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AMENDED
SCHEDULE 14C INFORMATION
Amendment No. 2 to
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[ ] Definitive Information Statement
Crown Energy Corporation
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies:
________________________________________________________________________
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
[X] Fee paid previously by written preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:__________________________________________________
2) Form, Schedule or Registration Statement No.:____________________________
3) Filing Party:____________________________________________________________
4) Date Filed:______________________________________________________________
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CROWN ENERGY CORPORATION
1710 WEST 2600 SOUTH
WOODS CROSS, UTAH 84087
[mailing date]
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 [record
date], 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 [effective date], 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 Idaho Asphalt Supply, Inc., an
unaffiliated asphalt products distributor, of a newly organized limited
liability company, or Newco, to produce and market asphalt products
through the transfer of substantially all of our asphalt business,
operations and assets to Newco in consideration of a $7.5 million
promissory note payable from Newco earnings, the assumption of
approximately $2.5 million in liabilities, and a 49% interest in Newco,
with the remaining 51% interest in Newco owned by Idaho Asphalt Supply,
which will provide Newco 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
reports 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
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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 the beneficial
owners of 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 (those stockholders were Jay Mealey, our chief
executive officer and chairman of our board of directors, the Mealey Family
Limited Partnership (hereinafter the "Mealey Partnership," of which Jay Mealey
is the general partner), and Andrew Buffmire, a member of our board of
directors, together, "the Approving Stockholders") 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 Idaho Asphalt Supply, Inc., an
unaffiliated asphalt products distributor, of a newly organized limited
liability company, or Newco, to produce and market asphalt products
through the transfer of substantially all of our asphalt business,
operations and assets, which represent approximately 47% of our total
assets, to Newco in consideration of a $7.5 million promissory note
payable from Newco earnings, assumption of approximately $2.5 million
of liabilities, and a 49% interest in Newco, with the remaining 51%
interest in Newco owned by Idaho Asphalt Supply, which will provide
Newco 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 [effective date], 2004 (the "Effective
Date"), which is at least 20 days after mailing this notice to the stockholders
on about [mailing date], 2004.
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.
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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.
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."
2. The Proposed Joint Venture Formation
We have entered into an agreement with Idaho Asphalt Supply to organize
a new limited liability company ("Newco") with the following principal terms:
o We will sell to Newco substantially all of our asphalt
business, operations and assets, which represent approximately
47% of our total assets, in consideration of:
o a promissory note for $7.5 million secured by the
assets and business sold to Newco, the payment of
which will be largely contingent upon Newco having
earnings sufficient to permit such payment,
o assumption of approximately $2.5 million in
liabilities relating to the assets transferred, and
o a 49% interest in Newco.
o Idaho Asphalt Supply will own 51% of Newco and will designate
a majority of its managers.
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In anticipation of completing this joint venture formation, interim
operating capital of approximately $3.0 million has been provided to us by Idaho
Asphalt Supply as of August 31, 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 Newco promissory note.
Formation of the joint venture is contingent on the completion of
definitive agreements and certain other 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."
THE REVERSE SPLIT
Special Factors
Purposes
As of June 30, 2004, we had a working capital deficit of approximately
$2.3 million, an accumulated deficit of approximately $6.0 million, and a
stockholders' deficit attributable to the common stock of approximately $1.9
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.
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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 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. Thus far in 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 37
of the first 177, or 21%, of the trading days of the year. From January 1, 2003,
through the first 177 trading days of 2004, only an aggregate of 1,203,243
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
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.
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
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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 form 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
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.
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
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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
results as discussed above. A dividend payment was made to Enron by the issuance
of 317,069 shares of 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%.
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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
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 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. 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
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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.
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 discussing an agreed 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
transactions 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 the Company
for other opportunities. Andrew Buffmire, Alexander Searl and Jeff Fishman
indicated they would sell their interests in Manhattan Goose to Mr. Mealey and
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
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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
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 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 June 30, 2004, we owed $1.4
million and $1.6 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.
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Some time between April and July 2003, we advised a major customer that
we would be unable to provide 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
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.
In November 2001, we entered into a nondisclosure agreement and began
discussions with a refiner that had been our primary asphalt supplier and had
provided inventory financing to us for the prior two years ("Company A").
Company A was considering the vertical integration of its business, and 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.
In December 2001, we and an unaffiliated asphalt supplier and
wholesaler ("Company B") executed a nondisclosure agreement and entered into
preliminary discussions about a possible business venture. In March 2002 those
talks centered around the idea of a merger of the two entities, out of which we
would be the surviving entity. In July 2002, those talks had evolved into
discussions about a joint venture in which Company B would purchase the ongoing
business from us, 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.
In December 2001, we entered into a nondisclosure agreement with an
unaffiliated asphalt refiner and supplier in another region ("Company C"), and
in January 2003, Company C had an engineer inspect our facilities in view of a
potential joint venture in which Company C would purchase into the joint venture
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 January 2004, Company C informed us that it could
not commit the capital necessary to enter into the joint venture with us.
In January 2002, we entered into a nondisclosure agreement with an
asphalt wholesaler and supplier interested in a joint venture with us to expand
its business (Company D"). Prior to that time, we had licensed technology from
Company D, and Company D was well-acquainted with our business. At that time,
the proposed transaction involved having Company D provide the funds to satisfy
our obligation to MCNIC and receiving a preferential return until that money was
repaid, at which time Company D's return in the joint venture would be reduced.
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. Our
management met with Company D's management again in November and December of
2002, discussing the possibility of a 50-50 joint venture, since our obligation
to MCNIC had been satisfied under the second settlement agreement, but Company D
again determined not to proceed.
In March 2002, we entered into a nondisclosure agreement and began
discussions with an unaffiliated asphalt refiner and supplier and occasional
competitor of ours ("Company E"). We engaged in discussions and Company E
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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.
In March 2002, we met with a large commercial lender ("Company F") to
discuss financing that would permit us to satisfy our obligation to MCNIC and
provide us with working capital; 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.
In April 2002, we signed a nondisclosure agreement with an unaffiliated
contractor and customer of ours ("Company G"), and in June 2002, we entered into
a 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, when Company G determined that it could not make an
agreement work because of the substantial amount we owed to MCNIC under the
settlement agreement.
In June 2002, we met with 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 placement 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. After completion of
financial due diligence, Company I advised that it would not pursue an
investment.
In June 2002, we engaged in 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 base 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, we met with a major oil
company ("Company K") to discuss inventory financing and joint venture
possibilities, but Company K determined that it could not proceed further with
us because of another joint venture in which it was engaged in the region.
In August 2002, we entered into a nondisclosure agreement and began
discussions with an unaffiliated refiner, asphalt supplier and a competitor of
ours ("Company L") about a potential joint venture agreement. 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.
In September 2002, we entered into a nondisclosure agreement and began
discussions of a potential merger or joint venture with an unaffiliated asphalt
refiner and supplier in an adjacent market region ("Company M"). Our management
met with Company M in January 2003 and determined that it was financially unable
to enter into a transaction of the type discussed.
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In November 2002, we met 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, 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, we entered into
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. 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 met with an unaffiliated venture capital source
("Company Q") 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"). 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, 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. 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
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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
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.
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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.
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, struck the best balance between the need to terminate 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.
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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.
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 5% to 10% during the current and
succeeding years 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 net book value will similarly
increase less than 1% as a result of the reverse split.
Detriments
The primary detriments to us associated with the proposed reverse split
are the elimination of our access to public equity markets and the associated
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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.
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.
Fairness of the Reverse Split
Each of the board of directors, Jay Mealey, and the Mealey Partnership
believe 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. 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, LLP, 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:
2004:
Third Quarter................................. $0.01 $0.012
Second Quarter................................ 0.01 0.02
First Quarter................................. 0.02 0.04
2003:
Fourth Quarter................................ 0.01 0.03
Third Quarter................................. 0.01 0.015
Second Quarter................................ 0.01 0.02
First Quarter................................. 0.01 0.02
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Low High
-------- --------
2002:
Fourth Quarter................................ 0.008 0.012
Third Quarter................................. 0.011 0.02
Second Quarter................................ 0.02 0.055
First Quarter................................. 0.011 0.04
From January 1, 2004, through the first 177 trading days of 2004, only
an aggregate of 560,375 shares were reported traded, representing an aggregate
transaction value of less than $11,000, at the quoted prices on the dates of the
reported transactions. Transactions were reported on only 37 of the 177 trading
days between January 1 and September 15, 2004. Therefore, the public trading
markets have provided very little actual liquidity for our stockholders. The
sale or potential sale of a number of shares significantly larger than the
number recently traded is likely to substantially depress trading prices and
adversely impact liquidity.
We, Jay Mealey, and the Mealey Partnership consider the recent trading
prices for our stock and, in particular, the extremely limited and sporadic
trading is a very significant factor in determining the overall fairness of the
transaction.
Stockholders' Deficit
As of June 30, 2004, we had a stockholders' deficit attributable to our
common stock of $1,946,878. 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 $1.6 million. We
do not believe that any of our value has an intrinsic or fair market value
higher than its net book value. 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.
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 $1.6 million in accumulated and unpaid dividends, the $5.0
million stated value of the preferred stock for an aggregate preference on
liquidation of $6.6 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.
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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 of a 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 imported value of our assets as of June 30, 2004, as well
as the estimated liquidation value of those assets:
As of June 30, 2004 Estimated
(unaudited) Liquidation Value
--------------------- ---------------------
Current Assets:
Cash and cash equivalents $ 75,144 $ 75,144
Accounts receivable, net of allowance for
uncollectible accounts of $159,970 2,438,701 2,194,831
Inventory 2,007,727 1,806,954
Prepaid and other current assets 67,670 50,000
--------------- ---------------
Total Current Assets 4,589,242 4,126,929
--------------- ---------------
Property, Plant, and Equipment, net 8,296,535 4,148,268
Other Assets 42,228 --
--------------- ---------------
Total Assets $ 12,928,005 $ 8,275,197
=============== ===============
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 June 30, 2004, we had total liabilities of approximately $14.3
million, as follows:
As of June 30, 2004 Estimated Obligation
(unaudited) in Liquidation
-------------------- ---------------------
Current Liabilities:
Accounts payable $ 3,980,632 $ 2,985,474
--------------- ---------------
Preferred stock dividends payable 1,600,000 --
Accrued expenses 163,193 81,596
Accrued interest 383,223 383,223
Long-term debt - current portion 802,859 802,859
--------------- ---------------
Total current liabilities 6,929,907 4,253,152
Long-term debt 2,371,515 2,371,515
Redeemable preferred stock 5,000,000 1,650,530
--------------- ---------------
Total liabilities $ 14,301,422 $ 8,275,197
=============== ===============
We believe that in liquidation, we may be able to compromise and reduce
the payment due on our accounts payable, accrued expense, and accrued interest
aggregating approximately $4.5 million to general, unsecured trade creditors.
Our liabilities include aggregations of $3,174,374 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 likely receive substantially less than the $1.6 million in
preferred stock dividends payable and the $5.0 million preference on
liquidation. Accordingly, we believe that there would be no funds available for
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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.
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, 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 transaction from Andrew Buffmire, a director, 3,089,620
shares of our common stock for $15,448, or $0.005 per share, 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.
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.
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 that
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could be included in communications with our stockholders. The preliminary due
diligence review was based on a review of publicly available information,
interim internal financial information, and preliminary interviews of our
management. 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.
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. Because of our
inability to obtain working capital and resulting lack of asphalt inventory,
projected revenues and increasing operating losses, we abandoned efforts to
proceed with the going-private transaction at that time, so our work with the
local firm was abandoned and has not been revived in connection with this
transaction because of our desire to avoid an estimated $10,000 in additional
costs that would be incurred.
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
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
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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 th is information statement, as of June 30,
2004, we had $5.0 million in redeemable preferred stock issued and outstanding
and accumulated accrued but unpaid dividends of $1.6 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 Newco on the payment of the Newco 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.
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 ________________, 2004, (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
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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
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.
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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. Our board of
directors currently intends to effect the reverse split, however, and we are not
currently aware of any circumstances under which the reverse split might be
abandoned.
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.
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 SEC 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
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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
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................................................. 30,000
Accounting............................................ --
Financial advisor fees................................ --
Solicitation expenses................................. 10,000
Printing costs........................................ 10,000
Miscellaneous......................................... 8,000
-------
Total............................................... $60,000
=======
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.
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THE PROPOSED JOINT VENTURE FORMATION
General
We believe that our agreements with Idaho Asphalt Supply will result in
substantial benefits for us and our continuing stockholders in the face of our
tenuous financial position and our continuing difficulties in obtaining required
capital. We will continue as the 49% owner of a limited liability company that
will own substantially all of our asphalt business, operations and assets. We
will hold a promissory note for the $7.5 million purchase price, payable
contingent upon Newco having funds sufficient to permit such payment. In
addition, Idaho Asphalt Supply will provide Newco with a line of credit to
operate the business, which may be extended in subsequent years at Idaho Asphalt
Supply's election. We believe this represents an opportunity to continue our
business and operations in a business structure that will permit us to continue
that business with improved opportunities for working capital through Idaho
Asphalt Supply.
Idaho Asphalt Supply, a private, closely-held corporation, advises us
that none of its officers, directors or owners owns or has owned any of our
common or preferred stock or is or has 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.
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 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, 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
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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 whom 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
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 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
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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. Negotiations with Idaho Asphalt Supply
toward the formation of a newly organized joint venture funded by Idaho Asphalt
led to a series of daily telephone and personal meetings to the completion of
our agreement with Idaho Asphalt Supply signed on June 7, 2004.
Formation of New Limited Liability Company
Newco will be organized under the laws of the state of Utah. Idaho
Asphalt Supply will own 51% and we will own 49% of the membership interests in
Newco. The members will not be bound by, or personally liable for, the expenses,
liabilities, debts or obligations of Newco. Newco will be managed by a
management committee comprised of three persons, two of whom will be designated
by Idaho Asphalt Supply and one of whom will be designated by us. The day-to-day
operations of the business of Newco will be managed by a president and secretary
and such other officers as the management committee deems necessary. Idaho
Asphalt Supply 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 Newco to us has been
paid in full. The person appointed by us as the secretary will be an employee of
Newco on mutually acceptable terms and will remain as an employee until the
promissory note from Newco to us has been paid in full. We anticipate that we
initially will appoint Jay Mealey, our president, as secretary of Newco. After
the promissory note from Newco 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 Newco.
Purchase of Assets
On the date the proposed joint venture formation is closed, but
effective as of May 1, 2004, we will sell to Newco 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. Newco will purchase only the assets generally set forth above, which
represent approximately 47% of our total assets, and will not purchase any of
our other assets, including 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).
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Purchase Price
In consideration of the rights, interests, assets and properties
transferred to Newco, Newco will issue us a $7.5 million promissory note and
will assume certain obligations. The promissory note will accrue interest at
4.0% per annum and will be paid quarterly on or before the fifth day of the
month following the end of the quarter on the then outstanding balance of the
promissory note. The principal balance will be paid in annual installments of
$1,166,667, adjusted by earnings before interest, taxes, depreciation and
amortization, or EBITDA, as follows:
(i) if EBITDA for a calendar year equals $3,000,000, then the
annual principal payment will be $1,166,667 and the remaining
annual principal payment payable on the following January 31
will equal $466,667 ($1,166,667 minus $700,000 minimum
payment); or
(ii) if EBITDA for a calendar year is less than $3,000,000, the
annual principal payment will be reduced by $0.67 for each
$1.00 that EBITDA for that year is less than $3,000,000 (for
example, if EBITDA is $2,500,000, then the annual principal
payment will be reduced to $831,667 and the remaining
principal payment payable on the following January 31 will be
$131,667); or
(iii) if EBITDA for a calendar year is greater than $3,000,000, the
annual principal payment will be increased by $0.33 for each
$1.00 that EBITDA exceeds $3,000,000 (for example, if EBITDA
is $5,000,000, then the annual principal payment will be
increased to $1,826,667 and the remaining principal payment
payable on the following January 31 will be $1,126,667);
provided, however, that the maximum annual principal payment for any calendar
year will never exceed $2,000,000. A minimum annual principal payment of
$700,000 will be paid on or before October 31 of each year beginning October 31,
2005; provided that if, in any year, the minimum principal payment is less than
40% of earnings before depreciation and after debt service, the minimum
principal payment will be reduced to such amount. Should Newco not have
sufficient cash (as determined by the management committee) when such minimum
payment becomes due, such payment shall be made as early thereafter as cash is
available, but in no event later than November 30 of such year. The balance of
the annual principal payment for any calendar year shall be paid to us on or
before January 31 of the following year and will be determined by reference to
the EBITDA of Newco for that calendar year as provided above.
The promissory note is secured by a first priority security interest in
all of the assets we convey to Newco (subject to any prior third-party liens)
pursuant to a security agreement. If Newco 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. Newco
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. Newco will use its best efforts to cause us to be released from all
liability related to such all assumed obligations; however, the decision to
grant such a release belongs to the third parties to whom we are indebted and
they may be unwilling to do so without payment in full, which may not be
reasonably possible for Newco.
The sale to Newco will be effective as of May 1, 2004. Therefore,
appropriate adjustments will be made to the purchase price to account for the
revenues, expenses and payments on the assumed obligations and other items
attributable to the purchased assets for the period from May 1, 2004, to the
closing date.
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Operating Line of Credit
Idaho Asphalt Supply will provide an operating line of credit to Newco
for all of its working capital requirements for the remainder of calendar year
2004, and thereafter, as Idaho Asphalt Supply may elect. During 2004, the
operating line of credit will not exceed $4 million unless approved by the
management committee of Newco. The operating line of credit will be secured by
and have a first priority in all of Newco'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 Newco'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. Newco will repay the
operating line of credit from available cash. Newco will maintain sufficient
cash reserves in its bank accounts to pay the estimated expenses and inventory
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 Idaho Asphalt Supply and us as members. It is anticipated that
the operating line of credit will be provided in subsequent years in the amount
necessary to fund Newco's operations as budgeted each year; however, Idaho
Asphalt Supply will have the option not to provide such operating line of
credit.
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 Newco, Idaho Asphalt Supply is willing to
advance $1,445,268 to us, which was equal to the book value cost of our
inventory as of April 30, 2004. Idaho Asphalt Supply is also obligated to
advance to us additional amounts sufficient to cover inventory and raw materials
purchases and other normal and customary expenses to operate the asphalt
business from May 1, 2004, until the closing date of the asset sale to Newco.
Through August 31, 2004, advances have amounted to approximately $3.3 million.
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 Newco, we will assign the above loan and
security documentation to Newco, 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 Newco or us, as the case may be, by the other
party at closing.
Conditions to Formation of the Joint Venture
Mutual Conditions
The obligations of Idaho Asphalt Supply and us to complete the
formation of Newco remain subject to the following conditions, each of which,
other than that set forth in clause (1), may be waived:
(1) the negotiation of definitive agreements, including an
operating agreement for Newco, an asset purchase and sale agreement
relating to the sale of our asphalt assets and operations to Newco and
related conveyances, the promissory note evidencing the $7.5 million
purchase price payment by Newco to us, and ancillary agreements; and
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(2) there shall not be any order, decree or judgment at law or
in equity preventing, or any action or suit seeking to prevent, the
consummation of the transactions contemplated.
Conditions to Idaho Asphalt Supply's Obligations
The obligations of Idaho Asphalt Supply to complete the formation of
Newco will be subject to the satisfaction by us at or prior to closing of the
following conditions, each of which, other than the requirement in clause (1)
that the approval by our stockholders be effective, may be waived by Idaho
Asphalt Supply:
(1) the transactions have been approved by our stockholders in
the manner required by law and our articles of incorporation and
bylaws, and that approval become effective;
(2) we shall have performed or complied in all material
respects with all covenants and conditions required by our June 7,
2004, Memorandum of Understanding or the definitive agreements to be
performed or complied with by us;
(3) there shall not have occurred since June 7, 2004, any
material adverse change in our assets or operations in the reasonable
opinion of Idaho Asphalt Supply;
(4) our representations and warranties, qualified as to
materiality, shall be true and correct in all material respects, and
our representations and warranties, not qualified by materiality, shall
be true and correct; and
(5) we shall have complied with such other terms, covenants
and conditions as Idaho Asphalt Supply may require in the definitive
agreements, which continue to be negotiated.
Conditions to Our Obligations
Our obligations to complete the formation of Newco will be subject to
the satisfaction by us at or prior to closing of the following conditions, each
of which may be waived by Idaho Asphalt Supply:
(1) Idaho Asphalt Supply shall have performed or complied in
all material respects with all covenants and conditions required by our
June 7, 2004, Memorandum of Understanding or the definitive agreements
to be performed or complied with by it;
(2) Idaho Asphalt Supply's representations and warranties,
qualified as to materiality, shall be true and correct in all material
respects, and our representations and warranties, not qualified by
materiality, shall be true and correct; and
(3) Idaho Asphalt Supply shall have complied with such other
terms, covenants and conditions as we may require in the definitive
agreements, which continue to be negotiated.
Other Memorandum of Understanding Terms
The Memorandum of Understanding we entered into on June 7, 2004,
relating to the formation of Newco contains the following additional material
terms. Until the closing or termination of the Memorandum of Understanding, we
and Idaho Asphalt Supply are each obligated to:
(1) carry on its business in substantially the same manner as
before;
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(2) maintain and keep its assets in good repair and condition,
except for ordinary wear and tear and loss due to casualty;
(3) maintain in full force and effect current levels and types
of insurance on assets;
(4) perform in all material respects obligations under
contracts to which it is a party or affecting its assets;
(5) maintain and preserve its business assets and operations;
and
(6) comply with applicable laws.
Each party is obligated not to disclose confidential information
learned about the other as a result of their dealings.
The Memorandum of Understanding may be terminated at any time prior to
consummation of the transactions by the mutual consent of the parties, by either
party if the closing has not occurred on or before October 31, 2004, or by
either party in the event of a material breach by the other party of any of the
agreements, representations or warranties of the other and the failure of such
other party to cure such breach within seven days after notice. In the event of
termination pursuant to these provisions, each party's obligations under the
memorandum shall terminate without further liability, unless such breach is
willful.
Each party is to pay its own expenses incurred in connection with
negotiating and performing its obligations under the memorandum.
Business of the Parties Before and After the Formation of Newco
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
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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.
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 Newco
Following the transfer of our assets and operations to Newco, we
anticipate that Newco 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 Newco's facilities for
storage and sale during the warmer months.
Because of the location of Newco's plants and transportation charges
for finished asphalt products, we do not anticipate that Newco 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.)
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Set forth below is certain summary information:
For the Year Ended December 31,
June 30 --------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
----------- ------------ ------------ ------------ ------------ ------------
Operating Results Data:
Operating revenues $ 3,451,424 $ 16,936,627 $ 17,964,675 $ 27,032,658 $ 22,787,103 $ 35,518,541
Loss from operations (1,100,143) (1,089,655) (1,372,853) (572,636) (16,084,230) (1,037,491)
Net loss before
extraordinary items (1,220,323) (1,260,885) (769,041) (6,487,981) (18,360,921) (3,053,516)
Extraordinary items -- -- 30,144,724 -- -- --
Net (loss) income (1,220,323) (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 $1,078, $984,
$769, $2,469, $15,785, and $850 during periods noted above respectively.
As of June 30, 2004
-------------------
Balance Sheet Data:
Total assets $12,928,005
Total liabilities $14,301,422
Stockholders' equity $(1,946,878)
Book value per share $ (0.07)
Reasons For and Effects of the Joint Venture Formation
We agreed to sell our assets to Newco in consideration of the $7.5
million secured promissory note, assumption of approximately $2.5 million in
liabilities, and a 49% interest in Newco, with the working capital financing
needed by Newco to be provided by Idaho Asphalt Supply, 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 Newco, with
working capital funding provided by Idaho Asphalt Supply.
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
Newco. Through this joint venture arrangement, we were able to obtain the
working capital we require for the 2004 asphalt cycle, which is now well
underway, 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 Idaho Asphalt Supply's appointment of
a majority of the members of Newco's management committee, we no longer have
control over our assets and operations. In addition, the terms under which Idaho
Asphalt Supply may provide us with working capital in future years may include
certain financial covenants or restrictions on our operating flexibility,
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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 Newco as partial
consideration for the sale of our asphalt assets and operations to Newco,
secured by a lien of the assets conveyed, will not be guaranteed by Idaho
Asphalt Supply. We cannot assure that Newco will be able to generate available
cash flow from operations or other sources to pay this obligation. If Newco is
unable to meet its payment obligations, we will have the right to seek to
enforce our rights as a secured creditor against Newco, 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
of June 30, 2004, there were dividends payable to the holder of the Series A
Cumulative Convertible Preferred Stock of approximately $1.6 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 $6.6
million, as of June 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 Newco promissory note.
Under the terms of the Series A Cumulative Convertible Preferred Stock,
the sale of our asphalt assets and operations to Newco 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 $6.6 million
as of June 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 Newco 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 Newco's continued operation of our asphalt business if, as
we anticipate, they become employed by Newco. Newco 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.
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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........ 52 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.
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.
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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.
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
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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.
STOCKHOLDER PROPOSALS
It is anticipated that the next meeting of stockholders will be held on
approximately July 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 February 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
Year Compen- Stock Options/ LTIP Other
Name and Principal Ended sation Award(s) SARs Payouts Compen-
Position Dec. 31 Salary ($) Bonus ($) ($) ($) (no.) ($) sation
------------------------- --------- ---------- ---------- ------------- --------- ---------- -------- ----------
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.
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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.
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.
38
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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 June 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
June 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
39
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ownership of any person, the amount of shares outstanding is deemed to
include the amount of shares beneficially owned by such person (and only
such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does
not necessarily reflect the person's actual ownership or voting power with
respect to the number of shares of common stock actually outstanding.
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; 160 million shares issuable at the election of the holder
at the market price of $0.01 per share as of June 30, 2004, in payment of
$1.6 million of dividends accrued as of June 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 165,210,771
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
40
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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 December 31, 2003, there were dividends payable to the holder of
the Series A Cumulative Convertible Preferred Stock of $1.4 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 June 30, 2004, 140 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, do not know whether we will attempt to do so, and have not
analyzed our obligations or responsibilities if the Mealey Partnership would
elect to convert the Series A Cumulative Convertible Preferred Stock, demand
payment of the dividends in common stock, or exercise the warrant.
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
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.
41
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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 reports on Form 10-Q (file no. 000-19365) for
the quarter ended March 31, 2004, filed July 7, 2004, and for
the quarter ended June 30, 2004, filed August 23, 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
[mailing date]
42
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet as of June 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 June 30, 2004. The following
unaudited pro forma consolidated statements of income for the six months ended
June 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 the periods presented. 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 June 30, 2004
June 30, 2004 As Adjusted
[unaudited] Adjustments [unaudited]
CURRENT ASSETS:
Cash and cash equivalents $ 75,144 $ (8,851) a $ 66,293
Accounts receivable, net of allowance for
uncollectible accounts of $159,970 2,438,701 (1,309,835) a 1,128,866
Inventory 2,007,727 (1,993,688) a 14,039
Prepaid and other current assets 67,670 (57,536) a 10,134
---------------- ---------------- ----------------
Total Current Assets 4,589,242 (3,369,910) 1,219,332
PROPERTY, PLANT, AND EQUIPMENT, Net 8,296,535 (8,286,495) a 10,040
NOTES RECEIVABLE -- 7,500,000 a, b 7,500,000
OTHER ASSETS 42,228 (13,472) a 28,756
---------------- ---------------- ----------------
TOTAL ASSETS 12,928,005 (4,169,877) 8,758,128
================ ================ ================
CURRENT LIABILITIES
Accounts payable 3,980,632 (3,362,400) a 618,232
Preferred stock dividends payable 1,600,000 -- 1,600,000
Accrued expenses 163,193 (67,216) a 95,977
Accrued interest 383,223 (8,715) a 374,508
Long-term debt - current portion 802,859 (456,675) a 346,184
---------------- ---------------- ----------------
Total current liabilities 6,929,907 (3,895,006) 3,034,901
Long-term debt 2,371,515 (1,919,664) a 451,851
Redeemable preferred stock 5,000,000 -- 5,000,000
---------------- ---------------- ----------------
Total liabilities 14,301,422 (5,814,670) 8,486,752
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURES 573,461 (573,461) a --
STOCKHOLDERS DEFICIT:
Stockholders' equity:
Common Stock $0.02 par value 50,000,000
shares authorized, 26,281 shares outstanding 529,647 (529,121) c 526
Additional paid in Capital 3,319,417 529,121 c 3,848,538
Stock warrants 186,256 -- 186,256
Accumulated deficit (5,982,198) 2,218,254 a (3,763,944)
---------------- ---------------- ----------------
Stockholders' deficit (1,946,878) 2,218,254 271,376
---------------- ---------------- ----------------
TOTAL $ 12,928,005 $ (4,169,877) $ 8,758,128
================ ================ ================
F-2
CROWN ENERGY CORPORATION
[Unaudited]
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Published June 30, 2004
June 30, 2004 As Adjusted
[unaudited] Adjustments [unaudited]
SALES, Net of demerits $ 3,451,424 $ 3,443,174 d $ 8,250
COST OF SALES 3,914,805 3,909,426 d 5,379
-------------- -------------- --------------
GROSS PROFIT (LOSS) (463,381) (466,252) 2,871
GENERAL AND ADMINISTRATIVE EXPENSES 636,762 485,787 d,e 150,975
-------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS (1,100,143) (952,039) (148,104)
OTHER INCOME (EXPENSES):
Interest income and other income 1,146 564 d 582
Interest income from note receivable -- (150,000) g 150,000
Interest expense (141,798) (82,702) d (59,096)
-------------- -------------- --------------
Total other income (expense), net (140,652) (232,138) 91,486
-------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTERESTS (1,240,795) (1,184,177) (56,618)
DEFERRED INCOME TAX BENEFIT -- -- --
PROFIT (LOSS) IN EQUITY INVESTMENT -- 570,216 f (570,216)
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED JOINT VENTURE 20,472 20,472 d --
-------------- -------------- --------------
NET INCOME (LOSS) $ (1,220,323) $ (593,489) $ (626,834)
============== ============== ==============
F-3
CROWN ENERGY CORPORATION
[Unaudited]
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
December 31,
Published 2003, As
December 31, 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 (LOSS) 100,633 49,131 51,502
GENERAL AND ADMINISTRATIVE EXPENSES 1,529,017 1,045,926 d,e 483,091
Recovery of (provision for) bad debt expense 338,729 -- d 338,729
--------------- --------------- ---------------
INCOME (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 note receivable -- (300,000) 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 INCOME (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 June 30, 2004.
Estimated net proceeds, assets sold, and resultant gain from the asset
sale are as follows:
Note Receivable $ 7,500,000
Liabilities Assumed 6,388,131
------------
Total Proceeds Received $ 13,888,131
============
Book Value of Assets Sold $ 11,669,877
Gain on Sale Before Taxes $ 2,218,254
Certain assets will be retained by Crown Energy 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 Crown Energy. It will accrue interest at a
rate of 4% per annum and will be paid out of the earnings of Newco. 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 June 30, 2004, and the year ended December 31,
2003, give effect to the asset sale as though it had occurred on
January 1, 2003. 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
give 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 Newco, which
the Company will retain from the asset sale. The June 30, 2004, pro
forma calculation of loss in an equity investment is calculated by
taking the loss before income taxes of $1,184,177, reduced by minority
interest in earnings of a consolidated joint venture of $20,472,
multiplied by 49%, which results in $570,215. The December 2003 pro
forma is calculated in the same manner--$1,485,472 less $49,673
multiplied by 49% for a total of $703,542.
(g) Interest income from the asset sale is the interest income derived from
the sale of the assets to Newco. This is calculated based on the
$7,500,000 note at 4% per annum for the six months ending June 30,
3004, and the twelve months ended December 31, 2003.
F-5