respect to, related to or arising from the Purchased Assets, the Terminal
or Seller's business operations at the Terminal:
(a) Seller does not have any agreements, contracts,
commitments, or restrictions that are material to its businesses,
prospects, financial condition, working capital, assets, liabilities
(absolute, accrued, contingent or otherwise), reserves or operations or
that require the making of any charitable contribution;
(b) There are no purchase contracts or commitments under which
Seller is required to pay in excess of $10,000, which continue for a
period of more than 12 months or which are in excess of the normal,
ordinary, and usual requirements of business or at any excessive price;
(c) There are no outstanding sales contracts, commitments or
proposals of Seller that call for the receipt of more than $10,000,
that continue for a period of more than 12 months, or that Seller
believes will result in any loss in excess of $10,000 to Seller upon
completion or performance thereof;
(d) Seller does not have any outstanding contracts with
officers, employees, agents, consultants, advisors, salesmen, sales
representatives, distributors or dealers that are not cancelable by it
on notice of not longer than 30 days and without liability, penalty, or
premium or any agreement or arrangement providing for the payment of
any bonus or commission based on sales or earnings;
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(e) Seller is not in default, nor is there any basis for any
valid claim of default, under any material contract made or obligation
owed by it;
(f) Seller is not restricted by agreement from carrying on its
business anywhere in the world;
(g) Seller is not under any material liability or obligation
with respect to the return of inventory or merchandise in the
possession of wholesalers, distributors, retailers or other customers;
(h) Except as set forth in SCHEDULE 3.17, none of the
officers, directors or shareholders of Seller has any interest in any
property, real or personal, tangible or intangible, including without
limitation the Intellectual Property, that is used in the business of
Seller.
3.18 LABOR RELATIONS. As of the date hereof, there is no strike or
other labor dispute pending against Seller. Seller is not bound by or subject to
(and none of its properties or assets is bound by or subject to) any written or
oral, express or implied, contract, commitment or arrangement with any labor
union, and no labor union has requested or, to the best Knowledge of Seller, has
sought to represent any of the employees, representatives or agents of Seller,
nor is Seller aware of any labor organization activity involving its employees.
To the Knowledge of Seller, no officer or key employee of Seller working at or
having substantial responsibility or authority over Seller's operations at the
Terminal has any plans to terminate his or her employment with Seller.
3.19 OMITTED.
3.20 INSURANCE. Seller has provided Purchaser with copies of all
policies of fire, liability, workmen's compensation and other forms of insurance
owned or held by Seller with respect to Seller's operations at the Terminal or
providing coverage for events, occurrences, risks, damages or liabilities
related to or arising from Seller's operations at the Terminal. Except as set
forth in SCHEDULE 3.20, such policies are in adequate amounts and cover risks
customarily insured against by businesses of the type operated by Seller. All
such policies are in full force and effect, all premiums with respect thereto
covering all periods up to and including the Closing will have been paid, and no
notice of cancellation or termination has been received with respect to any such
policy. Such policies will remain in full force and effect through the
respective dates set forth in SCHEDULE 3.20 without the payment of additional
premiums; and will not in any way be affected by, or terminate or lapse by
reason of, the transactions contemplated by this Agreement. All of such policies
have been issued by reputable insurance companies actively engaged in the
insurance business. All pending claims, if any, made against Seller related to
or arising from Seller's operations at the Terminal that are covered by
insurance have been disclosed to and accepted by the appropriate insurance
companies and, to the best Knowledge of Seller is being defended by such
insurance companies and are described in SCHEDULE 3.20 and no claims have been
denied coverage during the last three years. During the last three years, no
such policy of Seller has been cancelled by the issuer thereof, nor have the
premiums on any
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such policy been increased by more than 20% over the prior period, except as set
forth in SCHEDULE 3.20. Seller has not been refused any insurance with respect
to its assets or operations at the Terminal, nor has its coverage been limited,
by any insurance carrier to which it has applied for any such insurance or with
which it has carried insurance during the last three years.
3.21 CUSTOMERS. SCHEDULE 3.21 sets forth a list of Seller's twenty (20)
largest customers with respect to its operations at the Terminal in terms of
gross revenues. Except as set forth in SCHEDULE 3.21, since December 31, 1998,
there have not been any material adverse changes in the business relationships
of Seller with any of the customers named therein. SCHEDULE 3.21 lists the ages
and amounts of all accounts and notes more than 90 days past due and uncollected
at February 28, 1999.
3.22 OMITTED.
3.23 PERMITS. SCHEDULE 3.23 contains a complete listing and summary
description of all Permits used by Seller in the conduct of its business at the
Terminal. Except as indicated in SCHEDULE 3.23, Seller owns or possesses all
right, title and interest in and to all of the Permits that are necessary to own
and operate the Terminal and the Purchased Assets and to conduct Terminal
operations as presently constituted, including, without limitation, all Permits
required under any federal, state or local law relating to public health and
safety, employee health and safety, pollution or protection of the environment.
Seller is in compliance with the terms and conditions of such Permits and has
received no notices that it is in violation of any of the terms or conditions of
such Permits. Seller has taken all necessary action to maintain such Permits. No
loss or expiration of any such Permit is threatened, pending or reasonably
foreseeable other than expiration in accordance with the terms thereof. Except
as indicated in SCHEDULE 3.23, all Permits that are required to own and operate
the Purchased Assets and to carry on the businesses at the Terminal as now
conducted will have been transferred by Seller to Purchaser on terms and
conditions no less favorable to Purchaser than they are to Seller.
3.24 REPAIRS, RETURNS AND ALLOWANCES. Seller is not aware of any facts
that could cause Seller to suffer repairs, returns or allowances with respect to
products sold or proposed to be sold by Seller at rates higher than past
experience.
3.25 ABSENCE OF CERTAIN PAYMENTS. To the Knowledge of Seller, neither
Seller nor any of its Affiliates nor any of its respective officers, directors,
employees or agents or other people acting on behalf of any of them have (i)
engaged in any activity prohibited by the United States Foreign Corrupt
Practices Act of 1977 or any other similar law, regulation, decree, directive or
order of any other country and (ii), without limiting the generality of the
preceding clause (i), used any corporate or other funds for unlawful
contributions, payments, gifts or entertainment, or made any unlawful
expenditures relating to political activity to government officials or others.
Neither Seller nor any of its Affiliates or any of the respective directors,
officers, employees or agents or other Persons acting on behalf of any of them,
has accepted or received any unlawful contributions, payments, gifts or
expenditures.
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3.26 PRODUCTS; PRODUCT WARRANTIES.
(a) Except as set forth in SCHEDULE 3.26, all products
processed at the are sold or licensed by Seller pursuant to (i)
Seller's disclaimer of all warranties, express or implied, including
those of merchantability and fitness for a particular purpose; (ii)
Seller's disclaimer of all consequential damages arising from the use
or possession of the product, regardless of whether such liability is
based in tort, contract or otherwise; and (iii) language stating that
if the foregoing disclaimers are held to be unenforceable, Seller's
maximum liability shall not exceed the amount of money(ies) paid for
such product(s).
(b) SCHEDULE 3.26 contains a true and complete list of (i) all
products manufactured, marketed or sold by Seller that have been
recalled or withdrawn (whether voluntarily or otherwise) at any time
during the past four years and (ii) all proceedings (whether completed
or pending) at any time during the past three years seeking the recall,
withdrawal, suspension or seizure of any product sold by Seller.
3.27 REAL PROPERTY HOLDING CORPORATION. Seller is not and has never
been a United States real property holding corporation as defined in Section 897
of the Code.
3.28 PROJECTIONS. Seller has previously prepared and delivered to
Purchaser Seller's financial performance projections related to the operation of
the Purchased Assets at the Terminal through the year 1999 (the "Projections")
(a true and complete copy of which is attached hereto as EXHIBIT 3.28). Seller
acknowledges that the Projections have been material to Purchaser in its
decision to enter into this Agreement and to purchase the Purchased Assets
hereunder. Seller believes that the financial projections and other estimates
contained in the Projections are based on reasonable expectations at the time
such projections and estimates were made; and Seller believes that Purchaser is
justified in relying thereon. Seller has no reason to believe, and do not
believe, that any assumptions of fact underlying the Projections are
unreasonable, untrue or false.
3.29 CONDUCT OF BUSINESS. Seller has conducted its business and
operations in strict compliance with the terms, conditions and limitations set
forth in Paragraph 7 of that certain Letter of Intent dated as of January 27,
1999, a copy of which is attached hereto on EXHIBIT 3.29.
3.30 LEGAL AND TAX ADVICE. Seller has consulted with its own legal and
tax advisors as to the legal, financial and tax consequences related to or
arising from the transactions contemplated by this Agreement. Seller has not
received, obtained or relied upon any legal or tax advice from Purchaser or
Purchaser's attorney, accountants, or advisors.
3.31 FULL DISCLOSURE. No representation or warranty by Seller in this
Agreement and no statement contained in any document schedule or certificate
furnished or to be furnished by Seller to Purchaser or any of its
representatives pursuant to the provisions hereof, or in connection with the
transactions contemplated hereby, contains as of the date hereof or will contain
as of the Closing, any untrue statement of material fact or omits or will omit
to state any
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material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading. There is,
to the Knowledge of Seller, no fact that does have or could reasonably be
expected to have a Material Adverse Effect that has not been set forth in this
Agreement or the Schedules and Exhibits hereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller as follows:
4.1 DUE ORGANIZATION AND AUTHORITY OF PURCHASER. Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Utah and has all requisite power and authority to enter into and
deliver this Agreement and the other agreements contemplated hereby and perform
its obligations hereunder and thereunder. Purchaser has heretofore delivered to
Seller accurate and complete copies of the Articles of Incorporation of
Purchaser as currently in effect.
4.2 AUTHORIZATION AND VALIDITY OF AGREEMENT. The execution, delivery
and performance by Purchaser of this Agreement and the other agreements
contemplated hereby and the performance by it of the transactions contemplated
hereby and thereby have been duly and validly authorized by the Board of
Directors of Purchaser, and no other action on the part of Purchaser is
necessary for the execution, delivery and performance by Purchaser of this
Agreement and the other agreements contemplated hereby and the consummation by
it of the transactions contemplated hereby and thereby. This Agreement and the
other agreements contemplated hereby which are to be executed by Purchaser have
been duly and validly executed and delivered by Purchaser and, assuming due
authorization, execution and delivery by Seller, this Agreement and such other
agreements constitute legally valid and binding agreements of Purchaser,
enforceable against it in accordance with their terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium and other
similar laws affecting creditors' rights generally, by general equitable
principles (regardless of whether such enforceability is considered a proceeding
in equity or at law) or by an implied covenant of good faith and fair dealing.
4.3 NO CONFLICT. Neither the execution, delivery or performance by
Purchaser of this Agreement or the other agreements contemplated hereby nor the
consummation by it of the transactions contemplated hereby and thereby and
compliance by Purchaser with any of the provisions hereof or thereof will (a)
violate, or result in the violation of, any Requirement of Law; (b) require any
consent, approval or notice under, violate or result in violation of, conflict
with or result in a breach of any provisions of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination or acceleration or result in the loss of
a material benefit under any of the provisions of any organizational or
governing documents or contract of Purchaser.
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4.4 GOVERNMENTAL CONSENTS. No consent, order or authorization of, or
registration, declaration or filing with, any Governmental Authority is required
in connection with the execution, delivery and performance of this Agreement or
the consummation of the transactions contemplated hereby by Purchaser, except
for such consents, authorizations, filings, approvals and registrations that, if
not obtained or made, would not, individually or in the aggregate, have a
Material Adverse Effect.
4.5 BROKERS, FINDERS, ETC. Purchaser has not employed, nor is it
subject to the valid claim of, any broker, finder or other financial
intermediary or incurred any liability that would be payable by Seller for any
brokerage, finders or other fees or commissions in connection with the
transaction contemplated by this Agreement.
4.6 FULL DISCLOSURE. No representation or warranty by Purchaser in this
Agreement and no statement contained in any document, schedule or certificate
furnished or to be furnished by Purchaser to Seller or any of its
representatives pursuant to the provisions hereof, or in connection with the
transactions contemplated hereby, contains as of the date hereof or will contain
as of the Closing, any untrue statement of material fact or omits or will omit
to state any material fact necessary in order to make the statements herein or
therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE V
COVENANTS
5.1 NAMES. From and after the Closing Date, Seller shall not use any
name, tradename or trademark in its business which is similar to Crown Energy,
Crown Asphalt or any other name currently used by Purchaser or its Affiliates.
5.2 SELLER'S AND PRINCIPAL'S NON-COMPETITION AND NON-SOLICITATION. As a
substantial inducement to Purchaser to enter into and perform its obligations
under this Agreement, Seller and each Principal agree, severally and not
jointly, that:
(a) For a period of five (5) years after the Closing Date (the
"Non-Competition Period"), neither Seller nor Principal shall, without
the prior written consent of Purchaser, anywhere in the States of
Montana, North Dakota, South Dakota, Wyoming, Colorado, Utah and Idaho,
directly or indirectly, either for itself or himself or for any other
Person, own, operate, manage, control, engage in, participate in,
invest in, permit its or his name to be used by, act as consultant or
advisor to, render services for (alone or in association with any
Person) or otherwise assist in any manner, any Person that engages in
or owns, invests in, operates, manages or controls any venture or
enterprise which directly or indirectly engages or proposes to engage
in the processing, blending, sale or distribution of asphalt products
or the operation of an asphalt terminal Nothing herein shall prohibit
Seller or Principal from being a passive owner of not more than 5% of
the outstanding stock of any class of securities of a publicly traded
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corporation engaged in such business, so long as it or he has no active
participation in the business of such corporation.
(b) During the Non-Competition Period, neither Seller nor
Principal will directly or indirectly offer employment to or hire (in
any capacity) any former employee of Seller who is hired by Purchaser
without the prior written consent of Purchaser.
(c) If, at the time of enforcement of this Section 5.2, a
court shall hold that the duration, scope, geographic area or other
restrictions stated herein are unreasonable under circumstances then
existing, the parties agree that the maximum duration, scope,
geographic area or other restrictions deemed reasonable under such
circumstances by such court shall be substituted for the stated
duration, scope, geographic area or other restrictions.
(d) Seller and Principal each recognize and affirm that in the
event of breach by it of any of the provisions of this Section 5.2,
money damages would be inadequate and Purchaser would have no adequate
remedy at law. Accordingly, Seller and Principal agree that Purchaser
shall have the right, in addition to any other rights and remedies
existing in its favor, to enforce its rights and Seller's and
Principal's obligations under this Section 5.2 not only by an action or
actions for damages, but also by an action or actions for specific
performance, injunctive and/or other equitable relief in order to
enforce or prevent any violations (whether anticipatory, continuing or
future) of the provisions of this Section 5.2 (including, without
limitation, the extension of the Non-Competition Period by a period
equal to (i) the length of the violation of this Section 5.2 plus (ii)
the length of any court proceedings necessary to stop such violation).
Seller and each Principal hereby waive any requirement that Purchaser
post a bond or other security as a precondition to any such suit. In
the event of a breach or violation by Seller or Principal of any of the
provisions of this Section 5.2, the running of the Non-Competition
Period (but not of Seller's obligations under this Section 5.2) shall
be tolled with respect to Seller or Principal, as the case may be,
during the continuance of any actual breach or violation.
5.3 COMMUNICATIONS. All mail and other communications received by
Seller with respect to the Terminal, the Purchased Assets or the business
operations at the Terminal at any time after the Closing Date shall be promptly
turned over to Purchaser.
5.4 CONFIDENTIALITY. After the Closing, Seller and its shareholders,
officers, directors, employees and agents shall continue to maintain the
confidentiality of all information, documents and materials relating to
Seller's business at the Terminal, including all such materials which remain
in the possession of Seller, except to the extent disclosure of any such
information is required by law or authorized by Purchaser or reasonably
occurs in connection with disputes over the terms of this Agreement, and
Purchaser shall maintain the confidentiality of all information, documents
and materials relating to Seller (other than that relating to the Purchased
Assets) which Purchaser has obtained in connection with this Agreement or
with the transactions contemplated herein, except to the extent disclosure of
any such information is
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<PAGE>
required by law or authorized by Seller or reasonably occurs in connection
with disputes over the terms of this Agreement. In the event that any party
reasonably believes after consultation with counsel that it is required by
law to disclose any confidential information described in this Section 5.4,
the disclosing party will (a) provide the other party with prompt notice
before such disclosure in order that any party may attempt to obtain a
protective order or other assurance that confidential treatment will be
accorded such confidential information, and (b) cooperate with the other
party in attempting to obtain such order or assurance. The provisions of this
Section 5.4 shall not apply to any information, documents or materials which
are, as shown by appropriate written evidence, in the public domain or, as
shown by appropriate written evidence, shall come into the public domain,
other than by reason of breach by the applicable party bound hereunder or its
Affiliates.
5.5 TITLE COMMITMENTS. [Omitted]
5.6 PURCHASER BANK FINANCING AND GUARANTEES. On the Closing Date,
Purchaser shall obtain the Purchaser Bank Financing on terms and conditions
acceptable to Purchaser, as borrower, and Community First National Bank of
Casper, Wyoming, as lender, each in their sole discretion, and further provided
that (a) the repayment term of any such Purchaser Bank Financing shall not
exceed fifteen years, (b) Purchaser shall have no obligation to incur any
indebtedness or liability in a principal amount in excess of $1,800,000 or
bearing an interest rate in excess of one hundred basis points over the prime
rate of interest, (c) other than the payment of the proceeds of such Purchaser
Bank Financing to Community First National Bank as described in Section 2.4(b),
Purchaser shall have no further obligation to pay, discharge or satisfy the S &
L Bank Debt, and (d) upon closing and funding of the Purchaser Bank Financing,
Community First National Bank shall release any Liens it has or may have against
the Purchased Assets (including, but not limited to, the release of all Liens
related to or arising from the S & L Bank Debt), subject, however, to any new
Liens which may be created by the Purchaser Bank Financing, (e) the Purchaser
Bank Financing shall permit any Affiliate of Purchaser to extend working capital
or inventory financing to Purchaser on commercially acceptable terms and
conditions and otherwise permit the reasonably anticipated operations and
financing activities of Purchaser. Seller and each Principal shall cooperate
with and assist Purchaser with respect to the modification, amendment,
satisfaction, replacement or other restructuring of the S & L Bank Debt and the
closing and funding of the Purchaser Bank Financing as contemplated herein.
ARTICLE VI
DELIVERIES AT CLOSING
6.1 DOCUMENTS TO BE DELIVERED BY SELLER. Purchaser's obligation to
close the purchase and sale of the Purchased Assets and to consummate the
Purchaser Bank Financing under this Agreement shall be subject to the condition
preccdent that, on or prior to the Closing Date, Seller shall have delivered to
Purchaser, at Seller's expense, each of the following:
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<PAGE>
(a) A copy of the resolutions duly adopted by the Board of
Directors and shareholders (if legally required) of Seller, authorizing
the execution, delivery and performance by Seller of this Agreement and
the other agreements contemplated hereby, certified by the Secretary or
an Assistant Secretary of Seller;
(b) A certificate of the Secretary or an Assistant Secretary
of Seller as to the incumbency and signature of the officers of Seller
executing this Agreement and any other agreements and certificates
contemplated hereby;
(c) Such instruments of sale, transfer, assignment, conveyance
and delivery (including, without limitation, all assignments of
Intellectual Property and Permits), in form and substance satisfactory
to counsel for Purchaser, as are required in order to transfer to
Purchaser good and marketable title to the Purchased Assets, free and
clear of all Liens;
(d) With respect to each of the real property leases listed in
SCHEDULE 3.10(a) and included in the Purchased Assets, an estoppel
letter from the landlords listed in said Schedule, in form and content
reasonably satisfactory to Purchaser, stating the following: (a) the
copy of the lease or sublease, as applicable, attached to the estoppel
letter is a true, correct and complete copy of the lease or sublease,
and represents the entire agreement between the landlord and the
applicable Seller; (b) to landlord's knowledge, Seller is not in breach
or default under the lease or sublease and no event has occurred which,
with notice or the passage of time, would constitute a breach or
default, or permit termination, modification or acceleration under the
lease or sublease; (c) the landlord has not repudiated any provision of
the lease or sublease; (d) there are no disputes, oral agreements or
forbearance programs in effect as to the lease or sublease; (e) the
amount of rent due under the lease and the date through which rent has
been paid; (f) to landlord's knowledge, Seller has satisfied all
obligations as tenant under the lease or sublease; and (g) such other
matters as Purchaser may reasonably request;
(e) Such instruments as are necessary to evidence the release
of all Liens on the Purchased Assets;
(f) Consents of any Governmental Authority or other third
party under any material contracts, leases, licenses and permits of
Seller to the extent necessary for the operation of the businesses at
the Terminal or required for the consummation of the transactions
contemplated by this Agreement.
(g) Such instruments as are necessary to evidence that Seller
has complied with any applicable bulk sales laws.
(h) Such instruments as are necessary to evidence the transfer
of the Permits to Purchaser.
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<PAGE>
(i) Such other documents or instruments as Purchaser may
reasonably request to effect the transactions contemplated hereby.
6.2 DOCUMENTS TO BE DELIVERED BY PURCHASER. Seller's obligation to
close the purchase and sale of the Purchased Assets under this Agreement shall
be subject to the condition preccdent that, on or prior to the Closing Date,
Purchaser will have delivered to Seller, at Purchaser's expense, each of the
following:
(a) A copy of the resolutions duly adopted by Purchaser's
Board of Directors authorizing the execution, delivery and performance
by Purchaser of this Agreement and the other agreements contemplated
hereby, certified by the Secretary or an Assistant Secretary of
Purchaser;
(b) A copy of the Articles of Incorporation of Purchaser; and
(c) Such other documents or instruments as Seller may
reasonably request to effect the transactions contemplated hereby.
ARTICLE VII
INDEMNIFICATION
7.1 INDEMNIFICATION BY SELLER. Subject to the other provisions of this
Article VII, Seller shall indemnify, defend and hold harmless Purchaser and its
successors, assigns and Affiliates and the agents and employees of any of them
(collectively, the "Purchaser Parties") from and against any and all costs,
expenses, losses, damages and liabilities (including, without limitation,
attorneys' fees and expenses) ("Damages") suffered by any of the Purchaser
Parties to the extent resulting from, arising out of, or incurred with respect
to, or (in the case of claims asserted against any Purchaser Party by a third
party) alleged to result from, arise out of or have been incurred with respect
to, (i) any breach of any representation or warranty of Seller contained in this
Agreement, (ii) any breach of any covenant of Seller or any Principal contained
in this Agreement or in any agreements, covenants or instruments delivered at
Closing, or (iii) any liability or obligation of any kind or nature of Seller,
whether or not related to the Terminal or the Purchased Assets (other than the
Assumed Liabilities), or (iv) the operation or ownership of the Terminal or the
Purchased Assets prior to the Closing.
7.2 INDEMNIFICATION BY PURCHASER. Subject to the other provisions of
this Article VII, Purchaser shall indemnify, defend and hold harmless Seller and
its successors, assigns and Affiliates and the agents and employees of any of
them (collectively, the "Seller Parties") from and against any Damages suffered
by any of the Seller Parties resulting from, arising out of, or incurred with
respect to, or (in the case of claims asserted against Seller Party by a third
party) alleged to result from, arise out of or have been incurred with respect
to, (i) any breach of any representation or warranty of Purchaser contained in
this Agreement, (ii) any breach of any covenant of Purchaser contained in this
Agreement requiring performance after the Closing Date,
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<PAGE>
or (iii) the assertion against Seller Party of any liability or claim against a
Seller Party relating to any Assumed Liability.
7.3 NOTICE AND RESOLUTION OF CLAIM.
(a) An indemnified party under this Agreement will promptly
give written notice to the indemnifying party after obtaining knowledge
of: (i) any claim the indemnified party has against the indemnifying
party not involving a third party claim or litigation; or (ii) any
third party claim or litigation against the indemnified party as to
which recovery may be sought against the indemnifying party because of
the indemnity set forth in Section 7.1 or 7.2, specifying in reasonable
detail the claim or litigation and the basis for indemnification;
provided that the failure of the indemnified party promptly to notify
the indemnifying party of any such matter shall not release the
indemnifying party, in whole or in part, from its obligations under
this Article VII except to the extent the indemnified party's failure
to so notify actually prejudices the indemnifying party's ability to
defend against such third party claim or litigation. If such claim for
indemnity arises from the claim or litigation of a third party, the
indemnified party shall permit the indemnifying party to assume the
defense of any such claim, litigation or any litigation resulting from
such claim.
(b) If the indemnifying party assumes the defense of any such
third party claim or litigation, the obligations of the indemnifying
party under this Agreement shall include taking all steps necessary in
the investigation, defense or settlement of such claim or litigation
(including the retention of legal counsel) and holding the indemnified
party harmless from and against any and all losses caused by or arising
out of any settlement approved by the indemnifying party or any
judgment in connection with such claim or litigation. The indemnifying
party shall not, in the defense of such claim or litigation, consent to
entry of any judgment (except with the written consent of the
indemnified party), or enter into any settlement (except with the
written consent of the indemnified party): (i) that does not include as
an unconditional term thereof the giving by the claimant or the
plaintiff to the indemnified party a complete release from all
liability in respect of such claim or litigation; or (ii) the effect of
which is to permit any injunction, declaratory judgment, other order or
other equitable relief to be entered, directly or indirectly, against
any indemnified party. The indemnifying party shall permit the
indemnified party to participate in such defense or settlement through
counsel chosen by the indemnified party, with the fees and expenses of
such counsel borne by the indemnified party.
(c) Failure by the indemnifying party to notify the
indemnified party of its election to assume the defense of any such
claim or litigation by a third party within thirty (30) days after
notice thereof has been given to the indemnifying party shall be deemed
a waiver by the indemnifying party of its right to assume the defense
of such claim or litigation. If the indemnifying party does not assume
the defense of such claim or litigation by a third party, the
indemnified party may defend or settle such claim or
26
<PAGE>
litigation in such manner as the indemnified party may deem appropriate
and may settle such claim or litigation on such terms as it may deem
appropriate.
7.4 OFFSET. Purchaser shall be entitled to offset against any sums
otherwise payable to Seller, the amount of any and all Damages suffered by
Purchaser with respect to which Purchaser is indemnified pursuant to Section
7.1.
ARTICLE VIII
MISCELLANEOUS
8.1 EXPENSES. Whether or not the transactions contemplated hereby are
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such expenses.
8.2 ADDITIONAL AGREEMENTS. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, as soon as reasonably
practicable, the transactions contemplated by this Agreement. In case at any
time after the Closing Date any further action is necessary, proper or advisable
to carry out the purposes of this Agreement, as soon as reasonably practicable,
each party to this Agreement shall take, or cause its proper officers and/or
directors to take, all such necessary action.
8.3 TRANSFER TAXES. Seller shall pay, or cause to be paid, all transfer
Taxes and fees, recordation or similar Taxes or fees, deed, stamp or other
Taxes, recording charges, fees, or other similar cost or expense of any kind
required in connection with the effectuation of the transactions contemplated by
this Agreement, whether such Tax or fee is imposed on Purchaser, Seller or
others.
8.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties made by the parties in this Agreement, including
the Schedules and Exhibits hereto and the certificates delivered in accordance
herewith (insofar as the Schedules, Exhibits and such certificates relate to
such representations and warranties) shall survive the Closing for a period of
three (3) years after the Closing; PROVIDED, HOWEVER, that the representations
and warranties contained in Section 3.13 shall survive the Closing and shall
remain in full force and effect through the period of any statute of limitations
applicable to such Tax matters, and the representations and warranties contained
in Sections 3.1, 3.2 and 3.10 shall survive the Closing and shall remain in full
force and effect indefinitely.
8.5 EMPLOYEES. Seller shall terminate the employment of all of its
employees who work at the Terminal, or shall reassign such employees to other
jobs in Seller's remaining operations, immediately prior to the Closing.
Purchaser shall not assume any Seller Plan, and Purchaser shall not assume any
liability or obligation of Seller to any Person under any Seller
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Plan. Nothing contained in this Agreement shall (i) restrict or otherwise
inhibit Purchaser's rights to terminate the employment of any employees on or
after the Closing Date or (ii) be construed or interpreted to restrict
Purchaser's right or authority to amend or terminate (to the extent permitted by
applicable law and contractual obligations) any employee benefit plans, policies
or programs of Purchaser.
8.6 NOTICES. Any notice, request, consent, approval or other document,
instrument or communication that may be required or permitted to be delivered or
served hereunder shall be effective upon delivery and shall be in writing and
may be personally delivered, mailed by courier, mailed by United States
certified or registered mail, return receipt requested, postage pre-paid, or
sent by facsimile and confirmed by telephone as follows (until notice of a
change thereof is given as provided herein):
if to Purchaser, to:
Crown Asphalt Products Company
215 South State Street, Suite 650
Salt Lake City, Utah 84111
Attention: Jay Mealey
Telephone: (801) 537-5610
Facsimile: (801) 537-5609
with a copy to:
Ray, Quinney & Nebeker
79 South Main Street, 4th Floor
Salt Lake City, Utah 84111
Attention: Lorin E. Patterson
Telephone: (801) 323-3374
Facsimile: (801) 532-7543
if to Seller, to:
S & L Industrial
P.O. Box 126
Cowley, WY 82420
Attention: David Rael
Telephone: (307) 548-2242
Facsimile: (307) 548-2678
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<PAGE>
with a copy to:
M. Scott McColloch
P.O. Box 111
Greybull, WY 82426
Telephone: (307) 765-9428
Facsimile: (307) 765-2271
8.7 INTERPRETATION. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.8 NO THIRD PARTY BENEFICIARIES. Nothing herein express or implied
shall confer upon any third party any rights or remedies, including without
limitation any right to employment, or continued employment for any specified
period, of any nature or kind under or by reason of this Agreement.
8.9 AMENDMENT AND WAIVER. This Agreement and the Schedules and Exhibits
hereto may not be amended or waived except by an instrument or instruments in
writing signed and delivered on behalf of each of the parties hereto. No course
of dealing between or among any persons having any interest in this Agreement
will be deemed effective to modify, amend or discharge any part of this
Agreement or any rights or obligations of any person under or by reason of this
Agreement. No waiver of any of the provisions of this Agreement shall be deemed
or shall constitute, a waiver of any other provisions, whether or not similar,
nor shall any waiver constitute a continuing waiver.
8.10 EXTENSION OR WAIVER. At any time prior to the Closing Date, any
party hereto which is entitled to the benefits hereof may (a) extend the time
for the performance of any of the obligations or other acts of the other party;
(b) waive any inaccuracy in the representations and warranties of the other
party contained herein or in any Schedule and Exhibit hereto or in any document
delivered pursuant hereto; and (c) waive compliance with any of the agreements
of the other parties hereto or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed and delivered on behalf of such
party.
8.11 ENTIRE AGREEMENT. This Agreement (including the Schedules,
Exhibits, documents and instruments referred to herein) constitute the entire
agreement and supersede all other prior agreements and understandings, both
written and oral, among the parties hereto with respect to the subject matter
hereof.
8.12 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of, and be binding upon, the parties hereto and their successors and permitted
assigns. Notwithstanding the foregoing, this Agreement shall not be assignable
by any party hereto (other than by operation of law) without the prior written
consent of the other parties hereto; PROVIDED, that Purchaser may assign its
rights hereunder to any of its Affiliates.
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8.13 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF WYOMING (REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER
APPLICABLE WYOMING PRINCIPLES OF CONFLICTS OF LAW) AS TO ALL MATTERS, INCLUDING
BUT NOT LIMITED TO MATTERS OF VALIDITY, CONSTRUCTION, EFFECT, PREFERENCE AND
REMEDIES.
8.14 NO STRICT CONSTRUCTION. The language used in this Agreement shall
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction will be applied against any
person. The use of the word "including" in this Agreement or in any of the
agreements contemplated hereby shall be by way of example rather than by
limitation.
8.15 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but which together
shall constitute a single agreement. Facsimile signatures shall be binding on
the parties for all purposes as if they were originals.
[Balance of page intentionally left blank]
30
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
caused this Agreement to be executed by their respective officers thereunto duly
authorized, all as of the date first above written.
CROWN ASPHALT PRODUCTS COMPANY
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
S & L INDUSTRIAL
By:
--------------------------------
Name:
-------------------------------
Title:
-----------------------------
PRINCIPAL
------------------------------------------
David Rael, individually and for the sole
and limited purpose of Sections 5.2 and 5.6
31
<PAGE>
July 20, 1999
MCNIC Pipeline & Processing Company
150 West Jefferson Avenue
Suite 1700
Detroit, MI 48226
Re: Crown Asphalt Ridge, L.L.C.
Crown Asphalt Distribution Two, L.L.C.
Ladies and Gentlemen:
This letter is written to evidence our agreement made in conjunction
with the Loan Agreement and Promissory Note (the "FINANCING DOCUMENTS") entered
into today between Crown Asphalt Corporation ("CAC") and MCNIC Pipeline &
Processing Company ("MCNIC").
1. The Financing Documents and subject loan transaction were entered into such
that the loan proceeds will be used to satisfy the Secondary Capital
Contributions required, as of the date of the Financing Documents, of CAC under
Section 3.3 of the Operating Agreement (the "CAR OPERATING AGREEMENT") for Crown
Asphalt Ridge, L.L.C. ("CAR") dated as of September 1, 1997. The net cash
proceeds of the loan made under the Financing Documents ($1,891,650.50), after
deduction of amounts previously paid by MCNIC to creditors of CAR and less
certain amounts owed by CAR and/or CAC to MCNIC, shall be paid by MCNIC directly
to CAR. The gross proceeds of the loan ($2,991,868.66) made under the Financing
Documents shall be deemed the contribution by CAC to CAR, following which CAC
shall have a 25% Sharing Ratio and MCNIC shall have a 75% Sharing Ratio in CAR.
Of course, additional capital contributions may be required in the future as
otherwise provided under the CAR Operating Agreement.
2. We have been negotiating the terms of a Contribution Agreement between Crown
Asphalt Products Company ("CAPCO") and MCNIC (the "CONTRIBUTION AGREEMENT," the
most recent draft of which is attached hereto as EXHIBIT A). The Contribution
Agreement sets forth, among other things, the manner in which
(a) Crown Asphalt Distribution Two, L.L.C. ("CAD TWO") will be formed,
(b) CAD Two will acquire the Laurel, Montana asphalt terminal and the Williston,
North Dakota asphalt terminal (collectively, the "ASA TERMINALS") pursuant to
the terms of the existing Asphalt Supply Agreement (as defined in such
Contribution Agreement), AND
(c) MCNIC will make its required capital contributions related to the ASA
Terminals under such Contribution Agreement.
<PAGE>
When each of the actions or events specified in Section 2, subsections (a), (b)
and (c), have been completed, the ASA Terminals will have been acquired by CAD
Two as contemplated by the Contribution Agreement and for, convenience of
reference, we will refer to this CAD Two acquisition as the "ORIGINAL ASPHALT
SUPPLY ARRANGEMENT."
If the terms of the Asphalt Supply Agreement are materially changed or
modified in order to finally complete (including payment of the purchase price
to the seller) the Asphalt Supply Agreement, we will refer to these amended
acquisition terms as a "REVISED ASPHALT SUPPLY ARRANGEMENT."
3. This letter further evidences our agreements regarding the performance of the
Contribution Agreement depending on if, how and when the Asphalt Supply
Agreement is completed:
(a) If the acquisition of the ASA Terminals is completed under the
Original Asphalt Supply Arrangement on or before August 20, 1999, the
Contribution Agreement shall be performed in accordance with its terms.
(b) If the acquisition of the ASA Terminals is completed under the
Original Asphalt Supply Arrangement after August 20, 1999, the ASA Terminals
business deal shall constitute an "additional opportunity" under Section 6.3 of
the initial Operating Agreement (prior to and excluding any amendment on or
after the date hereof) of Crown Asphalt Distribution, L.L.C. ("CAD").
(c) If the acquisition of the ASA Terminals is completed under a
Revised Asphalt Supply Arrangement, the ASA Terminals business deal shall
constitute an "additional opportunity" under amended Section 6.3 of the CAD
Operating Agreement (as amended pursuant to a First Amendment to Operating
Agreement executed in connection with this letter agreement).
4. Notwithstanding anything to the contrary in Section 6.3 of the initial CAD
Operating Agreement (prior to and excluding any amendment on or after the date
hereof), if the acquisition of the ASA Terminals is completed under the Original
Asphalt Supply Arrangement (and, after August 20, 1999, if MCNIC elects to
participate), then the Contribution Agreement, an Operating Agreement in
substantially the same form attached hereto as EXHIBIT B and an Operating and
Management Agreement substantially similar to that executed in connection with
CAD (collectively referred to as the "CAD TWO AGREEMENTS") shall be executed and
delivered by the parties AND CAPCO will further secure the loan evidenced by the
Financing Documents with its interests in CAD by causing the execution of a
Guaranty and Security Agreement in substantially the same form as those
attached, respectively, as EXHIBITS C AND D.
5. Conversely, if the ASA Terminals are acquired under a Revised Asphalt Supply
Arrangement and MCNIC elects to participate in the "additional opportunity" in
accordance requirements of Section 3(c) above, then either:
(a) if CAPCO and MCNIC mutually agree, in their respective and sole
discretion, upon amended terms to acquire the ASA Terminals and the revised
structure of their respective contributions to CAD Two with respect to the ASA
Terminals and the Rawlins, Wyoming
<PAGE>
terminal which was acquired by CAPCO pursuant to the S&L Agreement (as defined
in the Contribution Agreement), then (i) the Contribution Agreement and the CAD
Two Agreements shall be revised to reflect such amended terms and the Revised
Asphalt Supply Arrangement and (ii) MCNIC and CAPCO shall execute and deliver
such agreements; OR
(b) if CAPCO and MCNIC do not mutually agree as described in Section 5(a) above,
either CAPCO or MCNIC may provide a written request for final determination to
the other party and, if CAPCO and MCNIC do not then mutually agree within ten
(10) days after the date of such request, then (i) CAPCO will contribute to CAD
Two only the Rawlins, Wyoming terminal pursuant to the S & L Agreement (as
defined in the Contribution Agreement), (ii) the Contribution Agreement and the
CAD Two Agreements shall be revised to delete all terms directly related to the
assignment, assumption, funding or other performance of the Asphalt Supply
Agreement and MCNIC and CAPCO shall execute, deliver and perform such
agreements, and (iii) upon contribution of the Rawlins, Wyoming terminal to CAD
Two pursuant to the Contribution Agreement, MCNIC shall unconditionally
guarantee and be liable for one-half of all obligations, debt and other
liabilities of CAPCO and Crown Energy Corporation arising from the original
acquisition under the S & L Agreement and shall execute and deliver such further
agreements or instruments as may be reasonable required to confirm the same.
Please indicate your agreement with the foregoing terms by executing a copy of
this letter in the space indicated below.
Very truly yours,
CROWN ASPHALT CORPORATION
By:
----------------------------------
Jay Mealey, President
CROWN ASPHALT PRODUCTS COMPANY
By:
----------------------------------
Jay Mealey, President
Accepted and agreed to this 20th day of July, 1999.
MCNIC PIPELINE & PROCESSING COMPANY
By:
----------------------------------------
William E. Kraemer, Vice President
<PAGE>
July 20, 1999
William Kraemer, Vice President
MCNIC Pipeline & Processing Company
150 West Jefferson Avenue Suite 1700
Detroit MI 48226
Re: Crown Asphalt Distribution, L.L.C.
Dear Bill:
As you know, pursuant to Section 6.3 of the Operating Agreement of
Crown Asphalt Distribution, L.L.C. ("CAD"), MCNIC Pipeline & Processing Company
("MCNIC") has chosen to participate in the formation of Crown Asphalt
Distribution Two, L.L.C. ("CAD TWO") such that CAD Two will pursue the
Additional Opportunity of acquiring certain assets from Asphalt Supply &
Service, Inc., Interstate Asphalt Company, Inc., Inoco, Inc. and S&L Industrial.
In particular, the agreements between MCNIC and Crown Asphalt Products Company
with respect to CAD Two are set forth in a separate letter agreement, also dated
as of today.
We ask that this supplemental letter agreement be executed and
delivered by MCNIC in order to confirm the agreement described below.
We have agreed that the Working Capital Loan referred to in Section 7.1
of the CAD Operating Agreement and the promissory note evidencing CAD's
repayment obligation under such Working Capital Loan will be rolled into and
replaced by the Loan from MCNIC for working capital, inventory and receivables
described in Section 7.2 of the CAD Operating Agreement. The Loan currently has
a balance and continues to be drawn against pursuant to the terms of Section
7.2, but as of this date has not been documented. As soon as reasonably
practicable following the Closing, MCNIC and CAD will execute the loan
documentation evidencing such Loan as described in Section 7.2 and any
documentation needed to evidence the corresponding satisfaction and discharge of
the preexisting promissory note.
In order to indicate MCNIC's acceptance of this letter agreement (which
acceptance will be a condition precedent to Capco's execution or delivery of the
Contribution Agreement and related CAD Two financing documents), please sign and
return a duplicate copy of this letter where indicated below.
CROWN ASPHALT PRODUCTS COMPANY
Jay Mealey, President
APPROVED AND ACCEPTED:
- -----------------------
MCNIC PIPELINE & PROCESSING COMPANY
By:
---------------------------------
William Kraemer, Vice President
<PAGE>
FIRST AMENDMENT TO OPERATING AGREEMENT
THIS FIRST AMENDMENT TO OPERATING AGREEMENT, dated as of July 20, 1999
(this "Amendment"), is by and between MCNIC PIPELINE & PROCESSING COMPANY, a
Michigan corporation ("MCNIC"), and CROWN ASPHALT PRODUCTS COMPANY, a Utah
corporation ("CAPCO").
WITNESSETH:
WHEREAS, MCNIC and CAPCO are parties to an Operating Agreement, dated
June 30, 1998 (the "Agreement"), pursuant to which MCNIC and CAPCO established
their rights and obligations regarding the formation of Crown Asphalt
Distribution L.L.C., a Utah limited liability company (the "Company"); and
WHEREAS, the parties desire to amend the Agreement on the terms and
conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual promises herein
provided, the parties hereto agree as follows:
AGREEMENT
1. DEFINITIONS. Terms used but not defined herein shall have the
meanings assigned to such terms in the Agreement.
2. AMENDMENT. The Agreement is amended as follows:
(a) Section 6.3 is deleted in its entirety and
the following inserted in place thereof:
"6.3 COMPANY OPPORTUNITIES, CONFLICTS OF INTEREST. (a) Subject to the
limitations set forth in subsection (b) and (c) of this Section 6.3, during the
term of the Company, unless the Company shall have theretofore ceased conducting
its business, no Member, nor any of their respective Affiliates, shall directly
or indirectly create, start up, acquire, invest in, loan money to, own, hold,
lease, operate or manage any entity whose business utilizes Products in any
manner the same as or similar to the then current business of the Company (an
"ADDITIONAL OPPORTUNITY"), unless (i) such Member shall have offered the Company
the opportunity to acquire or participate in such Additional Opportunity on the
same terms as offered to such Member; (ii) such acquisition or participation by
the Company is not approved by the unanimous consent of all of the Members other
than the Acquiring Member; and (iii) all of the Members consent to such
acquisition or participation by the Acquiring Member.
1
<PAGE>
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 (A) to
notify the Acquiring Member of the Company's election to pursue 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 (A).
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 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 Company or the newly formed entity, as the case may be, 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 those to which the Nonacquiring Member has agreed. The
Company or the newly formed entity, as the case may be, 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 the preceding clause (B) or elects not to pursue the
Additional Opportunity, if all of the other Nonacquiring Members give written
notice to the Acquiring Member within 15 days following the expiration of the
Company's option period refusing consent to the acquisition or participation by
the Acquiring Member in the Additional Opportunity, Acquiring Member shall no
longer pursue, acquire or participate in the Additional Opportunity. If the
Non-Acquiring Members consent to the acquisition or participation by Acquiring
Member in the Additional Opportunity, then no Member (other than the Acquiring
Member) shall thereafter have any interest in the activity or Additional
Opportunity.
2
<PAGE>
(b) The restrictions on any Member's ability to pursue an
Additional Opportunity set forth in Section 6.3 (a) above shall continue as set
forth in such section until the earlier to occur of March 15, 2000, or the
occurrence of a CAR Event (such earlier to occur date being known herein as the
"Veto Termination Date"). "CAR Event" shall mean either of the following: (i)
the Initial Plant (as defined in Operating Agreement for Crown Asphalt Ridge LLC
dated as of August 1, 1997 between MCNIC and Crown Asphalt Products Company)
shall have cumulative production of 12,500 tons of finished asphalt product over
any 100 successive days or (ii) the Members shall have unanimously agreed that
the Initial Plant is incapable of commercial operations, which shall mean for
purposes of this paragraph that the Initial Plant is not capable of producing
revenues in excess of the total costs of production, excluding depreciation.
Beginning with the Veto Termination Date and ending on June 18, 2001, the
provisions of 6.3 (a) shall remain in full force and effect provided that if the
Company does not elect to participate in an Additional Opportunity and the
Nonacquiring Member does not consent to the Acquiring Member's acquisition or
participation in the Additional Opportunity, the Acquiring Member may
nonetheless proceed with such Additional Opportunity and the Nonacquiring Member
shall have the right to back into participation according to the following
terms:
(i) The Nonacquiring Member shall have the option (the "Back
In Option") to acquire an interest in the entity or business conducting the
Additional Opportunity such that (1) the Nonacquiring Member's sharing ratio in
the Additional Opportunity if acquired or purchased by the Company or the newly
formed entity or business before 150% Payout is zero and (2) its sharing ratio
after 150% Payout is 50%.
(ii) "150% PAYOUT" shall mean 7:00 a.m. local time on the
first day of the calendar month following the earliest calendar month during
which the proceeds from the operations of the Additional Opportunity, after
deducting all costs and expenses associated with the Additional Opportunity
(other than income taxes), equals (A) 150% of the amount invested in the
Additional Opportunity by the Acquiring Member plus (B) interest on the invested
amount at the General Interest Rate plus 3% (compounded quarterly) from the time
each separate portion of such amount was paid.
(iii) The Acquiring Member shall provide the Nonacquiring
Member with quarterly reports of the operations, and returns from, the entity
that owns the Additional Opportunity. The Nonacquiring Member shall have fifteen
days following receipt of written notice that 150% Payout has occurred with
respect to the Additional Opportunity to give written notice the Acquiring
Member of its election to exercise the Back In Option with respect to the
Additional Opportunity. The failure by the Nonacquiring Member to notify the
Acquiring Member within such 15 day period shall be deemed to be an election by
the Nonacquiring Member not to exercise its Back In Option with respect to the
Additional Opportunity. If the Nonacquiring Member elects (or is deemed to
elect) not to exercise any Back In Option with respect to any Additional
Opportunity, such Member shall have no further right, option or contingent
interest whatsoever in the Additional Opportunity and upon the request of the
Acquiring Member will promptly
3
<PAGE>
execute and deliver to the Acquiring Member a release and assignment in
recordable form acknowledging the same and assigning to the Acquiring Member all
of the Nonacquiring Member's interest in such Additional Opportunity. In the
event a Nonacquiring Member elects to exercise the Back In Option, the Acquiring
Member shall assign to the Nonacquiring Member the applicable portion of its
sharing ratio in the entity or business that owns such Additional Opportunity.
(c) After June 10, 2001 the provisions of Section 6.3 (b) shall no longer be
applicable but Section 6.3 (a) shall remain in effect with the modification that
clause 6.3 (a)(iii) and clause (C) of Section 6.3 (a) shall be deleted so that
an Acquiring Member may proceed with any Additional Opportunity unless within
the notice period set forth in Section 6.3 (a)(B), the Company shall have made
the election to participate in the Additional Opportunity.
3. RATIFICATION. The Agreement, as amended hereby, remains in full
force and effect.
4. COUNTERPARTS. This Amendment may be executed in counterparts, each
of which shall be deemed an original, but all of which shall together constitute
one and the same agreement.
5. GOVERNING LAW. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of Utah.
6. NOTICES. All notices given under the amended Section 6.3 to the
Company and the Nonacquiring Member shall be given by certified or registered
mail.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date and year first above written.
MCNIC PIPELINE & PROCESSING COMPANY
By:
------------------------------------------
William E. Kraemer, Vice President
CROWN ASPHALT PRODUCTS COMPANY
By:
------------------------------------------
Jay Mealey, President
4
<PAGE>
[caad 234]I LOAN AGREEMENT
THIS AGREEMENT is made and entered into by and between CROWN
ASPHALT CORPORATION, a Utah Corporation (hereinafter called "BORROWER") and
MCNIC PIPELINE & PROCESSING COMPANY, a Michigan corporation (hereinafter called
"LENDER").
WHEREAS the Borrower has requested the Lender to make
available to the Borrower a term loan of $2,991,868.66. Lender is willing to
extend such credit upon the terms and conditions of this Agreement. All terms
not defined in this Agreement shall have the same meaning as set forth in the
Operating Agreement for Crown Asphalt Ridge, L.L.C. ("CAR") made and executed by
Borrower and Lender and dated as of August 1, 1997 (the "OPERATING AGREEMENT").
NOW, THEREFORE, for and in consideration of the foregoing and
the mutual covenants hereinafter contained, the Lender and Borrower agree as
follows:
1. THE LOAN. Upon and subject to the terms and conditions of this
Agreement, the Lender will make a loan (the "LOAN") to the Borrower in the
amount of $2,991,868.66, which loan shall bear interest at the Prime Rate, as
published in the money rates section of the Wall Street Journal, plus 1% per
annum, adjusted monthly and paid by the Borrower pursuant to the terms of a
Promissory Note (the "NOTE") dated of even date herewith from the Borrower to
the Lender, which Note, by this reference, is incorporated herein and made a
part hereof. For purposes of this Agreement, including all other agreements
executed in connection herewith or which refer to this Agreement, the term
"Indebtedness" shall mean the principal balance of the Loan, together with
interest, late fees, costs, attorney's fees and all other sums assessable and
due under the terms of this Agreement, including the Note.
2. COLLATERAL. The repayment of the Loan and all extensions and
renewals thereof, and the performance of all obligations of Borrower hereunder,
including the obligations under the Promissory Note, shall be secured by, and
Borrower hereby grants to Lender a security interest in and to, that portion of
Borrower's Sharing Ratio (as defined in the Operating Agreement) in CAR directly
attributable to the Contribution (as defined below) made with the Loan proceeds
(the "Collateral").
3. EVENTS OF DEFAULT. Time shall be considered of the essence
concerning this Agreement, including the Note and all of their provisions, and
the occurrence of any one or more of the following shall constitute an "EVENT OF
DEFAULT":
a) If any payment due or to be made under the terms of this
Agreement, or the Note is not paid within 10 days of the date
such payment is due;
b) There shall exist a default for a period of more than 30 days in
the performance or observance of any other obligation, covenant,
or liability contained in this Agreement or the Note;
c) Any action is taken by any governmental entity which materially
and adversely affects the Borrower's business.
d) Any warranty or representation made or furnished to Lender by or
on behalf of Borrower proves to have been false in any material
respect when made or furnished.
e) Bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any
other law for the relief of
<PAGE>
debtors shall be instituted by or against Borrower (except for an
involuntary petition against Borrower, which shall not constitute
an Event of Default if such petition is vacated or dismissed
within 30 days after filing thereof), or any order, judgment or
decree shall be entered against Borrower decreeing its
dissolution.
f) Dissolution or liquidation of the existence of Borrower.
4. REMEDIES. Upon an Event of Default, Lender may, at its option,
exercise any one or more of the following remedies:
a) Accelerate the remaining balance of the indebtedness due under
this Agreement, including the Note, and demand immediate payment
of the same, together with all accrued interest, late charges,
and other amounts recoverable by Lender under this Agreement.
b) Exercise any and every right and remedy allowed at law or in
equity.
5. BORROWER'S REPRESENTATIONS, WARRANTIES AND COVENANTS. In order to
induce Lender to make the Loan, Borrower represents and warrants to Lender, and
covenants and agrees with Lender for so long as any obligation or indebtedness
owed to Lender hereunder remains unpaid, as follows:
a) ENTITY EXISTENCE AND STANDING OF BORROWER. Borrower is and shall
remain a corporation duly formed, validly existing, and in good
standing under the law of the State of Utah, with all requisite
authority to conduct its business in any other state in which it
conducts business. The Borrower shall not be dissolved as
provided under the terms of the Utah statutes governing the
creation and existence of corporations.
b) COMPLIANCE WITH LAWS. The Borrower will promptly comply with all
laws, rules, regulations, ordinances, codes, decrees, and orders
applicable to the operation of its business.
c) FINANCIAL STATEMENTS. Any financial statements and other
financial information provided to Lender in connection with this
loan, or hereinafter provided to Lender is and will be true and
accurate in all material respects and fairly represent the
financial condition of the party providing such financial
information, all in accordance with generally accepted accounting
principles applied on a consistent basis.
d) LEGAL PROCEEDINGS. Except for the current arbitration and other
actions relating to CAR, there is and shall be no pending or
threatened action or proceeding affecting Borrower which may have
any material adverse effect upon the financial condition or
operation of Borrower.
e) TAXES. Borrower has filed and paid, and will continue to file and
pay (or provide evidence to Lender of an extension), all state
and federal taxes owed by or assessed against Borrower to the
extent the same are currently due and payable, including, without
limitation, all state sales taxes as well as all income, excise
and employment related taxes.
f) USE OF PROCEEDS. The proceeds of the Loan shall be used by
Borrower solely to make the Contribution.
----------------------------------------------
LOAN AGREEMENT
PAGE 2
<PAGE>
g) OTHER LIENS. Except as provided in the Operating Agreement, there
are no other liens, security interests or pledges against the
Collateral.
h) NO DISPOSITION OF ASSETS. The Borrower shall not sell, assign,
dispose of, grant a security interest in or otherwise assign the
Collateral.
6. GOVERNING LAW. The terms and obligations of this Agreement shall be
governed by the laws of the State of Utah, and Borrower hereby consents to
personal jurisdiction in Salt Lake County, Utah in the event of any litigation
by Lender under this Agreement.
7. LENDER'S CONSENT. Whenever the Lender's consent is required for any
action by the Borrower, the Lender agrees that it will respond to the Borrower's
request with reasonable promptness, and will not unreasonably withhold consent
to any reasonable requests of the Borrower.
8. INSPECTIONS AND AUDITS. Borrower agrees that Lender may inspect the
Borrower's business operations and/or audit the books of Borrower or its
successors, at any time after 48 hours prior notice to Borrower as Lender deems
necessary during normal business hours.
9. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement should be invalid, illegal, or unenforceable in any respect, the
validity, legality, and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
10. FURTHER ASSURANCES. Borrower shall take such further action as may
be reasonably requested by Lender to effect the purpose of this Agreement,
including, without limitation, the execution and delivery of any other documents
as may be necessary to effect the intent of this Agreement.
11. BINDING EFFECT. The promises of the parties in this Agreement shall
bind the respective heirs, administrators, personal representatives, successors,
and assigns.
12. NOTICES. Any notice to be given under this Agreement shall be
deemed given when placed in the United States Mail, postage prepaid with return
receipt, addressed as follows:
Borrower: 215 South State Street, Suite 650
Salt Lake City, Utah 84111
Lender: 150 West Jefferson, Suite 1700
Detroit, Michigan 48226
Either party may change its address by providing notice of such change
to the other party.
13. ATTORNEY'S FEES AND OTHER COSTS. In the event of a default or
breach of this Agreement, or the Note by either party, the defaulting party
agrees to pay and be responsible for all reasonable attorney's fees and/or costs
of collection or enforcement incurred by the non-defaulting party as a result of
such default, including, without limitation, any attorneys fees incurred in the
giving of any notice as a result of any such breach or default or taking
possession of and foreclosing against the Collateral. The non-defaulting party
shall be entitled to recover its attorney's fees and costs whether or not it
actually files litigation against the defaulting party.
----------------------------------------------
LOAN AGREEMENT
PAGE 3
<PAGE>
14. APPLICATION OF PAYMENTS. All sums paid by Borrower to Lender or
collected by Lender for application to the liabilities and obligations of
Borrower under this Agreement will be first applied to any costs, expenses, and
fees, including attorney's fees, which may be owing under the terms of this
Agreement, and then to any interest or late fees which may be due and owing
pursuant to the terms of this Agreement, and then to reduce the principal
balance owing.
15. LATE PAYMENTS. It is specifically agreed that late payments
accepted by Lender will not operate to change or modify any of the due dates or
other payments due from Borrower to Lender. The Borrower shall be entitled to
recover such late fees as are provided for in the Note.
16. NO ASSIGNMENT. This Agreement is not assignable by Borrower.
17. STIPULATIONS. Borrower and Lender agree that the proceeds of this
Loan will be used to satisfy the Secondary Capital Contributions required, as of
the date hereof, of Borrower under Section 3.3 of the Operating Agreement (the
"Operating Agreement") for Crown Asphalt Ridge, L.L.C. ("CAR") dated as of
August 1, 1997. Upon transfer of the loan proceeds to, or payment of such
proceeds on behalf of, CAR (the "CONTRIBUTION"), Borrower shall have a 25%
Sharing Ratio and MCNIC shall have a 75% Sharing Ratio in CAR. Of course,
additional capital contributions may be required in the future as otherwise
provided under the Operating Agreement.
Effective as of July 20, 1999.
BORROWER: LENDER:
Crown Asphalt Corporation, a Utah MCNIC Pipeline & Processing Company, a
corporation Michigan corporation
By: By:
------------------------------- ------------------------------
Jay Mealey, President
Title:
---------------------------
----------------------------------------------
LOAN AGREEMENT
PAGE 4
<PAGE>
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, Crown Asphalt Corporation, a
Utah corporation (hereinafter called "Borrower"), gives this promissory note
(the "Note") and promises to pay to the order of MCNIC Pipeline & Processing
Company, a Michigan corporation (hereinafter called "Lender"), the principal sum
of Two Million Nine Hundred Ninety One Thousand Eight Hundred Sixty Eight
Dollars and Sixty Six Cents ($2,991,868.66), together with interest at the
"Prime Rate" as published in the Wall Street Journal plus 1% per annum (the
"Note Rate") adjusted monthly on the first of each month to reflect any changes
in the Prime Rate.
1. AMOUNT AND PLACE OF PAYMENTS. (a) Beginning on September 20,
1999, and continuing on the 20th day of each month through and including July
20, 2001 (hereinafter called the "Interest Only Period"), the Borrower shall
make monthly payments of $20,757.14 which sum is anticipated to pay interest
only. If the amount of such payment is greater than the actual accrued interest,
the excess will be applied to principal. On each August 20, November 20,
February 20, and May 20 during the Interest Only Period, the Borrower will make
additional payments as may be necessary to bring interest current. In the year
2001, the Borrower will pay interest current on July 20, and then, beginning on
August 20, 2001 and continuing on the 20th day of each month thereafter, the
Borrower will make payments of principal and interest in order to amortize the
principal balance over 13 years. The amount of the monthly payments will be
established based on the principal balance and interest rate in effect on July
20, 2001. For the remainder of the Note, each time the Note Rate changes the
principal balance may, at the option of either the Borrower or the Lender, be
re-amortized and a new monthly payment amount established (for the balance of
the 13 years). The Payments will be applied as provided in this Note. All
payments are to be made or given to Lender at 150 West Jefferson, Suite 1700,
Detroit, Michigan 48226.
(b) Notwithstanding the terms of Section 1(a), the Interest Only Period
shall be extended until July 20, 2004, and the remaining terms of Section 1(a)
will be modified appropriately if Borrower and Lender mutually agree that the
Initial Plant (as defined in Operating Agreement for Crown Asphalt Ridge LLC
dated as of August 1, 1997, between Borrower and Lender) will never be able to
operate commercially.
2. ADDITIONAL PAYMENTS. Notwithstanding anything in Section 1 to the
contrary, the Borrower shall make additional debt service payments (i.e.,
payments to reduce the principal balance) during the Interest Only Period to the
extent the Borrower has "Total Cash Available to Reduce Principal" from its 1999
and 2000 (and 2001, 2002 and 2003 if the mutual agreement specified in Section
1(b) is reached) operations. For purposes of this agreement, "Total Cash
Available to Reduce Principal" shall be determined based upon the Borrower's
audited financial statements for 1999 and 2000 (and 2001, 2002 and 2003, if
applicable) using the following formula: Net Income (a) plus the sum of: (i)
depreciation, (ii) amortization, (iii) interest expense on all debt, (iv)
<PAGE>
prepaid expenses; and (v) distributions paid and (b) minus the sum of (i)
principal reduction on all debt paid as scheduled and (ii) interest expense on
all debt. The Borrower shall pay the Total Cash Available to Reduce Principal to
the Lender. The debt service payments shall be made within 15 days after the
audited financial statements are completed by the Borrower's auditors.
3. RIGHT TO PREPAY. The Borrower shall have the right to prepay or
make additional cash payments at any time, without penalty, but such additional
cash payments shall not relieve the Borrower's obligation to make timely monthly
payments each month as required hereunder.
4. ADDITIONAL TERMS AND CONDITIONS. This note is issued pursuant to
the provisions of a Loan Agreement of even date herewith (the "Loan Agreement").
The Loan Agreement is, by this reference, incorporated herein and made a part
hereof. A default under the Loan Agreement shall also be a default under this
Note.
5. LATE CHARGE. A late charge of five percent (5%) of any unpaid
payment amount may be collected by Lender for any payment (including an interest
only payment) that is not made within ten (10) days of the due date of such
payment. In the event the Lender accelerates this Note as permitted herein or
this Note is not paid at maturity, interest will accrue at a lesser of five
percent (5%) above the interest rate otherwise due or the highest interest rate
permitted under the laws of the State of Utah. In the event of default for which
the Lender does not accelerate this Note, including the failure of Borrower to
provide the financial statements as required under the Loan Agreement, the
applicable interest rate on this Note, for a period beginning ten (10) days
after written notice of such default and ending upon the curing of said noticed
default, shall increase one quarter of one percent (.25%) for the first 30 days
of said default and increase an additional one quarter of one percent (.25%)
during each 30 day period thereafter during which the noticed default continues.
Such default interest rates shall apply to the outstanding principal balance of
this Note. Upon the curing of the noticed default, the interest rate of this
Note shall revert to the initially agreed-upon interest rate effective on the
date on which the default is cured. Such late fees and default interest shall be
assessable without any prior notice by the holder to the Borrower that a payment
is late.
6. APPLICATION OF PAYMENTS. All payments on account of this Note
shall first be applied to the payment of any late fees, costs, fees (including
attorneys' fees), and charges; second, to accrued and unpaid interest; and
third, to the reduction of principal.
7. DEFAULT. The occurrence of an Event of Default under the Loan
Agreement will constitute a default under this Note.
---------------------------------------
PROMISSORY NOTE
-2-
<PAGE>
8. ACCELERATION. In the event this Note shall be in default, the
Lender may declare the entire unpaid balance of this Note, together with
interest accrued thereon and other charges as provided for in this Note, to be
immediately due and payable and may proceed to exercise any rights or remedies
that the Lender may have under this Note, the Loan Agreement, or such other
rights and remedies which the holder may have at law or in equity.
9. REMEDIES CUMULATIVE. The Lender is not required to first proceed
against any collateral for payment of this Note. All remedies conferred by this
Note, or by the Loan Agreement, shall be cumulative, and none is exclusive.
10. ATTORNEY'S FEES. In the event of a default or breach of this
Note, the Borrower agrees to pay and be responsible for all reasonable
attorney's fees and/or costs of collection or enforcement incurred by the Lender
as a result of such default, including, without limitation, any attorneys fees
incurred in the giving of any notice as a result of any such breach or default,
and further including, without limitation, any attorneys fees incurred by Lender
in taking possession of and foreclosing against any collateral. The Lender shall
be entitled to recover its attorney's fees and costs whether or not it actually
files litigation against the Borrower. Such fees and costs shall be due and
payable immediately on the Lender's demand.
11. WAIVER OF PRESENTMENT. Except as otherwise provided herein,
presentment or other demand for payment, notice of dishonor, and protest are
hereby expressly waived by the undersigned.
DATED July 20, 1999.
BORROWER:
Crown Asphalt Corporation, a Utah corporation
By:
--------------------------------------
Jay Mealey, President
---------------------------------------
PROMISSORY NOTE
-3-
<PAGE>
LOAN AGREEMENT
THIS AGREEMENT is made and entered into by and between CROWN
ASPHALT PRODUCTS COMPANY, a Utah corporation (hereinafter called "BORROWER") and
COMMUNITY FIRST NATIONAL BANK, a national banking association (hereinafter
called "LENDER") and CROWN ENERGY CORPORATION, a Utah corporation, (hereinafter
called the "GUARANTOR").
WHEREAS the Borrower has requested the Lender to make available to
the Borrower a secured term loan of $1,800,000.00, which the Borrower will use
to purchase certain equipment and property from S & L Industrial, a Wyoming
corporation, and the Lender is willing to extend such credit upon the terms and
conditions of this Loan Agreement.
NOW, THEREFORE, for and in consideration of the foregoing and
the mutual covenants hereinafter contained, the Lender and Borrower agree as
follows:
1. THE LOAN. Upon and subject to the terms and conditions of
this Loan Agreement, the Lender will make a term loan (the "LOAN") to the
Borrower in the amount of $1,800,000.00, which loan shall bear interest at the
rate of Prime, as published in the Wall Street Journal, plus 1% per annum,
adjusted monthly and paid by the Borrower pursuant to the terms of a Promissory
Note (the "NOTE") dated of even date herewith from the Borrower to the Lender,
which Note, by this reference, is incorporated herein and made a part hereof.
For purposes of this agreement, including all other agreements executed in
connection herewith or which refer to this agreement, the term "Indebtedness"
shall mean the principal balance of the Loan, together with interest, late fees,
costs, attorney's fees and all other sums assessable and due under the terms of
this agreement, including the Note and the Collateral Documents.
2. LOAN FEES. The Borrower agrees to pay the following fees in
connection with this loan:
a) Any loan origination or guarantee fees as are provided for in the
letter of commitment.
b) All costs incurred by Lender in connection with the chosing of the
Loan, including but not limited to title insurance premiums,
filing fees, recording fees, Lender's legal fees and other costs
incurred by Lender.
3. COLLATERAL. The repayment of the Loan and all extensions
and renewals thereof, and the performance of all obligations of Borrower
hereunder, including the obligations under the Promissory Note, shall be
secured by the following:
<PAGE>
a) A first lien on the asphalt terminal, blending and emulsion
facility including all buildings, storage tanks and improvements
referred to above, to be more fully described in a security
agreement (the "SECURITY AGREEMENT") from Borrower to Lender
perfected by a U.C.C.- 1 Financing Statement and Fixture Filing to
be filed with the public officials deemed necessary by Lender.
Although Borrower will be leasing the land on which said
collateral will be located, the lease shall provide that such
collateral does not become the property of the landlord when it is
placed on the land, and it may be removed therefrom by Borrower,
or by Lender upon a loan default.
b) A lien, evidenced by a blanket security agreement (also know as
the "SECURITY AGREEMENT") on all furniture, supplies, inventory,
equipment, machinery, fixtures, accounts, accounts receivable,
contract rights, instruments, documents, chattel paper, chases in
action, intellectual property and general intangibles presently or
hereafter owned by Borrower, and perfected by a blanket U.C.C.- 1
Financing Statement to be filed with the public officials deemed
necessary by Lender. The lien shall be a first lien with respect
to all such property other than the accounts receivable and the
inventory. With respect to the accounts receivable and the
inventory, the lien shall be second only to a revolving line of
credit in the sum not to exceed $3,000,000 (the "Line Limit"). The
Borrower shall give the Lender written notice each quarter
identifying the lender on the line of credit and stating the
average balance of the line of credit over that quarter. If the
lender on the line of credit changes, the Borrower shall give the
prior written notice of such change. The level of borrowing
against the accounts receivable and the inventory shall not be
greater than the Line Limit without the prior written consent of
the Lender, which consent will not be unreasonably withheld.
c) An assignment (the "LEASE ASSIGNMENT") of all of Borrower's right,
title and interest in and to the lease between the Union Pacific
Railroad Company (or related entity) as Lessor, and the Borrower,
as Lessee, (hereafter the "U.P. LEASE") covering the land (the
"REAL PROPERTY") where the Borrower's emulsion plant is located,
as more fully described in the Assignment.
The Security Agreements and Lease Assignment shall collectively
be known as the "COLLATERAL DOCUMENTS." The property secured by
or otherwise subject to the Collateral Documents shall be
collectively known as the "COLLATERAL".
------------------------------
LOAN AGREEMENT
PAGE 2
<PAGE>
All loans from the lender to the Borrower, now or hereafter shall be, and
hereby are agreed to be, cross-collateralized, whereby all of the Collateral
shall secure all of the Borrower's obligations to Lender under each and all
loans, and all future advanced thereunder, as well as any renewals,
modifications or substitutions of all loans made by Lender to Borrower.
4. GUARANTY. As an inducement to Lender to enter this
agreement on the terms and conditions set forth herein, and for good and
valuable consideration, which consideration includes benefits accruing to the
Guarantor as a result of this agreement between Lender and Borrower, and
other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the undersigned guarantor (hereinafter called the
"GUARANTOR"), will unconditionally, jointly and severally guarantee to Lender
that Borrower will fully and promptly and faithfully perform, pay and
discharge all its present and future obligations and covenants under this
agreement including, without limitation, the Note and the Collateral
Documents according to the terms of a separate Guaranty agreement to be
executed and delivered by the Guarantor to the Lender.
5. EVENTS OF DEFAULT. Time shall be considered of the essence
concerning this agreement, including the Note and the Collateral Documents and
all of their provisions, and the occurrence of any one or more of the following
shall constitute an "EVENT OF DEFAULT":
a) If any payment due or to be made under the terms of this Loan
Agreement, or the Note or any Collateral Document is not paid
within 10 days of the date such payment is due;
b) There shall exist a default for a period of more than 30 days in
the performance or observance of any other obligation, covenant,
or liability contained in this Loan Agreement, the Note, or any of
the Collateral Documents;
c) The Guarantor shall fail to carry out any of the terms or
conditions of its guarantee.
d) Any action is taken by any governmental entity which materially
and adversely affects the Borrower's business.
e) Any warranty or representation made or furnished to Lender by or
on behalf of Borrower proves to have been false in any material
respect when made or furnished.
f) Bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any
other law for the relief of debtors shall be instituted by or
against Borrower
------------------------------
LOAN AGREEMENT
PAGE 3
<PAGE>
(except for an involuntary petition against Borrower, which shall
not constitute an Event of Default if such petition is vacated or
dismissed within 30 days after filing thereof), or any order,
judgment or decree shall be entered against Borrower decreeing its
dissolution.
g) Dissolution or termination of the existence of Borrower or
Guarantor as corporations.
h) The Lender reasonably and in good faith deems itself to be
insecure, or determines that the prospect of payment, performance,
or observance of any of the obligations, indebtedness, or
liabilities of the Borrower to it is materially impaired.
6. REMEDIES. Upon an Event of Default, Lender may, at its
option, exercise any one or more of the following remedies.
a) Accelerate the remaining balance of the indebtedness due under
this agreement, including the Note, and demand immediate payment
of the same, together with all accrued interest, late charges, and
other amounts recoverable by Lender under this agreement.
b) Exercise any and every right and remedy under the Collateral
Documents.
c) Exercise any and all other rights or remedies allowed at law or in
equity.
7. BORROWER'S COVENANTS. In order to induce Lender to enter
into this loan agreement, and to make the loan set forth herein, borrower and
Guarantor represent and warrant to Lender, and covenant and agree with Lender
for so long as any obligation or indebtedness owed to Lender hereunder remains
unpaid, as follows:
a) ENTITY EXISTENCE AND STANDING OF BORROWER. Borrower is and shall
remain a limited liability company duly formed, validly existing,
and in good standing under the law of the State of Wyoming, with
all requisite authority to conduct its business in any other state
in which it conducts business. The Borrower shall not be dissolved
as provided under the terms of the Wyoming statutes governing the
creation and existence of limited liability companies.
b) CORPORATE EXISTENCE AND STANDING OF GUARANTOR. The Guarantor shall
remain a corporation duly formed, validly existing, and in good
standing under the law of the state of its creation, with all
requisite
------------------------------
LOAN AGREEMENT
PAGE 4
<PAGE>
authority to conduct its business in any other state in which it
conducts business.
c) COMPLIANCE WITH LAWS. The Borrower and the Guarantor will promptly
comply with all laws, rules, regulations, ordinances, codes,
decrees, and orders applicable to the operation of its business.
d) U.P. LEASE. The Borrower shall keep the U.P. Lease in existence
and out of default, and such lease shall not be amended, modified
or terminated without the prior written consent to the Lender.
e) OTHER LIEN. There are no other liens, security interests, or
mortgages against any of the property given as Collateral other
than as disclosed in this agreement.
f) FINANCIAL STATEMENTS. Any financial statements and other financial
information provided to Lender in connection with this loan, or
hereinafter provided to Lender is and will be true and accurate in
all material respects and fairly represent the financial condition
of the party providing such financial information, all in
accordance with generally accepted accounting principles applied
on a consistent basis.
g) LEGAL PROCEEDINGS. There is and shall be no pending or threatened
action or proceeding affecting either Borrower or the Guarantor(s)
which may have any material adverse effect upon the financial
condition or operation of Borrower or the Guarantor(s).
h) TITLE. Except to the extent the paragraph 2.6 of the Security
Agreement makes allowance for the Borrower to contest liens
against the Collateral, the Borrower has and will maintain good
title to the all Collateral pledged to secure this loan free and
clear of all liens, encumbrances, and security interests except as
disclosed in the Collateral Documents. Borrower will defend and
indemnify the Lender against claims, judgments, costs, and
expenses and attorney's fees resulting from a breach of this
warranty.
i) TAXES. Borrower has filed and paid, and will continue to file and
pay or provide evidence to Lender of an extension), all state and
federal taxes, including, without limitation, all state sales
taxes as well as federal form 1120, 940 and 941 returns and
related taxes.
j) OWNERSHIP TRANSFERS AND DISTRIBUTION. Borrower will not issue any
additional stock, and the Guarantor will not assign or transfer
any of its stock in the Borrower without the prior written notice
to the Lender. The Guarantor shall own not less than 60% of the
Borrower at
------------------------------
LOAN AGREEMENT
PAGE 5
<PAGE>
all times, and the Lender may require any person or company
owning more than a 10% interest in the Borrower to provide a
proportionate guaranty of the Loan.
k) DISTRIBUTIONS OF INCOME. The Borrower's debt service requirements
ratio (hereinafter defined as net operating income revenue less
all expenses, plus depreciation and interest divided by the annual
debt service requirement) shall be at least 2.5 before dividends
and 1.25 after dividends. Borrower will not pay any dividends or
make any other distributions of profits or capital to its owners
if such distributions would cause the debt service requirements
ratio to be out of compliance with the requirements of this
paragraph. Notwithstanding the foregoing, no dividends shall be
paid (even if such dividends would otherwise be allowed under the
debt service requirements ratio) without 15 days prior written
notice to the Lender's. Such notice shall state the amount of
dividends or other distributions to be paid and what the
Borrower's debt service requirements ratio will be after such
payments are made. Further, the Borrower shall not, under any
circumstances, pay any dividends or make any other distributions
of profits or capital to its owners if the Borrower is in default
of this Loan Agreement.
l) NO CAPITAL EXPENDITURES. Borrower agrees that it shall make no
capital expenditures of any kind whatsoever in excess of $15,000
per calendar year without prior written notice to Lender.
Additionally, within 30 days after the end of each year of this
Loan, the Borrower shall provide the Lender with a detailed list
of capital expenditures incurred during the year. The list shall
include a detailed description of the capital items acquired
(including makes, models, year, serial numbers, etc.), the cost of
such items, and the location of such items, whether the purchase
of such items was financed and if so the details of the financing
and such other information as the Lender may reasonably request.
The Borrower will also execute such additional security agreements
and financing statements as the Lender require in order to create
and perfect alien against such additional capital items.
m) NO DISPOSITION OF ASSETS. The Borrower shall not sell, assign,
dispose of, grant a security interest in or otherwise assign any
of the Collateral other than in accordance with the terms and
provisions of the Security Agreement.
8. GOVERNING LAW. The terms and obligations of this agreement
shall be governed by the laws of the State of Wyoming, and Borrower hereby
------------------------------
LOAN AGREEMENT
PAGE 6
<PAGE>
consents to personal jurisdiction in Wyoming in the event of any litigation
by Lender under this agreement.
9. LENDER'S CONSENTS. Whenever the Lender's consent is
required for any action by the Borrower, the Lender agrees that it will
respond to the Borrower's request with reasonable promptness, and will not
unreasonably withhold consent to any reasonable requests of the Borrower.
10. FINANCIAL INFORMATION. Throughout the life of the Loan,
Borrower shall be required to furnish lender with the following financial
information on Borrower and the Guarantor:
a) Annual audited financial statements of Borrower and the Guarantor
in a form satisfactory to Lender, showing all items of income
expense of the operation such entity's businesses, to be delivered
to Lender within 120 days of the close of each operating year of
the Borrower and Guarantor;
b) Quarterly 10Q report for the Guarantor within 40 days of the end
of each quarterly period;
c) Monthly in-house-prepared balance sheets and income statements for
Borrower and the Guarantor within 30 days of the end of each
calendar month;
d) A complete copy of the annual tax returns by April 15 of each year
for the Borrower and the Guarantor. If an extension is obtained, a
copy of the extension shall be provided by April 15 and a complete
copy of the tax returns shall be provided at the time of filing
with the IRS.
e) A pro-forma income and expense statement for each upcoming year at
least 90 days prior to the fiscal year end.
11. INSPECTIONS AND AUDITS. Borrower and Guarantor agree that
Lender may inspect the Borrower's and Guarantor's business operations and/or
audit the books of Borrower, Guarantor, or their successors, at any time as
Lender deems necessary during normal business hours.
12. SEVERABILITY. In case any one or more of the provisions
contained in this agreement should be invalid, illegal, or unenforceable in
any respect, the validity, legality, and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby.
13. FURTHER ASSURANCES. Borrower and the Guarantor shall take
such further action as may be reasonably requested by Lender to effect the
purpose
------------------------------
LOAN AGREEMENT
PAGE 7
<PAGE>
of this agreement, including, without limitation, the execution and
delivery of any other documents as may be necessary to effect the intent of this
agreement.
14. BINDING EFFECT. The promises of the parties in this
agreement shall bind the respective heirs, administrators, personal
representatives, successors, and assigns.
15. NOTICES. Any notice to be given under this agreement shall
be deemed given when placed in the United States Mail, postage prepaid with
return receipt, addressed as follows:
<TABLE>
<S> <C> <C>
Community First National Crown Asphalt Products Crown Energy
Bank Company Corporation
300 South Wolcott 215 South State Street, 215 South State Street,
Casper, Wyoming 82601 Suite 650 Suite 650
Salt Lake City, Utah 84111 Salt Lake City, Utah 84111
</TABLE>
16. ATTORNEY'S FEES AND OTHER COSTS. In the event of a default
or breach of this agreement, or the Note or any of the Collateral Documents by
the either party, the defaulting party agrees to pay and be responsible for all
reasonable attorney's fees and/or costs of collection or enforcement incurred by
the non-defaulting party as a result of such default, including, without
limitation, any attorneys fees incurred in the giving of any notice as a result
of any such breach or default, and further including, without limitation, any
attorneys fees incurred by Lender in taking possession of and foreclosing
against the Collateral. The non-defaulting party shall be entitled to recover
its attorney's fees and costs whether or not it actually files litigation
against the defaulting party.
17. APPLICATION OF PAYMENTS. All sums paid by Borrower to
Lender or collected by Lender for application to the liabilities and obligations
of Borrower under this agreement will be first applied to any costs, expenses,
and fees, including attorney's fees, which may be owing under the terms of this
agreement, and then to any interest or late fees which may be due and owing
pursuant to the terms of this agreement, and then to reduce the principal
balance owing.
18. LATE PAYMENTS. It is specifically agreed that late payments
accepted by Lender will not operate to change or modify any of the due dates or
other payments due from Borrower to Lender. The Borrower shall be entitled to
recover such late fees as are provided for in the Note.
Remainder of page left intentionally blank
------------------------------
LOAN AGREEMENT
PAGE 8
<PAGE>
19. NO ASSIGNMENT. This agreement is not assignable by
Borrower.
Effective this 12th day of May, 1999.
BORROWER: LENDER:
Crown Asphalt Products Company, a Community First National Bank, a
Utah corporation national banking association
By: /s/ Jay Mealey By: /s/ [ILLEGIBLE]
---------------------------------- ----------------------------------
Title: President Title: Sr. V.P.
------------------------------- -------------------------------
GUARANTOR:
Crown Energy Corporation, a Utah
corporation
By: /s/ Jay Mealey
-----------------------------------
Title: President
-------------------------------
------------------------------
LOAN AGREEMENT
PAGE 9
<PAGE>
[LOGO]
[LETTERHEAD]
June 2, 1999
Crown Asphalt Products Company
And Crown Energy Corporation
215 South State Street, Suite 650
Salt Lake City, Utah 84111
ATTN: Mr. Jay Mealey
Re: $1,800,000 Loan - Conforming Amendment
Dear Jay:
You have brought to our attention the fact that the collateral descriptions in
our Uniform Commercial Code Security Agreement and Loan Agreement (both dated
May 12, 1999), as executed, do not conform with our mutual understanding of the
breadth of the collateral coverage which was to be afforded as security for the
captioned loan obligations. This letter is intended to be a letter agreement to
amend and modify the documentation of the subject loan to meet our pre-closing
understanding.
Accordingly, the Loan Agreement and the Uniform Commercial Code Security
Agreement, are, upon your execution of this letter agreement, amended and
modified so that it is clear that the security interest, assignment, lien,
pledge and other similar collateral interests in furniture inventory,
equipment, supplies, machinery, fixtures, accounts, accounts receivable,
contract rights, instruments, documents, chattel paper, chases in action,
intellectual property and general intangibles, together with all proceeds,
replacements, additions and accessions of the foregoing, are limited to such
property, assets, rights and interests (both tangible and intangible),
directly associated with or used in connection with or derived from the
emulsion plant in Carbon County, Wyoming that is described at pages 1 and 2
in subparagraphs a) and b) of the Uniform Commercial Code Security Agreement.
Any references in the Loan Agreement and the Uniform Commercial Code Security
Agreement to "Collateral" shall be limited as aforesaid.
No other change or modification is made to the Loan Agreement and the Uniform
Commercial Code Security Agreement. Community First National Bank hereby agrees
to execute and deliver to you UCC-3 amendments to modify filed financing
statements in the same fashion.
Sincerely,
COMMUNITY FIRST NATIONAL BANK
/s/ Timothy J. Anderson
Timothy J. Anderson
Senior Vice President
<PAGE>
Crown Asphalt Products Company and
Crown Energy Corporation
June 2,1999
Page Two
The above and foregoing letter is hereby accepted in amendment end modification
of the Loan Agreement and the Uniform Commercial Code Security Agreement.
BORROWER:
CROWN ASPHALT PRODUCTS COMPANY
By
---------------------------
Name:
-------------------------
Title:
------------------------
GUARANTOR:
CROWN ENERGY CORPORATION
By
----------------------------
Name:
-------------------------
Title:
------------------------
<PAGE>
GUARANTY
This Guaranty is given pursuant to the provisions of a Loan Agreement
(the "LOAN AGREEMENT") of even date herewith by and between CROWN ASPHALT
PRODUCTS COMPANY, a Utah corporation (as "BORROWER") and COMMUNITY FIRST
NATIONAL BANK, a national banking association (as "LENDER") and CROWN ENERGY
CORPORATION, a Utah corporation, (hereinafter the "GUARANTOR ") pursuant to
which the Lender is making a loan to the Borrower in the principal amount of
$1,800,000.00 (the "LOAN"). This Guaranty is intended to guarantee payment
and performance of all obligations and covenants arising under such Loan
Agreement, including, without limitation, the obligations and covenants
arising under the Promissory Note and the Collateral Documents as described
in the Loan Agreement. The Loan Agreement, the Promissory Note, and the
Collateral Documents are, by this reference, incorporated herein.
As an inducement to Lender to make the Loan to Borrower on the terms
and conditions set forth in the Loan Agreement, and for other good and
valuable consideration, which consideration includes benefits accruing to the
Guarantor as a result of the loan by Lender to Borrower, Guarantor hereby
covenants and agrees with Lender as follows:
1. DEFINITIONS. Unless otherwise defined herein, capitalized terms used
herein shall have the meanings set forth in the Loan Agreement.
2. GUARANTY. (a) Guarantor hereby absolutely, irrevocably and
unconditionally guarantees to Lender the due and punctual payment of the
Indebtedness (as such term is defined in the Loan Agreement) as and when it
shall become due and payable, after an Event of Default, whether by lapse of
time, by acceleration of maturity or otherwise, irrespective of the validity,
regularity or enforceability of the Loan Agreement, the Note or the Collateral
Documents. The obligations of Guarantor herein shall remain in effect as long as
the Indebtedness is outstanding, including all extensions or modifications
thereof.
(b) This is an absolute, irrevocable and unconditional guaranty of
payment and performance, and not of collection. Guarantor agrees that
immediately upon the occurrence of an Event of Default and written demand by
Lender, Guarantor shall pay to Lender the full amount of the Indebtedness, 'as
if the Indebtedness constituted the direct and primary obligations of Guarantor.
Lender shall be entitled to proceed directly against Guarantor for payment of
the Indebtedness,
<PAGE>
without first pursuing or exhausting any remedy that Lender then may have
against Borrower or any other guarantor of the Indebtedness. Guarantor agrees
that any failure of Lender to exercise their right to proceed directly against
Guarantor, or any delay in the exercise thereof, shall not be construed as a
waiver by Lender with respect thereto and shall not release Guarantor from its
liability hereunder, and that Lender may proceed directly against Guarantor at
any time after the occurrence of an Event of Default and Failure of Cure.
Guarantor waives any defenses based upon any election of remedies by Lender
under this Guaranty, the Agreement, the Note or Collateral Documents.
(c) Guarantor hereby waives notice of acceptance, presentment for
payment, demand for payment, protest or notice of protest and dishonor, notice
of demand and all other notices and demands of any kind and description now or
hereafter provided by any law or statute, and all other rights and defenses, the
assertion or exercise of which would in any way diminish the liability of
Guarantor hereunder.
(d) Guarantor assumes full responsibility for keeping fully informed with
respect to the business, operation, condition, and assets of Borrower and all
circumstances bearing on the risk of non-payment of the Indebtedness. Guarantor
waives any duty on the part of Lender to disclose or report to Guarantor any
information now or hereafter known to Lender relating to the business,
operation, condition or assets of Borrower, regardless of whether Lender have
reason to believe that any such facts materially increase the risk beyond that
which Guarantor intends to assume or has reason to believe that such facts are
unknown to Guarantor or has a reasonable opportunity to communicate such facts
to Guarantor.
(e) Guarantor agrees that this Guaranty and the liability of Guarantor
hereunder shall not be affected, diminished or released by: (1) any extension,
forbearance or leniency extended by Lender to Borrower with respect to the Note,
without notice to or consent by Guarantor, including notice of any default by
Borrower; (2) any amendment, modification or extension of the terms and
conditions of the Loan Agreement, the Note and the Collateral Documents, without
notice to or consent by Guarantor; or (3) any release by Lender of any other
guarantor of the Note, without notice to or consent by Guarantor. Guarantor
agrees that any joinder, waiver, consent or agreement by Borrower, by their own
operation, shall be deemed to be a joinder, consent, waiver or agreement by
Guarantor with respect thereto and that Guarantor shall continue as Guarantor
with respect to the Loan Agreement, the Note and the Collateral Documents as so
modified, extended, amended or otherwise affected.
---------------------------------------------
GUARANTY BY CROWN ENERGY CORPORATION
PAGE 2 0F 5
<PAGE>
(f) If at any time any whole or partial payment of the Indebtedness is
sought to be rescinded or must otherwise be restored or returned by the Lender
as a result of the insolvency, bankruptcy, dissolution, liquidation or
reorganization of Borrower or the appointment of a receiver, intervenor or
conservator or trustee or similar officer for Borrower or any substantial part
of its property or otherwise, then this Guaranty shall continue to be effective
or shall be reinstated, as the case may be, all as though such payments and
performance had not been made.
(g) Nothing herein contained is intended or shall be construed to give to
Guarantor any right of subrogation in or under the Note, the Loan Agreement or
the Collateral Documents, or any right to participate in any way therein, or in
the right, title and interest of Lender in and to any property covered by or
transferred under the Loan Agreement and/or the Collateral Documents,
notwithstanding any payments made by Guarantor under this Guaranty. Until
payment in full of the Indebtedness, Guarantor shall have no right of
subrogation.
(h) Guarantor waives and releases all rights of participation,
contribution, reimbursement, recourse, and subrogation available to it, now or
hereafter, against any person liable for payment of the Indebtedness or as to
any collateral security, until the Indebtedness is fully paid and discharged.
(i) Guarantor, Borrower, and Lender retain any right to make additional
advances or to negotiate modifications in the loan.
3. REPRESENTATIONS AND COVENANTS. Guarantor represents and warrants to
Lender that:
(a) Guarantor has received copies of the Note, the Loan Agreement and the
Collateral Documents and is familiar with and fully understands all of their
terms and conditions; and
(b) Lender have not made any representations or warranties to Guarantor
regarding the credit-worthiness of Borrower or the prospects of repayment from
sources other than Borrower; and
(c) Guarantor has established adequate means of obtaining from Borrower,
on a continuing basis, financial and other information pertaining to the
business of Borrower.
---------------------------------------------
GUARANTY BY CROWN ENERGY CORPORATION
PAGE 3 0F 5
<PAGE>
(d) Guarantor will perform each obligation required of a Guarantor under
the Loan Agreement.
4. MISCELLANEOUS. (a) The remedies of Lender as provided in this Guaranty
are separate and cumulative and are in addition to any other legal or equitable
remedy which Lender may have under this Guaranty, the Note, the Collateral
Documents or the Loan Agreement and may be pursued separately, successively,
concurrently, independently or together against Borrower, Guarantor, any other
Guarantors, or any one or more of them, at the sole discretion of Lender, and
may be exercised as often as occasion therefor shall arise. The failure to
exercise any such remedy shall in no event be construed as a waiver or release
thereof, nor shall the choice of one remedy be deemed an election of remedies to
the exclusion of other remedies. Nothing in this Guaranty is intended to prevent
Lender, upon the occurrence of an Event of Default, in their sole discretion,
from enforcing the provisions of the Note, Loan Agreement or Collateral
Documents.
(b) Any notice required or permitted to be given pursuant hereto, or in
connection herewith, shall be deemed to have been duly given when deposited in
the U.S. Mail, certified mail - return receipt requested addressed:
Community First National Bank
300 South Wolcott
Casper, Wyoming 82601
Crown Energy Corporation
215 South State Street, Suite 650
Salt Lake City, Utah 84111
(c) The warranties, representations, covenants and agreements set forth
in this Guaranty shall survive the delivery hereof and shall continue in full
force and effect until the Indebtedness is paid in full.
(d) The parties intend this writing to be a final expression of their
agreements and a complete and exclusive statement of the terms and conditions
with respect to the subject matter hereof and the transactions contemplated
hereby. No course of prior dealings between the parties, no usage of the trade
and no
---------------------------------------------
GUARANTY BY CROWN ENERGY CORPORATION
PAGE 4 0F 5
<PAGE>
extrinsic evidence of any nature shall be used or be relevant to supplement or
explain or modify any term used in this Guaranty.
(e) Guarantor agrees to pay reasonable attorneys' fees and costs of
collection (through and including full collection of the Indebtedness, any
appellate fees and costs, and any fees and costs incurred in enforcing the Note,
the Loan Agreement, or this Guaranty or any of the Collateral Documents in any
proceedings, including bankruptcy or insolvency proceedings) incurred by Lender
in collecting or enforcing the Note, the Loan Agreement, or this Guaranty or any
of the Collateral Documents.
(f) This Guaranty shall be binding upon and shall inure to the benefit of
the successors and assigns of the parties.
(g) This Guaranty shall be governed by, and construed and enforced in
accordance with, the laws of the State of Wyoming.
Guarantor has executed this Guaranty of his own free act and deed this
12th day of May, 1999.
Crown Energy Corporation, a Utah
Corporation
By: /s/ J. Healey
---------------------------
Title: President
------------------------
---------------------------------------------
GUARANTY BY CROWN ENERGY CORPORATION
PAGE 5 0F 5
<PAGE>
ASSIGNMENT AND ASSUMPTION AGREEMENT
(OFFSITE SERVICES AGREEMENT)
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is made, executed and delivered between
and among Exxon Company U.S.A., a division of Exxon Corporation, a New Jersey
corporation having offices at 800 Bell Street, Houston, Texas 77002 ("Exxon");
Asphalt Supply and Service, Inc.
509 West Railroad Street
Laurel, MT 59044 hereafter called Assignor; and
Crown Asphalt Products Company
215 South State Street Suite 650
Salt Lake City, UT 84111 hereafter called Assignee.
Pursuant to an Offsite Services Agreement between Exxon and Assignor, such
agreement bearing Exxon internal reference number PIA032398 (the "Service
Contract") Assignor contracted to provide certain services to Exxon in exchange
for certain agreed-upon remuneration. Assignee has or will acquire certain
operating assets from Assignor, including the Service Contract. In connection
therewith, Assignor and Assignee now desire to assign all right, title and
interest of Assignor in and to the Service Contract to Assignee in accordance to
the terms and conditions specified below.
In consideration of their mutually-dependent promises, the Parties hereby agree
as follows:
1. For a valuable consideration, the receipt of which by Assignor is
acknowledged, Assignor sells, assigns, transfers and sets over to
Assignee all of Assignor's interest in and under the Service
Contract, as the same may have been amended or modified and as the
same may be hereby modified and amended.
2. Assignee accepts the assignment and agrees to be bound by and to
abide by each and every of the terms, conditions and provisions of
the Service Contract and any amendments made thereto.
3. Exxon consents to the assignment from Assignor to Assignee, provided
that such consent shall not be construed as consent to any further
assignment of the Service Contract.
Further, in order to induce the Assignee to assume the obligations of the
Assignor under the Service Contract, Exxon represents and warrants to the
Assignee, as of the date hereof, as follows:
1. The copy of the Service Contract attached hereto as EXHIBIT 1 is a
true, correct and complete copy of the Service Contract and
represents the entire agreement between Exxon and the Assignor.
2. Asphalt Supply & Service, Inc. is the current "Contractor" under the
Service Contract. Exxon has not previously been notified of any
other assignment of the Service Contract.
<PAGE>
3. The current term of the Service Contract expires on December 31, 2000 at
which time the Service Contract shall automatically renew for an
additional calendar year (and shall continue to renew for an unlimited
number of successive calendar year periods), unless earlier terminated by
Exxon or Contractor providing a notice of termination at least ninety
days in advance of the last day of the then current annual term.
4. To the best of Exxon's knowledge, the Assignor is not in default in any
respect of its obligations under the Service Contract, nor is there now
any fact or condition which, with notice or lapse of time, would
constitute a default or permit termination, modification or acceleration
under the Service Contract.
5. The Service Contract is in full force and effect.
6. Exxon is not aware of any claims, offsets or defenses against the
Assignor and there are no disputes, oral agreements or forbearance
programs in effect as to the Service Contract.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment and
Assumption Agreement and made the same effective as of April 17, 1999.
EXXON COMPANY, U.S.A., a division of
Exxon Corporation
By: /s/ [ILLEGIBLE]
----------------------------------
Title: EUSA, Mktg, L&FS Opns. Mgr.
-------------------------------
ASSIGNOR:
ASPHALT SUPPLY & SERVICE, INC.
By: /s/ R. Ryan Zimmerman
----------------------------------
R. Ryan Zimmerman, President
ASSIGNEE:
CROWN ASPHALT PRODUCTS COMPANY
By: /s/ Jay Mealey
----------------------------------
Jay Mealey, President
<PAGE>
EXHIBIT I
OFFSITE SERVICES AGREEMENT: PRINCIPAL DOCUMENT
This continuing services agreement ("Agreement") is made effective as of the
date of last signature below, between Exxon Company, U.S.A., a division of Exxon
Corporation, a New Jersey corporation, having offices at 800 Bell Street,
Houston, Texas 77002 ("Exxon") and Asphalt Supply and Services, Incorporated
(ASSI), a Montana corporation, having offices at 509 West Railroad Street,
Laurel, Montana 59044 ("Contractor"). and is made in consideration of the terms
and conditions contained in this Agreement. Exxon and Contractor agree as
follows:
INDEX
<TABLE>
<S> <C>
I PRINCIPAL DOCUMENT II. GENERAL TERMS AND CONDITIONS
1. DEFINITIONS
2. SCOPE OF SERVICES
3. TERM III. EXHIBITS
4. VOLUME
5. COMPENSATION Unless indicated by "N/A" adjacent to each Exhibit listed
6. INVOICING PROCEDURES below, the following Exhibits are each incorporated into
7. CONTRACTOR'S WARRANTIES this Agreement.
8. RETURNED GOODS
9. HEALTH, SAFETY AND RELATED POLICIES EXHIBIT A Scope of Services -------
10. ENVIRONMENTAL EXHIBIT B Product Quality Control & Measurement
11. INSURANCE -------
12. APPLICABLE LAW EXHIBIT C Compatibility & Cleaning Guidelines
13. FEDERAL CONTRACT CLAUSES -------
14. NOTICES EXHIBIT D Compensation -------
15. SURVIVORSHIP EXHIBIT E Invoicing Procedures -------
16. AGREEMENT ASSIGNMENTS EXHIBIT F Federal Contract Supplement -------
17. AMENDMENTS EXHIBIT G Health and Safety Requirements -------
18. PRECEDENCE
19. ENTIRE AGREEMENT EXHIBIT H Drug and Alcohol Policy -------
20. CONDITION PRECEDENT EXHIBIT I Product Specifications -------
EXHIBIT J Marine Provisions N/A
-------
</TABLE>
ARTICLE 1: DEFINITIONS
For the purposes of this Agreement, the following terms shall have the meanings
stated below:
<TABLE>
<S> <C>
1) "Agreement" means this Principal Document, the Houston, Texas 77002 which is the party entering
Exhibits indicated in the Index and the General into this Agreement.
Terms and Conditions.
6) "Law" means all government laws, regulations and
2) "Competence" means the expertise, experience, rules.
capability and specialized knowledge to perform
Services in a good and workmanlike manner and 7) "Principal Document" means this part of this
within all accepted standards for the industry. Agreement labeled CONTINUING SERVICES
AGREEMENT: PRINCIPAL DOCUMENT.
3) "Contractor" means the legal entity identified in the
preamble of this Principal Document that is 8) "Product" means asphalt binders and related
responsible for performing Services in accordance additives listed in Exhibit 1.
with the terms of this Agreement.
9) "Services" means the services described in Exhibit
4) "Exhibits" means the exhibits listed In the Principal A.
Document and incorporated into this Agreement.
10) "Subcontractors" means subcontractors, suppliers
5) "Exxon" means Exxon Company, U.S.A., a division or materialmen providing materials or services to
of Exxon Corporation, a New Jersey corporation, Contractor for the purpose of completing Services
having its principal offices at 800 Bell Street, under this Agreement.
</TABLE>
<PAGE>
Continuing Services Agreement PIA032398
ARTICLE 2: SCOPE OF SERVICES
The purpose of this Agreement is to provide the Services specifically set out in
Exhibit A. The Services are generally described as receiving, unloading,
storing, blending, shipping, and inventorying Exxon Product by Contractor at
ASSI's asphalt terminal located at 509 West Railroad Street, Laurel, Montana
59044.
ARTICLE 3: TERM AND AGREEMENT TERMINATION
3.1 TERM
The Term of this Agreement begins on the date of last signature below and shall
continue through December 31, 1998, at which time it shall automatically renew
each calendar year thereafter, unless terminated earlier as permitted by this
Agreement. In no event shall this Agreement extend beyond December 31,
2000.
3.2 AGREEMENT TERMINATION
Exxon or Contractor may terminate this Agreement on the last day of an
annual term by giving a notice of termination at least ninety (90) days in
advance to the other party.
Neither party shall be liable to the other as a result of termination of this
Agreement for any costs, claims, losses, damages, or liabilities including,
without limitation, loss of anticipated profits. Exxon shall not be liable to
Contractor for reimbursement for Services unperformed as a result of the
termination.
3.3 PRODUCTS IN CUSTODY AT TERMINATION/EXPIRATION
Upon receipt or delivery of a notice of termination or expiration of this
Agreement, Contractor shall have the option to purchase all or any quantity
of Product in its custody at any termination or expiration of this Agreement,
such option exercisable by giving Exxon notice of its election, including the
quantity of Product to be purchased, not later than thirty (30) days prior to
the effective date of termination. If Contractor exercises its option, title
to the option quantities of the Product shall automatically pass to
Contractor on the date of termination or expiration, and within ten (10) days
thereafter, Contractor shall pay Exxon per an agreed upon price at the time
of termination or expiration. Volume to be determined by gauging the tanks.
If Contractor does not exercise its option, Exxon shall arrange to have all
Product removed from ASSI's facility on or before the date of termination or
expiration at Exxon's expense.
ARTICLE 4: VOLUME
Exxon is not committed to purchase any specific amount of Service during the
period covered by this Agreement. Any yearly usage figures are Exxon's best
estimate of requirements and are for Contractor's use as a guide.
ARTICLE 5: COMPENSATION
Subject to the provisions of this Agreement, Contractor shall charge and
Exxon shall pay Contractor the applicable rates and fees specified in Exhibit
D, for satisfactory performance and completion of Services that Contractor
performs under this Agreement. No payment by Exxon shall limit Exxon's right
to later dispute any of the charges invoiced, and payment shall not be
construed at Exxon's acceptance of any Services.
ARTICLES 6: INVOICING PROCEDURES
Contractor shall invoice Exxon for Services using the invoicing procedures in
Exhibit E. Exxon shall not be obligated to make any payments of invoices if
Contractor does not comply with invoicing procedures.
ARTICLE 7: CONTRACTOR'S WARRANTIES
7.1 CONTRACTOR'S REPRESENTATIONS AND WARRANTIES
Contractor represents and warrants that it:
(a) Has the Competence to perform the Services;
(b) Has or shall obtain the necessary tools, equipment and personnel
to provide the Services;
(c) Shall maintain and use all tools and equipment in accordance with
manufacturer's specifications and recommendations and good
engineering and operational practices;
(d) Has or shall obtain, at its expense, before performing any
Services all the necessary certificates, permits, licenses and
authorizations to conduct business and perform the Services;
(e) Shall perform all Services in accordance with all applicable Law;
(f) Shall perform all Services in good faith, promptly, with due
diligence and Competence; and
(g) Fully comprehends the requirements and contingencies for providing
Services and it shall examine the Work Site for any additional or
special requirements and contingencies prior to performing
Services.
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Continuing Services Agreement PIA032398
7.2 CONTRACTOR'S DUTY FOR COMPLIANCE OF SERVICES WITH AGREEMENT
Contractor represents and warrants that it shall not perform any aspect of
the services that it knows or has reason to believe cannot be performed in
conformity with the provisions of this Agreement. If Contractor determines
that it cannot perform Services in conformity with these provisions,
Contractor shall immediately advise Exxon and work with Exxon to develop a
mutually satisfactory resolution for the inability to perform.
ARTICLE 8. RETURNED GOODS
Should Exxon elect to return to Contractor, and an authorized Contractor
employee has agreed to receive prior to being returned, on specification or
carrier damaged Products processed and delivered by Contractor, Exxon shall
be responsible for all transportation costs and Contractor's charges. In the
event off specification Product, which is confirmed by Contractor's retained
sample or non-salable Product as specified in Exhibit 1, which is noted an
Contractor's bill of lading and co-signed by both carrier and Contractor
authorized employee at time of delivery (for example, Product contamination
attributed to Contractor) was processed and delivered by Contractor, it shall
be returned at Contractor's cost including reimbursement to Exxon for all
transportation, insurance, Product, Service or material charges.
ARTICLE 9: HEALTH, SAFETY AND RELATED POLICIES
9.1 CONTRACTOR'S HEALTH AND SAFETY OBLIGATIONS
Contractor shall be responsible for providing a healthy and safe work place
and working environment for its employees and Subcontractors during
performance of Services. Contractor shall protect the health and safety of
Contractor's, Subcontractors' and Exxon's employees, the public, and other
third parties from any danger associated with the Services. All tools,
equipment, facilities and other items used by the Contractor and its
practices employed to accomplish the Services are considered part of the
working environment. As minimum health and safety requirements, Contractor
acknowledges and agrees that it is responsible for and shall ensure that all
Services are performed in compliance with any and all:
(a) Application Law;
(b) Health and safety requirements of Exxon set out in Exhibit G; and
In addition, Contractor agrees that it is responsible and shall ensure that
all Services are performed in compliance with any changes to Exhibit G made
by Exxon in accordance with Section 9.2 below. Contractor agrees to adopt
whatever methods, procedure and precautions are necessary to comply with the
provisions in this Article 9.
9.2 CHANGES IN HEALTH AND SAFETY REQUIREMENTS
Exxon may modify or replace at any time the provisions of Exhibit G regarding
any health or safety rule(s), regulation(s) or policy(s) applicable to
Services under this Agreement by notifying Contractor either orally or in
writing without complying with any provision on giving notice in this
Agreement.
9.3 RIGHTS AND REMEDIES
Contractor acknowledges that compliance with the provisions of this Article 9
are of the highest importance. Any breach of this Article 9 or the provisions
of Exhibit G or H as may be modified shall constitute a substantial and
material breach of the Agreement entitling Exxon to exercise the rights and
remedies specified in this Agreement and any other rights and remedies under
applicable Law or equity.
ARTICLE 10: ENVIRONMENTAL
In the event of any Product spills or other environmentally polluting
discharges arising from the operations of the Contractor's facility, clean up
and/or resulting liability for such spills or discharges shall be the sole
responsibility of Contractor. In the event of any Product spills or other
environmentally polluting discharges arising from the operation of delivering
or receiving vessel or vehicle operated by Exxon or its contractors or any
other entity except Contractor acting on behalf of or at the direction of
Exxon, Contractor is authorized to commence containment or clean up
operations as deemed appropriate or necessary and Contractor shall notify
Exxon immediately of such operations. All reasonable costs for containment or
cleanup for such spill or discharge shall be borne by Exxon. In the event a
spill or discharge is the result of joint negligence by both Contractor and
Exxon, costs of containment or clean up shall be borne jointly by Contractor
and Exxon In proportion to each party's negligence. Nothing herein shall
prevent either Exxon or Contractor from recovering any costs resulting from
the negligent act or omission of such contractor or its agents. With regard
to providing Services described herein, ASSI shall be deemed "Contractor" for
purposes of all environmental laws and regulations.
3
<PAGE>
Continuing Services Agreement PIA032398
ASSI shall be considered "generator" of all wastes generated on or from the
Premises in or from storage tanks or containment areas for purposes of
federal, state or local hazardous and non-hazardous waste laws and
regulations. ASSI shall perform the duties and responsibilities of the
"generator" in compliance with all applicable laws and regulations, including
(without limitation) identifying, packaging, manifesting, reporting, record
keeping, handling, transportation and disposing of all hazardous liquid or
solid waste removed from the facility. For the purpose of this agreement,
waste shall include but not be limited to, line flush, leakage and expired
Quality Control Samples. Any waste not specifically identified as the
responsibility of Exxon shall be the responsibility of Contractor. Exxon
agrees to notify Contractor immediately if any component supplied by Exxon is
or becomes classified as toxic or hazardous, and Exxon will remove inventory
of any such component from Contractor's premises at the end of the contract
or if use of such component is discontinued.
Material Safety Data Sheets: Exxon shall furnish to Contractor Material
Safety Data Sheets, including warnings and safety and health information
concerning the products and/or the containers for such products sold
hereunder. Contractor agrees to communicate such information to all persons
Contractor can reasonably foresee may be exposed to or may handle such
materials or containers, including but not limited to Contractor's employees,
agents, contractors or customers. Exxon Material Safety Data Sheets are
available on a 24 hour fax-it-back basis by calling 1-800-298-4007 and
entering the Exxon Product code for each Product as set out in Appendix F
attached hereto.
ARTICLE 11: INSURANCE
11.1 MINIMUM INSURANCE REQUIREMENTS
Contractor shall carry and maintain in force the following insurances in
amounts and with companies satisfactory to Exxon:
(a) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
For all its employees engaged in performing Services, workers'
compensation and employers' liability insurance or similar social
insurance in accordance with Law which may be applicable to those
employees.
(b) COMPREHENSIVE GENERAL LIABILITY
Its normal and customary comprehensive general liability insurance
coverage and policy limits or at least $1,000,000.00, whichever is
greater, providing coverage for injury, death or property damage
resulting from each occurrence.
Contractor further agrees that the minimum insurance requirements as set forth
above shall not limit or waive Contractor's legal or contractual
responsibilities to Exxon or to others.
11.2 PROOF OF INSURANCE AND CHANGES
Upon request by Exxon, Contractor shall have its insurance carrier(s) furnish to
Exxon certified copies of the required insurance policies and/or certificates of
insurance specifying that no insurance shall be canceled or materially changed
while Services are in progress without thirty (30) calendar days prior written
notice to the requester.
11.3 SUBCONTRACTORS' INSURANCE
If Contractor subcontracts any part of the Services, Contractor shall require
its Subcontractors to maintain insurance specified in the subcontracts, but
shall not require Subcontractors to carry insurance that would duplicate the
coverage of the insurance carried by Contractor. Upon request by Exxon,
Contractor shall have its Subcontractors furnish the same evidence of
insurance required by Contractor.
11.4 COMMENCEMENT OF SERVICES
Contractor and its Subcontractors shall not begin Services until all of the
insurance required of Contractor and its Subcontractors is in force and the
necessary documents, if requested by Exxon, have been received.
ARTICLE 12: APPLICABLE LAW
The validity, interpretation and construction of this Agreement shall be
governed by the Laws of the State of Texas without reference to that state's
principles of conflicts of law.
ARTICLE 13: FEDERAL CONTRACT CLAUSES
Exxon is an U.S. Government contractor. This Agreement therefore incorporates by
this reference, and each party shall comply with, all applicable federal laws,
regulations and orders, including without limitation those relating to equal
opportunity, utilization of small business concerns and small disadvantaged
business concerns, employment of the
4
<PAGE>
Continuing Services Agreement PIA032398
handicapped, employment of disabled veterans and veterans of the Vietnam era,
and the environment. Contractor certifies that no facility which has been the
subject of a conviction under the applicable portion of the Clean Air Act (42
U.S.C. 7413(c)(1)) or Clean Water Act (33 U.S.C. 1319(c)) and is listed by the
Environmental Protection Agency as a violating facility will he used in the
performance of any Services incorporating this Agreement. Those Federal Contract
Clauses which are required to be expressly incorporated into this Agreement are
contained in the attached Federal Contract Supplement (Exhibit F), and the
parties agree to the terms and conditions contained in that Supplement.
ARTICLE 14: NOTICES
14.1 AGREEMENT NOTICES
Notices intended to affect this Agreement and required or permitted to be given
under this Agreement to Exxon or Contractor, shall be in writing and deemed to
be properly given if addressed to the appropriate party at the address below,
and:
(a) Delivered in person,
(b) Sent by facsimile with confirmation,
(c) Deposited in the United States mail with first class postage
prepaid, or
(d) Delivered by private, prepaid courier
EXXON CONTRACTOR
- ------- ----------
Exxon Company, U.S.A. Mr. Robert R. Zimmerman
800 Bell Street, Room 2405D Asphalt Supply and Services, Incorporated
Houston, Texas 77002 509 West Railroad Street
Attn: CONTRACT FACILITY COORDINATOR Laurel, Montana 59044
Phone: 713/656-2411 Phone: (406) 628-2277/4353
Fax 713/656-7319 Fax: (406) 628-6459
14.2 ADDRESS CHANGES
Any address for notices under Sections 14.1 above may be changed by written
notice to the other party as provided in this Article 14.
ARTICLE 15: SURVIVORSHIP
The provisions of Articles 3, 7, 15 and 16 of this Principal Document and
ArticIes 3, 4, 7, 8 and 9 of the General Terms and Conditions shall survive any
expiration or termination of this Agreement.
ARTICLE 16: AGREEMENT ASSIGNMENTS
Contractor shall not assign this Agreement in whole or in part (including any
sum accruing to Contractor) without the prior written approval of Exxon, which
approval may be withheld for any reason. Any assignment of this Agreement, if
approved by Exxon, shall not relieve Contractor of its responsibilities under
this Agreement.
ARTICLE 17: AMENDMENTS
Any alteration deletion or addition to any of the terms of this Agreement shall
only be effective if made in a written amendment to this Agreement, duly
executed by Exxon and Contractor. Once an Agreement is made, it shall be deemed
incorporated as of its effective date for all ongoing and future Services,
unless expressly stated to the contrary in the amendment.
ARTICLE 18: PRECEDENCE
In the event of a conflict between any provisions of this Agreement, the
terms in this Principal Document shall take precedence and govern over the
General Terms and Conditions and the Exhibits, and the General Terms and
Conditions shall take precedence and govern over the Exhibits.
ARTICLE 19: ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between Contractor and Exxon,
and it supersedes all prior negotiations, representations, or agreements, either
oral or written, related to this Agreement.
5
<PAGE>
Continuing Services Agreement PIA032398
ARTICLE 20: CONDITION PRECEDENT
If Contractor is the first party to execute this Agreement below, Exxon's
acceptance of this Agreement is conditioned on Exxon's review and execution of
this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement in
duplicate originals.
Exxon Company, U.S.A.
(Contractor) (a division of Exxon Corporation)
By: Asphalt Supply & Service Inc. By: /s/ W R Carter
------------------------------------ -------------------------------
Name [ILLEGIBLE] Name W R Carter
---------------------------------- -----------------------------
(Typed or Printed) (Typed or Printed)
Title President Title [ILLEGIBLE] Operations Mgr.
--------------------------------- -----------------------------
Date 4-3-98 Date 4/6/99
----------------------------------- ------------------------------
6
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of November 1,
1999 (this "Amendment"), is by and between CROWN ENERGY CORPORATION, a Utah
corporation, (the "Company") and JAY MEALEY (the "Executive").
WITNESSETH:
WHEREAS, the Company and the Executive are parties to an Employment
Agreement, dated effective November 1, 1997 (the "Agreement"), pursuant to which
the Company is employing the Executive as President and CEO of the Company; and
WHEREAS, the parties desire to amend the Agreement on the terms and
conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual promises herein
provided, the parties hereto agree as follows:
AGREEMENT
1. DEFINITIONS. Terms used but not defined herein shall have the
meanings assigned to such terms in the Agreement.
2. EXTENSION OF TERM. The end of the Term of the Agreement is extended
to December 31, 2003 and Section 2.1 and 2.2 are hereby amended to reflect such
extension. The Company will give no written notice of non-renewal of the Term
until after December 31, 2002. as provided in Section 2.2
3. AMENDMENT. The Agreement is amended as follows:
Section 3.2.2 is deleted in its entirety and the following inserted
in the place thereof:
"3.2.2 STOCK PRICE BONUS. The Executive shall be paid bonus
compensation (the "Stock Price Bonus") in addition to his Base Salary, based on
an increase, if any, in the average price for the Company's Common Stock, $0.02
par value per share (the "Common Stock"), as quoted on the NASD's Electronic
Bulletin Board, or such other exchange as the case may be, for all of the
trading days in the month of September and October in each applicable fiscal
year (the "Average Price") from the Base Price of the Common Stock. The Base
Price for the year ending October 31, 2000 will be equal to the average bid
price per share of the Common Stock for the three months immediately preceding
and immediately following the effective date hereof and such Base Price will
increase each year by thirty percent (30%) over the prior year Base Price. For
each year ending October 31, Executive shall be paid a bonus which shall be
equal to 10% of Executive's actual Base Salary for such applicable fiscal year
(for purposes of this Section 3.2.2 such portion of
1
<PAGE>
the applicable Base Salary shall hereinafter be referred to as the "Stock Bonus
Payment") for each $0.20 increase in the Average Price over the Base Price for
that same year; provided, that in the event the Average Price exceeds the Base
Price plus $0.20, the Executive shall receive a payment equal to a pro rata
portion of the Stock Bonus Payment for any additional increase which is less
than $0.20. However, in no event shall the Stock Bonus Payment in any year
exceed 100% of Executive's Base Salary in that year.
4. STOCK OPTIONS. As soon as practicable, but in no event later than 30
days after the execution of this Agreement, the Company and the Executive shall
execute a stock option agreement pursuant to the Company's Incentive Stock
Option Plan in which the Executive is granted options (the "Options") to
purchase 450,000 shares of Common Stock of the Company (or any other shares or
class of stock into which the common stock shall be exchanged, recapitalized or
converted), (the "Company Common Stock") at an exercise price equal to the
average bid price for the three months immediately preceding and immediately
following the effective date hereof. Such Options are granted in addition to
those granted pursuant to Section 3.4 of the Agreement. Options to purchase
150,000 shares of the Company Common Stock shall vest on May 1, 2001, Options to
purchase 150,000 shares of the Company Common Stock shall vest on May 1, 2002
and Options to purchase 150,000 shares of the Company Common Stock shall vest on
May 1, 2003. In the event that the average ask price for the Company's Common
Stock, as quoted on the NASD's Electronic Bulletin Board, or such other exchange
as the case may be, for any thirty (30) day period (the "Stock Price") equals or
exceeds (a) $1.00, then Options to purchase 150,000 shares of the Company Common
Stock (the "First Shares") shall become exercisable at the end of such period,
(b) $1.30, then Options to purchase the First Shares, if applicable, and an
additional 150,000 shares of the Company Common Stock (the "Second Shares")
shall become exercisable at the end of such period and (c) $1.69, then Options
to purchase the First Shares, if applicable, the Second Shares, if applicable,
and an additional 150,000 shares of the Company Common Stock shall become
exercisable at the end of such period. The Options will be exercisable for a
period of ten years from the date of this Amendment.
5. RATIFICATION. The Agreement, as amended hereby, remains in full
force and effect.
6. COUNTERPARTS. This Amendment may be executed in counterparts, each
of which shall be deemed an original, but all of which shall together constitute
one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date and year first above written.
CROWN ENERGY CORPORATION JAY MEALEY
By:
------------------------------ ------------------------------
Title :
-------------------------
2
<PAGE>
January 7, 2000
Mr. William Kraemer
MCNIC Pipeline & Processing Company
170 West Jefferson, Suite 1900
Detroit, MI 48226
RE: ELECTION TO PROCEED WITH ADDITIONAL PILOT PLANT
Dear Bill:
Pursuant to our recent discussions, both MCNIC Pipeline & Processing Company
("MCNIC") and Crown Asphalt Corporation ("Crown"), as all of the members of
Crown Asphalt Ridge L.L.C. ("CAR"), have agreed that CAR should proceed with the
construction and operation of the pilot plant for the purposes of assessing the
process modifications made to CAR's tar sands facility in Vernal, Utah. The
purpose of this letter is to set forth the agreement of the parties with regard
to the present funding of the pilot plant without otherwise affecting the
parties' respective rights under the LLC Agreement, as defined below, other than
as expressly set forth herein. The estimated cost of such pilot plant is as set
forth in the Authorization for Expenditure attached hereto as Exhibit A (the
"Pilot Plant AFE"). Both MCNIC and Crown have agreed to and, simultaneously with
the execution of this Letter Agreement will, execute the Pilot Plant AFE. The
Pilot Plant AFE authorizes CAR, or either member on behalf of CAR, to expend the
sums set forth on the Pilot Plant AFE for the benefit of CAR.
While Crown has authorized CAR, or MCNIC on behalf of CAR, to make the
expenditures set forth on the Pilot Plant AFE, Crown, in its capacity as a
member of CAR, has stated that it is not able at this time to make its
proportionate share of the Additional Capital Contributions required in order to
satisfy the payment of any such expenditures in accordance with the Pilot Plant
AFE. Therefore, MCNIC and Crown agree that Crown will be considered a Delinquent
Member solely with regard to its proportionate amount of the Additional Capital
Contributions actually made by MCNIC and expended by CAR for payment of the
amounts under the Pilot Plant AFE. As provided in Section 3.6(a)(ii) of the
Crown Asphalt Ridge L.L.C. Operating Agreement, dated as of August 1, 1997 (the
"LLC Agreement"), MCNIC, as the Non-Defaulting Member, will advance Crown's
proportionate share of the Additional Capital Contributions from time to time
required for the payment of the expenditures set forth on the Pilot Plant AFE,
but shall be deemed not to be in breach of the LLC Agreement as a result of such
status. Such Additional Capital Contributions advanced by MCNIC will be
<PAGE>
Mr. William Kraemer
January 7, 2000
Page 2
designated as a Capital Contribution by MCNIC and will be subject to the terms
and conditions of Section 3.6(a)(ii)(B) of the LLC Agreement. As a result, as
provided in Section 3.6(a)(ii)(B), Crown, as the Delinquent Member will have its
Sharing Ratio reduced and MCNIC, as the Non-Defaulting Member will have its
Sharing Ratio increased to reflect the fact that MCNIC has made an Additional
Capital Contribution as agreed by the parties on the Pilot Plant AFE. MCNIC will
provide documentation to Crown evidencing the payment of such Additional Capital
Contribution.
For purposes of this Letter Agreement, terms used but not defined, shall have
the meaning assigned to them in the LLC Agreement. Except as specifically
provided in this Letter Agreement, the LLC Agreement will remain in full force
and effect with no changes, amendments or revisions. If the foregoing accurately
reflects our understanding, please execute both originals in the space provided
below. Please return one original to me and retain the other for your files.
Sincerely,
Crown Asphalt Corporation
- ---------------------------------
Jay Mealey
President
Accepted and agreed to
This ___ day of January, 2000.
MCNIC Pipeline & Processing Company
- ---------------------------------
William Kraemer
Vice President
<PAGE>
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT ("Agreement") is made as of February 4, 2000
by and between:
a. Crown Asphalt Products Company, a Utah corporation,
Crown Energy Corporation, a Utah corporation;
(collectively "Crown")
b. Asphalt Supply and Service, Inc., a Montana
corporation ("ASSI");
c. Inoco, Inc., a Montana corporation ("Inoco");
d. Interstate Asphalt Company, a North Dakota
corporation ("Interstate");
e. Robert A. Zimmerman, Connie R. Zimmerman, and R. Ryan
Zimmerman (collectively "Zimmermans")
Crown, ASSI, Inoco, Interstate, and Zimmermans are sometimes
collectively referred to as "Parties," or individually as "Party."
I. RECITALS
A. On or about April 17, 1999, the Parties entered into an Asset
Purchase Agreement whereby Crown purchased all of the assets, properties, titles
and interests of two asphalt terminals then owned by ASSI, Inoco, Interstate,
and/or the Zimmermans and located in Laurel, Montana and Williston, North
Dakota. On or about June 14, 1999, the parties entered into a Supplemental
Letter Agreement in connection with the Asset Purchase Agreement. Disputes have
arisen between the Parties regarding Asset Purchase Agreement and Supplemental
Letter Agreement. As a result of these disputes, on July 28, 1999, the
Zimmermans filed in the Montana First Judicial District Court, Lewis and Clark
County, an application for preliminary injunction, numbered CDV 9900502
(hereinafter "Zimmerman Action"). Also as a result of these disputes, on
December 8, 1999, Crown filed an action in the U.S. District Court for the
District of Montana, Billings Division, numbered CV-99-162-BLG-RWA (hereinafter
"Crown Action").
B. The Parties deny any and all liability arising out of the Asset
Purchase Agreement, the Supplemental Letter Agreement, the claims in the
Zimmerman Action, the claims in the Crown Action, or otherwise. The Parties are
willing to enter into this Agreement, wishing to avoid the delays, uncertainties
and hazards of litigation, and have agreed to fully compromise and settle all
claims between them.
<PAGE>
SETTLEMENT AGREEMENT
ZIMMERMAN V. CROWN
II. AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the Parties herein contained and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, it is agreed by and
between the Parties as follows:
1. RESCISSION OF THE ASSET PURCHASE AGREEMENT AND SUPPLEMENTAL LETTER
AGREEMENT
The Parties hereby acknowledge that the April 17, 1999 Asset Purchase
Agreement and the June 14, 1999 Supplemental Letter Agreement are rescinded.
2. PAYMENT OF $320,000.00
The Parties hereby agree that ASSI, Inoco, Interstate, and the
Zimmermans are jointly and severally liable to pay Crown the sum of $320,000.00
simultaneously with the release of the documents described in paragraph 6 below.
Payment shall be made simultaneously with the delivery of said documents by wire
transfer IN IMMEDIATELY AVAILABLE FUNDS to Crown's bank account as follows:
- Bank: Bank One Utah NA
185 South State
Salt lake City, UT
- ABA Number: 124001545
- For the Account of: Crown Asphalt Products Company
- Account Number: 913739939
3. RELEASES FROM MONTANA RAIL LINK AND EXXON CORPORATION
a. MONTANA RAIL LINK LEASE NO. 500,875-01
The Parties hereby agree that within 7 days of the execution of this
Settlement Agreement, ASSI, Inoco, Interstate, and the Zimmermans will provide
to Crown a written release from Montana Rail Link releasing Crown from any
demands, claims, interests, rights, liabilities, remedies, and/or causes of
action arising from the Montana Rail Link Lease No. 500,875-01, Laurel, Montana,
dated May 16, 1999.
b. ASSIGNMENT AND ASSUMPTION AGREEMENT (OFFSITE SERVICES
AGREEMENT)
The Parties hereby agree that within 7 days of the execution of this
Settlement Agreement, ASSI, Inoco, Interstate, and the Zimmermans will provide
to Crown a written release from Exxon Corporation releasing Crown from any
demands, claims, interests, rights, liabilities, remedies, and/or causes of
action arising from the Assignment and Assumption Agreement (Offsite Services
Agreement) among Exxon Company, U.S.A., ASSI, and Crown dated April 17, 1999,
and which relates to the Offsite Services Agreement dated April, 1998 between
ASSI and Exxon Company, U.S.A.
2
<PAGE>
c. INDEMNIFICATION
In addition to the written releases specified above, the Parties agree
that ASSI, Inoco, Interstate, and the Zimmermans will indemnify Crown and hold
it harmless for any and all demands, claims, interests, rights, liabilities,
remedies, and/or causes of action arising from the May 16, 1999 Montana Rail
Link Lease No. 500,875-01 and/or the April 17, 1999 Assignment and Assumption
Agreement (Offsite Services Agreement).
4. DISMISSAL OF ZIMMERMAN ACTION WITH PREJUDICE
The Parties agree that, upon execution of this Settlement Agreement,
ASSI, Inoco, Interstate, and the Zimmermans shall dismiss with prejudice Cause
No. CDV 9900502, filed in the Montana First District Court, Lewis and Clark
County.
5. DISMISSAL OF CROWN ACTION WITH PREJUDICE
The Parties agree that, upon execution of this Settlement Agreement,
Crown shall dismiss with prejudice Civil No. CV-99-162-BLG-RWA, filed in the
U.S. District Court for the District of Montana, Billings Division.
6. ESCROW OF DOCUMENTS
Upon execution of this Settlement Agreement, Crown will deliver the
following documents to Mark Parker, Esq., Parker Law Firm, 401 North 31st
Street, P.O. Box 7212, Billings, Montana, 59103-7212:
a. The Warranty Deed for the Williston, North Dakota facility;
b. Montana Rail Link Lease No. 500,875-01, Laurel, Montana,
dated May 16, 1999; and
c. The Assignment and Assumption Agreement (Offsite Services
Agreement) among Exxon Company, U.S.A., ASSI, and Crown dated
April 17, 1999.
These documents shall be held in escrow at the Parker Law Firm.
Simultaneously with the wire transfer of $320,000.00 from ASSI, Inoco,
Interstate, and/or the Zimmermans to Crown, the Parker Law Firm will release the
documents specified herein to ASSI, Inoco, Interstate, and/or the Zimmermans.
7. RELEASE AND DISCHARGE OF ASSI, INOCO, INTERSTATE, AND THE
ZIMMERMANS BY CROWN
Except as to the rights specified in paragraphs 1 - 6 herein:
a. Crown hereby waives, releases, relinquishes and disavows any
and all demands, claims, interests, rights, remedies, and causes of action
assertable, directly or
3
<PAGE>
indirectly, against ASSI, Inoco, Interstate, and the Zimmermans, or any of their
clients, agents, attorneys, employees, subsidiaries, parents, affiliates,
contractors, officers, advisers, directors, shareholders, consultants, insurers,
or successors in interest (whether or not any of the same were acting within or
without the scope of their employment, agency or engagement) for any acts,
failures to act, representations, commitments, statements, warranties, failures
to disclose or make representations, covenants, promises or agreements,
including without limitation any claims for past, present or future actual or
punitive damages, or for any claim or cause of action of any kind whatsoever
that Crown may have against the parties described above arising from acts
occurring on or prior to the date of this Agreement that are related to the
Asset Purchase Agreement, Supplemental Letter Agreement, the Zimmerman Action,
and/or the Crown Action. Crown agrees that the waivers, releases,
relinquishments, and disavowals herein granted shall be with respect to claims,
interests, rights, remedies, and causes of action known or unknown, matured or
unmatured, contingent or direct, existing or hereafter arising, which relate to
the Asset Purchase Agreement, the Supplemental Letter Agreement, the Zimmerman
Action, and/or the Crown Action.
b. Crown agrees not to encourage, assist, initiate, or prosecute
any actions, court proceedings, arbitration, disciplinary proceedings,
administrative agency actions or otherwise with respect to any of the matters
discharged, waived, released, and relinquished hereunder.
c. Nothing in this Release shall be deemed to be an admission by
Crown as to any responsibility or liability for any wrongdoing, negligence,
breach of duty, or breach of contract.
d. In the event that ASSI, Inoco, Interstate, and/or the
Zimmermans breach this Settlement Agreement in any manner, this Release shall no
longer be effective and Crown shall be permitted to assert any and all demands,
claims, interests, rights, remedies, and causes of action against ASSI, Inoco,
Interstate, and/or the Zimmermans, which relate to the Asset Purchase Agreement,
the Supplemental Letter Agreement, and/or the Action.
8. RELEASE AND DISCHARGE OF CROWN BY ASSI, INOCO, INTERSTATE AND
THE ZIMMERMANS
Except as to the rights specified in paragraphs 1 - 6 herein:
a. ASSI, Inoco, Interstate, and the Zimmermans hereby waive,
release, relinquish and forever disavow any and all demands, claims, interests,
rights, remedies, and causes of action assertable, directly or indirectly,
against Crown or any of its clients, agents, attorneys, employees, subsidiaries,
parents, affiliates, contractors, officers, advisers, directors, shareholders,
consultants, insurers, or successors in interest (whether or not any of the same
were acting within or without the scope of their employment, agency or
engagement) for any acts, failures to act, representations, commitments,
statements, warranties, failures to disclose or make representations, covenants,
promises or agreements, including without limitation any claims for past,
present or future actual or punitive damages, or for any claim or cause of
action of any kind whatsoever that ASSI, Inoco, Interstate, and/or the
Zimmermans may have against Crown or
4
<PAGE>
such other parties described above arising from acts occurring on or prior to
the date of this Agreement that are related to the Asset Purchase Agreement,
Supplemental Letter Agreement, the Zimmerman Action, and/or the Crown Action.
ASSI, Inoco, Interstate, and the Zimmermans agree that the waivers, releases,
relinquishments, and disavowals herein granted shall be with respect to claims,
interests, rights, remedies, and causes of action known or unknown, matured or
unmatured, contingent or direct, existing or hereafter arising, which relate to
the Asset Purchase Agreement, the Supplemental Letter Agreement, the Zimmerman
Action and/or the Crown Action.
b. ASSI, Inoco, Interstate, and the Zimmermans agree not to
encourage or initiate any actions, court proceedings, arbitration, disciplinary
proceedings, administrative agency actions or otherwise with respect to any of
the matters discharged, waived, released, and relinquished hereunder.
c. Nothing in this Release shall be deemed to be an admission by
ASSI, Inoco, Interstate, and the Zimmermans as to any responsibility or
liability for any wrongdoing, negligence, breach of duty, or breach of contract.
d. In the event that Crown breaches this Settlement Agreement in
any manner, this Release shall no longer be effective and ASSI, Inoco,
Interstate, and/or the Zimmermans shall be permitted to assert any and all
demands, claims, interests, rights, remedies, and causes of action against
Crown, which relate to the Asset Purchase Agreement, the Supplemental Letter
Agreement, the Zimmerman Action, and/or the Crown Action.
9. ACKNOWLEDGMENT
The Parties hereby acknowledge that each has read this Agreement
carefully, that each knows and understands its contents, and that each has
investigated the facts pertaining to the settlement and this Agreement to the
extent each deems necessary or desirable. All Parties are represented by
counsel. The Parties represent and acknowledge that each has entered into this
Agreement after being fully informed and advised by his or her respective
counsel concerning the terms of this Agreement. The Parties to this Agreement
further acknowledge that each has entered into this Agreement voluntarily,
without coercion, based on his or her own exercise of judgment and not in
reliance upon any representation or promises by any person, other than those
contained in this Agreement.
10. ENTIRE AGREEMENT AND SUCCESSORS IN INTEREST
This Agreement constitutes the entire agreement between Crown, on
the one hand, and ASSI, Inoco, Interstate, and the Zimmermans, on the other
hand, with respect to the subject matter set forth herein and shall be binding
upon and inure to the benefit of their legal representatives, heirs, successors
and assigns. This Agreement supersedes any prior understandings or agreements
between the Parties, with respect to the subject matter herein.
5
<PAGE>
11. MODIFICATION OF AGREEMENT
No change or modification of this Agreement shall be valid unless
the same be in writing executed by all Parties hereto.
12. ASSIGNMENT OF RIGHTS
No Party shall transfer or assign any or all of its rights or
interest under this Agreement without the prior written consent of the other
Parties hereto, which consent shall not be unreasonably withheld.
13. REPRESENTATION AND WARRANTIES
The Parties, by their signatures herein, do represent and warrant
that each has full capacity, ability, and authorization to enter into this
Agreement and offer the releases and waivers contained in or contemplated by
this Agreement.
14. GOVERNING LAW AND EFFECT OF PARTIAL INVALIDATION
This Agreement shall be construed under and interpreted in
accordance with the laws of the State of Utah. In the event that any portion of
this Agreement is found invalid, that portion may be severed from, and shall not
affect the validity of, the remaining provisions.
IN WITNESS WHEREOF, the Parties have executed this Settlement Agreement
effective the date first written above.
6
<PAGE>
CROWN ASPHALT PRODUCTS ASPHALT SUPPLY AND SERVICE, INC.ex
COMPANY
By
-----------------------------------
By
----------------------------
Its
-----------------------------------
Its
---------------------------
CROWN ENERGY CORPORATION INOCO, INC.
By By
------------------------------------ ----------------------------
Its Its
----------------------------------- ----------------------------
INTERSTATE ASPHALT COMPANY
By
-----------------------------
Its
----------------------------
-------------------------------
Robert A. Zimmerman
-------------------------------
Connie R. Zimmerman
-------------------------------
R. Ryan Zimmerman
7
<PAGE>
AMENDMENT TO SETTLEMENT AGREEMENT
THIS DOCUMENT AMENDS THE SETTLEMENT AGREEMENT ("Settlement Agreement")
concerning disputes arising from an April 17, 1999 Asset Purchase Agreement,
which Settlement Agreement was executed by and between:
a. Crown Asphalt Products Company, a Utah corporation,
Crown Energy Corporation, a Utah corporation;
(collectively "Crown")
b. Asphalt Supply and Service, Inc., a Montana
corporation ("ASSI");
c. Inoco, Inc., a Montana corporation ("Inoco");
d. Interstate Asphalt Company, a North Dakota
corporation ("Interstate");
e. Robert A. Zimmerman, Connie R. Zimmerman, and R. Ryan
Zimmerman (collectively "Zimmermans")
Crown, ASSI, Inoco, Interstate, and Zimmermans are sometimes
collectively referred to as "Parties," or individually as "Party."
Solely Paragraph 3 of the Settlement Agreement is amended to read as follows:
3. RELEASES FROM MONTANA RAIL LINK AND EXXON CORPORATION
a. MONTANA RAIL LINK LEASE NO. 500,875-01
The Parties hereby agree that WITHIN A REASONABLE TIME of the execution
of this Settlement Agreement, ASSI, Inoco, Interstate, and the Zimmermans will
provide to Crown a written release from Montana Rail Link releasing Crown from
any demands, claims, interests, rights, liabilities, remedies, and/or causes of
action arising from the Montana Rail Link Lease No. 500,875-01, Laurel, Montana,
dated May 16, 1999.
b. ASSIGNMENT AND ASSUMPTION AGREEMENT (OFFSITE
SERVICES AGREEMENT)
The Parties hereby agree that WITHIN A REASONABLE TIME of the execution
of this Settlement Agreement, ASSI, Inoco, Interstate, and the Zimmermans will
provide to Crown a written release from Exxon Corporation releasing Crown from
any demands, claims, interests, rights, liabilities, remedies, and/or causes of
action arising from the Assignment and Assumption Agreement (Offsite Services
Agreement) among Exxon Company, U.S.A., ASSI, and Crown dated April 17, 1999,
and which relates to the Offsite Services Agreement dated April, 1998 between
ASSI and Exxon Company, U.S.A.
<PAGE>
c. INDEMNIFICATION
In addition to the written releases specified above, the Parties agree
that ASSI, Inoco, Interstate, and the Zimmermans will indemnify Crown and hold
it harmless for any and all demands, claims, interests, rights, liabilities,
remedies, and/or causes of action arising from the May 16, 1999 Montana Rail
Link Lease No. 500,875-01 and/or the April 17, 1999 Assignment and Assumption
Agreement (Offsite Services Agreement).
IN WITNESS WHEREOF, the Parties have executed this Settlement Agreement
effective the date first written above:
DATED this ______ day of March, 2000.
CROWN ASPHALT PRODUCTS COMPANY WEBER LAW FIRM
-------------------------------
By By Robyn L. Weber
----------------------------------
Its Attorneys for Asphalt Supply and
--------------------------------- Service, Inc., Inoco, Inc., Interstate
Asphalt Co., Robert A. Zimmerman,
Connie R. Zimmerman, R. Ryan
Zimmerman
CROWN ENERGY CORPORATION
By
------------------------------------
Its
-----------------------------------
2
<PAGE>
FIFTH AMENDMENT TO LEASE
THIS FIFTH AMENDMENT to Lease (the "Fifth Amendment") is made as of this day of
January, 2000 by and between Parkside Salt Lake Corporation, a Delaware
corporation ("Landlord") and Crown Energy Corporation, a Utah corporation
("Tenant") with reference to the following facts:
A. Landlord is the Owner of that certain building located at 215 S. State
Street, Salt Lake City, Utah ("Property");
B. Landlord's predecessor in interest, State of California Public Employees'
Retirement System, and Tenant entered into a certain Lease Agreement
dated August 20, 1993 (the "Initial Lease Agreement") which was amended
by a First Amendment to Lease dated September 16, 1996, a Second
Amendment to Lease dated June 30, 1998, a third Amendment to Lease dated
December 21, 1998 and a Fourth Amendment to Lease dated July 26, 1999
(collectively the "Lease").
C. American Realty Advisors ("American") is the real estate investment
manager to the Landlord and has the responsibility for operating the
Property in accordance with the fiduciary and other responsibilities
imposed by ERISA and such other laws as impact American's relationship to
its client.
D. Landlord and Tenant desire to further amend the Lease by reducing the
Premises upon terms and conditions hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and legal
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:
1. DEFINITIONS. Each capitalized term used in this Fifth Amendment to
Lease shall have the same meaning as is ascribed to such capitalized term in
the Lease, unless otherwise provided for herein.
2. SQUARE FOOTAGE. Landlord and Tenant hereby agree that effective on
February 1, 2000, Tenant's Premises shall be reduced by approximately 356
rentable square feet. Therefore, Tenant's Premises shall consist of 10,284
rentable square feet as shown on the attached Exhibit "A" (the "Premises").
3. BASIC OPERATING COSTS. PROPORTIONATE SHARE AND BASE YEAR. Tenant's
Proportionate Share shall be changed effective on February 1, 2000 to 5.49%.
4. BASIC ANNUAL RENT. Effective on February 1, 2000, Basic Annual Rent
for Tenant's Leased Premises shall be due on the first day of each and every
month as follows:
<TABLE>
<CAPTION>
Period Annual Rent Monthly Installments
----------- --------------------
<C> <C> <C>
2/1/00 - 11/30/00 $180,278.52 $15,023.51
12/1/00 - 11/30/01 $186,140.40 $15,511.70
12/1/01 - 11/30/02 $192,207.96 $16,017.33
12/1/02 - 11/30/03 $198,172.68 $16,514.39
12/1/03 - 11/30/04 $205,165.80 $17,097.15
</TABLE>
1
<PAGE>
5. TENANT IMPROVEMENTS. Landlord and Tenant acknowledge and agree that
Tenant has not used the tenant improvement allowance (the "Improvement
Allowance") given in the Fourth Amendment to Lease. Therefore, due to
Tenant's reduction of its Premises, the Improvement Allowance shall be
adjusted and shall equal $10.00 per usable square foot based on 3,201 usable
square feet or $32,010.00.
6. PARKING. Landlord's predecessor in interest, State of California
Public Employees' Retirement system, and Tenant have previously entered into
a Parking Agreement dated effective as of August 20, 1993 (the "Parking
Agreement"). Landlord and Tenant hereby ratify the aforementioned Parking
Agreement and agree to modify said agreement as follows: Effective on
February 1, 2000, the number of unreserved Passes shall be decreased by one
(1) to a total number of sixteen (16). The number of reserved Passes shall
remain the same at five (5). The cost of the reserved and unreserved stalls
shall be at the rates currently being charged by the parking garage operator,
subject to periodic market adjustments.
7. BINDING. The Lease, as amended, shall continue in full force and
effect, subject to the terms and provisions thereof and hereof. In the event
of any conflict between the terms of the Lease and the terms of this Fifth
Amendment, the terms of this Fifth Amendment shall control. This Fifth
Amendment shall be binding upon and inure to the benefit of Landlord, Tenant
and their respective successors and permitted assigns.
8. BROKER. Tenant represents to Landlord that except for NAI Utah
Commercial Real Estate, Inc. (the "Broker"), Tenant has not dealt with any
real estate broker, salesperson or finder in connection with this Fifth
Amendment, and no other such person initiated or participated in the
negotiation of this Fifth Amendment or is entitled to any commission in
connection herewith. Tenant hereby agrees to indemnify, defend and hold
Landlord, its property manager and their respective employees harmless from
and against any and all liabilities, claims, demands, actions, damages, costs
and expenses (including attorney's fees) arising from either (a) a claim for
a fee or commission made by any broker, other than the Broker, claiming to
have acted by or on behalf of Tenant in connection with this Fifth Amendment,
or (b) a claim of, or right to lien under the statutes of Utah relating to
real estate broker liens with respect to any such broker retained by Tenant.
9. SUBMISSION. Submission of this Fifth Amendment by Landlord to Tenant
for examination and/or execution shall not in any manner bind Landlord and no
obligations on Landlord shall arise under this Fifth Amendment unless and
until this Fifth Amendment is fully signed and delivered by Landlord and
Tenant; provided, however, the execution and delivery by Tenant of this Fifth
Amendment to Landlord shall constitute an irrevocable offer by Tenant to
lease the Premises on the terms and conditions herein contained, which offer
may not be revoked for fifteen (15) days after such delivery.
10. LIMIT OF LIABILITY. Neither Landlord nor any principal of Landlord nor
any owner of the Property, whether disclosed or undisclosed, shall have any
personal liability with respect to any of the provisions of the Lease, as
hereby amended, or the Premises, and if landlord is in breach or default
with respect to Landlord's obligations under the Lease, as hereby amended,
or otherwise, Tenant shall look solely to the equity interest of Landlord in
the Property for the Satisfaction of Tenant's remedies or judgments.
11. FULL FORCE AND EFFECT. All other terms and conditions of the Lease
shall remain in full force and effect.
2
<PAGE>
IN WITNESS WHEREOF, this Fifth Amendment is executed as of the day and year
aforesaid.
TENANT: LANDLORD:
Crown Energy Corporation, Parkside Salt Lake Corporation
a Utah corporation
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
---------------------------- ------------------------------
Title: President Title: Asset Manager
------------------------- ----------------------------
Date: 1/7/00 Date: 1/11/2000
-------------------------- -----------------------------
3
<PAGE>
March 29, 2000
Mr. William Kraemer
MCNIC Pipeline & Processing Company
170 West Jefferson, Suite 1900
Detroit, MI 48226
RE: OPTION TO REMOVE CROWN ASPHALT CORPORATION AS OPERATOR
Dear Mr. Kraemer:
Pursuant to our recent discussions, both MCNIC Pipeline & Processing Company
("MCNIC") and Crown Asphalt Corporation ("Crown"), in their own capacity and as
all of the members of Crown Asphalt Ridge L.L.C. ("CAR") and in consideration of
additional capital contributions that MCNIC is going to make, have agreed that
MCNIC shall have the right, for a period of time, to remove Crown as Operator
under the Asphalt Ridge Operating and Management Agreement dated as of August 1,
1997 (the "Operating and Management Agreement"). To that end, MCNIC, Crown and
CAR hereby agree that, notwithstanding any provision of the Crown Asphalt Ridge
L.L.C. Operating Agreement, dated as of August 1, 1997 (the "LLC Agreement") or
the Operating and Management Agreement to the contrary, for a period of eighteen
months from the date hereof, at MCNIC's or its successor's or assign's sole
option and upon 30 days prior written notice to Crown and CAR, MCNIC, or its
successor or assign, shall have the right to terminate the Operating and
Management Agreement and remove Crown as Operator under the Operating and
Management Agreement. Such removal shall not relieve CAR of its obligation to
make any and all payments owed to Crown, as Operator under the Operating and
Management Agreement, including any employee payroll, benefits, severance and
other liabilities, which are attributable to the period of time for which Crown
was serving as Operator (the "Outstanding Costs"). Furthermore, prior to the
expiration of the 30 day notice period set forth above, MCNIC agrees that, to
the extent required, it shall have made any and all contributions to CAR
necessary for payment of its proportionate share of any undisputed Outstanding
Costs for which Crown has provided documentation. In the event MCNIC terminates
the Operating and Management Agreement and removes Crown as Operator as provided
above, then MCNIC would be the successor Operator and MCNIC and CAR would
execute a new operating and management agreement substantially in the same form
as the Operating and Management Agreement. It is the intent of the parties that
the termination of the Operating and Management Agreement and removal of Crown
as Operator will not affect Crown's right to serve as Operator for any
Subsequent Plant, Additional Opportunity or AMI Opportunity as described in
Section 15 of the Operating and Management Agreement. The new operating and
management agreement naming MCNIC as successor Operator shall contain provisions
to that effect.
<PAGE>
Mr. William Kraemer
MCNIC Pipeline & Processing Company
March 29, 2000
Page 2
For purposes of this Letter Agreement, terms used but not defined shall have the
meaning assigned to them in the LLC Agreement or the Operating and Management
Agreement as appropriate. Except as specifically provided in this Letter
Agreement, the LLC Agreement and the Operating and Management Agreement will
remain in full force and effect with no changes, amendments or revisions.
Further, by executing this letter, Crown shall not be deemed to be in default in
any way under the LLC Agreement or the Operating and Management Agreement. This
letter shall be binding upon the successors and assigns of MCNIC, Crown and CAR.
If the foregoing accurately reflects our understanding, please execute both
originals in the space provided below. Please return one original to me and
retain the other for your files.
Sincerely,
CROWN ASPHALT CORPORATION
Jay Mealey,
President
Accepted and agreed to
This ____day of January, 2000.
MCNIC PIPELINE & PROCESSING COMPANY
William Kraemer,
Vice President
CROWN ASPHALT RIDGE L.L.C.
By: Crown Asphalt Corporation By: MCNIC Pipeline & Processing Company
Its: Member Its: Member
- --------------------------------- ------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,978,977
<SECURITIES> 0
<RECEIVABLES> 5,484,325
<ALLOWANCES> 298,000
<INVENTORY> 2,133,866
<CURRENT-ASSETS> 12,334,750
<PP&E> 9,825,107
<DEPRECIATION> (587,372)
<TOTAL-ASSETS> 33,133,853
<CURRENT-LIABILITIES> 18,915,669
<BONDS> 0
4,839,623
0
<COMMON> 265,711
<OTHER-SE> (2,275,819)
<TOTAL-LIABILITY-AND-EQUITY> 33,113,853
<SALES> 35,518,541
<TOTAL-REVENUES> 35,518,541
<CGS> 33,811,003
<TOTAL-COSTS> 36,556,032
<OTHER-EXPENSES> 3,364,361
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,203,591
<INCOME-PRETAX> (3,053,516)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,053,516)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,053,516)
<EPS-BASIC> (.26)
<EPS-DILUTED> (.26)
</TABLE>
