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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22185
EXPROFUELS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 74-2727901
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 NORTH LOOP 1604 EAST, SUITE 250, SAN ANTONIO, TEXAS 78232
(Address of principal executive offices)
Registrant's telephone number, including area code: (210) 490-9400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
There is not currently a public market for the Company's Common Stock.
Prices at which the Company's Common Stock may trade after an orderly market
develops cannot be predicted. The Company's Common Stock may be traded on the
Electronic Bulletin Board once an application is filed with the National
Association of Security Dealers (NASD) by a broker or dealer. There is no
guarantee a broker or dealer will file such an application.
The number of shares outstanding of the Registrant's Common Stock as of
November 15, 1997, was 4,000,000 of which 1,614,160 shares were held by
non-affiliates.
Documents Incorporated by Reference: None
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INDEX AND
CROSS REFERENCE SHEET
<TABLE>
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PART I Page
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<S> <C> <C>
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 11
Item 3. Legal Proceedings................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............... 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters....................................... 12
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 12
Item 7. Financial Statements.............................................. 15
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures............................................. 15
PART III
Item 9. Directors and Executive Officers of the Registrant................ 15
Item 10. Executive Compensation............................................ 16
Item 11. Security Ownership of Certain Beneficial Owners
and Management.................................................... 17
Item 12. Certain Relationships and Related Transactions.................... 18
Item 13. Exhibits and Reports on Form 8-K.................................. 19
Signatures..................................................................... 20
Audited Financial Statements.................................................. F-1
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
ExproFuels, Inc. is a recently formed corporation engaged in the alternative
fuels conversion business. It became a publicly held company upon the
completion of the distribution of is common stock on August 29, 1997 in the
form of a stock dividend to the shareholders of its former parent, The
Exploration Company, (TXCO).
The Company converts gasoline and diesel engines to operate on compressed
natural gas (CNG), liquefied petroleum gas (LPG) and liquefied natural gas
(LNG). The Company also designs, builds, owns, operates and provides fuel for
alternative fuel stations. The Company currently owns and operates twenty-one
LPG motor fuel stations in Texas, owns and operates conversion facilities in
San Antonio, Dallas, and Tucson and operates affiliated conversion facilities
in Houston, Austin and Phoenix.
In late 1992, TXCO entered the alternative fuels vehicle (AFV) conversion
business through the creation of its own alternative fuels division,
ExproFuels. The division's focus included the conversion of internal combustion
engines to run alternately on CNG, LPG or LNG, and the design, installation and
operation of alternative fuels 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 continued to grow, although
profitable operating levels have not been attained. In late 1996, TXCO
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
newly incorporated ExproFuels, Inc. in August, 1996, in exchange for 100% of
the initial issue of shares of ExproFuels' Common Stock, thereby creating a
wholly owned corporate subsidiary of TXCO. On August 30, 1996, TXCO's Board
distributed 10% of the outstanding shares of ExproFuels' Common Stock to
ExproFuels' directors in exchange for serving as directors of TXCO in the past,
thereby reducing TXCO's ownership interest in ExproFuels from 100% to 90%. On
September 3, 1996, TXCO's Board declared a stock dividend of 1,910,000 shares
(or approximately 48%) of ExproFuels' Common Stock to its shareholders of record
as of September 13, 1996.
The Company's business strategy is to expand its key conversion and fuel
station construction markets in San Antonio, Dallas and Tucson, as well as to
strengthen its presence in the Phoenix, Arizona market during fiscal year 1998.
Management is currently considering various strategies and operating
alternatives with the goal of reaching operational efficiencies and increasing
output within its core conversion, repair and maintenance operations. Such
operating strategies are aimed at enabling ExproFuels to improve its
competitive stance in existing markets while facilitating expansion into new
growth areas. Company's management continues to pursue adequate sources of
equity and debt financing in order to continue its core operations in existing
and potential new markets and to meet its ongoing debt service and working
capital needs.
The Company's focus includes the conversion of internal combustion engines to
run alternatively on CNG, LPG or LNG, and the installation and design of
alternative fuels refueling stations. During its four years of existence,
ExproFuels' business strategy has been to:
1. Provide state of the art internal combustion engine
conversions utilizing three natural gas based alternative
fuels: CNG, LPG or LNG.
2. Provide refueling stations for the convenient and safe
delivery of these alternative fuels.
3. Position the Company to participate in the ongoing business
of supplying alternative fuels to its expanding conversion
customer base.
4. Maintain an alternative fuels and equipment neutral position,
allowing the Company'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.
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5. Establish a strong presence in selected U.S. markets prior to
1998 when more strenuous Environmental Protection Agency and
Department of Energy mandates are scheduled to come into
effect.
The combination of expertise in vehicle conversions, refueling station
construction and fuel sales forms the basis of an additional market niche:
financing conversions and/or fuel stations through savings generated using the
selected alternative fuel. ExproFuels provides alternative fuels vehicle
conversions to a growing number of private fleets, as well as the large
mandated governmental markets at a reasonable and competitive cost and follows
these conversions with superior, ongoing service and maintenance.
ExproFuels also offers a cost-free alternative fueled vehicle (AFV) conversion
program to qualified fleets in exchange for long-term fuel contracts. This
program is 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 outlines a cost-savings plan for fleets which
qualify for ExproFuels' long-term fuel contract program and assures the fleet
operator's compliance with current laws and anticipated standards. The programs
are set up so that the customer's fuel price is based on either a percentage of
unleaded gasoline, assuring a fixed fuel cost savings, or various other fuel
pricing scenarios. ExproFuels also provides customers 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 and repair
contracts along with 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 the various economic and
environmental benefits.
In its first four full years of operation, the Company's customers have come to
include the U.S. Government, the Governments of Uzbekistan and Colombia,
numerous 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. Cities such as
San Antonio, Plano, Arlington, Richardson, Grand Prairie, Tucson, Scottsdale
and Phoenix now make up a large portion of ExproFuels business. Additionally,
the Company converts vehicles and builds refueling stations for numerous school
districts, transit systems, utilities, private fleets and light industrial
users.
PRINCIPAL AREAS OF ACTIVITY
TEXAS OPERATIONS
San Antonio Facilities:
The first conversion center operated by the Company opened in May, 1993, in San
Antonio. Since its opening, the center has converted over 520 vehicles to LPG
or CNG including buses, vans, forklifts, industrial engines, and assorted
automobiles and trucks. At August 31, 1997, ExproFuels' company-wide vehicle
conversion backlog under contract stood at 163 units. The San Antonio facility
is responsible for the design and installation of 28 private use LPG fuel
stations since its opening, with four opened during the current fiscal year.
ExproFuels owns and operates 21 of these fuel stations. Monthly LPG motor fuel
sales from all facilities has grown from 340 gallons during December, 1994 to
an average of over 34,000 gallons per month during fiscal year 1997. For 1997,
over 412,000 gallons were sold, representing a 79% increase in volume over the
previous fiscal year.
Based on activity subsequent to year end, new activity for fuel station
construction and upgrades of existing fueling facilities have resulted in a
substantial increase over fiscal 1997 activity for the same period. The Company
anticipates this increased level of construction activity to continue through
1998. In fiscal year 1998, the Company expects to increase the volume of LPG
and CNG conversion maintenance and repair work it now performs for the
expanding vehicle fleets across the South and Central Texas region. Since
year-end, additional vehicle conversions have been awarded to the Company by
its existing customers and many have confirmed ongoing plans for expanding
their alternate fuel fleets during 1998.
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Dallas Facilities:
The Dallas conversion center opened in May, 1994. Since its opening, the center
has converted over 80 vehicles, and its customer base includes five
municipalities and three commercial fleets. The Company has a contract with the
City of Plano for 55 additional LPG conversions. The Company's two year fuel
supply contract with the City of Plano will end on December 1, 1997. The new
supply contract was rebid during the 4th quarter of fiscal 1997 and awarded to
a local competitor. The Company expects to maintain 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 previous fiscal year,
the Dallas facility was awarded a $75,000 service contract by the Texas
Department of Transportation involving the testing of CNG cylinders on existing
vehicles over a two year contract period. To date, the Department has issued no
purchase orders under this contract and is currently reviewing the status of
its entire CNG fleet operations. During the past fiscal year, the Company was
awarded a conversion contract with the City of Arlington totaling $102,000 but
commencement of conversion work was delayed until after year end. Contract
delays outside of the Company's control now appear to be resolved and
conversion activity under this contract is now under way. Fleet repair and
maintenance work has increased at the Dallas facility with several new
customers added through the year. This new business direction will be actively
pursued company wide in the coming year. Overall, 1997 Dallas sales reached
approximately $203,000, including $102,000 in fuel sales. Based on recent
activity, a detailed review and assessment of the Dallas operations and the
overall competitive market throughout the north Texas region is underway to
determine the potential for ongoing growth within the area and to further
assess the Company's ability to reach profitability in the Dallas market.
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 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 Company when
needed for its conversion operations. Through year end, ExproFuels had converted
over 104 vehicles since opening in Arizona through conversion contracts with 5
municipalities, the State of Arizona, numerous school districts and Davis
Monthan AFB. During fiscal year 1997, the Company successfully bid and was
co-awarded (with North American Fleet Services) the new state contract for CNG
conversions. Since that time, ExproFuels alone has successfully complied with
emissions and operational requirements under the contract and is now receiving
purchase orders from various state agencies. At the same time, the Company
successfully bid and was co-awarded (along with Northeast Automotive) the state
LPG conversion contract. Although operational compliance requirements of the
award have been met, emissions compliance certification has not yet been met by
either co-awardee. The Company continues to pursue various technical remedies
and feels confident it will meet all award requirements on this contract in the
near future. The Company has determined that sufficient new business will be
generated from these contracts to warrant the opening of its first Company-owned
conversion and service center in the Phoenix area. During November, 1997, a
Company owned conversion facility was opened and conversion activity commenced.
The City of Phoenix is currently the most promising customer in the area and has
provided ExproFuels with over $25,000 in conversion work since year end.
Conversion work in Phoenix includes completion of two separate projects for the
City of Phoenix Department of Transportation, including conversion contracts
totaling 39 vehicles with 24 vehicles remaining to be completed.
In Tucson, the Company has continued to win contracts with the City of Tucson
and Davis Monthan, AFB. Subsequent to August 1997, the Company was awarded a
contract for over $98,000 in conversions from Davis Monthan, AFB. State
legislative changes enacted during fiscal year 1997, as well as historical
conversion activity levels by new customers with ongoing alternate fuel fleet
expansion commitments, have encouraged ExproFuels to expand its presence in the
Phoenix, Arizona market. At the same time, ongoing overhead reduction strategies
will continue in the Tucson area until additional contracting opportunities are
identified and successfully developed.
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INTERNATIONAL OPERATIONS
Throughout fiscal year 1995, 1996 and 1997, ExproFuels expanded its support of
existing projects as well as initiated new activities in various international
alternative fuels programs. In 1997, such activities were limited due to
financial constraints, although various potentially lucrative new projects have
been presented and pursued, while ongoing projects continue to develop. As a
recognized participant in this emerging industry, the Company 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 the Company's particular
technical skills.
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, LLC. ("CNG International") was incorporated for
these purposes and at August 31, 1997, ExproFuels owned an approximate 10.8%
interest in it. CNG International has successfully negotiated with the
Government of Uzbekistan to participate with that nation 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. It is
intended that 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 supported estimates
of approximately 200,000 vehicle conversions and 300 CNG refueling stations to
be built during the first 5 years of operations.
Progress made through 1997 by CNG International on the project included 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 and the signing of the definitive
joint venture agreements between American parties and Uzbek parties in the U.S.
Capital Building in July, 1996.
Startup activities of CNG International have recently been 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 $381,000),
ExproFuels' unreimbursed expenses advanced to CNG International (approximately
$239,000) 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.
ExproFuels intends to pursue its claims and vigorously defend itself against
ATI's and AEI's claims; however, ExproFuels can not predict the eventual
outcome of such litigation nor the long-term effect of such litigation on
ExproFuels' investment in CNG International.
Although management is confident the Company will prevail in asserting its
claims, in accordance with generally accepted accounting principals, the
Company, during the last quarter of the fiscal year ended August 31, 1997,
fully impaired its remaining investment in and advances to CNG International,
resulting in a writedown of the investment to $0 and a resultant charge to
income of approximately $620,000. The impairment and charge to earnings
resulted in the Company incurring a net loss for the year ended August 31, 1997
of $1,620,642, and creating a deficiency in stockholders equity of $712,464.
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Latin America:
During 1995 and 1996 ExproFuels participated in the development of various
Latin American programs relative to its expertise and the public and private
contacts it had developed. 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 many 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. Although the regional trend towards privatizing of
energy resources offers special opportunities for companies like ExproFuels,
ongoing political and social unrest, and economic instability have been
significant factors in each potential opportunity the Company has reviewed to
date. Management is continuing the process of seeking to establish strategic
alliances or joint ventures with key industry participants in various countries
with the hope of identifying development opportunities consistent with the
Company's technical and financial capabilities.
COMPETITION
There are several large companies - including Transtar Technologies and N.W.
Butane in Texas and North American Fleet Services, Inc. and Northeast
Automotive in Arizona - that compete with the Company in the alternative fuels
conversion business. The Company may be at a competitive disadvantage since
these other companies may have greater financial resources, larger technical
staffs and greater ability to bear the economic risks inherent in this new
industry. The Company'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 customer's conversions.
During the past year, several competitors have either ceased operations
entirely, been acquired by larger entities whose focus is in the international
marketplace or decreased their participation in the conversion industry to a
minimum. In some cases, this decrease in competition has allowed the Company to
increase its presence in certain markets, while in other cases this decrease
represents additional evidence of markets not developing to their anticipated
potential.
CUSTOMERS
During 1997, three purchasers of the ExproFuels' alternative fuels vehicles
conversion services and products accounted for 16%, 11% and 10%, respectively,
of its total sales. In the event any or all these customers do not continue as
customers, the Company believes that additional customers will continue to be
found for such services and products at comparable prices; however, should the
Company be unsuccessful in such efforts, its results of operations and
financial condition would be materially and adversely affected.
EMPLOYEES
As of August 31, 1997, the Company employed 9 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.
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
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 Company's current
operations and business are provided herein below.
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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 Clean 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 Company has recognized the need for businesses and state and
local governments to convert their vehicles to run on clean fuels such as CNG,
LPG or LNG. The Company 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 Company is participating.
For example, beginning with the 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 by 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 at a
constant 50 percent of new purchases beginning in 1998. Past history has shown
that mandates of this type can be met by the purchase of new gasoline or diesel
vehicles and converting them to run on alternative fuels. 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.
Subsequent to year end, changes have been made to the Clean Air Act as it
pertains to aftermarket conversions of gasoline or diesel vehicles to operate
on CNG or LPG. These changes have come about in the form of an addendum to
Memorandum 1A, which was originally issued June 25, 1974 and was intended to
provide guidance to covered parties regarding how the EPA intended to enforce
the "tampering" prohibition under Section 203(a)(3) of the Clean Air Act with
respect to maintenance and the use of aftermarket parts. Under the previous
rule, Memo 1A provided in part, that the use of an aftermarket part, alteration
or add-on part will not constitute tampering if the dealer has a "reasonable
basis" to believe that such acts will not adversely affect emissions
performance. It also provided specific procedures or options by which the
dealer could quantify this "reasonable basis". With its addendum to Memorandum
1A, issued September 4, 1997, EPA has effectively redefined these specific
procedures or options so that companies such as ExproFuels, the various
aftermarket parts manufacturers and their distributors can expect to undergo
additional emissions testing over previous levels, thereby increasing the cost
of conversions to the customer, or lowering the profit margins to the
conversion provider. To date, several conferences have been held and attended
by Company representatives with the goal of further detailing EPA's intentions
to enforce the addendum to Memorandum 1A; however, at this point it is
impossible to determine exactly what impact these changes will have on the
Company.
The Energy Policy Act of 1992, as amended (the "Energy Policy Act"), also
provides federal mandates for AFVs. 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 AFVs 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 AFVs 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 AFVs 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, AFVs in numbers that exceed by 50%
the requirements for 1993 through 1995 set forth in the Energy Policy Act.
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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 Company believes that it will not be
significantly impacted by this legislation. Additionally, the Company 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 CNG,
LPG and LNG by various categories of vehicle owners. Incentives include special
reduced rates for AFV license plates, special permission allowing AFVs 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 Company 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 Company 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 CNG, LPG or LNG which lowers the level of the
pollutants being emitted in the non-attainment area because these alternative
fuels are 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; many 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
9
<PAGE> 10
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 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.
Recent Changes in Federal Fuel Tax Treatment of Alternative Fuels
The Taxpayer Relief Act of 1997 removed the existing disincentive to
alternative fuel use by lowering the Federal excise tax on LPG and LNG in an
attempt to make the rates for these fuels equivalent to gasoline on an energy
basis rather than a per gallon basis. Federal excise taxes applied to
conventional fuel sales are currently $.183 for gasoline and $.243 for diesel
fuel (per gasoline equivalent gallon). CNG has been and continues to be taxed
at only $.043 per equivalent gallon. LPG motor fuel is now taxed $.136 per
gallon and LNG is taxed $.119 per gallon rather than the $.183 per gallon tax
previous to this change.
Recent Changes in State Fuel Tax Treatment of Alternative Fuels
In 1996 Arizona enacted SB 1002, which among other things, exempts alternative
fuels from the state motor fuel tax, subjecting vehicles to an annual permit
requirement instead. The law replaced the partial tax exemption provided in
1988 in HB 2206. SB 1002 also permits single-occupant alternative fuel vehicles
access to high-occupancy vehicle lanes.
10
<PAGE> 11
ITEM 2. PROPERTIES
PHYSICAL PROPERTIES
The Company'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 TXCO, on a month to month basis, for $4,000 per
month. In addition, ExproFuels leases three other facilities:
<TABLE>
<CAPTION>
Approximate Monthly
Location Type Square Feet Rental Expiration
- -------- ---- ----------- ------ ----------
<S> <C> <C> <C> <C>
San Antonio, Texas Conversion & fueling 5,000 $2,500 May 1999
Dallas, Texas Conversion 7,000 1,900 May 1997 (1)
Dallas, Texas Fueling 8,200 400 July 1998
</TABLE>
(1) The Dallas conversion facility base term lease has expired and the facility
is leased on a month to month basis.
Management believes these facilities are suitable to accommodate the
anticipated growth of ExproFuels in these cities over the next several years.
The Company has leased an additional facility in the Phoenix area subsequent to
year end. No additional conversion center locations are anticipated to be
leased in other cities during next fiscal year; however, the Company continues
to seek additional fuel station sites wherever economically viable.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any significant matters of litigation incidental
to its business, except for 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 $381,000), ExproFuels' unreimbursed expenses
advanced to CNG International (approximately $239,000) 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
unspecified compensatory and exemplary damages. ExproFuels intends to pursue
its claims and vigorously defend itself against ATI's and AEI's claims. To
date, both suits are in the very preliminary stages. No formal discovery has
been submitted or completed, no scheduling orders have been entered nor have
any trial dates been set. While the Company and its counsel remain optimistic
ExproFuels will prevail in the matter, it is difficult to predict with any
certainty the likelihood of an unfavorable outcome of such litigation as of the
date of this writing. See Note C to the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during the
fourth quarter of the fiscal year ended August 31, 1997.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is not currently a public market for the Company's Common Stock. Prices
at which the Company's Common Stock may trade after an orderly market develops
cannot be predicted. The prices at which the Company'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
Company's Common Stock, investor perception of the Company and the industry in
which the Company participates, the Company's dividend policy and general
economic and market conditions.
The Company's Common Stock may be traded on the Electronic Bulletin Board 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 Company's Common Stock distributed to The Exploration Company's
shareholders on August 29, 1997 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 Company'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 have received the Company's Common Stock containing the same such
restrictions.
As of November 14, 1997, there were approximately 578 holders of record of the
Company's Common Stock. The transfer agent for the Company is Boston EquiServe,
Boston, Massachusetts. The Company has not paid any cash dividends on its
Common Stock and does not expect to do so in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the Company's financial condition and results
of operations. This discussion should be read in conjunction with the Financial
Statements of the Company and Notes thereto.
CAPITAL RESOURCES AND LIQUIDITY
1997
At August 31, 1997, the Company had cash on hand of $31,647, a working capital
deficiency of $478,623 based on current assets of $608,077 and current
liabilities of $1,086,700, and a stockholders' deficit of $712,464. This
compared to cash on hand of $20,871 at August 31, 1996, a positive working
capital position of $49,031 and stockholders' equity of $908,179. Although
sales increased slightly from the year earlier, $1,126,010 in 1997 compared to
$1,026,401 in 1996, net cash used in operating activities increased to $924,646
in 1997 from $626,116 in 1996.
Primary sources of capital for the Company during 1997 were $500,000 from
convertible debentures (with $400,000 of debentures being issued to parties
related to the Company), and $561,225 received as advances from TXCO under
formal credit agreements. Uses of cash included the $924,646 used in
operations, $48,904 in equipment purchases and $28,232 in additional cash
investments made in CNG International.
For fiscal year 1998, ExproFuels must continue to seek additional sources of
operating capital through additional debt or equity financing. The Company
anticipates returning to the same financiers of its convertible debentures for
additional funding; however, the Company has secured no commitment for such
financing as of the date hereof. In addition, while TXCO, its former Parent,
has committed additional working capital funds through December 31, 1997, the
Company has been advised no additional funds will be available from this source
after that date.
12
<PAGE> 13
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 Company's
financial position poses certain significant risks, including the risk that (i)
the Company's cash flow from operations will be insufficient to maintain
operations; (ii) the Company will be unable to obtain financing in the future
for working capital, capital expenditures and general corporate purposes; and
(iii) the Company will be more vulnerable to economic downturns and may be
unable to withstand competitive pressures. All of these factors raise
substantial doubt about the Company's ability to continue as a going concern.
See Notes to the Financial Statements.
1996
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 Exploration Company ($1,192,095 in
1996, $1,224,085 in 1995 and $882,566 in 1994) In fiscal year 1996, the
Company'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 C to the Company's Financial
Statements.
INFLATION
The Company's expenses are impacted by inflation. Management believes that over
time, however, the Company will be able to raise prices of its services and
sustain its profit margins.
RESULTS OF OPERATIONS
GENERAL
The Company was capitalized with the ExproFuels division's assets in August
1996, enabling it to conduct the alternative fuels conversion business
previously conducted by The Exploration Company through such division beginning
in late 1992. The following analysis and the related financial statements
included elsewhere herein are presented as if the Company were a separate
company for all periods presented as discussed in Note 1 to the Company's
Financial Statements.
RESULTS OF OPERATIONS
1997 Compared to 1996
ExproFuels' revenue for 1997 increased by 7.6% to $1,126,010 from 1,046,401 in
1996. Contributing most significantly was a 15.4% increase in conversion sales
to $643,607 from $557,641 primarily due to new contracts with San Antonio area
school districts and mass transit fleet operators. Alternative fuel sales
increased by over 78% to $333,950 from $187,645 for the same period due to the
addition of new fleet fueling contracts and six new company owned fuel stations
placed in operation subsequent to November, 1995. However, the above increases
were partially offset by a decline in fuel station construction to $148,453 in
1997 from $301,115 in 1996. Gross profit margins declined from 28% in the prior
year to 11% for 1997. The reduced margins reflect a changing sales mix, with a
drop in high margin construction sales for 1997, combined with increases in
conversion and alternative fuel sales which historically are lower gross margin
activities. Overall, 1997 general and administrative expenses increased to
$583,320 in 1997 from $404,708 in 1996. This increase was 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 over and above
the prior period.
CNG INTERNATIONAL, LLC. INVESTMENT
As discussed under Item 3 - Legal Proceedings, the Company is in litigation
over its CNG International investment. Although management is confident the
Company will prevail in asserting its claims, in accordance with generally
accepted accounting principals, the Company fully impaired its remaining
investment in and advances to CNG International, resulting in a writedown of
the investment to $0 and a resultant charge to income of approximately $620,000.
13
<PAGE> 14
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 Company. In addition, the Company 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, the
Company's 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.
Selected Financial Data
The following selected financial information is derived from and qualified in
its entirety by the Financial Statements of the Company and the Notes thereto
as set forth in this Annual Report on Form 10-KSB commencing on page F-1.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31
--------------------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Conversion sales ............................ $ 643,607 $ 557,641 $ 578,362 $ 627,366
Fuel station construction sales ............. 148,453 301,115 97,241 162,603
Alternative fuels sales ..................... 333,950 187,645 97,748 31,664
----------- ----------- ----------- -----------
Total revenues ......................... 1,126,010 1,046,401 773,351 821,633
Costs and expenses:
Costs of sales .............................. 1,004,613 752,024 646,078 701,198
Shop general and administrative ............. 420,983 484,920 415,944 302,647
Depreciation and amortization ............... 88,654 85,574 92,302 77,543
Abandonment of technological
rights ................................. -- -- -- 144,681
General and administrative .................. 583,320 404,708 587,916 431,107
Impairment of Investment in venture 620,658 -- -- --
----------- ----------- ----------- -----------
Total costs and expenses ........ 2,718,228 1,727,226 1,742,240 1,657,176
----------- ----------- ----------- -----------
Loss from operations (1,592,218) (680,825) (968,889) (835,543)
Other Income (expense):
Sublease rental income ...................... 13,500 58,500 6,750 --
Interest income ............................. 730 959 818 3
Other income ................................ 9,667 -- -- --
Interest expense ............................ (52,321) (23,648) (24,560) (37,367)
----------- ----------- ----------- -----------
Total other income ..................... (28,424) 35,811 (16,992) (37,364)
----------- ----------- ----------- -----------
Net loss ...................................... $(1,620,642) $ (645,014) $ (985,881) $ (872,907)
----------- ----------- ----------- -----------
Earnings (loss) per share of common
Stock ....................................... $ (.41) $ (.16) $ (.25) $ (.22)
Weighted average number of
common shares outstanding ................... 4,000,000 4,000,000 4,000,000 4,000,000
BALANCE SHEET DATA:
Cash and cash equivalents .................... $ 31,647 $ 20,871 $ 7,263 $ 4,711
Total assets ................................. 890,838 1,249,527 842,007 885,977
Total debt(1) ................................ 1,107,834 85,164 125,260 344,679
OTHER DATA:
Net cash (used) in operating activities ...... (924,646) (626,116) (1,115,043) (687,028)
Net cash (used) in investing activities ...... (87,248) (512,275) (99,658) (266,821)
Net cash provided by financing activities .... 1,022,670 1,151,999 1,217,253 955,451
</TABLE>
- ----------------
(1) Total debt includes current portion of debt and capital lease obligations.
14
<PAGE> 15
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements and Notes thereto are set out in this Form 10-KSB
commencing on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors and
executive officers of the Company, as of November 15, 1997:
<TABLE>
<CAPTION>
Name Position Age
---- -------- ---
<S> <C> <C>
Stephen M. Gose, Jr. Chairman of the Board of Directors 67
Thomas H. Gose Director and President 42
James E. Sigmon Director 49
Roberto R. Thomae Chief Financial Officer 46
Secretary/Treasurer
Vice President-Finance
Frank K. Alderman Vice President-Operations 41
Assistant Secretary
Richard A. Sartor Controller 45
</TABLE>
Stephen M. Gose, Jr., has served as Chairman of the Board of Directors of the
Company since August 1996. Mr. Gose also has served as Chairman of the Board of
Directors of The Exploration Company since July, 1984 and as Chairman of the
Audit and Compensation Committees of its Board of Directors since May, 1997. 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.
Thomas H. Gose has served as Director and President of the Company since August
1996. Mr. Gose has also served as the sole Director, CEO and President of
Cibolo Properties, Inc. and Retamco Operating, Inc. He formerly served as
President of Spectrum Resources, Inc. Since February, 1989, he has also served
as a Director of The Exploration Company, as Secretary from January 1992 to May
1997, and as Assistant Secretary since May 1997. Thomas H. Gose is the son of
Stephen M. Gose, Jr.
James E. Sigmon has served as a Director of the Company since August 1996. Mr.
Sigmon has also served as President of The Exploration Company since February
1985 and as a Director since July 1984.
Roberto R. Thomae has served as Chief Financial Officer and Vice
President-Finance of the Company since September 1996 and as
Secretary/Treasurer since March 1997.
Frank K. Alderman. has served as Vice President-Operations of the Company since
September 1996 and as Assistant Secretary since March, 1997.
Richard A. Sartor has served as Controller of the Company since April 1997.
Each of the aforementioned Executive Officers and/or Directors have been
elected to serve for one year or until his successor is duly elected.
15
<PAGE> 16
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Information: The following table contains certain
information for each of the fiscal years indicated with respect to the chief
executive officer and those executive officers of the Company as to whom the
total annual salary and bonuses exceed $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Other Annual Long-term All other
Principal Position Year Salary Bonuses Compensation Compensation Compensation
- ------------------ ---- ------ ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Gose, 1997 $ 108,000 $ 0 $0 $ 0 $0
President & CEO 1996 72,000 0 0 0 0
</TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total Options
# Options Granted to Employees Exercise Price Expiration Grant
Name Granted (1) in Fiscal Year per Share Date Date Value
--------- ------------ ----------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Thomas H. Gose 100,000 33.33% $ 0.15 2006 $ 0
James E. Sigmon 100,000 33.33% 0.15 2006 0
Roberto R. Thomae 50,000 16.67% 0.15 2006 0
Frank K. Alderman 50,000 16.67% 0.15 2006 0
-------- ------- ---
Totals 300,000 100.00% 0
======== ======= ===
</TABLE>
(1) Employee's ten year qualified options granted under the Company's 1996
Flexible Incentive Plan to purchase shares at 110% of current market price at
date of grant, vesting at 50% after one year and 100% after two years from the
date of grant, and continuing employee status. None were exercisable at August
31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
# Shares Value Options/SARs Options/SARs at
Name Exercised Realized August 31, 1997 August 31, 1997
--------- --------- -------- ----------------------- ------------------
<S> <C> <C>
Thomas H. Gose - - 100,000 $ 0
James E. Sigmon - - 100,000 0
Roberto R. Thomae - - 50,000 0
Frank K. Alderman - - 50,000 0
------- -----
Totals 300,000 0
======= =====
</TABLE>
None of the unexercised options were exercisable by option holders as of August
31, 1997.
16
<PAGE> 17
COMPENSATION OF DIRECTORS
Members of the Board of Directors of the Company are not compensated for any
services provided as a director.
EMPLOYMENT CONTRACTS
The Company has no outstanding employment agreements with any of its employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee. During the year ended
August 31, 1997, the following Directors participated in deliberations of the
Company's Board of Directors concerning executive officer compensation: Mr.
Stephen M. Gose, Jr., Mr. Thomas H. Gose and Mr. James E. Sigmon, .
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth beneficial ownership of the Company's common
stock, its only class of equity security. The percent owned is based on
4,000,000 shares outstanding and 4,800,000 fully diluted shares which includes
800,000 shares under options and warrants as of November 15, 1997.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information concerning all persons known to the
Company to beneficially own 5% or more if its common stock.
<TABLE>
<CAPTION>
Percent Owned
Name and Address of Number of Shares Primary Shares
Beneficial Owner Beneficially Owned Outstanding
---------------- ------------------ -----------
<S> <C> <C>
Thomas H. Gose 2,325,840 58.13%
500 North Loop 1604 East
Suite 250
San Antonio, TX 78232
James E. Sigmon 210,000 5.25%
500 N Loop 1604, East
Suite 250
San Antonio, Texas 78232
</TABLE>
17
<PAGE> 18
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is the beneficial ownership of the Company's Common Stock at
November 14, 1997, by (i) each person who is known to beneficially own more
than 5% of the outstanding shares of the Company's Common Stock, (ii) each
director of the Company, (iii) each Named Executive and (iv) executive officers
of the Company as a group. The address for each director, Named Executive and
The Exploration Company is the Company's address. Information provided is based
on the Form 4's obtained from stock records of the Company and the Company's
transfer agent.
<TABLE>
<CAPTION>
Number of Shares Percent
Beneficially Owned Owned
Name of Beneficial Owner (2) Number % (1)
----------------------------- ------------------ ---------
<S> <C> <C>
Stephen M. Gose, Jr.......................... 50,000 1.25
Thomas H. Gose (3).......................... 2,325,840 58.18
James E. Sigmon.............................. 210,000 5.25
The Exploration Company...................... 1,769,600 44.90
All directors and executive officers as a
Group(2) (3)............................... 2,685,840 67.10
</TABLE>
-----------
(1) Except as otherwise noted, the Company 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 include 0,
100,000 and 100,000 shares, respectively, of the Company's
Common Stock reserved for issuance under options issued
under the Company's 1996 Flexible Incentive Plan.
(3) The number of shares beneficially owned by Mr. Thomas H.
Gose include 254,100 shares owned directly, 164,214 shares
owned by Spectrum Resources, Inc., 37,926 owned by Retamco
Operating, Inc. and includes all of the shares, 1,769,600,
of the Company's Common Stock beneficially owned by the
former Parent, of which all three persons listed above
serve as directors and share voting and dispositive power
with the former Parent, but are attributed solely to Mr.
Gose for this presentation only.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the current year, the Company's former parent, TXCO, made advances to it
under a note agreement in the amount of $561,225. Interest accrued at 8%
totaled $19,262 at year end and together with principal is due in full on
December 31, 1998, but may be demanded by TXCO at any time. Subsequent to the
end of the current year, the Company received additional advances and
commitments for advances totaling $260,725 through December 31, 1997, under a
second note agreement with similar terms from TXCO. The Company has been
advised by TXCO that no additional funds will be available from this source
after January 1, 1998.
In August, 1996, 10% of the outstanding common stock of ExproFuels, Inc.,
previously a wholly-owned subsidiary of The Exploration Company, was given by
TXCO as consideration to the Directors of ExproFuels, Inc. for services
rendered.
18
<PAGE> 19
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) The following documents are being filed as part of this annual report
on Form 10-KSB after the signature page, commencing on page F-1.
(1) Financial Statements:
Independent Auditors' Report.
Balance Sheet, August 31, 1997
Statements of Operations, Years Ended August 31, 1997 and 1996.
Statements of Stockholders' Equity, Years Ended August 31, 1997
and 1996. Statements of Cash Flows, Years Ended August 31, 1997
and 1996.
Notes to Financial Statements.
(2) Financial Statement Schedule for the years ended August 31, 1997
and 1996:
Schedule II - Valuation and Qualifying Reserves.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are omitted as the required information is inapplicable or the
information is presented in the Financial Statements or Notes
thereto.
(3) Exhibits:
*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
27.1 Financial Data Schedule
- --------------------------------
*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
and Form 10-SB (as amended) filed with the Securities and Exchange
Commission on August 29, 1997.
(B) Reports on Form 8-K:
NONE
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
EXPROFUELS, INC.
Registrant
November 26, 1997 By: /s/ THOMAS H. GOSE
---------------------------------
Thomas H. Gose, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ STEPHEN M. GOSE, JR.
- ----------------------------
Stephen M. Gose, Jr. Chairman of the Board of Directors November 26, 1997
/s/ THOMAS H. GOSE
- ----------------------------
Thomas H. Gose President and Director November 26, 1997
(Principal Executive Officer)
/s/ JAMES E. SIGMON
- ----------------------------
James E. Sigmon Director November 26, 1997
/s/ ROBERTO R. THOMAE
- ----------------------------
Roberto R. Thomae Chief Financial Officer November 26, 1997
Vice President-Finance
Secretary/Treasurer
</TABLE>
20
<PAGE> 21
EXPROFUELS, INC.
CONTENTS
AUGUST 31, 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report F-1
Balance Sheet F-2
Statements of Operations F-4
Statements of Stockholders' Equity (Deficit) F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
</TABLE>
F-0
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ExproFuels, Inc.
We have audited the balance sheet of ExproFuels, Inc. as of August 31, 1997,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the two years in the period ended August 31, 1997. 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, 1997, and the results of its operations and its cash flows for each of the
two years in the period ended August 31, 1997, 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 B to the financial
statements, the Company has suffered recurring losses from operations since
inception, has a deficiency of current assets to current liabilities of
$478,623, an accumulated deficit in retained earnings of $4,238,600, and a
deficiency in stockholders' equity of $712,464 at August 31, 1997, 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
B. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
AKIN, DOHERTY, KLEIN & FEUGE, P.C.
San Antonio, Texas
November 14, 1997
F-1
<PAGE> 23
EXPROFUELS, INC.
BALANCE SHEET
AUGUST 31, 1997
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and equivalents $ 31,647
Accounts receivable, less allowance for doubtful
accounts of $10,000 141,754
Inventories 400,517
Prepaid expenses and other 34,159
---------
Total current assets 608,077
Property and Equipment:
Transportation and other equipment 133,883
Equipment under capital leases 93,326
Fuel stations 280,889
---------
Total property and equipment 508,098
Less accumulated depreciation and amortization (270,436)
---------
Net property and equipment 237,662
Other Assets:
Investments in and advances to CNG, net of provision
for impairment and allowance of $620,658 -
Other assets 45,099
---------
45,099
---------
Total Assets $ 890,838
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-2
<PAGE> 24
EXPROFUELS, INC.
BALANCE SHEET
AUGUST 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 495,468
Current portion of long-term debt-nonaffiliates 8,945
Current portion of long-term debt-affiliates 561,225
Current portion of capital lease obligations 21,062
-----------
Total current liabilities 1,086,700
Long-term Liabilities:
Long-term debt-nonaffiliates 107,946
Long-term debt-affiliates 400,000
Capital lease obligations 8,656
-----------
Total long-term liabilities 516,602
Stockholders' Equity (Deficit):
Common stock, par value $ .01 per share; authorized 50,000,000
shares; issued and outstanding 4,000,000 shares 40,000
Additional paid-in capital 3,486,136
Accumulated deficit (4,238,600)
-----------
Total stockholders' equity (deficit) (712,464)
-----------
Total Liabilities and Stockholders' Equity (Deficit) $ 890,838
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE> 25
EXPROFUELS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Conversion sales $ 643,607 $ 557,641
Fuel station construction sale 148,453 301,115
Alternative fuel sales 333,950 187,645
----------- -----------
1,126,010 1,046,401
COSTS AND EXPENSES:
Cost of sales 1,004,613 752,024
Shop general and administrative 420,983 484,920
Depreciation and amortization 88,654 85,574
General and administrative 583,320 404,708
Impairment of investment in CNG 620,658 --
----------- -----------
Total costs and expenses 2,718,228 1,727,226
----------- -----------
LOSS FROM OPERATIONS (1,592,218) (680,825)
Other Income (Expense):
Sublease rental income 13,500 58,500
Interest income 730 959
Other income 9,667 --
Interest expense (52,321) (23,648)
----------- -----------
(28,424) 35,811
----------- -----------
NET LOSS $(1,620,642) $ (645,014)
=========== ===========
PER SHARE DATA:
Net loss per common share $ (.41) $ (.16)
=========== ===========
Weighted average number of
common and common equivalent
shares outstanding 4,000,000 4,000,000
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE> 26
EXPROFUELS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 1, 1995 -- $ -- $ -- $(1,972,944) $(1,972,944)
Issuance of common stock 4,000,000 40,000 (40,000) -- --
Contribution of capital by
parent -- -- 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 (2,617,958) 908,178
Net loss for the year -- -- -- (1,620,642) (1,620,642)
----------- ----------- ----------- ----------- -----------
BALANCE AT AUGUST 31, 1997 4,000,000 $ 40,000 $ 3,486,136 $(4,238,600) $ (712,464)
=========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE> 27
EXPROFUELS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,620,642) $ (645,014)
Adjustments to reconcile net loss to net cash
used in operating activities:
Change in allowance for doubtful accounts (25,000) --
Proceeds from sale of equipment 5,816 --
Reserve for impairment and allowance on CNG 620,658 --
Depreciation 80,320 85,574
Amortization 8,334 --
Changes in operating assets and liabilities:
Receivables 37,947 66,775
Inventory (256,550) (40,011)
Prepaid expenses and other (14,813) 6,025
Accounts payable and accrued expenses 239,284 (99,465)
----------- -----------
Net cash (used) in operating activities (924,646) (626,116)
INVESTING ACTIVITIES:
Purchase of property and equipment (48,904) (79,946)
Investments in and advances to CNG (28,232) (442,426)
Other assets (10,112) 10,097
----------- -----------
Net cash (used) in investing activities (87,248) (512,275)
FINANCING ACTIVITIES:
Advances from affiliate 561,225 1,192,095
Proceeds from long-term debt 500,000 --
Payments on long-term debt (38,555) (40,096)
----------- -----------
Net cash provided by financing activities 1,022,670 1,151,999
----------- -----------
INCREASE IN CASH AND EQUIVALENTS 10,776 13,608
Cash and equivalents at beginning of year 20,871 7,263
----------- -----------
CASH AND EQUIVALENTS AT END OF YEAR $ 31,647 $ 20,871
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 27,532 $ 22,636
Cash paid for income taxes -- --
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE> 28
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997 AND 1996
NOTE A - 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. 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.
On August 30, 1996, TXCO distributed to it's Directors 400,000 common stock
shares it owned in ExproFuels, Inc. for services rendered, thereby reducing
TXCO's ownership interest from 100% to 90%.
On August 29, 1997, TXCO distributed 1,910,000 common stock it owned in
ExproFuels, Inc. to TXCO stockholders of record as of September 13, 1997. The
effect of the distribution was to reduce TXCO's ownership in ExproFuels, Inc.
to approximately 42%.
The Statement of Operations for the year ended August 31, 1996 includes the
accounts of ExproFuels while operated as a division of TXCO (September 1, 1995
through August 14, 1996) and as a subsidiary of TXCO (August 15, 1996 through
August 31, 1996).
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 seven years. Major renewals and betterments are
capitalized while repairs are expensed as incurred.
Federal Income Taxes: 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. The Company generally requires no
collateral from its customers.
Corporate Expenses: The Company shares office space, office equipment and
certain personnel with TXCO. The Statements of Operations for the years ended
August 31, 1997 and 1996 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).
F-7
<PAGE> 29
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997 AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
Net 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. Common stock issued in connection with the Company's incorporation
on August 15, 1996 has been assumed to be outstanding for all periods
presented.
Government Regulations: Substantially all of the Company's facilities are
subject to federal, state and local provisions regulating the discharge of
materials into the environment. Management believes that its current practices
and procedures for the control and disposition of such wastes comply with
applicable federal and state requirements.
Fair Value of Financial Instruments: The only financial instruments of the
Company at August 31, 1997 and 1996, are cash and equivalents, trade accounts
receivable and payable, and long-term debt. In all cases the carrying amount of
the financial instruments approximates fair value.
Revenue Recognition: The Company recognizes conversion sales and fuel station
construction sales upon completion of the work. Fuel sales are recognized at
the time of the sale.
NOTE B - GOING CONCERN UNCERTAINTY
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 The Exploration Company to fund its cash
requirements. As shown in the financial statements, the Company has suffered
recurring losses, has a deficiency of current assets to current liabilities of
$478,623, an accumulated deficit in retained earnings of $4,238,600 at August
31, 1997, and a deficiency in stockholders' equity of $712,464. These factors,
among others, raise substantial doubt about the Company's ability to continue
as a going concern. The 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 seeking alternatives, including raising additional debt or equity
financing. See Note D. The Company's ability to continue to operate is
dependent upon successfully accomplishing some or all of these or other
alternatives, and ultimately to attain profitable operations.
NOTE C - INVESTMENTS IN AND ADVANCES TO CNG INTERNATIONAL
The Company has invested $620,658 at August 31, 1997 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. The total investment of $620,658 is composed of an equity investment
of $381,123 and accounts receivable of $239,535. At August 31, 1997,
ExproFuels, Inc. owned an 10.8% interest in CNG International and accounted for
its ownership interest using the cost method of accounting.
F-8
<PAGE> 30
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997 AND 1996
NOTE C - INVESTMENTS IN AND ADVANCES TO CNG INTERNATIONAL - CONTINUED
In July, 1997, management became aware that its relationship with the majority
owners of CNG International had deteriorated to the level whereby the Company
filed suit in federal court to force payment of its accounts receivable of
$239,535. The majority owners of CNG International in turn countersued
ExproFuels, Inc. claiming, among other things, breach of contracts. The Company
is vigorously contesting the countersuit, and management believes it will
ultimately be successful in the legal claims. However, management has concluded
its investment in CNG International of $381,123 is at risk, and timely or
ultimate collection of its account receivable of $239,535 is doubtful.
Accordingly, at August 31, 1997 the Company has fully impaired its investment
of $381,123 and allowed for its accounts receivable of $239,535.
NOTE D - LONG TERM DEBT
Long-term debt and capitalized lease obligations consist of the following at
August 31, 1997:
<TABLE>
<S> <C>
Notes payable to financial institutions, with interest rates from 8.50% to
12%,due in monthly installments of $901
and secured by certain vehicles. $ 16,891
Capital lease obligations, with imputed interest rates from 16.21% to
19.82%, due in monthly installments of $2,349
and secured by related leased equipment. 29,718
Convertible notes payable with interest at 6%, interest due quarterly and
principal due from July, 1999 to February,
2000. See below. 500,000
Notes payable to affiliate with interest at 8%, due on demand
and unsecured. See below. 561,225
---------
Total long-term debt and capitalized lease obligations 1,107,834
Less current portion 591,232
---------
Long-term portion of debt and capitalized lease obligations $ 516,602
=========
</TABLE>
Convertible Notes Payable: During the current year, the Company issued four
separate unsecured convertible debentures, all with identical terms, except for
the due date, if not converted. Each debenture requires quarterly interest
payments computed at 6%, and are convertible at the payee's option into common
stock of the Company at the rate of $1 of debt to 1 share of common stock. The
Company has the right to force conversion if it attains $2,000,000 in total
assets. The convertible debentures were issued to parties related to the
Company ($400,000) and to an unrelated third party ($100,000), and, if not
converted, are due from September 18, 1999 to April 11, 2000.
Notes Payable to Affiliate: During the current year the Company's former
parent, TXCO, made advances to it under a note agreement in the total amount of
$561,225. The debt accrues interest at 8% and is due in full on December 31,
1998, but may be demanded by TXCO at any time.
F-9
<PAGE> 31
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997 AND 1996
NOTE D - LONG TERM DEBT - CONTINUED
The following is a schedule of principal maturities of long-term debt and
capital lease obligations as of August 31, 1997:
<TABLE>
<CAPTION>
Fiscal Year Ended
August 31 Debt Leases Total
------------------- ----------- -------- -----------
<S> <C> <C> <C> <C>
1998 $ 570,170 $ 21,062 $ 591,232
1999 205,839 8,656 214,495
2000 302,107 - 302,107
----------- -------- -----------
$ 1,078,116 $ 29,718 $ 1,107,834
=========== ======== ===========
</TABLE>
Future minimum rentals under all capital leases are as follows:
<TABLE>
<S> <C> <C>
1998 $ 28,212
1999 7,615
--------
Total minimum rentals 35,827
Less amount representing interest,
executory costs and profit 6,109
--------
Present value of capital lease obligations $ 29,718
========
</TABLE>
NOTE E - STOCKHOLDERS' EQUITY
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.
Stock Options: The Company grants options to its officers, directors, and key
employees under its 1996 Flexible Incentive Plan. The Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25) and related Interpretations in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation," (FASB 123) requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB
25, because the exercise price of the Company's stock options equals or exceeds
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company's stock option plans have authorized the grant of options to
management, directors, and key personnel for up to 400,000 shares of the
Company's common stock. All options granted have ten year terms and vest and
become fully exercisable based on the specific terms imposed at the date of
grant, generally ranging up to three years from the date of the grant.
Pro forma information regarding net income and earnings per share is required
by FASB 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
August 31, 1995 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997
and 1996, respectively: risk-free interest rates of 6.25% and 6.25%; dividend
yields of -0-% and -0-%; volatility factors of the expected market price of the
Company's common stock of .300 and .300; and a weighted-average expected life
of the option of five years.
F-10
<PAGE> 32
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997 AND 1996
NOTE E - STOCKHOLDERS' EQUITY - CONTINUED
The Black-Scholes option valuation model was developed for use in estimating
the fair value of trade options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows for the years ended August 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Pro forma net (loss) $ (1,620,642) $ (645,014)
Pro forma net loss per common share $ (0.41) $ (0.16)
</TABLE>
A summary of the status of the Company's stock option plan as of August 31,
1997 and 1996, and changes during the fiscal years then ending, is presented
below:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding options at beginning of year -- $ -- $ --
Granted 300,000 0.15 -- --
Exercised -- -- -- --
Forfeited -- -- -- --
-------- ------ ----------- --------
Outstanding options at end of year 300,000 $ 0.15 -- $ --
======== ====== =========== -=======
Options exercisable at end of year 0 N/A -- $ --
======== ====== =========== -=======
Weighted-average fair value of
options granted during the year* $ -- $ --
====== -=======
</TABLE>
* Due to the Company's financial condition at date of grant and August 31,
1997, the options granted have a determined fair value of $0.
The following table summarizes information about the options outstanding at
August 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Weighted-Average
Number Remaining Weighted-Average Number Weighted-Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.15 300,000 9 years $ 0.15 0 N/A
</TABLE>
F-11
<PAGE> 33
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997 AND 1996
NOTE F - OPERATING LEASES
The Company shares office space with TXCO and pays to them $4,725 per month for
the use of office space and equipment. In addition, the Company leases from
nonaffiliates its conversion facilities and a fuel station location under
noncancellable leases with terms from one to three years.
For the years ended August 31, 1997 and 1996, the Company incurred rent expense
of $120,925 and $141,996, respectively and received sublease rental income of
$13,500 in 1997 and $58,500 in 1996. Future minimum rentals under all
noncancellable operating leases are as follows at August 31, 1997:
<TABLE>
<S> <C> <C>
1998 $ 34,800
1999 22,500
--------
Net future minimum rentals $ 57,300
========
</TABLE>
NOTE G - FEDERAL INCOME TAXES
The Company began operating as a corporation on August 15, 1996; accordingly,
its tax attributes began on that date.
Deferred taxes are as follows at August 31, 1997:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,650,000
Statutory tax rate 34%
-----------
Net deferred tax asset 561,000
Less valuation allowance (561,000)
-----------
Deferred income tax asset recorded $ --
===========
</TABLE>
The net operating loss carryforwards expire $27,000 in 2011 and $1,623,000 in
2012.
NOTE H - RELATED PARTY TRANSACTIONS
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.
During fiscal year 1997, TXCO advanced the Company $561,225 under a note
agreement. See Note D.
During fiscal year 1997, related parties advanced the Company $400,000 under
convertible debenture agreements. See Note D.
F-12
<PAGE> 34
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997 AND 1996
NOTE I - MAJOR CUSTOMERS
Sales to major customers are as follows for the years ended August 31:
<TABLE>
<CAPTION>
Customer 1997 1996
------------ ------------ -----------
<S> <C> <C>
A $ 176,235 $ --
B 119,181 --
C 108,425 83,663
D 20,302 259,438
E -- 86,110
</TABLE>
F-13
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EXPROFUELS,
INC. AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH EXPROFUELS, INC. FORM 10KSB FOR
THE YEAR ENDED AUGUST 31, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 31,647
<SECURITIES> 0
<RECEIVABLES> 151,754
<ALLOWANCES> 10,000
<INVENTORY> 400,517
<CURRENT-ASSETS> 608,077
<PP&E> 508,098
<DEPRECIATION> 270,436
<TOTAL-ASSETS> 890,838
<CURRENT-LIABILITIES> 1,086,700
<BONDS> 516,602
0
0
<COMMON> 40,000
<OTHER-SE> (752,464)
<TOTAL-LIABILITY-AND-EQUITY> 890,838
<SALES> 1,126,010
<TOTAL-REVENUES> 1,126,010
<CGS> 1,514,250
<TOTAL-COSTS> 2,718,228
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