<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act Of 1934
EXPROFUELS, INC.
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(Name of Small Business Issuer in its charter)
Delaware 74-2727901
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 North Loop 1604 East, Suite 250, San Antonio, TX 78232
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (210) 490-9400
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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--------------------------- ------------------------------
Securities to be registered under Section 12(g) of the Act:
$0.01 Par Value Common Stock
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(Title of class)
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(Title of class)
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ITEM 1. DESCRIPTION OF BUSINESS
Pursuant to Rule 12b-23 of the Securities Exchange Act of 1934 (the
"Act"), this item is incorporated by reference to the section labeled
"Business" in the Issuer's Information Statement filed as Exhibit 99.1 to this
Form 10-SB/A.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference to the section labeled "Management's Discussion and Analysis of
Financial Condition and Results of Operation" in the Issuer's Information
Statement filed as Exhibit 99.1 to this Form 10-SB/A.
ITEM 3. DESCRIPTION OF PROPERTY
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference to the section labeled "Properties" in the Issuer's Information
Statement filed as Exhibit 99.1 to this Form 10-SB/A.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference to the section labeled "Security Ownership of Certain Beneficial
Owners and Management" in the Issuer's Information Statement filed as Exhibit
99.1 to this Form 10-SB/A.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference to the section labeled "Management" in the Issuer's Information
Statement filed as Exhibit 99.1 to this Form 10-SB/A.
ITEM 6. EXECUTIVE COMPENSATION
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference to the section labeled "Management" in the Issuer's Information
Statement filed as Exhibit 99.1 to this Form 10-SB/A.
2
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ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSMISSIONS
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference to the sections labeled "Relationship Between the Subsidiary and the
Parent After the Distribution," "Security Ownership of Certain Beneficial
Owners and Management" and "Business - General" in the Issuer's Information
Statement filed as Exhibit 99.1 to this Form 10-SB/A.
ITEM 8. LEGAL PROCEEDINGS
None.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference to the sections labeled "The Distribution - Trading of the
Subsidiary's Stock" and "Certain Special Considerations - No Current Public
Market for the Subsidiary's Common Stock" in the Issuer's Information
Statement filed as Exhibit 99.1 to this Form 10-SB/A.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference to the section labeled "Summary of Certain Information - The
Subsidiary" in the Issuer's Information Statement filed as Exhibit 99.1 to
this Form 10-SB/A.
ITEM 11. DESCRIPTION OF SECURITIES
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference to the section labeled "Description of the Subsidiary's Capital
Stock" in the Issuer's Information Statement filed as Exhibit 99.1 to
this Form 10-SB/A.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference to the section labeled "Liability and Indemnification of Officers
and Directors of the Subsidiary" in the Issuer's Information Statement filed
as Exhibit 99.1 to this Form 10-SB/A.
3
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ITEM 13. FINANCIAL STATEMENTS
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference to the section labeled "Financial Statements" in the Issuer's
Information Statement filed as Exhibit 99.1 to this Form 10-SB/A.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Listed below are the financial statements filed as part of this
Registration Statement:
FINANCIAL STATEMENTS
Report of Independent Public Accountants
Balance Sheets at August 31, 1995, August 31, 1996, and May 31, 1997
(unaudited)
Statements of Operations for Fiscal Years Ended August 31, 1994,
August 31, 1995, and August 31, 1996
Statement of Operations for the Nine Months and Three Months Ended
May 31, 1997, and May 31, 1996 (unaudited)
Statements of Cash Flows for Fiscal Years Ended August 31, 1994,
August 31, 1995, August 31, 1996, and Nine Months Ended May 31,
1997, and May 31, 1996 (unaudited)
Notes to Consolidated Financial Statements
(b) The following exhibits are filed as part of this Registration
Statement:
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EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
*3(i) Certificate of Incorporation and Certificate of Amendment
of the Issuer
*(3)(ii) Bylaws of the Issuer
</TABLE>
4
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*10.1 1996 Flexible Incentive Plan
*10.2 Convertible Promissory Note, dated February 12, 1997,
to Retamco Operating, Inc.
*10.3 Convertible Promissory Note, dated December 19, 1996,
to Wanluan Investments, Limited
*10.4 Convertible Promissory Note, dated September 18, 1996,
to TransEuro Capital, Inc.
*10.5 ATI/AEI ExproFuels Agreement (and First and Second Amendments)
for the CNG Conversion Project and CNG Refueling Infrastructure
in Uzbekistan, Central Asia and the World Market
*11.1 Statement Regarding Computation of Per Share Earnings
99.1 Information Statement
</TABLE>
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* These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Registration Statement on Form 10-SB, No. 0-22185,
filed with the Securities and Exchange Commission on February 28, 1997.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this Amendment to the Registrant's Registration Statement
(No. 0-22185) to be signed on its behalf by the undersigned, thereunto duly
authorized.
(Registrant) EXPROFUELS, INC.
Date: August 27, 1997
By (Signature): /s/ Roberto R. Thomae
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Name: Roberto R. Thomae
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Title: Chief Financial Officer
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5
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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*3(i) Certificate of Incorporation and Certificate of Amendment
of the Issuer
*(3)(ii) Bylaws of the Issuer
*10.1 1996 Flexible Incentive Plan
*10.2 Convertible Promissory Note, dated February 12, 1997,
to Retamco Operating, Inc.
*10.3 Convertible Promissory Note, dated December 19, 1996,
to Wanluan Investments, Limited
*10.4 Convertible Promissory Note, dated September 18, 1996,
to TransEuro Capital, Inc.
*10.5 ATI/AEI ExproFuels Agreement (and First and Second Amendments)
for the CNG Conversion Project and CNG Refueling Infrastructure
in Uzbekistan, Central Asia and the World Market
*11.1 Statement Regarding Computation of Per Share Earnings
99.1 Information Statement
</TABLE>
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* These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Registration Statement on Form 10-SB, No. 0-22185,
filed with the Securities and Exchange Commission on February 28, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EXPROFUELS,
INC. UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED MAY 31,
1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 13,575
<SECURITIES> 0
<RECEIVABLES> 186,086
<ALLOWANCES> 60,000
<INVENTORY> 335,367
<CURRENT-ASSETS> 490,129
<PP&E> 517,522
<DEPRECIATION> 266,388
<TOTAL-ASSETS> 1,384,910
<CURRENT-LIABILITIES> 341,197
<BONDS> 523,344
0
0
<COMMON> 40,000
<OTHER-SE> 142,066
<TOTAL-LIABILITY-AND-EQUITY> 1,384,910
<SALES> 789,844
<TOTAL-REVENUES> 790,478
<CGS> 646,985
<TOTAL-COSTS> 1,497,444
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,647
<INCOME-PRETAX> (726,113)
<INCOME-TAX> 0
<INCOME-CONTINUING> (726,113)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (726,113)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INFORMATION STATEMENT
EXPROFUELS, INC.
COMMON STOCK
This Information Statement is being furnished in connection with the
distribution (the "Distribution") to the holders of common stock, par value
$0.01 per share (the "Parent's Common Stock"), of The Exploration Company (the
"Parent") of 1,910,000 (or approximately 48%) of the outstanding shares of
common stock, $0.01 par value per share (the "Subsidiary's Common Stock"), of
ExproFuels, Inc. ("ExproFuels" or the "Subsidiary"). Upon the effectiveness of
the Distribution, the Subsidiary will be a publicly-held company that is
engaged in the alternative fuels conversion business. See "Business."
Shares of the Subsidiary's Common Stock will be distributed to holders
of record of the Parent's Common Stock as of the close of business on September
13, 1996 (the "Record Date"). Each such holder will receive one share of the
Subsidiary's Common Stock for every five shares of the Parent's Common Stock
held on the Record Date. The Distribution is scheduled to occur on August 29,
1997 (the "Distribution Date"). Upon the effectiveness of the Distribution,
the Parent will own approximately 42% of the outstanding shares of the
Subsidiary's Common Stock. No consideration will be paid by the holders of the
Parent's Common Stock for shares of the Subsidiary's Common Stock. See "The
Distribution."
There is no current trading market for the Subsidiary's Common Stock.
Upon the effectiveness of the Distribution and upon the filing of an
application with the National Association of Securities Dealers ("NASD") by a
broker or dealer, the Subsidiary's Common Stock may be traded on the Electronic
Bulletin Board. Shareholders interested in trading the Subsidiary's Common
Stock after the Distribution should contact their stockbrokers. See "The
Distribution--Trading of the Subsidiary's Common Stock."
________________
NO SHAREHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
_________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
_________________
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
__________________
THE SUBSIDIARY'S FINANCIAL CONDITION IS UNCERTAIN AND THE DISTRIBUTION OF THE
SHARES OF THE SUBSIDIARY'S COMMON STOCK WILL NOT BE TAX FREE TO THE HOLDERS
OF THE PARENT'S COMMON STOCK OR TO THE PARENT. FOR A DESCRIPTION OF THESE
CONSIDERATIONS, SEE "CERTAIN SPECIAL CONSIDERATIONS - FINANCIAL CONDITION",
CERTAIN SPECIAL CONSIDERATIONS - CERTAIN TAX CONSEQUENCES,"
AND NOTE 2 TO THE SUBSIDIARY'S FINANCIAL STATEMENTS.
_________________
Shareholders of the Parent with inquiries related to the Distribution
should contact James Sigmon, President, The Exploration Company, 500 North Loop
1604 East, Suite 250, San Antonio, Texas 78232, telephone: (210) 496-5300; or
the Subsidiary's transfer agent, Boston EquiServe, Shareholder Relations,
Boston, Massachusetts, telephone (617) 575- 3100. Boston EquiServe is also
acting as the Distribution Agent for the Distribution.
_________________
THE DATE OF THIS INFORMATION STATEMENT IS AUGUST 27, 1997.
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INFORMATION STATEMENT
TABLE OF CONTENTS
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PAGE
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SUMMARY OF CERTAIN INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Reasons for the Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Distribution Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Manner of Effecting the Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Results of the Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Appraisal of the Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Federal Income Tax Aspects of the Distribution . . . . . . . . . . . . . . . . . . . . . . 6
Trading of the Subsidiary's Common Stock Conditions . . . . . . . . . . . . . . . . . . . . 7
Reasons for Furnishing the Information Statement . . . . . . . . . . . . . . . . . . . . . 7
CERTAIN SPECIAL CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
RELATIONSHIP BETWEEN THE SUBSIDIARY AND THE PARENT AFTER 10
THE DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
REGULATORY APPROVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ACCOUNTING TREATMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . .
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 22
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
THE SUBSIDIARY'S 1996 FLEXIBLE INCENTIVE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . 23
DESCRIPTION OF THE SUBSIDIARY'S CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . 28
LIABILITY AND INDEMNIFICATION OF OFFICERS AND
DIRECTORS OF THE SUBSIDIARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-0
ANNEX I - APPRAISAL OF DAVID P. MARTIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
</TABLE>
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SUMMARY OF CERTAIN INFORMATION
This Summary is qualified by the more detailed information set forth
elsewhere in this Information Statement, which should be read in its
entirety. Capitalized terms used but not defined in this Summary are
defined elsewhere in this Information Statement.
THE DISTRIBUTION
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Distributing Parent . . . . . . . . . . . . . . . . The Exploration Company, a Colorado corporation (the Parent").
References herein to the Parent include its consolidated subsidiaries
except where the context otherwise requires.
Distributed Subsidiary . . . . . . . . . . . . . . ExproFuels, Inc. ("ExproFuels" or the "Subsidiary"). The Subsidiary
is currently engaged in the alternative fuels conversion business.
The Parent, as of the Record Date, owned 90% of the outstanding
shares of the Subsidiary's Common Stock.
Distribution Ratio . . . . . . . . . . . . . . . . One share of the Subsidiary's Common Stock for every five shares of
the Parent's Common Stock held on the Record Date.
Securities to be Distributed . . . . . . . . . . . 1,910,000 shares of the Subsidiary's Common Stock. The Subsidiary's
Common Stock to be distributed will constitute approximately 48% of
the outstanding shares of the Subsidiary's Common Stock immediately
after the Distribution.
Fractional Share Interests . . . . . . . . . . . . Fractional shares of the Subsidiary's Common Stock will not be
distributed. Fractional shares of Subsidiary's Common Stock will be
aggregated and purchased on behalf of the Subsidiary by the
Distribution Agent at the appraised price of $0.13 per share and the
aggregate net cash proceeds will be distributed ratably to those
shareholders entitled to fractional interests. See "The
Distribution-Manner of Effecting the Distribution" and "The
Distribution - Appraisal of the Subsidiary."
Record Date . . . . . . . . . . . . . . . . . . . . September 13, 1996 (3:00 p.m. Eastern Standard Time).
Distribution Date . . . . . . . . . . . . . . . . . August 29, 1997.
Mailing Date . . . . . . . . . . . . . . . . . . . Certificates representing the shares of the Subsidiary's Common Stock
to be distributed pursuant to the Distribution will be delivered to
the Distribution Agent on the Distribution Date. The Distribution
Agent will mail the certificates to holders of the Parent's Common
Stock as soon as practicable thereafter. See "The Distribution-
Manner of Effecting the Distribution."
Reasons for the Distribution . . . . . . . . . . . The Distribution is designed to separate two types of businesses with
distinct financial, investment and operating characteristics so that
each can adopt strategies and pursue objectives appropriate to its
specific needs. The Distribution will (i) enable the management of
each company to concentrate its attention and financial resources on
the core business of such company, and (ii) permit investors to make
more focused investment decisions based on the specific attributes of
each of the two businesses. The Parent will continue to engage in
oil and gas exploration, development and production. ExproFuels will
continue to conduct the alternative fuels conversion business. See
"The Distribution-Reasons for the Distribution."
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Tax Consequences . . . . . . . . . . . . . . . . . The receipt of shares of the Subsidiary's Common Stock by holders of
Parent's Common Stock will not be tax free, primarily because
Exprofuels has not been engaged in the alternative fuels conversion
business for the past five (5) years and because the Parent is not
distributing all of the Subsidiaries' Common Stock owned by it. See
"The Distribution - Federal Income Tax Aspects of the Distribution"
and "Certain Special Considerations-Certain Tax Considerations."
Trading Market . . . . . . . . . . . . . . . . . . There is currently no public market for the Subsidiary's Common
Stock. Upon the effectiveness of the Distribution and upon the
filing of an application with the NASD by a broker or dealer, the
Subsidiary's Common Stock may be traded on the Electronic Bulletin
Board. Shareholders interested in trading after the Distribution
should contact their stockbrokers. See "The Distribution - Trading
of the Subsidiary Common Stock" and "Certain Special Considerations-
No Current Public Market for the Subsidiary Common Stock."
Distribution Agent and Transfer Agent . . . . . . . Boston EquiServe of Boston, Massachusetts.
Dividends . . . . . . . . . . . . . . . . . . . . . The Subsidiary's dividend policy will be established by the Board of
Directors of the Subsidiary (the "Subsidiary's Board") from time to
time based on the results of operations and financial condition of
the Subsidiary and such other business considerations as the
Subsidiary's Board considers relevant. See "Certain Special
Considerations-Dividend Policy."
Certain Special Considerations . . . . . . . . . . See "Certain Special Considerations" for a discussion of factors that
should be considered in connection with the Subsidiary's Common Stock
received in the Distribution. IN PARTICULAR, SEE "CERTAIN SPECIAL
CONSIDERATIONS - FINANCIAL CONDITION" AND NOTE 2 TO THE SUBSIDIARY'S
FINANCIAL STATEMENTS FOR A DISCUSSION OF THE SUBSIDIARY'S ABILITY TO
CONTINUE AS AN ON-GOING CONCERN.
Relationship with Parent
after the Distribution . . . . . . . . . . . . . After the Distribution Date, the Parent will own approximately 42% of
the outstanding shares of the Subsidiary's Common Stock. The Parent
will continue to lease office space and equipment and provide
accounting personnel and reception services to the Subsidiary after
the Distribution, on a month to month basis, for $10,000 per month.
In addition, the Parent and the Subsidiary will share common
directors and officers. See "Certain Special Considerations -
Concentration of Voting Power," "Relationship Between the Subsidiary
and the Parent After the Distribution," "Management" and "Security
Ownership of Certain Beneficial Owners and Management."
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THE SUBSIDIARY
The Subsidiary is a recently capitalized corporation which,
upon completion of the Distribution, will be a publicly held company that is
engaged in the alternative fuels conversion business. The Subsidiary converts
gasoline and diesel engines to operate on compressed natural gas (CNG),
liquified petroleum gas (LPG) and liquified natural gas (LNG). The Subsidiary
also designs, builds, owns, operates and provides fuel for alternative fuel
stations. The Subsidiary currently owns and operates twenty LPG motor fuel
stations in Texas, owns and operates conversion facilities in San Antonio,
Dallas, and Tucson and operates affiliated conversion facilities in Houston and
Phoenix. The Company also owns an 11% interest in CNG International, L.L.C., a
Tennessee limited liability company that operates an alterative fuels conversion
business in Uzbekistan, a former Soviet Republic.
In late 1992, the Parent entered the alternative fuels vehicles
(AFV) conversion business through the creation of its own alternative fuels
division, ExproFuels. The alternative fuels division's focus included the
conversion of internal combustion engines to run alternately on LPG, CNG or LNG,
and the design, installation and operation of alternative fuel refueling
stations. The ExproFuels division initiated ongoing operations in Texas and
Arizona, while actively pursuing international opportunities in Europe, Asia and
Latin America. Since 1994, gross revenues from the ExproFuels division have
surpassed gross revenues from the Parent's oil and gas operations, although
profitable operating levels have not been attained. In late 1996, the Parent
determined it was in its best interest to refocus its resources on its core oil
and gas industry. Accordingly, the ExproFuels division was contributed to the
Company in August, 1996, in exchange for 100% of the outstanding shares of the
Subsidiary's Common Stock. On August 30, 1996, the Parent's Board paid 10% of
the outstanding shares of the Subsidiary's Common Stock to the Parent's
directors in exchange for, among other things, serving as directors of the
Parent in the past, thereby reducing the Parent's ownership interest in the
Subsidiary from 100% to 90%. On September 3, 1996, the Parent's Board declared a
stock dividend of 1,910,000 shares (or approximately 48%) of the Subsidiary's
Common Stock to its shareholders as of the Record Date.
The Subsidiary's business strategy is to install additional fuel stations
during fiscal year 1997, as well as to continue international marketing and
development efforts in Asia and Latin America. The Subsidiary's management is
also considering various potential domestic acquisition alternatives with the
goal of reaching operational efficiencies enabling ExproFuels to reduce current
per unit costs of purchasing, storage and distribution of alternative fuels.
Besides significantly enhancing existing net operating margins, such
acquisitions could enable ExproFuels to improve its competitive stance in
existing markets while facilitating expansion into new markets. The
Subsidiary's management continues to pursue adequate sources of equity and debt
financing for funding the acquisition of established operating business units,
assuming they will provide operating cash flows to ExproFuels within an
acceptable timeframe.
At August 31, 1996, ExproFuels had cash on hand of $20,871,
positive working capital of $49,031 and equity of $908,179. However, it had a
deficiency of quick assets (cash and receivables) to current liabilities of
$114,282, and its positive cash position was primarily due to cumulative
contributions of operating capital of $3,526,136 from the Parent ($1,192,095 in
1996, $1,224,085 in 1995 and $882,566 in 1994). From September 1, 1996 through
May 31, 1997, the Parent advanced the Subsidiary an additional $338,303 and,
subsequently, ExproFuels raised $500,000 in long-term, convertible debt
financings, which mature through fiscal year 2000 (the "Convertible Debt"). As
a result, at May 31, 1997, ExproFuels had cash on hand of $13,575, positive
working capital of $148,932 and equity of $182,066, with a deficiency of quick
assets (cash and receivables) to current liabilities of $201,536.
For the remainder of 1997 and fiscal 1998, ExproFuels must
continue to seek additional sources of operating capital through additional debt
or equity financings. The Company anticipates returning to the same financiers
of its Convertible Debt for funding its additional debt or equity financings;
however, the Company has secured no commitment for such financings as of the
date hereof. Capital requirements to sustain ExproFuels' growth and on-going
operations through August 31, 1998 are projected to be at least $250,000 for
capital expenditures and an additional $750,000 in working capital. The
Subsidiary's financial position poses certain risks, including the risk that (i)
the Subsidiary's cash flow from operation will be insufficient to maintain
operations; (ii) the Subsidiary will be unable to obtain financing in the future
for working capital, capital expenditures and general corporate purposes; and
(iii) the Subsidiary will be more vulnerable to economic downturns and may be
unable to withstand competitive pressures. See Note 2 to the Subsidiary's
Financial Statements.
The Subsidiary's principal executive offices are located at 500 North
Loop 1604 East, Suite 250, San Antonio, Texas 78232; telephone: (210) 490-9400.
3
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EXPROFUELS, INC.
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents summary historical financial data
derived from the Subsidiary's audited Financial Statements for the three most
recent fiscal years ended August 31, 1996 and unaudited Financial Statements as
of and for the nine months ended May 31, 1997 and May 31, 1996. The Subsidiary's
Financial Statements present the financial position, results of operations and
cash flows of the Subsidiary as if it were a separate company operating for all
periods presented. The information in the table should be read in conjunction
with "Selected Historical Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the Financial Statements
of the Subsidiary included elsewhere herein. Pro forma financial data
reflecting the effects of the Distribution is not set forth below or included
elsewhere in this Information Statement because the pro forma financial data
would not, in management's opinion, differ materially from the historical
financial data. The Subsidiary's fiscal year ends on August 31.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
Fiscal Year MAY 31
------------------------------------ -----------------------
1996 1995 1994 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues:
Conversion sales . . . . . . . . $ 557,641 $ 578,362 $ 627,366 $ 405,181 $ 381,983
Fuel station construction sales . 301,115 97,241 162,603 128,854 299,812
Alternative fuels sales . . . . . 187,645 97,748 31,664 255,809 137,929
---------- ---------- ---------- ---------- ----------
Total revenues . . . . . . . 1,046,400 773,351 821,633 789,844 819,724
Costs and expenses:
Costs of sales . . . . . . . . 752,024 646,078 701,198 646,985 583,461
Shop general and administrative . 484,920 415,944 302,647 326,191 336,338
Depreciation and amortization . . 85,574 92,302 77,543 65,500 67,131
Abandonment of technological
rights . . . . . . . . . . . . - - 144,681 - -
General and administrative . . . 404,708 587,916 431,107 458,768 265,190
---------- ---------- ---------- ---------- ----------
Total costs and expenses 1,727,226 1,742,240 1,657,176 1,497,444 1,252,120
---------- ---------- ---------- ---------- ----------
Profit (loss) from operations . . . (680,825) (968,889) (835,543) (707,600) (432,396)
Other income (expense):
Sublease rental income . . . . . 58,500 6,750 - 13,500 40,500
Interest income . . . . . . . . . 959 818 3 634 737
Interest expense . . . . . . . . (23,648) (24,560) (37,367) (32,647) (19,608)
---------- ---------- ---------- ---------- ----------
Total other income . . . . . 35,811 (16,992) (37,364) (18,513) 21,629
---------- ---------- ---------- ---------- ----------
Net loss . . . . . . . . . . . . . $ (645,014) $ (985,881 $ (872,907) $ (726,113) $ (410,767)
---------- ---------- ---------- ---------- ----------
Earnings (loss) per share of
common stock . . . . . . . . . . $ (.16) $ (.25) $ (.22) $ (.18) $ (.10)
---------- ---------- ---------- ---------- ----------
Weighted average number of
common shares outstanding . . . . 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Cash and cash equivalent . . . . $ 20,871 $ 7,263 $ 4,711 $ 13,575 $ 23,392
Total assets . . . . . . . . . . 1,249,527 842,007 885,977 1,384,910 1,148,030
Total debt(1) . . . . . . . . . . 85,164 125,260 344,679 898,989 124,021
</TABLE>
- -----------------
(1) Total debt includes current portion of debt and capital lease obligations.
4
<PAGE> 7
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The Parent, directly and through the Subsidiary, is currently engaged
in the oil and gas exploration, development and production business as well as
the alternative fuels conversion business. The Parent's Board has determined
that it is in the best interests of the Parent and its stockholders, for the
reasons set forth below, to separate the Parent and the Subsidiary. The Parent
will continue to conduct the oil and gas exploration, development and
production business and the Subsidiary will continue to conduct the alternative
fuels conversion business.
The Parent's Board believes that the Distribution will be beneficial
to the Parent's shareholders. Separation of the two businesses will (i) enable
the management of each company to concentrate its attention and financial
resources on the core businesses of each company, and (ii) permit investors to
make more focused investment decisions based on the specific attributes of each
of the two businesses.
DISTRIBUTION AGENT
The distribution agent ("Distribution Agent") is Boston EquiServe,
Shareholder Relations, P.O. Box 644, Mail Stop 45-02-64, Boston, Massachusetts
02102-0644, telephone (617) 575-3100.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth
below.
The Parent will effect the Distribution on the Distribution Date by
delivering 1,910,000 (or approximately 48%) of the outstanding shares of the
Subsidiary's Common Stock to the Distribution Agent for distribution to the
holders of record of Parent's Common Stock as of the close of business on the
Record Date. The Distribution will be made on the basis of one share of the
Subsidiary's Common Stock for every five shares of the Parent's Common Stock
held as of the close of business on the Record Date. The shares of the
Subsidiary's Common Stock will be fully paid and nonassessable, and the holders
thereof will not be entitled to preemptive rights. It is expected that
certificates representing shares of the Subsidiary's Common Stock will be
mailed to holders of the Parent's Common Stock as soon as practicable after the
Distribution Date. See "Description of the Subsidiary's Capital Stock."
No certificates or scrip representing fractional interests in shares
of the Subsidiary's Common Stock ("Fractional Shares") will be issued to
holders of Parent's Common Stock as part of the Distribution. The Distribution
Agent, acting as agent for holders of the Parent's Common Stock otherwise
entitled to receive in the Distribution certificates representing Fractional
Shares, will aggregate and buy on behalf of ExproFuels all Fractional Shares at
the appraised price of $0.13 per share and distribute the net proceeds to the
shareholders entitled thereto. See "The Distribution - Appraisal of the
Subsidiary." The Parent will pay the fees and expenses of the Distribution
Agent in connection with such Distribution and sales, which is estimated to be
approximately $8,100.
No holder of the Parent's Common Stock will be required to pay any
cash or other consideration for the shares of the Subsidiary's Common Stock to
be received in the Distribution or to surrender or exchange shares of the
Parent's Common Stock or to take any other action in order to receive the
Subsidiary's Common Stock pursuant to the Distribution.
RESULTS OF THE DISTRIBUTION
After the Distribution, the Subsidiary will be a separate public
company which will be engaged in the alternative fuels conversion business.
The number and identity of the holders of the Subsidiary's Common Stock to be
distributed in the Distribution will be, immediately after the Distribution,
substantially the same as the number and identity of the holders of the
Parent's Common Stock on the Record Date; however, the Parent will own after
the Distribution approximately 42% of the outstanding shares of the
Subsidiary's Common Stock and the directors of the Parent will own
approximately 10% of the outstanding shares of the Subsidiary's Common Stock.
Immediately after the Distribution, the Subsidiary expects to have
approximately 1800 holders of record of the Subsidiary's Common Stock based on
the number of record stockholders and outstanding shares of the Parent's Common
Stock as of the close of business on September 13, 1996, and the distribution
ratio of one share of Subsidiary Common Stock for every five shares
5
<PAGE> 8
of Parent's Common Stock. The Distribution will not affect the number of
outstanding shares of Parent's Common Stock or any rights of the Parent's
shareholders.
APPRAISAL OF THE SUBSIDIARY
In connection with the Distribution, the Parent's Board of Directors
obtained an appraisal from David P. Martin, an investment banker, as to the
fair market value, as of September 13, 1996, of all of the outstanding shares
of the Subsidiary's common stock (4 million shares). Mr. Martin determined the
range of the fair market value of all of the Subsidiary's outstanding common
stock was between $440,000 and $600,000 or $0.11 and $0.15 per share. He
concluded the midpoint of the range ($520,000 of $0.13 per share) was
ExproFuel's most probable fair market value. A copy of Mr. Martin's appraisal
is attached as Annex I to this Information Statement.
In reaching his conclusion, Mr. Martin followed the guidelines set
forth in Revenue Ruling 59-60 for the valuation of securities of closely held
companies. This method involved consideration of all available financial data,
including, but not limited to, the following: (i) the nature and history of the
business; (ii) the economic outlook in general and the condition and outlook of
the industry; (iii) the net asset value of ExproFuels and the financial
condition of the business; (iv) the earning capacity of ExproFuels; (v) the
capacity for paying dividends; (vi) whether or not ExproFuels had goodwill or
other intangible value; (vii) previous sales or purchases of shares and the
size of the block to be valued; and (viii) the market price of the securities
of companies involved in the same or similar line of business having their
securities actively traded in a free and open market, either on an exchange or
over-the- counter. In determining the weight to be given to the various
factors, Mr. Martin exercised his judgment based on his experience as an
investment banker, and followed the recommendations in Revenue Ruling 59-60 as
amended.
From May of 1977 through November of 1989, Mr. Martin was employed by
Rotan Mosle Inc., a subsidiary of Paine Webber. As a Vice President in the
Corporate Finance Department, Mr. Martin was active in the valuation of private
securities and raising capital for both public and private companies. Since
then, Mr. Martin has been active, as an investment banker, in evaluating
companies for recapitalizations, mergers, acquisitions, and divestitures as
well as various financings. In addition, Mr. Martin is often engaged as an
advisor in negotiations leading to the consummation of the various transactions
or to the resolution of disputes involving securities valuation. Mr. Martin is
a registered securities dealer and investment adviser. Mr. Martin has no
current or anticipated financial interest in any of the securities being
valued. There is no relationship between The Exploration Company or ExproFuels
and Mr. Martin which would influence his opinion of fair market value.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
The Distribution will not qualify as a tax free spin-off under Section
355 of the Internal Revenue Code of 1986, as amended (the "Code"), primarily
because Exprofuels has not been engaged in the alternative fuels conversion
business for the past five (5) years and because the Parent is not distributing
all of the Subsidiaries' Common Stock owned by it. As a result,
(1) Each shareholder receiving shares of the Subsidiary's
Common Stock in the Distribution will be treated as if such
shareholder received a taxable distribution in an amount equal to the
fair market value of the Subsidiary's Common Stock received, which
would result in (a) a dividend to the extent of such shareholder's pro
rata share of the Parent's current and accumulated earnings and
profits for 1997 (there is no accumulated earnings and no earnings are
anticipated for 1997) and (b) a reduction in such shareholder's pro
rata basis in the Parent's Common Stock to the extent the amount
received exceeds such shareholder's share of earnings and profits and
a capital gain to the extent the amount received exceeds the
shareholder's basis provided that such Parent's Common Stock is held
as a capital asset by such shareholder on the Distribution Date.
(2) Any shareholder of the Parent receiving cash in lieu of
fractional shares of the Subsidiary's Common Stock will be treated as
if such shareholder received a taxable distribution in an amount equal
to the cash received, which would result in (a) a dividend to the
extent of such shareholder's pro rata share of the Parent's current
and accumulated earnings and profits for 1997 (there is no accumulated
earnings and no significant earnings are anticipated for 1997) and (b)
a reduction in such shareholder's basis in the Parent's Common Stock
to the extent the amount received exceeds such shareholder's share of
earnings and profits and a capital gain to the extent the amount
received exceeds the shareholder's basis provided that such Parent's
Common Stock is held as a capital asset by such shareholder on the
Distribution Date.
6
<PAGE> 9
(3) The holding period of the Subsidiary's Common Stock
received by the shareholders of the Parent will include the holding
period of the Parent's Common Stock with respect to which the
Distribution will be made, provided that such shareholders held the
Parent's Common Stock as a capital asset on the Distribution Date.
(4) Gain (but not a loss) may be recognized by the Parent
upon the Distribution.
The summary of federal income tax consequences set forth above is for
general reference only and does not purport to cover all federal income tax
consequences that may apply to all categories of shareholders. All
shareholders should consult their own tax advisors regarding the particular
federal, foreign, state and local tax consequences of the Distribution to such
shareholders. See "Certain Special Considerations-Certain Tax
Considerations."
TRADING OF THE SUBSIDIARY'S COMMON STOCK
There is not currently a public market for the Subsidiary's Common
Stock and none is guaranteed after the Distribution Date. Prices at which the
Subsidiary's Common Stock may trade after the Distribution cannot be predicted.
Until the Subsidiary's Common Stock is fully distributed and an orderly market
develops, the prices at which trading in such stock occurs may fluctuate
significantly. The prices at which the Subsidiary's Common Stock trades will
be determined by the marketplace and may be influenced by many factors,
including, among others, the depth and liquidity of the market for the
Subsidiary's Common Stock, investor perception of the Subsidiary and the
industry in which the Subsidiary participates, the Subsidiary's dividend policy
and general economic and market conditions. See "Certain Special
Considerations-Dividend Policy," and "Certain Special Considerations - No
Current Public Market for the Subsidiary's Common Stock."
The Subsidiary's Common Stock may be traded on the Electronic Bulletin
Board after the Distribution once an application is filed with the NASD by a
broker or dealer. There is no guarantee a broker or dealer will file such an
application. The Subsidiary initially will have approximately 1800
stockholders of record, based primarily upon the number of stockholders of
record of the Parent as of September 13, 1996. See "Certain Special
Considerations - No Current Public Market for the Subsidiary's Common Stock."
The Subsidiary's Common Stock distributed to the Parent's shareholders
in the Distribution will be freely transferable, except for (i) securities
received by persons who may be deemed to be "affiliates" of Parent within the
meaning of Rule 144, in which case such persons may not publicly offer or sell
the Subsidiary's Common Stock received in connection with the Distribution
except pursuant to a registration statement under the Securities Act or
pursuant to Rule 144 and (ii) securities received by persons that were holders
of restricted shares of the Parent's Common Stock, in which case such holders
will receive Subsidiary's Common Stock containing the same such restrictions.
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by the Parent solely to
provide information to the Parent's shareholders who will receive the
Subsidiary's Common Stock in the Distribution. It is not, and is not to be
construed as, an inducement or encouragement to buy or sell any securities of
the Parent or the Subsidiary. The information contained in this Information
Statement is believed by the Parent to be accurate as of the date set forth on
its cover. Changes may occur after that date, and neither the Subsidiary nor
the Parent will update the information except in the normal course of their
respective public disclosure practices.
7
<PAGE> 10
CERTAIN SPECIAL CONSIDERATIONS
Shareholders of the Parent should be aware that the Distribution and
ownership of the Subsidiary's Common Stock involves certain special
consideration, including those described below and elsewhere in this
Information Statement, which could adversely affect the value of their
holdings. Neither the Subsidiary nor the Parent makes, nor is any other person
authorized to make, any representation as to the future market value of the
Subsidiary's Common Stock. Any forward-looking statements contained in this
Information Statement should not be relied upon as predictions of future
events. Such statements are necessarily dependent on assumptions, data or
methods that may be incorrect or imprecise and that may be incapable of being
realized.
LACK OF OPERATING HISTORY AS A SEPARATE ENTITY
The alternative fuels conversion business was conducted by the Parent
as a separate division from late 1992 until August 1996, when the Subsidiary
was organized into a wholly-owned subsidiary of the Parent. Accordingly, the
Subsidiary does not have a lengthy operating history as an independent or a
public company. Management of the Subsidiary has also historically relied upon
the Parent for certain administrative services required by the Subsidiary.
Because the Subsidiary is currently responsible for maintaining its own
administrative functions, its results of operations and financial condition may
be materially and adversely affected. See "Relationship Between the Subsidiary
and Parent After the Distribution."
FINANCIAL CONDITION
At August 31, 1996, ExproFuels had cash on hand of $20,871, positive
working capital of $49,031 and equity of $908,179. However, it had a
deficiency of quick assets (cash and receivables) to current liabilities of
$114,282, and its positive cash position was primarily due to cumulative
contributions of operating capital of $3,526,136 from the Parent ($1,192,095 in
1996, $1,224,085 in 1995 and $882,566 in 1994). The Parent has subsequently
advanced the Subsidiary an additional $338,303 through May 31, 1997.
ExproFuels has raised $500,000 in Convertible Debt, which matures through
fiscal year 2000. As a result, at May 31, 1997, ExproFuels had cash on hand of
$13,575, positive working capital of $148,932 and equity of $182,066, with a
deficiency of quick assets (cash and receivables) to current liabilities of
$201,536.
For the remainder of 1997 and fiscal 1998, ExproFuels must continue to
seek additional sources of operating capital through additional debt or equity
financings. The Company anticipates returning to the same financiers of its
Convertible Debt for funding its additional debt or equity financings; however,
the Company has secured no commitment for such financings as of the date
hereof. Capital requirements to sustain ExproFuels' growth and on-going
operations through its fiscal year ending August 31, 1998 are projected to be
at least $250,000 for capital expenditures and an additional $750,000 in
working capital. The Subsidiary's financial position poses certain risks,
including the risk that (i) the Subsidiary's cash flow from operation will be
insufficient to maintain operations; (ii) the Subsidiary will be unable to
obtain financing in the future for working capital, capital expenditures and
general corporate purposes; and (iii) the Subsidiary will be more vulnerable to
economic downturns and may be unable to withstand competitive pressures. See
Note 2 to the Subsidiary's Financial Statements.
CERTAIN TAX CONSIDERATIONS
Because the Distribution does not qualify as tax free under Section
355 of the Code, in general a corporate tax will be payable by the consolidated
group of which the Parent is the common parent based upon the difference
between (i) the fair market value of the Subsidiary's Common Stock and (ii) the
adjusted basis of the Subsidiary's Common Stock. The corporate level tax will
be payable by the Parent and, under the consolidated return regulations, each
member of the consolidated group (ie, the Subsidiary) is severally liable for
such tax liability; however, because the Parent has a net operating loss
carryforward of $16,000,000, any tax due will be absorbed by the Parent's net
operating loss carryforward.
Furthermore, each shareholder receiving shares of the Subsidiary's
Common Stock in the Distribution will be treated as if such shareholder
received a taxable distribution in an amount equal to the fair market value of
the Subsidiary's Common Stock received, which would result in (a) a dividend to
the extent of such shareholder's pro rata share of the Parent's current and
accumulated earnings and profits for 1997 (there is no accumulated earnings and
no significant earnings are anticipated for 1997) and (b) a reduction in such
shareholder's pro rata basis in the Parent's Common Stock to the extent the
amount received exceeds such shareholder's share of earnings and profits and a
capital gain to the extent the amount received exceeds the shareholder's basis,
provided that such Parent's Common Stock is held as a capital asset by such
holder on the Distribution Date.
8
<PAGE> 11
NO CURRENT PUBLIC MARKET FOR THE SUBSIDIARY'S COMMON STOCK
There is not currently a public market for the Subsidiary's Common
Stock and there can be no assurance as to the prices at which trading in the
Subsidiary's Common Stock will occur after the Distribution. Until the
Subsidiary's Common Stock is fully distributed and an orderly market develops,
the prices at which trading in such stock occurs may fluctuate significantly.
The Subsidiary's Common Stock may trade on the Electronic Bulletin Board
following the Distribution once an application is filed with the NASD by a
broker or dealer. There can be no guarantee a broker or dealer will file such
an application. See "The Distribution - Trading of the Subsidiary's Common
Stock."
CHANGES IN TRADING PRICES OF THE PARENT'S COMMON STOCK
It is expected that Parent's Common Stock will continue to be listed
and traded on the NASDAQ Small-Cap Market after the Distribution. As a result
of the Distribution, the trading price range of the Parent's Common Stock may
be higher or lower than the trading price range of the Parent's Common Stock
prior to the Distribution. The combined trading prices of the Subsidiary's
Common Stock and the Parent's Common Stock held by shareholders after the
Distribution may be less than, equal to or greater than the trading prices of
the Parent's Common Stock prior to the Distribution. See "The Distribution -
Trading of the Subsidiary's Common Stock."
FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that at the time the
Parent effected the Distribution the Parent (i) was insolvent; (ii) was
rendered insolvent by reason of the Distribution; (iii) was engaged in a
business or transaction for which the Parent's remaining assets constituted
unreasonably small capital; or (iv) intended to incur, or believed it would
incur, debts beyond its ability to pay as such debts matured, such court may be
asked to void the Distribution (in whole or in part) as a fraudulent conveyance
and require that the shareholders return the special dividend (in whole or in
part) to the Parent, or require the Subsidiary to fund certain liabilities for
the benefit of creditors. The measure of insolvency for purposes of the
foregoing will vary depending upon the jurisdiction whose law is being applied.
Generally, however, the Parent would be considered insolvent if the fair value
of its respective assets were less than the amount of its liabilities or if it
incurred debt beyond its ability to repay such debt as it matures. In
addition, under Section 7- 106-401 of the Colorado Revised Statutes ("CRS")
(which is applicable to the Parent in the Distribution) the Parent generally
would not be able to make a distribution to its shareholders if its total
assets would be less than its total liabilities or if the Parent would not be
able to pay its debts as they become due in the usual course of business.
The Parent's Board and management believe that, based upon the audited
financial statements of the Parent, the Parent will be solvent at the time of
the Distribution (in accordance with the foregoing definitions), will be able
to repay its debts as they mature following the Distribution and will have
sufficient capital to carry on its businesses.
COMPETITION
There are several very large companies - including Transtar
Technologies, N.W. Butane, Southern Union EconoFuel Co. and American Natural
Gas Power in Texas and North American Fleet Services, Inc. and Metropane, Inc.
in Arizona - that compete with the Subsidiary in the alternative fuels
conversion business. The Subsidiary may be at a competitive disadvantage since
these other companies have much greater financial resources, larger technical
staffs and greater ability to bear the economic risks inherent in this new
industry. The Subsidiary's revenues, profitability and future rate of growth
are substantially dependent on its ability to compete and increase its sales.
In particular, its ability to compete for the conversion of private fleets
depends on its ability to reduce costs and finance conversions for the
customer. ExproFuels' size allows it to control its cost of conversion;
however, its relatively small size limits its ability to finance customers.
DEPENDENCE ON CERTAIN CUSTOMERS
During 1996, three purchasers of the ExproFuels' alternative fuels
vehicles conversion services and products accounted for 25%, 8%, and 8%,
respectively, of its total sales. In the event any or all these customers do
not continue as customers, the Subsidiary believes that additional customers
will continue to be found for such services and products at comparable prices;
however, should the
9
<PAGE> 12
Subsidiary be unsuccessful in such efforts, its results of operations and
financial condition will be materially and adversely affected. See
"Business-Customers" and Note 9 to the Subsidiary's Financial Statements.
GOVERNMENTAL REGULATION
The conversion of alternative fuels vehicles are regulated by both
state and federal authorities. The executive and legislative branches of
government, at both the state and federal levels, have in the past and it
appears will continue to periodically propose and consider proposals for
regulation with respect to the development and use of alternative fuels, energy
conservation, environmental protection, as well as various other related
programs. Additional regulation, changes in regulation or re-regulation
relating to the above subjects could adversely affect the Subsidiary. See
"Business-General Regulations."
CONCENTRATION OF VOTING POWER
Following the Distribution, the directors and executive officers of
the Subsidiary will beneficially own approximately 54.5% of the outstanding
shares of the Subsidiary's Common Stock. As a result, the directors and
executive officers of the Subsidiary will have the ability to affect the vote
of the Subsidiary's shareholders on significant corporate actions requiring
shareholder approval, including mergers, share exchanges or sales of all or
substantially all of the Subsidiary's assets. With such voting power, the
directors and executive officers of the Subsidiary may also have the ability to
delay or prevent a change in control of the Subsidiary. See "Security
Ownership of Certain Beneficial Owners and Management."
DIVIDEND POLICY
The future payment of dividends by the Subsidiary will depend on
decisions that will be made by the Subsidiary's Board from time to time based
on the results of operations and financial condition of the Subsidiary and such
other business considerations as the Subsidiary's Board considers relevant.
The Subsidiary does not anticipate paying any cash dividends in the foreseeable
future.
RELATIONSHIP BETWEEN THE SUBSIDIARY AND THE PARENT
AFTER THE DISTRIBUTION
For the purpose of governing certain of the ongoing relationships
between the Subsidiary and the Parent after the Distribution and to provide
mechanisms for an orderly transition, the Subsidiary and the Parent have
entered into the various agreements, and will adopt policies, as described
below. The Subsidiary and the Parent have not adopted, however, a conflicts
policy to deal with potential conflicts that may arise between the Company and
the Parent and the directors and officers.
LEASE AGREEMENT
The Parent has agreed to lease office space and equipment to the
Subsidiary after the Distribution, on a month to month basis, for $4,000 per
month. See "Property."
TAX SHARING AGREEMENT
The Subsidiary and the Parent have agreed that, with respect to
periods ending on or before the last day of the year in which the Distribution
occurs, the Parent is responsible for (i) filing both consolidated federal tax
returns of the Parent and the Subsidiary and applicable state tax returns; and
(ii) paying the taxes relating to such returns (including any subsequent
adjustments resulting from the redetermination of such tax liabilities by the
applicable taxing authorities). The Subsidiary is responsible for filing
returns and paying taxes related to the Subsidiary for subsequent periods. The
Subsidiary and the Parent have agreed to cooperate with each other and to share
information in preparing such tax returns and in dealing with other tax
matters.
ADDITIONAL AGREEMENTS
The Subsidiary will assume, with respect to the Subsidiary's
employees, all responsibility for liabilities and obligations as of the
Distribution Date for medical plan coverage. The Parent will assume, with
respect to the Parent's employees, all responsibilities for all liabilities and
obligations as of the Distribution Date for medical plan coverage. The
Subsidiary will pay the Parent $6,000 per
10
<PAGE> 13
month for portions of time of certain employees of the Parent, particularly
those in the accounting department, who are utilized by the Subsidiary. This
monthly amount is expected to be adjusted quarterly based on actual usage of
employees of the Parent by the Subsidiary.
The Parent and the Subsidiary have agreed that the Distribution does
not constitute a termination of employment for the Subsidiary's Employees or
the Parent's Employees and those employees of the Parent or of the Subsidiary
who are employed immediately prior to the Distribution Date will not be deemed
severed from employment from the Parent or of the Subsidiary for purposes of
any policy, plan, program or agreement that provides for the payment of
severance, salary continuation or similar benefits based on periods of past
service.
REGULATORY APPROVALS
The Subsidiary does not believe that any material federal or state
regulatory approvals will be necessary in connection with the Distribution.
ACCOUNTING TREATMENT
The historical financial statements of the Subsidiary present its
financial position, results of operations and cash flows as if it was a
separate entity for all periods presented. The Parent's historical basis in
the assets of the Subsidiary has been carried over.
CAPITALIZATION
The following table sets for the capitalization of the Subsidiary as
of August 31, 1996 and as of May 31, 1997 on a historical and proforma basis.
The capitalization table should be read in conjunction with the Subsidiary's
Financial Statements, the notes thereto, and the "Management's Discussion and
Analysis of Financial Condition and Results of Operations," each contained
elsewhere herein.
<TABLE>
<CAPTION>
AUGUST 31, 1996 MAY 31, 1997 MAY 31, 1997
HISTORICAL HISTORICAL PRO FORMA(2)
<S> <C> <C> <C>
Total Debt (1) . . . . . . . . . . . . . $ 85,164 $ 898,989 $ 898,989
Equity . . . . . . . . . . . . . . . . . 908.179 182,066 182,066
-------- ---------- ----------
Total capitalization(2) . . . . . . . . $993,343 $1,081,055 $1,081,055
======== ========== ==========
</TABLE>
- --------------
(1) Includes current portion of long-term debt and capital lease obligations.
(2) There are no pro-forma adjustments required as a result of the spin-off of
ExproFuels, Inc.
11
<PAGE> 14
SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary historical financial data
derived from the Subsidiary's audited Financial Statements for the three most
recent fiscal years ended August 31, 1996 and unaudited Financial Statements as
of and for the nine months ended May 31, 1997 and May 31, 1996. The Subsidiary's
Financial Statements present the financial position, results of operations and
cash flows of the Subsidiary as if it were a separate company operating for all
periods presented. The information in the table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Subsidiary included elsewhere
herein. No pro forma financial data reflecting the effect of the Distribution is
provided as an adjustment to the historical financial data because, in
Management's opinion, such pro forma financial data would not differ materially
from the historical financial data.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
Fiscal Year MAY 31
------------------------------------- -----------------------
1996 1995 1994 1997 1996
---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues:
Conversion sales . . . . . . . . $ 557,641 $ 578,362 $ 627,366 $ 405,181 $ 381,983
Fuel station construction sales . 301,115 97,241 162,603 128,854 299,812
Alternative fuels sales . . . . . 187,645 97,748 31,664 255,809 137,929
---------- ----------- ---------- ---------- ----------
Total revenues . . . . . . . 1,046,400 773,351 821,633 789,844 819,724
Costs and expenses:
Costs of sales . . . . . . . . 752,024 646,078 701,198 646,985 583,461
Shop general and administrative . 484,920 415,944 302,647 326,191 336,338
Depreciation and amortization . . 85,574 92,302 77,543 65,500 67,131
Abandonment of technological
rights . . . . . . . . . . . . - - 144,681 - -
General and administrative . . . 404,708 587,916 431,107 458,768 265,190
---------- ----------- ---------- ---------- ----------
Total costs and expenses 1,727,226 1,742,240 1,657,176 1,497,444 1,252,120
---------- ----------- ---------- ---------- ----------
Profit (loss) from operations . . . (680,825) (968,889) (835,543) (707,600) (432,396)
Other income (expense):
Sublease rental income . . . . . 58,500 6,750 - 13,500 40,500
Interest income . . . . . . . . . 959 818 3 634 737
Interest expense . . . . . . . . (23,648) (24,560) (37,367) (32,647) (19,608)
---------- ----------- ---------- ---------- ----------
Total other income . . . . . 35,811 (16,992) (37,364) (18,513) 21,629
---------- ----------- ---------- ---------- ----------
Net loss . . . . . . . . . . . . . $ (645,014) $ (985,881 $ (872,907) $ (726,113) $ (410,767)
---------- ----------- ---------- ---------- ----------
Earnings (loss) per share of
common stock . . . . . . . . . . $ (.16) $ (.25) $ (.22) $ (.18) $ (.10)
---------- ----------- ---------- ---------- ----------
Weighted average number of
common shares outstanding . . . . 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
---------- ----------- ---------- ---------- ----------
BALANCE SHEET DATA:
Cash and cash equivalent . . . . $ 20,871 $ 7,263 $ 4,711 $ 13,575 $ 23,392
Total assets . . . . . . . . . . 1,249,527 842,007 885,977 1,384,910 1,148,030
Total debt(1) . . . . . . . . . . 85,164 125,260 344,679 898,989 124,021
OTHER DATA:
Net cash (used) in operating $ (626,116) $(1,115,043) $ (687,028) $ (748,982) $ (509,414)
activities . . . . . . . . . .
Net cash (used) in investing
activities . . . . . . . . . . (512,275) (99,658) (266,821) (72,140) (243,754)
Net cash provided by financing
activities . . . . . . . . . . 1,151,999 1,217,253 955,451 813,826 768,997
</TABLE>
- -----------------
(1) Total debt includes current portion of debt and capital lease obligations.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Subsidiary was capitalized with the ExproFuels division's assets
in August 1996, enabling it to conduct the alternative fuels conversion
business previously conducted by the Parent through such division beginning in
late 1992. The following analysis and the related financial statements
included elsewhere herein are presented as if the Subsidiary were a separate
company for all periods presented as discussed in Note 1 to the Subsidiary's
Financial Statements.
RESULTS OF OPERATIONS
Nine Months Ended May 31, 1997 Compared to Nine Months Ended May 31, 1996
ExproFuels' revenue for the nine months ended May 31, 1997 decreased
by 3.6% to $789,844 compared to the corresponding period of the previous fiscal
year. Contributing most significantly was a 6.0% increase in conversion sales
to $405,181 primarily due to new contracts with San Antonio area school
districts and mass transit fleet operators. Alternative fuel sales increased
by over 74% to $25,809 for the same period due to the addition of new fleet
fueling contracts and 6 new company owned fuel stations placed in operation
subsequent to November, 1995. However, the above increase was fully offset by
a decline in fuel station construction to $128,854 from $299,812. Gross profit
margins declined from 29% in the prior nine months to 18% for the current nine
months. The reduced margins reflect a changing sales mix, with a drop in high
margin construction sales for the nine-month period, combined with increases in
conversion and alternative fuel sales which historically are lower gross margin
activities. Overall, general and administrative expenses increased by
approximately 73% over the corresponding previous nine months due primarily to
accounting, auditing, legal and related expenses associated with the spin-off
of the Subsidiary during the current period, and to wage increases, health
insurance benefits, payroll taxes and associated payroll costs as compared to
the prior period.
1996 Compared to 1995
ExproFuels' revenue increased by 35% in 1996 to $1,046,000 from
$773,000 in 1995, primarily due to an increase of $204,000 in construction
sales and a $90,000 increase in alternative fuel sales. The fuel sales
increase reflects the growing number of company owned fuel stations and fleet
fuel customers. Gross profits margins improved from 16% in 1995 to 28% in 1996
reflecting less incidents of price cutting by industry competitors, thereby
allowing ExproFuels to set favorable sales prices for its conversions and
construction services. Overall, general and administrative expenses decreased
by approximately $100,000 in 1996 from prior year levels due to ongoing cost
control efforts conducted at all levels of the Subsidiary and ExproFuels was
generally able to maintain its fixed costs at or under prior year levels, while
sales and marketing efforts achieved significant gross sales increases. As a
result, ExproFuels' loss from operations declined by $288,064, or 30%, from
$968,889 in 1995 to $680,825 in 1996 and its overall net loss declined by
$340,867, or 35%, from $985,881 in 1995 to $645,014 in 1996.
1995 Compared to 1994
ExproFuels' revenues experienced a net decrease of $48,000, or 7.7%,
from 1994 to 1995. Components of this net decrease were a $49,000 decrease in
conversion sales and a $65,000 decrease in fuel station construction that was
partially offset by a $66,000 increase in alternative fuel sales. Lower
conversion sales were primarily the result of the closing of its New Orleans
conversion facilities. Lower fuel station construction revenues reflect
ExproFuels' decision to build more company owned fuel stations to support its
growing fuel sales. Alternative fuels sales increased significantly due to the
first full year of operation of company owned fuel stations in Plano and
Dallas, as well as additional fuel stations being placed in operation during
1995 under a contract with the Texas Department of Transportation.
Costs of sales decreased by $55,000, or 7.8%, from 1994 to 1995. This
decrease almost matched the Company's decrease in revenues.
Other costs included a decrease of $145,000 due to the one time charge
in 1994 for writing off of the Company's previously acquired technological
rights. General and administrative expense increased by $270,000, or 36.8%,
from 1994 to 1995. Included
13
<PAGE> 16
in this change are significantly higher costs associated with the Company's New
Orleans operations, which closed in 1995, and higher than expected startup
costs with its Arizona operations.
Overall, ExproFuels' loss from operations increased by $133,346, or
16%, from $835,543 in 1994 to $968,889 in 1995 and its net loss increased by
$112,974, or 13%, from $872,907 in 1994 to $985,881 in 1995.
CAPITAL RESOURCES AND LIQUIDITY
At August 31, 1996, ExproFuels had cash on hand of $20,871, positive
working capital of $49,031 and equity of $908,179. However, it had a
deficiency of quick assets (cash and receivables) to current liabilities of
$114,282, and its positive cash position was primarily due to cumulative
contributions of operating capital of $3,526,136 from the Parent ($1,192,095 in
1996, $1,224,085 in 1995 and $882,566 in 1994). The Parent has subsequently
advanced the Subsidiary an additional $338,303 through May 31, 1997.
ExproFuels has raised $500,000 in Convertible Debt which matures through fiscal
year 2000. During this same period, this capital was used to fund its net loss
of $726,113 and $39,000 for equipment and two new fuel stations. Additionally,
advances totalling $31,798 were made in support of the Company's investment in
CNG International, L.L.C. As a result, at May 31, 1997, ExproFuels had cash on
hand of $13,575, positive working capital of $148,932 and equity of $182,066,
with a deficiency of quick assets (cash and receivables) to current liabilities
of $201,536.
For the remainder of 1997 and fiscal year 1998, ExproFuels must
continue to seek additional sources of operating capital through additional
debt or equity financings. The Company anticipates returning to the same
financiers of its Convertible Debt for funding its additional debt or equity
financings; however, the Company has secured no commitment for such financings
as of the date hereof. Capital requirements to sustain ExproFuels' growth and
on-going operations through August 31, 1998 are projected to be at least
$250,000 for capital expenditures and an additional $750,000 in working
capital. The Subsidiary's financial position poses certain risks, including
the risk that (i) the Subsidiary's cash flow from operation will be
insufficient to maintain operations; (ii) the Subsidiary will be unable to
obtain financing in the future for working capital, capital expenditures and
general corporate purposes; and (iii) the Subsidiary will be more vulnerable to
economic downturns and may be unable to withstand competitive pressures. See
Note 2 to the Subsidiary's Financial Statements.
In fiscal year 1996, the Subsidiary's capital expenditures included
approximately $80,000 for equipment purchases for use in U.S. operations.
Additional capital investments and advances totaling $442,000 were made by
ExproFuels in CNG International, L.L.C. See "Business-International
Operations" and Note 3 to the Subsidiary's Financial Statements.
At August 31, 1995, ExproFuels had cash on hand of $7,263, negative
working capital of $37,685, a deficit in shareholders' equity of $1,972,943 and
a deficiency of quick assets to current liabilities of $167,012.
In fiscal year 1995, the Subsidiary's capital expenditures included
approximately $101,000 for equipment purchases for use in the U.S. operations,
and $150,000 for ExproFuels' growing participation in international operations
through its common stock investment in CNG International, L.L.C. See
"Business-International Operations."
INFLATION
The Company's expenses are impacted by inflation. Management believes
that over time, however, the Subsidiary will be able to raise prices and
sustain profit margins.
14
<PAGE> 17
BUSINESS
GENERAL
The Subsidiary is a recently formed corporation which, upon
completion of the Distribution, will be a publicly held company that is engaged
in the alternative fuels conversion business. The Subsidiary converts gasoline
and diesel engines to operate on compressed natural gas (CNG), liquified
petroleum gas (LPG) and liquified natural gas (LNG). The Subsidiary also
designs, builds, owns, operates and provides fuel for alternative fuel
stations. The Subsidiary currently owns and operates twenty LPG motor fuel
stations in Texas, owns and operates conversion facilities in San Antonio,
Dallas, and Tucson and operates affiliated conversion facilities in Houston and
Phoenix. The Company also owns an 11% interest in CNG International, L.L.C., a
Tennessee limited liability company that operates an alterative fuels
conversion business in Uzbekistan, a former Soviet Republic.
In late 1992, the Parent entered the alternative fuels vehicles (AFV)
conversion business through the creation of its own alternative fuels division,
ExproFuels. The alternative fuels division's focus included the conversion of
internal combustion engines to run alternately on LPG, CNG or LNG, and the
design, installation and operation of alternative fuel refueling stations. The
ExproFuels division initiated ongoing operations in Texas and Arizona, while
actively pursuing international opportunities in Europe, Asia and Latin
America. Since 1994, gross revenues from the ExproFuels division have
surpassed gross revenues from the Parent's oil and gas operations, although
profitable operating levels have not been attained. In late 1996, the Parent
determined it was in its best interest to refocus its resources on its core oil
and gas industry. Accordingly, the ExproFuels division was contributed to the
Company in August, 1996, in exchange for 100% of the outstanding shares of the
Subsidiary's Common Stock. On August 30, 1996, the Parent's Board paid 10% of
the outstanding shares of the Subsidiary's Common Stock to the Parent's
directors in exchange for serving as directors of the Parent in the past,
thereby reducing the Parent's ownership interest in the Subsidiary from 100% to
90%. On September 3, 1996, the Parent's Board declared a stock dividend of
1,910,000 shares (or approximately 48%) of the Subsidiary's Common Stock to its
shareholders as of the Record Date.
The Subsidiary's business strategy is to install additional fuel
stations during fiscal year 1997, as well as to continue international
marketing and development efforts in Asia and Latin America. The Subsidiary's
management is also considering various potential domestic acquisition
alternatives with the goal of reaching operational efficiencies enabling
ExproFuels to reduce current per unit costs of purchasing, storage and
distribution of alternative fuels. Besides significantly enhancing existing
net operating margins, such acquisitions could enable ExproFuels to improve its
competitive stance in existing markets while facilitating expansion into new
markets. The Subsidiary's management continues to pursue adequate sources of
equity and debt financing for funding the acquisition of established operating
business units, assuming they will provide operating cash flows to ExproFuels
within an acceptable timeframe.
While a division, the Subsidiary's focus included the conversion of
internal combustion engines to run alternatively on LPG, CNG or LNG, and the
installation and design of alternative fuel refueling stations. During its
three and one-half years as a division of the Parent, ExproFuels' business
strategy was to:
1. Provide state of the art internal combustion engine
conversions utilizing three natural gas based alternative
fuels on a worldwide basis: CNG, LNG or LPG.
2. Provide turnkey refueling solutions for the convenient and
safe delivery of alternative fuels.
3. Position the Subsidiary to participate in the ongoing business
of supplying alternative fuels to its expanding conversion
customer base.
4. Maintain an alternative fuel and equipment neutral position,
allowing the Subsidiary's marketing function complete
flexibility in responding to the diverse market opportunities
with the "best fit" fuel mix and equipment configuration
available, as demanded by an extremely specialized and
constantly changing market place.
5. Establish a strong presence in selected U.S. markets prior to
1996 when many more strenuous Environmental Protection Agency
and Department of Energy mandates were originally scheduled to
come into effect.
The combination of expertise in vehicle conversions, refueling station
construction and fuel sales formed the basis of an additional potentially
effective market niche: financing conversions and/or fuel stations through
savings generated using the selected
15
<PAGE> 18
alternative fuel. ExproFuels provided alternative fuel vehicles conversions to
a growing number of private fleets as well as the large mandated governmental
markets at a reasonable and competitive cost and followed up these conversions
with superior, ongoing service and maintenance.
ExproFuels also offered a cost-free alternatively fueled vehicles
(AFV) conversion program to qualified fleets in exchange for long-term fuel
contracts. This program was intended to initiate the heaviest fuel consumers
into alternative fuels use in the least painful manner possible, while
providing ExproFuels a base from which to expand its fuel service capabilities.
Through detailed cost and savings analysis, ExproFuels outlined a cost-savings
plan for fleets which qualified for ExproFuels' long-term fuel contract program
and would assure the fleet operator's compliance with current laws and
anticipated standards. The programs were set up so that the customer's fuel
price could be based on either a percentage of unleaded gasoline assuring a
fixed fuel cost savings, or various other fuel pricing scenarios. ExproFuels
also provided clients with information regarding tax credits, tax deductions,
pollution credits and other incentives being offered by various federal and
state programs.
ExproFuels actively solicits vehicle conversions, maintenance
contracts and fuel service contracts from fleets that are either mandated to
comply in the various alternative fuels and clean air legislation initiatives
or choose to convert their fleet for various economic and environmental
benefits.
In its first three full years of operation, the Subsidiary's customers
have come to include the U.S. Government, the Governments of Uzbekistan and
Colombia, several U.S. state agencies including the Texas Department of
Transportation, the Railroad Commission of Texas, the General Services
Commission of Texas, the Department of Transportation of the State of Louisiana
(through Ecogas, Inc.), and the Department of Administration for the State of
Arizona. Additionally, ExproFuels converts vehicles and builds refueling
stations for parishes, school districts, transit systems, utilities,
municipalities, private fleets and light industrial users.
TEXAS OPERATIONS
San Antonio Facilities:
The first conversion center operated by the Subsidiary was opened in
May, 1993, in San Antonio. Since its opening, the center has converted over
400 vehicles to LPG, including buses, vans, forklifts, industrial engines, and
assorted automobiles and trucks. At August 31, 1996, ExproFuels' vehicle
conversion backlog under contract stood at 111 units. The facility has
designed and installed 24 private use LPG fuel stations since its opening, with
six opened during the current fiscal year. 19 of these fuel stations are owned
and operated by ExproFuels. Monthly LPG motor fuel sales from all facilities
has grown from 340 gallons during December, 1994 to over 36,000 gallons during
August, 1996, with an annual volume of over 231,000 gallons for the current
fiscal year.
Based on recent monthly activity, the Subsidiary's management believes
annual fuel sales at its San Antonio facility may increase by at least 100% in
fiscal year 1997. Current year construction activity included a compressed
natural gas fuel station contract at Kelly AFB in San Antonio. The fueling
facility is one of the largest in the region, valued at over $260,000. In
fiscal year 1997, the Subsidiary expects to increase the volume of CNG
conversion maintenance and repair work it now performs for the expanding Kelly
AFB and Lackland AFB natural gas vehicle fleets.
Dallas Facilities:
The Dallas conversion center opened in May, 1994. Since its opening,
the center has converted over 50 vehicles, while its ongoing customers include
four municipalities and three commercial fleets. The Subsidiary was recently
selected as the ongoing preferred contractor for the City of Plano for 80
additional LPG conversions and a two year LPG fuel supply contract. The final
award of the contract is pending the finalization of current lease negotiations
for a second fuel station location on Texas Utilities property in the Plano
area. The Subsidiary expects to continue the development of its network of
fueling sites for new fleet customers as well as for the existing alternative
fuel-powered vehicles in the Dallas Metroplex. During the current fiscal year,
the Dallas facility was awarded a service contract by the Texas Department of
Transportation involving the testing of CNG cylinders on existing vehicles over
a two year contract period. The contract is valued at over $75,000 and
compliments the ongoing fleet repair and maintenance business performed in the
Dallas facility. Current year sales reached approximately $158,000, including
$90,000 in fuel sales. Based on recent activity, the Subsidiary expects a
significant increase in overall volumes for fiscal year 1997 at the Dallas
center.
16
<PAGE> 19
ARIZONA OPERATIONS
ExproFuels entered the Arizona market during 1995, with the opening of
affiliated centers in Phoenix and Tucson to convert vehicles and supply
conversion kits under a contract that it had been awarded by the State of
Arizona. The Company began offering its services through existing, locally
owned automotive repair facilities under a management agreement with
Arizona-based Environmental Fuel Systems. The existing facilities provided
traditional automotive repair services to the motoring market place while
remaining available to the Subsidiary when needed for conversions. ExproFuels
has converted over 70 vehicles since opening in Arizona through conversion
contracts with 5 municipalities, the state of Arizona, school districts and
Davis Monthan AFB. Subsequent to August, 1996, the Subsidiary successfully
contracted for the conversion of 28 new vehicles to LNG for the use of the City
of Phoenix Department of Transportation. While state legislative changes
enacted during fiscal year 1996 have encouraged ExproFuels to maintain its
presence in the Arizona market, ongoing overhead reduction strategies will
continue until significant, continuous contracting opportunities are identified
and successfully developed. The Subsidiary is actively seeking more bidding
opportunities to expand its conversion and fueling business in Arizona.
LOUISIANA OPERATIONS
In early 1994, ExproFuels was selected as a subcontractor for Ecogas,
Inc., a Texas based company holding a contract to convert up to 25% of the
State of Louisiana's vehicles to CNG. ExproFuels was selected to convert
approximately one-half of these vehicles and opened a conversion facility in
New Orleans, as required under its agreement with Ecogas. Unfortunately,
Ecogas was never able to meet the conversion rates established in the contract
and the number of state vehicles submitted for conversion were not sufficient
to maintain profitable operations. A total of 94 vehicles were eventually
converted to CNG at the Subsidiary's facilities prior to the suspension of
operations during the 2nd quarter of 1995. ExproFuels successfully subleased
the New Orleans conversion center to an unrelated business on a noncancellable
basis, with sublease base terms extending through the base period of the
Subsidiary's original building lease.
INTERNATIONAL OPERATIONS
Throughout fiscal year 1995 and 1996, ExproFuels expanded its support
of existing projects as well as initiated new activities in various
international alternative fuels programs. As a recognized participant in this
emerging industry, the Subsidiary continues to come to the attention of
foreign-based public and private entities interested in bringing ExproFuels'
expertise to their countries. It is ExproFuels' continuing challenge to
identify and successfully participate in those foreign opportunities that offer
new, profitable markets for our technologies.
Uzbekistan:
During 1995, ExproFuels signed a participation agreement with American
Technical Institute ("ATI") and American Engineering, Inc. ("AEI"), both of
Memphis, Tennessee, to provide project management, technical evaluation and
additional assistance in the development of business with the Government of
Uzbekistan. CNG International, Inc. ("CNG International") was incorporated for
these purposes and at August 31, 1996, ExproFuels owned an approximate 11%
interest in it. CNG International is in negotiations with the Government of
Uzbekistan to participate with that nation, on a profitable basis, in the
conversion of a majority of government owned motor vehicles to operate on CNG
and to develop, own and operate the CNG fueling infrastructure throughout that
nation. CNG International will participate in the development of a
manufacturing industry for primary conversion components within Uzbekistan.
Detailed in-country studies conducted during 1995 and 1996 support estimates of
approximately 200,000 vehicle conversions and 300 CNG refueling stations to be
built during the first 5 years, although there can be no guarantee such
estimates will prove accurate.
Throughout fiscal year 1996, ExproFuels has continued to provide
significant support to CNG International, while maintaining its equity stake at
approximately 11%. Progress has been made throughout the current year on the
following items: the successful conclusion to the ExproFuels' led feasibility
study and pilot CNG conversion project including the conversion of 15 Uzbek
government vehicles; the acceptance and approval of study results by all
affected Uzbek government agencies, including the National Bank of Uzbekistan;
the official signing of the Uzbek Cabinet of Ministers decree by Uzbek
President Karimov authorizing the conversion of a large portion of that
country's vehicle fleet to operate on CNG; the signing of the definitive joint
venture agreements between American parties and Uzbek parties in the U.S.
Capital Building in August, 1996; and the opening of offices in Tashkent, the
capital city of Uzbekistan shortly thereafter.
17
<PAGE> 20
Subsequent to year end, final startup activities continue, although
such startup activities continue to be slow through the first 3 quarters of
fiscal 1997. However, startup activities of CNG International have recently
been slowed further, if not put at risk, by disputes between ExproFuels and CNG
International, ATI and AEI. These disputes have resulted in the filing of two
lawsuits in July, 1997, one by ExproFuels in federal court in San Antonio,
Texas, and the other by ATI and AEI in state court in Memphis, Tennessee. In
its lawsuit, ExproFuels claims breach of contract and is seeking, among other
things, (i) damages in the amount of ExproFuels' investment in CNG
International (approximately $380,000), ExproFuels' unreimbursed expenses
advanced to CNG International (approximately $243,000) and ExproFuels' lost
profits or (ii) recision of ExproFuels' arrangement with CNG International and
a refund of all monies invested in or advanced to CNG International. ATI and
AEI, in their lawsuit, have sued ExproFuels for, among other things, breach of
contract, tortious interference with contract, libel, slander, defamation and
unfair competition. ATI and AEI are seeking a declaratory judgment that
ExproFuels' interest in CNG International is null and void as well as
compensatory and exemplary damages. While ExproFuels intends to pursue its
claims and vigorously defend itself against ATI's and AEI's claims, ExproFuels
can not predict the eventual outcome of such litigation or the long-term effect
of such litigation on ExproFuels' investment in CNG International.
Latin America:
During the current year, ExproFuels has continued to participate in
the development of various Latin American programs relative to its expertise
and the public and private contacts it has gained over the last two years.
Many of these countries or regions are in the early stages of the introduction
of alternative fuels to their general public. The ongoing privatization of
state-owned oil and gas industries in most of these countries offers a special
window of opportunity for ExproFuels to participate in the development of
in-country alternative fuels infrastructure, conversions and associated
operations. Currently, a proposal remains pending with Ecopetrol, the
state-owned oil company of Colombia, for an extensive training program for the
safe use and development of LPG and CNG as motor fuels. Ecopetrol's
alternative fuels program has failed to develop at the rate the Colombian
government originally indicated. During fiscal 1996, the Subsidiary
participated in two trade exhibitions in Colombia which generated approximately
$12,000 in conversion equipment and fuel station parts sales to Ecopetrol, and
is currently pursuing in-country investors and developing local market
knowledge for the establishment of an alternative fuels products distribution
company. The Subsidiary is also participating in industry trade shows,
technical symposiums and other opportunities to introduce itself to the
marketplace in these developing markets. The Subsidiary is currently in the
process of establishing strategic alliances or joint ventures with key industry
participants in various countries and feels strongly that significant revenue
producing opportunities, currently being developed, will be confirmed during
the 2nd quarter of fiscal year 1997 and initiated within the current fiscal
year.
COMPETITION
There are several very large companies - including Transtar
Technologies, N.W. Butane, Southern Union EconoFuel Co. and American Natural
Gas Power In Texas and North American Fleet Services, Inc. and Metropane, Inc.
in Arizona - that compete with the Subsidiary in the alternative fuels
conversion business. The Subsidiary may be at a competitive disadvantage since
these other companies have much greater financial resources, larger technical
staffs and greater ability to bear the economic risks inherent in this new
industry. The Subsidiary's revenues, profitability and future rate of growth
are substantially dependent on its ability to compete and increase its sales.
In particular, its ability to compete for the conversion of private fleets
depends on its ability to reduce costs and finance conversions for the
customer. ExproFuels' size allows it to control its cost of conversion;
however, its relatively small size limits its ability to finance clients. See
"Certain Special Considerations-Financial Condition."
CUSTOMERS
During 1996, three purchasers of the ExproFuels' alternative fuels
vehicles conversion services and products accounted for 25%, 8% and 8%,
respectively, of its total sales. In the event any or all these customers do
not continue as customers, the Subsidiary believes that additional customers
will continue to be found for such services and products at comparable prices;
however, should the Subsidiary be unsuccessful in such efforts, its results of
operations and financial condition would be materially and adversely affected.
See "Certain Special Considerations-Dependence on Certain Customers" and Note 9
to the Subsidiary's Financial Statements.
EMPLOYEES
As of June 30, 1997, the Subsidiary employed 11 full-time employees
including management. The Company believes its relations with its employees
are good. None of the Company's employees are covered by union contracts.
18
<PAGE> 21
GENERAL REGULATIONS
The conversion of alternative fuels vehicles are regulated by both
state and federal authorities. The executive and legislative branches of
government, at both the state and federal levels, have in the past and it
appears will continue to periodically propose and consider proposals for
regulation with respect to the development and use of alternative fuels, energy
conservation, environmental protection, as well as various other related
programs. Additional regulation, changes in regulation or re-regulation
relating to the above subjects could adversely affect the Company. A listing of
the more significant current state and federal statutory authority for
regulation of the Subsidiary's current operations and business are provided
herein below.
Federal Regulatory Controls:
The Clean Air Act of 1970, as amended (the "Clean Air Act"), requires
that the concentration of pollutants in exhaust gases from the nation's cars,
trucks and buses fall below prescribed pollution limits. Emission standards
for different types of vehicles were established for carbon monoxide,
hydrocarbons and nitrogen oxides. The Clear Air Act authorized the
Environmental Protection Agency ("EPA") to establish maximum concentration
levels for six pollutants: carbon monoxide, nitrogen oxides, ozone, particulate
matter, sulfur dioxide and lead. The Clean Air Act requires that states, where
the concentrations exceed the standards, develop plans to control these
emissions and to reduce these contaminates. States which do not comply face
possible bans on new source construction, freezes on federal grants and
reduction in highway funds. If states fail to implement an adequate plan, the
EPA may implement its own control measures which include downtown parking
restrictions, staggered working hours, and gasoline rationing, as well as many
other actions.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments")
clarified how areas would be designated as non-attainment areas for ozone,
carbon monoxide and particulate matter in accordance with the severity of the
air pollution problem. In November 1991, the EPA identified 98 non-attainment
areas for ozone, 42 areas for carbon monoxide and 71 areas for particulate
matter. Additional areas may be added if their air quality declines below the
standards. Because automobiles, trucks and buses are among the biggest
contaminators, the Subsidiary has recognized the need for businesses and state
and local governments to convert their vehicles to run on clean fuels such as
LPG, CNG or LNG. The Subsidiary believes that these regulations will be strong
motivation to these entities to convert their vehicles, thereby increasing
activity in this newly emerging industry in which the Subsidiary is
participating. For example, beginning with 1998 models, fleets with 10 or more
vehicles capable of being centrally refueled in the 22 smoggiest cities (the
serious, severe and extreme ozone nonattainment areas plus Denver, Colorado for
carbon monoxide nonattainment) must begin to buy clean fuel vehicles.
Beginning in the model-year 1998, 30 percent of new passenger cars and most
categories of light trucks and vans bought for these fleets must be clean fuel
vehicles. The percentage rises to 50 percent in 1999 and 70 percent in 2000.
For heavy-duty vehicles including school buses and delivery vans, the phase-in
stays a constant 50 percent of new purchases beginning in 1998. Past history
has shown that mandates of this type are generally met by the purchase of new
gasoline or diesel vehicles and converting them to run on alternative fuels.
Also under the 1990 CAA Amendments are mandates for the EPA which began testing
urban bus fleets in 1994. If it is found that the buses are not meeting the
new standards in use, the EPA may mandate a switch to cleaner fuels in 48
cities with populations of more than 750,000.
The Energy Policy Act of 1992, as amended (the "Energy Policy Act"),
also provides federal mandates for AFV's. The primary aim of the Energy Policy
Act is to reduce dependence of the United States on crude oil imports. The
Energy Policy Act directly affects light-duty federal, state and some private
fleets of at least 20 vehicles that can be centrally refueled and are operated
in metropolitan areas with populations of 250,000 or more. The minimum federal
fleet requirements for light duty AFV are as follows: 5,000 in 1993; 7,500 in
1994; 10,000 in 1995; 25% in 1996; 33% in 1997; 50% in 1998; and 75% for 1999
and thereafter. In addition, federal fleets are mandated to use commercial
fueling facilities that offer alternative fuels to the public as much as
practicable. Purchases of light-duty vehicles by state governments are
required to be AFV in the following amounts: 10% in 1996; 15% in 1997; 25% in
1998; 50% in 1999; and 75% in 2000 and thereafter. Private sector companies
that make alternative fuels, such as natural gas, electric and LPG producing
companies, are required to introduce AFV's into their fleets as follows: 30% in
1996; 50% in 1997; 70% in 1998; and 90% in 1999 and thereafter. Executive
Order 12844, issued in April 1993, requires federal agencies to acquire,
subject to the availability of funds and life-cycle costs, AFV's in numbers
that exceed by 50% the requirements for 1993 through 1995 set forth in the
Energy Policy Act.
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<PAGE> 22
State Regulatory Controls:
The 1990 CAA Amendments have caused at least sixteen states to pass
legislation requiring the purchase or conversion of vehicles to run on clean
fuels. Most of these require certain percentages of the state's own vehicle
fleet to be converted by various dates. In addition, some states have mandated
that school buses and metro transit systems convert percentages of their fleets
within given time frames. Texas, for example, has legislated that school
districts which operate more than 50 buses, state agencies with more than 15
vehicles and local transit authorities are not allowed to purchase or lease
vehicles which cannot operate on an approved alternative fuel after September
1, 1993. By September 1, 1997, 50% of these fleets must be converted; and by
September 1, 2001, 90% must be operating on alternative fuels. In addition,
Texas Senate Bill 769 requires that local government fleets of more than 15
vehicles and private fleets of more than 25 vehicles in non-attainment areas
must convert their vehicles. Under HB 2575, Arizona has mandated that 40% of
the state's fleet of vehicles must be converted to alternative fuels by
December 31, 1995 and 90% by December 31, 1997. Additionally, large cities are
required to convert city-owned vehicles and school buses under the following
schedules: 18% by 1996; 25% by 1997; 50% by 1999; and 75% by 2001. In
Louisiana, Acts 927 and 954 require that 30% of the state's vehicles be
converted to alternative fuels by September 1, 1994; 50% by September 1, 1996;
and 80% by September 1, 1998. Many states have similar legislation which
either legislates that conversions occur or gives incentives to help with the
conversions although punitive actions have not always followed non-compliance.
In March, 1995 SB 200 was passed by the Texas Legislature which
significantly affects certain sectors of the alternative fuels industry. The
bill reclassified reformulated gasoline as an alternative fuel, in recognition
of its cleaner, less polluting attributes. While effectively diminishing the
effect of upcoming deadlines on state regulatory mandates on some public and
private sector fleets operating in Texas, it established higher standards of
allowable emissions for certain public fleets, such as state agencies and
public transportation fleets. The Subsidiary believes that it will not be
significantly impacted by this legislation. Additionally, the Subsidiary is
closely monitoring the legislative developments in Arizona where it also
operates. HB 2002 was passed by the Arizona Legislature in late 1996 and
includes numerous beneficial provisions intended to encourage the use of LPG
and CNG by various categories of vehicle owners. Incentives include special
reduced rates for AFV license plates, special permission allowing AFV's to use
HOV lanes regardless of number of occupants, and the repeal of an $0.18 per
gallon use fuel tax on alternative fuels. The Subsidiary believes these
incentives, together with other incentives targeted at the public sector, will
allow alternative fuel conversions to be justified economically more readily by
many fleets throughout Arizona. As of year end, the Subsidiary was not aware
of any Arizona legislation which would significantly dilute that state's
mandate and related deadlines effecting the alternative fuel vehicles industry:
however, there can be no assurance that new legislation will not be forthcoming
in some future date which could adversely effect the Company's ability to
conduct its business in Arizona.
Environmental Regulation:
The Clean Air Act and the 1990 CAA Amendments have made improving the
air quality in the United States a major goal. To this end, the EPA has
established maximum permitted levels for six major air pollutants: carbon
monoxide, nitrogen oxide, ozone, particulate matter, sulfur dioxide and lead.
Certain metropolitan areas have been designated as non-compliance areas. These
areas have been classified as marginal, moderate or severe depending upon the
level of contamination. The EPA has established a time schedule for each of
these classifications to be brought within compliance with these two Acts.
ExproFuels converts vehicles to run on LPG, CNG or LNG which lowers the level
of the pollutants being emitted in the non-attainment area because these
alternative fuels are much cleaner-burning fuels than gasoline. ExproFuels is,
consequently, subject to the EPA standards for emissions from vehicles which
have been converted. Some states have adopted their own standards; most of
these have adopted those of the California Air Resources Board ("CARB") which
has been a leader in defining acceptable limits for pollutants. ExproFuels
must also comply with the applicable state regulations regarding the conversion
of vehicles and the sale of alternative fuels.
Federal and State Tax Considerations:
In October of 1992, Congress passed the Comprehensive National Energy
Policy Act which encourages the use of natural gas by providing a deduction for
a portion of the incremental cost of motor vehicles that are propelled by clean
burning fuels. The amount of the deduction depends on the gross vehicle weight
and ranges from $50,000 for heavy trucks and buses, $5,000 for medium weight
trucks and $2,000 for other motor vehicles. This Act also allows a deduction
for the cost of qualified clean fuel vehicle refueling property, defined as
property used to refuel clean-fuel vehicles at the point where the fuel is
delivered. The aggregate cost that may be taken into account in determining
the amount of the deduction may not exceed $100,000 at any location. The
deductions apply to properties placed in service after June 30, 1993. At least
twenty-four states have enacted their own legislation to give
20
<PAGE> 23
additional incentives to companies desiring to convert or purchase natural gas
vehicles. These incentives vary considerably from state to state. Arizona
reduces the license tax and gives a tax credit of $1,000 for alternative fuel
vehicles purchased in 1994, 1995 and 1996. Oklahoma gives a state income tax
credit of up to $1,500 and has provided interest free loans of up to $1,500,000
to local government and school districts to convert vehicles. Louisiana
provides that 20% of the conversion cost can be deducted as a tax credit.
Texas has legislated that propane and natural gas are exempt from the recent
increase of $0.05 per gallon motor fuels tax.
LITIGATION
The Subsidiary is not involved in any matters of litigation incidental
to its business, other than the following: Disputes between ExproFuels and CNG
International, AEI and ATI have resulted in the filing of two lawsuits in July,
1997, one by ExproFuels in federal court in San Antonio, Texas, and the other
by ATI and AEI in state court in Memphis, Tennessee. In its lawsuit,
ExproFuels claims breach of contract and is seeking, among other things, (i)
damages in the amount of ExproFuels' investment in CNG International
(approximately $380,000), ExproFuels' unreimbursed expenses advanced to CNG
International (approximately $243,000) and ExproFuels' lost profits or (ii)
recision of ExproFuels' arrangement with CNG International and a refund of all
monies invested in or advanced to CNG International. ATI and AEI, in their
lawsuit, have sued ExproFuels for, among other things, breach of contract,
tortious interference with contract, libel, slander, defamation and unfair
competition. ATI and AEI are seeking a declaratory judgment that ExproFuels'
interest in CNG International is null and void as well as compensatory and
exemplary damages. While ExproFuels intends to pursue its claims and
vigorously defend itself against ATI's and AEI's claims, ExproFuels can not
predict the eventual outcome of such litigation or the long-term effect of such
litigation on ExproFuels' investment in CNG International.
PROPERTIES
The Subsidiary's administrative offices are located at 500 North Loop
1604 East, Suite 250, San Antonio, Texas. These offices, consisting of
approximately 5,700 square feet, are leased from the Parent, on a month to
month basis, for $4,000 per month. In addition, ExproFuels leases four other
facilities:
<TABLE>
<CAPTION>
Approximate Monthly
Location Type Square Feet Rental Expiration
- -------- ---- ----------- ------ ----------
<S> <C> <C> <C> <C>
San Antonio, Texas conversion 5,000 $2,500 May 1999
New Orleans, Louisiana conversion 15,000 4,200 February 1997
Dallas, Texas conversion 7,000 1,900 May 1997
Dallas, Texas fueling 8,200 400 July 1998
</TABLE>
The New Orleans facility has been closed by the Subsidiary, and the facility
was subleased under a noncancellable lease for $4,500 per month which expired
in February, 1997. Management believes these facilities are suitable to
accommodate the anticipated growth of ExproFuels in these cities over the next
several fiscal years. While no additional conversion center locations are
anticipated to be leased in other cities during the next fiscal year, the
Subsidiary is seeking additional fuel station sites.
MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
Following the Distribution, it is intended that the Subsidiary will
continue to be operated in substantially the same manner in which it is
currently operated. Set forth below is information with respect to those
individuals who serve as a director or executive officer of the Subsidiary as
of the Distribution Date.
21
<PAGE> 24
<TABLE>
<CAPTION>
OTHER POSITIONS AND BUSINESS EXPERIENCE
PRIOR TO BECOMING AN EXECUTIVE OFFICER OF THE SUBSIDIARY
NAME AND TITLE AGE
<S> <C> <C>
Stephen M. Gose, Jr. . . . . . . . . . . . . . . 66 Stephen M. Gose, Jr., has served as Chairman of the Board of
Chairman of the Board of Directors Directors of the Subsidiary since August 1996, and of Parent since
July, 1984. He has been active for more than thirty-five years in
exploration and development of oil and gas properties, in real estate
development, and in ranching through the operations of Cibolo
Properties, Inc., its predecessors and affiliates. The Company
anticipates Stephen M. Gose, Jr. will spend an equal amount of time
(approximately 10 hours per month) as Chairman of the Board of
Directors of the Parent and of the Subsidiary.
Thomas H. Gose . . . . . . . . . . . . . . . . . 41 Thomas H. Gose has served as the President and a Director of the
President and Director Subsidiary since August 1996. He has also served as Director of the
Parent since February 1989 and as Secretary of the Parent since
January 1, 1992. He is the sole Director, CEO and President of
Cibolo Properties, Inc. He formerly served as President of Spectrum
Resources, Inc. since 1987. Thomas H. Gose is the son of Stephen M.
Gose, Jr. The Company anticipates that Thomas H. Gose will spend
approximately 40 hours per week on the business of the Company and 4
hours per week as a director of the Parent.
James E. Sigmon. . . . . . . . . . . . . . . . . 48 James E. Sigmon has served as a Director of the Subsidiary since
Director August 1996. He has served as the Parent's President since February
1985 and a Director of the Parent since July 27, 1984. The Company
anticipates that James E. Sigmon will spend approximately 40 hours
per week on the business of the Parent and 4 hours per week as a
director of the Subsidiary.
Richard A. Sartor . . . . . . . . . . . . . . . . 45 Richard A. Sartor has served as the Controller of the Subsidiary and
Controller of the Parent since April 1997. The Company anticipates Richard A.
Sartor will spend an equal amount of time (approximately 20 hours per
week) as Controller of the Subsidiary and the Parent.
Roberto R. Thomae . . . . . . . . . . . . . . . . 46 Roberto R. Thomae has served as Chief Financial Officer of the
Chief Financial Officer Subsidiary and of the Parent since August 1996. The Company
anticipates Roberto R. Thomae will spend an equal amount of time
(approximately 20 hours per week) as Chief Financial Officer of the
Subsidiary and the Parent.
</TABLE>
Each of the aforementioned executive officers and/or Directors have been
elected to serve for one year or until his successor is duly elected. The
Board of Directors has no nominating, audit or compensation committee. Members
of the Board of Directors are not compensated for any services provided as
Directors.
EXECUTIVE COMPENSATION
Prior to the Distribution, ExproFuels has functioned as a division or
a subsidiary of the Parent and its management has been employed by the Parent.
The following Summary Compensation Table sets forth a summary of the
compensation paid during the past fiscal year by the Subsidiary to the
individuals serving as the Subsidiary's chief executive officer and the four
most highly compensated executive officers whose total annual salary and bonus
exceeds $100,000 (the "Named Executives"). The compensation amounts in the
following tables represent all compensation paid to each such individual in
connection with his position with the Subsidiary only.
22
<PAGE> 25
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
---------------------- ------------------------
Securities All Other
Underlying Compen-
Name and Principal Position Fiscal Year Salary Bonus Options sation
<S> <C> <C> <C> <C> <C>
Thomas H. Gose, President 1996 $72,000 $ 0.00 -0- $ -0-
</TABLE>
STOCK OPTION GRANTS, EXERCISES AND YEAR-END VALUE
The Subsidiary did not grant any options to the Named Executives
during fiscal year 1996, and no options to purchase shares of the Subsidiary's
Common Stock were outstanding in the name of the Named Executives at August 31,
1996.
EMPLOYMENT CONTRACTS
The Subsidiary has no employment contracts with any of its Named
Executives.
23
<PAGE> 26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is the beneficial ownership of the Subsidiary's Common
Stock at February 1, 1997, by (i) each person who is known to beneficially own
more than 5% of the outstanding shares of the Subsidiary's Common Stock, (ii)
each director of the Subsidiary, (iii) each Named Executive and (iv) executive
officers of the Subsidiary as a group. The address for each director, Named
Executive and The Exploration Company is the Subsidiary's address.
<TABLE>
<CAPTION>
SHARES OF THE SUBSIDIARY'S
COMMON STOCK BENEFICIALLY SHARES OF THE SUBSIDIARY'S
OWNED PRIOR TO THE COMMON STOCK BENEFICIALLY
NAME OF BENEFICIAL OWNER DISTRIBUTION(1) OWNED AFTER THE DISTRIBUTION(1)
<S> <C> <C> <C> <C>
Number % Number %
------ - ------ -
Stephen M. Gose . . . . . . . . . . . . . . 3,650,000 91.3 1,740,000 43.5
Thomas H. Gose . . . . . . . . . . . . . . 3,950,000 96.3 2,040,000 49.8
James E. Sigmon . . . . . . . . . . . . . . 3,800,000 92.7 1,890,000 46.1
The Exploration Company . . . . . . . . . . 3,600,000 90.0 1,690,000 42.0
All directors and executive officers as a
group(2) . . . . . . . . . . . . . . . . 4,200,000 100.0 2,290,000 54.5
-----------
</TABLE>
(1) Except as otherwise noted, the Subsidiary believes that each named
individual has sole voting and investment power over the shares
beneficially owned.
(2) The number of shares beneficially owned by Messrs. Stephen M. Gose,
Thomas H. Gose and James E. Sigmon includes 0, 100,000 and 100,000
shares, respectively, of the Subsidiary's Common Stock reserved for
issuance under options which are exercisable within 60 days and includes
all of the shares of the Subsidiary's Common Stock beneficially owned by
the Parent, of which all three serve as a director and share voting and
dispositive power with the Parent.
24
<PAGE> 27
THE SUBSIDIARY'S 1996 FLEXIBLE INCENTIVE PLAN
GENERAL
In January 1996, the Subsidiary's Board of Directors adopted the 1996
Plan and the Subsidiary's only shareholder, the Parent, approved the 1996 Plan
on August 15, 1996.
The purpose of the 1996 Plan is to enable the Subsidiary to attract,
motivate and retain highly talented executive officers by enabling the
Subsidiary to make awards that recognize the creation of long-term value for
the Subsidiary's shareholders and promote the continued growth and success of
the Subsidiary. To accomplish this purpose, the 1996 Plan provides for the
granting to eligible persons of incentive stock options ("ISOs"), as defined in
Section 422A(b) of the Code, options which do not qualify as ISOs ("NQOs"),
stock appreciation rights ("SARs"), restricted stock ("Restricted Share"),
performance shares ("Performance Shares"), performance units ("Performance
Units"), dividend equivalent rights ("DERs") and any combinations thereof. For
purposes of this Information Statement, ISOs, NQOs, SARs, Restricted Shares,
Performance Shares, Performance Units and DERs are collectively referred to as
"Awards." Recipients of such Awards are hereinafter referred to individually as
an "Awardee" and collectively as "Awardees." ISOs and NQOs are sometimes
referred to individually as an "Option" and collectively as "Options," and an
Awardee of an Option is sometimes referred to individually as an "Optionee" and
collectively as "Optionees."
The 1996 Plan is not a qualified pension, profit sharing or stock
bonus plan under Section 401 (a) of the Code, nor is it an "employee benefit
plan" subject to the provisions of the Employee Retirement Income Security Act
of 1974.
Pursuant to the 1996 Plan, a total of 400,000 shares of Common Stock
may be issued under the 1996 Plan; however, the maximum number of shares of the
Subsidiary's Common Stock with respect to which Awards may be granted in any
fiscal year to any executive officer whose compensation is required to be
reported in the Company's proxy statement pursuant to rules promulgated under
the Exchange Act and whose total compensation is possibly subject to the
limitations on deductions imposed by Section 162(m) of the Code (such executive
officer being hereinafter referred to as a "Named Officer") shall not exceed
80,000. Shares issued under the 1996 Plan may be either authorized and
unissued Subsidiary's Common Stock or the Subsidiary's Common Stock held in or
acquired for the treasury of the Subsidiary. Any shares of the Subsidiary's
Common Stock subject to an Option or SAR that are not issued prior to the
expiration of such awards, or any Restricted Stock or Performance Shares that
are forfeited, will again be available for award under the 1996 Plan. In the
event that shares of the Subsidiary's Common Stock are delivered to the
Subsidiary in payment of the exercise price with respect to any Option granted
under the 1996 Plan, the number of shares available for future awards under the
1995 Plan will be reduced only by the net number of shares issued. There are
no aggregate limits to non-stock based awards which may be granted under the
1996 Plan.
As of November 1, 1996, ISOs to purchase 300,000 shares of the
Subsidiary's Common Stock had been issued under the 1996 Plan. No adjustment
will be made to the outstanding ISOs as a result of the Distribution. As a
result, only 100,000 shares of the Subsidiary's Common Stock will be available
for issuance under the 1996 Plan.
The following description of the 1996 Plan is a summary of certain
provisions of the 1996 Plan. This summary does not purport to be complete, and
is qualified in its entirety by reference to the provisions of the 1996 Plan, a
copy of which is included as an exhibit to the Subsidiary's Form 10-SB
Registration Statement filed with the SEC.
ELIGIBLE PARTICIPANTS
Eligibility for participation in the 1996 Plan is confined to key
employees of the Subsidiary and its subsidiaries, as determined by the
Subsidiary's Board in its sole discretion. There are approximately 6 persons
who will be currently eligible to participate in the 1996 Plan. Unless
otherwise employed by the Subsidiary, non-employee directors will not be
entitled to participate in the 1996 Plan.
ADMINISTRATION
The Subsidiary's Board will administer the 1996 Plan and has broad
powers under the 1996 Plan to, among other things, administer and interpret the
1996 Plan, establish guidelines for the 1996 Plan's operation, select persons
to whom Awards are to be made under the 1996 Plan, determine the types, sizes
and combinations of Awards to be granted under the 1996 Plan, and determine
other terms and conditions of an Award. In addition, except as set forth below
under "Amendment and Termination," the Subsidiary's
25
<PAGE> 28
Board also has the power to modify or waive restrictions or limitations on the
exercisability of Awards and to accelerate and extend existing Awards. The
Subsidiary's Board may also determine whether, and to what extent and under
what conditions to provide loans to eligible participants to purchase the
Subsidiary's Common Stock under the 1996 Plan. In addition, the Subsidiary's
Board has the power to modify the terms of existing Awards, including, in the
case of Options, the exercise price thereof.
OPTIONS
Under the 1996 Plan, the Subsidiary's Board may grant Awards in the
form of Options to purchase shares of the Subsidiary's Common Stock. Options
may be in the form of ISOs or NQOs. The Subsidiary's Board will, with regard
to each Option, determine the number of shares subject to the Option, the term
of the Option (which, for ISOs, shall not exceed ten years), the exercise price
per share of stock subject to the Option (which, for ISOs, must be not less
than the fair market value of the Common Stock at the time of grant), the
vesting schedule (if any) and the other material terms of the Option. Any
Option granted in the form of an ISO must satisfy the applicable requirements
of Section 422 of the Code. NQOs may have an exercise price that is less than
fair market value (but not less than the par value of the Common Stock).
The Option price upon exercise may, to the extent determined by the
Subsidiary's Board at or after the time of grant, be paid by a participant in
cash, in shares of the Subsidiary's Common Stock owned by the participant, in
shares of stock awarded under the 1996 Plan, including restricted stock, by a
reduction in the number of shares of the Subsidiary's Common Stock issuable
upon the exercise of the Option or by other consideration. The Subsidiary's
Board may offer to buy an Option previously granted on such terms and
conditions as the Subsidiary's Board shall establish. Options may, at the
discretion of the Subsidiary's Board, provide for "reloads," whereby a new
Option is granted for the same number of shares as the number of shares of
Common Stock or restricted stock used by the participant to pay the Option
price upon exercise.
Unless the Subsidiary's Board determines otherwise at the time of
grant, the 1996 Plan provides that upon termination of employment by reason of
death or disability, Options, to the extent vested, will be exercisable for one
year or until the end of the Option term, whichever is shorter. Unless the
Subsidiary's Board determines otherwise at the time of grant or thereafter, the
1996 Plan provides that upon termination of employment for any reason other
than death or disability, Options, to the extent vested, will be exercisable
for three months, or until the end of the Option term, whichever is shorter.
STOCK APPRECIATION RIGHTS
The 1996 Plan authorizes the Subsidiary's Board to grant SARs either
with an Option ("Tandem SARs") or independent of an Option ("Non-Tandem SARs").
An SAR is a right to receive a payment either in cash or the Subsidiary's
Common Stock, as the Subsidiary's Board may determine, equal in value to the
excess of the fair market value of a share of Common Stock on the date of
exercise over the reference price per share of the Subsidiary's Common Stock
established in connection with the grant of the SAR. The reference price per
share covered by an SAR will be the per share exercise price of the related
Option in the case of a Tandem SAR and will be a percentage designated by the
Subsidiary's Board of the per share fair market value of the Subsidiary's
Common Stock on the date of grant (or any other date chosen by the Subsidiary's
Board) in the case of a Non-Tandem SAR.
A tandem SAR may be granted at the time of the grant of the related
Option or, if the related Option is a NQO, at any time thereafter during the
term of the Option. A Tandem SAR generally may be exercised at and only at the
times and to the extent the related Option is exercisable. A Tandem SAR is
exercised by surrendering the same portion of the related Option. A Tandem SAR
expires upon the termination of the related Option.
A Non-Tandem SAR will be exercisable as provided by the Board of
Directors and will have such other terms and conditions as the Subsidiary's
Board may determine. A Non-Tandem SAR may have a term of no longer than ten
years from its date of grant. A Non-Tandem SAR is subject to acceleration of
vesting or immediate termination in certain circumstances, in the same manner
as discussed above in the case of Options.
The Subsidiary's Board is also authorized to grant "limited SARs,"
either as Tandem SARs or Non-Tandem SARs. Limited SARs would become
exercisable only upon the occurrence of a "Change in Control" (as defined in
the 1996 Plan) or such other event as the Subsidiary's Board may designate at
the time of grant or thereafter.
26
<PAGE> 29
RESTRICTED SHARES
The 1996 Plan authorizes the Subsidiary's Board to grant Awards in the
form of restricted Shares of the Subsidiary's Common Stock. These Awards may
be in such amounts and subject to such terms and conditions as the Subsidiary's
Board may determine, including, but not limited to, the price (if any) to be
paid by the Awardee, the time or times within which such Awards may be subject
to forfeiture, the vesting schedule (which may be based on service, performance
or other factors) and rights to acceleration of vesting (including whether
non-vested shares are forfeited or vested upon termination of employment). The
Subsidiary's Board may award performance-based shares of Restricted Shares by
conditioning the grant, vesting or the release, expiration or lapse of
restrictions of such Restricted Shares, or the acceleration of any of such
conditions, upon the attainment of specified performance goals or such other
factors as the Subsidiary's Board may determine.
PERFORMANCE SHARES
The 1996 Plan permits the granting of Performance Shares, consisting
of the right to receive the Subsidiary's Common Stock, restricted stock or cash
of an equivalent value, as the Subsidiary's Board of Directors may determine,
at the end of a specified performance period established by the Subsidiary's
Board. These Awards may be in such number of shares and subject to such
additional terms and conditions as the Subsidiary's Board may determine,
including, but not limited to, the criterion to be used to determine the
vesting of Performance Shares and whether Performance Shares are forfeited or
vest upon termination of employment during the performance period. The
Subsidiary's Board may condition the grant of Performance Shares upon the
attainment of specified performance goals, such as the Subsidiary's achievement
of certain earnings levels or the Subsidiary's performance (or the performance
of its stock) measured against the performance of its competition, or such
other facts as the Subsidiary's Board my determine.
PERFORMANCE UNITS
The 1996 Plan permits the granting of Performance Units, consisting of
the right to receive a fixed dollar amount payable in cash, the Subsidiary's
Common Stock or restricted stock, or any combination thereof, as the
Subsidiary's Board may determine, at the end of a performance cycle established
by the Subsidiary's Board. Except for the fact that the Award is denominated
in dollars rather than shares, the provisions of the 1996 Plan regarding
Performance Units are substantially similar to those regarding Performance
Shares, as described above.
DIVIDEND EQUIVALENT RIGHTS
The Subsidiary's Board of Directors may, in the Board's discretion,
provide that any Option, Restricted Shares, Performance Shares or Units or
other stock-based Awards under the Plan may earn DERs. In respect of any such
Award which is outstanding on a dividend record date for the Subsidiary's
Common Stock, the Subsidiary's Board may credit a participant with an amount
equal to the cash or stock dividends or other distributions that would have
been paid on the shares of Common Stock covered by such Award had such covered
shares been issued and outstanding on such dividend record date. The rules and
procedures governing the crediting of DERs, including the timing, form of
payment and payment contingencies thereof, shall be established by the
Subsidiary's Board.
WRITTEN AGREEMENTS
Awards shall be evidenced by instruments (which need not be identical)
in such forms as the Subsidiary's Board may from time to time approve. Such
instruments shall conform to such terms, conditions and provisions as are
applicable under the 1996 Plan and may contain such other terms and conditions
and provisions as the Subsidiary's Board deems advisable which are not
inconsistent with the 1996 Plan, including restrictions applicable to shares of
the Subsidiary's Common Stock issuable upon exercise of Awards. An Award may
provide for acceleration of exercise in the event of a change in control of the
Subsidiary, in the discretion of and as defined by the Subsidiary's Board.
EXERCISE OF AWARDS
An Award (or any part or installment thereof) shall be exercised as
specified in the written instrument granting such Award, which instrument may
specify any legal method of exercise. The holder of an Award exercisable for
shares shall not have the rights of a shareholder with respect to the shares
covered by his Award until the date of issuance of a stock certificate to him
for such shares.
27
<PAGE> 30
Except as expressly provided in the 1996 Plan with respect to changes in
capitalization and stock dividends, no adjustment shall be made for dividends
or similar rights for which the record date is before the date such stock
certificate is issued.
PAYMENT FOR AWARDS
The purchase price of any shares of the Subsidiary's Common Stock
purchased pursuant to the exercise of an award granted under the 1996 Plan
shall be payable in full on the exercise date in cash, by check, by surrender
to the Subsidiary of shares of the Subsidiary's Common Stock registered in the
name of the participant, by delivery to the Subsidiary of such other lawful
consideration as the Subsidiary's Board may determine, or by a combination of
the foregoing. Any such shares so surrendered shall be deemed to have a value
per share equal to the fair market value of a share of the Subsidiary's Common
Stock on such date.
ADJUSTMENTS; CHANGES IN STOCK; RECAPITALIZATION AND REORGANIZATION
Upon the happening of any of the following events, an Awardee's rights
with respect to Awards granted to him and the Awardee's rights with respect to
the Subsidiary's Common Stock to be acquired (or used for measurement purposes)
pursuant to an Award, shall be adjusted as provided below, unless otherwise
specifically provided, in addition or to the contrary, in the 1996 Plan or the
written agreement between the Awardee and the Subsidiary relating to such
Award.
In the event shares of the Subsidiary's Common Stock shall be
subdivided or combined into a greater or smaller number of shares or if, upon a
merger, consolidation or reorganization of the Subsidiary, the shares of the
Subsidiary's Common Stock shall be exchanged for other securities of the
Subsidiary or of another corporation, the number of shares covered by each
outstanding Award and the exercise price, if applicable, shall be
proportionately increased or decreased. If any Awardee receives new,
additional or different securities in connection with any corporate transaction
described in this paragraph, such new securities shall be subject to all of the
conditions and restrictions applicable to the Subsidiary's Common Stock with
respect to which the new securities were issued.
Upon the happening of any of the foregoing events, the class and
aggregate number of shares reserved for issuance under the 1996 Plan shall also
be appropriately adjusted to reflect the events described above.
AMENDMENT AND TERMINATION
The Subsidiary's Board may at any time and from time to time, amend,
in whole or in part, any or all of the provisions of the 1996 Plan or suspend
or terminate it entirely, retroactively or otherwise; provided, however, that
unless otherwise required by law or specifically provided in the 1996 Plan, the
rights of an Awardee to Options or other Awards grants prior to such amendment,
suspension or termination may not be impaired without the consent of such
Awardee; and, provided further, that without the approval of the shareholders
of the Subsidiary, no amendment may be made which would materially increase the
aggregate number of shares of the Subsidiary's Common Stock that may be issued
under the 1996 Plan; materially change the definition of employees eligible to
receive awards under the 1996 Plan; decrease the minimum option price permitted
under the 1996 Plan; or increase the ten-year maximum option term permitted
under the 1996 Plan.
No Award or grant may be made under the 1996 Plan on or after August
15, 2006 (the tenth anniversary of the effective date of the 1996 Plan).
AWARDS TO CERTAIN OFFICERS
Pursuant to the 1996 Plan, the Named Officers shall only have Awards
(other than Options and SARs granted under the 1996 Plan) based upon the
attainment of certain performance goals. Pursuant to the 1996 Plan, no later
than the earlier of 90 days after the commencement of the applicable fiscal
year or such other award period and the completion of 25% of such award period,
the Subsidiary's Board shall establish in writing the performance goals
applicable to each such Award for any Named Officer. At the time of the
establishment of the goals, the outcome of such goals must be substantially
uncertain. In addition, the goals must be stated in terms of an objective
formula or standard method for computing the amount of compensation payable to
any Named Officer if the goal is obtained. The formula or standard shall be
sufficiently objective so that a third party with knowledge of the relevant
performance results could calculate the amount to be paid to the officer.
Performance measures which may serve as determinants of any such Award shall be
limited to such measures as earnings per share, return on assets, return on
equity, net profits after taxes, etc. Within 90 days after the completion of
any award period, the Subsidiary's Board shall certify in writing whether the
performance goals
28
<PAGE> 31
and any other material terms were satisfied. Pursuant to the 1996 Plan, the
maximum amount of compensation payable as an Award (other than an award which is
an Option or SAR) to any Named Officer during any calendar year may not exceed
$1,000,000. In addition, the material terms of the performance goals for the
Officer and the compensation payable thereunder shall be submitted to the
shareholders of the Subsidiary for their review and approval; and such approval
must be obtained prior to any award being paid to any Named Officer. If not
approved, no amount shall be paid to such officer for such applicable Award
period under the 1996 Plan. In view of the Subsidiary's current financial
situation and compensation being paid to its officers and directors, the
Subsidiary does not currently anticipate that the provisions of the 1996 Plan
applicable to the maximum awards will be applicable in the near future, if
ever.
DESCRIPTION OF THE SUBSIDIARY'S CAPITAL STOCK
GENERAL
The Subsidiary's authorized capital stock consists of 60 million
shares of which ten million shares are preferred stock, $0.01 par value, and 50
million shares are Common Stock, $0.01 par value. Four million shares of the
Subsidiary's Common Stock are issued and outstanding prior to the Distribution
Date. On the Distribution Date, 1,190,000 shares of the Subsidiary's Common
Stock, constituting approximately 48% of the issued and outstanding shares of
the Subsidiary's Common Stock, will be distributed to stockholders of the
Parent in the Distribution. All of the shares of the Subsidiary's Common Stock
issued in the Distribution are validly issued, fully paid and non- assessable.
The Subsidiary's Certificate of Incorporation provides that the
Subsidiary's Board is authorized to provide for the issuance of shares of
preferred stock, from time to time, in one or more series, and to fix any
voting powers, full or limited or none, and the designations, preferences and
relative, participating, optional or other special rights, applicable to the
shares to be included in any such series and any qualifications, limitations or
restrictions thereon. No shares of preferred stock of the Subsidiary are
outstanding or will be outstanding directly following the Distribution.
There will be no material differences between the rights of holders of
capital stock of the Subsidiary and the rights of holders of capital stock in
the Parent following the Distribution.
COMMON STOCK
Voting Rights: Each holder of the Subsidiary's Common Stock will be
entitled to one vote for each share registered in his name on the books of the
Subsidiary on all matters submitted to a vote of stockholders. Except as
otherwise provided by law, the holders of the Subsidiary's Common Stock will
vote as one class. The shares of the Subsidiary's Common Stock will not have
cumulative voting rights. As a result, subject to the voting rights, if any,
of the holders of any shares of the Subsidiary's preferred stock which may at
the time be outstanding, the holders of the Subsidiary's Common Stock entitled
to exercise more than 50% of the voting rights in an election of directors will
be able to elect 100% of the directors to be elected if they choose to do so.
In such event, the holders of the remaining shares of the Subsidiary's Common
Stock voting for the election of directors will not be able to elect any
persons to the Subsidiary's Board. See "Certain Special
Considerations-Concentration of Voting Power."
Dividend Rights: Subject to the rights of the holders of any shares
of the Subsidiary's preferred stock which may at the time be outstanding and
subject to certain contractual restrictions on the payment of dividends
contained in any debt agreements of the Subsidiary, holders of the Subsidiary's
Common Stock will be entitled to such dividends as the Subsidiary's Board may
declare out of funds legally available therefor. The Subsidiary does not
anticipate paying any cash dividends in the foreseeable future. See "Certain
Special Considerations-Dividend Policy."
Liquidation Rights and Other Provisions: Subject to the prior rights
of creditors and the holders of any Subsidiary preferred stock which may be
outstanding from time to time, the holders of the Subsidiary's Common Stock are
entitled in the event of liquidation, dissolution or winding up to share pro
rata in the distribution of all remaining assets.
The Subsidiary's Common Stock is not liable for any calls or
assessments and is not convertible into any other securities. There are no
redemption or sinking fund provisions applicable to the Subsidiary's Common
Stock, and the Subsidiary's Certificate of Incorporation provides that there
are no preemptive rights.
29
<PAGE> 32
The transfer agent and registrar for the Subsidiary's Common Stock is
Boston EquiServe, Boston, Massachusetts.
LIABILITY AND INDEMNIFICATION OF
OFFICERS AND DIRECTORS OF THE SUBSIDIARY
Articles Twelve and Thirteen of the Subsidiary's Certificate of
Incorporation and Section 6 of the Subsidiary's Bylaws (the "Director Liability
and Indemnification Provisions") limit the personal liability of the
Subsidiary's directors to the Subsidiary or its stockholders for monetary
damages for breach of fiduciary duty. The Director Liability and
Indemnification Provisions are substantially identical to comparable provisions
contained in the Parent's Articles of Incorporation and Bylaws.
The Director Liability and Indemnification Provisions define and
clarify the rights of certain individuals, including the Subsidiary's directors
and officers, to indemnification by the Subsidiary in the event of personal
liability or expenses incurred by them as a result of certain litigation
against them. Such provisions are consistent with Section 102(b)(7) of the
DGCL, which is designed, among other things, to encourage qualified individuals
to serve as directors of Delaware corporations by permitting Delaware
corporations to include in their articles or certificates of incorporation a
provision limiting or eliminating directors' liability for monetary damages and
with other existing DGCL provisions permitting indemnification of certain
individuals, including directors and officers. The limitations of liability in
the Director Liability and Indemnification Provisions may not affect claims
arising under the federal securities laws.
In performing their duties, directors of a Delaware corporation are
obligated as fiduciaries to exercise their business judgment and act in what
they reasonably determine in good faith, after appropriate consideration, to be
the best interests of the corporation and its stockholders. Decisions made on
that basis are protected by the "business judgment rule." The business judgment
rule is designed to protect directors from personal liability to the
corporation or its stockholders when business decisions are subsequently
challenged. However, the expense of defending lawsuits, the frequency with
which unwarranted litigation is brought against directors and the inevitable
uncertainties with respect to the outcome of applying the business judgment
rule to particular facts and circumstances mean that, as a practical matter,
directors and officers of a corporation rely on indemnity from, and insurance
procured by, the corporation they serve as a financial backstop in the event of
such expenses or unforeseen liability. The Delaware legislature has recognized
that adequate insurance and indemnity provisions are often a condition of an
individual's willingness to serve as director of a Delaware corporation. The
DGCL has for some time specifically permitted corporations to provide indemnity
and procure insurance for its directors and officers.
Set forth below is a description of the Director Liability and
Indemnification Provisions. Such description is intended as a summary only and
is qualified in its entirety by reference to the Subsidiary's Certificate of
Incorporation and the Subsidiary's Bylaws.
Elimination of Liability in Certain Circumstances. Article Twelve of
the Subsidiary's Certificate of Incorporation protects directors against
monetary damages for breaches of their fiduciary duty of care, except as set
forth below. Under the DGCL, absent Article Twelve directors could generally
be held liable for gross negligence for decisions made in the performance of
their duty of care but not for simple negligence. Article Twelve eliminates
director liability for negligence in the performance of their duties, including
gross negligence. Directors remain liable for breaches of their duty of
loyalty to the Subsidiary and its stockholders, as well as acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law and transactions from which a director derives improper
personal benefit. Article Twelve does not eliminate director liability under
Section 174 of the DGCL, which makes directors personally liable for unlawful
dividends or unlawful stock repurchases or redemptions and expressly sets forth
a negligence standard with respect to such liability.
While Article Twelve provides directors with protection from awards of
monetary damages for breaches of the duty of care, it does not eliminate the
directors' duty of care. Accordingly, Article Twelve will have no effect on
the availability of equitable remedies such as an injunction or rescission
based upon a director's breach of the duty of care. The provisions of Article
Twelve which eliminate liability as described above will apply to officers of
the Subsidiary only if they are directors of the Subsidiary and are acting in
their capacity as directors, and will not apply to officers of the Subsidiary
who are not directors. The elimination of liability of directors for monetary
damages in the circumstances described above may deter persons from bringing
third-party or derivative actions against directors to the extent such actions
seek monetary damages.
Indemnification and Insurance. Under Section 145 of the DGCL,
directors and officers as well as other employees and individuals may be
indemnified against expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement in
30
<PAGE> 33
connection with specified actions, suits or proceedings, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporations "derivative action") if they acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the Subsidiary, and with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard of care is applicable in the case of derivative actions,
except that indemnification only extends to expenses (including attorneys'
fees) incurred in connection with defense or settlement of such an action and
the DGCL requires court approval before there can by any indemnification where
the person seeking indemnification has been found liable to the Subsidiary.
Section 8.6 of the Subsidiary Bylaws provides that the Subsidiary
shall indemnify any person to whom, and to the extent, indemnification may be
granted pursuant to Section 145 of the DGCL.
Article Thirteen of the Subsidiary's Certificate of Incorporation
provides that each person who was or is made a party to, or is involved in any
action, suit or proceeding by reason by the fact that he is or was a director,
officer of employee of the Subsidiary will be indemnified by the Subsidiary
against all expenses and liabilities, including counsel feels reasonably
incurred by or imposed upon him, except in such case where the director,
officer or employee is adjudged guilty of willful misfeasance or malfeasance in
the performance of his duties. Article Thirteen also provides that the right
of indemnification shall be in addition to and not exclusive of all other
rights to which such director, officer or employee may be entitled.
AVAILABLE INFORMATION
The Subsidiary has filed with the SEC a Registration Statement on Form
10-SB with respect to the shares of the Subsidiary's Common Stock to be
received by the shareholders of the Parent in the Distribution. This
Information Statement does not contain all of the information set forth in the
Form 10-SB Registration Statement and the exhibits thereto, to which reference
is hereby made. Statements made in this Information Statement as to the
contents of any contract, agreement or other document referred to herein are
not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to such exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement and the exhibits thereto may be
inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Regional Offices of the SEC at Seven World Trade Center, Suite 1300, New York,
New York 10048 and in the Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661 and may be obtained through the SEC Internet address at
http://www.sec.gov.
31
<PAGE> 34
EXPROFUELS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheets at August 31, 1995, August 31, 1996 and May 31, 1997 (unaudited) . . . . . . . . . . . . . . . . . . F-2
Statements of Operations for Fiscal Years
Ended August 31, 1994, August 31, 1995, August 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Operations for the Nine and Three Months
Months Ended May 31, 1997 and 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for Fiscal Years
Ended August 31, 1994, August 31, 1995, August 31, 1996
and Nine Months Ended May 31, 1997 and 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-0
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ExproFuels, Inc.
We have audited the balance sheets of ExproFuels, Inc. as of August 31, 1996
and 1995, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended August 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ExproFuels, Inc. as of August
31, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended August 31, 1996, in conformity with
generally accepted accounting principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 2 to the financial
statements, the Company is fully dependent on its former parent, has suffered
recurring losses from operations since inception, has a deficiency of quick
assets to current liabilities of $114,282 and an accumulated deficit in
retained earnings of $2,617,957 at August 31, 1996, all of which raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also discussed in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We have also audited Schedule II of ExproFuels, Inc. for each of the three
years in the period ended August 31, 1996. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
Akin, Doherty, Klein & Feuge, P.C.
San Antonio, Texas
November 8, 1996
F-1
<PAGE> 36
EXPROFUELS, INC.
BALANCE SHEETS
AUGUST 31, 1996 AND 1995
MAY 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
August 31,
May 31, ----------------------------
1997 1996 1995
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 13,575 $ 20,871 $ 7,263
Accounts receivable, less allowance for doubtful
accounts of $35,000 , $35,000, and $0 126,086 154,701 221,476
Inventories 335,367 143,967 103,956
Prepaid expenses and other 15,101 19,346 25,371
----------- ----------- -----------
Total current assets 490,129 338,885 358,066
Property and Equipment:
Transportation and other equipment 150,878 146,473 145,282
Equipment under capital leases 93,326 93,326 93,326
Fuel stations 273,318 238,484 159,729
Less accumulated depreciation and amortization (266,388) (203,388) (117,814)
----------- ----------- -----------
Net property and equipment 251,134 274,895 280,523
Other Assets:
Investments in and advances to CNG International 599,224 592,426 150,000
Other assets 44,423 43,321 53,418
----------- ----------- -----------
643,647 635,747 203,418
----------- ----------- -----------
Total Assets $ 1,384,910 $ 1,249,527 $ 842,007
=========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-2
<PAGE> 37
EXPROFUELS, INC.
BALANCE SHEETS
AUGUST 31, 1996 AND 1995
MAY 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
August 31,
May 31, ----------------------------
1997 1996 1995
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 303,855 $ 256,184 $ 355,649
Current portion of long-term debt 10,832 13,744 23,409
Current portion of capital lease obligations 26,510 19,926 16,693
----------- ----------- -----------
Total current liabilities 341,197 289,854 395,751
Long-term Liabilities:
Long-term debt due affiliate 338,303
Long-term debt 510,951 21,684 35,427
Capital lease obligations 12,393 29,810 49,731
----------- ----------- -----------
Total long-term liabilities 861,647 51,494 85,158
Investments and advances by The Exploration Company -- -- 2,334,041
Stockholders' Deficit:
Common stock, par value $ .01 per share;
authorized 50,000,000 shares; issued and
outstanding 4,000,000 shares 40,000 40,000 --
Additional paid-in capital 3,486,136 3,486,136 --
Accumulated deficit (3,344,070) (2,617,957) (1,972,943)
----------- ----------- -----------
Total stockholders' equity 182,066 908,179 (1,972,943)
----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 1,384,910 $ 1,249,527 $ 842,007
=========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE> 38
EXPROFUELS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Years Ended August 31,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Conversion sales $ 557,641 $ 578,362 $ 627,366
Fuel station construction sales 301,115 97,241 162,603
Alternative fuel sales 187,645 97,748 31,664
----------- ----------- -----------
1,046,401 773,351 821,633
Costs and Expenses:
Cost of sales 752,024 646,078 701,198
Shop general and administrative 484,920 415,944 302,647
Depreciation and amortization 85,574 92,302 77,543
Abandonment of technological rights -- -- 144,681
General and administrative 404,708 587,916 431,107
----------- ----------- -----------
Total costs and expenses 1,727,226 1,742,240 1,657,176
----------- ----------- -----------
Loss from operations (680,825) (968,889) (835,543)
Other Income (Expense):
Sublease rental income 58,500 6,750 --
Interest income 959 818 3
Interest expense (23,648) (24,560) (37,367)
----------- ----------- -----------
35,811 (16,992) (37,364)
----------- ----------- -----------
Net loss $ (645,014) $ (985,881) $ (872,907)
=========== =========== ===========
Net loss per common share $ (.16) $ (.25) $ (.22)
=========== =========== ===========
Weighted average number of
common and common equivalent
shares outstanding 4,000,000 4,000,000 4,000,000
=========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE> 39
EXPROFUELS, INC.
STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED MAY 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
May 31, May 31,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Conversion sales $ 405,181 $ 381,983 $ 139,673 $ 103,087
Fuel station construction sales 128,854 299,812 32,000 23,678
Alternative fuel sales 255,809 137,929 70,785 72,231
----------- ----------- ----------- -----------
789,844 819,724 242,458 198,996
Costs and Expenses:
Cost of sales 646,985 583,461 215,557 135,131
Shop general and administrative 326,191 336,338 107,412 110,446
Depreciation and amortization 65,500 67,131 21,833 22,377
Abandonment of technological rights -- -- -- --
General and administrative 458,768 265,190 170,484 109,882
----------- ----------- ----------- -----------
Total costs and expenses 1,497,444 1,252,120 515,286 377,836
----------- ----------- ----------- -----------
Loss from operations (707,600) (432,396) (272,828) (178,840)
Other Income (Expense):
Sublease rental income 13,500 40,500 -- 13,500
Interest income 634 737 263 233
Interest expense (32,647) (19,608) (18,764) (5,446)
----------- ----------- ----------- -----------
(18,513) 21,629 (18,501) 8,287
----------- ----------- ----------- -----------
Net loss $ (726,113) $ (410,767) $ (291,329) $ (170,553)
=========== =========== =========== ===========
Net loss per common share $ (.18) $ (.10) $ (.07) $ (.04)
=========== =========== =========== ===========
Weighted average number of
common and common equivalent
shares outstanding 4,000,000 4,000,000 4,000,000 4,000,000
=========== =========== =========== ===========
</TABLE>
F-5
<PAGE> 40
EXPROFUELS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994, AND
NINE MONTHS ENDED MAY 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional
Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 1, 1993 -- $ -- $ -- $ (114,155) $ (114,155)
Net loss for the year -- -- -- (872,907) (872,907)
--------- ----------- ----------- ----------- -----------
Balance at August 31, 1994 -- -- -- (987,062) (987,062)
Net loss for the year -- -- -- (985,881) (985,881)
--------- ----------- ----------- ----------- -----------
Balance at August 31, 1995 -- -- -- (1,972,943) (1,972,943)
Issuance of common stock
by parent 4,000,000 40,000 (40,000) -- --
Contribution of advances by
parent company -- -- 3,526,136 -- 3,526,136
Net loss for the year -- -- -- (645,014) (645,014)
--------- ----------- ----------- ----------- -----------
Balance at August 31, 1996 4,000,000 40,000 3,486,136 (2,617,957) 908,179
Net loss for the nine month
period (unaudited) -- -- -- (726,113) (726,113)
--------- ----------- ----------- ----------- -----------
Balance at May 31, 1997
(unaudited) 4,000,000 $ 40,000 $ 3,486,136 $(3,344,070) $ 182,066
========= =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE> 41
EXPROFUELS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994, AND
NINE MONTHS ENDED MAY 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
May 31, Years Ended August 31,
------------------------ -------------------------------------------
1997 1996 1996 1995 1994
--------- --------- ----------- ----------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(726,113) $(410,767) $ (645,014) $ (985,881) $(872,907)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 65,500 67,131 85,574 92,302 77,543
Changes in operating assets and liabilities:
Receivables 53,615 (67,025) 66,775 (142,948) 26,481
Inventory (191,400) (51,843) (40,011) 17,915 (119,480)
Prepaid expenses and other 1,745 5,588 6,025 31,314 (53,467)
Accounts payable and accrued expenses 47,671 (52,198) (99,465) (127,745) 254,802
--------- --------- ----------- ----------- ---------
Net cash (used) in operating activities (748,982) (509,114) (626,116) (1,115,043) (687,028)
INVESTING ACTIVITIES:
Purchase of property and equipment (39,240) (81,331) (79,946) (101,165) (230,012)
Investments in and advances to CNG (31,798) (221,123) (442,426) (150,000) --
Other assets (1,102) 58,700 10,097 151,507 (36,809)
--------- --------- ----------- ----------- ---------
Net cash (used) in investing activities (72,140) (243,754) (512,275) (99,658) (266,821)
FINANCING ACTIVITIES:
Proceeds of notes from The Exploration Company 338,303 769,437 1,192,095 1,224,085 882,566
Proceeds from long-term debt obligations 500,000 52,350 -- 30,967 94,293
Payments on long-term obligations (24,477) (52,790) (40,096) (37,799) (21,408)
--------- --------- ----------- ----------- ---------
Net cash provided by financing activities 813,826 768,997 1,151,999 1,217,253 955,451
--------- --------- ----------- ----------- ---------
INCREASE IN CASH AND EQUIVALENTS (7,296) 16,129 13,608 2,552 1,602
Cash and equivalents at beginning of period 20,871 7,263 7,263 4,711 3,109
--------- --------- ----------- ----------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 13,575 $ 23,392 $ 20,871 $ 7,263 $ 4,711
========= ========= =========== =========== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 17,084 $ 12,294 $ 22,636 $ 24,328 $ 35,409
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-7
<PAGE> 42
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995, AND MAY 31, 1997 (UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations: ExproFuels, Inc. (the Company), formerly a
division of The Exploration Company (TXCO), began operating as a wholly-owned
subsidiary of TXCO August 15, 1996, following the issuance of 4,000,000 shares
of its common stock. TXCO is registered with the Securities and Exchange
Commission (SEC) and its stock traded publicly on the National Association of
Securities Dealers (NASD) exchange.
On August 30, 1996, 10% of the outstanding common stock of ExproFuels, Inc. was
exchanged as consideration for services rendered to its Directors, thereby
reducing TXCO's ownership interest from 100% to 90%. On September 3, 1996, the
Company's Board of Directors voted for a distribution of ExproFuels common
stock directly to the shareholders of TXCO (the beneficial owners of 90% of
ExproFuels). The direct distribution of stock reduced TXCO's ownership in the
Company to 40%.
ExproFuels, Inc. is proceeding with plans for filing an Information Statement
on Form 10 with the Securities and Exchange Commission to register its
outstanding common stock.
The financial statements include the accounts of ExproFuels while operated as a
division of TXCO (inception through August 14, 1996) and as a subsidiary of
TXCO (period August 15, 1996 and subsequent). The Company converts vehicle
engines that use gasoline for combustion to propane or natural gas, supplies
alternative fuels to customers and constructs alternative fuels refueling
facilities. Customers are primarily located in Texas and Arizona. The Company
also has invested in CNG International, L.L.C., a Company which is
investigating and proceeding with the development of alternative fuel
operations in Uzbekistan.
Cash and Equivalents: Cash and cash equivalents consist of all demand deposits
and funds invested in short-term investments with original maturities of three
months or less.
Inventories: Inventories, consisting principally of finished goods (parts), are
valued at the lower of cost or market using the first-in, first-out method of
accounting.
Property and Equipment: Transportation and other equipment, equipment reported
under capitalized leases and fuel stations are recorded at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets ranging from five to fifteen years.
Major renewals and betterments are capitalized while repairs are expensed as
incurred.
Federal Income Taxes: For financial reporting purposes, the Company has adopted
the provisions of Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax basis of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. A valuation allowance is provided against net deferred assets for
which realization is doubtful.
Financial Instruments with Off-Balance-Sheet Risk: Financial instruments that
potentially subject the Company to concentrations of credit risk consist
principally of temporary cash investments and accounts receivables. The Company
places its temporary cash investments with financial institutions and limits
the amount of credit exposure to any one financial institution. The Company's
raw materials are readily available and the Company is not dependent on a
single supplier or a few suppliers.
Corporate Expenses: The historical statements of operations include all direct
and indirect costs of the Company, incurred either by it or on its behalf by
TXCO. The most significant common expenses have been allocated to the Company
generally as follows: a) payroll and related costs have been allocated on a
pro-rata basis using an estimate of the percentage of time devoted by the
personnel (those personnel with responsibilities for both companies) to TXCO
and ExproFuels; b) office costs, including rents, corporate depreciation and
similar charges have been allocated pro-rata based on a determination of the
corporate office square footage used by each Company's direct personnel to
total office square footage. Other general and administrative charges are not
significant, but have generally been allocated based on a combination of a) and
b). Management has reviewed the allocation of costs and believes such
allocation fairly reflects ExproFuels on a stand alone basis for the years
presented.
F-8
<PAGE> 43
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995, AND MAY 31, 1997 (UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Interim Financial Statements: The unaudited interim period financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. The information furnished and herein
reflects all adjustments, consisting of normal recurring accruals and
adjustments, which are, in the opinion of management, necessary to fairly state
the operating results for the respective interim periods. The results of
operations for the three and nine months ended May 31, 1997 and 1996 may not be
indicative of the results for the full fiscal year.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings (Loss) Per Share: Loss per common and common equivalent share are
computed by dividing net loss by the weighted average number of shares
outstanding during the period. The common stock issued in connection with the
Company's incorporation on August 15, 1996 has been assumed to be outstanding
for all periods presented.
NOTE 2. GOING CONCERN UNCERTAINTY AND REGISTRATION OF COMMON STOCK
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Since its inception, the Company
has been substantially reliant on its parent company to fund its cash
requirements. As shown in the financial statements, the Company has suffered
recurring losses, has a deficiency of quick assets to current liabilities of
$114,282 and an accumulated deficit in retained earnings of $2,617,957 at
August 31, 1996. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
going concern.
Management is exploring alternatives, including raising additional debt or
equity financing. The Company has raised $200,000 in debt financing since year
end. See Note 4. The Company is also proceeding with plans for filing an
Information Statement on Form 10 with the SEC to register the Company's
outstanding common stock. The Company's ability to continue to operate is
dependent upon its ability to successfully accomplish some or all of these or
other alternatives, and ultimately to attain profitable operations.
NOTE 3. INVESTMENTS IN AND ADVANCES TO CNG INTERNATIONAL
The Company has invested $592,426 at August 31, 1996 in CNG International,
L.L.C., a Tennessee company formed for the purpose of converting motor vehicles
to operate on alternative fuels, manufacturing and selling of related component
equipment and to develop the necessary infrastructure to support operation of
motor vehicles on alternative fuels primarily in Uzbekistan, a former Soviet
Republic. At August 31, 1996, ExproFuels, Inc. owned an 11% interest in CNG
International and accounted for its ownership interest using the cost method of
accounting. The Company periodically assesses the value of its investment in
CNG International in light of operations, economic conditions and progression
of the Uzbekistan project as a whole. No impairments have been recognized to
date.
During the years ended August 31, 1996 and 1995, the Company sold equipment and
provided services to CNG International in the amount of $133,505 and $110,611,
respectively. Unaudited operations of CNG International for the year ended
August 31, 1996 are as follows:
<TABLE>
<S> <C>
Sales $ 0
Gross profit 0
Net loss (390,000)
</TABLE>
F-9
<PAGE> 44
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995, AND MAY 31, 1997 (UNAUDITED)
NOTE 4. LONG TERM DEBT
Long-term debt consists of the following at August 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Notes payable to financial institutions, with interest rates
from 8.50% to 12%,due in monthly installments of $1,950
and secured by certain vehicles. $ 35,428 $ 58,836
Less current portion (13,744) (23,409)
-------- --------
Long-term portion of debt $ 21,684 $ 35,427
======== ========
</TABLE>
Subsequent Proceeds from Convertible Debt: On September 18, 1996, the Company
received $200,000 from the issuance of an unsecured 6% convertible note
payable. The note requires interest only payments quarterly, with the balance
due on September 18, 1999. The note is convertible into one share of $.01 par
value common stock for each $1 of debt outstanding, subject to adjustment in
certain circumstances.
The following is a schedule of principal maturities of long-term debt as of
August 31, 1996:
<TABLE>
<CAPTION>
Before After
Fiscal Year Ended Subsequent Subsequent
August 31 Proceeds Proceeds
----------------- -------- ---------
<S> <C> <C>
1997 $ 13,744 $ 13,744
1998 13,738 13,738
1999 5,839 5,839
2000 2,107 202,107
-------- ---------
$ 35,428 $ 235,428
======== =========
</TABLE>
NOTE 5. STOCKHOLDERS' EQUITY
1996 Flexible Incentive Plan: The Company's 1996 Flexible Incentive Plan
provides incentive stock options for granting to its officers, directors and
management, under which options for the purchase of 400,000 shares of common
stock have been reserved. Options for the purchase of 300,000 shares of common
stock were granted under the plan on September 4, 1996, vesting 50% in one year
and 100% in two years. The options are exercisable at 110% of the fair market
value of the common stock on the date of grant and expire ten years from the
date of grant, or upon termination of employment, if earlier. An appraisal of
the common stock fair value is currently being obtained.
Preferred Stock: The Company has authorized 10,000,000 shares of preferred
stock, none of which is issued. Terms and rights of the stock have not been
established by the Board of Directors.
F-10
<PAGE> 45
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995, AND MAY 31, 1997 (UNAUDITED)
NOTE 6. LEASES
Real Estate: The Company shares office space with its parent company and pays
to them, on a month to month basis, approximately $4,000 per month for the use
of office space and equipment. In addition, the Company leases its conversion
facilities and a fuel station location under noncancellable leases with terms
from one to three years. The Company also has a sublease on one of its
conversion facilities, from which it receives $4,500 per month through January,
1997.
For the years ended August 31, 1996, 1995 and 1994, the Company incurred rent
expense of $141,996, $140,549 and $91,626, respectively and received sublease
rental income of $58,500 in 1996 and $6,750 in 1995. As of August 31, 1996,
future minimum rentals under all noncancellable real estate leases, are as
follows:
<TABLE>
<S> <C>
1997 $ 69,802
1998 34,400
1999 22,500
----------
Future minimum rentals 126,702
Less sublease income (22,500)
----------
Net future minimum rentals $ 104,202
==========
</TABLE>
Capitalized Equipment Leases: The Company leases certain equipment located at
its conversion facilities under leases accounted for as capital leases. As of
August 31, 1996, future minimum rentals under all capital leases are as
follows:
<TABLE>
<S> <C>
1997 $ 28,211
1998 24,829
1999 8,926
--------
Total minimum rentals 61,966
Less amount representing interest,
executory costs and profit (12,230)
--------
Present value of capital lease obligations $ 49,736
========
</TABLE>
F-11
<PAGE> 46
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995, AND MAY 31, 1997 (UNAUDITED)
NOTE 7. FEDERAL INCOME TAXES
The Company began operating as a corporation on August 15, 1996; accordingly,
its tax attributes began on that date. From August 15, 1996 through August 31,
1996, the Company incurred a financial and tax loss of approximately $27,000.
Deferred taxes are as follows at August 31, 1996:
<TABLE>
Deferred tax assets:
<S> <C>
Net operating loss carryforwards $ 27,000
Statutory tax rate 34%
--------
Net deferred tax asset 9,180
Less valuation allowance (9,180)
Deferred income tax asset recorded $ -0-
========
</TABLE>
The net operating loss carryforward of $27,000 expires in 2111.
NOTE 8. RELATED PARTY TRANSACTION
On August 31, 1996, 10% of the outstanding common stock of the Company
previously held by TXCO was given as consideration for services rendered to the
Directors of ExproFuels, Inc.
Subsequent to year end, TXCO advanced the Company $40,000.
NOTE 9. MAJOR CUSTOMERS
Amounts sold to major customers are as follows:
<TABLE>
<CAPTION>
Customer 1996 1995 1994
------------ ------------ ------------ --------
<S> <C> <C> <C>
A $ 259,438 $ - $ -
B 86,110 110,612 -
C 83,663 60,820 231,184
D 42,356 208,938 -
E - 62,227 183,941
</TABLE>
F-12
<PAGE> 47
EXPROFUELS, INC.
SCHEDULE II - VALUATION AND QUALIFYING RESERVES
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994, AND
NINE MONTHS ENDED MAY 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Balance Charges to Balance
Beginning Costs and End of
of Period Expense Write-offs Period
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED MAY 31, 1997
(UNAUDITED)
Allowance for doubtful accounts -
trade accounts $ 35,000 $ -- $ -- $ 35,000
========== ========== ========== ==========
YEAR ENDED AUGUST 31, 1996
Allowance for doubtful accounts -
trade accounts $ -- $ 35,000 $ -- $ 35,000
========== ========== ========== ==========
YEAR ENDED AUGUST 31, 1995
Allowance for doubtful accounts -
trade accounts $ -- $ -- $ -- $ --
========== ========== ========== ==========
YEAR ENDED AUGUST 31, 1994
Allowance for doubtful accounts -
trade accounts $ -- $ -- $ -- $ --
========== ========== ========== ==========
</TABLE>
F-13
<PAGE> 48
Annex I
C 0 N F I D E N T I A L
VALUATION OF
EXPROFUELS, INC.
COMMON STOCK
This material represents our interpretation and analysis of information
generally available to the public or specifically released by responsible
persons at or associated with ExproFuels, Inc. We believe that our sources of
information are reliable; however, we do not assume any liability for the
accuracy or comprehensiveness of the information. This material is not to be
reproduced in whole or in part without our specific permission in writing.
Under no circumstances is this report to be considered as an offering to buy or
sell securities.
David P. Martin Investment Banking
115 East Travis - Suite 1145
San Antonio, Texas 78205
(210) 225-4900
Valuations o Private Placements o Mergers & Acquisitions
December 1996
<PAGE> 49
TABLE OF CONTENTS
<TABLE>
<S> <C>
Purpose and Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Exploration Company . . . . . . . . . . . . . . . . . . . . . . 1
ExproFuels, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Definition of Fair Market Value . . . . . . . . . . . . . . . . . . 2
Sources of Information . . . . . . . . . . . . . . . . . . . . . . 3
Valuation Considerations and Methods . . . . . . . . . . . . . . . 3
Certification of Independence . . . . . . . . . . . . . . . . . . . 4
Summary Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ExproFuels, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Business Description . . . . . . . . . . . . . . . . . . . . . . . 6
General Economic Considerations . . . . . . . . . . . . . . . . . . 6
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Financial Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Valuation Section - General . . . . . . . . . . . . . . . . . . . . . . . . 11
Valuation Methods . . . . . . . . . . . . . . . . . . . . . . . . . 11
Net Asset Value Method . . . . . . . . . . . . . . . . . . . . . . 11
Transactions Method . . . . . . . . . . . . . . . . . . . . . . . . 13
Capitalized Earnings Method . . . . . . . . . . . . . . . . . . . . 13
Valuation Section - ExproFuels, Inc. . . . . . . . . . . . . . . . . . . . 14
Valuation Approach . . . . . . . . . . . . . . . . . . . . . . . . 14
Asset Valuation Methods . . . . . . . . . . . . . . . . . . . . . . 15
Possible Sale Scenario . . . . . . . . . . . . . . . . . . . . . . 17
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 50
PURPOSE AND SCOPE
We have been asked our opinion of the fair market value, as of September
13, 1996, of 4.0 million shares (100% of the outstanding shares) of the common
stock of ExproFuels, Inc. ("ExproFuels"), a wholly owned subsidiary of The
Exploration Company. We understand that our opinion of value will be used to
assist the management of The Exploration Company in a restructuring involving
possible distribution of ExproFuels' shares to existing shareholders of The
Exploration Company.
THE EXPLORATION COMPANY
All of the common stock of ExproFuels is owned by The Exploration
Company, a publicly-traded company. In September of 1996, The Exploration
Company had approximately 3,500 shareholders and 9.9 million shares
outstanding. The Exploration Company's shares were traded on the NASDAQ
exchange at an average of $3.00 per share during the 30 day period prior to our
September 13, 1996, valuation date.
The Exploration Company was incorporated in the state of Colorado in
1979. The primary business of The Exploration Company is the development,
purchase, and sale of oil and gas production. In an effort to expand into
related areas, The Exploration Company entered into the alternative fuels
vehicles conversion business through the creation of its ExproFuels Division in
late 1992.
1
<PAGE> 51
EXPROFUELS, INC.
ExproFuels operated as a division of The Exploration Company until
August of 1996 when it was incorporated with the issuance of 4.0 million shares
of common stock. ExproFuels converts vehicle engines from gasoline to propane
or natural gas combustion. In addition, the Company supplies propane and
natural gas to customers, and constructs alternative fuels refueling
facilities. The Company's customers are primarily located in Texas and
Arizona. ExproFuels has a minority interest in CNG International, L.L.C., an
alternative fuel operation under development in Uzbekistan.
THE TRANSACTION
On September 3, 1996, The Exploration Company's Board of Directors voted
for distribution of approximately 1.9 million of ExproFuels' common stock to
The Exploration Company's existing shareholders of record at September 13,
1996. The common stock is $0.01 par, and there are no other classes of stock
outstanding.
DEFINITION OF FAIR MARKET VALUE
We define fair market value as the cash price at which ExproFuels'
shares would change hands between a willing buyer and a willing seller, each
having reasonable knowledge of relevant facts and neither being under any
compulsion to act.
2
<PAGE> 52
SOURCES OF INFORMATION
We have examined The Exploration Company's Form 10-K for the fiscal
years ended August 31, 1994, and 1995, The Exploration Company's Form 10-Q for
the quarters ended February 29 and May 31, 1996, and the Forms 8-K dated May
31, 1996, and September 4, 1996. We have also examined the preliminary reports
of the independent certified public accountants currently conducting an audit
of ExproFuels, Inc. as of August 31, 1995, and August 31, 1996.
Our analysis is based on information furnished to us by The Exploration
Company and key personnel at ExproFuels. We have obtained other data from
published and verbal sources of relevant information. We have held discussions
with The Exploration Company and ExproFuels' management regarding the
conditions and outlook for ExproFuels, Inc.'s operations, and made such other
investigations and analyses as we deemed necessary. We have relied on the
reports of independent certified public accountants for the completeness and
accuracy of the historical financial information submitted to us and have made
no independent verification of this information.
VALUATION CONSIDERATIONS AND METHODS
As of September 13, 1996, there was no public market in the common stock
of ExproFuels. Therefore, in arriving at our opinion of fair market value we
have followed the guidelines as set forth in Revenue Ruling 59-60 for the
valuation of securities of closely held companies. This method involves
consideration of all available financial data, as well as all relevant factors
affecting
3
<PAGE> 53
the fair market value, including, but not limited to, the following:
1. the nature and history of the business;
2. the economic outlook in general and the condition and outlook of
the industry;
3. the net asset value of ExproFuels and the financial condition of
the business;
4. the earning capacity of ExproFuels;
5. the capacity for paying dividends;
6. whether or not ExproFuels had goodwill or other intangible value;
7. previous sales or purchases of shares and the size of the block
to be valued;
8. the market price of the securities of companies involved in the
same or similar line of business having their securities actively
traded in a free and open market either on an exchange or over-
the-counter.
In determining the weight to be given to the various factors, we
exercised our judgment based on our experience as investment bankers, and
followed the recommendations in Revenue Ruling 59-60, as amended.
CERTIFICATION OF INDEPENDENCE
The appraiser has no current or anticipated financial interest in any of
the securities being valued. There is no relationship between The Exploration
Company or ExproFuels and the appraiser which would influence his opinion of
fair market value.
4
<PAGE> 54
SUMMARY CONCLUSION
In consideration of all relevant factors, we believe the fair market
value of 100% of the outstanding common stock of ExproFuels, Inc, as of
September 13, 1996, is between $440,000 and $600,000, or between $0.11 and
$0.15 per share. The $520,000 or $0.13 per share midpoint of the range is
ExproFuels's most probable fair market value.
--------------------------
David P. Martin
5
<PAGE> 55
EXPROFUELS, INC.
BUSINESS DESCRIPTION
ExproFuels converts gasoline and diesel engines to operate on compressed
natural gas (CNG), liquified petroleum gas (LPG), and liquified natural gas
(LNG). The Company designs, builds, owns, operates, and supplies alternative
fueling stations.
ExproFuels currently owns and operates nineteen LPG fueling stations in
Texas, and vehicle conversion facilities in San Antonio, Dallas, and Tucson.
GENERAL ECONOMIC CONSIDERATIONS
Economic factors affecting ExproFuels' business include a desire on the
part of the owners of fleets of vehicles to operate cost effectively.
Additionally, ExproFuels provides its customers with a more environmentally
responsible system for operating vehicles. As more stringent emissions
requirements are mandated by the Environmental Protection Agency and the
Department of Energy, systems such as those offered by ExproFuels become more
attractive. These factors in combination form the primary economic basis for
ExproFuels's operations.
CUSTOMERS
The customers of ExproFuels include transit systems, municipalities,
schools, and private transportation companies. Specific contracts include a
subcontract agreement to construct a refueling facility for Southwest ISD in
San Antonio, an agreement
6
<PAGE> 56
to convert twenty-nine school buses for Judson ISD in San Antonio, and
conversion of ten vehicles for the City of Tucson.
COMPETITION
In vehicle conversion and alternative fuels industry is highly
fragmented. While ExproFuels competes with several companies in each area of
its business, it rarely finds competition from one company offering ExproFuels'
wide range of services. Most of the Company's competitors concentrate on one
aspect of the conversion process rather than the "turn key" services such as
those offered by ExproFuels.
FACILITIES
ExproFuels offices in approximately 6,000 square feet of leased office
space in the north San Antonio area. The office space is leased from The
Exploration Company at rates and under terms believed by management to be
comparable to fair market rates.
EMPLOYEES
ExproFuels employs a total of nineteen full-time personnel. Twelve of
these are mechanical/technical employees directly involved in the vehicle
conversion process, and the remaining seven are management, supervisory and
administrative personnel. The Company uses contract employees in its sales
efforts and to supplement the full-time staff in peak periods.
7
<PAGE> 57
MANAGEMENT
Thomas H. Gose - President
Mr. Gose has been president of ExproFuels since its inception. He also
serves on the Board of The Exploration Company. Responsibilities include
managing day-to-day activities, overseeing fuel supply contracts, refueling
station construction, and vehicle conversions.
Frank K Alderman - Vice President, Operations
Mr. Alderman joined ExproFuels in 1993. Previous experience includes
ten years with Petrolane Gas Service, where his responsibilities included
managing Petrolane's conversion center in Louisiana. He also completed the
alternative fuels conversion of 200 materials handling vehicles for the U.S.
Navy. Mr. Alderman serves on the long-range planning and technical standards
committee of the Texas Propane Gas Association, the environmental committee of
the Alamo Area Council of Governments, and the safety and technology committee
of the Austin Clean Cities program.
Silverio M. Garcia - Vice President, Marketing and Sales
Mr. Garcia has over seventeen years experience in the oil and gas
industry, including serving as project manager for the planned conversion of
4,000 public transport buses in Mexico. He also served as international sales
manager for Wilson Technologies, the largest CNG refueling station manufacturer
in the U.S.
8
<PAGE> 58
Roberto R. Thomae - Chief Financial Officer
Mr. Thomae joined ExproFuels in 1995, bringing a diverse background of
management and financial experience to the Company. In addition to
participating in several start-ups, strategic alliances, and both domestic and
international projects, Mr. Thomae has owned his own international consulting
business, and has developed a primary interest in oil and gas production and
alternative fuels marketing.
LITIGATION
At the valuation date, management knows of no litigation pending or
threatened which would have a material adverse effect on the operations of
ExproFuels.
FINANCIAL SECTION
Following is summary income statement data taken from the preliminary
audit reports of Akin, Doherty, Klein & Feuge, P.C., independent certified
public accountants. While the audit is not complete as of the date of this
report, no substantial changes are expected in the final audit results.
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ExproFuels, Inc.
Summary Income Data
Years Ended August 31 - In Thousands
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues $ 821.6 $ 773.4 $1,046.4
Cost of Sales 701.2 1,071.0 1,236.9
General & Administrative 956.0 671.2 490.3
-------- -------- --------
Total Costs & Expenses $1,657.2 $1,742.2 $1,727.2
Operating Loss (835.5) (968.9) (680.8)
Other Income (Net) $ (37.4) $ (17.0) $ 35.9
Net Loss $ (872.9) $ (958.9) $ (645.0)
======== ======== ========
</TABLE>
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VALUATION SECTION - GENERAL
VALUATION METHODS
The principal methods used to value a closely held company's securities are
the: (1) Net Asset Value Method; (2) Transactions Method; and (3) Capitalized
Earnings Method. Following is a brief description of each:
Net Asset Value Method
There are several different types of net asset approaches to value
determinations. The most commonly used are as follows:
(a) Stated book value is derived from the company's balance
sheet and reflects the net difference between assets and liabilities as
stated, the remainder of which is reduced by the liquidation or
redemption value of any classes of securities having a preference to
assets ahead of the class being valued. While book value is significant
in valuing securities of regulated public utilities, banks and insurance
companies, book value in the ordinary industrial company seldom, if
ever, bears any direct relationship to the fair market value of the
company's securities. Book value may become meaningful if the company
has an unusually high level of liquid net assets relative to its
indicated value on an earnings basis.
(b) Adjusted book value is an approach which restates a
company's assets to reflect their market values as currently estimated.
This amount is then reduced by existing liabilities and securities
having a liquidation or redemption
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preference. Adjusted book value is given considerable weight in
determining the fair market value of securities of real estate and
investment holding companies. Adjusted book value may also affect the
fair market value of the stock when a company has acquired assets at a
price substantially over or under stated book value and these assets are
not required in the daily operations of the business.
(c) Replacement value is calculated by restating the assets to
reflect the cost of duplicating those assets at the valuation date.
This approach is a consideration in mergers or acquisitions where a
company must weigh the advantages of buying an existing business against
building its own facilities. This approach is seldom relevant to the
determination of the fair value of a closely held company's securities
unless the facilities in which the operations are conducted could be
disposed of and the company could acquire equally suitable facilities at
a substantially lower price.
(d) Liquidating value relates to the net proceeds that would
be available for distribution to the owners in the event all assets were
sold and liabilities discharged. This estimated net proceeds approach
is relevant to the fair market value of the securities when there is a
question as to whether or not the company is going to be continued as an
ongoing entity. This asset value approach becomes significant when a
company's indicated value based on its earnings is substantially below
its estimated liquidating value and the
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securities under consideration have the voting power to influence such
liquidation.
Transactions Method
The transactions approach is based on the prices at which transactions
in a company's securities have taken place. In many cases there is some degree
of market activity in a company's securities even though it is a privately held
company. In this regard, Revenue Ruling 59-60 states: "Sales of stock of a
closely held corporation should be carefully investigated to determine whether
they represent transactions at arm's length. Forced or distress sales do not
ordinarily reflect fair market value nor do isolated sales in small amounts
necessarily control as the measure of value. This is especially true in the
valuation of a controlling interest in a corporation."..."such sales as occur
at irregular intervals seldom reflect all of the elements of a representative
transaction as defined by the term fair market value."
Capitalized Earnings Method
This valuation method consists of capitalizing the average or current
earnings at an appropriate rate of return on the investment. An accepted
method used in determining an appropriate capitalization rate for a privately
held company is to study the capitalization rates that exist for comparable
companies whose securities are actively traded in the public market. These
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capitalization rates vary with the quality of the enterprise, and thus
recognize the longer term profit possibilities which are otherwise difficult to
establish with precision. Among the more important factors to be taken into
consideration in deciding upon a capitalization rate in a particular case are:
(1) the nature of the business; (2) the risks involved; and (3) the stability
or irregularity of earnings. Additional factors that must be considered in
determining an appropriate capitalization rate of a closely held company's
earnings are the liquidity of the investment as compared to those publicly
traded companies, management depth, geographic and/or product diversification,
and the size and degree of control represented by the securities under
consideration.
VALUATION SECTION - EXPROFUELS, INC.
VALUATION APPROACH
ExproFuels is a "start-up" company in the development phase. Since its
inception in late 1992 ExproFuels has relied on its parent for funding.
ExproFuels is experiencing increasing revenues from operations, but has yet to
earn a profit. As a result, valuation approaches based on historical earnings
are not applicable.
The markets in which ExproFuels operates are highly competitive, and the
vehicle conversion processes employed by ExproFuels are not proprietary.
ExproFuels does no manufacturing, and the machinery and equipment purchased and
used by ExproFuels is available from several manufacturers. There is no
discernable
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goodwill or other intangible value attributable to ExproFuels at this time.
This report will focus on asset values, replacements values, and the
value added by The Exploration Company in terms of time and effort expended to
the valuation date. In general, the approach will be one of determining what a
willing buyer would pay for ExproFuels's stock as compared to the cost of
duplicating the financial and operating position ExproFuels had achieved at the
September 13, 1996, valuation date.
ASSET VALUATION METHODS
As of August 31, 1996, the financial reporting period closest to the
valuation date, the stated book value of ExproFuels's assets net of liabilities
was $908,179 or $0.23 per share.
Adjusting the book values of the assets to estimated fair market values
results in a $511,500 or $0.13 per share adjusted net asset value as shown
below:
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EXPROFUELS, INC.
Summary Balance Sheet Data
August 31, 1996
Preliminary Audit - In Thousands
-----------------------------------------
<TABLE>
<CAPTION>
As Stated As Adjusted
--------- -----------
<S> <C> <C>
Cash $ 20.8 $ 20.8
Accounts Receivable 154.7 154.7
Inventories 144.0 144.0
Prepaid Expense 19.3 10.0
-------- --------
Total Current $ 338.8 $ 329.5
Net Property, Plant & $ 275.0 200.0
Equipment
Investment - CNG 592.4 300.0
International, LLC
Other Assets 43.3 23.3
-------- --------
Total Assets $1,249.4 $ 852.8
Liabilities $ 341.3 $ 341.3
-------- --------
Book Value - As Stated $ 908.2
Book Value - As Adjusted $ 511.5
Per Share - As Stated $ 0.23
Per Share - As Adjusted $ 0.13
</TABLE>
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In arriving at the $511,500 or $.013 per share adjusted book value, the
following adjustments were made to the stated values:
Prepaid expenses were reduced from $19,300 to $10,000 to reflect
management's belief that approximately one-half of these expenses could not be
recovered in sale or liquidation.
Property, Plant & Equipment was reduced to $200,000 based on estimates
of proceeds which could be achieved in an unhurried sale of these assets.
The ExproFuels' investment in CNG International, L.L.C. was in the form
of approximately $330,000 cash, with the remainder paid as parts and services
provided by ExproFuels. This investment was adjusted to $300,000 to reflect
the lack of marketability and minority interest discounts appropriate for an
investment of this nature.
POSSIBLE SALE SCENARIO
Because of our experience in structuring, selling, and purchasing
privately held securities, we can construct with a reasonable degree of
confidence a possible 100% sale scenario. In the case of ExproFuels, a
potential buyer would have two choices - either purchase ExproFuels or start
another company. A buyer would include the value of the time saved by
purchasing ExproFuels in his or her calculations.
The seller would attempt to recover the investment and a premium for any
value added during the start-up phase. A major
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consideration for both buyer and seller would be the value of the investment in
CNG International.
In a transaction involving the sale of 100% of ExproFuels' stock, the
seller is asking the buyer to assume all assets and liabilities on an "as is"
basis. For a purchaser of ExproFuels, the question is: "How much should I pay
for the stock of a company with a history of losses and the certainty of
additional capital requirements of an unknown amount?" For the seller, the
question is: "Can I get my investment back and a little more for my start-up
efforts and the expense of the transaction?"
We believe the buyer would first begin negotiations by offering to take
the assets and assume all liabilities for no payment to the seller. In effect,
the buyer would offer to pay nothing for the stock, but would take on the
liabilities and continue funding the losses.
The seller would counter that purchasing the stock will save the buyer
valuable time as compared to starting a new company. The seller would also
express a desire to recover some of the $2.6 million accumulated loss incurred
from funding the start-up of ExproFuels.
We believe arms-length negotiations for 100% of the ExproFuels' stock
would end with a transaction at the point approximately mid-way between a
$400,000 bid and a $700,000 offer, or at approximately $550,000. Transaction
costs would result in the seller receiving net proceeds of approximately
$500,000 for 100% of the ExproFuels' common stock.
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CONCLUSION
We believe both the willing buyer and the willing seller would consider
the following primary factors in arriving at the fair market value of 100% of
the outstanding stock of ExproFuels, Inc. at September 13, 1996:
o The potential for realizing substantial gains if the ExproFuels
project proves profitable;
o the probability of having to invest significant additional
capital to reach consistently profitable operations;
o the reluctance of potential customers to shift from established
patterns of providing fuel for their vehicle fleets in favor of a
new company;
o the amount debt on the balance sheet which must be dealt with
prior to compensating the holders of the common stock;
o possible competition from large and well-financed fuels
management companies;
o the fair market value of the underlying assets, and;
o the alternative investments of greater liquidity and lower risk
available to a potential buyer.
In consideration of all relevant factors, and as of September 13, 1996,
we believe the fair market value of 100% of the ExproFuels, Inc. common stock
is between $440,000 and $600,000. A purchase at the $520,000 mid-point of the
range would give the buyer control of an entity which is closer than a new
start-up to generating revenue. The $520,000 figure would allow the seller to
remove a good deal of risk from its balance sheet and eliminate future funding
requirements.
* * * * * * * * * * *
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