Preliminary Proxy Solicitation Material — Schedule 14A
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1: PRE 14A Preliminary Proxy Solicitation Material 24 120K
2: EX-10 Material Contract 115 377K
3: EX-21 Subsidiaries of the Registrant 5± 20K
4: EX-28.1 Information from a Report Furnished to State 9 39K
Insurance Regulatory Authorities
5: EX-28.2 Information from a Report Furnished to State 10 42K
Insurance Regulatory Authorities
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
Filed by the Registrant X
Filed by a Party other than the Registrant
Check the appropriate box:
X Preliminary Proxy Statement
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
CROWN ENERGY CORPORATION
(Name of Registrant as Specified In Its Charter)
(same)
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
No fee required.
X Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction
applies: n/a
2) Aggregate number of securities to which transaction
applies: n/a
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:1 n/a
4) Proposed maximum aggregate value of transaction: $500,000
5) Total fee paid: $100.00
__________________
1Set forth the amount on which the filing fee is calculated and
state how it was determined.
Fee paid previously with 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:
CROWN ENERGY CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
October 21, 1997
TO THE SHAREHOLDERS OF CROWN ENERGY CORPORATION:
The 1997 Annual Meeting of Shareholders of Crown Energy
Corporation, a Utah corporation, will be held on Tuesday, October
21, 1997, at 2:30 p.m., Mountain Standard Time, in Salon I of the
Doubletree Hotel, 255 South West Temple, Salt Lake City, Utah, for
the following purposes:
1. To elect a Board of Directors, comprised of four persons, to
serve until the next Annual Meeting of Shareholders or until
their respective successors shall be duly elected or appointed.
2. To approve the appointment of Pritchett, Siler and Hardy as
the independent accountants for Crown Energy Corporation for
the 1997 fiscal year.
3. To approve the Crown Energy Corporation 1997 Long-Term
Incentive Compensation Plan.
4. To approve the transfer of the Company's oil sands reserves
and related technology to a Joint Venture with MCNIC Pipeline &
Processing Company.
Only shareholders of record at the close of business on September
5, 1997, the "Record Date," are entitled to notice of, and to vote
at, the Meeting. In accordance with Utah law, a list of the
Company's Shareholders entitled to vote at the 1997 Annual Meeting
will be available for examination at the offices of the Company, 215
South State Street, Suite 550, Salt Lake City, Utah 84111, for ten
business days prior to the Annual Meeting, between the hours of 9:00
a.m. and 5:00 p.m., and during the Annual Meeting.
All shareholders are cordially invited to attend the Meeting in
person.
Whether or not you expect to attend, please immediately sign and
complete the enclosed Proxy Designation and Instruction Card
("Proxy") and return it in the envelope provided so that your shares
may be represented at the Annual Meeting. No postage is required if
a proxy is mailed in the United States. If a majority of outstanding
shares are not present at the Meeting either in person or by proxy,
the Meeting must be adjourned without conducting business, and
additional expense will be incurred to resolicit the Shareholders
for a new Meeting date.
By Order of the Board of Directors
Date: October , 1997 Richard S. Rawdin, Secretary
CROWN ENERGY CORPORATION
215 South State, Suite 550
Salt Lake City, Utah 84111
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 21, 1997
GENERAL INFORMATION
This Proxy Statement is furnished to shareholders of Crown Energy
Corporation, a Utah corporation (the "Company"), in connection with
the solicitation by the Company of Proxies, in the enclosed form,
for use at the 1997 Annual Meeting of Shareholders of the Company
(the "Meeting") to be held on Tuesday, October 21, 1997, at 2:30
p.m., Mountain Standard Time, in Salon I of the Doubletree Hotel,
255 South West Temple, Salt Lake City, Utah. The purposes of the
Meeting are set forth in the accompanying Notice of Annual Meeting
of Shareholders.
A Proxy Designation and Instruction Card ("Proxy" "or Proxy Card")
for your use in connection with the Annual Meeting is enclosed. You
are requested to sign and date the Proxy Card and to return it in
the envelope provided.
Voting Securities
The Board of Directors has fixed the close of business on September
5, 1997 as the Record Date for determination of Shareholders
entitled to notice of and to vote at the 1997 Annual Meeting (the
"Record Date"). As of the Record Date, there were issued and
outstanding 11,572,141 shares of Common Stock. The holders of
record of the shares of the Company's Common Stock on the Record
Date entitled to be voted at the Annual Meeting are entitled to cast
one vote per share on each matter submitted to a vote at the Annual
Meeting.
Proxies
Shares of Common Stock which are entitled to be voted at the Annual
Meeting and which are represented by properly executed Proxies will
be voted in accordance with the instructions indicated on such
Proxies. If no instructions are indicated, such shares will be
voted FOR all of the proposals listed on the Notice of Annual
Meeting, including the election of each of the Director nominees
described herein; and, in the discretion of the designated Proxy
holders, as to any other matters which may properly come before the
Annual Meeting.
Any Shareholder signing and delivering a Proxy has the power to
revoke it at any time before the vote at the Annual Meeting (a) by
notifying the Secretary of the Company in writing prior to 2:30p.m.
M.S.T. on October 21, 1997, (b) by signing and dating a later Proxy
and submitting the new Proxy in time to be counted for the Annual
Meeting, or (c) by attending the Annual Meeting and voting contrary
to the submitted Proxy at the time votes are requested. Any written
notice revoking a Proxy should be sent to Crown Energy Corporation,
215 South State, Suite 550, Salt Lake City, Utah 84111, Attention:
Richard S. Rawdin, Secretary.
If a Shareholder wishes to designate someone other than the
designated persons named on the Proxy Card as his authorized agent
to vote at the 1997 Annual Meeting, you may do so by crossing out
the names of all of the designated persons printed on the Proxy Card
and by writing in the name of another person or persons (not more
than 2) to act as agent for the Shareholder in voting his shares.
Such a special designation signed by the Shareholder(s) must be
presented at the Annual Meeting by the person or persons you have
designated on the Proxy Card.
The cost of preparing, assembling and mailing this Proxy Statement
and related materials will be borne by the Company. The
solicitation of Proxies by the Directors is being made by mail, and
may also be made by agents of the Company, in person, by telephone,
or by mail. No additional compensation will be given to employees
or Directors for such solicitation. Custodians of securities held
for Shareholders of record (for example, banks, brokers, etc.) may
be paid their reasonable out-of-pocket expenses incurred in
forwarding Proxy Cards and this Proxy Statement to Shareholders.
This Proxy Statement and the enclosed form of Proxy are being
mailed to Shareholders beginning on October 3, 1997. Mailed
together with this Proxy Statement is a copy of the Company's Annual
Report to Shareholders for the year ended December 31, 1996.
Shareholders who do not receive a copy of the 1996 Annual Report
with this Proxy Statement, or who desire extra copies, should
contact the Company at (801) 537-5610.
Votes Required For Action to be Taken at the 1997 Annual Meeting
A majority of the share votes entitled to be cast at the Annual
Meeting (legal ownership of outstanding shares as of the Record
Date) must be present in person or by Proxy for a quorum to exist at
the Annual Meeting. Abstentions and broker non-votes are counted
"present" for determining the presence or absence of a quorum for
the transaction of business.
In the election of Directors, the four (4) nominees receiving the
highest number of votes cast in their favor will be elected as the
Board of Directors of the Company for the 1997-98 period until the
1998 Annual Shareholders' Meeting. Accordingly, abstentions and
broker non-votes will not affect the outcome of the election of
Directors.
As to proposal Numbers 2 and 3 for shareholder action at the Annual
Meeting, a majority of the shares present at the Annual Meeting,
once a quorum is established, must be voted in favor of the proposal
for it to be adopted as the action of the Shareholders.
Accordingly, abstentions and broker non-votes will have the effect
of a NO vote, and thus could affect the outcome.
A majority of the shares entitled to vote on Proposal 4 will be
required to approve such matter. In other words, of the 11,572,141
shares of Common Stock outstanding and entitled to vote as of the
Record Date, at least 5,786,071 shares must be voted in favor of
Proposal 4 for it to pass as the action of the Shareholders.
Accordingly, abstentions and broker non-votes will have the effect
of a NO vote, and thus could affect the outcome.
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Holders of shares of Common Stock are entitled to one vote at the
Annual Meeting for each share held of record at the Record Date.
LAST YEAR'S (August 30, 1996) ANNUAL MEETING
The 1996 Annual Meeting of the Shareholders was held on August 30,
1996 in Salt Lake City, Utah. There were 6,645,949 shares of Common
Stock represented at the 1996 Annual Meeting in person or by proxy,
which shares constituted a legal quorum. Each of the nominees to
the Board of Directors presented to the 1996 Annual Meeting was
voted upon separately, and each was elected by the affirmative vote
of more than 97% of the shares present and voting.
MANAGEMENT OF THE COMPANY
Board of Directors
The business of the Company is managed under the direction of its
Board of Directors. The Board has responsibility for establishing
broad corporate policies, for the overall performance of the Company
and for the election and compensation of officers of the Company.
The Executive Officers of the Company are in charge of the day to
day affairs of the Company.
The Board of Directors meets regularly during the year to review
significant developments affecting the Company and to act on matters
requiring Board approval. It also holds special meetings when one
or more important matters requires Board action between scheduled
meetings.
As disclosed to the Company, the Board of Directors as presently
constituted beneficially own as a group 5,311,103 shares, or
approximately 39.7% of the Company's outstanding Common Stock as of
the Record Date, including 1,794,444 option shares exercisable
within 60 days of the Record Date but which were unexercised as of
the Record Date.
The Board of Directors held three (3) meetings during 1996. All
Directors attended all of the Board.
As presently constituted, the Board of Directors has no functioning
committees taking any of the responsibilities of the Board.
Executive Officers
Set forth on Table 1, below, are the names, ages, primary areas of
responsibility, and economic and beneficial stock ownership (as of
December 31, 1996) of the Company's Executive Officers. Executive
Officers serve at the pleasure of the Board of Directors, although
as disclosed later in this Proxy Statement, all of the Executive
Officers also are currently and proposed to continue as Directors of
the Company.
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Table 1
Executive Officers of Crown Energy Corporation
James A. Middleton, 61, is Chief Executive Officer of the Company
and Chairman of the Board of Directors. At the Record Date, Mr.
Middleton was the beneficial owner of 355,000 shares of Common
Stock, including 300,000 option shares exercisable within 60 days,
but not yet exercised.
Jay Mealey, 41, is President and Chief Operating Officer of the
Company, and is Director or the Company. At the Record Date, Mr.
Mealey beneficially owned 2,200199 shares of Common Stock, including
548,148 option shares exercisable within 60 days, but not yet
exercised. Also includes 110,000 shares gifted to Glenn Mealey, as
custodian for Mealey's children, Cameron and Andrew Mealey. Mr.
Mealey expressly disclaims beneficial ownership of the foregoing
gifted shares.
Richard S. Rawdin, 39, is Vice President and Chief Financial and
Accounting Officer of the Company. At the Record Date, Mr. Rawdin
beneficially owned 594,308 shares of Common Stock, including 398,148
option shares exercisable within 60 days, but not yet exercised.
Based on their disclosed share holdings at the Record Date, all of
the Company's Executive Officers as a group (three (3) persons,
beneficially owned a total of 3,149,507 shares, or approximately
24.65%, of the Company's Common Stock (including 960,000 shares
subject to unexercised options exercisable within 60 days), all
percentages calculated as of the Record Date.
COMPENSATION OF MANAGEMENT
Director Compensation
The Company does not compensate its Directors for service in that
capacity. Those Directors who are also Executive Officers are paid
compensation for that service. Directors who are not Executive
Officers serve without compensation, other than reimbursement of
expenses, but may be hired by the Company as professional advisors
and paid in that capacity.
Summary of Compensation to Certain Executive Officers
Set out in Table 2, below, is a Summary Compensation Table showing
the various elements of compensation earned during 1996 and during
the previous two years by the Company's Chief Executive Officer. No
Executive Officer was compensated at $100,000 or more during any of
the prior three years. The information on other Executive Officers
was calculated for each year was determined for this purpose on the
same basis as for the Chief Executive Officer):
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Table 2
Summary Compensation Table
Annual Long-Term
Compensation Compensation
Awards
Name and Year Salary Bonus1 Restricted Options/ All Other
Principal Position ($) ($) Stock SARs2 Compensation
Award(s) (#) ($)
($)
______________________________________________________________________
James A. 1996 -0- -0- -0- 300,000 -0-
Middleton, 1995 -0- -0- -0- -0- -0-
Chairman and 1994 -0- -0- -0- -0- -0-
Chief Executive
Officer of the
Company
_____________________________________________________________________
1Bonuses are listed in the year earned and normally accrued,
although such bonuses may be paid in the following year. Stock
bonuses are valued at the market value on the date of receipt.
2The Company has never issued SARs.
Stock Options and Similar Awards To Management.
Table 3 provides information concerning the stock options and
similar awards provided to the Executive Officers listed in Table 2
during 1996. There were no option exercises by these listed
Executive Officers during 1996.
Table 3
Option Grants To Certain Executive Officers During 1996
Individual Grants
% of Total
Options/SARS Options/SARS Exercise Potential
Granted Granted to or Base Expiration Realizable
Name (#)1 All Employees Price Date Value3
n Fiscal Year ($Sh)2 5% 10%
_________________________________________________________________________
James A. 300,000 100% $0.66 01/29/00 $54,000 $120,000
Middleton $120,000
__________________________________________________________________________
1 The Company has never issued SARs.
2 The 1996 Options were awarded by the Board of Directors on
February 2, 1996. The exercise price is [the "last sale" price
quotation for the Company's common stock on the last business
day prior to the date of grant.]
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Certain Relationships and Related Transactions
During the year ended December 31, 1996, the Company executed
promissory notes payable to Mr. Thomas W. Bachtell, Esq., a
Director of the Company, for loans to the Company including
accrued interest and salary payable in the amount of $63,051 and
bearing interest at the rate of 9% per annum replacing prior
promissory notes. The foregoing notes mature on July 1, 1998 (or
earlier upon the Company's receipt of at least $2,000,000 as a
result of any offering of its securities).
The Company also executed a promissory note payable to Mr. Jay
Mealey, President, Chief Operating Officer, Treasurer and a
Director of the Company for amounts loaned to the Company in the
amount of $58,196 and bearing interest at a rate of 9% per annum
replacing a prior promissory note. The foregoing note matures on
July 1, 1998 (or earlier upon the Company's receipt of at least
$2,000,000 as a result of an offering of its securities).
Other Transactions
During 1996, the Company incurred approximately $43,917 in legal
fees to Pruitt, Gushee & Bachtell, a law firm of which Mr. Thomas
W. Bachtell, a Director of the Company, is a shareholder and
director.
PRINCIPAL SHAREHOLDERS
The Messrs. Mealey and Bachtell are the only persons known to
the Company to be the beneficial owner (within the meaning of
applicable governmental regulations) of five percent (5%) or more
of any class of the Company's voting securities as of the Record
Date. Mr. Mealey's share ownership is set out under the heading
"EXECUTIVE OFFICERS OF THE COMPANY," above. At the Record Date,
Mr. Bachtell's beneficial share ownership consisted of 2,013,448
shares, including 400,000 option shares exercisable within 60
days, but not yet exercised, and 5,000 shares held as trustee of
the Nielson Family Trust - their addresses are set out under the
heading "ELECTION OF DIRECTORS," below.:
PROPOSALS FOR SHAREHOLDER ACTION
Item No. 1: Election of Directors
A board of four directors is to be elected at the Meeting, to
hold office until the next Annual Meeting of Shareholders and
until their respective successors are duly elected and qualified.
Unless otherwise instructed, the proxy holders will vote all
Proxies received by them FOR the election of the four nominees
named below, who are the nominees of the current Board of
Directors, all of whom are shareholders of the Company.
Nominations for election as a Director also will be accepted from
the floor by any Shareholder at the 1997 Annual Meeting. While
no formal procedure exists with respect to nominations for
Director outside of the Annual Meeting, Shareholders are free to
write to the President of the Company with any suggestions
concerning nominations to the Board of Directors.
Individuals receiving the most votes will be elected. All
nominees are present members of the Board of Directors. All duly
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signed and delivered proxies will be voted FOR the election of
ALL of the nominees listed below in the absence of contrary
direction. The Directors know of no reason why any nominee
listed below may be unable to serve as a Director. If any
nominee is unable to serve, the shares present at the 1997 Annual
Meeting through proxies will be voted FOR the election of such
other person(s) as the Board of Directors may nominate at the
Annual Meeting, or the current Directors may conclude to reduce
the number of Directors to be elected.
All of the nominees were elected to their present term of office
by a vote of the Shareholders at the 1996 Annual Meeting.
Nominees
There is set forth below as to each of the four (4) Board
nominees for election as a Director of the Company, his/her age,
the year he/she first became a Director of the Company, his/her
principal occupation, his/her business experience during the past
five years, other material officerships or directorships in other
companies held at this time. The beneficial stock ownership of
the nominees in the Company's common stock as of the Record Date
is set out under the heading "EXECUTIVE OFFICERS OF THE COMPANY,"
above.
James A. Middleton, 61, is Chairman and Chief Executive Officer
of the Company. Previously Mr. Middleton was President of ARDCO
Oil and Gas Company as well as Executive Vice President and a
member of the Board of Directors of Atlantic Richfield Company.
He remains on the Board of Directors of ARDCO Chemical Company
and is Executive Vice President - Emeritus of ARDCO. Mr.
Middleton also serves on the Board of Directors of Texas
Utilities Company as well as many community and civic
organizations. Mr. Middleton joined the Board of Directors of
Monterey Resources, Inc. in July, 1997.
Jay Mealey, 41, has been the President, Treasurer and a Director
of the Company since 1991. Mr. Mealey has been actively involved
in the oil and gas exploration and production business since
1978. Prior to employment with the Company, he was Vice
President of Ambra Oil and Gas Company and worked for Belco
Petroleum Corporation and Conoco, Inc. in their exploration
divisions. Mr. Mealey is responsible for managing the day to day
operations of the Company. He is a full-time employee and it is
anticipated that he will devote one hundred percent of his time
to the Company.
Richard S. Rawdin, 39, is Vice President and the Chief Financial
and Accounting Officer of the Company. Prior to joining the
Company in 1991, he was Controller and Vice President of Finance
for Kerry Petroleum Company, Inc. where he was responsible for
directing the financial and accounting affairs of the Company,
its two subsidiaries and six partnerships. Prior to that, he was
a Senior Consultant with Deloitte and Touche. Mr. Rawdin is a
full-time employee of the Company and it is anticipated that he
will devote one-hundred percent of his time to the Company.
Thomas W. Bachtell, 46, is a practicing natural resources
attorney and President of the law firm of Pruitt, Gushee &
Bachtell. Mr. Bachtell's law practice focuses on advising and
assisting oil, gas and mineral companies in their exploration and
development activities in the Rocky Mountain States.
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The Board of Directors Recommends a Vote FOR all four nominees.
Item No. 2: Approval of the Board's Selection of Auditors
At the Annual Meeting, the Shareholders will be asked to approve
the Board's selection of Pritchett, Siler and Hardy as the
independent public accountants to audit the financial statements
of the Company for the 1997 fiscal year. Pritchett, Siler and
Hardy has audited the financial statements of the Company for the
last seven fiscal years. The Company does not anticipate that
any representatives of Pritchett, Siler & Hardy will be present
at the Meeting.
Unless a contrary choice is specified, Proxies received by the
Company pursuant to this solicitation will be voted FOR the
appointment of Pritchett, Siler and Hardy as the independent
public accountants of the Company for the 1997 fiscal year.
The Board of Directors Recommends a Vote FOR the appointment
of Pritchett, Siler and Hardy as the independent public
accountants of the Company for the 1997 fiscal year.
Item No. 3: Approval of the Crown Energy Corporation Long Term
Equity-Based Incentive Plan
The Board of Directors has adopted the Crown Energy Corporation
Long-Term Equity-Based Incentive Plan ("Plan"), subject to
approval by the Shareholders at the Annual Meeting. (A copy of
the Plan is attached to this Proxy Statement as Appendix "A".
The information in the following summary statement is limited in
its scope. Please refer to the Plan itself for a fuller
explanation of its terms. If any conflict is seen between this
summary statement and the Plan itself, the Plan will govern all
such conflicts.) The purpose of the Plan is to assist the
Company in attracting, retaining and motivating executive
officers and other key employees essential to the success of the
Company through performance-related incentives linked to long-
range performance goals. Performance goals under the Plan may be
based on individual performance of the particular employee and/or
include criteria such as absolute or relative increases in total
shareholder return, revenues, sales, net income, or net worth of
the Company, any of its subsidiaries, divisions, business units
or other areas of the Company, all as the Board may determine.
The Board believes that the Plan is necessary in order for the
Company to attract and retain qualified executive officers
capable of directing the Company through an ever-changing and
increasingly competitive business environment, and that the Plan
will more closely align Executive Officer incentives and total
compensation with the economic interests of the Shareholders.
The Board also believes that the Plan is essential for the
Company to maintain for its key employees an appropriate and
competitive balance of base salaries, annual incentives and long-
term incentives.
The Plan provides for discretionary awards ("Awards") of
nonqualified stock options. All Awards will be made in, or based
on the value of, the Company's Common Stock at the date of award
grant.
The Plan will be administered by the Board of Directors. The
selection of key employees who are to receive Awards under the
Plan, as well as all terms, conditions, performance criteria and
restrictions applicable to each Award will be determined by the
Board in its discretion.
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The maximum number of shares of Common Stock for which Awards
may be granted under the Plan is 2,000,000 subject to adjustment
in the event of a merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, or other similar
event. Shares subject to previously canceled, lapsed or
forfeited Awards may be reissued under the Plan. The shares to be
issued under the Plan may consist of authorized but unissued
shares or shares purchased in the open market.
Regular, full-time employees of the Company and its subsidiaries
or affiliates who are designated by the Board will be eligible to
participate in, and receive Awards under, the Plan. All of the
executive officers of the Company will be eligible to participate
in the Plan, and it is intended that all of them will
participate.
Stock Options. The number of shares and other terms of each
grant will be determined by the Board. The price payable upon
exercise of an option may not be less than 100% of the fair
market value of the Common Stock at the time of the grant, and
may be paid in cash or with shares of Common Stock. Under the
terms of the Plan, options may not be exercised until at least
six months after they are granted, except in the case of the
death or disability of the participant or a change in control of
the Company. Options may remain outstanding for no more than ten
years. During the lifetime of the employee receiving the Option
(the "Optionee"), the Option may be exercisable only by the
Optionee and shall not be assignable or transferrable. Each
Option will become exercisable in such installments, at such time
or times, and is subject to such conditions, as the Board, in its
discretion, may determine at or before the time the Option is
granted. The Board may provide for the accelerated
exercisability of an Option in the event of the death, disability
or retirement of the Optionee and may provide for expiration of
the Option prior to the end of its term in the event of the
termination of the Optionee's employment.
In the event of a change in control of the Company, all
outstanding stock options shall immediately become fully vested,
and all restrictions on all outstanding Awards shall be deemed to
have been fully satisfied, unless the transaction or event
constituting the change in control was approved in advance by a
majority of the Company's Board of Directors. Under the terms of
the Plan, a change in control shall be deemed to have occurred
if: (i) any person becomes the beneficial owner of 20% excluding
those shares acquired by Enron Capital & Trade Resources Corp.
per negotiations with the Company's Board of Directors or more of
the Company's voting securities; (ii) the Company is involved in
a merger, acquisition or similar transaction pursuant to which
the Company's directors immediately before the transaction ceases
to constitute a majority of the Company's directors after the
transaction; or (iii) the Company is involved in a transaction
pursuant to which it is not the surviving corporation, its Common
Stock is exchanged for, or converted into securities of another
entity, it becomes a subsidiary of another entity, or 50% or more
of its assets or business is sold to another entity.
The Plan may be amended, modified, suspended or terminated by
the Board of Directors at any time. No amendment shall be
effective prior to approval of the shareholders to the extent
such approval is necessary to comply with any legal requirement,
including the requirement for the performance based compensation
exception under Internal Revenue Code Section 162(m). If not
earlier terminated, the Plan shall terminate on December 31,
2006.
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Federal Income Tax Consequences
The grant of an option under the Plan will not cause the
recognition of ordinary income by the participant or entitle the
Company to a compensation deduction for federal income tax
purposes because, under existing Treasury regulations, such an
option does not have a "readily ascertainable" fair market value.
The exercise of an option which is not subject to any
restrictions on the participant's ownership or disposition
thereof will cause the recognition of taxable compensation income
in an amount equal to the difference between the exercise price
and the fair market value on the exercise date of the shares
purchased by the participant. The Company will be able to take a
corresponding tax deduction for compensation expense in an amount
equal to the compensation recognized by the participant.
If restrictions apply to the shares acquired upon exercise of an
option, the time of recognition of taxable compensation income
and the amount thereof, and the availability of a corresponding
tax deduction to the Company, will be determined when such
restrictions cease to apply.
The Board of Directors has previously adopted the Plan, subject
to shareholder approval at the 1997 Annual Meeting. The Board
believes that the approval and adoption of the Plan will advance
the interests of the Company and its shareholders by enabling the
Company to attract and retain high caliber, motivated executive
officers and other key employees by offering compensation
incentives which provide such officers and employees with a sense
of proprietorship through stock ownership.
Shareholder Approval; Effect of Non-Approval.
Approval of the Plan requires that a majority of the shares
present at the Annual Meeting vote in favor of the Plan at the
Annual Meeting exceed the number of votes cast in opposition to
the Plan. Approval of the Plan will not result directly in the
grant of any Awards to Executive Officers, key employees of the
Company. Shareholder approval will, however, allow the Company
to use the plan as it was intended and approved by the Directors:
as an incentive to excellent performance, even if the value of
Awards may total in excess of $1,000,000 over time. If the
Shareholders fail to approve the Plan in this vote, the Company
will continue to use the Plan and will grant future Awards under
it. The only result of Shareholder non-approval at this time is
that the Company may be denied a tax deduction for compensation
to an executive officer to the extent that compensation,
including option exercises under the Plan, exceeds $1,000,000.
Certain Interests of Directors
In considering the recommendation of the Board of Directors with
respect to the Plan, Shareholders should be aware that the
members of the Board of Directors have certain interests which
may present them with conflicts of interest in connection with
such proposal. All Directors would be eligible to participate in
the Plan.
The Board of Directors believes that the Plan is in the best
interests of the Company and its Shareholders, and therefore,
unanimously recommends a vote FOR the Plan. In considering the
foregoing recommendation of the Board of Directors, Shareholders
should be aware that the current members of the Board of
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Directors own, in the aggregate, approximately 38.13% of the
shares of the Company's issued and outstanding Common Stock,
including option shares exercisable within 60 days of the Record
Date.
The Board of Directors Recommends a Vote FOR Approval of the
Crown Energy Equity-Based Long-Term Incentive Plan.
Item No. 4: Approval of the Transfer of the Company's Oil Sands
Reserves and Related Technology to A Joint Venture with
MCNIC Pipeline & Processing Company
General Background of the Joint Venture Proposal
The Company has been actively seeking opportunities to develop
and profit from its large holdings of oil sands at Asphalt Ridge
in Eastern Utah, particularly as the revenue production abilities
of the Company's other assets declines. As part of its ongoing
efforts to finance the Asphalt Ridge project, the Company began
discussions with representatives of MCN Energy Group, Inc., a
large diversified energy holding company with approximately $4
billion in assets ("MCN"). These discussions produced an
agreement in principle for MCN to provide financial and other
resources to the Company to assist in the commercial exploitation
of the Company's oil sands reserves.
Further discussions produced a joint venture concept whereby the
Company's Crown Asphalt subsidiary, the legal owner of the oil
sands reserves and certain proprietary licenses to oil sands
technology ("Crown"), would form a new limited liability company
(the "Joint Venture") with MCN's MCNIC Pipeline & Processing Inc.
subsidiary ("MCNIC"). The deal calls for Crown to contribute
some cash equipment, the oil sands reserves, and the technology
licenses to the new Joint Venture, and for MCNIC to contribute
cash. In return both Crown and MCNIC would be equity members in
the Joint Venture, with the relative percentage of their
ownerships determined by the what each one ultimately puts into
the Joint Venture and, to some extent, how the Joint Venture
performs economically.
The following summary describes the Joint Venture in more
detail, focusing on its impact and potential for the Company.
The Company believes that the Joint Venture offers significant
potential economic benefits to the Company, including the
opportunity for profitable exploitation of its oil sands reserves
that are currently producing no revenue because the Company has
insufficient funds to develop them. For these reasons, the Board
of Directors has approved the Joint Venture unanimously, and
recommends that the Shareholders also vote to approve the Joint
Venture.
Shareholders who disagree with the Joint Venture are entitled to
perfect their Dissenters Rights under Utah law. See "RIGHTS OF
DISSENTING SHAREHOLDERS," below.
Because the Joint Venture is only recently formed, with limited
assets, it currently has no meaningful financial information to
provide to the shareholders of the Company other than as set
forth textually below. Detailed financial and other information
concerning the Company's oil sands reserves and the recent
financial results of the Company are contained in the Company's
Annual Report to Shareholders and in the Company's most recent
quarterly report on Form 10-Q, both of which accompany this Proxy
Statement. Shareholders who do not receive an Annual Report and
11
a Form 10-Q for the June 30, 1997 quarter should contact the
Company and a set will be sent out to you. On September 2, 1997,
the date preceding the public announcement of the transaction,
the Company's shares traded on the NASD Electronic Bulletin Board
at bid and ask prices of $.75-$.81.
The Recommendation of the Board of Directors
The Board of Directors believes that the Joint Venture
represents a significant positive event in the Company's
development, and that the Joint Venture is a preferable course of
action to its other alternatives because the Joint Venture
provides the Company with the opportunity to develop its
considerable oil sands reserves in coordination with a
financially solid natural resource industry participant. The
Joint Venture provides for MCNIC to contribute 75% of the costs
of the Initial Plant and Crown to contribute all of its oil sands
reserves, certain equipment and cash equal to the 25% of the
total costs.
The Board of Directors unanimously recommends that the Company's
shareholders vote FOR the Joint Venture.
The Joint Venture will complete up to $400,000 of detailed
engineering and the Board has agreed to participate for its
$100,000 (25%) share, but will wait for the Shareholder vote to
proceed further with the Joint Venture. If the Shareholders do
not approve the transfer of the oil sands reserves to the Joint
Venture, the Company will not be obligated to reimburse MCNIC for
its initial capital contribution of $300,000, but will have lost
the Company's $100,000 contribution. (See below)
In coming to its decision to recommend the Joint Venture to the
Shareholders, the Board of Directors considered a number of
factors, including without limitation, (i) MCNIC's financial
resources and reputation in the natural resource industry; (ii)
its other financing alternatives; and (iii) the terms and
conditions of the Joint Venture agreement, including the required
capital contributions from both Crown and MCNIC, the ability of
Crown to participate meaningfully in the management of the Joint
Venture. The Board of Directors did not assign relative weights
to any specific factor in reaching its recommendation.
The Joint Venture
Various written agreements create and govern the Joint Venture.
These documents are not attached to this Proxy Statement because
of their size and complexity. The Joint Venture's Operating
Agreement will be filed with the Company's future public filings
and will be available publicly at that time.
Limited Liability Company Status
The Joint Venture is a new Utah limited liability company called
"Crown Asphalt Ridge, L.L.C.", and Crown and MCNIC are the
members of the Joint Venture. Crown and MCNIC will be entitled
to the protections and benefits afforded by the Utah Limited
Liability Company Act (the "Act"). Under the Act, members of
limited liability companies are afforded limited liability
protection similar to that afforded to shareholders of a
corporation in that the members' risk from the operation of the
enterprise is limited to the loss of the member's investment
without recourse to the members' other assets. Accordingly,
except as described below in connection with the Company's
12
Guaranty of Crown's obligations, neither the Company nor Crown
will face liability from the operation of the Joint Venture which
exceeds the value of the oil sands properties and other capital
contributions made to the Joint Venture.
Sharing In Profits and Losses of the Joint Venture
MCNIC and Crown will initially own shares of 75% and 25%,
respectively, in the profits, losses and obligations of the Joint
Venture. Once the first processing plant is built by the Joint
Venture and the economic operations of the Joint Venture are
successful to the extent of paying out profits to MCNIC equal to
115% of its investment in the Joint Venture, excluding tax
benefits, Crown's interest in the Joint Venture will increase to
50%. Thereafter the Joint Venture may build other plants to
further develop the oil sands reserves. These plants will
require additional capital contributions from Crown and MCNIC,
which are described in more detail below. Crown or the Company
may participate up to 50% in additional facilities and there are
provisions for the Company to retain an interest in these
facilities after the recoupment of certain amounts in the event
the Company does not participate in its costs of such additional
facilities, asprovided in the "Back-In Option.
Required Capital Contributions from Crown and MCNIC
The Joint Venture will proceed in phases, in order to shepherd
the risks and resources of the Members. Each phase calls for the
Members to contribute new capital to move the Joint Venture
through the next phase. The first phase is now underway, this
phase calls for detailed engineering and verification of the oil
sands reserves of the Company. Approval by the Shareholders of
the Company for the transfer of the oil sands reserves and the
other Company property to the Joint Venture is part of this first
phase. MCNIC and Crown have already agreed to contributed
capital to the Joint Venture to achieve the first phase of
$300,000 and $100,000 respectively. This first phase is
scheduled to be completed by November 1, 1997, subject to the
Shareholders approval.
Based on the results of the first phase, either Crown or MCNIC
may choose to abandon the Joint Venture. If MCNIC elects not to
proceed, Crown retains all of the oil sands reserves and its
processing technology, but Crown may not recover its $100,000
initial contribution. If Crown elects not to proceed but MCNIC
wishes to do so, Crown must contribute to the Joint Venture a
sublicense of its License of proprietary oil sands extraction
technology from Park Guymon Enterprises and the oil sands
reserves, subject to Shareholder approval at the Annual Meeting,
and also subject to Crown's the Back-In Option, defined below.
Assuming Crown and MCNIC both elect to proceed with the
construction of the first processing plant, Crown must contribute
the following to the Joint Venture:
1. Crown's rights as lessee under certain equipment leases on
mining equipment with a fair market value of up to $3.5
million dollars (MCNIC has agreed that this contribution
will be accepted in lieu of $3.5 million in cash);
2. A sublicense of Crown's License of proprietary oil sands
refining technology from Park Guymon Enterprises;
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3. The oil sands reserves. (These properties are initially
valued for the first facility at $500,000); and
4. An amount of cash, if any, needed to bring Crown 's new
capital contributions up to 25% capital to construct the
Initial Plant, giving full credit to the $3.5 million of
equipment leases and the $500,000 of property rights in 1
and 3 above.
MCNIC will fund 75% of the amounts required by the Joint Venture
to construct the Initial Plant and to operate the Joint Venture.
It is presently estimated that the first Plant (the "Initial
Plant") will cost $15 million to construct, but the foregoing
number may be modified during the conducting of detailed
engineering.
Both Members may make such additional contributions as may be
required or agreed in the course of building the Initial Plant.
Penalties for Failure to Contribute Capital as Required
In the event either Crown or MCNIC (the "Delinquent Member")
fails to contribute as required, the Joint Venture or the other
Member (the "Non-Defaulting Member") may exercise several
specified remedies provided that under no circumstances may the
Delinquent Member be liable for more than the obligation owed.
The remedies which may be exercised by the Non-Defaulting Member
include, (i) legal action to collect the payment to the Joint
Venture by the Delinquent Member, together with interest thereon;
and (ii) the election by Non-Defaulting Member to advance the
Delinquent Member's contribution to the Joint Venture and
designate whether such advance is to be treated as a Capital
Contribution by the Non-Defaulting Member or as a loan repayable
on demand. In the event that the Non-Defaulting Member elects to
treat its advance as a Capital Contribution to the Joint Venture,
the Delinquent Member's interest in the Joint Venture will be
reduced by the percentage which the unpaid contribution bears to
the total Capital Contributions of all of the Members, including
the contribution made by the Non-Defaulting Member.
In order to secure any loan made by the Non-Defaulting Member to
the Delinquent Member, the Delinquent Member will also be
required to grant to the Joint Venture and to the Non-Defaulting
Member a security interest in the Delinquent Member's interests
in the Joint Venture.
Conditions Precedent to the Requirements to Contribute Capital
to the Joint Venture; Representations and Warranties
MCNIC and Crown have made representations, warranties and
covenants to each other in the Joint Venture agreements, and
these have been reviewed and approved by the management and legal
counsel of both Members. The obligations of both Members to
contribute capital to the Joint Venture are subject to the
satisfaction of certain conditions precedent, including the prior
performance of required acts by the other party, the truthfulness
of the representations and warranties made by the Members to each
other in the Joint Venture agreements, and the ongoing legal and
practical ability of the Joint Venture to perform as intended by
the Members.
Once certain time periods have passed and/or certain events have
occurred, the failure to make required capital contributions by a
Member may have different consequences.
14
Subsequent Plants
Under the Joint Venture Operating Agreement, the Members may
construct up to two subsequent plants (the "Subsequent Plants"),
similar to the Initial Plant if the economics of the Joint
Venture's oil sands processing business so permit. In summary, a
Subsequent Plant may be constructed if certain economic returns
(approximately 18% on 50% of its Capital Contributions to the
Joint Venture or any Successor Joint Venture during any 12 month
period) have been experienced by MCNIC from the first processing
plant and if the Members believe or are independently advised
that a sufficient market exists to allow for the operation of the
Subsequent Plant without damaging the competitive position or
returns of the earlier already built plants. The agreement of
MCNIC and Crown is that any Subsequent Plant will be held and
operated by a separate legal entity (a "Successor Joint Venture")
formed by the Members with similar provisions as the Joint
Venture entity described above. Crown may elect to participate
in either of the Subsequent Plants and may obtain, at its option,
between 10% and 50% of the interests in the newly formed entity.
A portion of Crown's obligations to contribute to the Successor
Joint Venture may be satisfied through the value of the
contributed properties which Crown may be credited with, as
described below.
Following the determination by both Members or one Member to
proceed with the construction of a Subsequent Plant, the Joint
Venture will convey to the Successor Joint Venture sufficient oil
sands reserves or other property and water rights to enable it to
sustain operations in accordance with the applicable projections
and market study. If, during the twelve months prior to the sale
of products from the first Subsequent Plant, MCNIC has realized a
return of approximately 30% on 50% of its Capital Contributions
to the Joint Venture, Crown will be credited with a value for
these reserves and properties equal to $.10 per barrel for the
products estimated to be produced from the plant over a 20 year
period.
If Crown elects not to proceed with any Subsequent Plant, and to
not make the needed capital contributions to build and operate
the Subsequent Plant, Crown will have a reduced interest in the
Subsequent Plant (but will still be credited with an interest
equal to the value of the contributed properties if the requisite
return is achieved), subject to an escalation under the Back-In
Option.
Whether or not Crown elects to proceed with either Subsequent
Plant, if the Subsequent Plants reach certain levels of economic
success (approximately 115% of its investment without giving
effect to any tax benefits), Crown will receive an increased
interest of 10% in the Subsequent Plant as a result of its oil
sands properties and technology being used by the Subsequent
Plant(s).
Management of the Joint Venture; Major Decisions
The Joint Venture is governed by a Management Committee
consisting of five Managers. Initially, MCNIC is entitled to
appoint four Managers and Crown, one Manager. MCNIC's Manager
appointees have yet to be named. Crown's Manager appointee is
Mr. Jay Mealey, the Company's President. A Chairman of the
Management Committee is elected by a majority vote of the
Managers. Managers may be removed or replaced from time to time
by the Member which appointed them.
When the first plant is completed both Crown and MCNIC will be
entitled to appoint one Manager for each 20% of Joint Venture
15
interest held by that Member (rounded to the nearest 20% level),
provided, that MCNIC and Crown shall each be entitled to at least
one Manager at all times that they are Members of the Joint
Venture. The size of the Management Committee may be increased
to six Managers if the foregoing calculation requires it.
In carrying out their duties, each Manager is required to manage
the Joint Venture in a good faith manner and with such care as an
ordinarily prudent person in a like position would exercise under
similar circumstances. The Managers shall not be liable to the
Joint Venture or to any Member for their good faith actions or
failures to act or for any errors of judgment or for any acts or
omissions believed in good faith to be within the scope of their
authority. Further, subject to the limitations of the Act, the
Joint Venture will indemnify and hold harmless each of the
Managers and any of the Joint Venture's officers, as described
below, from and against any third party claims arising as a
result of any good faith act or omission of any such Manager or
officer. The Joint Venture's obligation to indemnify the
foregoing persons, however, is limited to the extent of the net
assets of the Joint Venture.
The Managers may designate one or more persons to act as
officers of the Joint Venture. Such officers may bear the titles
and responsibilities typically associated with a business
corporation formed under the Utah Revised Business Corporation
Act, such as "President" or "Managing Director", etc. The
Managers shall serve without receiving any fee or salary from the
Joint Venture, but shall be entitled to reimbursement by the
Joint Venture for any reasonable out-of-pocket costs incurred on
the Joint Venture's behalf.
Management decisions shall generally be made through a majority
vote of the Managers. However, the certain "Major Decisions"
such as: (i) the approval of the detailed engineering for the
first plant; (ii) the approval of, or substantial amendment to,
the annual operating plan (the "Annual Operating Plan"); and
(iii) calls for additional Capital Contributions (except for
calls contemplated by the EPC Contract and those required to
maintain the Joint Venture in emergencies); most distributions to
the Members, require unanimous approval of the Managers.
The Joint Venture's operations shall be conducted each year
pursuant to an Annual Operating Plan. The Annual Operating Plan
shall address all aspects of the Joint Venture's operations for
the coming year, including budgeting for operations, the mining
of oil sands products and the marketing of those products. In
the event the Management Committee is unable to unanimously
approve an Annual Operating Plan for any given calendar year, a
majority of the Managers shall have the authority to continue to
maintain the Joint Venture's operations at levels comparable to
those approved under the last Annual Operating Plan.
Additional Opportunities Within the Project Area and Area of
Mutual Interest
The Joint Venture may elect to pursue Additional Opportunities
in its Project Area which are brought to its attention by one of
its Members. Should the Joint Venture elect to pursue such an
Additional Opportunity, it may do so either through the Joint
Venture entity or by forming a new company containing terms and
provisions substantially similar to those of the Joint Venture.
In the event that the Joint Venture does proceed with any
Additional Opportunity, Crown shall have the right, but not the
obligation, to obtain an equity interest in each such Additional
Opportunity of no less than 10% and no greater than 50% (with
16
MCNIC obtaining the remaining interest). If the Management
Committee determines not to proceed with the Additional
Opportunity, any Member of the Joint Venture may then do so
alone, subject to the Back-In Option, discussed below, of the
nonparticipating Member.
If either Member desires to develop any interests in real
property, fixtures or improvements within the State of Utah
relating to the processing of oil sands, bitumen, asphaltum or
other minerals or mineral resources into asphalt, performance
grade asphalt, synthetic crude oil, diesel fuel, or any other
product produced using the intellectual property covered by the
Crown Sublicense or any derivation thereof (an "AMI
Opportunity"), the AMI Opportunity must first be offered to the
Joint Venture. Crown or the Company, shall then have the option,
but not the obligation, of acquiring (i) up to a 50% equity
interest if the AMI Opportunity relates to, or is designed for,
the production and sale of asphalt or performance grade asphalt;
or, (ii) up to a 66b% equity interest if the AMI Opportunity
relates to the production of synthetic crude oil, diesel fuel or
any other similar products.
If the Joint Venture elects not to proceed with the AMI
Opportunity, the Member who brought the opportunity to the Joint
Venture may proceed alone and the nonparticipating Member shall
have no further interest in the activity covered by such
opportunity. Except as limited in the discussion above, each
Member of the Joint Venture shall have the right to independently
engage in any business activities except that MCNIC shall not be
entitled to use Crown's technology provided to the Joint Venture
in connection with such activities.
The Back-In Option
The Back-in Option is a means by which the Member which
initially elects not to participate in a plant may subsequently
participate at a later date upon favorable terms. The Back-in
Option shall apply if:
(i)Crown elects not to proceed with construction of the Initial
Plant following the completion of the Detailed Engineering
(and MCNIC elects to proceed);
(ii)either Member elects not to participate in the construction
of a Subsequent Plant; or
(iii) either Member elects not to participate in an Additional
Opportunity.
In the case of Crown's election not to participate in the Initial
Plant, Crown shall be entitled to receive a 50% interest in such
Plant following MCNIC's achievement of a 200% payout, as defined
below. In the case of any Subsequent Plants or Additional
Opportunity, Crown shall be entitled to a 60% interest in the
particular plant or opportunity if it is the non-participating
Member, and MCNIC shall be entitled to a 40% interest if it is
the non-participating Member, after the participating Member has
achieved a 200% payout of the costs of the respective facility.
Distributions; Allocations of Profits and Losses
The Management Committee shall cause the Joint Venture to
distribute Available Cash, as defined within the Operating
Agreement, to the Members quarterly, within 30 days following the
end of each quarter. Distributions will be made in connection
with the respective capital account balances after taking into
17
account all allocations for profits and losses. Except as
expressly stated within the Operating Agreement, allocations for
profits and losses shall be made to the Members in accordance
with their respective interests in the Joint Venture.
Restrictions on Transfers of Interests; "Tag Along Rights"
Additional Members may not be admitted to the Joint Venture
without the prior written consent of all Members. In addition,
in the event that a Member (the "Soliciting Member") proposes to
sell or otherwise dispose of all or any part of its membership
interest in the Joint Venture, it must first notify the other
Member (the "Notified Member"), of such intent. The Notified
Member shall then have the option to present the Soliciting
Member with an offer to purchase its interest. The Soliciting
Member shall, in turn, have the option of accepting the Notified
Member's offer or of selling its interest to a third party for a
higher price.
Following the receipt by a Member of an offer to purchase its
interest in the Joint Venture from a third party, the remaining
Member may require the third party purchaser to also purchase a
proportionate share of its interests on identical terms. If
Crown is the non-transferring Member, the notice pursuant to
which the "Tag Along Rights" are triggered must also expressly
indicate whether the third party intends to remove Crown as the
Joint Venture operator under the Management Agreement, described
below.
Dissolution and Termination
The Joint Venture may be dissolved upon:
(i)the consent in writing of all Members,
(ii)the election by any nondefaulting Member following written
notice to the Joint Venture that the other Member is in
default of any material obligation under the Agreement and
the failure of such default to be cured (or efforts to cure
commenced) within 90 days;
(iii) the sale of all, or substantially all, of the assets of
the Joint Venture,
(iv)the occurrence of an event under the Act that causes the
dissolution of a limited liability company;
(v)unless the Members unanimously agree otherwise, the failure
of the Joint Venture to commence construction of the first
processing plant by January 1, 1999; or
(vi)if after commencement of construction of the first
processing plant, MCNIC has the right to, and does, withhold
Capital Contributions necessary to complete construction of
the Initial Plant for a period of 24 months.
Upon dissolution, the Management Committee shall appoint one or
more liquidators to wind up the affairs of the Joint Venture. If
the Joint Venture is dissolved at any time prior to commencement
of the construction of the Initial Plant, the oil sands reserves
and the technology will revert 100% back to Crown. Should the
Joint Venture be dissolved at any time after commencement of the
18
construction of the Initial Plant, the liquidator of the Joint
Venture shall not have the right to sell the oil sands reserves
or the technology as part of the winding up process, but rather
such reserves and technology shall be distributed to Crown to the
extent of Crown's adjusted capital account balance. Any oil
sands reserves which remain following the foregoing distribution
to Crown may be distributed in kind to MCNIC.
During the five year period following the above distribution of
oil sands reserves in kind, either Member may only develop the
reserves its received from the Joint Venture after giving the
other Member the opportunity to participate in such development
in the same manner and on the same terms as such Member would
have been entitled to participate if such development were an AMI
Opportunity (see above).
Indemnification
Crown will indemnify MCNIC and the Joint Venture against (i) any
claims, demands, causes of action, losses or damages incurred
with respect to the oil sands reserves which accrued prior to the
time Crown contributed the reserves to the Joint Venture; (ii)
any violation or breach of applicable environmental laws by the
Company or by Crown or their respective predecessors in title; or
(iii) any breach of any representation, warranty or covenant by
Crown. The sole remedy of MCNIC for any claim relating to the
loss of title to any portion of the reserves shall be Crown's
obligation to contribute to the Joint Venture the amount of such
loss or damage incurred up to $500,000 in the aggregate.
MCNIC is also required to indemnify Crown, the Company and the
Joint Venture against any losses from any claims, demands, causes
of action, losses, damages, liabilities, costs and expenses
incurred by any of the foregoing parties which result from a
breach by MCNIC of any warranty, agreement or covenant.
The Guaranty
MCNIC has required and the Company has agreed that the Company
will guarantee, for a period of two years, the obligations of
Crown under the Joint Venture agreements.
Management Agreement
Pursuant to a "Management Agreement", Crown will act as the
"Operator" of the first processing plant upon commencement of
operations. Under the Management Agreement, Crown will act as an
independent contractor to the Joint Venture and will (i) manage,
supervise and conduct the operations of the Joint Venture; (ii)
carry out the terms of the Annual Operating Plan adopted and
approved by the Management Committee of the Joint Venture; (iii)
implement the decisions made and instructions given from time to
time by the Management Committee. As compensation for the
services rendered under the Management Agreement, Crown will
receive (i) a monthly fee of $3,000; (ii) the payment of all out-
of-pocket expenses incurred through the performance of its
duties; (iii) the payment of the reasonable salaries, wages,
overtime and other similar compensation paid to employees who are
employed full time in connection with the operations of the Joint
Venture; and (iv) a monthly home office overhead charge of
$10,000.
19
During the first two years, Crown may be removed as Operator
only for "good cause" as defined within the Management Agreement.
After this initial term, the agreement will automatically renew
for unlimited succeeding one year terms unless either party
indicates its desire to not renew within 90 days of the
expiration of the term. Also following the expiration of the
initial term, the Joint Venture may challenge Crown's status as
Operator on economic grounds by serving written notice to Crown
that it believes that the operations of the Plant may be
conducted more efficiently and cheaply and that it is willing to
become the Operator (or has a bona fide commitment from a third
party to do so) on a reduced charge basis. Following the receipt
of the economic challenge, Crown will have 30 days to notify the
Joint Venture that it elects to (i) allow the Joint Venture, or
its designee, to become the Operator under the proposed terms, or
(ii) continue as the Operator under the proposed terms.
Tax Effects of Contributing the Oil Sands Reserves and Technology
to the Joint Venture
Because the contribution of the oil sands reserves and the
technology to the Joint Venture will constitute a tax free
transaction by the Company, the Shareholders will not suffer an
adverse tax affect as a result.
RIGHTS OF DISSENTING SHAREHOLDERS
Requirements of Utah Law.
Under Utah law, a Shareholder who has perfected dissenter's
rights with respect to the MCNIC Joint Venture will be entitled
to receive in cash the fair value of his shares of the Company's
Common Stock, if and when the Company contributes its property to
the MCNIC Joint Venture, as described above. To perfect
dissenter's rights, a Shareholder must comply with the
requirements included in Part 13 of Chapter 10a of Title 16 of
the Utah Code.
The following is a summary of steps that Shareholders must take
for effective exercise of dissenters' rights. This summary is
qualified in its entirety by reference to the provisions of Utah
law creating and governing dissenters' rights, a copy of which is
included as Appendix "B" to this Proxy Statement. Any
Shareholder contemplating the exercise of dissenters' rights is
urged to review Appendix "B" carefully.
1. Action At or Prior to Special Meetings. A Shareholder
wishing to assert dissenters' rights must NOT vote in favor of
the MCNIC Joint Venture, and the Shareholder must send or deliver
a notice of dissent to the Company prior to or at the Annual
Meeting, but before the vote on the MCNIC Joint Venture is taken.
2. Shareholder Status. To claim dissenters' rights, a
Shareholders must have been a shareholder of the Company on the
Record Date.
3. Information and Payment to Be Submitted By the Company.
Within 10 days after the vote on the MCNIC Joint Venture, the
Company must notify all Shareholders who informed the Company
prior to the vote that they would claim dissenters' rights of the
results of the vote and with respect to the process to be
followed for redeeming the dissenting Shareholders' shares for
cash as provided in the Utah Code. The Company will provide
financial information and its calculation of the fair market
value of the Company's shares, along with a check for the same
amount, as part of the information required to be provided to
dissenting shareholders.
20
4. Acceptance of Payment For Shares. Any Shareholder who
accepts the Company's calculation and offer of fair value for his
shares in the Company will be deemed to have settled with the
Company unless within 60 days of receiving the Company's offer,
the dissenting Shareholder commences an action in Third District
Court in Salt Lake City to dispute the Company's valuation of the
dissenting shares.
If a dissenting Shareholder votes against the transfer of
oil sands reserves and related technology to the MCNIC Joint
Venture but otherwise fails to perfect a dissent, or who notifies
the Company of his intent to dissent, but then votes in favor of
the transfer to the MCNIC Joint Venture shall have effectively
lost his or her right to appraisal of and payment for the fair
value of his or her shares, and such dissenting Shareholder shall
be treated identically to a nondissenting Shareholder.
ANY SHAREHOLDER CONTEMPLATING THE EXERCISE OF DISSENTERS'
RIGHTS WITH RESPECT TO HIS OR HER SHARES IS URGED TO REVIEW
CAREFULLY THE PROVISIONS OF APPENDIX "B" INASMUCH AS
DISSENTERS' RIGHTS MAY BE LOST IF THE REQUIREMENTS OF UTAH
LAW ARE NOT FULLY AND PRECISELY SATISFIED.
Tax Consequences to Dissenting Shareholders.
The redemption of a dissenting Shareholder's shares in the
Company by the Company pursuant to Utah law, as described above,
is equivalent to a sale of such shares under Federal and State
income tax laws. The cash received from the Company will be
taxable as a capital gain to the extent the value received from
the Company is in excess of the dissenting Shareholder's basis in
his shares. Whether the gain will be taxed as long term capital
gains or short term capital gains will depend on how long the
dissenting shareholder has held his shares.
Dissenting shareholders should consult their own tax advisor(s)
for a full understanding the tax effects on them from and
exercise of dissenters rights in connection with the MCNIC Joint
Venture.
SHAREHOLDER PROPOSALS
Any proposals that shareholders of the Company desire to have
presented at the Company's 1998 Annual Meeting of Shareholders
must be received by the Company, at its principal office, no
later than April 15, 1998, or within a reasonable period of time
prior to the solicitation of proxies for such meeting. All such
proposals should be transmitted to the Company by Certified
United States Mail, with return receipt requested.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's officers and directors, and persons who own more
than ten percent of a registered class of the Company's equity
securities, to file certain reports regarding ownership of and
transactions in the Company's securities with the Securities and
Exchange Commission (the "SEC"). Such officers, directors and
ten-percent stockholders are also required by SEC rules to
furnish the Company with copies of all Section 16(a) forms that
they file.
21
Based solely on its review of copies of such forms or "no
filings required" letters received by it, the Company believes
that during the fiscal year ended December 31, 1996, all of its
officers, directors and ten percent shareholders complied with
all applicable requirements of Section 16(a).
OTHER MATTERS
The Company knows of no other matters that will be presented at
the 1997 Annual Meeting of Shareholders. If any other matter
properly comes before the Meeting, it is the intention of the
persons named as proxies on the Proxy Cards to vote all common
shares represented by such Proxy Cards in accordance with the
directions of the present Board of Directors.
By Order of the Board of Directors
/S/Richard S. Rawdin
Richard S. Rawdin
Secretary
245341
Dates Referenced Herein and Documents Incorporated by Reference
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