SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
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[ ] Preliminary Information Statement
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14c-5(d)(2))
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Crown Energy Corporation
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(Name of Registrant as Specified In Its Charter)
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_______________________________________________________________________
2) Aggregate number of securities to which transaction applies:
_______________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
_______________________________________________________________________
4) Proposed maximum aggregate value of transaction:
$10,000,000 (calculated based on the estimated value of the securities
and property to be received by the registrant in consideration of the
sale of assets in accordance with Rule 0-11(c)(2))
5) Total fee paid: $2,000
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CROWN ENERGY CORPORATION
1710 WEST 2600 SOUTH
WOODS CROSS, UTAH 84087
March 7, 2005
Dear Stockholder:
We are providing this information statement to you as a stockholder of
record of our outstanding common stock at the close of business on July 13,
2004, to advise you of three actions recently approved by the holders of a
majority of the issued and outstanding common stock and all of the issued and
outstanding Series A Cumulative Convertible Preferred Stock (together, "the
Approving Stockholders"). These recently approved actions will become effective
on March 30, 2005, which is at least 20 days after this information statement is
provided to our stockholders.
On June 30, 2004, the Approving Stockholders approved the following
actions:
(a) the 1,000-to-one reverse split of our issued and
outstanding common stock, without any change to our authorized
capitalization of 50,000,000 shares of common stock, par value $0.02;
(b) the formation with Peak Holding, LLC, an affiliate of
Idaho Asphalt Supply, Inc., an unaffiliated asphalt products
distributor, of a newly organized limited liability company, Peak
Asphalt, LLC, to produce and market asphalt products through the
transfer of substantially all of our asphalt business, operations and
assets to Peak Asphalt in consideration of a $7.5 million promissory
note payable from Peak Asphalt earnings, the assumption of
approximately $2.5 million in liabilities, and a 49% interest in Peak
Asphalt, with the remaining 51% interest in Peak Asphalt owned by Peak
Holding, LLC, which will provide Peak Asphalt with working capital
financing for its operations; and
(c) the election of Jay Mealey, Alan L. Parker, and Andrew W.
Buffmire as directors, each to serve until the next annual meeting of
directors and until his successor is elected and qualified.
The purpose of the reverse split is to reduce the number of holders of
our common stock in order for us to terminate our reporting obligations under
the Securities Exchange Act of 1934 ("Exchange Act"). Our common stock would
then no longer be eligible for quotation on the OTC Bulletin Board, and we
cannot assure that any trading market for our common stock would continue
thereafter.
We are enclosing our information statement that describes the above
transactions, as well as our 2003 annual report to stockholders, which consists
principally of our annual report on Form 10-K, and our most recent quarterly
report on Form 10-Q.
Please review the enclosed information statement carefully.
We Are Not Asking for a Proxy and You Are Requested Not To Send Us a
Proxy.
Sincerely,
CROWN ENERGY CORPORATION
Jay Mealey, President
CROWN ENERGY CORPORATION
1710 WEST 2600 SOUTH
WOODS CROSS, UTAH 84087
TELEPHONE 801-296-9585
NOTICE OF ACTION BY MAJORITY WRITTEN STOCKHOLDER CONSENT
To the Stockholders of Crown Energy Corporation:
On June 30, 2004, the board of directors unanimously and Jay Mealey,
our chief executive officer and chairman of our board of directors, the Mealey
Family Limited Partnership (hereinafter the "Mealey Partnership"), of which Mr.
Mealey is the general partner, and Andrew Buffmire, a member of our board of
directors (together, "the Approving Stockholders"), who beneficially own
15,441,818 shares, or 58.3%, of our issued and outstanding common stock and all
500,000 shares of our issued and outstanding Series A Cumulative Convertible
Preferred Stock, approved the following actions:
(1) the 1,000-to-one reverse split of our issued and
outstanding common stock, without any change to our authorized
capitalization of 50,000,000 shares of common stock, par value $0.02;
(2) the formation with Peak Holding, LLC, an affiliate of
Idaho Asphalt Supply, Inc., an unaffiliated asphalt products
distributor, of a newly organized limited liability company, or Peak
Asphalt, LLC, to produce and market asphalt products through the
transfer of substantially all of our asphalt business, operations and
assets, which represent approximately 93% of our total assets as of
September 30, 2004, to Peak Asphalt in consideration of a $7.5 million
promissory note payable from Peak Asphalt earnings, assumption of
approximately $2.5 million of liabilities, and a 49% interest in Peak
Asphalt, with the remaining 51% interest in Peak Asphalt owned by Peak
Holding, LLC, which will provide Peak Asphalt with working capital
financing for its operations; and
(3) the election of Jay Mealey, Alan L. Parker, and Andrew W.
Buffmire as directors, each to serve until the next annual meeting of
directors and until his successor is elected and qualified.
Our board of directors had previously unanimously approved the above
actions and fixed the close of business on July 13, 2004 (the "Record Date"),
for the determination of stockholders entitled to notice of the above actions.
As of the Record Date, we had issued and outstanding 26,482,388 shares of common
stock and 500,000 shares of Series A Cumulative Convertible Preferred Stock. In
view of the approval by written consent of the Approving Stockholders, no
special meeting or annual meeting of the stockholders will be held, and the
above actions will become effective on March 30, 2005, (the "Effective Date"),
which is at least 20 days after mailing this notice to the stockholders on about
March 7, 2005.
We Are Not Asking for a Proxy and You Are Requested Not to Send Us a
Proxy.
Neither the Securities and Exchange Commission nor any state regulatory
authority has approved or disapproved these transactions, passed upon the merits
or fairness of the transactions, or determined if this information statement is
accurate or complete. Any representation to the contrary is a criminal offense.
SUMMARY OF ACTIONS
1. The Reverse Split
The Approving Stockholders have approved an amendment to our articles
of incorporation to:
o reverse split our issued and outstanding common stock
1,000-to-one, without reducing the 50,000,000 shares of
authorized common stock, par value $0.02, which will have the
effect of converting each 1,000 shares of our common stock
outstanding immediately prior to the reverse split into one
full share of post-reverse-split common stock; and
o provide that stockholders that would otherwise receive a
fractional share of common stock receive a cash payment of
$0.012 per pre-split share, with those stockholders owning
fewer than 1,000 shares before the reverse split receiving
only the cash payment.
Our board of directors has determined that the reverse split, including
the amount to be paid per pre-split share for fractional shares:
o is procedurally fair to our unaffiliated stockholders, and
o is substantively fair to our unaffiliated stockholders.
Immediately after the Effective Date of the reverse split, we will have
approximately 148 stockholders with at least one share of post-reverse-split
common stock, which will include Jay Mealey, the Mealey Partnership, and Andrew
W. Buffmire. The 1,000-to-one reverse-split ratio will then have reduced our
number of stockholders below 300, which will allow us to file documents with the
Securities and Exchange Commission under the Exchange Act to terminate our
reporting obligations under the Exchange Act. Our common stock would then no
longer be eligible for quotation on the OTC Bulletin Board, and we cannot assure
that any trading market for our common stock would continue thereafter. The
board of directors determined that a 1,000-to-one ratio was the simplest ratio
to permit a substantial number of unaffiliated stockholders to retain an
ownership interest in the Company, while reducing the total number so that we
could seek to terminate our Exchange Act reporting obligations.
We estimate that the reverse split will result in the cancellation of
less than 1% of our issued and outstanding common stock and will reduce our
number of stockholders from approximately 742 to approximately 148. The reverse
split of our common stock and the termination of reporting obligations under the
Exchange Act will enable us to eliminate costs now associated with meeting
regulatory requirements for filing periodic reports of financial and business
information as a publicly-held company subject to the reporting obligations
under the Exchange Act, which we believe now provide us minimal benefits. See
"THE REVERSE SPLIT."
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2. The Proposed Joint Venture Formation
We have entered into an agreement with Peak Holding, LLC with the
following principal terms:
o We will sell to Peak Asphalt substantially all of our asphalt
business, operations and assets, which represent approximately
93% of our total assets as of September 30, 2004, in
consideration of:
- a promissory note for $7.5 million secured by the
assets and business sold to Peak Asphalt, the payment
of which will be largely contingent upon Peak Asphalt
having earnings sufficient to permit such payment,
- assumption of approximately $2.5 million in
liabilities relating to the assets transferred, and
- a 49% interest in Peak Asphalt.
o Peak Holding will own 51% of Peak Asphalt and will designate a
majority of its managers.
In anticipation of completing this joint venture formation, Idaho
Asphalt Supply advanced interim operating capital of a high of approximately
$3.5 million during 2004, with a balance outstanding of approximately $3.3 as of
September 30, 2004, secured by a lien on our inventory, work in progress,
finished goods, and accounts receivable. This interim funding was sufficient to
allow us to substantially complete the 2004 asphalt season.
Because of the dividends payable on our Series A Cumulative Convertible
Preferred Stock and its preference in liquidation, the Mealey Partnership, of
which Jay Mealey is the general partner, will benefit directly from the payments
we receive on the Peak Asphalt promissory note.
At September 30, 2004, there were dividends payable on the preferred
stock of $1.7 million that may, at the election of the Mealey Partnership, be
taken in cash. We anticipate that payments on the Peak Asphalt promissory note
will be applied first to payment of dividends accruing on our outstanding
preferred stock owned by the Mealey Partnership.
Formation of the joint venture is contingent on certain factors,
including approval by our stockholders as described in this information
statement. See "THE PROPOSED JOINT VENTURE FORMATION."
3. Election of Directors
The board of directors and the Approving Stockholders have approved the
reelection of directors Jay Mealey, Alan L. Parker, and Andrew W. Buffmire, each
to serve until the next annual meeting of the stockholders and until his
successor is elected and qualified. See "ELECTION OF DIRECTORS."
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THE REVERSE SPLIT
Special Factors
Purposes
As of September 30, 2004, we had a working capital deficit of
approximately $2.8 million, an accumulated deficit of approximately $6.1
million, and a stockholders' deficit attributable to the common stock of
approximately $2.2 million. Our auditor's report on our consolidated financial
statements for the year ended December 31, 2003, as for prior years, contained
an explanatory paragraph about our ability to continue as a going concern.
Our asphalt business requires a large amount of working capital to
purchase and store inventory and for accounts receivable and general operations.
We have not had outside working capital financing since 1999 and have continued
to explore avenues to obtain working capital financing, including supplier
financing, through-put arrangements, structured supply arrangements and joint
ventures with industry participants, facility leasing, and conventional
financing from commercial sources. We believe shortages of working capital are
the most significant limitation on our operations.
In seeking outside working capital lines of credit, potential sources
of funding have stated that, among other things, they would require personal
guarantees of our officers and directors, and our officers and directors are
unwilling to provide such guarantees for our benefit while we are burdened by
the costs associated with meeting the reporting obligations under the Exchange
Act. Further, bonding underwriters we historically used for asphalt supply
contracts with federal and state highway projects have stated that their ability
to provide payment and performance bonding for small public companies has become
limited because of the uncertainties regarding management continuation, the
requirement for personal guarantees that generally are not provided in public
companies, and the third-party liability that public companies face from
stockholders, which can severely impact the financial ability of those companies
and their ability to meet their contractual obligations for which bonding
companies provide surety.
Our operating history and the prevailing current conditions in the
investment markets generally have precluded us from obtaining outside equity
capital. The closing sales price for our common stock ranged from a low of $0.01
per share to a high of $0.025 per share in 2003, with trades taking place on
only 48 of 252, or 19%, of the trading days. Through November 30, 2004, the
closing sales price has ranged from a low of $0.01 per share to a high of
$0.035, with trades taking place on only 47 of the 230, or 20%, trading days.
From January 1, 2003, through 230 trading days of 2004, only an aggregate of
1,252,448 shares were reported traded, representing an aggregate transaction
value of less than $35,000. Finally, we have reviewed the costs required to meet
regulatory and stockholder requirements associated with being a publicly-held
company subject to the periodic reporting, proxy and other requirements under
the Exchange Act, along with recent increased cost of insurance and other
burdens we believe result from the enactment of the Sarbanes-Oxley Act of 2002,
particularly for a small company such as ours, and determined that those burdens
represent a substantial impediment to our ability to continue.
In view of our continuing inability to arrange required financing as
discussed above, in March 2003, our board of directors, which includes
affiliates of our principal stockholders, authorized management to investigate
available alternatives for a so-called "going-private" transaction, with the
effect that we would become privately held by the holders of a majority of our
current stock, subject to satisfying various regulatory requirements. As we
investigated these possible going-private alternatives, we also continued our
search for financing from a variety of sources through a number of alternative
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arrangements. These efforts finally led to our recent agreement with Idaho
Asphalt Supply to continue our asphalt production and marketing activities
through a joint venture as described in detail below and as approved by our
board of directors and the Approving Stockholders. As part of this agreement,
Idaho Asphalt Supply provided us with an interim working capital loan, secured
by our inventory, work in progress and accounts receivable, and has agreed to
certain additional working capital funding to operate the business.
Until we reached the agreement with Idaho Asphalt Supply discussed in
detail in this information statement, we did not have adequate working capital
to finance our pressing requirements for the 2004 summer asphalt sales cycle.
This arrangement for working capital further reduces the likelihood that we will
seek capital through the public equity markets in the future. Therefore, based
on our consideration of various alternatives for reducing ongoing costs and
regulatory burdens, we determined to proceed with the reverse split as described
in this information statement to eliminate the costs associated with meeting the
periodic reporting, proxy and other requirements of the Exchange Act, but not to
incur the costs of a cash payment to minority holders to become privately held
by our majority stockholders.
Previous Transactions
History of Crown
We were organized in March 1981 for the purpose of acquiring, holding
and developing oil and gas leases and properties, including conventional oil and
gas activities, exploration and development of oil sands, and the extraction of
oil from oil sands through proprietary technologies. Our common stock has been
traded on the over-the-counter market and quoted on the OTCBB under the symbol
"CROE" since the early 1980s.
In approximately 1997, we began to implement a program using our
proprietary technology to develop and commercialize asphalt recovery from our
oil sand properties in Asphalt Ridge, Uintah County, Utah. This focus was based
on our analysis of our operation of a pilot plant and demonstration facility
employing our proprietary technologies that had been conducted in the preceding
years. We designed and sought financing for a production facility to process
approximately 3,000 tons of oil sands per day for an estimated production of
1,500 barrels of premium-grade asphalt daily. This focus on asphalt production
was in part based on the federal government's then-recent establishment of
uniform performance and quality standards that states were being required to
follow in order to obtain federal funding for federal and state highways. Our
tests confirmed that asphalt producible from our properties could meet or exceed
these new performance-grade asphalt requirements without additives or modifiers.
In August 1997, we obtained funding for our Asphalt Ridge project
through a joint venture with MCNIC Pipeline and Processing Company of Michigan.
This joint venture was to be conducted through a new entity, Crown Asphalt
Ridge, L.L.C., which was to develop the Asphalt Ridge project. MCNIC was to
provide approximately $15.0 million for the Asphalt Ridge facility. We and MCNIC
were to have 25% and 75% interests, respectively, in Crown Asphalt Ridge,
shifting to 50% each after MCNIC had recovered from operations an amount equal
to 115% of its cash investment in Crown Asphalt Ridge. Crown Asphalt Ridge's
management committee initially was to be controlled by MCNIC. We cooperated with
MCNIC in additional ventures in anticipating full-scale production from our
Asphalt Ridge project.
In order for us to meet our obligation for our share of funding Crown
Asphalt Ridge, on November 4, 1997, we sold in an arm's-length transaction to
Enron Capital & Trade Resources Corp., an Enron Corp. subsidiary, an unrelated
third party, for $5.0 million in cash, 500,000 shares of $10 Series A Cumulative
Convertible Preferred Stock and a warrant to purchase at $0.002 per share an
amount equal to 8% of the shares of common stock then outstanding and reserved
for issuance, or approximately 925,771 shares. This warrant was required by
5
Enron as an additional incentive for it to complete the transaction in the event
our performance was not as forecast at the time of the transaction. Enron
desired a more potentially dilutive mechanism that would provide it with enough
stock on conversion to return its investment plus the desired return on its
investment using the stock price at the time it made the conversion. Proceeds
from the sale of the Series A Cumulative Convertible Preferred Stock enabled us
to meet our Crown Asphalt Ridge funding obligation, which was a condition
precedent to the substantial funding being provided by MCNIC. During the quarter
ended December 31, 1997, our stock had a high bid of $2.00 and a low bid at
$1.22 per share. In additional provisions of our agreement, Enron granted us a
right of first refusal to purchase its securities, and we granted Enron the
preemptive right to purchase additional equity securities in order to preserve
its percentage interest in our stock and agreed to register under the Securities
Act of 1933 resale of Enron's securities in certain circumstances. In addition,
Enron required Jay Mealey to enter into a co-sale agreement providing that Enron
have the right to participate in any sale by Mr. Mealey of his shares at any
time prior to September 25, 2002.
We initially anticipated that Crown Asphalt Ridge would be operational
by June 1998. However, during the start-up of the facility, mechanical and
process difficulties were experienced that affected production economics and
plant start-up. Extensive research and engineering to develop a solution to
these problems were undertaken and tested in a pilot study, which indicated that
modifications to the facility would be required. Both we and MCNIC, which
controlled the management of Crown Asphalt Ridge, determined to press on with
the project. With inadequate capital available from other sources to fund our
Asphalt Ridge obligations, during 1997-99 we borrowed additional funds from
MCNIC.
While commercial production from the Asphalt Ridge facility was delayed
by technical problems, we and MCNIC launched our asphalt marketing and
distribution activities through Crown Asphalt Distribution, L.L.C., our
distribution subsidiary. MCNIC refused to provide working capital or to
guarantee working capital loans sought by us as we asserted MCNIC was obligated
to do. Without the MCNIC guarantee, Crown Asphalt Distribution was unable to
obtain the necessary working capital for its business, and therefore, it was
unable to take advantage of the lower raw material purchase opportunities during
the winter months. In addition to the inability to purchase raw materials at
favorable winter prices, the price of crude oil and base asphalt rose rapidly in
early 2000, further negatively impacting operating margins.
By 1999 year-end and notwithstanding MCNIC's control of the management
of Crown Asphalt Ridge, it was unable to overcome technical processing problems
to place the plant into production. In addition, by 1999 year-end, MCNIC had
provided to Crown Asphalt Distribution approximately $14.9 million in loans,
which MCNIC advised in March 2000 were in default. On June 20, 2000, MCNIC sued
us in state court in Utah for collection of $14.9 million in advances to Crown
Asphalt Distribution. In turn, in July 2000, we sued MCNIC and certain of its
affiliates in federal court in Utah, seeking damages in excess of $100 million
on a variety of causes of action. In early 2001, the state and federal court
actions between MCNIC and us were submitted to binding arbitration.
Enron's Sale of Preferred Stock
The Series A Cumulative Convertible Preferred Stock we issued to Enron
in 1997 continued to accrue dividends as we encountered technical construction
and operating difficulties respecting our Asphalt Ridge plant, leading to
pre-operating cost overruns and continuing delays while our asphalt
manufacturing and distribution business continued to experience disappointing
6
results as discussed above. A dividend payment was made to Enron by the issuance
of 317,069 shares of common stock on January 27, 1999. As of June 30, 2001, we
had accrued $1.1 million in dividends payable on this preferred stock. In
approximately April 2001, Enron advised us that Enron intended to dispose of the
Series A Cumulative Convertible Preferred Stock and inquired of our interest in
purchasing or redeeming the preferred stock at an undisclosed price, but
indicated as less than the $5.0 million initial purchase price, under the right
of first refusal contained in our agreement. Enron also advised us that it was
pressing to liquidate its investment and would also be approaching third parties
about the possible sale of the securities. We were concerned then that Enron
might approach MCNIC, which might see the ownership of the preferred stock,
warrant and related preemptive and co-sale right as leverage against us in our
pending disputes. We were, among other things, concerned that Enron might
attempt to sell the securities to a third party to the detriment of the Company
and our stockholders, and we sought the financial means to repurchase the
securities from Enron.
We did not have the financial resources with which to repurchase the
preferred stock and warrants, even at a significant discount to the original
purchase price of the securities. In addition, we were advised by outside legal
counsel that, in view of our financial position, Utah law prohibited us from
redeeming the preferred stock. Redemptions of stock are treated under Section
16-10a-640 of the Utah Revised Business Corporation Act as distributions to
stockholders, so that the Series A Cumulative Convertible Preferred Stock could
not be redeemed if, after the redemption, we would be unable to pay our debts as
they became due in the ordinary course of business (the equity insolvency test)
or if our total assets, based on their fair valuation as distinguished from book
value, would be less than the sum of our total liabilities (the balance sheet
test) as determined by the board of directors. UTAH CODE ANN. Section
16-10a-640(3). As of September 30, 2001, we had a common stockholders' deficit
of approximately $23.8 million. During the nine months ended September 30, 2001,
we used cash of approximately $2.0 million for operating activities, $464,000
for investing activities, and $155,000 for financing activities. Upon review of
these requirements and our status with our legal advisors and outside
accountants, the board determined that we were, in any case, prohibited from
acquiring the Enron securities under the foregoing statutory provisions.
Mr. Mealey approached Jeff Fishman, a third-party investor, to acquire
the preferred stock. Mr. Fishman undertook negotiations with Enron. During the
course of the negotiations, Mr. Fishman requested the participation of other
parties in the transaction. As a result, Jay Mealey and Andrew Buffmire,
executive officers and directors of the Company, took the initiative with
Alexander L. Searl, a third-party investor, to organize Manhattan Goose, L.L.C.,
a Utah limited liability company, to negotiate the purchase of the Series A
Cumulative Convertible Preferred Stock, accumulated but unpaid dividends,
warrant and associated rights from Enron. Manhattan Goose was owned by Jay
Mealey, 32.5%; Andrew W. Buffmire, 32.5%; Jeff Fishman, 10.0%; and Alexander L.
Searl, 25.0%.
On November 1, 2001 (just one week before Enron publicly announced the
restatement of prior period financial statements and certain related-party
transactions at the beginning of its financial debacle), Manhattan Goose
completed the purchase from Enron of the Series A Cumulative Convertible
Preferred Stock, accumulated dividends, 317,069 shares of common stock
previously issued as a dividend payment, the warrant, and related preemptive,
right of first refusal and co-sale rights for a total of $263,000. Manhattan
Goose reported that each member of Manhattan Goose used personal funds to
provide his pro rata share of this purchase price; the purchase by Manhattan
Goose was for the purpose of making a financial investment in the Company; and
as current officers and directors of the Company, Messrs. Mealey and Buffmire
participated in the transaction in order to ensure that partial ownership of the
preferred interest remain with persons involved with the Company, increase the
amount of their equity stake in the Company, and make a financial investment in
the Company.
As a condition precedent to completing the sale of our securities to
Manhattan Goose, Enron required that we formally waive our right of first
refusal. Accordingly, on October 25, 2001, Jay Mealey and Andrew Buffmire
advised our board of directors of the circumstances, price and other terms of
7
Manhattan Goose's proposed purchase of the securities from Enron, including
advice that they owned interests in Manhattan Goose, that the purchase of the
preferred stock and the waiver of our right of first refusal constituted a
"directors' conflicting interest transaction" as defined by the Utah Revised
Business Corporation Act, and that they would not vote on the matter before the
board since the third director represented the only "qualified director," as
defined in the Utah corporate statute. Messrs. Mealey and Buffmire indicated
that it was their opinion that the purchase of the preferred stock by Manhattan
Goose was objectively fair to us since the result of the purchase would be that
the preferred stock would be at least partially owned by management personnel
who already controlled the Company, instead of an unaffiliated third party with
no stake in our success. The board also discussed the fact that, given our
financial condition at that time, we could not legally purchase the preferred
stock because of Section 16-10-640 of the Utah Revised Business Corporation Act,
which prohibits the redemption of stock if, following the redemption, the
liabilities of a corporation will exceed its assets.
Following a thorough discussion of the matter, Messrs. Mealey and
Buffmire recused themselves from voting, and upon a motion duly made and
recorded, the board formally waived our right of first refusal to purchase the
securities from Enron by the affirmative vote of the sole qualified director,
James A. Middleton, who was then the chairman of the board of directors.
By early 2002, we were engaged in intense negotiations with MCNIC to
settle the arbitration judgment and recognized our necessity to raise a
substantial amount to fund any settlement reached. Based on the substance and
status of our negotiation with MCNIC, we also anticipated that we would have
limited time within which to obtain the required funding. Further, if we were
unable to sell securities to raise equity, we expected that any new funding
might involve a sale of substantially all of our assets to form a new joint
venture, business combination, or similar extraordinary corporate transaction
that would require stockholder approval. Since our directors and executive
officers owned less than 24% of the issued and outstanding common stock, based
on initial contacts with potential funding sources, we were concerned that we
would be unable to satisfy anticipated concerns of potential joint venture or
other funding sources that we could assure stockholder approval or obtain it
expeditiously. In order to increase the percentage of beneficial ownership and
control of executive officers and directors, on February 28, 2002, Manhattan
Goose exercised its rights as the holder of the preferred stock to require
payment of $200,000 in accrued and past-due dividends by the issuance of
13,793,103 shares of common stock.
Settlement of MCNIC Dispute
In November 2001, the arbitrator in the binding arbitration ruled that
the loans, plus accruing interest, made by MCNIC to us were currently due and
payable. In February 2002, on application of MCNIC, a Utah state court confirmed
the arbitration award and entered judgment for $20.2 million, plus post-judgment
interest, in favor of MCNIC. In addition, the arbitrator determined that $2.6
million in legal fees and costs incurred in the dispute by MCNIC were payable by
us.
On March 8, 2002, the parties entered into a settlement agreement
pursuant to which we assigned our interest in Crown Asphalt Ridge to MCNIC and
agreed not to compete in certain tar sands activities in the western United
States and Canada in return for: (i) the receipt of a non-cost-bearing
overriding royalty interest in the Asphalt Ridge properties; (ii) the
elimination of all of our obligations to MCNIC; and (iii) MCNIC's payment of a
third-party obligation in the amount of approximately $304,000. We were granted
the option to acquire for $5.5 million all of MCNIC's interest in Crown Asphalt
Distribution. All litigation and related judgment enforcement actions were
stayed. The settlement agreement provided that if we did not exercise the option
to purchase Crown Asphalt Distribution by September 30, 2002, MCNIC could seek
collection of the full damage award and the parties could either move to confirm
or appeal, as the case may be, the $2.6 million fee award.
8
We attempted to obtain the financing needed to exercise the option to
acquire MCNIC's interest in Crown Asphalt Distribution. See "THE REVERSE
SPLIT--Special Factors--Alternatives Considered--Possible Financing or Sale."
We were not able to obtain the needed financing through debt, equity,
joint venture, or a sale of the business. Immediately after September, MCNIC
threatened to initiate foreclosure proceedings, but then expressed an interest
in negotiating a resolution, so we undertook further discussions with MCNIC to
resolve the substantial monetary awards against us. On October 16, 2002, all
parties to the MCNIC litigation and arbitration executed a settlement agreement
to settle all claims and liabilities among them. Under the settlement agreement,
we conveyed to MCNIC all of our interests in the overriding royalty assigned in
the Asphalt Ridge properties, and MCNIC agreed to assign its interest in Crown
Asphalt Distribution, L.L.C., including approximately $30.1 million in
obligations that we owed. As a result, we no longer owned an interest in Crown
Asphalt Ridge or any of the Asphalt Ridge properties and we became owner of all
of Crown Asphalt Distribution. As a further result of this settlement, we
realized a gain of approximately $30.1 million, calculated as the amount by
which the total of our liabilities cancelled exceeded our cost for the assets
conveyed, which was recorded as an extraordinary gain on extinguishment of debt.
For the year ended December 31, 2002, we reported a loss before the
extraordinary gain on extinguishment of debt of approximately $770,000. As of
December 31, 2002, we had approximately $180,000 negative working capital and
stockholders' equity of $1.1 million.
Dissolution of Manhattan Goose
We reached the settlement with MCNIC as discussed above in order to
avoid foreclosure or perhaps bankruptcy reorganization or liquidation, but
recognized that our viability was tenuous due to several factors. Our survival
depended on obtaining substantial amounts of working capital through the sale of
securities, a strategic relationship with an industry or funding partner, a
business combination, or other means, and our previous efforts to complete such
a transaction had not been productive. Jay Mealey and the other operating
executives that had endured the strain and uncertainty of the MCNIC dispute were
expressing their frustration and fatigue and were exploring leaving us for other
opportunities. Andrew Buffmire, Alexander Searl and Jeff Fishman indicated they
would sell their interests in Manhattan Goose to Mr. Mealey if he would continue
as our chief executive officer to lead our business and financial recovery. On
November 25, 2002, Jay Mealey purchased the Manhattan Goose membership interests
held by Alexander Searl and Jeff Fishman for $78,900 and $31,560, respectively.
On November 26, 2002, Manhattan Goose distributed 4,585,806 shares of
our common stock to Andrew Buffmire in partial redemption of his ownership
interest in Manhattan Goose. On November 27, 2002, Jay Mealey purchased the
remaining membership interest in Manhattan Goose held by Mr. Buffmire for
$102,570. Because of his 32.5% ownership interest in Manhattan Goose, this
transaction represented the sale by Mr. Buffmire for $102,570 in cash and
4,585,806 shares of common stock of the equivalent ownership of 162,500 shares
of Series A Cumulative Convertible Preferred Stock with an aggregate liquidation
preference of $1,625,000, plus accrued and unpaid dividends of $443,083,
together with warrants to purchase 300,876 shares of common stock at $0.002 per
share.
Immediately after the foregoing transactions, Manhattan Goose dissolved
and distributed 9,524,366 shares of our common stock and 500,000 shares of our
Series A Cumulative Convertible Preferred Stock and accumulated dividends
receivable to Jay Mealey. Immediately thereafter, Mr. Mealey organized the
Mealey Partnership and conveyed to it all 9,524,366 shares of common stock and
500,000 shares of preferred stock, the warrant to purchase our shares,
accumulated dividends receivable, and the related preemptive right to purchase
additional equity securities to preserve the percentage interest represented by
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the common stock issuable on conversion of the preferred stock, securities
registration rights, and the right of first refusal on resale of the acquired
securities in consideration of 100% ownership interest in the Mealey
Partnership.
Mr. Mealey effected the foregoing transactions in order to increase his
equity stake in us as inducement and incentive for continuing as our chief
executive officer.
On November 27, 2002, we paid dividends of $300,000 in cash to
Manhattan Goose. On December 30, 2002, we paid dividends of $100,000 in cash to
the Mealey Partnership. At December 31, 2003, and September 30, 2004, we owed
$1.4 million and $1.7 million, respectively, in additional accumulated preferred
stock dividends payable.
Our Bonding Dilemma
As we encountered financial difficulties as a result of our disputes
with MCNIC, it became increasingly difficult for us to obtain payment and
performance bonds that were required in order for us to bid on some major
asphalt supply contracts, particularly contracts with state agencies. As a
result of our settlement with MCNIC in late 2002, our difficulties increased
substantially.
In the fall of 2002, we requested a bond from our independent bonding
agent for a contract to be performed by a major U.S. asphalt firm and were
advised that the bonding company was limiting bonding to public companies and
would require a personal guaranty from Mr. Mealey. However, the bond was
eventually granted.
On October 26, 2002, we participated in a bid to supply approximately
$3.3 million in asphalt to the Wyoming State Department of Transportation and
provided information to our bonding agent on March 17, 2003, to initiate the
Wyoming State Department of Transportation bonding process. On March 25, 2003,
the Wyoming State Department of Transportation awarded us an approximately $1.7
million asphalt supply agreement. We advised our bonding agent on March 27,
2003, that we had been awarded the Wyoming State Department of Transportation
award and submitted the Wyoming State Department of Transportation forms on
which the bond must be issued. The bonding company advised that it would not
provide bonding for us without a personal guarantee of Mr. Mealey. On the
condition that he be indemnified for any losses incurred in providing the
guarantee of the bonding obligation as an accommodation to us, Mr. Mealey
provided his personal guarantee. Thereafter, on April 8, 2003, our bonding
company issued the $434,424 bond in favor of the Wyoming State Department of
Transportation, which accepted the bond on April 16, 2003. The bonding company
advised that this bond would be the last one it could provide us because we were
a public company and its policy was to no longer issue bonds to public
companies, with or without guaranties.
Some time between April and July 2003, we advised a major customer that
we would be unable to provide a payment and performance bond in the amount
previously requested in connection with our agreements with it for the reasons
given at the time the April 2003 bond was issued.
Alternatives Considered
Possible Financing or Sale
During the last three years, we have investigated obtaining capital
through (i) asset-based debt from financial sources; (ii) equity investment that
could include a debt component; (iii) a sale of a portion of our assets or
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business; and (iv) a partnership or joint venture with an adequately financed
partner. In the chronological detailing of those investigations that follows, we
have identified the potential financing sources using letters of the alphabet
for clarity.
While our litigation and arbitration disputes with MCNIC were pending,
we explored the following possible strategic relationships that we believed
might be beneficial.
We had an established relationship with a refiner that had been our
primary asphalt supplier and had provided inventory financing to us for the
prior two years ("Company A"). In conversations over the course of the
relationship, Company A representatives had expressed an interest in vertical
integration of its business into the segment serviced by us. After the
arbitration decision, our survival relied on our ability to secure asphalt
supply and strategic alliances with suppliers and this was a means of fulfilling
this requirement. Mr. Mealey initiated discussions with Company A and determined
its interest was high enough to warrant further discussion. As a result, in
November 2001, we entered into a nondisclosure agreement and began discussions
with Company A. We engaged in discussions through May 2002, when Company A
determined that our facilities presented potential environmental liabilities and
that our market was too risky to satisfy its internal requirements.
Mr. Mealey initiated discussions with the president of an unaffiliated
asphalt supplier and wholesaler ("Company B") following a gathering both parties
had attended where Mr. Mealey discovered Company B was interested in expanding
its business. In December 2001, we and Company B executed a nondisclosure
agreement and entered into preliminary discussions about a possible business
venture. In March 2002 those talks centered on the idea of a merger of the two
entities, out of which we would be the surviving entity. In connection with
these discussions, in January 2002 we provided a 2002 financial forecast based
on Company B providing us with a $15.0 million line of credit early in the year.
We then forecast that we could achieve revenue of approximately $26.5 million,
as compared to revenue of $27.0 million in 2001, with a total 2002 pretax profit
of approximately $1.7 million, as compared to a net loss of $6.5 million in
2001. In July 2002, talks with Company B had evolved into discussions about a
joint venture in which Company B would purchase the ongoing business from us for
from $6.0 to $10.0 million, the proceeds of which would pay off the amount due
under the settlement with MCNIC, and provide working capital for the joint
venture entity. Our talks with Company B were terminated in November 2002
because of financial difficulties suffered by Company B.
Mr. Mealey initiated discussions with the president of an unaffiliated
asphalt refiner and supplier in another region ("Company C"). We had previously
purchased supply base asphalt supply from Company C, which had provided
inventory financing at the time. Mr. Mealey knew from previous general
discussions with the president of Company C that it was interested in
distributing its asphalt production into new regions of the U.S., and Mr. Mealey
made the contact to inquire of Company C's interest in some form of venture with
us. In December 2001, we entered into a nondisclosure agreement with Company C.
Discussions stopped during much of 2002 due to a business combination between
Company C and another company. However, in January 2003, Company C had an
engineer inspect our facilities with the view toward forming a potential joint
venture, with the joint venture purchasing our assets and operations for a
purchase price sufficient to enable us to satisfy our obligations to MCNIC and
provide working capital for the joint venture entity. Company C tabled its
negotiations until October 2003, when it conducted additional financial and
operational due diligence. In late 2003, Company C informed us that it could not
commit the capital necessary to enter into a joint venture with us.
We had licensed certain asphalt processing technology from Company D,
an asphalt wholesaler and supplier, and in that process Company D became
well-acquainted with our business. Mr. Mealey contacted one of the owners of
Company D to determine the potential of it providing the working capital to us.
In January 2002, we entered into a nondisclosure agreement with Company D to
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further discussions of a possible joint venture transaction that would involve
having Company D use its line of credit to provide the funds to satisfy our
obligation to MCNIC and receive a preferential return until that money was
repaid, at which time Company D's interest in the joint venture would be
reduced. As part of our discussions, we provided a financial forecast in which
we estimated that with a $12.0 to $15.0 million credit line and additional
capital investment for expansion, we could increase revenue from approximately
$27.0 million for 2001 to approximately $32.4 million for 2007, reversing the
2001 $6.5 million net loss to an annual profit of approximately $2.6 million for
2007. Company D then determined that such a transaction would place too large a
burden on its working capital credit facilities, and it terminated the
discussions. After our obligation to MCNIC had been satisfied under the second
settlement agreement, our management met with Company D's management again in
November and December of 2002, discussing the possibility of a 50-50 joint
venture, but Company D again determined not to proceed.
After we reached our March 2002 settlement agreement with MCNIC, we
attempted to obtain the funds necessary to pay the amounts we owed in order to
effect the agreed settlement. In addition to continuing discussions with Company
B as noted above, we initiated the following discussions.
We had conducted business with a regional asphalt emulsions competitor
over the years. That company was acquired by a large independent asphalt refiner
and supplier and occasional competitor of ours ("Company E"). During our
relationship, several general strategic discussions took place with the view
toward a business combination to expand each company's market position. Mr.
Mealey contacted representatives of that competitor to further previous
discussions, and he was introduced and directed toward the management of
Company E. In March 2002, we entered into a nondisclosure agreement and began
serious discussions with Company E regarding some form of possible business
combination. Mr. Mealey had discussions with several members of Company E's
senior management about expansion into the territories served by us because our
facilities were a logical extension of the facilities it had acquired. As part
of these discussions, we provided a financial forecast in which we estimated
that with a $12.0 to $15.0 million credit line, we could achieve revenue of
$22.8 million in 2002, with income before taxes of $1.5 million, as compared to
actual 2001 revenues of $27.0 million and a net loss of $6.5 million. We engaged
in discussions and Company E representatives visited our facilities through June
of 2002, when discussions cooled for the remainder of the asphalt season. We met
with Company E representatives again in November 2002, after the MCNIC
obligation was satisfied, and resumed discussions about a potential joint
venture. Serious negotiations toward the completion of a transaction continued
to progress until March 2003, when the Venezuelan oil strike severely affected
the business and financial performance of Company E. We engaged in additional
discussions with Company E in July 2003, after which Company E determined not to
expand its business in the western United States due to poor performance of its
existing western operations.
Mr. Mealey contacted a large commercial lender ("Company F") with which
we had existing credit arrangements to discuss the possibility of it providing
expanded working capital and asset-based financing to us. In March 2002, we met
with Company F to discuss financing that would permit us to satisfy our
obligation to MCNIC and provide us with working capital. Certain financial
information was exchanged, however, Company F determined that we represented an
unacceptable level of risk. We were successful in refinancing an equipment lease
and obtaining financing for a facility expansion with Company F in May 2003.
We initiated discussions with the senior management of an unaffiliated
contractor and customer of ours ("Company G") that previously had expressed some
general interest in vertically integrating its operations into the asphalt
supply business and about some possible alliance between our companies. In April
2002, we signed a nondisclosure agreement, and in June 2002, we entered into a
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letter of intent under which Company G would provide inventory purchasing for us
and have a first right of refusal to purchase our assets. We engaged in ongoing
discussions, and Company G conducted due diligence investigations through July
and into August 2002. As part of these discussions, we provided a financial
forecast in which we estimated that with a $12.0 to $15.0 million credit line
and additional capital investment for expansion, we could generate revenue of
approximately $24.9 million in 2006 with operating income before interest,
taxes, depreciation and amortization of approximately $5.0 million. During the
course of these discussions several possibilities were explored and analyzed
based on the specific territories where Company G operated. In August 2002,
Company G advised that it was unwilling to pursue discussions because of the
substantial amount we owed to MCNIC under the settlement agreement.
In June 2002, following a contact initiated by Jay Mealey, we met with
our commercial bank, a large regional bank ("Company H"), to discuss asset-based
financing to enable us to satisfy our obligation to MCNIC and provide us with
working capital; however, Company H determined that we did not meet its lending
profile.
In June 2002, we engaged in discussions with a private equity fund
("Company I") to discuss the possibility of a private sale of securities that
would enable us to meet our obligation to MCNIC and then potentially provide
enough equity to base a working line of capital from a lender. Mr. Mealey
initiated the discussions after an introduction to the fund manager by an
unaffiliated third party. We provided a financial forecast in which we estimated
that with $15.0 million in new equity to provide working capital and $9.0
million for capital expenditures over two years, and sufficient future working
capital lines of credit, we could increase revenue from approximately $27.0
million for 2001 to approximately $63.9 million for 2006, with net income before
taxes of approximately $10.3 million for 2007. After completion of financial due
diligence, Company I advised that it would not pursue an investment.
Based on a potential lead from an unaffiliated third party that was
aware of our search for capital, in June 2002, Mr. Mealey initiated discussions
with a private equity fund ("Company J") to discuss the possibility of a private
placement that would enable us to meet our obligation to MCNIC and then
potentially provide enough equity to serve as the base for a working line of
capital from a lender. Company J determined that we did not meet its investment
criteria.
In July 2002 and then again in November 2002, discussions were
initiated by Mr. Beall, one of our officers, with a major oil company ("Company
K") to discuss inventory financing and joint venture possibilities after
discovering a potential interest in moving asphalt supply into the western
United States, where previously Company K had not met with much success. Messrs.
Mealey and Beall met and had several conversations with Company K's
representatives, but Company K advised that it could not proceed further with us
because of another joint venture in which it was engaged in the region.
Mr. Mealey contacted the president of an unaffiliated refiner and
asphalt supplier that was a competitor of ours ("Company L") about a potential
joint venture agreement. In August 2002, we entered into a nondisclosure
agreement and began discussions with Company L. Discussions continued through
December of 2002, and in January 2003, Company L informed us that it believed
its market position would enable it to compete with us without entering into any
agreement with us.
Mr. Mealey initiated the discussions of a potential merger or joint
venture with the president of an unaffiliated asphalt refiner and supplier in an
adjacent market region ("Company M"). We had previously operated the refinery
then owned by Company M. Company M was a public company that had accessed
capital for operations during some difficult times. In September 2002, we
entered into a nondisclosure agreement. As part of these discussions, we
provided financial forecasts in which we estimated that by selling our assets to
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a joint venture with Company M for $6.0 to $10.0 million and with an initial
$12.0 million credit line for operating requirements, $9.0 million in capital
expenditures over two years, and sufficient future working capital lines of
credit, the joint venture could achieve 2006 revenue of $61.4 million with
income before taxes of approximately $17.0 million. Our management met with
Company M in January 2003 and determined it was extremely unlikely that Company
M could provide the amount of capital and the type discussed that we required.
Accordingly, we discontinued further discussions.
After our October 2002 settlement with MCNIC as discussed above, we
continued our efforts to obtain much-needed financing.
In November 2002, Messrs. Mealey and Beall initiated meetings with a
large unaffiliated refiner ("Company N") to discuss the sale of a portion of our
assets, but Company N ultimately determined that our facilities were located too
far away from its existing facilities.
In February 2003, following a contact initiated by Jay Mealey, we
entered into a nondisclosure agreement and began discussions with an
unaffiliated asphalt supplier and competitor of ours ("Company O") about the
possibility of interim inventory financing with the possibility of a joint
venture agreement. In July 2003, Company O determined that it could not agree
with us on the value of our assets, particularly given that it was only
interested in certain of our assets, and discussions ended.
In March 2003, we entered into a nondisclosure agreement with an
unaffiliated asphalt wholesaler in the midwestern United States ("Company P")
that had become aware of our discussions with Company E. After Company E
determined not to pursue a business arrangement with us, the vice president of
Company P contacted Mr. Beall because of prior business dealings. We began
discussions with Company P that initially focused on Company P providing
inventory financing for a fee. Those discussions shifted to discussions of a
potential joint venture, and in September 2003, Company P informed us that it
had retained a third party to help it locate new working capital financing for
its business and the potential joint venture. During the course of our
discussions with Company P, we provided financial forecasts in which we
estimated that by selling our assets to a joint venture with Company P for $8.0
million in cash, assumption of $2.3 million in liabilities, and purchase of
approximately $1.5 million in inventory, for a total of approximately $11.8
million, and with a $15.0 million credit line for operating requirements and
additional capital investment for expansion and sufficient future working
capital lines of credit, the joint venture could achieve potential revenue of
approximately $44.0 million by 2008, yielding joint venture cash available for
distribution of approximately $4.2 million for that year. In December 2003, we
met with Company P and its financial advisor, at which time we advised them that
financing needed to be in place by January 2004 in order to take advantage of
winter-fill asphalt purchases. In March 2004, although the financing for the
potential joint venture was still not in place, Company P advised such financing
was imminent, and we entered into a letter of intent with Company P regarding a
joint venture. In May 2004, we terminated the relationship prior to negotiating
definitive terms because Company P remained unable to complete the required
financing.
In April 2003, we were introduced to an unaffiliated venture capital
source ("Company Q") by a business acquaintance of Mr. Beall's, and we met to
discuss high-interest inventory financing and the possibility of a private
placement of our securities; however, we determined that Company Q did not have
access to capital on the timely basis we required.
In January 2004, we entered into a nondisclosure agreement with an
unaffiliated high-interest financing source ("Company R"). The introduction to
Company R came through an investment banking agreement signed with a third party
to assist us in sourcing capital for our requirements. Company R completed
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forecasts based on both historic and pro forma volume, pricing, costs of goods,
and operating expense information provided by us. Discussions continued through
April 2004, when Company R offered to provide high-interest financing with an
equity component. The potential financing would have required us to agree to a
five-year exclusive period for financing and to borrow $100 million. If we
elected to complete financing with any other source during the exclusive period,
we would have faced a significant financial penalty. Our management determined
that the joint venture with Idaho Asphalt Supply, discussed under "THE PROPOSED
JOINT VENTURE FORMATION," provided a better opportunity for us and our
stockholders, and we have informed Company R that we no longer require the
financing at this time.
Possible "Going-Private" Transaction
After having no success in obtaining or completing a sale, financing or
similar transaction, in March 2003, we requested that our legal counsel outline
potential alternatives for a "going-private" transaction, including the
potential costs and effects on our stockholders of each alternative. We
determined that a going-private transaction might provide the best alternative
to lead to the implementation of required working capital financing and the
issuance of payment and performance bonds for participation in government
contracting, both of which we determined would require personal guarantees of
our principal stockholders, which we were advised would not be available as long
as we remained subject to Securities and Exchange Commission reporting
obligations.
We determined to explore and then to pursue a going-private transaction
in early 2003 due to the increasing difficulty in obtaining insurance for our
officers and directors at a reasonable cost, the increasing likelihood that we
would be unable to obtain payment and performance bonds if we remained a public
company, and our developing understanding of the costs imposed on us by the
Sarbanes-Oxley Act of 2002, which we currently believe to be approximately
$75,000 to $100,000 per year, including costs relating to the upcoming
requirements for management reports and independent auditor attestation on our
internal control over financial reporting. In addition, our proposed agreement
with Idaho Asphalt Supply and its agreement to provide working capital make it
less likely that we would need access to the capital markets provided by
remaining a public company. Finally, in our discussions with Idaho Asphalt
Supply it indicated its preference to have as its joint venture partner a
company that was not subject to the public reporting obligations of the Exchange
Act.
The alternatives reviewed and considered were: (i) Chapter 11
bankruptcy reorganization; (ii) tender offer; (iii) freeze-out merger; (iv)
reverse split of our common stock; and (v) sale of the assets. After carefully
considering the alternatives, the board determined that a reverse split of our
common stock would realize the best attainable value to our stockholders.
Chapter 11 Reorganization. One alternative considered by the board of
directors was the filing of a petition seeking to reorganize our affairs under
Chapter 11 of the U.S. Bankruptcy Code. Filing such a petition in the U.S.
Bankruptcy Court in Utah would give the Bankruptcy Court jurisdiction over all
of our assets, liabilities, creditors and stockholders. The overall thrust of
the Chapter 11 reorganization would then have been to propose a plan under which
we would pay our creditors, subject to the rules and regulations of the
Bankruptcy Code, and reorganize our capital structure, likely resulting in the
entire equity ownership being held by the current preferred stockholder and the
common stockholders receiving nothing or some nominal amount. With the
elimination of the common stock in a reorganization plan, we would have
terminated formally the registration of our common stock under the Exchange Act.
The potential impact of a Chapter 11 filing on our business was
difficult to predict. The board of directors recognized that generally, however,
a Chapter 11 petition has an immediate and material adverse effect on the filing
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company's relationships with all of the parties with which it does business,
particularly government entities, which are a principal component of our
business. These issues are exacerbated by the fact that a Chapter 11 proceeding
typically takes a number of months to be completed following the filing of the
petition, during which the filing company's flexibility is significantly
impaired, particularly to the extent that prior court approval of significant
commitments or agreements is required. Such uncertainty and delay frequently
requires that the filing company's management devote an even greater effort
toward keeping the business of the company focused and moving forward. Finally,
even after the completion of a Chapter 11 reorganization, there is an
unquantifiable stigma attached to such a company that lingers indefinitely and
continues to have a negative impact.
Following the filing of a Chapter 11 petition, the court, either on its
own motion or on the motion of persons having a claim or interest in the debtor,
might consider whether the proceeding should be converted to a Chapter 7
liquidation proceeding. In broad terms, such a determination would focus on the
economic viability of our business and its financial resources to determine
whether we had a viable chance of continuing through completion of the
reorganization and beyond. As a company with little liquidity and ongoing
operating losses, and with it unlikely that we would be able to have
reorganization financing arranged prior to such a filing, we might have been
unable to demonstrate to a critical court that we had adequate financing to meet
our working capital requirements to pay the costs of the Chapter 11 proceeding,
to cover anticipated ongoing operating losses, and to emerge from the
reorganization as a viable enterprise.
Freeze-Out Merger or Exchange. Another means of accomplishing a
going-private transaction considered by the board of directors was a so-called
"freeze-out merger" in which a new company would be organized, owned by our
principal stockholder or stockholders that intend to continue their ownership.
Then our current corporation would be merged with and into the new company, with
the continuing stockholders receiving stock in the new company in exchange for
their old Crown stock while all other stockholders received cash. This is
sometimes referred to as a "cash-out" merger, as contemplated by Utah Revised
Business Corporation Act Section 16-10a-1101(2). The board of directors also
considered that a freeze-out transaction such as this could be structured as a
share exchange with a newly-organized corporation controlled by the continuing
stockholders in which the continuing stockholders would receive stock of the new
corporation for their existing stock, while all other stockholders would receive
cash, as contemplated by Utah Revised Business Corporation Act Section
16-10a-1102. The fact that some stockholders receive stock in the new company
while others are forced to accept cash is specifically permitted, as addressed
in the official commentary to each of the sections noted above. The amount paid
in cash to the minority stockholders would be determined by the board of
directors, after receiving such valuation information as deemed warranted.
The board of directors determined that each of these transactions had
the disadvantage of requiring the creation of a new company, which presented
more complications than the reverse-split procedure ultimately decided on. A
freeze-out merger would also require stockholder approval and trigger statutory
dissenters' rights.
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Tender Offer. The board of directors also considered undertaking a
tender offer to buy back, or redeem, the stock from the minority stockholders.
This would have required the filing of an issuer tender offer statement under
Rule 13e-4 promulgated under the Exchange Act and compliance with the
substantive provisions of the issuer tender offer requirements. Among other
things, the tender offer rules require that the tender offer be open for a
minimum period with terms that essentially assure a level playing field for all
possible participants and require the payment of one price to all stockholders
that tender their shares.
One advantage of a tender offer would be that each stockholder would
have the individual decision as to whether or not to accept the price offered
based on the disclosures provided. Unfortunately, an issuer tender offer cannot
be assured of achieving 100% ownership because some stockholders may not sell at
any price, we may be unable to locate some of our stockholders, or some
stockholders may simply not respond to the offer. A tender offer would be
particularly difficult in the context of a significant number of odd-lot owners
that own a small number of shares for which the time and effort of completing a
transaction are not warranted. For example, someone that owned fewer than 1,000
shares at a price of $0.012 would receive less than $12.00, and someone that
owned 100 shares would receive $1.20. The board of directors was concerned that
stockholders simply would not want to exert any effort for so little a payment.
Since it is extremely unlikely that an issuer tender offer would have
resulted in the ownership of 100% of the stock, we would still have been
required to do a second transaction to effect 100% ownership, probably through a
short-form merger not requiring the vote of the minority stockholders of the
90%-owned subsidiary. Although a short-form merger could then be effected
without stockholder approval, an issuer tender offer followed by a short-form
merger nevertheless would require an extra step and result in additional time
delays and expenses.
Reverse Split. The board of directors then considered, and determined
to pursue, a reverse split in which the issued and outstanding shares are
reverse split sufficiently to leave fewer than 300 stockholders with at least
one whole share. The initial consideration was to use a reverse-split ratio that
left only one or a few principal stockholders as owners of the Company and paid
the other stockholders for their fractional shares in scrip. However, our board
of directors ultimately determined that a reverse split that left approximately
148 stockholders, while eliminating less than one percent of the issued and
outstanding common stock and paying for those fractional shares in cash, rather
than scrip, was the best method of terminating our reporting obligations and
treating the stockholders fairly. As part of structuring the transaction, the
board of directors has the ability to determine those stockholders that would
remain with whole shares by specifying the extent of the reverse split. Pursuant
to Utah law, the reverse split of our common stock has been submitted to the
stockholders for consideration, with the recommendation of the board of
directors that it be approved, and the Approving Stockholders have executed and
delivered to the corporation their written consent effecting the required
approval.
One advantage of this structure is that the minority stockholders will
be bound by the vote of the majority and will not have the right to invoke the
special appraisal procedure under the dissenters' rights provisions of the
statute, thus assuring that this potential delay and expense can be avoided by
the corporation.
As distinguished from a merger or sale of assets, the reverse-split
transaction does not involve the complexity of a second corporation. Instead, it
is a simple, one-step process that avoids the two-step complication of an issuer
tender offer.
Reasons for and Effects of the Reverse Split
Benefits for the Company
The primary benefit of the reverse split for us and our continuing
stockholders, including both our affiliates and unaffiliated stockholders, is
the opportunity to avoid the continuing financial burden and legal compliance
costs and risks associated with continuing to have our common stock registered
under the Exchange Act.
17
We anticipate that we will benefit from the elimination or reduction of
expenses associated with being a publicly-traded entity. Costs associated with
auditor fees, attorney fees, transfer agent fees, listing fees, printing
expenses, and directors' and officers' insurance amounted to nearly $151,609 for
our most recent fiscal year before taking into account internal payroll costs
associated with compliance with reporting requirements. In addition, we estimate
that these costs will increase by approximately $75,000 to $100,000 per year as
a result of increased regulatory burdens imposed as a result of the adoption
during 2002 of the Sarbanes-Oxley Act, which imposes significant additional
burdens on corporations whose stock is publicly traded and that are required to
file periodic reports with the Securities and Exchange Commission. These burdens
include substantive legal requirements that also expose us and our officers and
directors to litigation risks for possible violations. As a nonreporting entity,
we expect that we will continue to prepare audited financial statements at a
cost of approximately $15,000, but that we will be able to eliminate most, if
not all, of the balance of the expenditures associated with being publicly
traded.
Benefits for our Unaffiliated Stockholders
Those unaffiliated stockholders holding more than 1,000 shares of our
pre-split common stock will enjoy the continued ownership of a company that
obtains the benefits described above, as well as a small increase in their
percentage ownership in the Company, as a result of the extinguishment of the
ownership interest of those stockholders holding fewer than 1,000 shares of our
pre-split stock, which in the aggregate represent less than 1% of our issued and
outstanding common stock. Those stockholders holding fewer than 1,000 shares of
our pre-split common stock will benefit by receiving the cash payment of $0.012
per pre-split share, a result they would otherwise be unlikely to obtain given
the thinly-traded history of our common stock and the fact that a typical
broker's commission on the sale of 1,000 or fewer shares of our common stock
would likely equal or exceed the amount received.
Benefits for our Affiliates
Our affiliates will receive the same benefits from the reverse split as
will the unaffiliated holders of our common stock described above. Inasmuch as
the reverse split will result in the elimination of less than 1% of our issued
and outstanding common stock, the interests of our principal stockholders, Jay
Mealey and the Mealey Partnership, and our stockholders' deficit per share will
similarly decrease less than 1% as a result of the reverse split. Additionally,
at September 30, 2004, there were dividends payable on our Series A Cumulative
Convertible Preferred Stock, which is held by the Mealey Partnership, of $1.7
million that may, at the election of the Mealey Partnership, be taken in cash or
common stock. We anticipate that payments on the Peak Asphalt promissory note
will be applied first to payment of dividends accruing on our outstanding
preferred stock owned by the Mealey Partnership.
Detriments
The primary detriments to us associated with the proposed reverse split
are the practical elimination of our access to public equity markets and the
associated loss of ready public market liquidity for our remaining equity
holders resulting from the termination of our reporting status under the
Exchange Act and the ineligibility of our common stock for quotation on the OTC
Bulletin Board. After the reverse split, which we estimate will result in the
elimination of less than 1% of our issued and outstanding common stock and
approximately 594 stockholders of record, Crown will still have approximately
148 stockholders of record. Therefore, liquidity for their investment in common
stock now available to stockholders that continue to be stockholders following
the reverse split will be substantially reduced and perhaps practicably
eliminated.
18
Additionally, the reverse split will require those of our stockholders
with fewer than 1,000 shares of our pre-split common stock to effectively sell
all of their shares, and those other stockholders with a number of shares not
evenly divisible by 1,000 to sell some of their shares, at a time and price not
of their choosing.
Finally, if we successfully terminate our reporting obligations under
the Exchange Act, we will no longer be subject to the liability provisions of
the Exchange Act, the provisions of the Sarbanes-Oxley Act, and all other laws
and regulations that protect stockholders in publicly-owned companies. Our
officers would also no longer be required to certify the accuracy of our
financial statements.
Procedural Fairness of the Reverse Split
The board of directors has determined that the procedure by which we
have determined to conduct the reverse split is fair to the unaffiliated
stockholders. The transaction was reviewed and approved by Andrew Buffmire, our
sole director who is not our employee or affiliated stockholder, after full
disclosure of the interests in the transaction of our other two directors.
Although Mr. Buffmire did not retain an unaffiliated representative to represent
the interests of the unaffiliated stockholders and the transaction is not
structured so that it must be approved by a majority of the unaffiliated
stockholders, our board of directors believes that the procedures used to
structure the reverse split were fair to the unaffiliated stockholders in the
light of the following factors:
o Mr. Buffmire's review and approval of the proposed transaction as a
director without a conflicting interest in the transaction under the
Utah Revised Business Corporation Act;
o the fact that Mr. Buffmire's approval of the proposed transaction
provides procedural fairness within the safe harbor provisions of
Sections 850-853 of the Utah Revised Business Corporation Act; and
o our weighing of the potential costs and benefits of retaining an
unaffiliated representative against the fact that the aggregate value
of shares held by unaffiliated stockholders to be eliminated in the
reverse split is estimated at less than $10,000.
Based on the foregoing, the board of directors believes that the
reverse split is fair to both those stockholders that hold more than 1,000
pre-split shares of common stock and who will remain as stockholders following
the reverse split and those that hold fewer than 1,000 pre-split shares of
common stock and who will be cashed out.
Substantive Fairness of the Reverse Split
Each of the board of directors, Jay Mealey, and the Mealey Partnership
believes the reverse split is fair to the unaffiliated stockholders as a whole
because it enables us to avoid the substantial costs and regulatory burdens of
having our common stock registered under the Exchange Act. The board of
directors believes that the reverse split is fair to both those stockholders
that hold more than 1,000 pre-split shares of common stock and who will remain
as stockholders following the reverse split and those that hold fewer than 1,000
pre-split shares of common stock and who will be cashed out. Each group will
receive benefits from the reverse split that the board believes outweigh the
detriments (see "Reasons for and Effects of the Reverse Split"), and the board
believes that the factors (described below) it reviewed in determining the
substantive fairness of the reverse split apply equally to each group. Both
19
groups will receive an amount per share for their fractional shares that is
substantively fair to them based on the factors considered. In reaching these
conclusions, our board of directors, Jay Mealey, and the Mealey Partnership
considered a number of factors, principally the following.
Current and Historical Market Prices
Our common stock has been traded in the over-the-counter market since
1980. The common stock was quoted under the symbol "CROE" on the Nasdaq OTC
Bulletin Board prior to June 2, 2004, and thereafter on the Pink Sheets
published by Pink Sheets, LLC, due to our failure to file timely periodic
reports under the Securities Exchange Act. The following table sets forth the
range of high and low bid quotations of the common stock as reported by the OTC
Bulletin Board or the Pink Sheets, as the case may be, for each full quarter
during the two most recent fiscal years and for the subsequent interim period.
The table represents prices between dealers, and does not include retail
markups, markdowns or commissions, and may not represent actual transactions:
Low High
---------- ---------
2005:
First Quarter (through February 25, 2005)..... $0.011 $0.011
2004:
Fourth Quarter................................ 0.011 0.012
Third Quarter................................. 0.010 0.012
Second Quarter................................ 0.010 0.020
First Quarter................................. 0.020 0.035
2003:
Fourth Quarter................................ 0.010 0.030
Third Quarter................................. 0.010 0.015
Second Quarter................................ 0.015 0.022
First Quarter................................. 0.010 0.025
2002:
Fourth Quarter................................ 0.005 0.018
Third Quarter................................. 0.011 0.023
Second Quarter................................ 0.020 0.060
First Quarter................................. 0.011 0.040
From January 1, 2004, through November 30, 2004, only an aggregate of
609,580 shares were reported as traded, representing an aggregate transaction
value of less than $12,000, at the quoted prices on the dates of the reported
transactions. Transactions were reported on only 47 of the 230 trading days
between January 1 and November 30, 2004. Therefore, the public trading markets
have provided very little actual liquidity for our stockholders. Although there
were high bid quotations between December 15, 2003, and May 19, 2004, from
$0.014 to $0.035, there were reportedly only 625,971 shares traded on 34 of the
108 trading days during the period for an aggregate value, based on the high bid
quotation on each transaction day, of $14,282 over the above approximately five
months. Except for the foregoing, the high bid quotations during most of 2003
and 2004 were between $0.010 and $0.020 per share with a very limited number of
actual transactions reported involving only a nominal number of shares. We
believe the sale or potential sale of a number of shares significantly larger
than the number recently traded would substantially depress trading prices below
$0.012 per share and further adversely impact liquidity. We, Jay Mealey, and the
Mealey Partnership believe that, notwithstanding the fact that the stock traded
at a significantly higher price per share than the price per share to be paid
for fractional shares in the reverse split, the recent trading history indicates
that the trading market for our common stock provides minimal practicable
20
liquidity for our stockholders. In view of the trading prices over the last two
years and the light trading volume in our common stock, we, Jay Mealey, and the
Mealey Partnership believe the price of $0.012 per pre-split share to be fair to
the unaffiliated stockholders.
We, Jay Mealey, and the Mealey Partnership consider the recent trading
prices and volume for our stock and, in particular, the extremely sporadic
trading of only a nominal number of shares, very significant factors in
determining the overall fairness of the transaction.
Stockholders' Deficit
As of September 30, 2004, we had a stockholders' deficit attributable
to our common stock of $2,165,306. The deficit attributable to the common
stockholders is after the preference on the redeemable preferred stock of $5.0
million and the accumulated and unpaid preferred stock dividends payable of $1.7
million. We do not believe that any of our assets have an intrinsic or fair
market value higher than their net book values. The amount of the common
stockholders' deficit means that upon our liquidation, our assets would be
insufficient to pay the liquidation preference and unpaid dividends on the
preferred stock, leaving the common stockholders with nothing. Therefore, the
payment of any amount in the reverse split for fractional shares of common stock
is greater than the zero amount common stockholders would receive for their
shares in liquidation. We, Jay Mealey, and the Mealey Partnership believe that
the stockholders' deficit attributable to the common stock is a very significant
factor in determining the overall fairness of the transaction, including the
price to be paid for each fractional share of common stock.
Going Concern Value
We, Jay Mealey, and the Mealey Partnership have not determined a going
concern value for us because of our record of ongoing operating losses during
the last several years caused by shortages of working capital and our inability,
notwithstanding significant efforts, to obtain the capital we believe we need.
Because of the $1.7 million in accumulated and unpaid dividends, the $5.0
million stated value of the preferred stock for an aggregate preference on
liquidation, including accrued dividends, of $6.7 million, and the amounts we
anticipate we will receive in the future from payments on the promissory not due
us for the sale of our assets to the joint venture entity as well as our share
of possible earnings, if any, we, Jay Mealey, and the Mealey Partnership do not
believe that our going concern value would likely provide any going concern
value to the common stockholders. We, Jay Mealey, and the Mealey Partnership do
not believe this to be a very significant factor in determining the overall
fairness of the transaction, including the price to be paid for each fractional
share.
21
Liquidation Value
As noted above, we do not believe that our assets have intrinsic value
in excess of the value at which they are carried on our balance sheet. Instead,
we believe we would obtain less than the net book value of our assets as of
September 30, 2004, if we were required to liquidate the Company. The following
table sets forth the reported value of our assets as of September 30, 2004, as
well as the estimated liquidation value of those assets:
As of
September 30,
2004 Estimated
(unaudited) Liquidation Value
------------- ------------------
Current Assets:
Cash and cash equivalents $ 157,696 $ 157,696
Accounts receivable, net of allowance for
uncollectible accounts of $159,970 4,162,621 3,746,359
Inventory 1,476,880 1,329,192
Prepaid and other current assets 103,621 103,621
------------ -----------
Total Current Assets 5,900,818 5,336,868
Property, Plant, and Equipment, net 8,215,629 4,107,815
Other Assets 235,577 --
------------ -----------
Total Assets $14,352,024 $ 9,444,683
=========== ===========
The adjustments to book value to estimate liquidation value includes a
reduction of approximately 10% on accounts receivable, approximately 10% on
inventory, and approximately 50% on property, plant and equipment. These
estimates are not based on any independent valuation or appraisal of these
assets.
As of September 30, 2004, we had total liabilities of approximately
$15.9 million, as follows:
As of September 30, Estimated Obligation
2004 (unaudited) in Liquidation
------------------- --------------------
Current Liabilities:
Accounts payable $ 5,654,082 $ 2,827,041
Preferred stock dividends payable 1,700,000 --
Accrued expenses 133,588 66,794
Accrued interest 428,925 428,925
Long-term debt - current portion 821,975 821,975
------------ -----------
Total current liabilities 8,738,570 4,144,235
Long-term debt 2,193,973 2,193,973
Redeemable preferred stock 5,000,000 3,106,475
------------ -----------
Total liabilities $ 15,932,543 $ 9,444,583
============ ===========
We believe that in liquidation, we may be able to compromise and reduce
the payment due on our accounts payable and accrued expense aggregating
$5,787,670 to general, unsecured trade creditors. Our liabilities include
aggregations of $3,015,948 due on secured long-term debt, including current
portion, that as secured indebtedness, we believe would have to be repaid in
full. As a result, we believe that the holder of the preferred stock would
22
likely receive nothing for the $1.7 million in preferred stock dividends payable
and only approximately 62.1% of the $5.0 million preference on liquidation.
Accordingly, we believe that there would be no funds available for any
distribution on liquidation to the common stockholders. We believe our
liquidation deficit to be a very significant factor in determining the overall
fairness of the transaction, including the price to be paid for each fractional
share.
Prior Purchases by Jay Mealey and the Mealey Partnership
As noted above, under "THE REVERSE SPLIT--Special Factors--Previous
Transactions," in November 2001, an affiliated predecessor-in-interest to Jay
Mealey and the Mealey Partnership purchased from an Enron subsidiary for
$263,000, 500,000 shares of Series A Cumulative Convertible Preferred Stock,
$1,133,667 in accumulated dividends, and 317,069 shares of common stock, a
warrant to purchase an additional 926,771 shares of common stock at $0.002 per
share, and related preemptive rights and rights of first refusal As of the date
of that transaction, the common stock purchased together with the equivalent
common stock giving effect to the conversion of the preferred stock, the
exercise of the warrant, and the payment of the dividend would have aggregated
approximately 23.24 million shares of common stock for an aggregate of $554,167,
or a price per equivalent share of common stock of approximately $0.0238. In
November 2002, Jay Mealey purchased the 62.5% majority interest in Manhattan
Goose for an aggregate of $213,030, plus 4,585,806 shares of common stock. As of
the date of the November 2002 transaction, the interests in Manhattan Goose
purchased from the other owners consisted of the equivalent ownership of 312,500
shares of preferred stock with an aggregate liquidation preference of
$3,125,000, plus accrued and unpaid dividends of approximately $852,000,
together with warrants to purchase 578,607 shares of common stock at $0.002 per
share, and 198,168 shares of common stock. As of the date of this transaction,
the common stock purchased together with the equivalent common stock giving
effect to the conversion of the preferred stock, the exercise of the warrant,
and the payment of the dividend, would have aggregated approximately 90.38
million shares of common stock for an aggregate of $137,098, or a price per
equivalent share of common stock of approximately $0.0015.
Inasmuch as the foregoing transactions involve 500,000 shares of
convertible preferred stock with an aggregate liquidation preference of $5.0
million, together with substantial accrued and unpaid dividends aggregating $1.7
million as of September 30, 2004, we did not believe that the prices paid in
previous transactions to be a significant factor in determining the overall
fairness of the transaction.
Additionally, on June 8, 2004, Jay Mealey purchased in a
privately-negotiated, arm's-length transaction from Andrew Buffmire, a director,
3,089,620 shares of our common stock for $15,448, or $0.005 per share, paid in
securities of another entity. The factual circumstances of this sale cause us to
believe that the price paid is not a significant factor in determining the
overall fairness of the transaction, including the price to be paid for each
fractional share.
Outside Preliminary Evaluation
In mid-2003, as we were considering whether to pursue a possible
going-private transaction, we contacted two firms to investigate the possibility
of obtaining a formal written opinion respecting the fairness of a possible
going-private transaction from a financial point of view. We interviewed a
representative of one regional firm of financial advisors regarding a possible
scope of engagement, information required to be provided, kinds of advisory
opinions issued, and related costs, and determined not to pursue any discussions
with such regional firm further about either any going-private transaction, the
proposed joint venture with Idaho Asphalt Supply, or any other transaction.
23
We also met with a principal of a Salt Lake City, Utah, local firm to
discuss a possible scope of engagement, information required to be provided,
kinds of advisory opinions issued, and related costs. In October 2003, we
authorized the local firm to undertake a due diligence review of our business
and financial condition to determine whether, if we requested, it would
undertake an assignment to prepare a formal evaluation and fairness opinion of a
transaction on unspecified terms that could be included in communications with
our stockholders. The firm's preliminary due diligence review was based on a
review of publicly available information, interim internal financial
information, preliminary interviews of our management, including financial
forecasts. In the financial forecasts we provided to this firm, we estimated
that by selling our assets to a joint venture at the end of 2003 for
approximately $6.0 million in cash, assumption of $2.3 million in liabilities
and purchase of inventory, and with $12.0 to $15.0 million credit line for
capital investment for expansion and operating requirements, the joint venture
could achieve potential revenue of approximately $28.6 million for 2004,
yielding joint venture cash available for distribution of approximately $685,000
for the year. After a review of this information, the local firm indicated
orally that it would be prepared to undertake the preparation of a formal
evaluation and opinion after we had determined the structure and economic terms
of the proposed transaction. The local firm further advised that it would not
propose the value attributable to the common stock in a going-private
transaction, but would only review the fairness from a financial point of view
of a value attributable to the common stock that had first been determined by
the board of directors.
We authorized the local firm to initiate the assembly of material
necessary to provide us with a formal opinion if, as and when we determined the
form of the transaction and the principal economic terms, particularly the
amount proposed to be paid to the minority stockholders. Because of our
inability to obtain working capital and resulting lack of asphalt inventory,
projected revenues and increasing operating losses, by approximately the end of
2003, we had abandoned efforts to proceed with the going-private transaction at
that time and did not engage such firm to provide an evaluation or opinion and
no such evaluation or opinion was provided. Accordingly, our work with the local
firm was then abandoned because of our desire to avoid an estimated $10,000 or
more in additional costs that would be incurred.
We have not had any discussion with the above local firm about the
proposed formation of a joint venture with Idaho Asphalt Supply.
We are not obligated under the Utah Revised Business Corporation Act to
provide any opinion respecting the fairness of the transaction to the
stockholders from a financial point of view and, in view of the related costs
and the other factors discussed that we believe are more significant in the
determination of the overall fairness of the transaction, we have determined not
to obtain a fairness opinion. We do not consider this factor to be significant
in determining the overall fairness of the transaction.
Firm Offers from Unaffiliated Persons
During the preceding two years, neither we, Jay Mealey nor the Mealey
Partnership has received any firm offer for our merger or consolidation with or
into another firm, the sale of all or other transfer of all, or substantially
all, of our business, or to acquire a controlling interest in us, except for two
joint venture proposals.
The first joint venture proposal culminated in a letter of intent dated
March 19, 2004, with a regional asphalt company identified earlier as Company P
relating to the possible formation of a new joint venture that, effective
January 1, 2003, would purchase our asphalt production and marketing assets and
operations, purchase our inventory, and assume approximately $2.3 million in
liabilities in consideration of a 49% retained interest by us in the joint
venture. The purchase price would be paid through a cash payment for inventory
and accrued costs from the effective date, the assumption of approximately $2.3
24
million in long-term debt, and a promissory note for $5.7 million with the
principal and interest payable at the rate of $5 per ton of asphalt processed
and sold by the joint venture company, until paid. The $5.7 million note was to
be secured by an encumbrance on the assets purchased, subject to the prior lien
securing the $2.3 million in assumed liabilities. As a condition of the
agreement, Company P was to secure a working capital line of credit of up to
approximately $20 million for the current level of operations and business of
the joint venture entity. Company P was unable to arrange the working line of
credit as contemplated by the letter of intent, so the letter of intent expired
prior to reaching definitive agreements.
When Company P was unable to secure the working capital credit lines as
proposed, we reopened discussions with Idaho Asphalt Supply, which we had
previously contacted in July 2003, to discuss a possible business arrangement
between us. That renewed contact resulted in the agreement to enter into the
terms outlined in this information statement.
We believe that the transaction with Idaho Asphalt Supply provides us
with an opportunity to fund our asphalt business indirectly through the working
capital that may be provided by Idaho Asphalt Supply under our arrangement. With
adequate working capital, we believe that the joint venture may be able to
increase revenues, as compared to our recent annual revenues, and improve
operating margins. At this early stage, we are unable to assure that Idaho
Asphalt Supply will in fact provide sufficient working capital to meet our new
joint venture company's needs or that, even if such working capital is provided,
our new joint venture company will be able to increase sales or improve results
of operations. We expect that most of the cash flow resulting from the joint
venture during the next several years will be required to pay installments due
on the note to us for the sale of our assets, for capital improvements, and for
operations of the joint venture entity.
As discussed elsewhere in this information statement, as of September
30, 2004, we had $5.0 million in redeemable preferred stock issued and
outstanding and accumulated accrued but unpaid dividends of $1.7 million.
Dividends continue to accrue on the preferred stock at the rate of 8% per annum.
Accordingly, we expect that the funds we receive from Peak Asphalt on the
payment of the Peak Asphalt note for the purchase of the assets will be required
to pay dividends accrued or accruing on the preferred stock and to either redeem
the preferred stock at the election of the holder, the Mealey Partnership, or at
the election of the Company in order to terminate the continuing accrual of
dividends. The aggregate redemption price for the preferred stock is $5.0
million, plus all accrued but unpaid dividends.
After considering all of the foregoing, we, Jay Mealey, and the Mealey
Partnership do not believe that either one of the joint venture proposals
discussed above provide significant present value to the common stockholders.
We, Jay Mealey, and the Mealey Partnership consider this factor to be moderately
significant in determining the overall fairness of the transaction.
Determination of the Price To Be Paid per Share
The board of directors has determined that we will pay $0.012 per
pre-split share for each fractional share after the reverse split, which is
approximately equivalent to the market price for our common stock, on September
8, 2004, the date the board determined the price we will pay. This determination
was made based upon the board's review of all the circumstances described above,
particularly the market price of our common stock throughout the preceding
several years, the lack of real liquidity for stockholders in the trading market
for our common stock for any significant quantity of stock, the stockholders'
25
deficit attributable to our common stock, and the liquidation value attributable
to our common stock. We believe this amount per share to be paid to all
stockholders for their fractional shares, including stockholders that will
remain stockholders after the reverse split and those that will receive a cash
payment for all shares held by them as a result of the reverse split, is fair
both procedurally and substantively.
No Unaffiliated Representative and No Formal Report, Opinion or Appraisal
Our sole nonemployee director has not retained an unaffiliated
representative to act solely on behalf of unaffiliated security holders, and we
have not obtained any formal report, opinion or appraisal relating to the
fairness of the 1,000-to-one reverse split of our issued and outstanding common
stock to stockholders owning less than 1,000 shares, stockholders owning more
than 1,000 shares, our affiliates, or any other person.
Amendment to our Articles of Incorporation
We will amend our articles of incorporation to effect the 1,000-to-one
reverse split of our issued and outstanding common stock, without reducing the
50,000,000 shares of authorized common stock, par value $0.02. The full text of
the operative provisions of the proposed amendment is as follows:
Reverse Split. The shares of common stock of the Corporation
issued and outstanding as of ________________, 2005, (the "Effective
Date") shall be reverse split, or consolidated, without any change in
the authorized number of shares of common stock or the par value
thereof as follows:
(a) Each 1,000 shares of common stock issued and
outstanding immediately prior to the Effective Date shall be
converted into the right to receive one share of
post-reverse-split common stock ("New Common Stock").
(b) No fractional shares of New Common Stock shall be
issued in connection with the foregoing, and in lieu thereof,
the Corporation shall make a cash payment of $0.012 per
pre-split share.
(c) As soon as reasonably practicable after the
Effective Date, the Corporation shall cause its registrar and
transfer agent, acting as exchange agent (the "Exchange
Agent"), to mail to each holder of record of shares of common
stock immediately prior to the Effective Date (the
"Pre-Reverse-Split Common Stock"), a letter of transmittal
(which shall specify that delivery shall be effected, and risk
of loss and title to the Pre-Reverse-Split Common Stocks shall
pass, only upon delivery of certificate representing such
Pre-Reverse-Split Common Stock to the Exchange Agent, which
shall be in such form and have such other provisions as the
Corporation may reasonably specify, and which shall specify
the fee payable in order to effectuate such exchange) and
instructions for use in effecting the surrender of
certificates representing Pre-Reverse-Split Common Stock in
exchange for certificates representing shares of New Common
Stock issuable pursuant hereto. Upon surrender of a
certificate representing Pre-Reverse-Split Common Stock for
cancellation to the Exchange Agent, together with such duly
executed letter of transmittal and the payment of the
prescribed fee, the holder of such certificate representing
Pre-Reverse-Split Common Stock shall be entitled to receive in
exchange therefor a certificate representing that number of
whole shares of New Common Stock that such holder has the
right to receive in exchange for the Pre-Reverse-Split Common
26
Stock surrendered pursuant to the provisions hereof (after
taking into account all Pre-Reverse-Split Common Stock then
held by such holder), and the Pre-Reverse-Split Common Stock
so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Pre-Reverse-Split Common Stock that
is not registered in the transfer records of the Corporation,
a certificate representing the proper number of shares of New
Common Stock may be issued to a transferee if the certificate
representing such Pre-Reverse-Split Common Stock is presented
to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes and other transfer fees have
been paid. Holders of certificates representing
Pre-Reverse-Split Common Stock shall not be required to
convert their certificates into certificates representing New
Common Stock. Until surrendered as contemplated hereby, each
certificate representing Pre-Reverse-Split Common Stock shall
be deemed at any time after the Effective Date to represent
only the New Common Stock into which such certificate
representing Pre-Reverse-Split Common Stock is convertible as
provided herein and the right to receive, upon such surrender,
the cash payment of $0.012 per share of the Pre-Reverse Split
Common Stock in lieu of any fractional shares of New Common
Stock as provided above.
(d) After the Effective Date, there shall be no
further registration of transfers of certificates representing
Pre-Reverse-Split Common Stock. If, after the Effective Date,
certificates representing shares of Pre-Reverse-Split Common
Stock are presented to the Corporation or the Exchange Agent
for registration of transfer, such certificates shall be
canceled and exchanged for certificates representing New
Common Stock and cash in accordance with the procedures set
forth herein.
The reverse split will become effective on the Effective Date or as
soon thereafter as the articles of amendment to our articles of incorporation
can be filed with the Division of Corporations and Commercial Code of the State
of Utah. On the Effective Date of the reverse split, each 1,000 shares of common
stock issued and outstanding will be automatically converted into one share of
new common stock. Those stockholders owning fewer than 1,000 shares before the
reverse split will receive only the cash payment.
As a result of the reverse split of our common stock, the terms of the
issued and outstanding preferred stock will be adjusted automatically so that
the number of shares into which each share of preferred stock will be
convertible will be reduced 1,000-to-one to give effect to the reverse split.
The board of directors may, at any time prior to the effective date of
the reverse split, abandon the filing of the articles of amendment and the
reverse split without any further action by the stockholders if there is any
order, decree, or judgment at law or in equity preventing, or any action or suit
seeking to prevent, the reverse split.
Exchange of Certificates; Treatment of Fractional Shares
Our transfer agent, Interwest Transfer Company, will act as our
exchange agent in connection with the reverse split. As soon as practicable
after the Effective Date, we will notify the holders of the common stock that
the reverse split has been effected and instruct them as to the manner in which
they should surrender to Interwest Transfer Company any certificate(s)
representing outstanding shares of existing common stock.
27
We will authorize the issuance of certificates representing one or more
shares of common stock then issued and outstanding for those stockholders
holding more than 1,000 shares immediately prior to the reverse split upon
surrender of existing certificates evidencing outstanding shares of existing
common stock for an aggregate of 1,000 or more shares. As exchange agent,
Interwest Transfer Company will issue certificates evidencing one or more shares
to be held by the continuing stockholders following the reverse split.
We will not issue fractional shares, but instead will pay $0.012 per
pre-split share for each fractional share of common stock following the reverse
split.
Termination of Securities and Exchange Commission Reporting Status and Stock
Quotations
Immediately following the effectiveness of the reverse split, we will
file with the Securities and Exchange Commission documents to terminate our
ongoing reporting obligations. Our common stock will then no longer be eligible
for quotation on the OTC Bulletin Board, and we cannot assure that any trading
market for our common stock will continue thereafter.
Federal Income Tax Consequences
A summary of the federal income tax consequences of the reverse split
is set forth below. This discussion is based on federal income tax law. This
summary does not purport to deal with all aspects of federal income taxation
that may be relevant to a particular stockholder in light of such stockholder's
personal investment circumstances or to certain types of stockholders subject to
special treatment under the Internal Revenue Code of 1986, as amended. Such
stockholders that may be subject to special treatment may include financial
institutions, securities broker-dealers, regulated investment companies, life
insurance companies, tax-exempt organizations, foreign corporations, and
nonresident aliens. Accordingly, stockholders are urged to consult their
personal tax advisors for an analysis of the effect of the reverse split on
their own tax situation, including consequences under applicable local or
foreign tax laws.
We believe that the exchange of existing common stock for new common
stock issuable to those stockholders holding more than 1,000 shares will qualify
as a recapitalization under Section 368(a)(1)(E) of the Internal Revenue Code,
to the extent that outstanding shares of existing common stock are exchanged for
a reduced number of shares of new common stock. Therefore, neither we nor the
continuing stockholders will recognize any gain or loss for federal income tax
purposes as a result of the reverse split. The shares of the common stock to be
issued to the continuing stockholders will have an aggregate basis, for
computing gain or loss, equal to the aggregate basis of the shares of existing
common stock held by such stockholder immediately prior to the reverse split.
Each stockholder's holding period for the share of new common stock to be issued
or any interest therein would include the holding period for shares of existing
common stock exchanged therefor, provided that such outstanding shares of
existing common stock were held by the stockholder as a capital asset on the
Effective Date of the reverse split.
Stockholders who receive cash in exchange for a fractional share
following the reverse split will be taxed on any gain recognized (or entitled to
take any loss with respect thereto) measured by the difference between the
amount of cash received and the basis of such stock in the hands of the holder
of the shares of our common stock surrendered as a result of the reverse split.
Unless the stockholder is a dealer with respect to such stock, the gain or loss
will be capital gain or loss, and will be long term if the stockholder has held
28
common stock surrendered for more than one year. Any loss will be allowed in
full against any other capital gain that the stockholder has for the tax year,
and up to a maximum of $3,000 of all capital losses for that year will be
allowed as a deduction against ordinary income.
No Dissenters' Rights
Utah corporate law does not vest our stockholders with dissenters'
rights respecting the reverse split of our common stock.
Expenses
The following is a reasonably itemized statement of all expenses
incurred or estimated to be incurred in connection with the transaction:
Description Amount
----------- ------
Filing......................................... $ 2,000
Legal.......................................... 50,000
Accounting..................................... --
Financial advisor fees......................... --
Solicitation expenses.......................... 10,000
Printing costs................................. 10,000
Miscellaneous.................................. 8,000
--------
Total........................................ $ 80,000
========
All fees, other than the Securities and Exchange Commission filing fee, are
estimates. We will pay the fees incurred in connection with the proposed
transaction.
THE PROPOSED JOINT VENTURE FORMATION
General
We have signed definitive agreements with Idaho Asphalt Supply's
affiliate, Peak Holding, LLC for the formation of a joint venture through which
we will continue to participate in the asphalt distribution business. Under our
agreements with Peak Holding, we organized Peak Asphalt with the following
principal terms:
o We will sell to Peak Asphalt substantially all of our asphalt
business, operations and assets, which represent approximately
93% of our total assets as of September 30, 2004, in
consideration of:
- a promissory note for $7.5 million secured by the
assets and business sold to Peak Asphalt, the payment
of which will be largely contingent upon Peak Asphalt
having earnings sufficient to permit such payment,
- assumption of approximately $2.5 million in
liabilities relating to the assets transferred, and
- a 49% interest in Peak Asphalt.
o Peak Holding will own 51% of Peak Asphalt and will designate a
majority of its managers.
29
Idaho Asphalt Supply, a private, closely-held corporation, advises us
that none of its officers, directors or owners, and none of the managers or
owners of Peak Asphalt appointed by it, own or have owned any of our common or
preferred stock or is or have been at any time our officer, director or other
affiliate. Prior to initiating the discussions with Idaho Asphalt Supply that
led to the agreements and transactions described below, we had not had any
business transactions with Idaho Asphalt Supply for several years.
This transaction was the result of arm's-length negotiations and has
been approved unanimously by our board of directors on the grounds that it is
fair to our corporation and our stockholders. We have not obtained any report,
opinion or appraisal from any outside party as to whether the terms of the
transaction are fair to our corporation or our stockholders.
Events Leading to our Agreements with Idaho Asphalt Supply
During 2002, as we explored various financing alternatives as discussed
above, Jay Mealey telephoned the president of Idaho Asphalt Supply to inquire if
it would be interested in some kind of a business relationship that would,
directly or indirectly, enable us to obtain financing for our activities. Idaho
Asphalt Supply advised that it was not interested in a possible transaction at
that time.
On July 8, 2003, Scott Beall, vice president of our subsidiary Crown
Asphalt Products Company, telephoned Idaho Asphalt's president to discuss if
there were any common interests in some sort of undescribed business
transaction. Mr. Beall advised him that we had resolved our MCNIC dispute and we
were exploring ways to reactivate and expand our business. At that time, Mr.
Beall was advised that Idaho Asphalt Supply was fully engaged in other
activities and was not interested in pursuing a possible transaction with us. In
December 2003 or January 2004, Mr. Beall had another casual conversation with
the president of Idaho Asphalt about business in general that did not include a
discussion of a specific possible transaction between us.
On a date that Mr. Beall is unable to specify, but estimates to be in
February 2004, he received a telephone call from a vice president of Idaho
Asphalt Supply to advise of his new affiliation with Idaho Asphalt Supply and
his responsibility for business development, inquiring as to whether or not
there was some possible common business interest between Idaho Asphalt Supply
and us. During this conversation, they discussed generally the asphalt business,
the activities of their respective companies, and issues and challenges within
the industry, with a general, unspecified expression of possible interest in
working together in some manner in the future, but without any discussions of a
possible sale, acquisition, or joint venture. At that time, Mr. Beall was told
that the president of Idaho Asphalt had attempted on one or more occasions
between July 2003 and January 2004 to contact us, but that apparently our old
telephone number (which had been changed for approximately one year) must have
been used.
In March 2004, Idaho Asphalt's vice president and Mr. Beall began
speaking approximately weekly by telephone to discuss overall industry matters,
touching generally on possible overlapping business interests, again with no
specific discussions of a possible transaction.
On approximately March 26, 2004, we signed the letter of intent dated
March 17, 2004, with the midwestern regional asphalt supply company (identified
earlier as Company P). The above letter of intent specifically authorized us to
continue discussions with parties with which we had made contact prior to
entering the letter of intent. In response to an invitation from Idaho Asphalt's
vice president, on April 4, 2004, Messrs. Mealey and Beall met with him for
lunch in Idaho for a casual meeting to discuss possible business opportunities
30
between the two companies. Mr. Mealey told him that we had a binding letter of
intent with another company contingent on certain events. Messrs. Mealey and
Beall were advised at the meeting that Idaho Asphalt Supply had a board of
directors' meeting scheduled for the following week, and would be in a position
to consider a possible acquisition of our asphalt business or some combination
of our businesses if the transaction contemplated by the letter of intent with
Company P was not completed. Messrs. Mealey and Beall said that Idaho Asphalt
Supply might have an opportunity to discuss a possible transaction, but only in
the event that the transaction contemplated by the pending letter of intent was
not completed.
On April 7, 2004, Mr. Mealey traveled out of town to meet with
Company P to support its efforts to obtain an operating line of credit for the
new joint venture to be created with us and such other firm. Mr. Mealey and
representatives from Company P met with several banks interested in providing a
working capital line of credit for operations of the proposed joint venture. Mr.
Mealey concluded from those meetings however, that all of the banks represented
that day would require at least four weeks or longer to complete a transaction,
if such a transaction could be approved. During a meeting with representatives
from Company P after the bank meeting, Mr. Mealey advised that we were
continuing our discussions for financing or joint venture opportunities with
other companies to mitigate our risk that Company P could not secure the working
capital line of credit for the proposed venture in a timely manner.
Notwithstanding Mr. Mealey's efforts in support of the credit application of
Company P, we were continually advised that the anticipated working capital line
of credit had not been established by Company P, which was an important
condition precedent to us in proceeding with that venture. In late April 2004,
we became increasingly concerned that Company P was not going to be able to
fulfill its obligations under the letter of intent, both respecting the line of
credit financing and certain joint venture operating and control requirements.
Accordingly, and as discussed with Company P, we determined to more aggressively
pursue our other options.
On or about April 23, 2004, Idaho Asphalt Supply's vice president
called Mr. Beall to inquire about the status of the possible transaction covered
by the letter of intent with Company P and to determine whether it was then
appropriate to advance discussions with us. On April 23, 2004, we and Idaho
Asphalt Supply signed a mutual confidentiality agreement, and we provided
operating, financial, budgeting, and related information to Idaho Asphalt Supply
for its consideration. Following Idaho Asphalt Supply's analysis of this
material, on May 5, 2004, Mr. Mealey, Mr. Beall, and Alan Parker, our vice
president and a director, traveled to Idaho Falls, Idaho, to meet in the Idaho
Asphalt Supply offices with its management team. We described our business,
financial needs, specific marketing targets, and other items. On May 12, 2004,
Company P advised us that it still had not been able to arrange a working
capital line of credit as contemplated by the letter of intent, which provided
by its terms that it expired if the transaction was not completed by April 30,
2004. On receiving the news, Mr. Mealey met with the president of Idaho Asphalt
Supply on the evening of May 12, 2004, in Idaho Falls, Idaho, to discuss a
possible venture between the two companies that would, among other things,
assist us in meeting 2004 supply contracts. Negotiations for such an arrangement
continued on May 13, 2004, and on May 14, 2004, we signed an agreement to
purchase asphalt and asphalt related products from Idaho Asphalt Supply, with
extended payment terms granting to Idaho Asphalt Supply a security interest in
the raw materials purchased, products manufactured from those raw materials, and
related accounts receivable with the understanding that a joint venture
agreement would be negotiated and presented to each company's board of directors
for approval.
By Monday, May 17, 2004, we concluded that, in view of the inability of
Company P to provide the required credit facility as contemplated by its letter
of intent, we needed to pursue all other alternatives with dispatch.
Accordingly, Mr. Mealey immediately contacted the vice president of Company P to
advise him that the letter of intent had by its own terms expired and because of
its failure to secure the line of credit provided for therein. During that
conversation, Mr. Mealey stated that we would be pursuing a potential joint
venture opportunity with another company. Mr. Mealey, sometimes assisted by our
31
other officers, had almost daily telephone conversations and personal meetings
with Idaho Asphalt Supply officers to negotiate the possible formation of a
newly organized joint venture funded by Idaho Asphalt. These negotiations led to
the completion of our agreement with Idaho Asphalt Supply signed on June 7,
2004.
Formation of New Limited Liability Company
Peak Asphalt was organized under the laws of the state of Utah. Peak
Holding will own 51% and we will own 49% of the membership interests in Peak
Asphalt. The members will not be bound by, or personally liable for, the
expenses, liabilities, debts or obligations of Peak Asphalt. Peak Asphalt will
be managed by a management committee comprised of three persons, two of whom
will be designated by Peak Holding and one of whom will be designated by us. The
day-to-day operations of the business of Peak Asphalt will be managed by a
president and secretary and such other officers as the management committee
deems necessary. Peak Holding will appoint the initial president until his or
her successor is appointed by the management committee. We will appoint the
secretary and his or her successor until such time as the promissory note from
Peak Asphalt to us has been paid in full. The person appointed by us as the
secretary will be an employee of Peak Asphalt on mutually acceptable terms and
will remain as an employee until the promissory note from Peak Asphalt to us has
been paid in full. We anticipate that we initially will appoint Jay Mealey, our
president, as secretary of Peak Asphalt. After the promissory note from Peak
Asphalt to us has been paid, the secretary will be appointed by the management
committee.
We do not believe there are any federal or state regulatory
requirements that must be complied with or approval that must be obtained in
connection with the formation of Peak Asphalt.
Purchase of Assets
On the date the proposed joint venture formation is closed, but
effective as of May 1, 2004, we will sell to Peak Asphalt our asphalt business,
operations and assets, including all ownership and leasehold interests in real
and tangible personal property, the equipment and fixtures used in our asphalt
business, all intangible rights and property relating to the asphalt business,
all of our rights under leases, contracts and agreements to which we are a party
or by which we benefit that are used in the asphalt business, all of our
goodwill and going concern value of our asphalt business, including the rights
to any trade names, service marks or copyrights, all of our interest as a member
in Cowboy Asphalt Terminal, L.L.C., and all other rights, interests, assets and
properties owned by us and used in connection with our asphalt business and
operations. Peak Asphalt will purchase only the assets generally set forth
above, which represented approximately 93% of our total assets as of September
30, 2004, and will not purchase any of our cash, accounts receivable, other
current assets, or any assets owned directly by us (but not including assets
owned by our subsidiaries that are related to the asphalt business).
Purchase Price
In consideration of the rights, interests, assets and properties
transferred to Peak Asphalt, Peak Asphalt will issue us a $7.5 million
promissory note and will assume certain obligations. The principal terms of the
promissory note provide for interest to accrue at 4.0% per annum, with interest
only payable quarterly on or before the last day of the month following the
calendar quarter, commencing April 2005. The principal balance will be paid in
annual installments on January 31 of each year, commencing January 31, 2005,
based on earnings before interest, taxes, depreciation and amortization, or
EBITDA, less interest accruing on current debt, including Idaho Asphalt's
operating line of credit advances to Peak Asphalt, or Adjusted EBITDA. The
32
annual principal payment shall be equivalent to 40% of the Adjusted EBITDA for
the preceding year, less the amount of interest payments on the note during such
year. If the interest payments on the note during such year exceed 40% of
adjusted EBITDA for that year, no principal payment will be required for that
year. Notwithstanding the foregoing, for the payment due January 31, 2005, if
the Adjusted EBITDA for 2004 is less than zero, no principal payment will be
due, and an amount equal to 60% of the Adjusted EBITDA deficit will be
subtracted from the principal balance of the note. The principal amount of the
note will be increased by the amount of the interest accrued on the 2004
operating line of credit. Any principal amount of the note outstanding on
January 31, 2014, will be cancelled.
The promissory note will be secured by a first priority security
interest in all of the assets we convey to Peak Asphalt (subject to any prior
third-party liens) pursuant to a security agreement. If Peak Asphalt refinances
the existing obligations against the purchased assets (other than the promissory
note), our security interest will be subordinated to the liens created by such
refinancing. Peak Asphalt will assume our obligations for third-party
indebtedness for certain previous facility purchases and improvements, equipment
purchases and leases, and similar items, estimated to total approximately $2.5
million, but not assume any prior obligations of or claims against us or to
which the purchased assets are subject. Peak Asphalt will use its best efforts
to cause us to be released from all liability related to such all assumed
obligations. However, we cannot assure that the third-party creditors will
release us from the obligations assumed by Peak Asphalt prior to payment or that
Peak Asphalt will have the financial resources to pay such third-party
indebtedness prior to or at maturity.
Interim Financing for our Asphalt Operations
In order to provide interim operating capital for operating the asphalt
business after May 1, 2004, pending the effective date of our required
stockholder approval and formation of Peak Asphalt, Idaho Asphalt Supply
advanced a high of approximately $3.5 million during 2004, with a balance
outstanding of approximately $3.3 million as of September 30, 2004. These
advances to us by Idaho Asphalt Supply are secured by a security interest in all
of the asphalt oil, extender oils, chemicals and asphalt modifiers owned by us
as of April 30, 2004, inventory we acquired subsequent to May 1, 2004, and our
accounts receivable relating to the asphalt business after May 1, 2004. Upon the
closing of the asset sale to Peak Asphalt, we will assign the above loan and
security documentation to Peak Asphalt, which will assume the obligations
thereunder, and Idaho Asphalt Supply will release us from further obligation for
repayment of that interim funding.
Inventory quantities valued at cost, effective as of April 30, 2004,
will be verified prior to closing and adjustments will be made to account for
any discrepancies in volume, cost or amounts advanced. The amount of any such
discrepancy will be paid to either Peak Asphalt or us, as the case may be, by
the other party at closing.
Operating Line of Credit
As described above, Idaho Asphalt Supply provided an operating line of
credit for much of our working capital requirements in calendar year 2004, and
Peak Holding may elect to continue to do so for Peak Asphalt in future years.
The operating line of credit will be secured by and have a first priority in all
of Peak Asphalt's inventory, accounts receivable, bank accounts and contracts.
In addition, the operating line of credit will be secured by the purchased
assets, equipment, real estate and other assets, subject to our prior lien
securing Peak Asphalt's $7.5 million promissory note to us. The outstanding
balance of the operating line of credit will accrue interest at one percentage
point over the prime interest rate. Peak Asphalt will repay the operating line
of credit from available cash. Peak Asphalt will maintain sufficient cash
reserves in its bank accounts to pay the estimated expenses and inventory
33
purchases for the succeeding 30-day period. Available cash will be used to repay
the outstanding balance of the operating line of credit prior to any
distributions to Peak Holding and us as members. It is anticipated that the
operating line of credit will be provided beginning in 2005 in the amount
necessary to fund Peak Asphalt's operations as budgeted each year; however, Peak
Holding will have the option not to provide such operating line of credit.
If Peak Holding does not provide an operating line of credit to Peak
Asphalt at any time, Peak Asphalt will seek financing from other sources. If
Peak Asphalt is unable to obtain financing from other sources, it may be unable
to continue operations or to pay amounts due us under the $7.5 million note
issued to us for the purchase of our asphalt assets and operations, in which
case we may grant a forbearance, extend payment terms, or seek to negotiate an
alternative solution, or, in the alternative, we would be entitled to exercise
our remedies under the security agreement and recover possession of our asphalt
assets and operations. If we repossess our assets and operations, we would be
solely responsible for funding ongoing operations, and in view of our previous
experience in seeking external funding, we may be unable to continue.
Conditions to Closing of the Agreement
1. Our obligations and those of Peak Holding are subject to the
satisfaction, at or before closing, of the following conditions:
(a) All required third-party consents to the agreement and the
transactions contemplated thereby shall have been received.
(b) There shall not be any action or threatened action before
any court or governmental body to restrain, prohibit, or invalidate the
transactions contemplated by the agreement or that, in the judgment of
the boards of directors and managers of us or Peak Holding, made in
good faith and based on the advice of legal counsel, make it
inadvisable to proceed with the transactions contemplated by the
agreement.
(c) Peak Holding shall have executed, acknowledged, and
delivered (i) a certificate, signed by a duly authorized officer of
Peak Holding and dated as of the closing date, warranting that all
action necessary to approve the transactions contemplated by the June
7, 2004 Memorandum of Understanding (the "Memorandum of Understanding")
have been taken and that all actions and undertakings required of Peak
Holding thereunder have been completed; (ii) all certificates,
opinions, schedules, agreements, resolutions, or other instruments
required by the Memorandum of Understanding or the agreement to be so
delivered by Peak Holding at or prior to the Closing; and (iii) such
other items as may be reasonably requested by us and our legal counsel
in order to effectuate or evidence the transactions contemplated by the
agreement and/or the Memorandum of Understanding.
(d) Peak Asphalt shall have been formed as a limited liability
company by filing articles of organization with the Utah Division of
Corporations and Commercial Code, and Peak Holding shall have executed,
acknowledged, and delivered an operating agreement acceptable to us
governing the affairs of Peak Asphalt.
(e) We and Peak Holding shall have received such further
documents, certificates or instruments relating to the transactions
contemplated hereby as we may reasonably request.
34
2. The obligations of Peak Asphalt under the terms of the agreement are
subject to the satisfaction, at or before the closing, of the following
conditions:
(a) The representations and warranties made by us in the
agreement were true when made and shall be true at the closing with the
same force and effect as if such representations and warranties were
made at and as of the closing.
(b) We shall have performed or complied with all covenants and
conditions required by the agreement to be performed or complied with
by us prior to or at the closing.
(c) No litigation, proceeding, investigation or inquiry is
pending or, to our best knowledge, threatened that might result in an
action to enjoin or prevent the consummation of the transactions
contemplated by the agreement or that might result in a material
adverse change in our assets, properties or business.
(d) We shall have taken all corporate or other action
necessary to approve the transactions contemplated by the agreement,
including obtaining the requisite approval of our stockholders and the
mailing of an information statement to our stockholders.
(e) We shall deliver to Peak Asphalt a certificate, signed by
our duly authorized officer and dated as of the closing date,
warranting that the foregoing have been satisfied and that all
documents delivered at closing are accurate and shall provide
reasonable proof thereof as reasonably required by Peak Asphalt.
3. Our obligations under the agreement are subject to the satisfaction,
at or before the closing, of the following conditions:
(a) The representations and warranties made by Peak Asphalt in
the agreement were true when made and shall be true as of the closing
date except for changes permitted by the agreement or made in the
ordinary course of business.
(b) Peak Asphalt shall have performed and complied with all
covenants and conditions required by the agreement to be performed or
complied with by Peak Asphalt prior to or at the closing.
(c) No litigation, proceeding, investigation or inquiry is
pending or, to the best knowledge of Peak Asphalt, threatened that
might result in an action to enjoin or prevent the consummation of the
transactions contemplated by the agreement or that might result in any
adverse material change in the assets, properties or business
operations of Peak Asphalt.
(d) Jay Mealey and Peak Asphalt shall have executed an
employment agreement.
(e) We shall have received a release acceptable to us duly
executed by Idaho Asphalt Supply relating to the loan to us from Idaho
Asphalt Supply assumed by Peak Asphalt pursuant to the agreement.
(f) Peak Asphalt shall deliver to us a certificate, signed by
a duly authorized officer of Peak Asphalt and dated as of the closing
date, warranting that the foregoing have been satisfied and that all
documents delivered at closing are accurate and shall provide
reasonable proof thereof as reasonably required by us.
35
Business of the Parties Before and After the Formation of Peak Asphalt
Our Business
We focus primarily on the performance-grade asphalt and
emulsion/maintenance segments of the liquid asphalt industry. We have
approximately 75,000 tons of asphalt tank storage at our facilities. Given
adequate working capital availability, we prefer to purchase enough asphalt
inventory from November through April to fill the storage tanks and benefit from
the approximate $30 to $50 per ton price advantage relative to purchasing
inventory in the summer months. We purchase the base asphalt inventory from
refineries and transport it to our facilities via rail and truck. The material
is unloaded and stored until needed during the asphalt-paving season.
We manufacture finished liquid asphalt products by blending the base
asphalt inventory from the storage tanks with other additives, chemicals and
modifiers to meet the various product specifications. Our products are sold to
paving contractors that mix it with aggregate (rock and gravel) to make a hot
mix asphalt pavement or directly to customers for pavement maintenance.
We submit sealed bids to contractors, who in turn bid for road and
highway projects, for most of our business. We also have direct sales to
contractors, states, counties and cities for some of our business.
In June 1998, we and Foreland Refining Corporation, an unrelated entity
engaged in the asphalt roofing products business, formed Cowboy Asphalt
Terminal, L.L.C. to acquire an asphalt terminal and its underlying real property
located in Woods Cross, Utah. Though the property and tanks are owned by Cowboy
Asphalt Terminal, the property was divided by specific assets and use by us and
Foreland. Foreland retained three storage tanks and a certain portion of the
land for exclusive use in its roofing asphalt business. The remaining tanks and
a certain portion of the land are for our exclusive use in our paving asphalt
business. The remaining land may be used jointly by the parties. All revenues
generated from the exclusive-use assets are the sole property of the respective
party. Both Foreland and we have made capital equipment improvements to our
respective exclusive-use assets. Those capital improvements are the sole
property of the party making the improvement. Each party retains all revenues
and profits generated from its respective exclusive operations. Cowboy Asphalt
Terminal is owned 66.7% by us and 33.3% by Foreland, and we are the operator.
The accounts and results of operations of Cowboy Asphalt Terminal are included
within our consolidated financial statements and results of operations as
majority-owned subsidiary.
Foreland and we are obligated to make equal contributions to Cowboy
Asphalt Terminal for environmental clean-up costs, if any, up to $650,000 and
related legal expenses. Contributions for these costs will not affect our
respective percentage interests in Cowboy Asphalt Terminal.
As of September 30, 2004, we had 25 full and part-time employees. None
of our employees is represented by a union or other collective bargaining group.
Management believes that its relations with its employees are good.
Our principal executive offices are located in the office building we
own at 1710 West 2600 South, Woods Cross, Utah 84087, adjacent to the Woods
Cross asphalt terminal owned by Cowboy Asphalt Terminal.
36
We conduct our activities from manufacturing and distribution
facilities that we own or lease in Woods Cross and Salt Lake City, Utah;
Rawlins, Wyoming; Fredonia, Arizona; and Grand Island, Nebraska.
Business of Idaho Asphalt Supply
Operating a business very similar to ours but generally in a different
market area, Idaho Asphalt Supply produces a variety of asphalt products using
feedstock from third-party refiners and other suppliers that are marketed in
Idaho, Eastern Oregon, Washington, Northern Utah and Western Montana and
supplied from Idaho Asphalt's processing facilities in Idaho Falls, Nampa, and
Post Falls, Idaho.
After the Formation of Peak Asphalt
Following the transfer of our assets and operations to Peak Asphalt, we
anticipate that Peak Asphalt will continue our asphalt business in the general
manner previously conducted by us, with the benefit of working capital to be
provide asphalt supply, which should enable it to purchase base asphalt
inventory from refineries during the cold months and transport it to Peak
Asphalt's facilities for storage and sale during the warmer months.
Because of the location of Peak Asphalt's plants and transportation
charges for finished asphalt products, we do not anticipate that Peak Asphalt
will compete materially with Idaho Asphalt Supply.
Financial Information
Included at the end of this information statement are unaudited
financial information respecting the business to be sold and pro forma
information depicting the effect of such sale and related co-venture on us.
(See pages F-1 through F-5.)
Set forth below is certain summary information:
Nine Months
Ended For the Year Ended December 31,
September 30 --------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
------------ ---- ---- ---- ---- ----
Operating Results Data:
Operating revenues $ 11,013,696 $ 16,936,627 $ 17,964,675 $ 27,032,658 $ 22,787,103 $ 35,518,541
Loss from operations (1,142,800) (1,089,655) (1,372,853) (572,636) (16,084,230) (1,037,491)
Net loss before
extraordinary items (1,338,756) (1,260,885) (769,041) (6,487,981) (18,360,921) (3,053,516)
Extraordinary items -- -- 30,144,724 -- -- --
Net (loss) income (1,338,756) (1,260,885) 29,375,683 (6,487,981) (18,360,921) (3,053,516)
Earnings (loss) per
common share--diluted $ (0.05) $ (0.06) $ 1.14 $ (0.51) $ (1.39 $ (0.26)
Earnings to fixed cost ratio (a) (a) (a) (a) (a) (a)
--------------
(a) Earnings were insufficient to cover fixed charges by $1,110, $984, $769,
$2,469, $15,785, and $850 during periods noted above respectively.
37
As of September 30, 2004
------------------------
Balance Sheet Data:
Total assets $14,352,024
Total liabilities $15,932,543
Stockholders' equity $(2,165,306)
Book value per common share $ (0.08)
Reasons For and Effects of the Joint Venture Formation
We agreed to sell our assets to Peak Asphalt in consideration of the
$7.5 million secured promissory note, assumption of approximately $2.5 million
in liabilities, and a 49% interest in Peak Asphalt, with the working capital
financing needed by Peak Asphalt to be provided by Idaho Asphalt Supply's
affiliate, Peak Holding, principally as a method of indirectly obtaining working
capital financing in order to continue our asphalt business. This joint venture
will enable us to continue to participate in asphalt production, marketing and
distribution indirectly through Peak Asphalt, with working capital funding
provided by Peak Holding.
We believe that with sufficient operating capital, we may be able to
increase revenues and perhaps generate income from our asphalt operations. Based
on our recent efforts, we have recognized that the economic interest of our
common stockholders would likely be diluted by obtaining additional capital
through the issuance of common stock, joint venture arrangements with other
industry or financial participants, or borrowings. Although we have explored a
number of potential financing sources, we have not had the opportunity for
funding on terms that would dilute the interest of our common stockholders as a
whole less than under the joint venture arrangement for the organization of Peak
Asphalt. Through this joint venture arrangement, we were able to obtain the
working capital we required for the 2004 asphalt cycle, while retaining an
indirect 49% interest in the ongoing operation of our asphalt assets and
operations.
By reducing our interest from 100% ownership to a minority 49% interest
in our asphalt business and by agreeing to Peak Holding's appointment of a
majority of the members of Peak Asphalt's management committee, we no longer
have control over our assets and operations. In addition, the terms under which
Peak Holding may provide us with working capital in future years may include
certain financial covenants or restrictions on our operating flexibility,
although we do not believe that such restrictions are likely to impose greater
limitations on the operation of the asphalt business than would be required by
an unaffiliated lender.
The $7.5 million promissory note payable to us by Peak Asphalt as
partial consideration for the sale of our asphalt assets and operations to Peak
Asphalt, secured by a lien of the assets conveyed, will not be guaranteed by
Idaho Asphalt Supply. We cannot assure that Peak Asphalt will be able to
generate available cash flow from operations or other sources to pay this
obligation. If Peak Asphalt is unable to meet its payment obligations, we will
have the right to seek to enforce our rights as a secured creditor against Peak
Asphalt, including executing on and recovering the assets and operations sold.
If we were to do that, however, we expect that we would again need to obtain
additional amounts of capital in order to resume asphalt operations on our own
behalf with the recovered assets. Based on our recent experience, we may be
unable to do so.
Interest of Certain Persons in the Joint Venture Formation
Our president, a director and principal stockholder, Jay Mealey, is the
beneficial owner of 500,000 shares of $10 Series A Cumulative Convertible
Preferred Stock accruing dividends at the rate of 8% per annum payable in cash
or, at the option of the holder, in shares of common stock valued at market. As
38
of September 30, 2004, there were dividends payable to the holder of the Series
A Cumulative Convertible Preferred Stock of approximately $1.7 million that may,
at the election of the holder, be taken in cash or common stock. The preferred
stock also has a preference on distributions on liquidation aggregating $5.0
million plus accrued and unpaid dividends, or a total of approximately $6.7
million, as of September 30, 2004, plus additional dividends accumulating
thereafter. Because of the dividends payable on the preferred stock and the
preference in the event of liquidation, the holder of the preferred stock will
benefit directly from payments we receive on the Peak Asphalt promissory note.
Under the terms of the Series A Cumulative Convertible Preferred Stock,
the sale of our asphalt assets and operations to Peak Asphalt entitles the
holder of the preferred stock to require us to redeem the preferred stock at its
stated value plus all accrued but unpaid dividends, or for approximately $6.7
million as of September 30, 2004. Rather than require such redemption, the
holder of the preferred stock has executed and delivered to us its written
consent to approve the transfer of our asphalt assets and operations to Peak
Asphalt in order to continue our activities indirectly through the joint
venture. This consent is not conditioned on repayment of the accrued but unpaid
dividends.
Our employees, including Jay Mealey, president, a director and a
principal stockholder, and Alan Parker, principal financial officer, will
benefit indirectly in Peak Asphalt's continued operation of our asphalt business
if, as we anticipate, they become employed by Peak Asphalt. Peak Asphalt has not
reached any written agreement or other employment arrangement with either Mr.
Mealey or Mr. Parker.
ELECTION OF DIRECTORS
The board of directors and the Approving Stockholders have approved the
reelection of each of our existing directors, each to serve until the next
annual meeting of the stockholders and until his successor is elected and
qualified. On the Effective Date, the election of Jay Mealey, Alan L. Parker,
and Andrew W. Buffmire will become effective.
Directors and Executive Officers
Our directors are elected annually by the stockholders. Our officers
serve at the pleasure of the board of directors. Our officers and directors,
their ages, and their positions are set forth below:
Name Age Position
---- --- --------
Jay Mealey................ 48 Chairman of the Board of Directors
Chief Executive Officer, President,
Treasurer
Stephen J. Burton......... 56 Secretary
Andrew W. Buffmire........ 57 Director
Alan L. Parker............ 53 Vice President, Director
Scott Beall............... 50 Vice President
Jay Mealey has served as president and chief operating officer and as
our director since 1991 and was appointed as chief executive officer in April
1999 and treasurer in October 2000. Mr. Mealey has been actively involved in the
oil and gas exploration and production business since 1978. Prior to becoming
our employee, Mr. Mealey served as vice president of Ambra Oil and Gas Company,
and prior to that position, worked for Belco Petroleum Corporation and Conoco,
Inc. in their exploration divisions. Mr. Mealey is responsible for managing our
day-to-day operations.
39
Stephen J. Burton was elected secretary in October 2000. Mr. Burton
joined our accounting department in 1989 and his duties have gradually increased
such that for the last five years, he has been our human resources manager,
payroll manager, and office manager. He is currently responsible for our Human
Resources Department. Mr. Burton graduated from Utah State University in 1986.
Andrew W. Buffmire is currently a private consultant. Mr. Buffmire has
been a director since 2000. He was most recently the vice president business
development for publicly-traded Ubiquitel, Inc., a wireless telecommunications
company headquartered in Conshohocken, Pennsylvania. Prior to joining Ubiquitel,
Mr. Buffmire was a director in the business development group at Sprint PCS, a
national wireless telecommunications service provider, from October 1997 until
May 2001. Before joining Sprint PCS, Mr. Buffmire was an attorney in private
legal practice in Salt Lake City, Utah, for 16 years, with the exception of two
years (1985-1987), when he was the founder, general counsel and registered
principal of an NASD-registered, investment-banking firm.
Alan L. Parker has been our vice-president, controller and director
since 1992. Mr. Parker has been employed by us since 1998 and our predecessor,
Petro Source Asphalt Company, since 1987.
Scott Beall, vice president, has been employed by us since 1998 and our
predecessor, Petro Source Asphalt Company, since 1979.
Audit Committee and Audit Committee Financial Expert
We do not have an audit committee composed entirely of independent
directors; our board of directors acts as our audit committee. Additionally, we
do not have an audit committee financial expert, as that term is defined by Item
401(h) of Regulation SK. Given our financial condition and recent history of
legal matters, our board of directors has determined that it would be unlikely
to identify a qualified audit committee financial expert who would be willing to
serve.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Exchange Act requires our directors and officers,
and persons who own more than 10% of our outstanding common stock, to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership in our common stock and other equity securities.
To our knowledge, based solely on a review of the copies of the Section
16(a) reports furnished to us, or written representations that no reports were
required, we believe that during fiscal year 2003 all Section 16(a) filing
requirements applicable to our directors, executive officers and greater than
10% stockholders were complied with.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our employees,
including our chief executive officer and our principal financial officer. We
will provide a copy of our Code of Ethics, without charge, to anyone who sends a
written request to Crown Energy Corporation, Attention: Code of Ethics, 1710
West 2600 South, Woods Cross, Utah 84087.
40
BOARD MEETINGS AND COMMITTEES
The board of directors held two meetings in 2003 and two meetings thus
far in 2004. Each member of the board of directors attended all meetings. The
board of directors has no standing audit, nominations, or compensation
committees, and the board of directors as a whole performs the functions of each
of those committees without the adoption of any written charter. One of our
directors, Andrew W. Buffmire, is an independent director under both Rule
4200(a)(14) of the National Association of Securities Directors and Rule
10A-3(b)(1) adopted under the Exchange Act, while the other two directors are
not independent under either rule. The board of directors has determined that it
is appropriate for the board of directors not to have any of the
above-identified committees based on the substantial majority of our common
stock that is held by our officers and directors, the fact that our board of
directors is currently composed of only three directors, and the substantial
difficulty presented in recruiting additional independent directors given our
financial condition.
NOMINATION OF DIRECTORS
When considering candidates for directors, the board of directors takes
into account a number of factors, including the individual's judgment, skill,
integrity, and reputation; whether the candidate has relevant business
experience; whether the candidate has achieved a high level of professional
accomplishment; existing commitments to other businesses; potential conflicts of
interest with other pursuits; corporate governance background and experience;
financial and accounting background; age, gender, and ethnic background; and the
size, composition, and experience of the existing board of directors.
The board of directors will also consider candidates for directors
suggested by stockholders using the same considerations. Stockholders wishing to
suggest a candidate for director should write to our Corporate Secretary and
include a statement that the writer is a stockholder and is proposing a
candidate for consideration by the committee; the name of and contact
information for the candidate; a statement that the candidate is willing to be
considered and would serve as a director if elected; a statement of the
candidate's business and educational experience preferably in the form of a
resume or curriculum vitae; information regarding each of the factors identified
above, other than facts regarding the existing board of directors, that would
enable the committee to evaluate the candidate; a statement detailing any
relationship between the candidate and any customer, supplier, or our
competitor; and detailed information about any relationship or understanding
between the stockholder and the proposed candidate.
POLICY REGARDING DIRECTOR ATTENDANCE AT ANNUAL MEETING
Our directors are encouraged, but not required, to attend our annual
meetings of stockholders.
STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Stockholders desiring to communicate with the board of directors should
send their communications in writing to our address, attention Corporate
Secretary, who will forward those communications to the other members of the
board of directors.
41
STOCKHOLDER PROPOSALS
It is anticipated that the next meeting of stockholders will be held on
approximately August 15, 2005. If we have not terminated our reporting
obligations under the Exchange Act, stockholders may present proposals for
inclusion in the information or proxy statement to be mailed in connection with
our 2005 annual meeting of stockholders, provided such proposals are received by
us no later than March 15, 2005, and are otherwise in compliance with applicable
laws and regulations and the governing provisions of our articles of
incorporation and bylaws.
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth, for the last three fiscal years, the
annual and long-term compensation earned by, awarded to, or paid to the person
who was our chief executive officer and each of our other highest compensated
executive officers as of the end of the last fiscal year (the "Named Executive
Officers"):
Long-Term Compensation
------------------------------
Annual Compensation Awards Payouts
---------------------------------------------- --------------------- --------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Under-
Annual Restricted lying All Other
Year Compen- Stock Options/ LTIP Compen-
Name and Principal Ended sation Award(s) SARs Payouts sation
Position Dec. 31 Salary ($) Bonus ($) ($) ($) (no.) ($) ($)
-------------------------- ---------- ----------- ----------- ------------ ---------- ---------- -------- ----------
Jay Mealey 2003 $302,700 -- $10,563(1) -- -- -- $734(2)
President 2002 344,600 -- 10,563(1) -- -- -- 688(2)
(CEO) 2001 250,000 -- 8,400(1) -- -- -- 647(2)
Scott Beall 2003 $110,300 -- -- -- -- -- --
Vice-President 2002 128,462 -- -- -- -- -- --
2001 107,225 -- -- -- -- -- --
---------------------
(1) Car allowance.
(2) Term life insurance paid for Mr. Mealey.
Option/SAR Grants in Last Fiscal Year
During the fiscal year ended December 31, 2003, we did not grant any
stock options or stock appreciation rights to any Named Executive Officers.
42
Aggregate Option/SAR Exercises and Fiscal Year-End Option/SAR Values
The following table contains information regarding the fiscal year-end
value of unexercised options held by the Named Executive Officers. The aggregate
value of the options was calculated using $0.03 per share, the average bid and
asked price for our common stock on December 31, 2003:
(a) (b) (c) (d) (e)
Number Value of Unexercised
of Securities Underlying In-the-Money
Shares Unexercised Options/ Options/SARs
Acquired SARs at FY-End (#) at FY-End ($)
on Value
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
------------------------------------------- ---------- ------------------------- --------------------------
Jay Mealey -- -- 900,000 / --(1) -- / --
Scott Beall -- -- 125,000 / -- -- / --
------------------------
(1) Represents six tranches of 150,000 options each granted in two separate
grants to Mr. Mealey in November 1997 and November 1999 and exercisable as
follows:
Exercise Market Price
Number Expiration Date Price Condition *
------ --------------- ----- -----------
150,000.................. November 1, 2007 $0.125 $0.16
150,000.................. November 1, 2007 0.125 0.23
150,000.................. November 1, 2007 0.125 0.31
150,000.................. November 1, 2009 0.38 1.00
150,000.................. November 1, 2009 0.38 1.30
150,000 ................. November 1, 2009 0.38 1.69
----------------
* Vested options cannot be exercised unless the market price for the
common stock is at least equal to the market price stated.
Director Compensation
Members of the board of directors are not compensated for their time or
service representing us. Direct expenses incurred by members of the board in
connection with our business are reimbursed.
Employment Contracts
Jay Mealey, our chief executive officer, president and treasurer, was
employed under a November 1997 employment agreement that expired on December 31,
2003. The employment agreement provided for a base salary plus compensation
bonuses. No bonus has been paid to Mr. Mealey under these provisions during the
preceding three fiscal years. In previous years, Mr. Mealey was also issued
options to purchase an aggregate of 900,000 shares, subject to vesting and
minimum trading price conditions as summarized above. Of these, options to
purchase 450,000 shares at $1.62 were repriced in 2000 to an exercise price of
$0.125 per share. Mr. Mealey continues his employment at the same rate of
compensation without an employment agreement.
43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the our common stock as of September 30, 2004, to the
extent known to us, of each of our executive officers and directors, each person
known to us to be the beneficial owner of more than 5% of the outstanding shares
of any class of our stock, and all directors and officers as a group:
Name and Address of Person or Group Nature of Ownership Amount Percent(1)
----------------------------------- ------------------- ------ ----------
Principal Stockholders:
-----------------------
Jay Mealey(2)............................... Common stock(3) 13,841,818 52.3%
Options 900,000 3.3
Shares issuable on conversion
of Series A Cumulative
Convertible Preferred, payment
of accrued dividends and
exercise of warrant(4) 20,454,464 43.6
----------
35,196,282 73.6%
Andrew W. Buffmire(2)....................... Common stock 1,600,000 6.0
Options 85,000 0.8
1,685,000 6.8
Directors:
----------
Jay Mealey.................................. ----------See above----------
Andrew W. Buffmire.......................... ----------See above----------
Alan L. Parker.............................. Common stock -- --
All Executive Officers and Directors as a
Group (4 persons):(5)........................ Common Stock 15,441,818 58.3
Options 1,130,000 4.1
Shares issuable on conversion
of Series A Cumulative
Convertible Preferred, payment
of accrued dividends and
exercise of warrant(4) 20,454,464 43.6
----------
Total 37,026,282 77.0%
========== ====
--------------------
(1) Based on 26,482,388 shares of our common stock issued and outstanding on
September 30, 2004. Under Rule 13d-3 of the Exchange Act, shares are deemed
to be beneficially owned by a person if the person has the right to acquire
the shares (for example, upon exercise of an option) within 60 days of the
date as of which the information is provided. In computing the percentage
ownership of any person, the amount of shares outstanding is deemed to
include the amount of shares beneficially owned by such person (and only
such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does
44
not necessarily reflect the person's actual ownership or voting power with
respect to the number of shares of common stock actually outstanding.
Unless otherwise indicated, all securities are owned beneficially and of
record.
(2) The address for all principal stockholders is c/o Crown Energy Corporation,
1710 West 2600 South, Woods Cross, Utah 84087.
(3) Consists of 3,307,452 shares owned of record and beneficially by Mr.
Mealey, 9,524,366 shares owned by the Mealey Partnership, 110,000 shares
owned by Mr. Mealey's brother as custodian for Mr. Mealey's minor children,
and 900,000 shares owned for the benefit of Mr. Mealey's minor children by
a trust, of which Mr. Mealey is the trustee. Mr. Mealey is the general
partner of the Mealey Partnership and owns 48.5% of the partnership, and
members of his immediate family are the beneficiaries. Mr. Mealey expressly
disclaims beneficial ownership of the shares held by his brother and
mother. Furthermore, the options that are included within this calculation
may not be exercised unless specified trading prices are realized for our
common stock. As of the date hereof, such trading prices have been not been
met and there is no assurance that they will ever be met during the terms
of the options.
(4) The number reported constitutes the maximum issuable, based on our
authorized capitalization of 50,000,000 shares, with 26,482,388 shares
issued and outstanding and 3,063,148 shares reserved for issuance on the
exercise of outstanding options and warrants. The Mealey Partnership has
the right to acquire common stock as follows: 4,285,000 shares issuable
upon conversion of 500,000 shares of our Series A Cumulative Convertible
Preferred Stock; 170 million shares issuable at the election of the holder
at the market price of $0.01 per share as of September 30, 2004, in payment
of $1.7 million of dividends accrued as of September 30, 2004, on the
Series A Cumulative Convertible Preferred Stock; and 925,771 shares
issuable on the exercise of warrants to purchase shares at $0.002 per
share. Mr. Mealey and the Mealey Partnership, which he controls, own
beneficially a sufficient number of shares to amend our articles of
incorporation to increase our authorized capitalization, which would enable
us to issue all 175,210,771 shares to which the Mealey Partnership would be
entitled on conversion of the Series A Cumulative Convertible Preferred
Stock, the payment of accrued dividends, and the exercise of the warrant.
(5) The fourth person included in this group is Stephen J. Burton, who is an
executive officer of ours, but is not disclosed above because he is neither
a principal stockholder nor a director. Mr. Burton holds no shares of
common or preferred stock and holds options to purchase 25,000 shares of
common stock.
Change of Control Contracts
In November 1997, we entered into an employment agreement with Jay
Mealey that contained "change of control" provisions providing for the payment
of compensation and benefits upon our termination of Mr. Mealey's employment
without cause or termination by Mr. Mealey for "good reason" (as defined in that
agreement). No change of control events occurred and the employment agreement
terminated December 31, 2003.
Equity Compensation Plan Information
Number of securities
available for future
issuance under equity
Number of securities to be compensation plans
issued upon exercise of Weighted average exercise (excluding securities
outstanding prices of outstanding reflected in column
Plan Category options options (a))
------------- -------------------------- ------------------------- ----------------------
(a) (b) (c)
Equity compensation plans
approved by stockholders... 2,263,148 $0.122 460,000
Equity compensation plans not
approved by security holders
-- -- --
--------- -------
Total.................. 2,263,148 $0.122 460,000
45
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1997, we sold to Enron Capital & Trade Resources Corp., an
unrelated third party, for $5.0 million in cash 500,000 shares of $10 Series A
Cumulative Convertible Preferred Stock and a warrant to purchase 925,771 shares
at $0.002 per share. In 2002, the Series A Cumulative Convertible Preferred
Stock, the warrant, and all associated rights were acquired by the Mealey
Partnership, which is the current holder of the Series A Cumulative Convertible
Preferred Stock, the warrant, all associated rights, and accrued dividends. Jay
Mealey, our chief executive officer, president and a director, owns 48.5% of the
Mealey Partnership and is its general partner and his immediate family is its
beneficiary. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
As of September 30, 2004, there were dividends payable to the holder of
the Series A Cumulative Convertible Preferred Stock of $1.7 million that may, at
the election of the holder be taken in cash or common stock. At the market price
of $0.01 per share as of September 30, 2004, 170 million shares of common stock
would have to be issued to satisfy the dividend payable. The Series A Cumulative
Convertible Preferred Stock is convertible to 4,285,000 shares of common stock,
if so elected by the holder of the Series A Cumulative Convertible Preferred
Stock.
We currently have an authorized capital of 50.0 million shares of
common stock, of which approximately 26.5 million shares are issued and
outstanding and approximately 3.1 million shares are reserved for issuance on
the exercise of outstanding options and warrants, for a total of approximately
29.6 million shares, excluding the shares issuable on conversion of the Series A
Cumulative Convertible Preferred Stock, the payment of accrued dividends
thereon, and exercise of the warrant. Therefore, there are only approximately
20.4 million shares available for issuance under the Series A Cumulative
Convertible Preferred Stock on conversion or the payment of dividends or on
exercise of the warrant. We have not undertaken to renegotiate with the Mealey
Partnership any of the terms of the Series A Cumulative Convertible Preferred
Stock or the warrant, and do not know whether we will attempt to do so.
Should the Mealey Partnership elect to convert the preferred stock and
take the accrued dividend in the form of common stock prior to the effective
date of the reverse split detailed herein, we would be required to issue
4,285,000 shares on conversion of the preferred stock, plus 170,000,000 shares
in payment of the $1.7 million in accrued but unpaid dividends as of September
30, 2004. We have 50,000,000 shares of common stock authorized and would be
unable to issue the required shares without the stockholders approving an
increase in the number of authorized shares. This could be approved by the
affiliated stockholders that hold a majority of the outstanding shares.
Subsequent to the effective date, we would have a sufficient number of
authorized shares to accommodate the conversion.
INDEPENDENT PUBLIC ACCOUNTANT
The board of directors has chosen to retain Tanner + Co. as our
independent public accountant for the fiscal year ending December 31, 2004.
Audit Fees
The aggregate fees billed by Tanner + Co. for professional services
rendered for the audit of our annual consolidated financial statements for the
fiscal year ended December 31, 2003, and for the reviews of the consolidated
financial statements included in our quarterly reports on Form 10-Q for that
46
fiscal year were $33,000. The aggregate fees billed by Tanner + Co. for
professional services rendered for the audit of our annual consolidated
financial statements for the fiscal year ended December 31, 2002, and for the
reviews of the consolidated financial statements included in our quarterly
reports on Form 10-Q for that fiscal year were $52,295.
Audit Related Fees
Tanner + Co. did not bill us for any professional services that were
reasonably related to the performance of the audit or review of consolidated
financial statements for either the fiscal year ended December 31, 2003, or the
fiscal year ended December 31, 2002, that are not included under "Audit Fees"
above.
Tax Fees
The aggregate fees billed by Tanner + Co. for professional services
rendered for tax compliance, tax advice, and tax planning for the fiscal years
ended December 31, 2003, and December 31, 2002, were $12,750 and $5,348,
respectively.
All Other Fees
Tanner + Co. did not perform any services for us or charge any fees
other than the services described above under "Audit Fees" and "Tax Fees" for
either the fiscal year ended December 31, 2003, or the fiscal year ended
December 31, 2002.
The engagements of Tanner + Co. to perform all of the above-described
services were approved by the board of directors, acting as the audit committee,
before we entered into the engagements, and the policy of the board of directors
is to require that all services performed by the independent auditor be
preapproved by the board of directors before the services are performed.
FINANCIAL INFORMATION
Financial statement information is being provided by:
(1) Our annual report on Form 10-K (file no. 000-19365) for the
year ended December 31, 2003, filed July 7, 2004; and
(2) Our quarterly report on Form 10-Q (file no. 000-19365) for the
quarter ended September 30, 2004, filed November 15, 2004.
Copies of each of these documents are bound with this information statement and
are being delivered to each stockholder of record as of the record date.
By Order of the Board of Directors
Jay Mealey, President and Chairman
Woods Cross, Utah
March 7, 2005
47
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet as of September 30,
2004, estimates the pro forma effect of the asset sale on the Company's
financial position as if the asset sale and the transactions contemplated in the
purchase agreement had been consummated on September 30, 2004. The following
unaudited pro forma consolidated statements of income for the nine months ended
September 30, 2004, and the year ended December 31, 2003, estimate the pro forma
effects of the asset sale on the Company's results of operations as if the asset
sale had occurred at the beginning of each of the respective periods. The pro
forma adjustments are described in the accompanying notes and are based upon
available information and certain assumptions that the Company believes are
reasonable. The pro forma information may not be indicative of the results of
operations and financial position of the Company as it may be in the future or
as it might have been had the transactions been consummated on the respective
dates assumed. The pro forma information is included for comparative purposes
and should be read in conjunction with the Company's consolidated financial
statements and related notes.
F-1
CROWN ENERGY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
Published Sept. 30, 2004
Sept. 30, 2004 As Adjusted
[unaudited] Adjustments [unaudited]
------------- ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 157,696 $ (8,060) a $ 149,636
Accounts receivable, net of allowance for
uncollectible accounts of $159,970 4,162,621 (3,418,034) a 744,587
Inventory 1,476,880 (1,470,404) a 6,476
Prepaid and other current assets 103,621 (87,637) a 15,984
------------------------------------ -------------------
Total Current Assets 5,900,818 (4,984,135) 916,683
PROPERTY PLANT, AND EQUIPMENT, Net 8,215,629 (8,207,078) a 8,551
NOTES RECEIVABLE -- 7,500,000 a, b 7,500,000
OTHER ASSETS 235,577 (209,640) a 25,937
------------------------------------ -------------------
TOTAL ASSETS 14,352,024 (5,900,853) 8,451,171
==================================== ===================
CURRENT LIABILITIES
Accounts payable 5,654,082 (5,125,488) a 528,594
Preferred stock dividends payable 1,700,000 -- 1,700,000
Accrued expenses 133,588 (39,052) a 94,536
Accrued interest 428,925 (22,417) a 406,508
Long-term debt - current portion 821,975 (477,018) a 344,957
------------------------------------ -------------------
Total current liabilities 8,738,570 (5,663,975) 3,074,595
Long-term debt 2,193,973 (1,791,231) a 402,742
Redeemable preferred stock 5,000,000 -- 5,000,000
------------------------------------ -------------------
Total liabilities 15,932,543 (7,455,206) 8,477,337
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 584,787 (584,787) a --
STOCKHOLDERS DEFICIT:
Stockholders' equity:
Common stock $0.02 par value 50,000,000
shares authorized 26,281 shares outstanding 529,647 (529,121) 526
Additional paid in capital 3,219,417 529,121 c 3,748,538
Stock warrants 186,256 -- 186,256
Accumulated deficit (6,100,626) 2,139,140 a (3,961,486)
------------------------------------ -------------------
Stockholders' deficit (2,165,306) 2,139,140 (26,166)
------------------------------------ -------------------
TOTAL $ 14,352,024 $ (5,900,853) $ 8,451,171
==================================== ===================
F-2
CROWN ENERGY CORPORATION
[Unaudited]
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Published Sept. 30, 2004
Sept. 30, 2004 As Adjusted
[unaudited] Adjustments [unaudited]
---------------- ----------------
SALES, Net of demerits $ 11,013,696 $ 10,961,571 d $ 52,125
COST OF SALES (11,166,002) (11,132,017) d (33,985)
-------------------------------- ---------------
GROSS PROFIT (LOSS) (152,306) (170,446) 18,140
GENERAL AND ADMINISTRATIVE EXPENSES 990,494 731,287 d, e 259,207
-------------------------------- ---------------
LOSS FROM OPERATIONS (1,142,800) (901,733) (241,067)
OTHER INCOME (EXPENSES):
Interest income and other income 1,510 -- d 1,510
Interest income from asset sale -- (225,000) g 225,000
Interest expense (228,503) (92,759) d (135,744)
-------------------------------- ---------------
Total other income (expense), net (226,993) (317,759) 90,766
-------------------------------- ---------------
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (1,369,793) (1,219,492) (150,301)
DEFERRED INCOME TAX BENEFIT -- -- --
PROFIT (LOSS) IN EQUITY INVESTMENT -- 582,343 f (582,343)
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 31,037 31,037 d --
-------------------------------- ---------------
NET LOSS $ (1,338,756) $ (606,112) $ (732,644)
================================ ===============
F-3
CROWN ENERGY CORPORATION
[Unaudited]
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
December 31,
Published 2003
December 31, As Adjusted
2003 Adjustments [unaudited]
------------- ------------- -------------
SALES, Net of demerits $ 16,936,627 $ 16,813,797 d $ 122,830
COST OF SALES (16,835,994) (16,764,666) d (71,328)
-------------------------------- ----------------
GROSS PROFIT 100,633 49,131 51,502
GENERAL AND ADMINISTRATIVE EXPENSES 1,529,017 1,045,926 d, e 483,091
Recovery of bad debt expense 338,729 -- d 338,729
-------------------------------- ----------------
LOSS FROM OPERATIONS (1,089,655) (996,795) (92,860)
OTHER INCOME (EXPENSES):
Interest income and other income 4,358 2,147 d 2,211
Interest Income from asset sale -- (300,000) g 300,000
Interest expense (275,920) (183,667) d (92,253)
Other (expense) income 50,659 (7,157) d 57,816
-------------------------------- ----------------
Total other income (expense), net (220,903) (488,677) 267,774
-------------------------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTERESTS (1,310,558) (1,485,472) d 174,914
DEFERRED INCOME TAX BENEFIT -- -- --
PROFIT (LOSS) IN EQUITY INVESTMENT -- 703,541 f (703,541)
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 49,673 49,673 d --
-------------------------------- ----------------
NET LOSS $ (1,260,885) $ (732,258) $ (528,627)
================================ ================
F-4
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) The unaudited pro forma condensed consolidated balance sheet gives
effect to the asset sale and the assumption of certain related
liabilities as though the asset sale had occurred on September 30,
2004. Estimated net proceeds, assets sold, and resultant gain from the
asset sale are as follows:
Note Receivable $ 7,500,000
Liabilities Assumed 8,039,993
------------
Total Proceeds Received $ 15,539,993
Book Value of Assets Sold $ 13,400,853
Gain on Sale Before Taxes $ 2,139,140
Certain assets will be retained by the Company and certain liabilities
will not be assumed by the purchaser at the consummation of the
transaction.
(b) As part of the asset sale, a note receivable in the amount of
$7,500,000 will be held by the Company. It will accrue interest at a
rate of 4% and will be paid out of the earnings of Peak Asphalt. It is
estimated that the note will be paid off over a five-year period.
(c) The adjustment to common stock and additional paid-in capital reflects
the effect the reverse stock split would have on shares outstanding.
(d) The unaudited pro forma condensed consolidated statements of operations
for the quarter ended September 30, 2004, and the year ended December
31, 2003, give effect to the asset sale as though it had occurred on
January 1, 2004 and 2003, respectively. These pro forma adjustments
eliminate the historical results of the asphalt business. Any gain or
loss from the asset sale is not included in the pro forma condensed
consolidated statement of operations.
(e) The allocation of general and administrative expenses is based on
estimates. The pro forma condensed consolidated statement of operations
gives effect to the asset sale as if it had occurred at the beginning
of the respective periods considering the probable administrative
structure retained by the Company subsequent to the asset sale and
those general and administrative costs that are associated with the
asphalt business that would transfer with the asphalt business, as a
result of the asset sale.
(f) The Company's pro forma condensed consolidated statement of operations
includes the retention of 49% of the earnings or loss of Peak Asphalt,
which the Company will retain from the asset sale. The September 30,
2004, pro forma calculation of loss in an equity investment is
calculated by taking the loss before income taxes of $1,219,492,
reduced by minority interest in earnings of a consolidated joint
venture of $31,037, multiplied by 49%, which results in $582,343. The
December 2003 pro forma is calculated in the same manner --$1,485,472
less $49,673 multiplied by 49% for a total of $703,541.
(g) Interest income from the asset sale is the interest derived from the
sale of the assets to Peak Asphalt. This is calculated based on the
$7,500,000 note at 4% per annum for the nine months ending September
30, 2004, and the twelve months ended December 31, 2003.
F-5