A 10% increase in interest rates would decrease our cash flow by approximately $271,491 and would decrease the fair value of our debt instruments. Recent Accounting Pronouncements– In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS 141”) and No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method. For all business combinations for which the date of acquisition is after June 30, 2001, SFAS 141 also establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as extraordinary gain, rather than deferred and amortized. SFAS 142 changes the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for intangible assets with finite lives will no longer be limited to forty years. We do not believe that the adoption of these statements had a material effect on our financial position, results of operation, or cash flows. 16
In June 2001, the FASB also approved for issuance SFAS 143 “Asset Retirement Obligations”. SFAS 143 establishes accounting requirements for retirement obligations associated with tangible long-lived assets, including: 1) the timing of the liability recognition, 2) initial measurement of the liability, 3) allocation of asset retirement cost to expense, 4) subsequent measurement of the liability and 5) financial statement disclosures. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. We will adopt the statement effective no later than January 1, 2003, as required. The transition adjustment resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle. At this time, we cannot reasonably estimate the effect of the adoption of this statement on our financial position, results of operations, or cash flows. In October 2001, the FASB also approved SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 replaces SFAS 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The new accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30,Reporting Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, for the Disposal of a Segment of a Business, for the disposal of segments of a business. Statement 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. Statement 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. Adoption of Statement 144 had no material impact on our Company. PART II. OTHER INFORMATIONItem 1.Legal Proceedings On June 29, 1992, prior to the August 10, 1992 acquisition of the St. Marks, Florida facility by St. Marks Refinery, Inc., or SMR, the Florida Department of Environmental Protection and Seminole Refining Corporation, a prior owner of the facility, entered into Consent Order Addendum No. 2. Through the Consent Order, Seminole acknowledged its continuing liability for the assessment and cleanup of the St. Marks facility. As it pertained to St. Marks, the Consent Order defined SMR as the “Buyer” of the facility, and provided that in consideration of the acknowledgement of the continuing liability of Seminole for the site assessment and cleanup of the conveyed Property, the financial guarantees provided for and the representations contained in this Consent Order addendum No. 2, the DEP agreed to waive any claim of liability against SMR for the assessment or cleanup of preexisting conditions of the Property conveyed to SMR by Seminole. Preexisting conditions are those that existed on the property on or before the date of closing. On June 29, 1992, the DEP and Seminole entered a Settlement Agreement and Stipulation for Entry of a Consent Judgment, which explicitly adopted the Consent Order. Upon entry of the Consent Order and the Settlement Agreement, SMR purchased the facility from Seminole. On September 16, 1992, a circuit judge entered a Consent Judgment, which adopted the Consent Order as the Final Judgment of the Court. In 1998, we entered into discussions to purchase the stock of SMR. In October 1998, we met at the facility with representatives of the DEP who were most familiar with the facility history and that had negotiated the terms of the Consent Order on behalf of the DEP. The purpose of the meeting was to inspect the facility and identify and differentiate areas of contamination that were attributable to SMR from areas that were preexisting and thus remained attributable to Seminole. Upon completion of the site inspection, our counsel wrote to counsel for the DEP to memorialize the agreement as to preexisting conditions. The letter provided that with the exception of three specified areas, “all existing contamination at the facility is attributable to SRC [Seminole].” The letter advised the DEP that the purpose of the inspection and inquiry into the scope of preexisting contamination was to allow us “to understand the full extent of the liability that we would have as the sole shareholder of SMR for the assessment and remediation of any contamination at the facility.” On November 23, 1998, prior to the closing of the stock purchase agreement, the DEP provided a written response to the October 26, 1998 letter which stated that “we are in general agreement with your letter with the following caveats:…" which was followed by four specific items, none of which served to diminish the effect of the Consent Order. On November 23, 1998, we acquired the stock of SMR. 17
On October 10, 2001, counsel for the DEP advised us that Seminole’s failure to cleanup the facility constituted a failure of consideration for the Consent Order and rendered invalid any waiver of liability, whether derived from Consent Order, Consent Judgment, or written agreement. As such, the DEP advised us that SMR was jointly and severally liable, with Seminole, for all conditions and contaminations at the facility. On March 29, 2002, the DEP, acting on behalf of the Board of Trustees of the Internal Improvement Trust Fund, entered an order denying the renewal of SMR’s submerged land lease at the St. Marks facility. The lease allows SMR to operate and maintain the loading dock on state-owned river bottom. The denial, if ultimately upheld, would eliminate the ability of SMR to bring asphalt into the facility by barge, unless arrangements could be made to have river access through a different riverfront location. On April 24, 2002, SMR filed a Petition for Formal Administrative Hearing that challenged the denial. A hearing was set for September 23-27, but at the request of the parties, the hearing has been postponed until other issues have been resolved. These, and other ongoing environmental factors have brought into question if, and when, we will be able to utilize the facility for our asphalt business. In order to establish our rights, we filed a Complaint for Declaratory Judgment on May 3, 2002 in the Circuit Court for Wakulla County, Florida. On May 24, 2002, the DEP filed a Motion to Dismiss, arguing that the Consent Order was entered between the DEP and Seminole, and that as a nonparty to the Consent Order, SMR had failed to state a cause of action. On June 4, 2002, we filed a response and memorandum citing Florida case law that a third party beneficiary has standing to bring an action to enforce its rights in a contract, even though the third party beneficiary is not in privity with the parties to the contract. On July 24, 2002, the DEP’s Motion to Dismiss was denied by the Court. We are now awaiting a decision on our Complaint for Declaratory Judgment from the Court. Item 2.Change in Securities On June 18, 2002, we sold a $1.9 million principal amount of 12% secured bridge notes due March 18, 2003 to GCA Strategic Investment Fund Limited, an accredited investor, for a purchase price of $1.9 million and a five-year warrant to purchase 3.6 million shares of our common stock at an exercise price of $0.04 per share. In connection with the sale, we paid a commission of $85,000 and $40,000 to Colony Park Financial, LLC and Global Capital Advisors, LLC, respectively. We also issued a warrant to Colony Park to purchase 1,050,000 shares of our common stock at an exercise price of $0.04 per share. The issuance and sale of the Notes and warrants is exempt from the registration requirements of the Securities Act under Section 4(2) and Rule 506 of Regulation D. Item 4.Submission of Matters to a Vote of Security Holders None. 18
Item 6.Exhibits and Reports on Form 8-K |
