SCHEDULE 14C INFORMATION
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
[ ] 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 [confidential information has been
omitted and filed separately with the Securities and Exchange
Commission], an unaffiliated asphalt products distributor (our
"Co-venturer"), 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 [confidential information has been omitted
and filed separately with the Securities and Exchange Commission]
promissory note payable from Newco earnings, the assumption of
approximately [confidential information has been omitted and filed
separately with the Securities and Exchange Commission] in liabilities,
and a 49% interest in Newco, with the remaining 51% interest in Newco
owned by Co-venturer, 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 each's successor is elected and qualified.
The purpose of the reverse split is to reduce the number of holders of
our common stock in order for us to terminate our reporting obligations under
the Securities Exchange Act of 1934 ("Exchange Act"). Our common stock would
then no longer be eligible for quotation on the OTC Bulletin Board, and we
cannot assure that any trading market for our common stock would continue
thereafter.
We are enclosing our information statement that describes the above
transactions, as well as our 2003 annual report to stockholders, which consists
principally of our annual report on Form 10-K and our most recent quarterly
report on Form 10-Q.
Please review the enclosed information statement carefully.
We Are Not Asking for a Proxy and You Are Requested Not To Send Us a
Proxy.
Sincerely,
CROWN ENERGY CORPORATION
Jay Mealey, President
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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 14,431,818 shares, or 54.4%, of our issued and outstanding common
stock and all 500,000 shares of our issued and outstanding Series A Cumulative
Convertible Preferred Stock (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 [confidential information has been
omitted and filed separately with the Securities and Exchange
Commission], an unaffiliated asphalt products distributor (our
"Co-Venturer"), 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 [confidential information has been omitted
and filed separately with the Securities and Exchange Commission]
promissory note payable from Newco earnings, assumption of
approximately [confidential information has been omitted and filed
separately with the Securities and Exchange Commission] of liabilities,
and a 49% interest in Newco, with the remaining 51% interest in Newco
owned by Co-venturer, 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 each's 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;
o convert each of the 1,000 shares of our common stock
outstanding immediately prior to the reverse split into one
full share of post-reverse-stock-split common stock; and
o provide that stockholders owning fewer than 1,000 shares that
would otherwise receive a fractional share of common stock as
a result of the reverse split will instead receive scrip.
Immediately after the Effective Date of the reverse split, we will 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 reverse split 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 provides us minimal benefits. See
"THE REVERSE SPLIT."
2. The Proposed Joint Venture Formation
We have entered into an agreement with our Co-venturer 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 in consideration of:
o a promissory note for [confidential information has
been omitted and filed separately with the Securities
and Exchange Commission] 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 [confidential information
has been omitted and filed separately with the
Securities and Exchange Commission] in liabilities
relating to the assets transferred, and
o a 49% interest in Newco.
o Our Co-venturer will own 51% of Newco and will designate a
majority of its managers.
o Our Co-venturer will grant Newco an operating line of credit
to finance its operations, which may be extended in subsequent
years at our Co-venturer's election.
In anticipation of completing this joint venture formation, interim
operating capital has been provided to us by our Co-venturer, secured by a lien
on our inventory, work in progress, finished goods and accounts receivable.
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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 March 31, 2004, we had a working capital deficit of approximately
$2.3 million, an accumulated deficit of approximately $5.5 million, and a
stockholders' deficit attributable to the common stock of approximately $1.4
million. Our auditor's report on our 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. We had 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 they would require personal guarantees of our
officers and directors, and our officers and directors are unwilling to provide
such guarantees for our benefit while we are burdened by the costs associated
with meeting the reporting obligations under the Exchange Act. Further, bonding
underwriters we historically used for asphalt supply contracts with federal and
state highway projects have stated that their ability to provide payment and
performance bonding for small public companies has become limited because of the
uncertainties regarding management continuation, the requirement for personal
guarantees that generally are not provided in public companies, and the
third-party liability that public companies face from stockholders, which can
severely impact the financial ability of those companies and their ability to
meet their contractual obligations for which bonding companies provide surety.
Our operating history and the prevailing current conditions in the
investment markets generally have precluded us from obtaining outside equity
capital. The closing sales price 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 32
of the first 118, or 27%, of the trading days of the year. From January 1, 2004,
through the first 118 trading days of 2004, only an aggregate of 1,095,993
shares were reported traded, representing an aggregate transaction value of less
than $32,000. 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.
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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 our current principal
stockholders, 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 our
Co-venturer 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, our
Co-venturer 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 our Co-venturer 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 stock split as described in
this information statement.
Alternatives Considered
Possible Financing or Sale
During the last two 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. We developed a detailed business plan, including historical and pro
forma financial forecasts, based on a number of assumptions and identified
potential candidates for each potential financing method.
After discussions with two commercial banks and one large commercial
finance institution in April and May 2002, we determined that financing with
debt through traditional lending institutions was not achievable without a
significant infusion of equity because of the loan-to-value limitations of
asset-based lenders.
During the period between April and August, 2002, we contacted several
private equity sources to explore the availability and possible terms of needed
equity investment. We explored both stand-alone equity financing and an equity
investment to finance the loan-to-value deficit with asset-based financing.
After a review of our business and financial condition and prospects and the
asphalt industry, all of these sources advised they were not interested in
providing funding because they typically would not make an investment of the
type desired in a public company and the business did not appear capable of
meeting the 30% to 35% return criteria such private equity participants
required.
We also attempted to sell the business through the formation of a joint
venture, partnership or similar arrangement in which we would contribute our
asphalt assets and operations to an entity formed with a funding source so that
we could maintain a continuing interest in the resulting business. To accomplish
this, between April and September 2002, we contacted several potential companies
that were customers, suppliers and competitors, both those currently operating
in our region and those desiring to enter the region. We contacted a large
contractor that operates as a customer that has been involved in some vertical
acquisitions in other areas of the United States. The other company conducted an
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extensive review of our business, financial condition and prospects under a
reciprocal confidentiality agreement, but did not extend a firm offer to us.
Between April and September 2002, we also contacted several companies
that are in the same business and where market territories either marginally
crossed with us or where our facilities were an extension to an existing market
region. Serious business and financial reviews and discussions ensued with two
companies under reciprocal nondisclosure agreements. Both companies declined to
make an offer, however, citing concerns about market risk, risk of asphalt
availability to supply our facilities, and too high an acquisition price.
During this period, we also opened discussions with three refiners that
supply base asphalt, detailing how our facilities provided storage capacity and
an entrance downstream of the refiners' present market into new modified asphalt
and asphalt emulsions markets. These companies declined to make an offer citing
concerns about limitations on their ability to ascertain potential environmental
contingencies, competing with their own existing customer base, and too high an
acquisition cost.
During 2003, we returned to several of the sources with which we had
seriously discussed potential funding, as well as several additional potential
sources of financing the transaction. We were unable to generate serious
interest or an offer to finance the working capital requirements through either
a debt/equity or a joint venture/partner transaction.
In early 2004, we entered into negotiations with an unrelated asphalt
company about the formation of a possible joint venture to which we would
contribute our asphalt assets and operations in consideration of approximately
[confidential information has been omitted and filed separately with the
Securities and Exchange Commission] in payments and liability assumptions and a
minority interest in the venture and the other firm would provide an agreed
working capital line of credit of up to [confidential information has been
omitted and filed separately with the Securities and Exchange Commission] in
consideration of a controlling interest in the venture. In March 2004, we
entered into a letter of intent to proceed with this venture, but the other firm
could not arrange the agreed line of credit by the date provided in the letter,
and we terminated the relationship prior to negotiating definitive terms.
Thereafter, we reached the agreement with our Co-venturer for the
formation of the joint venture discussed under "The Proposed Joint Venture
Formation."
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 that could 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 it was 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 stock
split; and (v) sale of the assets. After carefully considering the alternatives,
the board determined that a reverse stock split would realize the greatest 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 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
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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 also be structured
as a share exchange with a newly-organized corporation controlled by the
continuing stockholders in which the continuing stockholders would receive stock
of the new corporation for their existing stock, while all other stockholders
would receive cash, as contemplated by Utah Revised Business Corporation Act
Section 16-10a-1102. The fact that some stockholders receive stock in the new
company while others are forced to accept cash is specifically permitted, as
addressed in the official commentary to each of the sections noted above.
The amount paid in cash to the minority stockholders would be
determined by the board of directors, after receiving such valuation information
as deemed warranted.
The board of directors determined that each of these transactions had
the disadvantage of requiring the creation of a new company, which presented
more complications than the reverse stock split procedure ultimately decided on.
A freeze-out merger would also require stockholder approval and trigger
statutory dissenters' rights. Finally, both of these approaches would require
the expenditure of our limited resources to pay minority stockholders.
Tender Offer. The board of directors also considered undertaking a
tender offer to buy back, or redeem, the stock from the minority stockholders.
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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. As with the freeze-out merger or exchange, the tender offer
had the further disadvantage of requiring the expenditure of our limited
financial resources to pay minority stockholders.
Reverse Stock Split. The board of directors then considered, and
determined to pursue, a reverse stock split in which the issued and outstanding
shares are reverse split sufficiently to leave only one or a few of the
principal stockholders with whole shares and reducing all other stockholders to
having only fractional shares, which would be evidenced as scrip that could be
combined by stockholders owning fractional shares to make a whole share that
could be retained as provided in Section 16-10a-604(1)(c) of the Utah Revised
Business Corporation Act. 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 stock split 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.
Section 16-10a-604 of the Utah Revised Business Corporation Act
specifically authorized us to "issue scrip in registered or bearer form
entitling the holder to receive a full share upon surrendering enough scrip to
equal a full share." We have elected to issue scrip in registered form in that
it will be issued on the stock transfer books of the corporation in the name of
stockholders of record and not in bearer form. We will not issue certificates
evidencing scrip. Persons wishing to transfer scrip on the records of the
corporation can provide the transfer agent with appropriate transfer documents.
The holder of scrip is not entitled to exercise the rights of a stockholder,
including the right to vote, to receive dividends, and to participate in assets
of the corporation on liquidation. The scrip will become void if not exchanged
for a full share within 120 days after the effective date of the reverse split.
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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. It furthermore will eliminate the cost to us of paying for
fractional shares.
Reasons for and Effects of the Reverse Split
Benefits
The primary benefit of the reverse split for us and our continuing
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.
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
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.
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.
Fairness of the Reverse Stock Split
The board of directors believes the reverse stock 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. Further, we believe the issuance of scrip in lieu of a
cash payment for fractional shares is fair because it enables stockholders
owning fractional shares after the reverse split, including those left with less
than one full share, to combine their scrip if they should elect to do so,
rather than imposing on us the cash cost for fractional shares as well as the
clerical burden and cost of issuing payments in cash.
No Report, Opinion or Appraisal
We have not obtained any 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.
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Amendment to our Articles of Incorporation
We will amend our articles of incorporation to effect the 1,000-to-one
reverse stock 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 Stock Split. The shares of common stock of the
Corporation issued and outstanding as of 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 issue scrip in registered form, but not
represented by a certificate, that shall entitle the holder to
receive a full share upon the surrender of such scrip
evidencing a whole share. Upon the surrender of scrip
evidencing a whole share, the Corporation shall issue to the
holder thereof a certificate evidencing such whole share.
Holders of scrip shall not be entitled to exercise voting
rights, to receive dividends thereon, or to participate in any
of the assets of the Corporation in the event of liquidation.
Such scrip shall be void if not exchanged for certificates
representing full shares of uncertificated full shares before
12:00 midnight, Salt Lake City time, on the 120th day
following the Effective Date.
(c) As soon as reasonably practicable after the
Effective Date, the Corporation shall cause its registrar and
transfer agent, acting as exchange agent (the "Exchange
Agent") to mail to each holder of record of shares of common
stock immediately prior to the Effective Date (the
"Pre-Reverse-Split Common Stock"), a letter of transmittal
(which shall specify that delivery shall be effected, and risk
of loss and title to the Pre-Reverse-Split Common Stocks shall
pass, only upon delivery of certificate representing such
Pre-Reverse-Split Common Stock to the Exchange Agent, which
shall be in such form and have such other provisions as the
Corporation may reasonably specify, and which shall specify
the fee payable in order to effectuate such exchange) and
instructions for use in effecting the surrender of
certificates representing Pre-Reverse-Split Common Stock in
exchange for certificates representing shares of New Common
Stock issuable pursuant hereto. Upon surrender of a
certificate representing Pre-Reverse-Split Common Stock for
cancellation to the Exchange Agent, together with such duly
executed letter of transmittal and the payment of the
prescribed fee, the holder of such certificate representing
Pre-Reverse-Split Common Stock shall be entitled to receive in
exchange therefor a certificate representing that number of
whole shares of New Common Stock that such holder has the
right to receive in exchange for the Pre-Reverse-Split Common
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
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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
prior to the expiration date of scrip as provided above, scrip
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 scrip 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.
As a result of the reverse stock split, 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.
While our board of directors currently intends to effect 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.
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 certificate evidencing one or more shares
to be held by the continuing stockholders following the reverse split.
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We will not issue fractional shares or pay for such fractional share in
cash to those stockholders that will own less than one share of common stock
following the reverse stock split. Instead, we will issue scrip, in registered
form, but not represented by a certificate, that shall entitle the holder to
receive a full share upon the surrender of such scrip evidencing a whole share.
Upon the surrender of scrip evidencing a whole share, we will issue to the
holder thereof a certificate evidencing such whole share. Holders of scrip will
not be entitled to exercise voting rights, to receive dividends thereon, or to
participate in any distribution of our assets in the event of liquidation. Such
scrip shall be void if not exchanged for certificates representing full shares
of uncertificated scrip evidencing full shares before 12:00 midnight, Salt Lake
City time, on the 120th day following the Effective Date.
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
discussion is not and should not be relied on as a comprehensive analysis of the
tax issues resulting from or relating to the reverse split. This summary does
not purport to deal with all aspects of federal income taxation that may be
relevant to a particular stockholder in light of such stockholder's personal
investment circumstances or to certain types of stockholders subject to special
treatment under the Internal Revenue Code of 1986, as amended. Such stockholders
that may be subject to special treatment may include financial institutions,
securities broker-dealers, regulated investment companies, life insurance
companies, tax-exempt organizations, foreign corporations, and nonresident
aliens. Accordingly, stockholders are urged to consult their personal tax
advisors for an analysis of the effect of the reverse split on their own tax
situation, including consequences under applicable local or foreign tax laws.
We believe that the exchange of existing common stock for new common
stock issuable to those stockholders holding more than 1,000 shares will qualify
as a recapitalization under Section 368(a)(1)(E) of the Internal Revenue Code,
to the extent that outstanding shares of existing common stock are exchanged for
a reduced number of shares of new common stock. Therefore, neither we nor the
continuing stockholders will recognize any gain or loss for federal income tax
purposes as a result of the reverse split. The shares of the common stock to be
issued to the continuing stockholders will have an aggregate basis, for
computing gain or loss, equal to the aggregate basis of the shares of existing
common stock held by such stockholder immediately prior to the reverse split.
Each stockholder's holding period for the share of new common stock to be issued
or any interest therein would include the holding period for shares of existing
common stock exchanged therefor, provided that such outstanding shares of
existing common stock were held by the stockholder as a capital asset on the
Effective Date of the reverse split.
No Dissenters' Rights
Utah corporate law does not vest our stockholders with dissenters'
rights respecting the reverse stock split.
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THE PROPOSED JOINT VENTURE FORMATION
General
We believe that our agreements with our Co-venturer 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 [confidential information has been omitted
and filed separately with the Securities and Exchange Commission] purchase
price, payable contingent upon Newco having funds sufficient to permit such
payment. In addition, our Co-venturer will provide Newco with a line of credit
to operate the business, which may be extended in subsequent years at our
Co-venturer'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
our Co-venturer.
Our Co-venturer, 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 our Co-venturer that led to
the agreements and transactions described below, we had not had any business
transactions with our Co-venturer.
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 Our Co-venturer
During 2002 as we explored various financing alternatives as discussed
above, we contacted our Co-venturer to inquire if it was interested in forming a
joint venture with us as a possible method for it to enter our asphalt market by
providing operating capital. Our Co-venturer then advised that it was not
interested in pursing a possible transaction at that time.
In late 2003, we again contacted our Co-venturer regarding its possible
interest in our assets and operations or the formation of a joint venture of our
assets and operations and our Co-venturer's financing. These discussions over
several months eventually led to the negotiation of our agreement with our
Co-venturer that was entered into on June 7, 2004.
Formation of New Limited Liability Company
Newco will be organized under the laws of the state of Utah. Our
Co-venturer 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 our Co-venturer 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. Our
Co-venturer 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
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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 the 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 the 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 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).
Purchase Price
In consideration of the rights, interests, assets and properties
transferred to Newco, Newco will issue us a [confidential information has been
omitted and filed separately with the Securities and Exchange Commission]
promissory note and will assume certain obligations. [Confidential information
has been omitted and filed separately with the Securities and Exchange
Commission.]
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 [confidential information has been
omitted and filed separately with the Securities and Exchange Commission], 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.
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.
Operating Line of Credit
Our Co-venturer 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 our Co-venturer may elect. During 2004, the operating line of
credit will not exceed [confidential information has been omitted and filed
separately with the Securities and Exchange Commission] 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 [confidential information has been
omitted and filed separately with the Securities and Exchange Commission]
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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 our Co-venturer 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, our
Co-venturer 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, our Co-venturer is loaning us
[confidential information has been omitted and filed separately with the
Securities and Exchange Commission]. Our Co-venturer 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.
These advances to us by our Co-venturer 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 our Co-venturer will release us from further obligation for repayment of
that interim funding.
As noted above, our Co-venturer's advance to us was based on our April
30, 2004, inventory. 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 or cost. 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 our Co-venturer and us to complete the formation of
Newco will be 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 [confidential
information has been omitted and filed separately with the Securities
and Exchange Commission] purchase price payment by Newco to us, and
ancillary agreements;
(2) the satisfactory completion by our Co-venturer of a due
diligence review of our assets and operations to be conveyed to Newco;
(3) any required approvals or consents from third parties
shall have been obtained or waivers from compliance granted; and
(4) 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.
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Conditions to our Co-venturer's Obligations
The obligations of our Co-venturer 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 our
Co-venturer:
(1) the transactions have been approved by our stockholders in
the manner required by law and our articles of incorporation and
bylaws;
(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;
(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 our Co-venturer may require in the definitive
agreements 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 our Co-venturer:
(1) our Co-venturer 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) our Co-venturer'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) our Co-venturer shall have complied with such other terms,
covenants and conditions as we may require in the definitive agreements
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 our Co-venturer are each obligated to:
(1) carry on its business in substantially the same manner as
before;
(2) maintain and keep its assets in good repair and condition,
except for ordinary wear and tear and loss due to casualty;
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(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 September 30, 2004, 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 and in
performing its obligations thereunder.
The foregoing discussion of the material terms of the Memorandum of
Understanding is qualified in its entirety by the more detailed terms of the
memorandum itself, which we have included as an exhibit to a current report on
Form 8-K filed with the Securities and Exchange Commission on [filing date].
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.
For the majority of our business, 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 June 15, 2004, we had 30 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 Our Co-venturer
Operating a business very similar to ours but generally in a different
market area, our Co-venturer produces a variety of asphalt products, using
feedstock from third-party refiners and other suppliers, that are marketed
[confidential information has been omitted and filed separately with the
Securities and Exchange Commission].
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 our Co-venturer.
Reasons For and Effects of the Joint Venture Formation
We agreed to sell our assets to Newco in consideration of the
[confidential information has been omitted and filed separately with the
Securities and Exchange Commission] secured promissory note, assumption of
approximately [confidential information has been omitted and filed separately
with the Securities and Exchange Commission] in liabilities, and a 49% interest
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in Newco, with the working capital financing needed by Newco to be provided by
our Co-venturer, 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
our Co-venturer.
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 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 under way, 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 our Co-venturer'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 our
Co-venturer may provide us with working capital in future years may include
certain financial covenants or restrictions on our operating flexibility,
although we do not believe that such restrictions are likely to impose greater
limitations on the operation of the asphalt business than would be required by
an unaffiliated lender.
The [confidential information has been omitted and filed separately
with the Securities and Exchange Commission] 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
our Co-venturer. 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 March 31, 2004, there were dividends payable to the holder of the Series A
Preferred Stock of approximately $1.5 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 $6.5 million, as of March 31,
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 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 $6.5 million as of March 31,
2004. Rather than require such redemption, the holder of the preferred stock has
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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.
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.
FINANCIAL STATEMENTS
Our financial statements are incorporated herein by reference from our
annual report on Form 10-K for the year ended December 31, 2003, filed July 7,
2004, and our quarterly report on Form 10-Q for the quarter ended March 31,
2004, filed July 7, 2004, with the Securities and Exchange Commission. Copies of
each of these documents have been included with this information statement and
are being mailed to each stockholder of record as of the record date.
ELECTION OF DIRECTORS
The board of directors and the Approving Stockholders have approved the
reelection of each of our existing directors, each to serve until the next
annual meeting of the stockholders and until his successor is elected and
qualified. On the Effective Date, the election of Jay Mealey, Alan L. Parker,
and Andrew W. Buffmire will become effective.
Directors and Executive Officers
Our directors are elected annually by the stockholders. Our officers
serve at the pleasure of the board of directors. Our officers and directors,
their ages, and their positions are set forth below:
Name Age Position
---- --- --------
Jay Mealey........... 48 Chairman of the Board of Directors
Chief Executive Officer, President, Treasurer
Stephen J. Burton.... 56 Secretary
Andrew W. Buffmire... 57 Vice President Business Development, 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 has
held various accounting positions with us since 1989. 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. 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,
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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, vice-president and controller, has been employed by us
since 1998 and our predecessor, Petro Source Asphalt Company, since 1987.
Scott Beall, vice president, has been employed by us since 1998 and our
predecessor, Petro Source Asphalt Company, since 1979.
Audit Committee and Audit Committee Financial Expert
We do not have an audit committee composed entirely of independent
directors; our board of directors acts as our audit committee. Additionally, we
do not have an audit committee financial expert, as that term is defined by Item
401(h) of Regulation SK. Given our financial condition and recent history of
legal matters, our board of directors has determined that it would be unlikely
to identify a qualified audit committee financial expert who would be willing to
serve.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Exchange Act requires our directors and officers,
and persons who own more than 10% of our outstanding common stock, to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership in our common stock and other equity securities.
Except as described below, 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 not adopted a code of ethics because the board of directors has
determined that given our small size, the service of our chief executive officer
and our principal financial officers on our board of directors, and the
significant majority of our common stock owned by our officers and directors, a
written code of ethics would be a mere formality and would not meaningfully
enhance our commitment to act honestly and ethically, provide full, fair,
accurate, timely and understandable disclosure, or comply with applicable
governmental laws, rules and regulations.
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
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directors is currently composed of only three directors, and the substantial
difficulty presented in recruiting additional independent directors given our
financial condition.
We do not have a policy regarding stockholder nominations for the board
of directors, and our board of directors has determined that it is appropriate
for us not to have such a policy because our directors and officers hold a
substantial majority of our common stock and our board of directors, as a whole,
performs the functions of the nominating committee.
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.
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth, for the last three fiscal years, the
annual and long-term compensation earned by, awarded to, or paid to the person
who was our chief executive officer and each of our other highest compensated
executive officers as of the end of the last fiscal year (the "Named Executive
Officers"):
Long-Term Compensation
------------------------------
Annual Compensation Awards Payouts
--------------------------------- --------------------- -------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Under-
Annual Restricted lying All Other
Year Compen- Stock Options/ LTIP Compen-
Name and Principal Ended sation Award(s) SARs Payouts sation
Position Dec. 31 Salary ($) Bonus ($) ($) ($) (no.) ($) ($)
------------------------------------- ----------- ----------- ---------------------------------- -------------------
Jay Mealey 2003 $302,700 -- $10,563(1) -- -- -- $734(2)
President 2002 344,600 -- 10,563(1) -- -- -- 688(2)
(CEO) 2001 250,000 -- 8,400(1) -- -- -- 647(2)
Scott Beall 2003 $110,300 -- -- -- -- -- --
Vice-President 2002 128,462 -- -- -- -- -- --
2001 107,225 -- -- -- -- -- --
----------------------
(1) Car allowance.
(2) Term life insurance paid for Mr. Mealey.
Option/SAR Grants in Last Fiscal Year
During the fiscal year ended December 31, 2003, we did not grant any
stock options or stock appreciation rights to any Named Executive Officers.
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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 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 -- -- 750,000 / --(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.
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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 15, 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 40.6%
Options 900,000 3.3
Shares issuable on conversion
of Series A Preferred, payment
of accrued dividends and
exercise of warrant(4)
20,454,464 43.6
35,196,282 67.1%
Andrew W. Buffmire(2)....................... Common stock 1,600,000 17.7
Options 85,000 0.3
1,685,000 18.0
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):........................... Common Stock 15,441,818 58.3
Options(5) 1,052,500 3.8
Shares issuable on conversion
of Series A Preferred, payment
of accrued dividends and
exercise of warrant(4) 36,948,782 77.0
--------------------
(1) Based on 26,482,388 shares of our common stock issued and outstanding on
April 10, 2003. Under Rule 13d-3 of the Exchange Act, shares are deemed to
be beneficially owned by a person if the person has the right to acquire
the shares (for example, upon exercise of an option) within 60 days of the
date as of which the information is provided. In computing the percentage
ownership of any person, the amount of shares outstanding is deemed to
include the amount of shares beneficially owned by such person (and only
such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does
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 Family Limited 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 Family Limited 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 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.
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(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 Family Limited
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 Preferred
Stock; 150 million shares issuable at the election of the holder at the
market price of $0.01 per share as of April 30, 2003, in payment of $1.5
million of dividends accrued as of December 31, 2003, on the Series A
Preferred Stock; and 925,771 shares issuable on the exercise of warrants to
purchase shares at $0.002. Mr. Mealey and the Mealey Family Limited
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 60,766,327 shares to
which the Mealey Family Limited Partnership would be entitled on conversion
of the Series A Preferred Stock, the payment of accrued dividends, and the
exercise of the warrant.
(5) Includes 67,500 shares underlying options held by an unnamed executive
officer to acquire 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 Weighted average exercise compensation plans
Plan Category issued upon exercise of prices of outstanding (excluding securities
outstanding options options reflected in column (a))
(a) (b) (c)
Equity compensation plans
approved by shareholders...... 2,263,148 $0.122 460,000
Equity compensation plans not
approved by security holders.. -- -- --
--------- ------ -------
Total.................. 2,263,148 $0.122 460,000
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1997, we sold to 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 Preferred Stock, the warrant, and all associated rights were acquired
by the Mealey Family Limited Partnership, which is the current holder of the
Series A 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 Family Limited Partnership and is its general partner
and his immediate family is its beneficiary. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS."
As of December 31, 2003, there were dividends payable to the holder of
the Series A Preferred Stock of $1.5 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 April 30, 2004, 150 million shares of common stock would have to be issued
to satisfy the dividend payable. The Series A Preferred Stock is convertible to
4,285,000 shares of common stock, if so elected by the holder of the Series A
Preferred Stock.
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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
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 Preferred Stock on conversion or the payment of
dividends or on exercise of the warrant. We have not undertaken to renegotiate
with the Mealey Family Limited Partnership any of the terms of the Series A
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 Family
Limited Partnership would elect to convert the Series A 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 financial statements for the fiscal year
ended December 31, 2003, and for the reviews of the 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 financial statements for the fiscal year
ended December 31, 2002, and for the reviews of the 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 financial
statements for either the fiscal year ended December 31, 2003, or the fiscal
year ended December 31, 2002, that are not included under "Audit Fees" above.
Tax Fees
The aggregate fees billed by Tanner + Co. for professional services
rendered for tax compliance, tax advice, and tax planning for the fiscal years
ended December 31, 2003, and December 31, 2002, were $12,750 and $5,348,
respectively.
All Other Fees
Tanner + Co. did not perform any services for us or charge any fees
other than the services described above under "Audit Fees" and "Tax Fees" for
either the fiscal year ended December 31, 2003, or the fiscal year ended
December 31, 2002.
The engagements of Tanner + Co. to perform all of the above-described
services were approved by the board of directors, acting as the audit committee,
before we entered into the engagements, and the policy of the board of directors
is to require that all services performed by the independent auditor be
preapproved by the board of directors before the services are performed.
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FINANCIAL INFORMATION
The following financial statement information is incorporated herein by
reference from:
(1) Our annual report on Form 10-K (file no. 000-19365) for the
year ended December 31, 2003, filed July 7, 2004;
(2) Our quarterly report on Form 10-Q (file no. 000-19365) for the
quarter ended March 31, 2004, filed July 7, 2004; and
Copies of each of these documents are bound with this information statement and
are being mailed to each stockholder of record as of the record date.
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 [_____________], 2005, and are otherwise in compliance with applicable laws
and regulations and the governing provisions of our articles of incorporation
and bylaws.
By Order of the Board of Directors
Jay Mealey, President and Chairman
Woods Cross, Utah
[mailing date]
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