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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
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EXPROFUELS, INC.
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(Name of Small Business Issuer in its charter)
Delaware 74-2727901
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 North Loop 1604 East, Suite 250, San Antonio, TX 78232
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(Address of principal executive offices) (Zip Code)
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Issuer's telephone number, (210) 490-9400
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
________________________________ ______________________________
________________________________ ______________________________
Securities to be registered under Section 12(g) of the Act:
$0.01 Par Value Common Stock
- --------------------------------------------------------------------------------
(Title of class)
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(Title of class)
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ITEM 1. DESCRIPTION OF BUSINESS
Pursuant to Rule 12b-23 of the Securities Exchange Act of 1934 (the
"Act"), this item is incorporated by reference from the section labelled
"Business" in the Issuer's Information Statement filed as Exhibit 28.1 to this
Form 10-SB.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference from the section labelled "Management's Discussion and Analysis of
Financial Condition and Results of Operation" in the Issuer's Information
Statement filed as Exhibit 28.1 to this Form 10-SB.
ITEM 3. DESCRIPTION OF PROPERTY
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference from the section labelled "Properties" in the Issuer's Information
Statement filed as Exhibit 28.1 to this Form 10-SB.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference from the section labelled "Security Ownership of Certain Beneficial
Owners and Management" in the Issuer's Information Statement filed as Exhibit
28.1 to this Form 10-SB.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference from the section labelled "Management" in the Issuer's Information
Statement filed as Exhibit 28.1 to this Form 10-SB.
ITEM 6. EXECUTIVE COMPENSATION
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference from the section labelled "Management" in the Issuer's Information
Statement filed as Exhibit 28.1 to this Form 10-SB.
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ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference from the sections labelled "Relationship Between the Subsidiary and
the Parent After the Distribution," "Security Ownership of Certain Beneficial
Owners and Management" and "Business - General" in the Issuer's Information
Statement filed as Exhibit 28.1 to this Form 10-SB.
ITEM 8. LEGAL PROCEEDINGS
None.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference from the sections labelled "The Distribution - Trading of the
Subsidiary's Stock" and "Certain Special Considerations - No Current Public
Market for the Subsidiary's Common Stock" in the Issuer's Information Statement
filed as Exhibit 28.1 to this Form 10-SB.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 11. DESCRIPTION OF SECURITIES
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference from the section labelled "Description of the Subsidiary's Capital
Stock" in the Issuer's Information Statement filed as Exhibit 28.1 to this Form
10-SB.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference from the section labelled "Liability and Indemnification of Officers
and Directors of the Subsidiary" in the Issuer's Information Statement filed as
Exhibit 28.1 to this Form 10-SB.
ITEM 13. FINANCIAL STATEMENTS
Pursuant to Rule 12b-23 of the Act, this item is incorporated by
reference from the section labelled "Financial Statements" in
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the Issuer's Information Statement filed as Exhibit 28.1 to this Form 10-SB.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Listed below are the financial statements filed as part of
this Registration Statement:
FINANCIAL STATEMENTS
Report of Independent Public Accountants
Balance Sheets at August 31, 1995, August 31, 1996, and
November 30, 1996 (unaudited)
Statements of Operations for Fiscal Years
Ended August 31, 1994, August 31, 1995, August 31,
1996, and November 30, 1996 (unaudited)
Statements of Cash Flows for Fiscal Years
Ended August 31, 1994, August 31, 1995, August 31,
1996, and November 30, 1996 (unaudited)
Notes to Consolidated Financial Statements
(b) The following exhibits are filed as part of this Registration
Statement:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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
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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
28.1 Information Statement
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
(Registrant) EXPROFUELS, INC.
Date: February 26, 1997
By (Signature): /s/ Roberto R. Thomae
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Name: Roberto R. Thomae
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Title: Chief Financial Officer
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EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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3(i) Certificate of Incorporation and Certificate
of Amendment of the Issuer
3(ii) Bylaws of the Issuer
10.1 1996 Flexible Incentive Plan
10.2 Convertible Promissory Note, dated February
12, 1997, to Retamco Operating, Inc.
10.3 Convertible Promissory Note, dated December
19, 1996, to Wanluan Investments, Limited
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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
28.1 Information Statement
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EXHIBIT 3(i)
CERTIFICATE OF INCORPORATION
OF
EXPROFUELS INC.
First: The name of the Corporation is ExproFuels Inc.
Second: The registered office of the Corporation in the State of
Delaware is located at 1013 Centre Road, Wilmington, Delaware 19805. The name
and address of its registered agent is Corporation Service Company.
Third: The nature of the business, objects and purposes to be
transacted, promoted or carried on by the Corporation are:
To engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware, and by
such statement all lawful acts and activities shall be within the
purposes of the corporation, except for express limitations, if any.
Fourth: The total number of shares of stock which the Corporation
shall have authority to issue is 50,000,000 shares of Common Stock, $.01 par
value.
Fifth: No stockholder shall have any preemptive right to subscribe
to an additional issue of stock or to any security convertible into such stock
or carrying a right to subscribe to or acquire shares of the Corporation is
hereby denied.
Sixth: Directors shall be elected by majority vote. No stockholder
of the Corporation shall have the right to cumulate his votes in the election
of directors.
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Seventh: The name and mailing address of the incorporator is
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Name Mailing Address
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Arthur S. Berner Winstead Sechrest & Minick P.C.
910 Travis Street, Suite 1700
Houston, Texas 77002
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Eighth: The Corporation is to have perpetual existence.
Ninth: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
(1) To make, alter or repeal the by-laws of the Corporation.
(2) To authorize and cause to be executed mortgages and liens
upon the real and personal property of the Corporation.
(3) To set apart out of any of the funds of the Corporation
available for dividends a reserve or reserves for my proper purpose and
to abolish any such reserve in the manner in which it was created.
(4) By a majority of the whole Board of Directors, to
designate one or more committees, each committee to consist of one or
more of the directors of the Corporation. The Board of Directors may
designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. Any such committee, to the extent provided in the resolution
or in the by-laws of the Corporation, shall have and may exercise the
powers of the Board of Directors in the management of the business and
affairs of the Corporation and may authorize the seal of the Corporation
to be affixed to all papers which may require it; provided, however, the
by-laws may provide that in the absence or disqualification of any
member of such committee or committees the member or members thereof
present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member
of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
(5) When and as authorized by the affirmative vote of the
holders of a majority of the stock issued and
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outstanding having voting power given at a stockholders' meeting duly
called upon such notice as is required by statute, or when authorized by
the written consent of the holders of a majority of the voting stock
issued and outstanding, to sell, lease or exchange all or substantially
all the property and assets of the Corporation, including its goodwill
and its corporate franchises, upon such terms and conditions and for
such consideration, which may consist in whole or in part of money or
property including securities of any other corporation or corporations,
as the Board of Directors shall deem expedient and for the best
interests of the Corporation.
Tenth: Meetings of stockholders may be held within or without the State
of Delaware, as the by-laws may provide. The books of the Corporation may be
kept (subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the by-laws of the Corporation. Elections of
directors need not be by written ballot unless the by-laws of the Corporation
shall so provide.
Whenever the vote of stockholders at a meeting thereof is required or
permitted to be taken for or in connection with any corporate action, the
meeting and vote of stockholders may be dispensed with and such action may be
taken with the written consent of stockholders having not less than the minimum
percentage of the vote required by statute for the proposed corporate action,
provided that prompt notice shall be given to all stockholders of the taking of
corporate action without a meeting and by less than unanimous consent.
Subject to the provisions of the General Corporation Law of Delaware,
the Certificate of Incorporation or by-laws for notice of
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meetings, and unless otherwise restricted by this Certificate of Incorporation,
stockholders may participate in and hold a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in such
meeting shall constitute attendance and presence in person at such meeting,
except where a person participates in the meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting is
not lawfully called or convened.
Eleventh: The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
Twelfth: A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, as the same exists or hereafter may be amended, or (iv) for
any transaction from which the director derived an improper personal benefit.
If the Delaware General Corporation Law hereafter is amended to authorize the
further elimination or limitation on personal liability of directors, then
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the liability of a director of the Corporation, in addition to the limitation
on personal liability provided herein, shall be limited to the fullest extent
permitted by the amended Delaware General Corporation Law. Any repeal or
modification of this paragraph by the stockholders of the Corporation shall be
prospective only, and shall not adversely affect any limitation on the personal
liability of a director of the Corporation existing at the time of such repeal
or modification.
Thirteenth:
(a) Each person who was or is made a party or is threatened to be
made a party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she, or a person of whom he or she is the
legal representative, is or was a director or officer, of the Corporation or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action in an official
capacity as a director, officer, employee or agent or in any other capacity
while serving as a director, officer, employee or agent shall be indemnified
and held harmless by the Corporation to the fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the
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Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that except as provided in
paragraph (b) hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. The right to indemnification conferred
in this Article Thirteenth shall be a contract right and shall include the
right to be paid by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if the
Delaware General Corporation Law requires, the payment of such expenses
incurred by a director or officer in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of a
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it
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shall ultimately be determined that such director or officer is not entitled to
be indemnified under this Article Thirteenth or otherwise. The Corporation
may, by action of its Board of Directors, provide indemnification to employees
and agents of the Corporation with the same scope and effect as the foregoing
indemnification of directors or officers.
(b) If a claim under paragraph (a) of this Article Thirteenth is not
paid in full by the Corporation within thirty days after a written claim has
been received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred
in defending any proceeding in advance of its final disposition where the
required undertaking, if any is required, has been tendered to the Corporation)
that the claimant has not met the standards of conduct which make it
permissible under the Delaware General Corporation Law for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set
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forth in the Delaware General Corporation Law, nor an actual determination by
the Corporation (including its Board of Directors, independent legal counsel,
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
(c) The right to indemnification and the payment of expenses incurred
in defending a proceeding in advance of its final disposition conferred in this
Article Thirteenth shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, provision of the Certificate
of Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
(d) The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability
or loss under the Delaware General Corporation Law.
Fourteenth:
The names and mailing addresses of the directors, who shall serve until
the first annual meeting of the stockholders or until their successors are
elected and qualified are as follows:
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Name Mailing Address
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Steve Gose 500 North Loop 1604 East
Suite 250
San Antonio, Texas 78232
Thomas H. Gose 500 North Loop 1604 East
Suite 250
San Antonio, Texas 78232
James E. Sigmon 500 North Loop 1604 East
Suite 250
San Antonio, Texas 78232
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The number of the directors of the Corporation shall be as specified in,
or determined in the manner provided in the by-laws.
THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, does make this Certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 1st day of November, 1994.
/s/ Arthur S. Berner
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Arthur S. Berner
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THE STATE OF TEXAS Section
Section
COUNTY OF HARRIS Section
BE IT REMEMBERED that on this 1st day of November, 1994, personally came
before me, a Notary Public for the State of Texas, Arthur S. Berner, the party
to the foregoing Certificate of Incorporation, known to me personally to be
such, and acknowledged the said certificate to be his act and deed and that the
facts stated therein are true.
GIVEN under my hand and seal of office the day and year aforesaid.
/s/ Julia A. Brown
-----------------------------------
Notary Public in and for the
State of TEXAS
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EXHIBIT 3(i) cont.
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
EXPROFUELS INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is ExproFuels Inc.
2. The certificate of incorporation of the Corporation is hereby
amended by striking out Article Fourth thereof and by substituting in lieu of
said Article Fourth the following new Article Fourth:
"Fourth: The aggregate number of shares which the Corporation
has authority to issue is Sixty Million (60,000,000) shares of One Cent
($0.01) par value per share. Fifty Million (50,000,000) of such shares
are designated as Common Stock and shall have identical rights and
privileges in every respect. Ten Million (10,000,000) of such shares
are designated as Preferred Stock. The shares of Preferred Stock may be
issued from time to time in one or more series. The Board of Directors
is hereby expressly authorized to provide for the issuance of all or any
of the shares of the Preferred Stock in one or more series, and to fix
the number of shares and to determine or alter for each such series,
such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative participating, optional or other
rights and such qualifications, limitations or restrictions thereof, as
shall be stated and expressed in a resolution or resolutions adopted by
the Board of Directors providing for the issuance of such shares and as
may be permitted by the General Corporation Law of Delaware."
3. The amendment of the certificate of incorporation herein
certified has been duly adopted in accordance with the provisions of Section
228 and 242 of the General Corporation of the State of Delaware.
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4. The effective time of the amendment herein certified shall be on
the date of filing with the Secretary of State of Delaware.
SIGNED this 29th day of August, 1996.
/s/ Roberto R. Thomae
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Roberto R. Thomae, Vice President-Finance
of ExproFuels Inc.
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EXHIBIT 3(ii)
BYLAWS
OF
EXPROFUELS INC.
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TABLE OF CONTENTS
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ARTICLE I. Offices.
1. Registered Office.
2. Other Offices.
ARTICLE II. Meetings of Stockholders.
1. Place of Meetings.
2. Annual Meeting.
3. Special Meetings.
4. Notice.
5. Voting List.
6. Quorum.
7. Required Vote; Withdrawal of Quorum.
8. Method of Voting; Proxies.
9. Record Date.
10. Action Without Meeting.
11. Inspectors of Elections.
ARTICLE III. Directors.
1. Management.
2. Number; Election.
3. Change in Number.
4. Removal.
5. Vacancies and Newly Created Directorships.
6. Election of Directors; Cumulative Voting Prohibited.
7. Place of Meetings.
8. First Meetings.
9. Regular Meetings.
10. Special Meetings.
11. Quorum.
12. Action Without Meeting; Telephone Meetings.
13. Chairman of the Board.
14. Compensation.
ARTICLE IV. Committees.
1. Designation.
2. Number; Qualification; Term.
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3. Authority.
4. Committee Changes; Removal.
5. Alternate Members of Committees.
6. Regular Meetings.
7. Special Meetings.
8. Quorum; Majority Vote.
9. Minutes.
10. Compensation.
11. Responsibility.
ARTICLE V. Notices.
1. Method.
2. Waiver.
3. Exception to Notice Requirement.
ARTICLE VI. Officers.
1. Officers.
2. Election.
3. Compensation.
4. Removal and Vacancies.
5. President.
6. Vice Presidents.
7. Secretary.
8. Assistant Secretaries.
9. Treasurer.
10. Assistant Treasurers.
ARTICLE VII. Certificates Representing Shares.
1. Certificates.
2. Legends.
3. Lost Certificates.
4. Transfer of Shares.
5. Registered Stockholders.
ARTICLE VIII. General Provisions.
1. Dividends.
2. Reserves.
3. Checks.
4. Fiscal Year.
5. Seal.
6. Indemnification.
7. Transactions with Directors and Officers.
8. Amendments.
9. Table of Contents; Headings.
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BYLAWS
OF
EXPROFUELS, INC.
(the "Corporation")
ARTICLE I.
OFFICES
Section 1. Registered Office. The registered office of the
Corporation shall be in c/o Corporation Service Company, 1013 Centre Road,
Wilmington, Delaware 19805.
Section 2. Other Offices. The Corporation may also have offices at
such other places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders for all
purposes may be held at such time and place, either within or without the State
of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
Section 2. Annual Meeting. An annual meeting of stockholders of the
Corporation shall be held each calendar year on such date and at such time as
shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting or in a duly executed waiver of notice of such
meeting. At such meeting, the stockholders shall elect directors and transact
such other business as may properly be brought before the meeting.
Section 3. Special Meetings. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute, the
Certificate of Incorporation or these Bylaws, may be called by the President,
the Board of Directors, or the holders of not less than ten percent (10%) of
all shares entitled to vote at the meetings. Business transacted at all
special meetings shall be confined to the purposes stated in the notice of the
meeting.
Section 4. Notice. Written or printed notice stating the place,
date, and hour of each meeting of the stockholders and, in the case of a
special meeting, the purpose or purposes for which the meeting is called, shall
be given not less then ten (10) nor
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more than sixty (60) days before the date of the meeting, either personally or
by mail, by or at the direction of the President, the Secretary, or the officer
of person(s) calling the meeting, to each stockholder of record entitled to
vote at such meeting. If such notice is to be sent by mail, it shall be
directed to such stockholder at his address as it appears on the records of the
Corporation, unless he shall have filed with the Secretary of the Corporation a
written request that notices to him be mailed to some other address, in which
case it shall be directed to him at such other address. Notice of any meeting
of stockholders shall not be required to be given to any stockholder who shall
attend such meeting in person or by proxy and shall not, at the beginning of
such meeting, object to the transaction of any business because the meeting is
not lawfully called or convened, or who shall, either before or after the
meeting, submit a signed waiver of notice, in person or by proxy.
Section 5. Voting List. At least ten (10) days before each meeting
of stockholders, the Secretary or other officer of the Corporation who has
charge of the Corporation's stock ledger, either directly or through another
officer appointed by him or through a transfer agent appointed by the Board of
Directors, shall prepare a complete list of the stockholders entitled to vote
at the meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting or a duly executed waiver of notice of such meeting or,
if not so specified, at the place where the meeting is to be held. Such list
shall also be produced and kept at the time and place of the meeting at all
times during such meeting and may be inspected by any stockholder who is
present.
Section 6. Quorum. The holders of a majority of the outstanding
shares entitled to vote on a matter, present in person or represented by proxy,
shall constitute a quorum at any meeting of stockholders, except as otherwise
provided by statute, the Certificate of Incorporation or these Bylaws. If a
quorum shall not be present at any meeting of stockholders, the stockholders
entitled to vote thereat who are present, in person or by proxy, or, if no
stockholder entitled to vote is present, any officer of the Corporation, may
adjourn the meeting from time to time until a quorum shall be present. When a
meeting is adjourned to another time or place, notice need not be given of the
adjourned meeting if the time and place are announced at the meeting at which
the adjournment is taken. At any adjourned meeting at which a quorum shall be
present, any business may be transacted which might have been transacted at the
original meeting had a quorum been present; provided that, if the adjournment
is for more than thirty (30) days or if after the adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given
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to each stockholder of record entitled to vote at the adjourned meeting.
Section 7. Required Vote; Withdrawal of Quorum. When a quorum is
present at any meeting, the vote of the holders of at least a majority of the
outstanding shares entitled to vote who are present, in person or by proxy,
shall decide any question brought before the meeting, unless the question is
one on which, by express provision of statute, the Certificate of Incorporation
or these Bylaws, a different vote is required, in which case such express
provision shall govern and control the decision of the question. The
stockholders present at a duly constituted meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
Section 8. Method of Voting; Proxies.
(a) Each outstanding share, regardless of class, shall be entitled to
one vote on each matter submitted to a vote at a meeting of stockholders,
except to the extent that the voting rights of the shares of any class or
classes are limited, denied, increased or decreased by the Certificate of
Incorporation.
(b) Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for him by proxy, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period.
(c) Without limiting the manner in which a stockholder may authorize
another person or persons to act for him as proxy pursuant to subsection (b) of
this section, the following shall constitute a valid means by which a
stockholder may grant such authority:
(i) A stockholder may execute a writing authorizing another
person or persons to act for him as proxy. Execution may be
accomplished by the stockholder or by an authorized officer, director,
employee or agent of the stockholder signing such writing or causing
such stockholder's signature to be affixed to such writing by any
reasonable means including, but not limited to, by facsimile signature.
(ii) A stockholder may authorize another person or persons to
act for him as proxy by transmitting or authorizing the transmission of
a telegram, cablegram, or other means of electronic transmission to the
person who will be the holder of the proxy or to a proxy solicitation
firm, proxy support service organization or like agent duly authorized
by the person who will be the holder of the proxy to receive such
transmission, provided that any such telegram, cablegram or other means
of electronic transmission must either set forth or be submitted with
information from which it can be determined that the telegram, cablegram
or other electronic transmission was authorized by the stockholder. If
it is
<PAGE> 6
determined that such telegrams, cablegrams or other electronic
transmissions are valid, the inspectors or, if there are no inspectors,
such other persons making that determination shall specify the
information upon which they relied.
(d) Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to subsection (c)
of this section may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
(e) A duly executed proxy shall be irrevocable if it states that it
is irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power.
Section 9. Record Date.
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record
date is adopted by the Board of Directors, and which record date shall not be
more than sixty (60) nor less than ten (10) days before the date of such
meeting. If no record date is fixed by the Board of Directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date,which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten (10) days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by statute or these Bylaws, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the Corporation by delivery to
<PAGE> 7
its registered office in Delaware, its principal place of business, or an
officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Such delivery shall be
by hand or by certified or registered mail, return receipt requested. If no
record date has been fixed by the Board of Directors and prior action by the
Board of Directors is required by statute or these Bylaws, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action.
(c) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty (60) days prior to
such action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
Section 10. Action Without Meeting.
(a) Any action required or permitted to be taken at a meeting of the
stockholders of the Corporation may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Such consent or consents shall be delivered to the
Corporation at its registered office in Delaware, its principal place of
business, or an officer or agent of the Corporation having custody of the book
in which proceedings of stockholders' meetings are recorded. Such delivery
shall be by hand or by certified or registered mail, return receipt requested.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the written consent, and no consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered in the manner required by this section to
the Corporation, written consents signed by a sufficient number of stockholders
to take action are delivered to the Corporation in the manner required by this
section.
Section 11. Inspectors of Elections. The Board of Directors may, in
advance of any meeting of stockholders, appoint one or more inspectors to act
at such meeting or any adjournment thereof. If any of the inspectors so
appointed shall fail to
<PAGE> 8
appear or act, the chairman of the meeting shall, or if inspectors shall not
have been appointed, the chairman of the meeting may, appoint one or more
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares of capital stock of the
Corporation outstanding and the voting power of each, the number of shares
represented at the meeting, the existence of a quorum, and the validity and
effect of proxies and shall receive votes, ballots, or consents, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes, ballots, or consents, determine the
results, and do such acts as are proper to conduct the election or vote with
fairness to all stockholders. On request of the chairman of the meeting, the
inspectors shall make a report in writing of any challenge, request, or matter
determined by them and shall execute a certificate of any fact found by them.
No director or candidate for the office of director shall act as an inspector
of an election of directors. Inspectors need not be stockholders.
ARTICLE III.
DIRECTORS
Section 1. Management. The business and affairs of the Corporation
shall be managed by its Board of Directors who may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by statute,
the Certificate of Incorporation or these Bylaws directed or required to be
exercised or done by the stockholders. The Board of Directors shall keep
regular minutes of its proceedings.
Section 2. Number; Election. The Board of Directors shall consist of
no less than one (1) nor more than three (3) directors, who need not be
stockholders or residents of the State of Delaware. The directors shall be
elected at the annual meeting of the stockholders, except as hereinafter
provided, and each director elected shall hold office until his successor is
elected and qualified or until his earlier resignation or removal.
Section 3. Change in Number. The number of directors may be
increased or decreased from time to time by resolution adopted by the
affirmative vote of a majority of the Board of Directors, but no decrease shall
have the effect of shortening the term of any incumbent director.
Section 4. Removal. Any director may be removed, with or without
cause, at any annual or special meeting of stockholders, by the affirmative
vote of the holders of a majority of the shares represented in person or by
proxy at such meeting and entitled to vote for the election of such director,
if notice of the intention to act upon such matters shall have been given in
the notice calling such meeting.
<PAGE> 9
Section 5. Vacancies and Newly Created Directorships. Vacancies and
newly-created directorships resulting from any increase in the authorized
number of directors may be filled by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director. Each
director so chosen shall hold office until the first annual meeting of
stockholders held after his election and until his successor is elected and
qualified or until his earlier resignation or removal. If at any time there
are no directors in office, an election of directors may be held in the manner
provided by statute. Except as otherwise provided in these Bylaws, when one or
more directors shall resign from the Board of Directors, effective at a future
date, a majority of the directors then in office, including those who have so
resigned, shall have the power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in these
Bylaws with respect to the filling of other vacancies.
Section 6. Election of Directors; Cumulative Voting Prohibited. At
every election of directors, each stockholder shall have the right to vote in
person or by proxy the number of voting shares owned by him for as many persons
as there are directors to be elected and for whose election he has a right to
vote. Cumulative voting shall be prohibited.
Section 7. Place of Meetings. The directors of the Corporation may
hold their meetings, both regular and special, either within or without the
State of Delaware.
Section 8. First Meetings. The first meeting of each newly elected
Board shall be held without further notice immediately following the annual
meeting of stockholders, and at the same place, unless by unanimous consent of
the directors then elected and serving, such time or place shall be changed.
Section 9. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board of Directors.
Section 10. Special Meetings. Special meetings of the Board of
Directors may be called by the President on three (3) days' notice to each
director, either personally or by mail or by telegram. Special meetings may be
called in like manner and on like notice on the written request of any one of
the directors. Except as may be otherwise expressly provided by statute, the
Certificate of Incorporation or these Bylaws, neither the business to be
transacted at, nor the purpose of, any special meeting need be specified in a
notice or waiver of notice.
Section 11. Quorum. At all meetings of the Board of Directors, the
presence of a majority of the directors shall be necessary and sufficient to
constitute a quorum for the transaction
<PAGE> 10
of business, and the vote of a majority of the directors present at any meeting
at which a quorum is present shall be the act of the Board of Directors, except
as may be otherwise specifically provided by statute, or the Certificate of
Incorporation or these Bylaws. If a quorum shall not be present at any meeting
of directors, the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 12. Action Without Meeting; Telephone Meetings. Any action
required or permitted to be taken at a meeting of the Board of Directors or of
any committee thereof may be taken without a meeting if a consent in writing,
setting forth the action so taken, is signed by all the members of the Board of
Directors or committee, as the case may be. Such consent shall have the same
force and effect as an unanimous vote at a meeting. Subject to applicable
notice provisions and unless otherwise restricted by the Certificate of
Incorporation, members of the Board of Directors, or any committee designated
by the Board of Directors, may participate in and hold a meeting by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in
such meeting shall constitute presence in person at such meeting, except where
a person's participation is for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
Section 13. Chairman of the Board. The Board of Directors may elect a
Chairman of the Board to preside at their meetings and to perform such other
duties as the Board of Directors may from time to time assign to him.
Section 14. Compensation. Directors, as such, shall not receive any
stated salary for their services, but, by resolution of the Board of Directors,
a fixed sum and expenses of attendance, if any, may be allowed for attendance
at each regular or special meeting of the Board of Directors; provided, that
nothing herein contained shall be construed to preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE IV.
COMMITTEES
Section 1. Designation. The Board of Directors may, by resolution
passed by a majority of the entire Board of Directors, designate one or more
committees.
Section 2. Number; Qualification; Term. Each committee shall consist
of one or more directors appointed by resolution adopted by a majority of the
entire Board of Directors. The number of committee members may be increased or
decreased from time to time by resolution adopted by a majority of the entire
Board of
<PAGE> 11
Directors. Each committee member shall serve as such until the earliest of (i)
the expiration of his term as director, (ii) his resignation as a committee
member or as a director, or (iii) his removal as a committee member or as a
director.
Section 3. Authority. Each committee, to the extent expressly
provided in the resolution of the Board of Directors establishing such
committee, shall have and may exercise all of the authority of the Board of
Directors in the management of the business and affairs of the Corporation
except to the extent expressly restricted by statute, the Certificate of
Incorporation or these Bylaws.
Section 4. Committee Changes; Removal. The Board of Directors shall
have the power at any time to fill vacancies in, to change the membership of,
and to discharge any committee. The Board of Directors may remove any
committee member, at any time, with or without cause.
Section 5. Alternate Members of Committees. The Board of Directors
may designate one or more directors as alternate members of any committee. Any
such alternate member may replace any absent or disqualified member at any
meeting of the committee.
Section 6. Regular Meetings. Regular meetings of any committee may
be held without notice at such time and place as may be designated from time to
time by the committee and communicated to all members thereof.
Section 7. Special Meetings. Special meetings of any committee may
be held whenever called by any committee member. The committee member calling
any special meeting shall cause notice of such special meeting, including
therein the time and place of such special meeting, to be given to each
committee member at least two (2) days before such special meeting. Neither
the business to be transacted at, nor the purpose of, any special meeting of
any committee need be specified in the notice or waiver of notice of any
special meeting.
Section 8. Quorum; Majority Vote. At meetings of any committee, a
majority of the number of members designated by the Board of Directors shall
constitute a quorum for the transaction of business. If a quorum is not
present at a meeting of any committee, a majority of the members present may
adjourn the meeting from time to time, without notice other than an
announcement at the meeting, until a quorum is present. The act of a majority
of the members present at any meeting at which a quorum is in attendance shall
be the act of a committee, unless the act of a greater number is required by
law, the Certificate of Incorporation or these Bylaws.
Section 9. Minutes. Each committee shall cause minutes of its
proceedings to be prepared and shall report the same to the Board of Directors
upon the request of the Board of Directors. The
<PAGE> 12
minutes of the proceedings of each committee shall be delivered to the
Secretary of the Corporation for placement in the minute books of the
Corporation.
Section 10. Compensation. Committee members may, by resolution of the
Board of Directors, be allowed a fixed sum and expenses of attendance, if any,
for attending any committee meetings or a stated salary.
Section 11. Responsibility. The designation of any committee and the
delegation of authority to it shall not operate to relieve the Board of
Directors or any director of any responsibility imposed upon it or such
director by law.
ARTICLE V.
NOTICES
Section 1. Method. Whenever by statute, the Certificate of
Incorporation, or these Bylaws, notice is required to be given to any committee
member, director, or stockholder and no provision is made as to how such notice
shall be given, personal notice shall not be required, and any such notice may
be given (a) in writing, by mail, postage prepaid, addressed to such committee
member, director, or stockholder at his address as it appears on the books or
(in the case of a stockholder) the stock transfer records of the Corporation,
or (b) by any other method permitted by law (including, but not limited to,
overnight courier service, telegram, telex, or telefax). Any notice required
or permitted to be given by mail shall be deemed to be given when deposited in
the United States mail as aforesaid. Any notice required or permitted to be
given by overnight courier service shall be deemed to be given at the time
delivered to such service with all charges prepaid and addressed as aforesaid.
Any notice required or permitted to be given by telegram, telex, or telefax
shall be deemed to be delivered and given at the time transmitted with all
charges prepaid and addressed as aforesaid.
Section 2. Waiver. Whenever any notice is required to be given to
any stockholder, director, or committee member of the Corporation by statute,
the Certificate of Incorporation or these Bylaws, a written waiver thereof,
signed by the person or persons entitled to such notice, whether before or
after the time stated therein, shall be equivalent to notice. Attendance of a
stockholder, director, or committee member at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends for the
express purpose of objecting at the beginning of the meeting to the transaction
of any business on the grounds that the meeting is not lawfully called or
convened.
Section 3. Exception to Notice Requirement. The giving of any notice
required under any provision of the General Corporation Law of Delaware, the
Certificate of Incorporation or these Bylaws shall not be required to be given
to any stockholder to whom (i)
<PAGE> 13
notice of two consecutive annual meetings, and all notices of meetings or of
the taking of action by written consent without a meeting to such stockholder
during the period between such two consecutive annual meetings, or (ii) all,
and at least two, payments (if sent by first class mail) of dividends or
interest on securities during a twelve-month period, have been mailed addressed
to such person at his address as shown on the records of the Corporation and
have been returned undeliverable. If any such stockholder shall deliver to the
Corporation a written notice setting forth his then current address, the
requirement that notice be given to such stockholder shall be reinstated.
ARTICLE VI.
OFFICERS
Section 1. Officers. The officers of the Corporation shall be
elected by the directors and shall be a President and a Secretary. The Board
of Directors may also choose a Chairman of the Board, additional Vice
Presidents and one or more Assistant Secretaries and Assistant Treasurers. Any
two or more offices may be held by the same person.
Section 2. Election. The Board of Directors at its first meeting
after each annual meeting of stockholders shall elect the officers of the
Corporation, none of whom need be a member of the Board, a stockholder or a
resident of the State of Delaware. The Board of Directors may appoint such
other officers and agents as it shall deem necessary, who shall be appointed
for such terms and shall exercise such powers and perform such duties as shall
be determined from time to time by the Board of Directors.
Section 3. Compensation. The compensation of all officers and agents
of the Corporation shall be fixed by the Board of Directors.
Section 4. Removal and Vacancies. Each officer of the Corporation
shall hold office until his successor is elected and qualified or until his
earlier resignation or removal. Any officer or agent elected or appointed by
the Board of Directors may be removed either for or without cause by a majority
of the directors represented at a meeting of the Board of Directors at which a
quorum is represented, whenever in the judgment of the Board of Directors the
best interests of the Corporation will be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. If the office of any officer becomes vacant for any reason, the
vacancy may be filled by the Board of Directors.
Section 5. President. The President shall be the chief executive
officer of the Corporation. He shall preside at all meetings of the
stockholders and the Board of Directors unless the Board of Directors shall
elect a Chairman of the Board, in which event the President shall preside at
Board meetings in the absence
<PAGE> 14
of the Chairman of the Board. The President shall have general and active
management of the business and affairs of the Corporation, shall see that all
orders and resolutions of the Board are carried into effect, and shall perform
such other duties as the Board of Directors shall prescribe.
Section 6. Vice-Presidents. Each Vice President shall have only such
powers and perform only such duties as the Board of Directors may from time to
time prescribe or as the President may from time to time delegate to him.
Section 7. Secretary. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders and record all votes
and the minutes of all proceedings in a book to be kept for that purpose and
shall perform like duties for any committee when required. Except as otherwise
provided herein, the Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or President, under whose supervision he shall be. He shall keep in
safe custody the seal of the Corporation and, when authorized by the Board of
Directors, affix the same to any instrument requiring it, and, when so affixed,
it shall be attested by his signature or by the signature of the Treasurer or
an Assistant Secretary.
Section 8. Assistant Secretaries. Each Assistant Secretary shall
have only such powers and perform only such duties as the Board of Directors
may from time to time prescribe or as the President may from time to time
delegate.
Section 9. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements of the Corporation and shall deposit all monies and
other valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. He shall disburse
the funds of the Corporation as may be ordered by the Board of Directors,
taking proper vouchers for such disbursements, and shall render to the
President and directors, at the regular meetings of the Board of Directors, or
whenever they may require it, an account of all his transactions as Treasurer
and of the financial condition of the Corporation, and shall perform such other
duties as the Board of Directors may prescribe. If required by the Board of
Directors, he shall give the Corporation a bond in such form, in such sum, and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement
or removal from office, of all books, papers, vouchers, money, and other
property of whatever kind in his possession or under his control belonging to
the Corporation.
<PAGE> 15
Section 10. Assistant Treasurers. Each Assistant Treasurer shall have
only such powers and perform only such duties as the Board of Directors may
from time to time prescribe.
ARTICLE VII.
CERTIFICATES REPRESENTING SHARES
Section 1. Certificates. The shares of the Corporation shall be
represented by certificates in such form as shall be determined by the Board of
Directors. Such certificates shall be consecutively numbered and shall be
entered in the books of the Corporation as they are issued. Each certificate
shall state on the face thereof the holder's name, the number and class of
shares, and the par value of such shares or a statement that such shares are
without par value. Each certificate shall be signed by the President or a Vice
President and by the Secretary or an Assistant Secretary and may be sealed with
the seal of the Corporation or a facsimile thereof. Any or all of the
signatures on a certificate may be facsimile.
Section 2. Legends. The Board of Directors shall have the power and
authority to provide that certificates representing shares of stock shall bear
such legends, including, without limitation, such legends as the Board of
Directors deems appropriate to assure that the Corporation does not become
liable for violations of federal or state securities laws or other applicable
law.
Section 3. Lost Certificates. The Corporation may issue a new
certificate representing shares in place of any certificate theretofore issued
by the Corporation, alleged to have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate to
be lost, stolen or destroyed. The Board of Directors, in its discretion and as
a condition precedent to the issuance thereof, may require the owner of such
lost, stolen or destroyed certificate, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
Corporation a bond in such form, in such sum, and with such surety or sureties
as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen
or destroyed.
Section 4. Transfer of Shares. Shares of stock shall be transferable
only on the books of the Corporation by the holder thereof in person or by his
duly authorized attorney. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate representing shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation or the transfer agent of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
<PAGE> 16
Section 5. Registered Stockholders. The Corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof, and, accordingly, shall not be bound to recognize any
equitable or other claim or interest in such share or shares on the part of any
other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by law.
ARTICLE VIII.
GENERAL PROVISIONS
Section 1. Dividends. The directors, subject to any restrictions
contained in the Certificate of Incorporation, may declare dividends upon the
shares of the Corporation's capital stock. Dividends may be paid in cash, in
property, or in shares of the Corporation, subject to the provisions of the
General Corporation Law of Delaware and the Certificate of Incorporation.
Section 2. Reserves. By resolution of the Board of Directors, the
directors may set apart out of any of the funds of the Corporation such reserve
or reserves as the directors from time to time, in their discretion, think
proper to provide for contingencies, or to equalize dividends, or to repair or
maintain any property of the Corporation, or for such other purposes as the
directors shall think beneficial to the Corporation, and the directors may
modify or abolish any such reserve in the manner in which it was created.
Section 3. Checks. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 5. Seal. The corporate seal shall have inscribed thereon the
name of the Corporation. Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 6. Indemnification. The Corporation shall indemnify its
directors, officers, employees and agents to the fullest extent permitted by
the General Corporation Law of Delaware and the Certificate of Incorporation.
Section 7. Transactions with Directors and Officers. No contract or
other transaction between the Corporation and any other corporation and no
other act of the Corporation shall, in the absence of fraud, be invalidated or
in any way affected by the fact that any of the directors of the Corporation
are pecuniarily or otherwise interested in such contract, transaction or other
act, or are directors or officers of such other corporation. Any director
<PAGE> 17
of the Corporation, individually, or any firm or corporation of which any such
director may be a member, may be a party to, or may be pecuniarily or otherwise
interested in, any contract or transaction of the Corporation; provided,
however, that the fact that the director, individually, or the firm or
corporation is so interested shall be disclosed or shall have been known to the
Board of Directors or a majority of such members thereof as shall be present at
any annual meeting or at any special meeting, called for that purpose, of the
Board of Directors at which action upon any contract or transaction shall be
taken. Any director of the Corporation who is so interested may be counted in
determining the existence of a quorum at any such annual or special meeting of
the Board of Directors which authorizes such contract or transaction, and may
vote thereat to authorize such contract or transaction with like force and
effect as if he were not such director or officer of such other corporation or
not so interested. Every director of the Corporation is hereby relieved from
any disability which might otherwise prevent him from carrying out transactions
with or contracting with the Corporation for the benefit of himself or any
firm, corporation, trust or organization in which or with which he may be in
anywise interested or connected.
Section 8. Amendments. These Bylaws may be altered, amended, or
repealed or new bylaws may be adopted by the stockholders or by the Board of
Directors at any regular meeting of the stockholders or the Board of Directors,
at any special meeting of the stockholders or the Board of Directors if notice
of such alteration, amendment, repeal, or adoption of new bylaws be contained
in the notice of such special meeting, or by written consent of the Board of
Directors or the stockholders without a meeting.
Section 9. Table of Contents; Headings. The Table of Contents and
headings used in these Bylaws have been inserted for convenience only and do
not constitute matters to be construed in interpretation.
CERTIFICATE BY PRESIDENT
The undersigned, being the President of the Corporation, hereby
certifies that the foregoing Bylaws were duly adopted by the Board of Directors
of the Corporation effective on August 15, 1996.
IN WITNESS WHEREOF, I have signed this certification as of the 26th day
of September, 1996.
/s/ Thomas H. Gose
-----------------------------
Thomas H. Gose, President
<PAGE> 1
EXHIBIT 10.1
EXPROFUELS, INC.
1996 FLEXIBLE INCENTIVE PLAN
Section 1. PURPOSE OF THE PLAN
The purposes of the ExproFuels, Inc. 1996 Flexible Incentive Plan (the
"Plan") are to promote the interests of ExproFuels, Inc. (together with any
successor thereto, the "Company") and its stockholders by enabling the Company
to attract, motivate and retain key employees by offering such key employees
performance-based stock incentives and other equity interests in the Company
and other incentive awards that recognize the creation of value for the
stockholders of the Company and promote the Company's long-term growth and
success. To achieve these purposes, eligible persons may receive stock
options, Stock Appreciation Rights, Restricted Stock, Performance Awards,
performance stock, Dividend Equivalent Rights and any other Awards, or any
combination thereof.
Section 2. DEFINITIONS
As used in the Plan, the following terms shall have the meanings set
forth below unless the content otherwise requires:
2.1 "Award" shall mean the grant of a stock option, a Stock
Appreciation Right, a Restricted Stock, a Performance Award, performance
stock, a Dividend Equivalent Right or any other award under the Plan.
2.2 "Board" shall mean the Board of Directors of the Company,
as the same may be constituted from time to time.
2.3 "Change in Control" shall mean, after the effective date
of the Plan, (i) the occurrence of an event of a nature that would be
required to be reported in response to Item I or Item 2 of a Form 8-K
Current Report of the Company promulgated pursuant to Sections 13 and
15(d) of the Exchange Act; provided that, without limitation, such a
Change in Control shall be deemed to have occurred if (a) any "person,"
as such term is used in Sections 13(d) and 14(d) of the Exchange Act
(other than the Company, any trustee or other fiduciary holding
securities under any employee benefit plan of the Company, or any
company owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of
stock of the Company), is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more
of the combined voting power of the Company's then outstanding
securities, or (b) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board
cease for any reason to constitute at least a majority
<PAGE> 2
thereof, unless the election by the Board or the nomination for election
by the Company's stockholders was approved by a vote of at least two-
thirds (2/3) of the directors then still in office who either were
directors at the beginning of the two-year period or whose election or
nomination for election was previously so approved; (ii) the
stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation
that would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity) more than eighty percent (80%) of the combined voting
power of the voting securities of the surviving entity outstanding
immediately after such merger or consolidation; provided, however, that
a merger or consolidation effected to implement a reorganization or
recapitalization of the Company, or a similar transaction (collectively,
a "Reorganization"), in which no "person" acquires more than twenty
percent (20%) of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in Control of the
Company; or (iii) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets.
2.4 "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
2.5 "Committee" shall mean the Stock Option and Compensation
Committee, if such a separate committee is appointed by the Board, or,
until such time as a separate committee is appointed, it shall mean the
Board. If a separate committee is appointed, the Committee shall meet
the applicable requirements for "disinterested administration" within
the requirements of Rule 16b-3 promulgated under the Exchange Act and
any successor thereunder promulgated during the duration of the Plan.
The Board may amend the Plan to modify the definition of Committee
within the limits of Rule 16b-3 to assure that the Plan is administered
in compliance with Rule 16b-3. Initially, the Committee will consist of
not less than three (3) members of the Board who are appointed by, and
serve at the pleasure of, the Board and who are (i) "disinterested"
within the meaning of Rule 16b-3, and (ii) "outside directors," as
required under Section 162(m) of the Code and such Treasury Regulations
as may be promulgated thereunder. The Board does not meet the
applicable requirements of Rule 16b-3.
2.6 "Common Stock" shall mean the Common Stock, par value $.01
per share, of the Company.
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2.7 "Designated Beneficiary" shall mean the beneficiary
designated by a Participant in a manner determined by the Committee, to
exercise rights of the Participant in the event of the Participant's
death. In the absence of an effective designation by a Participant, the
Designated Beneficiary shall be the Participant's estate.
2.8 "Disability" shall mean permanent and total inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months, as determined in
the sole and absolute discretion of the Committee.
2.9 "Dividend Equivalent Right" shall mean the right of the
holder thereof to receive credits based on the cash dividends that would
have been paid on the Shares specified in an Award granting Dividend
Equivalent Rights if the Shares subject to such Award were held by the
person to whom the Award is made.
2.10 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
2.11 "Fair Market Value" shall mean with respect to the Shares,
as of any date, (i) the last reported sales price on any stock exchange
on which the Common Stock is traded or, if not reported on such
exchange, on the composite tape, or, in case no such sale takes place on
such day, the average of the reported closing bid and asked quotations
on such exchange; (ii) if the Common Stock is not listed on a stock
exchange or no such quotations are available, the closing price of the
Common Stock as reported by the National Market System of the National
Association of Securities Dealers, Inc., or, if no such quotations are
available, the average of the high bid and low asked quotations in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or similar organization; or (iii) in the event that there
shall be no public market for the Common Stock, the fair market value of
the Common Stock as determined (which determination shall be conclusive)
in good faith by the Committee, based upon the value of the Company as a
going concern, as if such Common Stock were publicly owned stock, but
without any discount with respect to minority ownership.
2.12 "Incentive Stock Option" shall mean any stock option
awarded under the Plan which qualifies as an "Incentive Stock Option"
under Section 422 of the Code or any successor provision.
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2.13 "Non-Tandem Stock Appreciation Right" shall mean any Stock
Appreciation Right granted alone and not in connection with an Award
which is a stock option.
2.14 "Non-Qualified Stock Option" shall mean any stock option
awarded under the Plan that does not qualify as an Incentive Stock
Option.
2.15 "Option" shall mean any person who has been granted a
stock option under the Plan and who has executed a written stock option
agreement with the Company reflecting the terms of such grant.
2.16 "Performance Award" shall mean any Award thereunder of
Shares, units or rights based upon, payable in, or otherwise related to,
Shares (including Restricted Stock), or cash of an equivalent value, as
the Committee may determine, at the end of a specified performance
period established by the Committee.
2.17 "Plan" shall mean ExproFuels, Inc. 1996 Flexible Incentive
Plan set forth herein.
2.18 "Reload Option" shall mean a stock option as deemed in
subsection 6.6(b) herein.
2.19 "Restricted Stock" shall mean any Award of Shares under
the Plan that are subject to restrictions or risk of forfeiture.
2.20 "Retirement" shall mean termination of employment other
than discharge for cause, after age 65 or on or before age 65 if
pursuant to the terms of any retirement plan maintained by the Company
or any of its Subsidiaries in which such person participates.
2.21 "Shares" shall mean shares of the Company's Common Stock
and any shares of capital stock or other securities of the Company
hereafter issued or issuable upon, in respect of or in substitution or
exchange for such Shares.
2.22 "Stock Appreciation Right" shall mean the right of the
holder thereof to receive an amount in cash or Shares equal to the
excess of the Fair Market Value of a Share on the date of exercise over
the Fair Market Value of a Share on the date of the grant (or such other
value as may be specified in the agreement granting the Stock
Appreciation Right).
2.23 "Subsidiary" shall mean a subsidiary corporation of the
Company, as defined in Section 424(f) of the Code.
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2.24 "Tandem Stock Appreciation Right" shall mean a Stock
Appreciation Right granted in connection with an Award which is a stock
option.
Section 3. ADMINISTRATION OF THE PLAN
3.1 Committee. The Plan shall be administered and interpreted
by the Committee.
3.2 Awards. Subject to the provisions of the Plan and
directions from the Board, the Committee is authorized to:
(a) determine the persons to whom Awards are to be
granted;
(b) determine the types and combinations of Awards to
be granted, the number of Shares to be covered by the Award, the
pricing of the Award, the time or times when the Award shall be
granted and may be exercised, the terms, performance criteria or
other conditions, vesting periods or any restrictions for an
Award, any restrictions on Shares acquired pursuant to the
exercise of an Award and any other terms and conditions of an
Award;
(c) conclusively interpret the provisions of the Plan;
(d) prescribe, amend and rescind rules and regulations
relating to the Plan or make individual decisions as questions
arise, or both;
(e) determine whether, to what extent and under what
circumstances to provide loans from the Company to participants
to purchase Shares subject to Awards under the Plan, and the
terms and conditions of such loans;
(f) rely upon employees of the Company for such
clerical and recordkeeping duties as may be necessary in
connection with the administration of the Plan; and
(g) make all other determinations and take all other
actions necessary or advisable for the administration of the
Plan.
3.3 Procedures. A majority of the Committee members shall
constitute a quorum. All determinations of the Committee shall be made
by a majority of its members. All questions of interpretation and
application of the Plan or pertaining to any question of fact or Award
granted thereunder shall be decided by the Committee, whose decision
shall be final, conclusive and binding upon the Company and each other
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affected party.
Section 4. SHARES SUBJECT TO PLAN
4.1 Limitations. The maximum number of Shares that may be
issued with respect to Awards under the Plan shall not exceed 400,000
unless such maximum shall be increased or decreased by reason of changes
in capitalization of the Company as hereinafter provided. The Shares
issued pursuant to the Plan may be authorized but unissued Shares, or
may be issued Shares which have been reacquired by the Company.
4.2 Changes. To the extent that any Award under the Plan, or
any stock option or performance award granted under any prior incentive
plan of the Company, shall be forfeited, shall expire or shall be
canceled, in whole or in part, then the number of Shares covered by the
Award or stock option so forfeited, expired or canceled may again be
awarded pursuant to the provisions of the Plan. In the event that
Shares are delivered to the Company in full or partial payment of the
exercise price for the exercise of a stock option granted under the Plan
or any prior incentive plan of the Company, the number of Shares
available for future Awards under the Plan shall be reduced only by the
net number of Shares issued upon the exercise of the option. Awards
that may be satisfied either by the issuance of Shares or by cash or
other consideration shall, until the form of consideration to be paid is
finally determined, be counted against the maximum number of Shares that
may be issued under the Plan. If the Award is ultimately satisfied by
the payment of consideration other than Shares, as, for example, a stock
option granted in tandem with a Stock Appreciation Right that is settled
by a cash payment of the stock appreciation, such Shares may again be
made the subject of an Award under the Plan. Awards will not reduce the
number of Shares that may be issued pursuant to the Plan if the
settlement of the Award will not require the issuance of Shares, as, for
example, a Stock Appreciation Right that can be satisfied only by the
payment of cash.
Section 5. ELIGIBILITY
Eligibility for participation in the Plan shall be confined to those
persons who are employed by the Company, and who are officers or directors of
the Company, or who are in managerial or other key positions within the
Company. In making any determination as to persons to whom Awards shall be
granted, the type of Award, and/or the number of Shares to be covered by the
Award, the Committee shall consider the position and responsibilities of the
person, his or her importance to the Company, the duties of such person, his or
her past, present and potential contributions to the growth and success of the
Company, and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes
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of the Plan.
Section 6. STOCK OPTIONS
6.1 Grants. The Committee may grant stock options alone or in
addition to other Awards granted under the Plan to any eligible officer,
director or other key employee. Each person so selected shall be
offered an option to purchase the number of Shares determined by the
Committee. The Committee shall specify whether such option is an
Incentive Stock Option or Non-Qualified Stock Option and any other terms
and conditions relating to such Award. To the extent that any stock
option does not qualify as an Incentive Stock Option (whether because of
its provisions or the time or manner of its exercise or otherwise), such
stock option or the portion thereof which does not qualify shall
constitute a separate Non-Qualified Stock Option. Each such person so
selected shall have a reasonable period of time within which to accept
or reject the offered option. Failure to accept within the period so
fixed by the Committee may be treated as a rejection. Each person who
accepts an option shall enter into a written agreement with the Company,
in such form as the Committee may prescribe, setting forth the terms and
conditions of the option, consistent with the provisions of the Plan.
The Option and the Company shall enter into option agreements for
Incentive Stock Options and NonQualified Stock Options. At any time and
from time to time, the Option and the Company may agree to modify an
option agreement so that an Incentive Stock Option may be converted to a
Non-Qualified Stock Option.
The Committee may require that an Option meet certain conditions
before the option or a portion thereof may vest or be exercised, as, for
example, that the Option remain in the employ of the Company for a
stated period or periods of time before the option, or stated portions
thereof, may vest or be exercised.
6.2 Option Price. The option exercise price of the Shares
covered by each stock option shall be determined by the Committee;
provided, however, that the option exercise price of an Incentive Stock
Option shall not be less than one hundred percent (100%) of the Fair
Market Value of Shares on the date of the grant of such Incentive Stock
Option.
6.3 Incentive Stock Options Limitations.
(a) In no event shall any person be granted Incentive
Stock Options to the extent that the Shares covered by any
Incentive Stock Options (and any incentive stock options granted
under any other plans of the Company and its Subsidiaries) that
may be exercised for the first time by such person in any
calendar year have
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an aggregate Fair Market Value in excess of $100,000. For this
purpose, the Fair Market Value of the Shares shall be determined
as of the dates on which the Incentive Stock Options are granted.
It is intended that the limitation on Incentive Stock Options
provided in this subsection 6.3(a) be the maximum limitation on
options which may be considered Incentive Stock Options under the
Code.
(b) Notwithstanding anything herein to the contrary, in
no event shall any employee owning more than ten percent (10%) of
the total combined voting power of the Company or any Subsidiary
be granted an Incentive Stock Option thereunder unless the option
exercise price shall be at least one hundred ten percent (110%)
of the Fair Market Value of the Shares subject to such Incentive
Stock Option at the time that the Incentive Stock Option is
granted and the term of such Incentive Stock Option shall not
exceed five (5) years.
6.4 Option Term. Subject to subsection 6.3(b) hereof, the
term of a stock option shall be for such period of months or years from
the date of its grant as may be determined by the Committee; provided,
however, that no Incentive Stock Option shall be exercisable later than
ten (10) years from the date of its grant. Furthermore, no Incentive
Stock Option may be exercised unless, at the time of such exercise, the
Option is, and has been continuously since the date of grant of his or
her Incentive Stock Option, employed by the Company, except that:
(a) An Incentive Stock Option may, to the extent
vested, be exercised within the period of three months after the
date the Participant ceases to be an employee of the Company (or
within such lesser period as may be specified in the applicable
option agreement), provided that the option agreement may
designate a longer exercise period and that the exercise after
such three-month period shall be treated as the exercise of a
Non-Qualified Stock Option under the Plan;
(b) if the Option dies while in the employ of the
Company, or within three months after the Option ceases to be
such an employee, the Incentive Stock Option may, to the extent
vested, be exercised by the Optionee's Designated Beneficiary
within the period of one year after the date of death (or within
such lesser period as may be specified in the applicable option
agreement); and
(c) If the Option ceases to be an employee of the
Company by reason of the Optionee's Disability, the Incentive
Stock Option may be exercised within the period
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of one year after the date of Disability (or within such lesser
period as may be specified in the applicable option agreement).
6.5 Vesting of Stock Options.
(a) Each stock option granted thereunder may only be
exercised to the extent that the Option is vested in such option.
Each stock option shall vest separately in accordance with the
option vesting schedule, if any, determined by the Committee in
its sole discretion, which will be incorporated in the stock
option agreement entered into between the Company and each
Option. The option vesting schedule will be accelerated if, in
the sole discretion of the Committee, the Committee determines
that acceleration of the option vesting schedule would be
desirable for the Company.
(b) in the event of the dissolution or liquidation of
the Company, each stock option granted under the Plan shall
terminate as of a date to be fixed by the Board; provided,
however, that not less than thirty (30) days' written notice of
the date so fixed shall be given to each Option and each such
Option shall be fully vested in and shall have the right during
such period to exercise the option, even though such option would
not otherwise be exercisable under the option vesting schedule.
At the end of such period, any unexercised option shall terminate
and be of no other effect.
(c) In the event of a Reorganization (as defined in
Section 2.3 hereof):
(1) If there is no plan or agreement respecting
the Reorganization, or if such plan or agreement does not
specifically provide for the change, conversion or
exchange of the Shares under outstanding and unexercised
stock options for other securities, then the provisions of
subsection 6.5(b) shall apply as if the Company had
dissolved or been liquidated on the effective date of the
Reorganization; or
(2) If there is a plan or agreement respecting
the Reorganization, and if such plan or agreement
specifically provides for the change, conversion or
exchange of the Shares under outstanding and unexercised
stock options for securities of another corporation, then
the Board shall adjust the Shares under such outstanding
and unexercised stock options (and shall adjust the Shares
remaining under the Plan which are then
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available to be awarded under the Plan, if such plan or
agreement makes no specific provision therefor) in a
manner not inconsistent with the provisions of such plan
or agreement for the adjustment change, conversion or
exchange of such Shares and such options.
(d) In the event of a Change in Control of the
Company, all stock options and any associated Stock
Appreciation Rights shall become fully vested and
immediately exercisable and the vesting of all
performance-based stock options shall be determined as if
the performance period or cycle applicable to such stock
options had ended immediately upon such Change in Control;
provided, however, that if in the opinion of counsel to
the Company the immediate exercisability of options when
taken into consideration with all other "parachute
payments" as defined in Section 280G of the Code, as
amended, would result in an "excess parachute payment" as
defined in such section as well as an exercise tax imposed
by Section 4999 of the Code, such options and any
associated Stock Appreciation Rights shall become fully
vested and immediately exercisable, except as and to the
extent the Committee, in its sole discretion, shall
otherwise determine, and which determination by the
Committee shall be based solely upon maximizing the after-
tax benefits to be received by any such Option.
6.6 Exercise of Stock Options.
(a) Stock options may be exercised as to Shares only in
amounts and at intervals of time specified in the written option
agreement between the Company and the Option. Each exercise of a
stock option, or any part thereof, shall be evidenced by a notice
in writing to the Company. The purchase price of the Shares as
to which an option shall be exercised shall be paid in full at
the time of exercise, and may be paid to the Company either:
(1) in cash (including check, bank draft or
money order); or
(2) by the delivery of Shares having a Fair
Market Value equal to the aggregate option rate;
(3) by a combination of cash and Shares; or
(4) by other consideration deemed acceptable by
the Committee in its sole discretion.
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(b) If an Option delivers Shares (including Shares of
Restricted Stock) already owned by him or her in full or partial
payment of the exercise price for any stock option granted under
the Plan or any prior incentive plan of the Company, or if the
Option elects to have the Company reflect that number of Shares
out of the Shares being acquired through the exercise of the
option having a Fair Market Value equal to the exercise price of
the stock option being exercised, the Committee may authorize the
automatic grant of a new option (a "Reload Option") for that
number of Shares as shall equal the number of already owned
Shares surrendered (including Shares of Restricted Stock) or
newly acquired Shares being retained in payment of the option
exercise price of the underlying stock option being exercised.
The grant of a Reload Option will become effective upon the
exercise of the underlying stock option. The option exercise
price of the Reload Option shall be the Fair Market Value of a
Share on the effective date of the grant of the Reload Option.
Each Reload Option shall be exercisable no earlier than six (6)
months from the date of its grant and no later than the time when
the underlying stock option being exercised could be last
exercised. The Committee may also specify additional terms,
conditions and restrictions for the Reload Option and the Shares
to be acquired upon the exercise thereof
(c) The amount, as determined by the Committee, of any
federal, state or local tax required to be withheld by the
Company due to the exercise of a stock option shall be satisfied
by payment by the Option to the Company of the amount of such
withholding obligation in cash or other consideration acceptable
to the Committee in its sole discretion.
(d) An Option shall not have any of the rights of a
stockholder of the Company with respect to the Shares covered by
a stock option except to the extent that one or more certificates
representing such Shares shall have been delivered to the Option,
or the Option has been determined to be a stockholder of record
by the Company's transfer agent, upon due exercise of the option.
6.7 Date of a Stock Option Grant. The granting of a stock
option shall take place only upon the execution and delivery by the
Company and an optionee of an option agreement. Neither any action
taken by the Board nor anything contained in the Plan or in any
resolution adopted or to be adopted by the Board or the stockholders of
the Company shall constitute the granting of a stock option under the
Plan.
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Section 7. STOCK APPRECIATION RIGHTS
7.1 Grants. The Committee may grant to any eligible employee
either Non-Tandem Stock Appreciation Rights or Tandem Stock Appreciation
Rights. Stock Appreciation Rights shall be subject to such terms and
conditions as the Committee shall impose. The grant of the Stock
Appreciation Right may provide that the holder may be paid for the value
of the Stock Appreciation Right either in cash or in Shares, or a
combination thereof, at the discretion of the Committee. In the event
of the exercise of a Stock Appreciation Right payable in Shares, the
holder of the Stock Appreciation Right shall receive that number of
whole Shares of stock of the Company having an aggregate Fair Market
Value on the date of exercise equal to the value obtained by multiplying
(i) either (a) in the case of a Tandem Stock Appreciation Right, the
difference between the Fair Market Value of a Share on the date of
exercise over the per share exercise price of the related option, or (b)
in the case of a Non-Tandem Stock Appreciation Right, the difference
between the Fair Market Value of a Share on the date of exercise over
the Fair Market Value on the date of the grant by (ii) the number of
Shares as to which the Stock Appreciation Right is exercised. However,
notwithstanding the foregoing, the Committee, in its sole discretion,
may place a ceiling on the amount payable upon exercise of a Stock
Appreciation Right but any such limitation shall be specified at the
time that the Stock Appreciation Right is granted.
7.2 Exercisability. A Tandem Stock Appreciation Right may be
granted at the time of the grant of the related stock option or, if the
related stock option is a Non-Qualified Stock Option, at any time
thereafter during the term of the stock option. A Tandem Stock
Appreciation Right granted in connection with an Incentive Stock Option
(i) may be exercised at, and only at, the times and to the extent the
related Incentive Plan Stock Option is exercisable, (ii) expires upon
the termination of the related Incentive Stock Option, (iii) may not
exceed 100% of the difference between the exercise price of the related
Incentive Stock Option and the market price of the Shares subject to the
related Incentive Stock Option at the time the Tandem Stock Appreciation
Right is exercised, and (iv) may be exercised at, and only at, such
times as the market price of the Shares subject to the related Incentive
Stock Option exceeds the exercise price of the related Incentive Stock
Option. The Tandem Stock Appreciation Right may be transferred at, and
only at, the times and to the extent the related stock option is
transferable. If a Tandem Stock Appreciation Right is granted, there
shall be surrendered and canceled from the related option at the time of
exercise of the Tandem Stock Appreciation Right, in lieu of exercise
under the related option, that number of Shares as
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shall equal the number of Shares as to which the Tandem Stock
Appreciation Right shall have been exercised.
7.3 Certain Limitations on Non-Tandem Stock Appreciation
Rights. A Non-Tandem Stock Appreciation Right will be exercisable as
provided by the Committee and will have such other terms and conditions
as the Committee may determine. A Non-Tandem Stock Appreciation Right
is subject to acceleration of vesting or immediate termination in
certain circumstances in the same manner as stock options pursuant to
subsections 6.4 and 6.5 of the Plan.
7.4 Limited Stock Appreciation Rights. The Committee is also
authorized to grant "limited stock appreciation rights," either as
Tandem Stock Appreciation Rights or Non-Tandem Stock Appreciation
Rights. Limited stock appreciation rights would become exercisable only
upon the occurrence of a Change in Control or such other event as the
Committee may designate at the time of grant or thereafter.
Section 8. RESTRICTED STOCK
8.1 Grants. The Committee may grant Awards of Restricted
Stock for no cash consideration, for such minimum consideration as may
be required by applicable law, or for such other consideration as may be
specified by the grant. The terms and conditions of the Restricted
Stock shall be specified by the grant agreement. The Committee, in its
sole discretion, may specify any particular rights which the person to
whom an Award of Restricted Stock is made shall have in the Restricted
Stock during the restriction period and the restrictions applicable to
the particular Award, the vesting schedule (which may be based on
service, performance or other factors) and rights to acceleration of
vesting (including, without limitation, whether non-vested Shares are
forfeited or vested upon termination of employment). Further, the
Committee may award performance-based Restricted Stock by conditioning
the grant, or vesting or such other factors, such as the release,
expiration or lapse of restrictions upon any such Award (including the
acceleration of any such conditions or terms) of such Restricted Stock
upon the attainment of specified performance goals or such other factors
as the Committee may determine. The Committee shall also determine when
the restrictions shall lapse or expire and the conditions, if any, under
which the Restricted Stock will be forfeited or sold back to the
Company. Each Award of Restricted Stock may have different restrictions
and conditions. The Committee, in its discretion, may prospectively
change the restriction period and the restrictions applicable to any
particular Award of Restricted Stock. Unless otherwise set forth in the
Plan, Restricted Stock may not be disposed of by the recipient until the
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restrictions specified in the Award expire.
8.2 Awards and Certificates. Any Restricted Stock issued
hereunder may be evidenced in such manner as the Committee, in its sole
discretion, shall deem appropriate including, without limitation, book-
entry registration or issuance of a stock certificate or certificates.
In the event any stock certificate is issued in respect of Shares of
Restricted Stock awarded hereunder, such certificate shall bear an
appropriate legend with respect to the restrictions applicable to such
Award. The Company may retain, at its option, the physical custody of
any stock certificate representing any awards of Restricted Stock during
the restriction period or require that the Restricted Stock be placed in
escrow or trust, along with a stock power endorsed in blank, until all
restrictions are removed or expire.
Section 9. PERFORMANCE AWARDS
9.1 Grants. A Performance Award may consist of either or
both, as the Committee may determine, of (i) "Performance Shares," or
the right to receive Shares, Restricted Stock or cash of an equivalent
value, or any combination thereof as the Committee may determine, or
(ii) "Performance Units," or the right to receive a fixed dollar amount
payable in cash, Common Stock, Restricted Stock or any combination
thereof, as the Committee may determine. The Committee may grant
Performance Awards to any eligible employee, for no cash consideration,
for such minimum consideration as may be required by applicable law or
for such other consideration as may be specified at the time of the
grant. The terms and conditions of Performance Awards shall be
specified at the time of the grant and may include provisions
establishing the performance period, the performance criteria to be
achieved during a performance period, the criteria used to determine
vesting (including the acceleration thereof), whether Performance Awards
are forfeited or vest upon termination of employment during a
performance period and the maximum or minimum settlement values. Each
Performance Award shall have its own terms and conditions, which shall
be determined in the discretion of the Committee. If the Committee
determines, in its sole discretion, that the established performance
measures or objectives are no longer suitable because of a change in the
Company's business, operations, corporate structure or for other reasons
that the Committee deems satisfactory, the Committee may modify the
performance measures or objectives and/or the performance period.
9.2 Terms and Conditions. Performance Awards may be valued by
reference to the Fair Market Value of a Share or according to any
formula or method deemed appropriate by the Committee, in its sole
discretion, including, but not limited
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to, achievement of specific financial, production, sales, cost or
earnings performance objectives that the Committee believes to be
relevant to the Company's business and for remaining in the employ of
the Company for a specified period of time, or the Company's performance
or the performance of its Common Stock measured against the performance
of the market, the Company's industry segment or its direct competitors.
Performance Awards may be paid in cash, Shares (including Restricted
Stock) or other consideration, or any combination thereof. If payable
in Shares, the consideration for the issuance of the Shares may be the
achievement of the performance objective established at the time of the
grant of the Performance Award. Performance Awards may be payable in a
single payment or in installments and may be payable at a specified date
or dates or upon attaining the performance objective, all at the
Committee's discretion. The extent to which any applicable performance
objective has been achieved shall be conclusively determined by the
Committee.
Section 10. DIVIDEND EQUIVALENT RIGHTS
The Committee may grant a Dividend Equivalent Right either as a
component of another Award or as a separate Award, and, in general, each such
holder of a Dividend Equivalent Right that is outstanding on a dividend record
date for the Company's Common Stock shall be credited with an amount equal to
the cash or stock dividends or other distributions that would have been
received had the Shares covered by the Award been issued and outstanding on the
dividend record date. The terms and conditions of the Dividend Equivalent
Right shall be specified by the grant. Dividend equivalents credited to the
holder of a Dividend Equivalent Right may be paid currently or may be deemed to
be reinvested in additional Shares (which may thereafter accrue additional
Dividend Equivalent Rights). Any such reinvestment shall be at the Fair Market
Value at the time thereof. Dividend Equivalent Rights may be settled in cash
or Shares, or a combination thereof, in a single payment or in installments. A
Dividend Equivalent Right granted as a component of another Award may provide
that such Dividend Equivalent Right shall be settled upon exercise, settlement
or payment for or lapse of restrictions on such other Award, and that such
Dividend Equivalent Right shall expire or be forfeited or annulled under the
same conditions as such other Award. A Dividend Equivalent Right granted as a
component of another Award may also contain terms and conditions different from
such other Award.
Section 11. OTHER AWARDS
The Committee may grant to any eligible employee other forms of Awards
based upon, payable in or otherwise related to, in whole or in part, Shares, if
the Committee, in its sole discretion, determines that such other form of Award
is consistent with the purposes and restrictions of the Plan. The terms and
conditions of
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such other form of Award shall be specified by the grant, including, but not
limited to, the price, if any, and the vesting schedule, if any. Such Awards
may be granted for no cash consideration, for such minimum consideration as may
be required by applicable law or for such other consideration as may be
specified by the grant.
Section 12. COMPLIANCE WITH SECURITIES AND OTHER LAWS
In no event shall the Company be required to sell or issue Shares under
any Award if the sale or issuance thereof would constitute a violation of
applicable federal or state securities laws or regulations or a violation of
any other law or regulation of any governmental or regulatory agency or
authority or any national securities exchange. As a condition to any sale or
issuance of Shares, the Company may place legends on Shares, issue stop
transfer orders and require such agreements or undertakings as the Company may
deem necessary or advisable to assure compliance with any such laws or
regulations, including, if the Company or its counsel deems it appropriate,
representations from the person to whom an Award is granted that he or she is
acquiring the Shares solely for investment and not with a view to distribution
and that no distribution of the Shares will be made unless registered pursuant
to applicable federal and state securities laws, or in the opinion of counsel
of the Company, such registration is unnecessary.
Section 13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR
REORGANIZATION
The value of an Award in Shares shall be adjusted from time to time as
follows:
(a) Subject to any required action by stockholders, the
number of Shares covered by each outstanding Award, and the
exercise price, shall be proportionately adjusted for any
increase or decrease in the number of issued Shares of the
Company resulting from a subdivision or consolidation of Shares
or the payment of a stock dividend (but only in Shares) or any
other increase or decrease in the number of Shares affected
without receipt of consideration by the Company.
(b) Subject to any required action by stockholders, if
the Company shall be the surviving corporation in any
reorganization, merger or consolidation, each outstanding Award
shall pertain to and apply to the securities to which a holder of
the number of Shares subject to the Award would have been
entitled, and if a plan or agreement reflecting any such event is
in effect that
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specifically provides for the change, conversion or exchange of
Shares, then any adjustment to Shares relating to an Award
hereunder shall not be inconsistent with the terms of any such
plan or agreement.
(c) In the event of a change in the Shares of the
Company as presently constituted, which is limited to a change of
par value into the same number of Shares with a different par
value or without par value, the Shares resulting from any such
change shall be deemed to be the Shares within the meaning of the
Plan.
To the extent that the foregoing adjustments relate to
stock or securities of the Company, such adjustments shall be
made by the Board, whose determination shall be final, binding
and conclusive.
Except as hereinbefore expressly provided in the Plan, any
person to whom an Award is granted shall have no rights by reason
of any subdivision or consolidation of stock of any class or the
payment of any stock dividend or any other increase or decrease
in the number of shares of stock of any class or by reason of any
dissolution, liquidation, reorganization, merger or consolidation
or spin-off of assets or stock of another corporation, and any
issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall
not affect and no adjustment by reason thereof shall be made with
respect to, the number or exercise price of Shares subject to an
Award.
The grant of an Award pursuant to the Plan shall not
affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge or to consolidate or to
dissolve, liquidate or sell or transfer all or any part of its
business or assets.
Section 14. AMENDMENT OR TERMINATION OF THE PLAN
14.1 Amendment of the Plan. Notwithstanding anything contained
in the Plan to the contrary, all provisions of the Plan may at any time
or from time to time be modified or amended by the Board; provided,
however, that no Award at any time outstanding under the Plan may be
modified, unpaired or canceled adversely to the holder of the Award
without the consent of such holder; and provided, further, that the Plan
may not be amended without approval by the holders of a majority of the
Shares of the Company represented and voted at a meeting of the
stockholders (a) to increase the maximum number of Shares subject to the
Plan, (b) to materially modify the requirements as to eligibility for
participation in the
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Plan, (c) to decrease the minimum exercise price for options, (d) to
otherwise materially increase the benefits accruing to persons to whom
Awards may be made under the Plan, as amended, or (e) if such approval
is otherwise necessary, to comply with Rule 16b-3 promulgated under the
Exchange Act, as amended, or to comply with any other applicable laws,
regulations or listing requirements, or to qualify for an exemption or
characterization that is deemed desirable by the Board.
14.2 Termination of the Plan. The Board may suspend or
terminate the Plan at any time, and such suspension or termination may
be retroactive or prospective. However, no Award may be granted on or
after the tenth anniversary of the adoption of the Plan. Termination of
the Plan shall not impair or affect any Award previously granted
hereunder, and the rights of the holder of the Award shall remain in
effect until the Award has been exercised in its entirety or has expired
or otherwise has been terminated by the terms of such Award.
Section 15. AMENDMENTS AND ADJUSTMENTS TO AWARDS
The Committee may amend, modify or terminate any outstanding Award with
the participant's consent at any time prior to payment or exercise in any
manner not inconsistent with the terms of the Plan, including, without
limitation, (i) to change the date or dates as of which (A) an option becomes
exercisable, or (B) a performance-based Award is deemed earned, (ii) to amend
the terms of any outstanding Award to provide an exercise price per share which
is higher or lower than the then current exercise price per share of such
outstanding Award, or (iii) to cancel an Award and grant a new Award in
substitution therefor under such different terms and conditions as it
determines in its sole and complete discretion to be appropriate, including,
but not limited to, having an exercise price per share which may be higher or
lower than the exercise price per share of the canceled Award. The Committee
is also authorized to make adjustments in the terms and conditions of, and the
criteria included in, Awards in recognition of unusual or nonrecurring events
(including, without limitation, the events described in Section 13 hereof)
affecting the Company, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations or accounting
principles, whenever the Committee determines that such adjustments are
appropriate in order to prevent reduction or enlargement of the benefits or
potential benefits intended to be made available under the Plan. Any provision
of the Plan or any agreement regarding an Award to the contrary
notwithstanding, the Committee may cause any Award granted to be canceled in
consideration of a cash payment or alternative Award made to the holder of such
canceled Award equal in value to the Fair Market Value of such canceled Award.
The determinations of value under this Section 15 shall be made by the
Committee in its sole discretion.
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Section 16. GENERAL PROVISIONS
16.1 No Limit on Other Compensation Arrangements. Nothing
contained in the Plan shall prevent the Company from adopting or
continuing in effect other compensation arrangements, and such
arrangements may be either generally applicable or applicable only in
specific cases.
16.2 No Right to Employment. Nothing in the Plan or in any
Award, nor the grant of any Award, shall confer upon or be construed as
giving any recipient of an Award any right to remain in the employ of
the Company. Further, the Company may at any time dismiss a participant
in the Plan from employment, free from any liability or any claim under
the Plan, unless otherwise expressly provided in the Plan or in any
Award agreement. No employee, participant or other person shall have
any claim to be granted any Award, and there is no obligation for
uniformity or treatment of employees, participants or holders or
beneficiaries of Awards.
16.3 GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND EFFECT OF
THE PLAN AND ANY RULES AND REGULATIONS RELATING TO THE PLAN SHALL BE
DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
16.4 Severability. If any provision of the Plan or any Award
is or becomes or is deemed to be invalid, illegal or unenforceable in
any jurisdiction or as to any person or Award, or would disqualify the
Plan or any Award under any law deemed applicable by the Committee, such
provision shall be construed or deemed amended to conform to applicable
laws, or if it cannot be construed or deemed amended without in the sole
determination of the Committee, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such
jurisdiction, person or Award and the remainder of the Plan and any such
Award shall remain in full force and effect.
16.5 No Fractional Shares. No fractional Shares shall be
issued or delivered pursuant to the Plan or any Award, and the Committee
shall determine whether cash, other securities or other property shall
be paid or transferred in lieu of any fractional Shares or whether such
fractional Shares or any fights thereto shall be canceled, terminated or
otherwise eliminated.
16.6 Headings. Headings are given to the subsections of the
Plan solely as a convenience to facilitate reference. Such headings
shall not be deemed in any way material or relevant to the construction
or interpretation of the Plan or any provision thereof
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16.7 Effective Date. The Plan shall be effective as of the
date of its approval by the holders of a majority of the Shares of the
Company represented and voting at the next Annual Meeting of
Stockholders. If the Plan is not approved by the stockholders at the
1994 Annual Meeting, after such date, the Plan and all Awards granted
hereunder, if any, shall be void.
16.8 Non-Transferability of Awards. Awards shall not be
transferable otherwise than by will or the laws of descent and
distribution, and Awards may be exercised, during the lifetime of the
holder, only by the holder; provided, however, that with the approval of
the Committee, Awards other than Incentive Stock Options may be
transferred as directed under a qualified domestic relations order. Any
attempted assignment, transfer, pledge, hypothecation or other
disposition of an Award contrary to the provisions hereof, or the levy
of any execution, attachment or similar process upon an Award shall be
null and void and without effect.
Section 17. NAMED EXECUTIVE OFFICERS
17.1 Applicability of Section 17. The provisions of this
Section 17 shall apply only to those executive officers (i) whose
compensation is required to be reported in the Company's proxy statement
pursuant to Item 402(a)(3)(i) and (ii) of Regulation S-K under the
general rules and regulations under the Exchange Act, as amended, and
(ii) whose total compensation, including estimated Awards, is determined
by the Committee to possibly be subject to the limitations on deductions
imposed by Section 162(m) of the Code ("Named Executive Officers"). In
the event of any inconsistencies between this Section 17 and the other
Plan provisions as they pertain to Named Executive Officers, the
provisions of this Section 17 shall control.
17.2 Establishment of Performance Goals. Awards for Named
Executive Officers, other than stock options and Stock Appreciation
Rights, shall be based on the attainment of certain performance goals.
No later than the earlier of (i) ninety (90) days after the commencement
of the applicable fiscal year or such other award period as may be
established by the Committee ("Award Period"), and (ii) the completion
of twenty-five percent (25%) of such Award Period, the Committee shall
establish, in writing, the performance goals applicable to each such
Award for Named Executive Officers. At the time the performance goals
are established by the Committee, their outcome must be substantially
uncertain. In addition, the performance goal must state, in terms of an
objective formula or standard, the method for computing the amount of
compensation payable to the Named Executive Officer if the goal is
obtained. Such formula or standard shall be
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sufficiently objective so that a third party with knowledge of the
relevant performance results could calculate the amount to be paid to
the subject Named Executive Officer. The material terms of the
performance goals for Named Executive Officers and the compensation
payable thereunder shall be submitted to the shareholders of the Company
for their review and approval. Shareholder approval shall be obtained
for such performance goals prior to any Award being paid to such Named
Executive Officer. If the shareholders do not approve such performance
goals, no amount shall be paid to such Named Executive Officer for such
applicable Award Period under the Plan. The disclosure of the "material
terms" of a performance goal and the compensation payable thereunder
shall be determined under the guidelines set forth under Section 162(m)
of the Code, and the Treasury Regulations thereunder.
17.3 Components of Awards. Each Award of a Named Executive
Officer, other than stock options and Stock Appreciation Rights, shall
be based on performance goals which are sufficiently objective so that a
third party having knowledge of the relevant facts could determine
whether the goal was met. Except as provided in subsection 17.8 herein,
performance measures which may serve as determinants of Named Executive
Officers Awards shall be limited to the following measures: earnings per
share; return on assets; return on equity; return on capital; net profit
after taxes; net profit before taxes; economic value added; operating
profits; stock price; market share; and sales or expenses. Within
ninety (90) days following the end of each Award Period, the Committee
shall certify in writing that the performance goals, and any other
material terms were satisfied. Thereafter, Awards shall be made for
each Named Executive Officer as determined by the Committee. The Awards
may not vary from the preestablished amount based on the level of
achievement.
17.4 No Mid-Year Change in Awards. Except as provided in
subsections 17.8 and 17.9 herein, each Named Executive Officers Awards
shall be based exclusively on the performance measures established by
the Committee pursuant to subsection 17.2.
17.5 No Partial Award Period Participation. A Named Executive
Officer who becomes eligible to participate in the Plan after
performance goals have been established in an Award Period pursuant to
subsection 17.2 may not participate in the Plan prior to the next
succeeding Award Period, except with respect to Awards which are stock
options or Stock Appreciation Rights.
17.6 Performance Goals. Except as provided in subsection 17.8
herein, performance goals shall not be changed following their
establishment, and Named Executive Officers shall not
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receive any payout, except with respect to Awards which are stock
options or Stock Appreciation Rights, when the minimum performance goals
are not met or exceeded.
17.7 Individual Performance and Discretionary Adjustments.
Except as provided in subsection 17.8 herein, subjective evaluations of
individual performance of Named Executive Officers shall not be
reflected in their Awards, other than Awards which are stock options or
Stock Appreciation Rights. The payment of such Awards shall be entirely
dependent upon the attainment of the preestablished performance goals.
17.8 Amendments. No amendment of the Plan with respect to any
Named Executive Officer may be made which would (i) increase the maximum
amount that can be paid to any one participant under the Plan, (ii)
change the specified performance goal for payment of Awards, or (iii)
modify the requirements as to eligibility for participation in the Plan,
unless the Company's shareholders have first approved such amendment in
a manner which would permit the deduction under Section 162(m) of the
Code of such payment in the fiscal year it is paid. The Committee shall
amend this Section 17 and such other provisions as it deems appropriate,
to cause amounts payable to Named Executive Officers to satisfy the
requirements of Section 162(m) and the Treasury Regulations promulgated
thereunder.
17.9 Stock Options and Stock Appreciation Rights.
Notwithstanding any provision of the Plan (including the provisions of
this Section 17) to the contrary, the amount of compensation which a
Named Executive Officer may receive with respect to stock options and
Stock Appreciation Rights which are granted hereunder is based solely on
an increase in the value of the applicable Shares after the date of
grant of such Award. Thus, no stock option may be granted hereunder to
a Named Executive Officer with an exercise price less than the Fair
Market Value of Shares on the date of grant. Furthermore, the maximum
number of Shares (or cash equivalent value) with respect to which stock
options or Stock Appreciation Rights may be granted hereunder to any
Named Executive Officer during any calendar year may not exceed 80,000
Shares, subject to adjustment as provided in Section 13 hereunder.
17.10 Maximum Amount of Compensation. The maximum amount of
compensation payable as an Award (other than an Award which is a stock
option or Stock Appreciation Right) to any Named Executive Officer
during any calendar year may not exceed $1,000,000.
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EXHIBIT 10.2
THIS NOTE IS SUBJECT TO RESTRICTIONS
ON TRANSFER AS SET FORTH HEREIN.
CONVERTIBLE PROMISSORY NOTE
$100,000.00 San Antonio, Texas February 12, 1997
GENERAL PROVISIONS
1. FOR VALUE RECEIVED, ExproFuels, Inc., a corporation duly
organized and existing under the laws of the State of Delaware (the "Company"),
hereby unconditionally promises to pay to the order of Retamco Operating, Inc.
("Payee"), the sum of ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00)
plus the interest thereon as provided herein, in lawful money of the United
States of America.
2. The unpaid principal amount of this Convertible Promissory Note
(the "Note") shall be due and payable in full on February 12, 2000 ("the
Maturity Date"). Upon thirty (30) days prior written notice to Payee, the
principal amount of the Note together with all accrued but unpaid interest
thereon may be prepaid in whole but not in part by the Company as specified in
paragraph 14.
3. The unpaid principal amount of this Note shall bear interest from
the date hereof until paid at the rate per annum of six percent (6%).
Interest shall be computed on the basis of the actual number of days elapsed in
a year consisting of 365 days or 366 days as appropriate.
4. Interest shall be payable in consecutive quarterly installments
commencing on January 1, 1997 and continuing on the first day of each quarter
thereafter, until and including February 12, 2000.
5. Regardless of any provision contained in this Note or any other
document executed or delivered in connection herewith, Payee shall never be
deemed to have contracted for or be entitled to receive, collect or apply as
interest on this Note, any amount in excess of the maximum rate of interest
permitted to be charged by applicable law, and, in the event that Payee ever
receives, collects or applies as interest any such excess, such amount which
would be excessive interest shall be applied to the reduction of the unpaid
principal balance of this Note, and, if the principal balance of this Note is
paid in full, any remaining excess shall forthwith be paid to the Company.
<PAGE> 2
6. (a) Wherever used herein, "Event of Default" means any one of
the following events (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(i) default in the payment of any cash installment of
principal or interest upon the Note when it becomes due and payable, and
continuance of such default for a period of 10 days; or
(ii) the entry of a decree or order by a court having
jurisdiction in the premises adjudging the Company bankrupt or
insolvent, or approving as properly filed a petition seeking the
reorganization, arrangement, adjustment or composition of or in respect
of the Company under the Federal bankruptcy laws or any other applicable
Federal or state law of the United States of America, or appointing a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) for the Company or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a
period of 90 consecutive days; or
(iii) the institution by the Company of proceedings to be
adjudicated bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking reorganization
or relief under the Federal bankruptcy laws or any other applicable
Federal or state law of the United States of America, or the consent by
it to the filing of any such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) for the Company or of any substantial part of its property,
or the making by it of any assignment for the benefit of creditors.
(b) If an Event of Default occurs and is continuing, then and
in every such case, the Payee may declare the principal of this Note and all
accrued interest thereon to be due and payable immediately, by a notice in
writing to the Company, and upon any such declaration, such principal and
interest shall become immediately due and payable. At any time after such a
declaration of acceleration has been made and before a judgment or decree for
payment of the money due has been obtained, Payee, by written notice to the
Company, may rescind and annul such declaration and its consequences. Payee,
upon the occurrence of an Event of Default and with or without any acceleration
of maturity, may reduce any claim to judgment and pursue and enforce any of
Payee's rights and remedies under this Note or otherwise provided under or
pursuant to any applicable law or agreement.
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7. Should the principal of, or any installment of interest on, this
Note become due and payable on a day other than a Business Day (as hereinafter
defined), then the maturity thereof shall be extended to the next succeeding
Business Day. If this Note, or any installment or payment due hereunder is not
paid when due, whether at maturity or by acceleration, or if it is collected
through a bankruptcy, probate or other court, whether before or after maturity,
the Company agrees to pay all costs of collection, including, but not limited
to, reasonable and customary attorneys' fees incurred by the holder hereof.
8. This Note has been executed and delivered in, and shall be
governed by and construed in accordance with the laws of, the State of Texas.
9. As used herein:
(a) The term "Highest Lawful Rate" shall mean, as of any date, the
highest non-usurious rate of interest then applicable to the Note; Payee
hereby notifies the Company that, and discloses to the Company that, for
purposes of TEX.REV.CIV.STAT.ANN. Art. 5069-1.04, as it may from time to time
be amended, the "applicable rate ceiling" shall be the "indicated rate ceiling"
referred to in Art. 5069-1.04(a)-(1), from time to time in effect, as limited
by Art. 5069-1.04(b); provided however, that to the extent permitted by
applicable law, Payee reserves the right to change the applicable rate ceiling
from time to time by further notice and disclosure to the Company; and
provided further, that the highest non-usurious rate of interest permitted by
the applicable law for purposes hereof shall not be limited to the applicable
rate ceiling under Art. 5069-1.04 if federal laws or other state laws now or
hereafter in effect and applicable to the Note (and the interest contracted
for, charged and collected thereunder) shall permit a higher rate of interest.
(b) The term "Business Day" shall mean a day upon which business is
transacted by Texas Commerce Bank of San Antonio other than a Saturday or
Sunday.
CONVERTIBILITY FEATURE
10. Payee may at its option, at any time or from time to time from
and after the date hereof, convert (such option to convert being hereinafter
referred to as the "Conversion Option") the unpaid amount hereof (i.e.,
principal and all accrued interest, whether or not paid or payable) or any
portion thereof (any such converted amount being hereinafter referred to as
the "Conversion Amount") into fully paid and nonassessable shares of common
stock, $0.01 par value, of the Company (the "Common Stock") at a conversion
price (the "Conversion Price") of $1.00 per share, such initial Conversion
Price being, however, subject to adjustment
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as set forth in paragraph 12 below. The number of shares of Common Stock
issuable upon the exercise of a Conversion Option shall be determined by
dividing the Conversion Amount by the Conversion Price. If any fraction of a
share of Common Stock would be issuable on any exercise of the Conversion
Option, the Company shall purchase such fraction for an amount in cash equal to
the same fraction of the current market price on the date of exercise.
11. In order to exercise a Conversion Option, Payee shall deliver to
the Company (a) a notice in the form attached hereto as Exhibit "A" and (b)
an investment letter in the form attached hereto as Exhibit "B". The effective
date of the conversion related thereto shall be the date of the Company's
receipt of such notice from Payee. As soon as practicable after such receipt,
the Company shall cause its transfer agent to issue and deliver to Payee, or
Payee's designate, a certificate, or certificates, for the number of shares of
Common Stock issuable upon conversion of the Conversion Amount.
12. The Conversion Price shall be adjusted from time to time. In
case the Company shall (A) pay a dividend or make a distribution in shares of
its Common Stock, (B) subdivide the shares of its outstanding Common Stock
into a greater number of shares, (C) combine its outstanding Common Stock
into a smaller number of shares, or (D) issue by reclassification of its
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation) any
shares, the Conversion Price in effect immediately prior thereto shall be
adjusted so that the Conversion Amount shall be convertible into the number and
kind of shares into which such amount would have been convertible if converted
immediately prior to the happening of any event described in the immediately
preceding clauses (A), (B), (C), or (D). An Adjustment made pursuant to
this subparagraph shall become effective immediately after the record date in
the case of a dividend (provided, however, that in the event a dividend shall
be rescinded after the record date but before payment, no adjustment hereunder
shall be made) and immediately after the effective date in the case of a
subdivision, combination or reclassification.
13. No shares of Common Stock acquired by exercise of the Conversion
Option granted pursuant to the terms of this Note may be transferred unless and
until (a) the Company and Payee shall have received an opinion of counsel
satisfactory to the Company and Payee to the effect that any such proposed
transfer may be effected without registration under the Securities Act of 1933,
as amended (the "Act"), and any applicable state law, or (b) such shares of
Common Stock shall have been so registered.
14. The Company reserves the right, but not the obligation, to
convert the entire outstanding balance of the Note under the
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<PAGE> 5
provisions of paragraphs 10 and 11 once the Company has received two million
dollars ($2,000,000.00) in assets.
MISCELLANEOUS PROVISIONS
15. Subject to the terms and conditions hereof, this Note may be
assigned by Payee to any assignee with or without consideration. No assignment
of this Note shall be effective unless and until (a) the Company and the
Payee shall have received from such assignee an investment letter in similar
form and content to Exhibit "B" attached hereto (appropriately altered to
reflect the receipt and assignment of this Note rather than the receipt of
Common Stock), (b) the Company shall have been notified in writing by Payee
and assignee of the fact of such assignment, and (c) Payee and the Company
shall have received an opinion of counsel to the effect that such assignment
shall not be in violation of any securities or the applicable laws of the
United States or any political subdivision thereof. Notwithstanding anything
in this paragraph 15 or in paragraph 11 above, no investment letter shall be
required to be delivered in the event that any shares of Common Stock which may
be acquired by the exercise of the Conversion Option stated herein shall have
been registered under the Act and applicable Blue Sky laws.
16. No modification or waiver of any provision of this Note, nor
consent to departure therefrom, shall be effective unless in writing signed by
the Company and Payee, and no such consent or waiver shall extend beyond the
particular case and purpose involved. No notice or demand given in any case
shall constitute a waiver of the right to take other action in the same,
similar or other instances without such notice or demand.
17. If any provision of this Note is held to be illegal, invalid or
unenforceable under present or future laws effective during the term of this
Note, such provision shall be fully severable and this Note shall be construed
and enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of this Note, and the remaining provisions of this Note shall
remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance from this Note.
18. This Note shall be binding upon and inure to the benefit of the
Company and Payee and their respective successors, assigns and legal
representatives.
19. Any notice or communication required or permitted hereunder shall
be sufficiently given if sent by first class mail, postage prepaid:
5
<PAGE> 6
(a) If to the Company, addressed to it at 500 North Loop 1604 E.,
Suite 250, San Antonio, Texas, 78232, marked for the attention of Thomas H.
Gose, President;
(b) If to Payee, addressed to it at 500 North Loop 1604 E., Suite
250, San Antonio, Texas, 78232, marked for the attention of Thomas H. Gose,
President.
EXPROFUELS, INC.
By:
---------------------------------
Thomas H. Gose, President
6
<PAGE> 7
EXHIBIT "A"
CONVERSION NOTICE
TO EXPROFUELS, INC.:
The undersigned holder of that certain $100,000.00 Convertible
Promissory Note, dated February 12, 1997 payable by ExproFuels, Inc.
("Company") to Retamco Operating, Inc. (the "Note"), hereby exercises the
option to convert the amount of such Note, together with all accrued interest
thereon, or a portion thereof below designated, into shares of Common Stock of
the Company in accordance with the terms of such Note. The undersigned directs
that the shares issuable and the certificates deliverable upon the conversion,
and any replacement convertible promissory note representing any unconverted
principal amount of the Note, be issued and delivered to the registered holder
of such Note unless a different name has been indicated below.
Amount to be converted (if less than all):
$
-------------------
Person to whom shares are to be issued and delivered:
- --------------------------------------------------------------------------------
(Name)
- --------------------------------------------------------------------------------
(Address)
- --------------------------------------------------------------------------------
- -----------------------------------
(Signature)
Dated:
----------------------------
1
<PAGE> 8
EXHIBIT "B"
February 12, 1997
Gentlemen:
The undersigned, Retamco Operating, Inc. (hereinafter referred to as the
"Holder"), is acquiring shares of the Common Stock (the "Shares"), $.01 par
value, of ExproFuels, Inc. (the "Company"), pursuant to the exercise of rights
under that certain Convertible Promissory Note ("Note") dated February 12,
1997 executed and delivered by the Company. In order to induce the Company to
deliver the Shares to the Holder, the Holder has made certain representations
and warranties concerning the Shares, which representations and warranties are
reduced to writing herein.
The Company has informed the Holder that the issuance of the Shares to Holder
has not been registered with the Securities and Exchange Commission (the
"Commission") nor with the Blue Sky authority of any state, and that the Shares
must be held indefinitely unless they are subsequently registered under the
Securities Act of 1933, as amended (the "Act"), and the appropriate state
Blue Sky Laws, or an exemption from such registration is available. Any
routine sale of the Shares or any part thereof, must be made in reliance upon
Regulation S as promulgated under the Act, or some other exemption to
registration..
The Holder hereby represents and warrants to the Company that the Holder is not
a U.S. Person under the meaning of Rule 902 of Regulation S of the Act.
Generally, a U.S. Person is defined as any natural person resident in the U.S.
(regardless of citizenship); any corporation or partnership organized or
incorporated under the laws of the United States; any estate of which any
executor or administrator is a U.S. Person; any trust of which any trustee is
a U.S. Person; any branch or agency of a foreign entity located in the United
States; any non-discretionary account (other than an estate or trust) held by
a dealer or other fiduciary for the benefit or account of a U.S. Person; any
discretionary account (other than an estate or trust) held by a dealer or other
fiduciary, organized, incorporated, or (if an individual) resident in the
United States; or any foreign partnership or corporation formed by a U.S.
Person principally for the purpose of investing in securities not registered
under the Act (with certain exceptions).
The Holder acknowledges that it has been furnished all information that it has
requested to the extent that it considers necessary and
1
<PAGE> 9
advisable and such information is reasonable upon which to base an investment
decision. The Holder further understands that the Shares have not been
registered under the Act or under the securities laws of any state of the
United States, and, therefore, the Shares cannot be resold in the United States
or to any U.S. Person (other than Distributors as defined in Regulation S)
unless the Shares are registered under the Act and any applicable state
securities laws or any exemption from such registration is available. The
Holder agrees that a restrictive legend may be placed on the stock certificate
representing the Shares to the effect as follows:
The shares represented by this certificate may not be offered, sold,
assigned, pledged, hypothecated, encumbered or in any other manner
transferred or disposed of in the United States or to a "U.S. Person"
(as defined in regulation S promulgated under the Securities Act of
1933, as amended) prior to _________, 199_.
The Holder agrees that transfer of the Shares may be refused by the Company or
its transfer agent if, in the opinion of counsel for the Company, any proposed
sale or transfer by the Holder of the Shares would not be in compliance with
the Act and applicable state securities laws.
Sincerely,
----------------------------
(Holder)
2
<PAGE> 1
EXHIBIT 10.3
THIS NOTE IS SUBJECT TO RESTRICTIONS
ON TRANSFER AS SET FORTH HEREIN.
CONVERTIBLE PROMISSORY NOTE
$100,000.00 San Antonio, Texas December 19, 1996
General Provisions
1. FOR VALUE RECEIVED, ExproFuels, Inc., a corporation duly
organized and existing under the laws of the State of Delaware (the "Company"),
hereby unconditionally promises to pay to the order of Wanluan Investments,
Limited ("Payee"), the sum of ONE HUNDRED THOUSAND AND NO/100 DOLLARS
($100,000.00) plus the interest thereon as provided herein, in lawful money of
the United States of America.
2. The unpaid principal amount of this Convertible Promissory
Note (the "Note") shall be due and payable in full on December 19, 1999 (the
"Maturity Date"). Upon thirty (30) days prior written notice to Payee, the
principal amount of the Note together with all accrued but unpaid interest
thereon may be prepaid in whole but not in part by the Company as specified in
paragraph 14.
3. The unpaid principal amount of this Note shall bear interest
from the date hereof until paid at the rate per annum of six percent (6%).
Interest shall be computed on the basis of the actual number of days elapsed in
a year consisting of 365 days or 366 days as appropriate.
4. Interest shall be payable in consecutive quarterly
installments commencing on January 1, 1997, and continuing on the first day of
each quarter thereafter, until and including December 19, 1999.
5. Regardless of any provision contained in this Note or any
other document executed or delivered in connection herewith, Payee shall never
be deemed to have contracted for or be entitled to receive, collect or apply as
interest on this Note, any amount in excess of the maximum rate of interest
permitted to be charged by applicable law, and, in the event that Payee ever
receives, collects or applies as interest any such excess, such amount which
would be excessive interest shall be applied to the reduction of the unpaid
principal balance of this Note, and, if the principal balance of this Note is
paid in full, any remaining excess shall forthwith be paid to the Company.
<PAGE> 2
6. (a) Wherever used herein, "Event of Default" means any
one of the following events (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(i) default in the payment of any cash installment of
principal or interest upon the Note when it becomes due and payable,
and continuance of such default for a period of 10 days; or
(ii) the entry of a decree or order by a court having
jurisdiction in the premises adjudging the Company bankrupt or
insolvent, or approving as properly filed a petition seeking the
reorganization, arrangement, adjustment or composition of or in
respect of the Company under the Federal bankruptcy laws or any other
applicable Federal or state law of the United States of America, or
appointing a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) for the Company or of any substantial
part of its property, or ordering the winding up or liquidation of its
affairs, and the continuance of any such decree or order unstayed and
in effect for a period of 90 consecutive days; or
(iii) the institution by the Company of proceedings to be
adjudicated bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking reorganization
or relief under the Federal bankruptcy laws or any other applicable
Federal or state law of the United States of America, or the consent
by it to the filing of any such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) for the Company or of any substantial part of its
property, or the making by it of any assignment for the benefit of
creditors.
(b) If an Event of Default occurs and is continuing, then
and in every such case, the Payee may declare the principal of this Note and
all accrued interest thereon to be due and payable immediately, by a notice in
writing to the Company, and upon any such declaration, such principal and
interest shall become immediately due and payable. At any time after such a
declaration of acceleration has been made and before a judgment or decree for
payment of the money due has been obtained, Payee, by written notice to the
Company, may rescind and annul such declaration and its consequences. Payee,
upon the occurrence of an Event of Default and with or without any acceleration
of maturity, may reduce any claim to judgment and pursue and enforce any of
Payee's rights and remedies under this Note or otherwise provided under or
pursuant to any applicable law or agreement.
2
<PAGE> 3
7. Should the principal of, or any installment of interest on,
this Note become due and payable on a day other than a Business Day (as
hereinafter defined), then the maturity thereof shall be extended to the next
succeeding Business Day. If this Note, or any installment or payment due
hereunder is not paid when due, whether at maturity or by acceleration, or if
it is collected through a bankruptcy, probate or other court, whether before or
after maturity, the Company agrees to pay all costs of collection, including,
but not limited to, reasonable and customary attorneys' fees incurred by the
holder hereof.
8. This Note has been executed and delivered in, and shall be
governed by and construed in accordance with the laws of, the State of Texas.
9. As used herein:
(a) The term "Highest Lawful Rate" shall mean, as of
any date, the highest non-usurious rate of interest then applicable to the
Note; Payee hereby notifies the Company that, and discloses to the Company
that, for purposes of TEX.REV.CIV.STAT.ANN. Art. 5069-1.04, as it may from time
to time be amended, the "applicable rate ceiling" shall be the "indicated rate
ceiling" referred to in Art. 5069-1.04(a)-(1), from time to time in effect, as
limited by Art. 5069-1.04(b); provided however, that to the extent permitted
by applicable law, Payee reserves the right to change the applicable rate
ceiling from time to time by further notice and disclosure to the Company; and
provided further, that the highest non-usurious rate of interest permitted by
the applicable law for purposes hereof shall not be limited to the applicable
rate ceiling under Art. 5069-1.04 if federal laws or other state laws now or
hereafter in effect and applicable to the Note (and the interest contracted
for, charged and collected thereunder) shall permit a higher rate of interest.
(b) The term "Business Day" shall mean a day upon which
business is transacted by Texas Commerce Bank of San Antonio other than a
Saturday or Sunday.
Convertibility Feature
10. Payee may at its option, at any time or from time to time from
and after the date hereof, convert (such option to convert being hereinafter
referred to as the "Conversion Option") the unpaid amount hereof (i.e.,
principal and all accrued interest, whether or not paid or payable) or any
portion thereof (any such converted amount being hereinafter referred to as
the "Conversion Amount") into fully paid and nonassessable shares of common
stock, $0.01 par value, of the Company (the "Common Stock") at a conversion
price (the "Conversion Price") of $1.00 per share, such initial Conversion
Price being, however, subject to adjustment
3
<PAGE> 4
as set forth in paragraph 12 below. The number of shares of Common Stock
issuable upon the exercise of a Conversion Option shall be determined by
dividing the Conversion Amount by the Conversion Price. If any fraction of a
share of Common Stock would be issuable on any exercise of the Conversion
Option, the Company shall purchase such fraction for an amount in cash equal to
the same fraction of the current market price on the date of exercise.
11. In order to exercise a Conversion Option, Payee shall deliver
to the Company (a) a notice in the form attached hereto as Exhibit "A" and
(b) an investment letter in the form attached hereto as Exhibit "B". The
effective date of the conversion related thereto shall be the date of the
Company's receipt of such notice from Payee. As soon as practicable after such
receipt, the Company shall cause its transfer agent to issue and deliver to
Payee, or Payee's designate, a certificate, or certificates, for the number of
shares of Common Stock issuable upon conversion of the Conversion Amount.
12. The Conversion Price shall be adjusted from time to time. In
case the Company shall (A) pay a dividend or make a distribution in shares of
its Common Stock, (B) subdivide the shares of its outstanding Common Stock
into a greater number of shares, (C) combine its outstanding Common Stock
into a smaller number of shares, or (D) issue by reclassification of its
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation)
any shares, the Conversion Price in effect immediately prior thereto shall be
adjusted so that the Conversion Amount shall be convertible into the number and
kind of shares into which such amount would have been convertible if converted
immediately prior to the happening of any event described in the immediately
preceding clauses (A), (B), (C), or (D). An Adjustment made pursuant to
this subparagraph shall become effective immediately after the record date in
the case of a dividend (provided, however, that in the event a dividend shall
be rescinded after the record date but before payment, no adjustment hereunder
shall be made) and immediately after the effective date in the case of a
subdivision, combination or reclassification.
13. No shares of Common Stock acquired by exercise of the
Conversion Option granted pursuant to the terms of this Note may be transferred
unless and until (a) the Company and Payee shall have received an opinion of
counsel satisfactory to the Company and Payee to the effect that any such
proposed transfer may be effected without registration under the Securities Act
of 1933, as amended (the "Act"), and any applicable state law, or (b) such
shares of Common Stock shall have been so registered.
14. The Company reserves the right, but not the obligation, to
convert the entire outstanding balance of the Note under the
4
<PAGE> 5
provisions of paragraphs 10 and 11 once the Company has received two million
dollars ($2,000,000.00) in assets.
Miscellaneous Provisions
15. Subject to the terms and conditions hereof, this Note may be
assigned by Payee to any assignee with or without consideration. No assignment
of this Note shall be effective unless and until (a) the Company and the
Payee shall have received from such assignee an investment letter in similar
form and content to Exhibit "B" attached hereto (appropriately altered to
reflect the receipt and assignment of this Note rather than the receipt of
Common Stock), (b) the Company shall have been notified in writing by Payee
and assignee of the fact of such assignment, and (c) Payee and the Company
shall have received an opinion of counsel to the effect that such assignment
shall not be in violation of any securities or the applicable laws of the
United States or any political subdivision thereof. Notwithstanding anything
in this paragraph 15 or in paragraph 11 above, no investment letter shall be
required to be delivered in the event that any shares of Common Stock which may
be acquired by the exercise of the Conversion Option stated herein shall have
been registered under the Act and applicable Blue Sky laws.
16. No modification or waiver of any provision of this Note, nor
consent to departure therefrom, shall be effective unless in writing signed by
the Company and Payee, and no such consent or waiver shall extend beyond the
particular case and purpose involved. No notice or demand given in any case
shall constitute a waiver of the right to take other action in the same,
similar or other instances without such notice or demand.
17. If any provision of this Note is held to be illegal, invalid
or unenforceable under present or future laws effective during the term of this
Note, such provision shall be fully severable and this Note shall be construed
and enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of this Note, and the remaining provisions of this Note shall
remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance from this Note.
18. This Note shall be binding upon and inure to the benefit of
the Company and Payee and their respective successors, assigns and legal
representatives.
19. Any notice or communication required or permitted hereunder
shall be sufficiently given if sent by first class mail, postage prepaid:
5
<PAGE> 6
(a) If to the Company, addressed to it at 500 North Loop
1604 E., Suite 250, San Antonio, Texas, 78232, marked for the attention of
Thomas H. Gose, President;
(b) If to Payee, addressed to it c/o Ernst & Young, 11th
Floor, Tower Two, Gate Way, #25-27, Canton Road, Kowloon, Hong Kong, marked for
the attention of Wilf Timso.
EXPROFUELS, INC.
By:
----------------------------------
Thomas H. Gose, President
6
<PAGE> 7
EXHIBIT "A"
Conversion Notice
TO EXPROFUELS, INC.:
The undersigned holder of that certain $100,000.00 Convertible
Promissory Note, dated December 19, 1996, payable by ExproFuels, Inc.
("Company") to Wanluan Investments, Limited (the "Note"), hereby exercises the
option to convert the amount of such Note, together with all accrued interest
thereon, or a portion thereof below designated, into shares of Common Stock of
the Company in accordance with the terms of such Note. The undersigned directs
that the shares issuable and the certificates deliverable upon the conversion,
and any replacement convertible promissory note representing any unconverted
principal amount of the Note, be issued and delivered to the registered holder
of such Note unless a different name has been indicated below.
Amount to be converted (if less than all):
$
----------------------
Person to whom shares are to be issued and delivered:
- -----------------------------------------------------------
(Name)
- -----------------------------------------------------------
(Address)
- -----------------------------------------------------------
- ------------------------------
(Signature)
Dated:
------------------------
1
<PAGE> 8
EXHIBIT "B"
December 19, 1996
Gentlemen:
The undersigned, Wanluan Investments, Limited (hereinafter referred to as the
"Holder"), is acquiring shares of the Common Stock (the "Shares"), $.01 par
value, of ExproFuels, Inc. (the "Company"), pursuant to the exercise of rights
under that certain Convertible Promissory Note ("Note") dated December 19,
1996, executed and delivered by the Company. In order to induce the Company to
deliver the Shares to the Holder, the Holder has made certain representations
and warranties concerning the Shares, which representations and warranties are
reduced to writing herein.
The Company has informed the Holder that the issuance of the Shares to Holder
has not been registered with the Securities and Exchange Commission (the
"Commission") nor with the Blue Sky authority of any state, and that the Shares
must be held indefinitely unless they are subsequently registered under the
Securities Act of 1933, as amended (the "Act"), and the appropriate state
Blue Sky Laws, or an exemption from such registration is available. Any
routine sale of the Shares or any part thereof, must be made in reliance upon
Regulation S as promulgated under the Act, or some other exemption to
registration.
The Holder hereby represents and warrants to the Company that the Holder is not
a U.S. Person under the meaning of Rule 902 of Regulation S of the Act.
Generally, a U.S. Person is defined as any natural person resident in the U.S.
(regardless of citizenship); any corporation or partnership organized or
incorporated under the laws of the United States; any estate of which any
executor or administrator is a U.S. Person; any trust of which any trustee is
a U.S. Person; any branch or agency of a foreign entity located in the United
States; any non-discretionary account (other than an estate or trust) held by
a dealer or other fiduciary for the benefit or account of a U.S. Person; any
discretionary account (other than an estate or trust) held by a dealer or other
fiduciary, organized, incorporated, or (if an individual) resident in the
United States; or any foreign partnership or corporation formed by a U.S.
Person principally for the purpose of investing in securities not registered
under the Act (with certain exceptions).
The Holder acknowledges that it has been furnished all information that it has
requested to the extent that it considers necessary and advisable and such
information is reasonable upon which to base an investment decision. The
Holder further understands that the
1
<PAGE> 9
Shares have not been registered under the Act or under the securities laws of
any state of the United States, and, therefore, the Shares cannot be resold in
the United States or to any U.S. Person (other than Distributors as defined in
Regulation S) unless the Shares are registered under the Act and any applicable
state securities laws or any exemption from such registration is available.
The Holder agrees that a restrictive legend may be placed on the stock
certificate representing the Shares to the effect as follows:
The shares represented by this certificate may not be offered, sold,
assigned, pledged, hypothecated, encumbered or in any other manner
transferred or disposed of in the United States or to a U.S. Person
(as defined in regulation S promulgated under the Securities Act of
1933, as amended) prior to _________, 199_.
The Holder agrees that transfer of the Shares may be refused by the Company or
its transfer agent if, in the opinion of counsel for the Company, any proposed
sale or transfer by the Holder of the Shares would not be in compliance with
the Act and applicable state securities laws.
Sincerely,
---------------------------------
(Holder)
2
<PAGE> 1
EXHIBIT 10.4
THIS NOTE IS SUBJECT TO RESTRICTIONS
ON TRANSFER AS SET FORTH HEREIN.
CONVERTIBLE PROMISSORY NOTE
$200,000.00 San Antonio, Texas September 18, 1996
General Provisions
1. FOR VALUE RECEIVED, ExproFuels, Inc., a corporation duly
organized and existing under the laws of the State of Delaware (the "Company"),
hereby unconditionally promises to pay to the order of TransEuro Capital, Inc.
("Payee"), the sum of TWO HUNDRED THOUSAND AND NO/100 DOLLARS ($200,000.00)
plus the interest thereon as provided herein, in lawful money of the United
States of America.
2. The unpaid principal amount of this Convertible Promissory
Note (the "Note") shall be due and payable in full on September 18, 1999 (the
"Maturity Date"). Upon thirty (30) days prior written notice to Payee, the
principal amount of the Note together with all accrued but unpaid interest
thereon may be prepaid in whole but not in part by the Company as specified in
paragraph 14.
3. The unpaid principal amount of this Note shall bear interest
from the date hereof until paid at the rate per annum of six percent (6%).
Interest shall be computed on the basis of the actual number of days elapsed in
a year consisting of 365 days or 366 days as appropriate.
4. Interest shall be payable in consecutive quarterly
installments commencing on January 1, 1997, and continuing on the first day of
each quarter thereafter, until and including September 18, 1999.
5. Regardless of any provision contained in this Note or any
other document executed or delivered in connection herewith, Payee shall never
be deemed to have contracted for or be entitled to receive, collect or apply as
interest on this Note, any amount in excess of the maximum rate of interest
permitted to be charged by applicable law, and, in the event that Payee ever
receives, collects or applies as interest any such excess, such amount which
would be excessive interest shall be applied to the reduction of the unpaid
principal balance of this Note, and, if the principal balance of this Note is
paid in full, any remaining excess shall forthwith be paid to the Company.
<PAGE> 2
6. (a) Wherever used herein, "Event of Default" means any
one of the following events (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(i) default in the payment of any cash installment of
principal or interest upon the Note when it becomes due and payable,
and continuance of such default for a period of 10 days; or
(ii) the entry of a decree or order by a court having
jurisdiction in the premises adjudging the Company bankrupt or
insolvent, or approving as properly filed a petition seeking the
reorganization, arrangement, adjustment or composition of or in
respect of the Company under the Federal bankruptcy laws or any other
applicable Federal or state law of the United States of America, or
appointing a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) for the Company or of any substantial
part of its property, or ordering the winding up or liquidation of its
affairs, and the continuance of any such decree or order unstayed and
in effect for a period of 90 consecutive days; or
(iii) the institution by the Company of proceedings to be
adjudicated bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking reorganization
or relief under the Federal bankruptcy laws or any other applicable
Federal or state law of the United States of America, or the consent
by it to the filing of any such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) for the Company or of any substantial part of its
property, or the making by it of any assignment for the benefit of
creditors.
(b) If an Event of Default occurs and is continuing, then
and in every such case, the Payee may declare the principal of this Note and
all accrued interest thereon to be due and payable immediately, by a notice in
writing to the Company, and upon any such declaration, such principal and
interest shall become immediately due and payable. At any time after such a
declaration of acceleration has been made and before a judgment or decree for
payment of the money due has been obtained, Payee, by written notice to the
Company, may rescind and annul such declaration and its consequences. Payee,
upon the occurrence of an Event of Default and with or without any acceleration
of maturity, may reduce any claim to judgment and pursue and enforce any of
Payee's rights and remedies under this Note or otherwise provided under or
pursuant to any applicable law or agreement.
2
<PAGE> 3
7. Should the principal of, or any installment of interest on,
this Note become due and payable on a day other than a Business Day (as
hereinafter defined), then the maturity thereof shall be extended to the next
succeeding Business Day. If this Note, or any installment or payment due
hereunder is not paid when due, whether at maturity or by acceleration, or if
it is collected through a bankruptcy, probate or other court, whether before or
after maturity, the Company agrees to pay all costs of collection, including,
but not limited to, reasonable and customary attorneys' fees incurred by the
holder hereof.
8. This Note has been executed and delivered in, and shall be
governed by and construed in accordance with the laws of, the State of Texas.
9. As used herein:
(a) The term "Highest Lawful Rate" shall mean, as of
any date, the highest non-usurious rate of interest then applicable to the
Note; Payee hereby notifies the Company that, and discloses to the Company
that, for purposes of TEX.REV.CIV.STAT.ANN. Art. 5069-1.04, as it may from time
to time be amended, the "applicable rate ceiling" shall be the "indicated rate
ceiling" referred to in Art. 5069-1.04(a)-(1), from time to time in effect, as
limited by Art. 5069-1.04(b); provided however, that to the extent permitted
by applicable law, Payee reserves the right to change the applicable rate
ceiling from time to time by further notice and disclosure to the Company; and
provided further, that the highest non-usurious rate of interest permitted by
the applicable law for purposes hereof shall not be limited to the applicable
rate ceiling under Art. 5069-1.04 if federal laws or other state laws now or
hereafter in effect and applicable to the Note (and the interest contracted
for, charged and collected thereunder) shall permit a higher rate of interest.
(b) The term "Business Day" shall mean a day upon which
business is transacted by Texas Commerce Bank of San Antonio other than a
Saturday or Sunday.
Convertibility Feature
10. Payee may at its option, at any time or from time to time from
and after the date hereof, convert (such option to convert being hereinafter
referred to as the "Conversion Option") the unpaid amount hereof (i.e.,
principal and all accrued interest, whether or not paid or payable) or any
portion thereof (any such converted amount being hereinafter referred to as
the "Conversion Amount") into fully paid and nonassessable shares of common
stock, $0.01 par value, of the Company (the "Common Stock") at a conversion
price (the "Conversion Price") of $1.00 per share, such initial Conversion
Price being, however, subject to adjustment
3
<PAGE> 4
as set forth in paragraph 12 below. The number of shares of Common Stock
issuable upon the exercise of a Conversion Option shall be determined by
dividing the Conversion Amount by the Conversion Price. If any fraction of a
share of Common Stock would be issuable on any exercise of the Conversion
Option, the Company shall purchase such fraction for an amount in cash equal to
the same fraction of the current market price on the date of exercise.
11. In order to exercise a Conversion Option, Payee shall deliver
to the Company (a) a notice in the form attached hereto as Exhibit "A" and
(b) an investment letter in the form attached hereto as Exhibit "B". The
effective date of the conversion related thereto shall be the date of the
Company's receipt of such notice from Payee. As soon as practicable after such
receipt, the Company shall cause its transfer agent to issue and deliver to
Payee, or Payee's designate, a certificate, or certificates, for the number of
shares of Common Stock issuable upon conversion of the Conversion Amount.
12. The Conversion Price shall be adjusted from time to time. In
case the Company shall (A) pay a dividend or make a distribution in shares of
its Common Stock, (B) subdivide the shares of its outstanding Common Stock
into a greater number of shares, (C) combine its outstanding Common Stock
into a smaller number of shares, or (D) issue by reclassification of its
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation)
any shares, the Conversion Price in effect immediately prior thereto shall be
adjusted so that the Conversion Amount shall be convertible into the number and
kind of shares into which such amount would have been convertible if converted
immediately prior to the happening of any event described in the immediately
preceding clauses (A), (B), (C), or (D). An Adjustment made pursuant to
this subparagraph shall become effective immediately after the record date in
the case of a dividend (provided, however, that in the event a dividend shall
be rescinded after the record date but before payment, no adjustment hereunder
shall be made) and immediately after the effective date in the case of a
subdivision, combination or reclassification.
13. No shares of Common Stock acquired by exercise of the
Conversion Option granted pursuant to the terms of this Note may be transferred
unless and until (a) the Company and Payee shall have received an opinion of
counsel satisfactory to the Company and Payee to the effect that any such
proposed transfer may be effected without registration under the Securities Act
of 1933, as amended (the "Act"), and any applicable state law, or (b) such
shares of Common Stock shall have been so registered.
14. The Company reserves the right, but not the obligation, to
convert the entire outstanding balance of the Note under the
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<PAGE> 5
provisions of paragraphs 10 and 11 once the Company has received two million
dollars ($2,000,000.00) in assets.
Miscellaneous Provisions
15. Subject to the terms and conditions hereof, this Note may be
assigned by Payee to any assignee with or without consideration. No assignment
of this Note shall be effective unless and until (a) the Company and the
Payee shall have received from such assignee an investment letter in similar
form and content to Exhibit "B" attached hereto (appropriately altered to
reflect the receipt and assignment of this Note rather than the receipt of
Common Stock), (b) the Company shall have been notified in writing by Payee
and assignee of the fact of such assignment, and (c) Payee and the Company
shall have received an opinion of counsel to the effect that such assignment
shall not be in violation of any securities or the applicable laws of the
United States or any political subdivision thereof. Notwithstanding anything
in this paragraph 15 or in paragraph 11 above, no investment letter shall be
required to be delivered in the event that any shares of Common Stock which may
be acquired by the exercise of the Conversion Option stated herein shall have
been registered under the Act and applicable Blue Sky laws.
16. No modification or waiver of any provision of this Note, nor
consent to departure therefrom, shall be effective unless in writing signed by
the Company and Payee, and no such consent or waiver shall extend beyond the
particular case and purpose involved. No notice or demand given in any case
shall constitute a waiver of the right to take other action in the same,
similar or other instances without such notice or demand.
17. If any provision of this Note is held to be illegal, invalid
or unenforceable under present or future laws effective during the term of this
Note, such provision shall be fully severable and this Note shall be construed
and enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of this Note, and the remaining provisions of this Note shall
remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance from this Note.
18. This Note shall be binding upon and inure to the benefit of
the Company and Payee and their respective successors, assigns and legal
representatives.
19. Any notice or communication required or permitted hereunder
shall be sufficiently given if sent by first class mail, postage prepaid:
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<PAGE> 6
(a) If to the Company, addressed to it at 500 North Loop
1604 E., Suite 250, San Antonio, Texas, 78232, marked for the attention of
Thomas H. Gose, President;
(b) If to Payee, addressed to it at Flacherstasse 10,
Lupfig 5242, Switzerland, marked for the attention of the President.
EXPROFUELS, INC.
By:
--------------------------------
Thomas H. Gose, President
6
<PAGE> 7
EXHIBIT "A"
Conversion Notice
TO EXPROFUELS, INC.:
The undersigned holder of that certain $200,000.00 Convertible
Promissory Note, dated September 18, 1996, payable by ExproFuels, Inc.
("Company") to TransEuro Capital, Inc. (the "Note"), hereby exercises the
option to convert the amount of such Note, together with all accrued interest
thereon, or a portion thereof below designated, into shares of Common Stock of
the Company in accordance with the terms of such Note. The undersigned directs
that the shares issuable and the certificates deliverable upon the conversion,
and any replacement convertible promissory note representing any unconverted
principal amount of the Note, be issued and delivered to the registered holder
of such Note unless a different name has been indicated below.
Amount to be converted (if less than all):
$_______________________
Person to whom shares are to be issued and delivered:
- -----------------------------------------------------------
(Name)
- -----------------------------------------------------------
(Address)
- -----------------------------------------------------------
- ---------------------------
(Signature)
Dated:
---------------------------
1
<PAGE> 8
EXHIBIT "B"
September 18, 1996
Gentlemen:
The undersigned, TransEuro Capital, Inc. (hereinafter referred to as the
"Holder"), is acquiring shares of the Common Stock (the "Shares"), $.01 par
value, of ExproFuels, Inc. (the "Company"), pursuant to the exercise of rights
under that certain Convertible Promissory Note ("Note") dated September 18,
1996, executed and delivered by the Company. In order to induce the Company to
deliver the Shares to the Holder, the Holder has made certain representations
and warranties concerning the Shares, which representations and warranties are
reduced to writing herein.
The Company has informed the Holder that the issuance of the Shares to Holder
has not been registered with the Securities and Exchange Commission (the
"Commission") nor with the Blue Sky authority of any state, and that the Shares
must be held indefinitely unless they are subsequently registered under the
Securities Act of 1933, as amended (the "Act"), and the appropriate state
Blue Sky Laws, or an exemption from such registration is available. Any
routine sale of the Shares or any part thereof, must be made in reliance upon
Regulation S as promulgated under the Act, or some other exemption to
registration.
The Holder hereby represents and warrants to the Company that the Holder is not
a U.S. Person under the meaning of Rule 902 of Regulation S of the Act.
Generally, a U.S. Person is defined as any natural person resident in the U.S.
(regardless of citizenship); any corporation or partnership organized or
incorporated under the laws of the United States; any estate of which any
executor or administrator is a U.S. Person; any trust of which any trustee is
a U.S. Person; any branch or agency of a foreign entity located in the United
States; any non-discretionary account (other than an estate or trust) held by
a dealer or other fiduciary for the benefit or account of a U.S. Person; any
discretionary account (other than an estate or trust) held by a dealer or other
fiduciary, organized, incorporated, or (if an individual) resident in the
United States; or any foreign partnership or corporation formed by a U.S.
Person principally for the purpose of investing in securities not registered
under the Act (with certain exceptions).
The Holder acknowledges that it has been furnished all information that it has
requested to the extent that it considers necessary and advisable and such
information is reasonable upon which to base an investment decision. The
Holder further understands that the
1
<PAGE> 9
Shares have not been registered under the Act or under the securities laws of
any state of the United States, and, therefore, the Shares cannot be resold in
the United States or to any U.S. Person (other than Distributors as defined in
Regulation S) unless the Shares are registered under the Act and any applicable
state securities laws or any exemption from such registration is available.
The Holder agrees that a restrictive legend may be placed on the stock
certificate representing the Shares to the effect as follows:
The shares represented by this certificate may not be offered, sold,
assigned, pledged, hypothecated, encumbered or in any other manner
transferred or disposed of in the United States or to a U.S. Person
(as defined in regulation S promulgated under the Securities Act of
1933, as amended) prior to _________, 199_.
The Holder agrees that transfer of the Shares may be refused by the Company or
its transfer agent if, in the opinion of counsel for the Company, any proposed
sale or transfer by the Holder of the Shares would not be in compliance with
the Act and applicable state securities laws.
Sincerely,
---------------------------
(Holder)
2
<PAGE> 1
EXHIBIT 10.5
ATI/AEI/EXPRO FUELS AGREEMENT FOR THE
CNG CONVERSION PROJECT AND CNG REFUELING INFRASTRUCTURE IN
UZBEKISTAN, CENTRAL ASIA AND THE WORLD MARKET
This Agreement (hereafter "this Agreement") is entered into by, between
and among AMERICAN TECHNICAL INSTITUTE (hereafter "ATI"), a Tennessee non-
profit corporation, AMERICAN ENGINEERING, INCORPORATED (hereafter "AEI"), a
Delaware corporation, and EXPRO FUELS, a division of The Exploration Company, a
Colorado corporation (hereafter "EXPRO"). The aforementioned corporations may
collectively be referred to throughout this Agreement as the "Parties." For
purposes of this Agreement, ATI and AEI shall be considered as one Party.
WITNESSETH:
WHEREAS, ATI has established certain agreements and understandings with
agencies of the government of the Republic of Uzbekistan (hereafter Uzbekistan)
in Central Asia for the transfer of technology in compressed natural gas
("CNG"), the conversion of State owned and privately owned motor vehicles to
CNG fuel, the establishment of manufacturing facilities for CNG conversion
equipment, the development of CNG refueling infrastructure (hereafter
collectively the "CNG Project"); and
WHEREAS, ATI has caused AEI to be formed for the purpose of transferring
CNG technology to Uzbekistan and has appointed AEI as its agent for the
transfer of such technology; and
WHEREAS, EXPRO is an established company specializing in the conversion
of motor vehicles to operate on CNG; and
WHEREAS, both ATI/AEI and EXPRO wish to combine their mutual strengths
and resources and intend to negotiate in good faith to form a Joint Venture
(hereafter the "AEJV") to assure the success of the CNG Project; and
WHEREAS, both ATI/AEI and EXPRO wish to establish this Agreement
governing the operations of the proposed AEJV and the investment in the AEJV
for the purposes of conducting the CNG Project, the marketing of the CNG
Project and alternative fuel related products or services which are either
produced by or distributed through the Uzbek-American Joint Venture (hereafter
the "UAJV").
NOW, THEREFORE, in consideration of the aforesaid premises, the Parties
do hereby agree as follows:
1. EXPRO RESPONSIBILITIES
EXPRO will be responsible for support of the CNG Project by providing
for the performance of the following designated tasks or task areas.
<PAGE> 2
1.1. Vehicle Conversions
1.1.1. System Design and Engineering
- conversion system design and engineering;
- design and engineering of the manufacturing facilities for
conversion equipment to be manufactured in Uzbekistan.
1.1.2. CNG Conversion Project Feasibility Studies
- design of CNG Project Feasibility Studies to support all aspects
of vehicle conversion, conversion equipment manufacturing and
marketing of Uzbekistan manufactured conversion equipment to
Uzbekistan, Central Asia and the world market.
1.1.3. Pilot Vehicle Conversions
- developing the detailed conversion procedures for all vehicles to
be converted;
- supervising Uzbekistan personnel in conversions for the "proof of
concept" project;
- monitoring the conversion operations during CNG Project Startup
as necessary to ensure that designated quality and performance
standards are being met by the native Uzbekistan Conversion
Project Personnel.
1.1.4. Equipment Procurement/Contracting
- selecting vendors for evaluation and approval for the supply of
conversion equipment which satisfies the requirements of the CNG
Project;
- reviewing bids from the selected prospective CNG conversion kit
vendors;
- based on analysis of the bid specifications, selecting and
approving conversion equipment to be used for all Uzbekistan
vehicle conversions;
- ordering the required conversion equipment;
- obtaining shipment of the equipment and then verifying and
monitoring proper shipment to Uzbekistan;
<PAGE> 3
- verifying receipt and warehousing of equipment in acceptable
condition in Uzbekistan (until Uzbek personnel are sufficiently
trained to perform these tasks without EXPRO supervision).
1.1.5. Conversion Equipment Manufacturing (Coordination between the OEM(s) of
purchased conversion equipment and CNG Project Management)
EXPRO will provide coordination between the OEM(s) of the CNG conversion
kits selected for the CNG Project and the ATI/AEI Project Management for
the following:
- ensuring production schedules meet CNG Project requirements;
- ensuring the respective OEM fully understands the precise
conversion equipment specification and that equipment meeting
that specification is what is ordered and produced;
- factory acceptance of conversion equipment ordered verifying
equipment meets specified design specifications and quality
standards.
1.1.6. Uzbek Conversion Personnel Training
EXPRO will provide subject matter experts to aide ATI/AEI in the design
of the training program for all aspects of the training required for
Uzbekistan personnel for:
- vehicle conversions;
- manufacturing of conversion equipment.
1.1.7. Conversion Quality Control
EXPRO will have responsibility for the design and implementation of the
CNG Project Quality Assurance Program and for the development of CNG
Project Quality Control Procedures Including:
- verification of quality of all outside purchased conversion
equipment (equipment not manufactured in Uzbekistan);
- quality of all vehicle conversions;
- quality of the conversion equipment manufacturing process in
Uzbekistan.
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<PAGE> 4
1.1.8. Conversion Candidate Approval and Acceptance
EXPRO will design and ensure implementation of all procedures for
vehicle conversion candidate approval and acceptance.
1.1.9. Inventory Control
EXPRO will:
- provide lists of recommended spare parts and tools for
maintenance of all refueling station equipment provided to
support specified equipment availability requirements;
- provide instructions for ordering spares and other necessary
tools and items to account for normal lead times related to
production scheduling, shipment delays, etc.;
- provide recommendations and training for Uzbekistan CNG Project
Personnel for proper storage, inventory control and warehousing
of conversion equipment.
1.2. Refueling Stations
EXPRO and/or the Vendor of the Refueling Stations will be responsible
for their individually designated task areas related to the procurement
and installation of Compressed Natural Gas (CNG) Refueling Stations to
Uzbekistan as per the following:
1.2.1. System Design and Engineering
The Vendor will be responsible for all system design and engineering for
all CNG Refueling Stations supplied to Uzbekistan.
1.2.2. CNG Refueling Station Project Feasibility Studies
The Vendor and EXPRO will jointly design CNG Refueling Station Project
Feasibility Studies of the required Refueling Station and related
infrastructure development needed to support the success of the CNG
Conversion Project.
1.2.3. Pilot Station Installations
The Vendor will supervise the installation and verify proper operation
of all Vendor supplied CNG Refueling Stations.
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<PAGE> 5
1.2.4. Station Equipment Procurement
EXPRO will:
- work with the Vendor, ATI/AEI and the Uzbekistan customer to
identify and specify the required Refueling Station equipment;
- order the specified Refueling Station equipment;
- obtain shipment of the equipment and then verify and monitor
proper shipment to Uzbekistan;
- verify receipt and warehousing of equipment in acceptable
condition in Uzbekistan (until Uzbek personnel are sufficiently
trained to perform these tasks without EXPRO supervision).
1.2.5. Manufacturing Setup and Coordination
EXPRO will provide all coordination between the Vendor and the ATI/AEI
Project Management as per the following:
- EXPRO ensuring Vendor production schedules meet CNG Project
requirements established by ATI/AEI Project Management;
- EXPRO providing ATI/AEI Project Management assurance that the
Vendor fully understands the precise Refueling Station equipment
specification and that equipment meeting that specification is
what is ordered and produced;
- factory acceptance of Refueling Station equipment ordered and
verifying that such equipment meets specified design
specifications and quality standards with appropriate reports
delivered to ATI/AEI Project Management.
1.2.6. Uzbek Installation & Maintenance Personnel Training
Where Vendor does not already have an adequate training program
developed, Vendor will provide subject matter experts to aide ATI/AEI in
the design of the training program for all aspects of the training
required for Uzbekistan personnel for such areas as:
- installation of CNG Refueling Stations; - operation of CNG
Refueling Stations; - maintenance of CNG Refueling Stations.
5
<PAGE> 6
1.2.7. Installation & Manufacturing Quality Control
EXPRO will have complete responsibility for the design and
implementation of the CNG Refueling Station Project Quality Assurance
Program and for the development of all CNG Refueling Station Project
Quality Control Procedures including:
- verification of quality of all outside purchased conversion
equipment (equipment not manufactured in Uzbekistan);
- quality of all vehicle conversions;
- quality of the conversion equipment manufacturing process in
Uzbekistan.
1.2.8. Inventory Control
Vendor will provide:
- lists of recommended spare parts and tools for maintenance of all
refueling station equipment provided to support specified
equipment availability requirements;
- instructions for ordering spares and other necessary tools and
items to account for normal lead times related to production
scheduling, shipment delays, etc.;
- recommendations and training for Uzbekistan CNG Project Personnel
related to proper storage and warehousing of all Vendor supplied
equipment.
2. ATI/AEI RESPONSIBILITIES
2.1. Project Management
ATI/AEI will be responsible for overall Project Management including all
CNG Project administrative functions. ATI/AEI will provide the Co-
Director of the Uzbek American Joint Venture as per the CNG Project
organization chart provided as a separate document. ATI/AEI Project
Management will have review and approval authority of all work performed
on the CNG Conversion Project and the CNG Refueling Station Project.
2.1.1. Accounting Controls, Budgets and Reporting
ATI/AEI will administer distribution of all CNG Project funds in
accordance with the mutually agreed upon
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<PAGE> 7
budgets, implement all mutually agreed upon CNG Project accounting
controls, and provide all required reporting of CNG Project operations
and financial activities to the designated bodies and organizations for
their review and approval.
2.1.2. Customer Liaison
ATI/AEI will have complete administrative control, as per formal written
CNG Project Policies, of all contact and communications with the
customers of the CNG Project and the UAJV including, but not limited to,
the governments of Uzbekistan, other Central Asian Countries, other
countries of the Former Soviet Union, and the World market for all
products or services produced or distributed by or through the UAJV,
including:
- Meeting Arrangements;
- Written Correspondence; and
- Verbal Correspondence.
2.1.3. Translation
- Document and Correspondence Translation;
- Legal Certification of Translations where Required;
- Interpreter(s).
2.1.4. Personnel Acquisition/Management (to be done under policies approved by
both EXPRO and ATI/AEI)
- Recruiting;
- Personnel Policies;
- Personnel Management.
2.1.5. Payroll
ATI/AEI will administer and ensure performance in accordance with all
respective government (U.S. and Uzbekistan) regulatory requirements and
the requirements of the CNG Project of all CNG Project Payroll
Functions.
2.1.6. Facilities Acquisition/Management
For all facilities to be used for conversion and/or manufacturing of
conversion equipment, ATI/AEI will:
7
<PAGE> 8
- Perform Feasibility Studies designed to support the facilities
selection process;
- Select and approve facilities in coordination with EXPRO and the
designated representatives of the government of Uzbekistan;
- Facilities Management.
2.1.7. Fleet Surveys
ATI/AEI will perform the necessary surveys of the fleets and vehicles to
be converted in accordance with the survey requirements designed under
the joint efforts of ATI/AEI and EXPRO.
2.1.8. Fueling Pattern Surveys
ATI/AEI will perform the necessary surveys of the fueling patterns of
fleets and vehicles to be converted in accordance with the survey
requirements designed under the joint efforts of ATI/AEI and EXPRO.
2.1.9. Conversion Candidate Logistics
ATI/AEI will design and coordinate, in consultation with EXPRO,
implementation of all the logistics for all vehicles which are
candidates for conversion including:
- all contact and scheduling with the vehicle owners;
- all vehicle transportation arrangements (including rail if
necessary):
- coordination of needed repairs or return to owners for conversion
candidates as result of pre-test program;
- ensuring necessary backlog of vehicles is available to support
the conversion schedule.
2.1.10. Marketing of Products or Services Produced or Distributed by or
Through the Activities of the UAJV, Including:
- Uzbekistan Marketing;
- Foreign Marketing;
- Central Asia
- Other Newly Independent States (Former Soviet Union)
8
<PAGE> 9
- World Market
2.2. Project Financial Organization
ATI/AEI will directly provide or will organize and manage the
performance of all tasks necessary to ensure provision of:
- World Bank and ExIm Bank Support;
- Bank Finance and Banking Relationships;
- Repatriation of Profits;
- Financial Institution Coordination;
- Project Educational Activities (PR);
- CNG Project Budgets;
- Inventory Accounting and Controls.
3. JOINT RESPONSIBILITIES
The Board of Directors of the proposed AEJV will establish the
requirements for the following:
- Project Equity Investment;
- Accounting Oversight;
- Board of Directors;
- Budget Approval;
- Project Coordination.
4. EQUITY OWNERSHIP/OPTIONS
4.1. ATI/AEI currently has equity control of the proposed AEJV for the
purpose of development of the CNG Project and the associated
Refueling Station Project.
4.2. EXPRO has the option to earn an equity position of up to 50% on
the following basis:
4.2.1. EXPRO has the right to invest up to a total of $3,200,000 based
on successful completion of agreed upon specified project
activities or milestones at each stage of the project. This
total $3,200,000 investment will be provided on a time scale and
by a means which is mutually agreed between the Parties at the
time of the acceptance
9
<PAGE> 10
of the first investment funds or "earnest money" by ATI/AEI as
per Paragraph 8 of this Agreement. ATI/AEI will provide detailed
combined timeframe and activities to be accomplished for
completion of Stages I, II and III (per project stages defined in
Barents Group Outline of Scope of Work and shown in Attachment
A).
4.2.2. EXPRO will earn a 10.625% equity position by investing $450,000
as soon as possible.
4.2.3. EXPRO may invest another $450,000 within 2 weeks after all tasks
listed in Item A of Stage II are completed (defined by Barents
Scope of Work shown in Attachment A) to earn another 10.625%
equity interest. Of this amount, $100,000 will be marked for
repayment of expenses of ATI and principals of AEI. Tasks
comprising Item A of Stage II are more fully defined as Steps 1
thru 5 in the Barents Analysis provided in the letter of March 9,
1995, from Mr. Joe Saldutti, Director of Central Asia for Barents
Group LLC, to Mr. Jerry Stevens of ATI with excerpt shown in
Attachment B.
4.2.4. EXPRO may invest another $500,000 within 1 month after issuance
of the Decree as listed under Item D of Stage II (defined by the
Barents Scope of Work shown in Attachment A) or earlier if
required by financing institution prior to transaction closing
which is part of Stage III. If such funding is required, EXPRO
will agree to fund this tranche to accomplish finance closing by
said institution. This $500,000 earns additional 6.25% equity
interest.
4.2.5. EXPRO will be allowed to invest up to a total of $3,200,000 with
each $1,000,000 earning added equity position at the rate of
12.5% per million. If more investment than $3,200,000 is
required and approved by the Board of Directors of the proposed
AEJV and such investment must be obtained through a third party,
then EXPRO and ATI/AEI shall jointly be responsible for raising
the additional equity and any dilution resulting therefrom shall
be shared equally. However, if EXPRO or ATI/AEI invest their own
funds, the resulting equity positions of each Party would be
based on the percent of total funds invested by each Party with
ATI/AEI given credit for a total cash and non-cash investment of
$3,200,000.
4.3. EXPRO will earn a seat on the board through its role inthe
project as consultant/operations management participant.
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<PAGE> 11
4.3.1. EXPRO has the right to earn one-half (three) of the board seats
through its role as an equity participant.
4.3.2. By following the above equity investment schedule, EXPRO will
earn these seats from the beginning of its participation in the
project.
4.3.3. For each failure to provide any required equity investment
(tranche) at any stage of the project, ATI/AEI will have the
right to replace one of the EXPRO board seats with a member of
its choosing. However, so long as EXPRO continues in its role as
project consultant and operations management participant, it will
retain a minimum of one board seat.
4.4. EXPRO and ATI/AEI will remain equal partners if other sources
(such as bank financing or investment brokers) require equity
ownership. Additional outside equity investment into the project
will lower EXPRO and ATI/AEI's ownership position equally.
It is mutually understood that the Uzbekistan government will
share in the net revenue as per the current Uzbek American Joint
Venture (UAJV) Agreement.
4.5. Unless otherwise separately agreed in writing, EXPRO will fund
investment directly into the newly formed AEJV.
5. FUTURE BUSINESS OPPORTUNITIES
Future business opportunities in the oil and gas industry created by,
through or around the activities described herein will be made available
as a right of first refusal to the other joint venture partner on a
50/50 basis. The partner so offered will have 30 days in which to agree
to participate in the new business venture or not. If said partner
agrees, he will have an additional 30 days with which to perform on
whatever basis is required to initiate the new partnership business.
6. PROJECT ORGANIZATION AND ADMINISTRATION
See CNG Project Organization Chart - Attachment C.
7. ASSIGNMENT
Neither this Agreement nor any interest of either party herein may be
assigned, pledged, or transferred without the prior written consent of
the Parties hereto, or without otherwise complying with the terms and
conditions set forth herein.
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<PAGE> 12
8. VALIDITY OF THIS AGREEMENT
This Agreement is binding on both EXPRO and ATI/AEI as provided herein.
If EXPRO has not made the investment specified in Paragraph 4.2.2 of
this Agreement by the date of April 7, 1995, then this Agreement is null
and void unless it Is extended in writing at the sole discretion of
ATI/AEI. If, after making the first investment as specified in
Paragraph 4.2.2 of this Agreement, EXPRO in unable or unwilling to
continue its investment via a mutually agreed upon means and schedule,
as specified in Paragraph 4.2.1 of this Agreement, then EXPRO will
retain the equity percentage acquired through its investment in the CNG
Project and ATI/AEI has the right, at its sole discretion, to pursue any
and all other sources of funding and to make separate contracts with
such sources of funding.
IN WITNESS WHEREOF, the Parties, by the signatures below of their duly
authorized representatives on the below indicated dates, have executed this
Agreement.
AMERICAN TECHNICAL INSTITUTE EXPRO FUELS INC.
AMERICAN ENGINEERING
/s/ D. W. Jones /s/ Tom Gose
- ------------------------------- --------------------------
D. W. Jones, President Tom Gose, President
3/29/95 3/30/95
- ------------------------------- --------------------------
Date Date
12
<PAGE> 13
AMENDMENT TO AGREEMENT
(First Amendment)
REFERENCE is here made to that certain agreement dated March 30, 1995,
by and between American Technical Institute ("ATI"), American Engineering
Incorporated ("AEI"), and ExproFuels, a division of The Exploration Company
("EXPRO"), hereinafter Fred to as the "Parties," for the CNG Conversion Project
and CNG Refueling Infrastructure in Uzbekistan, Central Asia and the world
market ("Agreement"); and
WHEREAS, the Parties hereby affirm that the Agreement is in full force
and effect; and,
WHEREAS, the Parties now wish to amend and modify the Agreement in
certain respects;
NOW, THEREFORE, for and in consideration of the aforesaid premises, the
Parties do hereby agree to alter and amend said Agreement in the following
manner to wit:
A. Paragraph 4.2.2 of said Agreement shall be deleted in its
entirety, and substituting and inserting in lieu thereof the following:
4.2.2 EXPRO will earn a 10.625% equity position by investing
$450,000 as soon as possible. Initially, EXPRO shall invest $50,000 on
or before April 20, 1995, and thereby earn a 1.18% equity position.
EXPRO, at its sole discretion and option, intends to continue investing
in increments of $50,000, up to a minimum of $150,OOO on an as needed
basis or prior to May 15, 1995, whichever comes first, as part of the
payment of the aforementioned $450,000. Each $50,000 incremental
investment toward a total of $450,000 shall earn EXPRO an additional
1.18% equity position. Failure of EXPRO to wire transfer, as directed
by ATI, $50,000 to CNG International, LLC on, or before, April 20, 1995,
shall terminate all of EXPRO's rights under the Agreement.
Additionally, to keep EXPRO's rights to earn additional interest under
the Agreement in full force and effect, EXPRO must invest an additional
$150,000 by June 15, 1995, and an additional $150,000 by July 15, 1995.
Failure of EXPRO to make the aforementioned investments shall terminate
EXPRO's rights to earn additional interest in the CNG project under the
Agreement.
B. Said Agreement is hereby altered and amended to add the following
Paragraphs 9 and 10 after Paragraph 8 of the Agreement:
13
<PAGE> 14
9. ATI and AEI hereby assign all of their right, title and
interest in the CNG project in Uzbekistan to CNG International, LLC.
10. EXPRO agrees to allow contributions to CNG International,
LLC by AEI and/or its agents. The equity interest to be earned by such
contributions may be subtracted from EXPRO's potential interest on a
negotiated case-by-case basis.
This amendment becomes effective immediately upon execution and is
attached to and becomes a part of the Agreement and amends the Agreement only
as regards the terms stated herein.
And for the same consideration, the undersigned Parties do hereby ADOPT,
RATIFY and CONFIRM said Agreement, as the same is hereby amended, and confirm
that same is a valid and subsisting agreement as of this date.
EXECUTED this 19th day of April, 1995.
AMERICAN TECHNICAL INSTITUTE EXPROFUELS
/s/ D. W. Jones /s/ Thomas H. Gose
- --------------------------------- -----------------------------
D. W. Jones, President Thomas H. Gose, President
AMERICAN ENGINEERING INCORPORATED
/s/ D. W. Jones
- ---------------------------------
D. W. Jones, President
CNG INTERNATIONAL, LLC
/s/ D. W. Jones
- ---------------------------------
D. W. Jones, President
14
<PAGE> 15
Amendment to ATI/AEI/ExproFuels Agreement (Second
Amendment)
REFERENCE is here made to that certain agreement dated March 30, 1995,
and to that certain Amendment to Agreement dated April 19, 1995, by and between
American Technical Institute ("ATI"), American Engineering Incorporated ("AEI")
and ExproFuels ("Expro"), a division of The Exploration Company ("TXCO"),
hereinafter referred to as the "Parties," for the CNG Conversion Project
("Gasmotors") and the CNG Refueling Project ("Gascompressors") in Uzbekistan,
Central Asia and the world market (hereinafter referred to as the
("Agreement"); and
WHEREAS, the Parties hereby affirm that the Agreement remains in full
force and effect; and
WHEREAS, the Parties now wish to amend and modify the Agreement in
certain respects;
NOW, THEREFORE, for and in consideration of the aforesaid premises, the
Parties do hereby agree to alter and amend said Agreement in the following
manner, to wit:
1) Paragraph 4.2.1 of said Agreement shall be changed by deleting all but
the first sentence.
2) Paragraphs 4.2.2, 4.2.3 and 4.2.4 of said Agreement shall be amended as
follows by substituting and inserting in lieu thereof the following:
4.2.2 Expro has invested $150,000 in CNG International, LLC and
the CNG Project in Uzbekistan as of the date signed below. The equity
interest earned for this investment is 3.54% of CNG International, LLC
as of this date.
4.2.2.1 Expro has accepted responsibility for outstanding
bills totaling $181,393.08 to date (not including interest which will be
accrued on this amount) and for purposes of the CNG Project has earned a
total of 4.28% interest in CNG International, LLC as of this date.
4.2.2.2 Expro has earned a total of 7.82% interest in CNG
International, LLC by providing all funding detailed above. This
interest will be increased to account for interest paid on outstanding
bills referenced in paragraph 4.2.2.1 at the rate of 1.18% per $50,000
when the amount of this interest is determined.
4.2.2.3 In addition, Expro will receive a total of three
per cent (3%) for cooperation in developing the CNG
15
<PAGE> 16
Program.
4.2.3 Within three (3) weeks after signing of the decree, Expro,
at its sole discretion and option, may invest an additional $500,000
(five hundred thousand dollars) to earn an additional interest of up to
10% in CNG International, LLC, or 1% per $50,000 investment. AEI has
the right to raise funds from outside sources at any time that Expro is
not able to provide funding as needed for the project after receiving
ten (10) days written notice or as much notice as is practicable given
the individual situation. Any funds secured from outside sources may
earn an interest in CNG International, LLC, and Expro agrees that said
interest may reduce its potential ability to earn interest in CNG
International, LLC.
4.2.4 Expro, at its sole discretion and option, may invest an
additional $2,300,000 (two million three hundred thousand dollars) to
earn additional equity interest in CNG International, LLC at the rate of
one per cent (1%) per one hundred thousand dollars ($100,000) of
investment up to the time at which a commitment is received for bank
financing. AEI has the right to raise funds from outside sources at any
time that Expro is not able to provide funding as needed for the project
after receiving ten (10) days written notice or as much notice as is
practicable given the individual situation. Any funds secured from
outside sources may earn an interest in CNG International LLC, and Expro
agrees that said interest may reduce its potential ability to earn
interest in CNG International, LLC.
3) Paragraph 4.2.5 of said Agreement shall be deleted in its entirety.
4) ATI and AEI hereby acknowledge that all their rights, title and interest
in the CNG Project in Uzbekistan has been assigned to CNG International, LLC.
5) This agreement becomes effective immediately upon execution and is
attached to and becomes a part of the Agreement and amends the Agreement only
as regards the terms stated herein.
And for the same consideration, the undersigned Parties do hereby ADOPT,
RATIFY and CONFIRM said Agreement, as the same is hereby amended, and confirm
that same is a valid and subsisting agreement as of this date.
16
<PAGE> 17
Executed this the 6th day of November, 1995.
AMERICAN TECHNICAL INSTITUTE EXPROFUELS
/s/ D. W. Jones /s/ Thomas H. Gose
- ----------------------------- --------------------------
D. W. Jones, President Thomas H. Gose, President
AMERICAN ENGINEERING, INC.
/s/ D. W. Jones
- -----------------------------
D. W. Jones, President
17
<PAGE> 1
ExproFuels, Inc. EXHIBIT 11.1
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended
November 30, Years Ended August 31,
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net (Loss) Per Common Shareholder ($ 210,550) ($ 170,806) ($ 645,014) ($ 985,881) ($ 872,907)
----------- ----------- ----------- ----------- -----------
Common Stock Shares Used in
Primary Per Share Calculation
Weighted average number of Common 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
Shares ----------- ----------- ----------- ----------- -----------
Common stock equivalents:
Dilutive effect of stock -- -- -- -- --
options (1) ----------- ----------- ----------- ----------- -----------
Weighted Average Common Shares 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
Used in Primary Per Share =========== =========== =========== =========== ===========
Calculations
Primary (Loss) Per Share ($ 0.05) ($ 0.04) ($ 0.16) ($ 0.25) ($ 0.22)
=========== =========== =========== =========== ===========
</TABLE>
(1) Stock options outstanding are not considered equivalents as their impact
would be antidulitive.
<PAGE> 1
EXHIBIT 28.1
EXPROFUELS, INC.
COMMON STOCK
This Information Statement is being furnished in connection with the
distribution (the "Distribution") to the holders of common stock, par value
$0.01 per share (the "Parent's Common Stock"), of The Exploration Company (the
"Parent") of 1,910,000 (or approximately 48%) of the outstanding shares of
common stock, $0.01 par value per share (the "Subsidiary's Common Stock"), of
ExproFuels, Inc. ("ExproFuels" or the "Subsidiary"). Upon the effectiveness of
the Distribution, the Subsidiary will be a publicly-held company that is
engaged in the alternative fuels conversion business. See "Business."
Shares of the Subsidiary's Common Stock will be distributed to holders
of record of the Parent's Common Stock as of the close of business on September
13, 1996 (the "Record Date"). Each such holder will receive one share of the
Subsidiary's Common Stock for every five shares of the Parent's Common Stock
held on the Record Date. The Distribution is scheduled to occur on March 15,
1997 (the "Distribution Date"). Upon the effectiveness of the Distribution,
the Parent will own approximately 42% of the outstanding shares of the
Subsidiary's Common Stock. No consideration will be paid by the holders of the
Parent's Common Stock for shares of the Subsidiary's Common Stock. See "The
Distribution."
There is no current trading market for the Subsidiary's Common Stock.
Upon the effectiveness of the Distribution, the Subsidiary's Common Stock may
be traded on the Electronic Bulletin Board. Shareholders interested in trading
the Subsidiary's Common Stock after the Distribution should contact their
stockbrokers. See "The Distribution--Trading of the Subsidiary's Common
Stock."
________________
NO SHAREHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
_________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
_________________
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
__________________
THE DISTRIBUTION OF THE SHARES OF THE SUBSIDIARY'S COMMON STOCK MAY NOT BE
TAX FREE TO THE HOLDERS OF THE PARENT'S COMMON STOCK OR TO THE PARENT.
FOR A DESCRIPTION OF THESE TAX CONSEQUENCES, SEE "CERTAIN SPECIAL
CONSIDERATIONS - CERTAIN TAX CONSEQUENCES."
_________________
Shareholders of the Parent with inquiries related to the Distribution
should contact James Sigmon, President, The Exploration Company, 500 North Loop
1604 East, Suite 250, San Antonio, Texas 78232, telephone: (210) 496-5300; or
the Subsidiary's transfer agent, Boston EquiServe, Shareholder Relations,
Boston, Massachusetts, telephone (617) 575-3100. Boston EquiServe is also
acting as the Distribution Agent for the Distribution.
_________________
THE DATE OF THIS INFORMATION STATEMENT IS MARCH 15, 1997.
<PAGE> 2
INFORMATION STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF CERTAIN INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Reasons for the Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Distribution Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Manner of Effecting the Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 5
Results of the Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Appraisal of the Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Federal Income Tax Aspects of the Distribution . . . . . . . . . . . . . . . . . . . . . 6
Trading of the Subsidiary's Common Stock Conditions . . . . . . . . . . . . . . . . . . 7
Reasons for Furnishing the Information Statement . . . . . . . . . . . . . . . . . . . . 7
CERTAIN SPECIAL CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
RELATIONSHIP BETWEEN THE SUBSIDIARY AND THE PARENT AFTER 10
THE DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
REGULATORY APPROVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ACCOUNTING TREATMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . .
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 22
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
THE SUBSIDIARY'S 1996 FLEXIBLE INCENTIVE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . 23
DESCRIPTION OF THE SUBSIDIARY'S CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . 28
LIABILITY AND INDEMNIFICATION OF OFFICERS AND
DIRECTORS OF THE SUBSIDIARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-0
ANNEX I - APPRAISAL OF DAVID P. MARTIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
</TABLE>
<PAGE> 3
SUMMARY OF CERTAIN INFORMATION
This Summary is qualified by the more detailed information set forth
elsewhere in this Information Statement, which should be read in its
entirety. Capitalized terms used but not defined in this Summary are
defined elsewhere in this Information Statement.
THE DISTRIBUTION
<TABLE>
<S> <C>
Distributing Parent . . . . . . . . . . . . . . . . The Exploration Company, a Colorado corporation (the Parent").
References herein to the Parent include its consolidated subsidiaries
except where the context otherwise requires.
Distributed Subsidiary . . . . . . . . . . . . . . ExproFuels, Inc. ("ExproFuels" or the "Subsidiary"). The Subsidiary
is currently engaged in the alternative fuels conversion business.
The Parent currently owns 90% of the outstanding shares of the
Subsidiary's Common Stock.
Distribution Ratio . . . . . . . . . . . . . . . . One share of the Subsidiary's Common Stock for every five shares of
the Parent's Common Stock held on the Record Date.
Securities to be Distributed . . . . . . . . . . . 1,910,000 shares of the Subsidiary's Common Stock. The Subsidiary's
Common Stock to be distributed will constitute approximately 48% of
the outstanding shares of the Subsidiary's Common Stock immediately
after the Distribution.
Fractional Share Interests . . . . . . . . . . . . Fractional shares of the Subsidiary's Common Stock will not be
distributed. Fractional shares of Subsidiary's Common Stock will be
aggregated and purchased on behalf of the Subsidiary by the
Distribution Agent at the appraised price of $0.13 per share and the
aggregate net cash proceeds will be distributed ratably to those
shareholders entitled to fractional interests. See "The
Distribution-Manner of Effecting the Distribution" and "The
Distribution - Appraisal of the Subsidiary."
Record Date . . . . . . . . . . . . . . . . . . . . September 13, 1996 (3:00 p.m. Eastern Standard Time).
Distribution Date . . . . . . . . . . . . . . . . . March 15, 1997.
Mailing Date . . . . . . . . . . . . . . . . . . . Certificates representing the shares of the Subsidiary's Common Stock
to be distributed pursuant to the Distribution will be delivered to
the Distribution Agent on the Distribution Date. The Distribution
Agent will mail the certificates to holders of the Parent's Common
Stock as soon as practicable thereafter. See "The Distribution-
Manner of Effecting the Distribution."
Conditions to the Distribution . . . . . . . . . . The Distribution is conditioned upon, among other things, the
registration of the Subsidiary's Common Stock with the Securities and
Exchange Commission ("SEC") on Form 10 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Board of Directors
of the Parent (the "Parent's Board") has reserved the right to waive
any conditions to the Distribution. See "The Distribution-
Conditions."
</TABLE>
1
<PAGE> 4
<TABLE>
<S> <C>
Reasons for the Distribution . . . . . . . . . . . The Distribution is designed to separate two types of businesses with
distinct financial, investment and operating characteristics so that
each can adopt strategies and pursue objectives appropriate to its
specific needs. The Distribution will (i) enable the management of
each company to concentrate its attention and financial resources on
the core business of such company, and (ii) permit investors to make
more focused investment decisions based on the specific attributes of
each of the two businesses. The Parent will continue to engage in
oil and gas exploration, development and production. ExproFuels will
continue to conduct the alternative fuels conversion business. See
"The Distribution-Reasons for the Distribution."
Tax Consequences . . . . . . . . . . . . . . . . . The receipt of shares of the Subsidiary's Common Stock by holders of
Parent's Common Stock will not be tax free. See "The Distribution -
Federal Income Tax Aspects of the Distribution" and "Certain Special
Considerations-Certain Tax Considerations."
Trading Market . . . . . . . . . . . . . . . . . . There is currently no public market for the Subsidiary's Common
Stock. Upon the effectiveness of the Distribution, the Subsidiary's
Common Stock may be traded on the Electronic Bulletin Board.
Shareholders interested in trading after the Distribution should
contact their stockbrokers. See "The Distribution - Trading of the
Subsidiary Common Stock" and "Certain Special Considerations-No
Current Public Market for the Subsidiary Common Stock."
Distribution Agent and Transfer Agent . . . . . . . Boston EquiServe of Boston, Massachusetts.
Dividends . . . . . . . . . . . . . . . . . . . . . The Subsidiary's dividend policy will be established by the Board of
Directors of the Subsidiary (the "Subsidiary's Board") from time to
time based on the results of operations and financial condition of
the Subsidiary and such other business considerations as the
Subsidiary's Board considers relevant. See "Certain Special
Considerations-Dividend Policy."
Certain Special Considerations . . . . . . . . . . See "Certain Special Considerations" for a discussion of factors that
should be considered in connection with the Subsidiary's Common Stock
received in the Distribution.
Relationship with Parent
after the Distribution . . . . . . . . . . . . . The Parent will own approximately 42% of the Subsidiary's Common
Stock after the Distribution. The Parent will continue to lease
office space and equipment and provide accounting personnel and
reception services to the Subsidiary after the Distribution, on a
month to month basis, for $10,000 per month. In addition, the
Parent and the Subsidiary will share common directors and officers.
See "Certain Special Considerations - Concentration of Voting Power,"
"Relationship Between the Subsidiary and the Parent After the
Distribution," "Management" and "Security Ownership of Certain
Beneficial Owners and Management."
</TABLE>
2
<PAGE> 5
THE SUBSIDIARY
The Subsidiary is a recently capitalized corporation which, upon
completion of the Distribution, will be a publicly held company that is
engaged in the alternative fuels conversion business. The Subsidiary
converts gasoline and diesel engines to operate on compressed natural gas
(CNG), liquified petroleum gas (LPG) and liquified natural gas (LNG). The
Subsidiary also designs, builds, owns, operates and provides fuel for
alternative fuel stations. The Subsidiary currently owns and operates twenty
LPG motor fuel stations in Texas, owns and operates conversion facilities in
San Antonio, Dallas, and Tucson and operates affiliated conversion facilities
in Houston and Phoenix. The Company also owns an 11% interest in CNG
International, L.L.C., a Tennessee limited liability company that operates an
alterative fuels conversion business in Uzbekistan, a former Soviet Republic.
In late 1992, the Parent entered the alternative fuels vehicles
(AFV) conversion business through the creation of its own alternative fuels
division, ExproFuels. The alternative fuels division's focus included the
conversion of internal combustion engines to run alternately on LPG, CNG or
LNG, and the design, installation and operation of alternative fuel refueling
stations. The ExproFuels' division initiated ongoing operations in Texas and
Arizona, while actively pursuing international opportunities in Europe, Asia
and Latin America. Since 1994, gross revenues from the ExproFuels' division
have surpassed gross revenues from the Parent's oil and gas operations,
although profitable operating levels have not been attained. In late 1996,
the Parent determined it was in its best interest to refocus its resources on
its core oil and gas industry. Accordingly, the ExproFuels' division was
contributed to the Company in August, 1996, in exchange for 100% of the
outstanding shares of the Subsidiary's Common Stock. On August 30, 1996, the
Parent's Board paid 10% of the outstanding shares of the Subsidiary's Common
Stock to the Parent's directors in exchange for past services to the Parent,
thereby reducing the Parent's ownership interest in the Subsidiary from 100%
to 90%. On September 3, 1996, the Parent's Board declared a stock dividend
of 1,910,000 shares (or approximately 48%) of the Subsidiary's Common Stock
to its shareholders as of the Record Date.
The Subsidiary's business strategy is to install additional fuel
stations during fiscal year 1997, as well as to continue international
marketing and development efforts in Asia and Latin America. The
Subsidiary's management is also considering various potential domestic
acquisition alternatives with the goal of reaching operational efficiencies
enabling ExproFuels to reduce current per unit costs of purchasing, storage
and distribution of alternative fuels. Besides significantly enhancing
existing net operating margins, such acquisitions could enable ExproFuels to
improve its competitive stance in existing markets while facilitating
expansion into new markets. The Subsidiary's management continues to pursue
adequate sources of equity and debt financing for funding the acquisition of
established operating business units, assuming they will provide operating
cash flows to ExproFuels within an acceptable timeframe.
At August 31, 1996, ExproFuels had cash on hand of $20,871,
positive working capital of $49,031 and equity of $908,179. However, it had
a deficiency of quick assets (cash and receivables) to current liabilities of
$114,282, and its positive cash position was primarily due to cumulative
contributions of operating capital of $3,526,136 from the Parent ($1,192,095
in 1996, $1,224,085 in 1995 and $882,566 in 1994). On September 30, 1996,
the Parent advanced the Subsidiary an additional $40,000 and, subsequently,
ExproFuels raised $400,000 in long-term, convertible debt financings, which
mature through fiscal year 2000. For 1997, ExproFuels must continue to seek
additional sources of operating capital. Capital requirements to sustain
ExproFuels' growth and on-going operations are projected to be at least
$250,000 for capital expenditures and an additional $750,000 in working
capital. The Subsidiary's financial position poses certain risks, including
the risk that (i) the Subsidiary's cash flow from operation will be
insufficient to maintain operations; (ii) the Subsidiary will be unable to
obtain financing in the future for working capital, capital expenditures and
general corporate purposes; and (iii) the Subsidiary will be more vulnerable
to economic downturns and may be unable to withstand competitive pressures.
The Subsidiary's principal executive offices are located at 500
North Loop 1604 East, Suite 250, San Antonio, Texas 78232; telephone: (210)
490-9400.
3
<PAGE> 6
EXPROFUELS, INC.
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents summary historical financial data derived
from the Subsidiary's audited Financial Statements for the three most recent
fiscal years ended August 31, 1996 and unaudited Financial Statements as of and
for the quarter ended November 30, 1996 and November 30, 1995. The
Subsidiary's Financial Statements present the financial position, results of
operations and cash flows of the Subsidiary as if it were a separate company
operating for all periods presented. The information in the table should be
read in conjunction with "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Financial Statements of the Subsidiary included elsewhere herein. Pro
forma financial data reflecting the effects of the Distribution is not set
forth below or included elsewhere in this Information Statement because the pro
forma financial data would not, in management's opinion, differ materially from
the historical financial data. The Subsidiary's fiscal year ends on August 31.
<TABLE>
<CAPTION>
QUARTER ENDED
Fiscal Year NOVEMBER 30
-------------------------------- -------------------
1996 1995 1994 1996 1995
---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues:
Conversion sales . . . . . . . . . $ 557,641 $ 578,362 $ 627,366 $ 157,333 $ 91,255
Fuel station construction sales . . 301,115 97,241 162,603 19,453 75,798
Alternative fuels sales . . . . . . 187,645 97,748 31,664 85,694 33,345
--------- --------- --------- --------- ---------
Total revenues . . . . . . . . 1,046,40 773,351 821,633 262,480 200,498
Costs and expenses:
Costs of sales . . . . . . . . . . 752,024 646,078 701,198 203,988 135,433
Shop general and administrative . . 484,920 415,944 302,647 116,000 125,827
Depreciation and amo.t.z.t.o. . . . . 85,574 92,302 77,543 21,833 22,377
Abandonment of technological
rights . . . . . . . . . . . . - - 144,681 - -
General and administrative . . . . 404,708 587,916 431,107 138,925 94,678
--------- --------- --------- --------- ---------
Total costs and expenses 1,727,226 1,742,240 1,657,176 480,746 378,315
--------- --------- --------- --------- ---------
Profit (loss) from operations (680,825) (968,889) (835,543) (218,266) (177,817)
Other income (expense):
Sublease rental income . . . . . . 58,500 6,750 - 13,500 13,500
Interest income . . . . . . . . . . 959 818 3 208 258
Interest expense . . . . . . . . . (23,648) (24,560) (37,367) (5,992) (6,747)
--------- --------- --------- --------- ---------
Total other income . . . . . . 35,811 (16,992) (37,364) 7,716 7,011
--------- --------- --------- --------- ---------
Net loss . . . . . . . . . . . . . . $ (645,014) $ (985,881) $ (872,907) $ (210,550) $ (170,806)
========= ========= ========= ========= =========
Earnings (loss) per share of common
stock . . . . . . . . . . . . . . . $ (.16) $ (.25) $ (.22) $ (.05) $ (.04)
--------- --------- --------- --------- ---------
Weighted average number of
common shares outstanding . . . . . 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalent . . . . . $ 20,871 $ 7,263 $ 4,711 $ 28,938 $ 14,397
Total assets . . . . . . . . . . . 1,249,527 842,007 885,977 1,345,535 1,017,731
Total debt(1) . . . . . . . . . . . 85,164 125,260 344,679 277,341 253,094
- -------------------
(1) Total debt includes current portion of debt and capital lease obligations.
</TABLE>
4
<PAGE> 7
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The Parent, directly and through the Subsidiary, is currently engaged
in the oil and gas exploration, development and production business as well as
the alternative fuels conversion business. The Parent's Board has determined
that it is in the best interests of the Parent and its stockholders, for the
reasons set forth below, to separate the Parent and the Subsidiary. The Parent
will continue to conduct the oil and gas exploration, development and
production business and the Subsidiary will continue to conduct the alternative
fuels conversion business.
The Parent's Board believes that the Distribution will be beneficial
to the Parent's shareholders. Separation of the two businesses will (i) enable
the management of each company to concentrate its attention and financial
resources on the core businesses of each company, and (ii) permit investors to
make more focused investment decisions based on the specific attributes of each
of the two businesses.
DISTRIBUTION AGENT
The distribution agent ("Distribution Agent") is Boston EquiServe,
Shareholder Relations, P.O. Box 644, Mail Stop 45-02-64, Boston, Massachusetts
02102-0644, telephone (617) 575-3100.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set
forth below.
The Parent will effect the Distribution on the Distribution Date by
delivering 1,910,000 (or approximately 48%) of the outstanding shares of the
Subsidiary's Common Stock to the Distribution Agent for distribution to the
holders of record of Parent's Common Stock as of the close of business on the
Record Date. The Distribution will be made on the basis of one share of the
Subsidiary's Common Stock for every five shares of the Parent's Common Stock
held as of the close of business on the Record Date. The shares of the
Subsidiary's Common Stock will be fully paid and nonassessable, and the holders
thereof will not be entitled to preemptive rights. It is expected that
certificates representing shares of the Subsidiary's Common Stock will be
mailed to holders of the Parent's Common Stock as soon as practicable after the
Distribution Date. See "Description of the Subsidiary's Capital Stock."
No certificates or scrip representing fractional interests in shares
of the Subsidiary's Common Stock ("Fractional Shares") will be issued to
holders of Parent's Common Stock as part of the Distribution. The Distribution
Agent, acting as agent for holders of the Parent's Common Stock otherwise
entitled to receive in the Distribution certificates representing Fractional
Shares, will aggregate and buy on behalf of ExproFuels all Fractional Shares at
the appraised price of $0.13 per share and distribute the net proceeds to the
shareholders entitled thereto. See "The Distribution - Appraisal of the
Subsidiary." The Parent will pay the fees and expenses of the Distribution
Agent in connection with such Distribution and sales, which is estimated to be
approximately $8,100.
No holder of the Parent's Common Stock will be required to pay any
cash or other consideration for the shares of the Subsidiary's Common Stock to
be received in the Distribution or to surrender or exchange shares of the
Parent's Common Stock or to take any other action in order to receive the
Subsidiary's Common Stock pursuant to the Distribution.
RESULTS OF THE DISTRIBUTION
After the Distribution, the Subsidiary will be a separate public
company which will be engaged in the alternative fuels conversion business.
The number and identity of the holders of the Subsidiary's Common Stock to be
distributed in the Distribution will be, immediately after the Distribution,
substantially the same as the number and identity of the holders of the
Parent's Common Stock on the Record Date; however, the Parent will own after
the Distribution approximately 42% of the outstanding shares of the
Subsidiary's Common Stock and the directors of the Parent will own
approximately 10% of the outstanding shares of the Subsidiary's Common Stock.
Immediately after the Distribution, the Subsidiary expects to have
approximately 1800 holders of record of the Subsidiary's Common Stock based on
the number of record stockholders and outstanding shares of the Parent's Common
Stock as of the close of business on January 10, 1997 and the distribution
ratio of one share of Subsidiary Common Stock for every five shares
5
<PAGE> 8
of Parent's Common Stock. The Distribution will not affect the number of
outstanding shares of Parent's Common Stock or any rights of the Parent's
shareholders.
APPRAISAL OF THE SUBSIDIARY
In connection with the Distribution, the Parent's Board of Directors
obtained an appraisal from David P. Martin, an investment banker, as to the
fair market value, as of September 13, 1996, of all of the outstanding shares
of the Subsidiary's common stock (4 million shares). Mr. Martin determined the
range of the fair market value of all of the Subsidiary's outstanding common
stock was between $440,000 and $600,000 or $0.11 and $0.15 per share. He
concluded the midpoint of the range ($520,000 of $0.13 per share) was
ExproFuel's most probable fair market value. A copy of Mr. Martin's appraisal
is attached as Annex I to this Information Statement.
In reaching his conclusion, Mr. Martin followed the guidelines set
forth in Revenue Ruling 59-60 for the valuation of securities of closely held
companies. This method involved consideration of all available financial data,
including, but not limited to, the following: (i) the nature and history of the
business; (ii) the economic outlook in general and the condition and outlook of
the industry; (iii) the net asset value of ExproFuels and the financial
condition of the business; (iv) the earning capacity of ExproFuels; (v) the
capacity for paying dividends; (vi) whether or not ExproFuels had goodwill or
other intangible value; (vii) previous sales or purchases of shares and the
size of the block to be valued; and (viii) the market price of the securities
of companies involved in the same or similar line of business having their
securities actively traded in a free and open market, either on an exchange or
over-the-counter. In determining the weight to be given to the various
factors, Mr. Martin exercised his judgment based on his experience as an
investment banker, and followed the recommendations in Revenue Ruling 59-60 as
amended. Mr. Martin has no current or anticipated financial interest in any of
the securities being valued. There is no relationship between The Exploration
Company or ExproFuels and Mr. Martin which would influence his opinion of fair
market value.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
The Distribution will not qualify as a tax free spin-off under Section
355 of the Internal Revenue Code of 1986, as amended (the "Code"). As a
result,
(1) Each shareholder receiving shares of the Subsidiary's
Common Stock in the Distribution will be treated as if such
shareholder received a taxable distribution in an amount equal to the
fair market value of the Subsidiary's Common Stock received, which
would result in (a) a dividend to the extent of such shareholder's pro
rata share of the Parent's current and accumulated earnings and
profits for 1997 (there is no accumulated earnings and no earnings are
anticipated for 1997) and (b) a reduction in such shareholder's pro
rata basis in the Parent's Common Stock to the extent the amount
received exceeds such shareholder's share of earnings and profits and
a capital gain to the extent the amount received exceeds the
shareholder's basis provided that such Parent's Common Stock is held
as a capital asset by such shareholder on the Distribution Date.
(2) Any shareholder of the Parent receiving cash in lieu of
fractional shares of the Subsidiary's Common Stock will be treated as
if such shareholder received a taxable distribution in an amount equal
to the cash received, which would result in (a) a dividend to the
extent of such shareholder's pro rata share of the Parent's current
and accumulated earnings and profits for 1997 (there is no accumulated
earnings and no significant earnings are anticipated for 1997) and (b)
a reduction in such shareholder's basis in the Parent's Common Stock
to the extent the amount received exceeds such shareholder's share of
earnings and profits and a capital gain to the extent the amount
received exceeds the shareholder's basis provided that such Parent's
Common Stock is held as a capital asset by such shareholder on the
Distribution Date.
(3) The holding period of the Subsidiary's Common Stock
received by the shareholders of the Parent will include the holding
period of the Parent's Common Stock with respect to which the
Distribution will be made, provided that such shareholders held the
Parent's Common Stock as a capital asset on the Distribution Date.
(4) Gain (but not a loss) may be recognized by the Parent upon
the Distribution.
The summary of federal income tax consequences set forth above is for
general reference only and does not purport to cover all federal income tax
consequences that may apply to all categories of shareholders. All
shareholders should consult their own tax
6
<PAGE> 9
advisors regarding the particular federal, foreign, state and local tax
consequences of the Distribution to such shareholders. See "Certain Special
Considerations-Certain Tax Considerations."
TRADING OF THE SUBSIDIARY'S COMMON STOCK
There is not currently a public market for the Subsidiary's Common
Stock. Prices at which the Subsidiary's Common Stock may trade after the
Distribution cannot be predicted. Until the Subsidiary's Common Stock is fully
distributed and an orderly market develops, the prices at which trading in such
stock occurs may fluctuate significantly. The prices at which the Subsidiary's
Common Stock trades will be determined by the marketplace and may be influenced
by many factors, including, among others, the depth and liquidity of the market
for the Subsidiary's Common Stock, investor perception of the Subsidiary and
the industry in which the Subsidiary participates, the Subsidiary's dividend
policy and general economic and market conditions. See "Certain Special
Considerations-Dividend Policy," and "Certain Special Considerations - No
Current Public Market for the Subsidiary's Common Stock."
The Subsidiary's Common Stock may be traded on the Electronic Bulletin
Board after the Distribution. The Subsidiary initially will have approximately
1800 stockholders of record, based primarily upon the number of stockholders of
record of the Parent as of January 10, 1997. See "Certain Special
Considerations - No Current Public Market for the Subsidiary's Common Stock."
The Subsidiary's Common Stock distributed to the Parent's shareholders
in the Distribution will be freely transferable, except for (i) securities
received by persons who may be deemed to be "affiliates" of Parent within the
meaning of Rule 144, in which case such persons may not publicly offer or sell
the Subsidiary's Common Stock received in connection with the Distribution
except pursuant to a registration statement under the Securities Act or
pursuant to Rule 144 and (ii) securities received by persons that were holders
of restricted shares of the Parent's Common Stock, in which case such holders
will receive Subsidiary's Common Stock containing the same such restrictions.
CONDITIONS
The Parent's Board has conditioned the Distribution upon, among other
things, the registration of the Subsidiary's Common Stock with the SEC on Form
10 under the Exchange Act. Any of these conditions may be waived in the
discretion of the Parent's Board.
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by the Parent solely to
provide information to the Parent's shareholders who will receive the
Subsidiary's Common Stock in the Distribution. It is not, and is not to be
construed as, an inducement or encouragement to buy or sell any securities of
the Parent or the Subsidiary. The information contained in this Information
Statement is believed by the Parent to be accurate as of the date set forth on
its cover. Changes may occur after that date, and neither the Subsidiary nor
the Parent will update the information except in the normal course of their
respective public disclosure practices.
7
<PAGE> 10
CERTAIN SPECIAL CONSIDERATIONS
Shareholders of the Parent should be aware that the Distribution and
ownership of the Subsidiary's Common Stock involves certain special
consideration, including those described below and elsewhere in this
Information Statement, which could adversely affect the value of their
holdings. Neither the Subsidiary nor the Parent makes, nor is any other person
authorized to make, any representation as to the future market value of the
Subsidiary's Common Stock. Any forward-looking statements contained in this
Information Statement should not be relied upon as predictions of future
events. Such statements are necessarily dependent on assumptions, data or
methods that may be incorrect or imprecise and that may be incapable of being
realized.
LACK OF OPERATING HISTORY AS A SEPARATE ENTITY
The alternative fuels conversion business was conducted by the Parent
as a separate division from late 1992 until August 1996, when the Subsidiary
was organized into a wholly-owned subsidiary of the Parent. Accordingly, the
Subsidiary does not have a lengthy operating history as an independent or a
public company. Management of the Subsidiary has also historically relied upon
the Parent for certain administrative services required by the Subsidiary.
Because the Subsidiary is currently responsible for maintaining its own
administrative functions, its results of operations and financial condition may
be materially and adversely affected. See "Relationship Between the Subsidiary
and Parent After the Distribution."
FINANCIAL CONDITION
At August 31, 1996, ExproFuels had cash on hand of $20,871, positive
working capital of $49,031 and equity of $908,179. However, it had a
deficiency of quick assets (cash and receivables) to current liabilities of
$114,282, and its positive cash position was primarily due to cumulative
contributions of operating capital of $3,526,136 from the Parent ($1,192,095 in
1996, $1,224,085 in 1995 and $882,566 in 1994). The Parent has subsequently
advanced the Subsidiary an additional $40,000 on September 13, 1996 and an
additional $38,000 on December 12, 1996. ExproFuels has raised $400,000 in
long-term, convertible debt financings, which mature through fiscal year 2000.
Additionally, the Company has incurred expenses of $40,000 for rent and
overhead to November 30, 1996. For 1997, ExproFuels must continue to seek
additional sources of operating capital. Capital requirements to sustain
ExproFuels' growth and on-going operations are projected to be at least
$250,000 for capital expenditures and an additional $750,000 in working
capital. The Subsidiary's financial position poses certain risks, including
the risk that (i) the Subsidiary's cash flow from operation will be
insufficient to maintain operations; (ii) the Subsidiary will be unable to
obtain financing in the future for working capital, capital expenditures and
general corporate purposes; and (iii) the Subsidiary will be more vulnerable to
economic downturns and may be unable to withstand competitive pressures.
CERTAIN TAX CONSIDERATIONS
Because the Distribution does not qualify as tax free under Section
355 of the Code, in general a corporate tax will be payable by the consolidated
group of which the Parent is the common parent based upon the difference
between (i) the fair market value of the Subsidiary's Common Stock and (ii) the
adjusted basis of the Subsidiary's Common Stock. The corporate level tax will
be payable by the Parent and, under the consolidated return regulations, each
member of the consolidate group (ie, the Subsidiary) is severally liable for
such tax liability; however, because the Parent has a net operating loss
carryforward of $16,000,000, any tax due will be absorbed by the Parent's net
operating loss carryforward.
Furthermore, each shareholder receiving shares of the Subsidiary's
Common Stock in the Distribution will be treated as if such shareholder
received a taxable distribution in an amount equal to the fair market value of
the Subsidiary's Common Stock received, which would result in (a) a dividend to
the extent of such shareholder's pro rata share of the Parent's current and
accumulated earnings and profits for 1997 (there is no accumulated earnings and
no significant earnings are anticipated for 1997) and (b) a reduction in such
shareholder's pro rata basis in the Parent's Common Stock to the extent the
amount received exceeds such shareholder's share of earnings and profits and a
capital gain to the extent the amount received exceeds the shareholder's basis,
provided that such Parent's Common Stock is held as a capital asset by such
holder on the Distribution Date.
NO CURRENT PUBLIC MARKET FOR THE SUBSIDIARY'S COMMON STOCK
There is not currently a public market for the Subsidiary's Common
Stock and there can be no assurance as to the prices at which trading in the
Subsidiary's Common Stock will occur after the Distribution. Until the
Subsidiary's Common Stock is fully
8
<PAGE> 11
distributed and an orderly market develops, the prices at which trading in such
stock occurs may fluctuate significantly. The Subsidiary's Common Stock may
trade on the Electronic Bulletin Board following the Distribution. See "The
Distribution - Trading of the Subsidiary's Common Stock."
CHANGES IN TRADING PRICES OF THE PARENT'S COMMON STOCK
It is expected that Parent's Common Stock will continue to be listed
and traded on the NASDAQ Small-Cap Market after the Distribution. As a result
of the Distribution, the trading price range of the Parent's Common Stock may
be higher or lower than the trading price range of the Parent's Common Stock
prior to the Distribution. The combined trading prices of the Subsidiary's
Common Stock and the Parent's Common Stock held by shareholders after the
Distribution may be less than, equal to or greater than the trading prices of
the Parent's Common Stock prior to the Distribution. See "The Distribution -
Trading of the Subsidiary's Common Stock."
FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that at the time the
Parent effected the Distribution the Parent (i) was insolvent; (ii) was
rendered insolvent by reason of the Distribution; (iii) was engaged in a
business or transaction for which the Parent's remaining assets constituted
unreasonably small capital; or (iv) intended to incur, or believed it would
incur, debts beyond its ability to pay as such debts matured, such court may be
asked to void the Distribution (in whole or in part) as a fraudulent conveyance
and require that the shareholders return the special dividend (in whole or in
part) to the Parent, or require the Subsidiary to fund certain liabilities for
the benefit of creditors. The measure of insolvency for purposes of the
foregoing will vary depending upon the jurisdiction whose law is being applied.
Generally, however, the Parent would be considered insolvent if the fair value
of its respective assets were less than the amount of its liabilities or if it
incurred debt beyond its ability to repay such debt as it matures. In
addition, under Section 7-106-401 of the Colorado Revised Statutes ("CRS")
(which is applicable to the Parent in the Distribution) the Parent generally
would not be able to make a distribution to its shareholders if its total
assets would be less than its total liabilities or if the Parent would not be
able to pay its debts as they become due in the usual course of business.
The Parent's Board and management believe that, based upon the audited
financial statements of the Parent, the Parent will be solvent at the time of
the Distribution (in accordance with the foregoing definitions), will be able
to repay its debts as they mature following the Distribution and will have
sufficient capital to carry on its businesses.
COMPETITION
There are several very large companies that compete with the
Subsidiary in the alternative fuels conversion business. The Subsidiary may be
at a competitive disadvantage since these other companies have much greater
financial resources, larger technical staffs and greater ability to bear the
economic risks inherent in this new industry. The Subsidiary's revenues,
profitability and future rate of growth are substantially dependent on its
ability to compete and increase its sales. In particular, its ability to
compete for the conversion of private fleets depends on its ability to reduce
costs and finance conversions for the customer. ExproFuels' size allows it to
control its cost of conversion; however, its relatively small size limits its
ability to finance customers.
DEPENDENCE ON CERTAIN CUSTOMERS
During 1996, three purchasers of the ExproFuels' alternative fuels
vehicles conversion services and products accounted for 25%, 8%, and 8%,
respectively, of its total sales. In the event any or all these customers do
not continue as customers, the Subsidiary believes that additional customers
will continue to be found for such services and products at comparable prices;
however, should the Subsidiary be unsuccessful in such efforts, its results of
operations and financial condition will be materially and adversely affected.
See "Business-Customers" and Note 9 to the Subsidiary's Financial Statements.
GOVERNMENTAL REGULATION
The conversion of alternative fuels vehicles are regulated by both
state and federal authorities. The executive and legislative branches of
government, at both the state and federal levels, have in the past and it
appears will continue to periodically propose and
9
<PAGE> 12
consider proposals for regulation with respect to the development and use of
alternative fuels, energy conservation, environmental protection, as well as
various other related programs. Additional regulation, changes in regulation
or re-regulation relating to the above subjects could adversely affect the
Subsidiary. See "Business-General Regulations."
CONCENTRATION OF VOTING POWER
Following the Distribution, the directors and executive officers of
the Subsidiary will beneficially own approximately 54.5% of the outstanding
shares of the Subsidiary's Common Stock. As a result, the directors and
executive officers of the Subsidiary will have the ability to affect the vote
of the Subsidiary's shareholders on significant corporate actions requiring
shareholder approval, including mergers, share exchanges or sales of all or
substantially all of the Subsidiary's assets. With such voting power, the
directors and executive officers of the Subsidiary may also have the ability to
delay or prevent a change in control of the Subsidiary. See "Security
Ownership of Certain Beneficial Owners and Management."
DIVIDEND POLICY
The future payment of dividends by the Subsidiary will depend on
decisions that will be made by the Subsidiary's Board from time to time based
on the results of operations and financial condition of the Subsidiary and such
other business considerations as the Subsidiary's Board considers relevant.
The Subsidiary does not anticipate paying any cash dividends in the foreseeable
future.
RELATIONSHIP BETWEEN THE SUBSIDIARY AND THE PARENT
AFTER THE DISTRIBUTION
For the purpose of governing certain of the ongoing relationships
between the Subsidiary and the Parent after the Distribution and to provide
mechanisms for an orderly transition, the Subsidiary and the Parent have
entered into the various agreements, and will adopt policies, as described
below.
LEASE AGREEMENT
The Parent has agreed to lease office space and equipment to the
Subsidiary after the Distribution, on a month to month basis, for $4,000 per
month. See "Property."
TAX SHARING AGREEMENT
The Subsidiary and the Parent have agreed that, with respect to
periods ending on or before the last day of the year in which the Distribution
occurs, the Parent is responsible for (i) filing both consolidated federal tax
returns of the Parent and the Subsidiary and applicable state tax returns; and
(ii) paying the taxes relating to such returns (including any subsequent
adjustments resulting from the redetermination of such tax liabilities by the
applicable taxing authorities). The Subsidiary is responsible for filing
returns and paying taxes related to the Subsidiary for subsequent periods. The
Subsidiary and the Parent have agreed to cooperate with each other and to share
information in preparing such tax returns and in dealing with other tax
matters.
ADDITIONAL AGREEMENTS
The Subsidiary will assume, with respect to the Subsidiary's
employees, all responsibility for liabilities and obligations as of the
Distribution Date for medical plan coverage. The Parent will assume, with
respect to the Parent's employees, all responsibilities for all liabilities and
obligations as of the Distribution Date for medical plan coverage. The
Subsidiary will pay the Parent $6,000 per month for portions of time of certain
employees of the Parent, particularly those in the accounting department, who
are utilized by the Subsidiary.
The Parent and the Subsidiary have agreed that the Distribution does
not constitute a termination of employment for the Subsidiary's Employees or
the Parent's Employees and those employees of the Parent or of the Subsidiary
who are employed immediately prior to the Distribution Date will not be deemed
severed from employment from the Parent or of the Subsidiary for purposes of
any policy, plan, program or agreement that provides for the payment of
severance, salary continuation or similar benefits based on periods of past
service.
10
<PAGE> 13
REGULATORY APPROVALS
The Subsidiary does not believe that any material federal or state
regulatory approvals will be necessary in connection with the Distribution.
ACCOUNTING TREATMENT
The historical financial statements of the Subsidiary present its
financial position, results of operations and cash flows as if it was a
separate entity for all periods presented. The Parent's historical basis in
the assets of the Subsidiary has been carried over.
CAPITALIZATION
The following table sets for the capitalization of the Subsidiary as
of August 31, 1996 and as of November 30, 1996 on a historical and proforma
basis. The capitalization table should be read in conjunction with the
Subsidiary's Financial Statements, the notes thereto, and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations," each
contained elsewhere herein.
<TABLE>
<CAPTION>
AUGUST 31, 1996 NOVEMBER 30, 1996 NOVEMBER 30, 1996
HISTORICAL HISTORICAL PRO FORMA (2)
<S> <C> <C> <C>
Total Debt (1) . . . . . . . . . . . . . $ 85,164 $ 277,341 $ 277,341
Equity . . . . . . . . . . . . . . . . . 908.179 697,629 697,629
-------- ---------- -----------
Total capitalization(2) . . . . . . . . $993,343 $ 974,970 $ 974,970
======== ========== ===========
</TABLE>
- --------------
(1) Includes current portion of long-term debt and capital lease obligations.
(2) There are no pro-forma adjustments required as a result of the spin-off of
ExproFuels, Inc.
11
<PAGE> 14
SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary historical financial data
derived from the Subsidiary's audited Financial Statements for the three
most recent fiscal years ended August 31, 1996 and unaudited Financial
Statements as of and for the quarter ended November 30, 1996 and November
30, 1995. The Subsidiary's Financial Statements present the financial
position, results of operations and cash flows of the Subsidiary as if it
were a separate company operating for all periods presented. The information
in the table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Subsidiary included elsewhere herein. No pro forma
financial data reflecting the effect of the Distribution is provided as an
adjustment to the historical financial data because, in Management's opinion,
such pro forma financial data would not differ materially from the historical
financial data.
<TABLE>
<CAPTION>
QUARTER ENDED
Fiscal Year NOVEMBER 30,
1996 1995 1994 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues:
Conversion sales . . . . . . . . . . . . $ 557,641 $ 578,362 $ 627,366 $ 157,333 $ 91,255
Fuel station construction sales . . . . . 301,115 97,241 162,603 19,453 75,798
Alternative fuels sales . . . . . . . . . 187,645 97,748 31,664 85,694 33,345
--------- --------- --------- --------- ---------
Total revenues . . . . . . . . . . . 1,04,640 773,351 821,633 262,480 200,498
Costs and expenses:
Costs of sales . . . . . . . . . . . . . 752,024 646,078 701,198 203,988 135,433
Shop general and administrative . . . . . 484,920 415,944 302,647 116,000 125,827
Depreciation and amortiza.i.n. . . . . . . 85,574 92,302 77,543 21,833 22,377
Abandonment of technological
rights . . . . . . . . . . . . . . . - - 144,681 - -
General and administrative . . . . . . . 404,708 587,916 431,107 138,925 94,678
--------- --------- --------- --------- ---------
Total costs and expenses 1,727,226 1,742,240 1,657,176 480,746 378,315
--------- --------- --------- --------- ---------
Profit (loss) from operations (680,825) (968,889) (835,543) (218,266) (177,817)
Other income (expense):
Sublease rental income . . . . . . . . . 58,500 6,750 - 13,500 13,500
Interest income . . . . . . . . . . . . . 959 818 3 208 258
Interest expense . . . . . . . . . . . . (23,648) (24,560) (37,367) (5,992) (6,747)
--------- --------- --------- --------- ---------
Total other income . . . . . . . . . 35,811 (16,992) (37,364) 7,716 7,011
--------- --------- --------- --------- ---------
Net loss . . . . . . . . . . . . . . . . . $ (645,014) $ (985,881) $ (872,907) $ (210,550) $ (170,806)
========= ========= ========= ========= =========
Earnings (loss) per share of common
stock . . . . . . . . . . . . . . . . . . $ (.16) $ (.25) $ (.22) $ (.05) $ (.04)
Weighted average number of
common shares outstanding . . . . . . . . 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
BALANCE SHEET DATA:
Cash and cash equivalent $ 20,871 $ 7,263 $ 4,711 $ 28,938 $ 14,397
Total assets 1,249,527 842,007 885,977 1,345,535 1,017,731
Total debt(1) 85,164 125,260 344,679 277,341 253,094
OTHER DATA:
Net cash (used) in operating activities . $ (626,116) $(1,115,043) $ (687,028) $ 183,937 $ (56,162)
Net cash (used) in investing activities . (512,275) (99,658) (266,821) (40,173) (176,001)
Net cash provided by financing
activities . . . . . . . . . . . . . 1,151,999 1,217,253 955,451 232,177 239,297
</TABLE>
- ----------------
(1) Total debt includes current portion of debt and capital lease obligations.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Subsidiary was capitalized with the ExproFuels' division's assets
in August 1996, enabling it to conduct the alternative fuels conversion
business previously conducted by the Parent through such division beginning in
late 1992. The following analysis and the related financial statements
included elsewhere herein are presented as if the Subsidiary were a separate
company for all periods presented as discussed in Note 1 to the Subsidiary's
Financial Statements.
RESULTS OF OPERATIONS
Quarter Ended November 30, 1996 Compared to Quarter Ended November 30,
1995
ExproFuels revenue for the quarter ended November 30, 1996 increased
by 31% to $262,480 compared to the corresponding period of the previous fiscal
year. Contributing most significantly was a 72% increase in conversion sales
to $157,333 primarily due to new contracts with San Antonio area school
districts and mass transit fleet operators. Alternative fuel sales increased
by over 250% to $85,694 for the current quarter due to the addition of new
fleet fueling contracts and 6 new company owned fuel stations placed in
operation subsequent to November, 1995. Average propane sales increased to
over 35,000 gallons per month during the current quarter compared to
approximately 14,000 gallons per month in the corresponding period of 1995.
Gross profit margins declined from 32% in 1995 to 22% for the current quarter.
The reduced margins reflect a changing sales mix, with a drop in high margin
construction sales for the quarter, combined with increases in conversion and
alternative fuel sales which historically are lower gross margin activities.
Overall general and administrative expenses increased by approximately 15% over
the corresponding previous quarter due primarily to wage increases, the
establishment of health insurance benefits, as well as incremental corporate
office rent, payroll and administrative expenses charged to the Company
commencing in September, 1996, while like expenses were absorbed by the Parent
in prior periods.
1996 Compared to 1995
ExproFuels' revenue increased by 35% in 1996 to $1,046,000 from
$773,000 in 1995, primarily due to an increase of $204,000 in construction
sales and a $90,000 increase in alternative fuel sales. The fuel sales
increase reflects the growing number of company owned fuel stations and fleet
fuel customers. Gross profits margins improved from 16% in 1995 to 28% in 1996
reflecting less incidents of price cutting by industry competitors, thereby
allowing ExproFuels to set favorable sales prices for its conversions and
construction services. Overall, general and administrative expenses decreased
by approximately $100,000 in 1996 from prior year levels due to ongoing cost
control efforts conducted at all levels of the Subsidiary and ExproFuels was
generally able to maintain its fixed costs at or under prior year levels, while
sales and marketing efforts achieved significant gross sales increases. As a
result, ExproFuels' loss from operations declined by $288,064, or 30%, from
$968,889 in 1995 to $680,825 in 1996 and its overall net loss declined by
$340,867, or 35%, from $985,881 in 1995 to $645,014 in 1996.
1995 Compared to 1994
ExproFuels' revenues experienced a net decrease of $48,000, or 7.7%,
from 1994 to 1995. Components of this net decrease were a $49,000 decrease in
conversion sales and a $65,000 decrease in fuel station construction that was
partially offset by a $66,000 increase in alternative fuel sales. Lower
conversion sales were primarily the result of the closing of its New Orleans
conversion facilities. Lower fuel station construction revenues reflect
ExproFuels' decision to build more company owned fuel stations to support its
growing fuel sales. Alternative fuels sales increased significantly due to the
first full year of operation of company owned fuel stations in Plano and
Dallas, as well as additional fuel stations being placed in operation during
1995 under a contract with the Texas Department of Transportation.
Costs of sales decreased by $55,000, or 7.8%, from 1994 to 1995. This
decrease almost matched the Company's decrease in revenues.
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Other costs included a decrease of $145,000 due to the one time charge
in 1994 for writing off of the Company's previously acquired technological
rights. General and administrative expense increased by $270,000, or 36.8%,
from 1994 to 1995. Included in this change are significantly higher costs
associated with the Company's New Orleans operations, which closed in 1995, and
higher than expected startup costs with its Arizona operations.
Overall, ExproFuels' loss from operations increased by $133,346, or
16%, from $835,543 in 1994 to $968,889 in 1995 and its net loss increased by
$112,974, or 13%, from $872,907 in 1994 to $985,881 in 1995.
CAPITAL RESOURCES AND LIQUIDITY
At August 31, 1996, ExproFuels had cash on hand of $20,871, positive
working capital of $49,031 and equity of $908,179. However, it had a
deficiency of quick assets (cash and receivables) to current liabilities of
$114,282, and its positive cash position was primarily due to cumulative
contributions of operating capital of $3,526,136 from the Parent ($1,192,095 in
1996, $1,224,085 in 1995 and $882,566 in 1994). The Parent has subsequently
advanced the Subsidiary an additional $40,000 on September 13, 1996 and an
additional $38,000 on December 12, 1996. ExproFuels has raised $400,000 in
long-term, convertible debt financings, which mature through fiscal year 2000.
Additionally, the Company has incurred expenses of $40,000 for rent and
overhead to December 31, 1996. For 1997, ExproFuels must continue to seek
additional sources of operating capital. Capital requirements to sustain
ExproFuels' growth and on-going operations are projected to be at least
$250,000 for capital expenditures and an additional $750,000 in working
capital. The Subsidiary's financial position poses certain risks, including
the risk that (i) the Subsidiary's cash flow from operation will be
insufficient to maintain operations; (ii) the Subsidiary will be unable to
obtain financing in the future for working capital, capital expenditures and
general corporate purposes; and (iii) the Subsidiary will be more vulnerable to
economic downturns and may be unable to withstand competitive pressures.
In fiscal year 1996, the Subsidiary's capital expenditures included
approximately $80,000 for equipment purchases for use in U.S. operations.
Additional capital investments and advances totaling $442,000 were made by
ExproFuels in CNG International, L.L.C. See "Business-International
Operations" and Note 3 to the Subsidiary's Financial Statements.
At August 31, 1995, ExproFuels had cash on hand of $7,263, negative
working capital of $37,685, a deficit in shareholders' equity of $1,972,943 and
a deficiency of quick assets to current liabilities of $167,012.
In fiscal year 1995, the Subsidiary's capital expenditures included
approximately $101,000 for equipment purchases for use in the U.S. operations,
and $150,000 for ExproFuels' growing participation in international operations
through its joint venture investment in CNG International, L.L.C. See
"Business-International Operations."
INFLATION
The Company's expenses are impacted by inflation. Management believes
that over time, however, the Subsidiary will be able to raise prices and
sustain profit margins.
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BUSINESS
GENERAL
The Subsidiary is a recently formed corporation which, upon
completion of the Distribution, will be a publicly held company that is engaged
in the alternative fuels conversion business. The Subsidiary converts gasoline
and diesel engines to operate on compressed natural gas (CNG), liquified
petroleum gas (LPG) and liquified natural gas (LNG). The Subsidiary also
designs, builds, owns, operates and provides fuel for alternative fuel
stations. The Subsidiary currently owns and operates twenty LPG motor fuel
stations in Texas, owns and operates conversion facilities in San Antonio,
Dallas, and Tucson and operates affiliated conversion facilities in Houston and
Phoenix. The Company also owns an 11% interest in CNG International, L.L.C., a
Tennessee limited liability company that operates an alterative fuels
conversion business in Uzbekistan, a former Soviet Republic.
In late 1992, the Parent entered the alternative fuels vehicles (AFV)
conversion business through the creation of its own alternative fuels division,
ExproFuels. The alternative fuels division's focus included the conversion of
internal combustion engines to run alternately on LPG, CNG or LNG, and the
design, installation and operation of alternative fuel refueling stations. The
ExproFuels' division initiated ongoing operations in Texas and Arizona, while
actively pursuing international opportunities in Europe, Asia and Latin
America. Since 1994, gross revenues from the ExproFuels' division have
surpassed gross revenues from the Parent's oil and gas operations, although
profitable operating levels have not been attained. In late 1996, the Parent
determined it was in its best interest to refocus its resources on its core oil
and gas industry. Accordingly, the ExproFuels' division was contributed to the
Company in August, 1996, in exchange for 100% of the outstanding shares of the
Subsidiary's Common Stock. On August 30, 1996, the Parent's Board paid 10% of
the outstanding shares of the Subsidiary's Common Stock to the Parent's
directors in exchange for past services to the Parent, thereby reducing the
Parent's ownership interest in the Subsidiary from 100% to 90%. On September
3, 1996, the Parent's Board declared a stock dividend of 1,910,000 shares (or
approximately 48%) of the Subsidiary's Common Stock to its shareholders as of
the Record Date.
The Subsidiary's business strategy is to install additional fuel
stations during fiscal year 1997, as well as to continue international
marketing and development efforts in Asia and Latin America. The Subsidiary's
management is also considering various potential domestic acquisition
alternatives with the goal of reaching operational efficiencies enabling
ExproFuels to reduce current per unit costs of purchasing, storage and
distribution of alternative fuels. Besides significantly enhancing existing
net operating margins, such acquisitions could enable ExproFuels to improve its
competitive stance in existing markets while facilitating expansion into new
markets. The Subsidiary's management continues to pursue adequate sources of
equity and debt financing for funding the acquisition of established operating
business units, assuming they will provide operating cash flows to ExproFuels
within an acceptable timeframe.
While a division, the Subsidiary's focus included the conversion of
internal combustion engines to run alternatively on LPG, CNG or LNG, and the
installation and design of alternative fuel refueling stations. During its
three and one-half years as a division of the Parent, ExproFuels' business
strategy was to:
1. Provide state of the art internal combustion engine conversions
utilizing three natural gas based alternative fuels on a
worldwide basis: CNG, LNG or LPG.
2. Provide turnkey refueling solutions for the convenient and
safe delivery of alternative fuels.
3. Position the Subsidiary to participate in the ongoing business
of supplying alternative fuels to its expanding conversion
customer base.
4. Maintain an alternative fuel and equipment neutral position,
allowing the Subsidiary's marketing function complete
flexibility in responding to the diverse market opportunities
with the "best fit" fuel mix and equipment configuration
available, as demanded by an extremely specialized and
constantly changing market place.
5. Establish a strong presence in selected U.S. markets prior to
1996 when many more strenuous Environmental Protection Agency
and Department of Energy mandates were originally scheduled to
come into effect.
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The combination of expertise in vehicle conversions, refueling station
construction and fuel sales formed the basis of an additional potentially
effective market niche: financing conversions and/or fuel stations through
savings generated using the selected alternative fuel. ExproFuels provided
alternative fuel vehicles conversions to a growing number of private fleets as
well as the large mandated governmental markets at a reasonable and competitive
cost and followed up these conversions with superior, ongoing service and
maintenance.
ExproFuels also offered a cost-free alternatively fueled vehicles
(AFV) conversion program to qualified fleets in exchange for long-term fuel
contracts. This program was intended to initiate the heaviest fuel consumers
into alternative fuels use in the least painful manner possible, while
providing ExproFuels a base from which to expand its fuel service capabilities.
Through detailed cost and savings analysis, ExproFuels outlined a cost-savings
plan for fleets which qualified for ExproFuels' long-term fuel contract program
and would assure the fleet operator's compliance with current laws and
anticipated standards. The programs were set up so that the customer's fuel
price could be based on either a percentage of unleaded gasoline, assuring a
fixed fuel cost savings, or various other fuel pricing scenarios. ExproFuels
also provided clients with information regarding tax credits, tax deductions,
pollution credits and other incentives being offered by various federal and
state programs.
ExproFuels actively solicits vehicle conversions, maintenance
contracts and fuel service contracts from fleets that are either mandated to
comply in the various alternative fuels and clean air legislation initiatives
or choose to convert their fleet for various economic and environmental
benefits.
In its first three full years of operation, the Subsidiary's customers
have come to include the U.S. Government, the Governments of Uzbekistan and
Colombia, several U.S. state agencies including the Texas Department of
Transportation, the Railroad Commission of Texas, the General Services
Commission of Texas, the Department of Transportation of the State of Louisiana
(through Ecogas, Inc.), and the Department of Administration for the State of
Arizona. Additionally, ExproFuels converts vehicles and builds refueling
stations for parishes, school districts, transit systems, utilities,
municipalities, private fleets and light industrial users.
TEXAS OPERATIONS
San Antonio Facilities:
The first conversion center operated by the Subsidiary was opened in
May, 1993, in San Antonio. Since its opening, the center has converted over
400 vehicles to LPG, including buses, vans, forklifts, industrial engines, and
assorted automobiles and trucks. At August 31, 1996, ExproFuels' vehicle
conversion backlog under contract stood at 111 units. The facility has
designed and installed 24 private use LPG fuel stations since its opening, with
six opened during the current fiscal year. 19 of these fuel stations are owned
and operated by ExproFuels. Monthly LPG motor fuel sales from all facilities
has grown from 340 gallons during December, 1994 to over 36,000 gallons during
August, 1996, with an annual volume of over 231,000 gallons for the current
fiscal year.
Based on recent monthly activity, the Subsidiary's management believes
annual fuel sales at its San Antonio facility may increase by at least 100% in
fiscal year 1997. Current year construction activity included a compressed
natural gas fuel station contract at Kelly AFB in San Antonio. The fueling
facility is one of the largest in the region, valued at over $260,000. In
fiscal year 1997, the Subsidiary expects to increase the volume of CNG
conversion maintenance and repair work it now performs for the expanding Kelly
AFB and Lackland AFB natural gas vehicle fleets.
Dallas Facilities:
The Dallas conversion center opened in May, 1994. Since its opening,
the center has converted over 50 vehicles, while its ongoing customers include
four municipalities and three commercial fleets. The Subsidiary was recently
selected as the ongoing preferred contractor for the City of Plano for 80
additional LPG conversions and a two year LPG fuel supply contract. The final
award of the contract is pending the finalization of current lease negotiations
for a second fuel station location on Texas Utilities property in the Plano
area. The Subsidiary expects to continue the development of its network of
fueling sites for new fleet customers as well as for the existing alternative
fuel-powered vehicles in the Dallas Metroplex. During the current fiscal year,
the Dallas facility was awarded a service contract by the Texas Department of
Transportation involving the testing of CNG cylinders on existing vehicles over
a two year contract period. The contract is valued at over $75,000 and
compliments the ongoing fleet repair and maintenance business performed in the
Dallas facility. Current year sales reached approximately $158,000, including
$90,000 in fuel sales. Based on recent activity, the Subsidiary expects a
significant increase in overall volumes for fiscal year 1997 at the Dallas
center.
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ARIZONA OPERATIONS
ExproFuels entered the Arizona market during 1995, with the opening of
affiliated centers in Phoenix and Tucson to convert vehicles and supply
conversion kits under a contract that it had been awarded by the State of
Arizona. The Company began offering its services through existing, locally
owned automotive repair facilities under a management agreement with
Arizona-based Environmental Fuel Systems. The existing facilities provided
traditional automotive repair services to the motoring market place while
remaining available to the Subsidiary when needed for conversions. ExproFuels
has converted over 70 vehicles since opening in Arizona through conversion
contracts with 5 municipalities, the state of Arizona, school districts and
Davis Monthan AFB. Subsequent to August, 1996, the Subsidiary successfully
contracted for the conversion of 28 new vehicles to LNG for the use of the City
of Phoenix Department of Transportation. While state legislative changes
enacted during fiscal year 1996 have encouraged ExproFuels to maintain its
presence in the Arizona market, ongoing overhead reduction strategies will
continue until significant, continuous contracting opportunities are identified
and successfully developed. The Subsidiary is actively seeking more bidding
opportunities to expand its conversion and fueling business in Arizona.
LOUISIANA OPERATIONS
In early 1994, ExproFuels was selected as a subcontractor for Ecogas,
Inc., a Texas based company holding a contract to convert up to 25% of the
State of Louisiana's vehicles to CNG. ExproFuels was selected to convert
approximately one-half of these vehicles and opened a conversion facility in
New Orleans, as required under its agreement with EcoGas. Unfortunately,
Ecogas was never able to meet the conversion rates established in the contract
and the number of state vehicles submitted for conversion were not sufficient
to maintain profitable operations. A total of 94 vehicles were eventually
converted to CNG at the Subsidiary's facilities prior to the suspension of
operations during the 2nd quarter of 1995. ExproFuels successfully subleased
the New Orleans conversion center to an unrelated business on a noncancellable
basis, with sublease base terms extending through the base period of the
Subsidiary's original building lease.
INTERNATIONAL OPERATIONS
Throughout fiscal year 1995 and 1996, ExproFuels expanded its support
of existing projects as well as initiated new activities in various
international alternative fuels programs. As a recognized participant in this
emerging industry, the Subsidiary continues to come to the attention of
foreign-based public and private entities interested in bringing ExproFuels'
expertise to their countries. It is ExproFuels' continuing challenge to
identify and successfully participate in those foreign opportunities that offer
new, profitable markets for our proven technologies.
Uzbekistan:
During 1995, ExproFuels signed a participation agreement with American
Technical Institute (ATI) and American Engineering, Inc., both of Memphis,
Tennessee to provide project management, technical evaluation and additional
assistance in the development of various joint ventures with the Government of
Uzbekistan. The purpose of the joint ventures with the Government of
Uzbekistan is to participate with that nation, on a profitable basis, in the
conversion of a majority of government owned motor vehicles to operate on CNG
and to develop, own and operate the CNG fueling infrastructure throughout that
nation. The venture will participate in the development of a manufacturing
industry for primary conversion components within Uzbekistan. Detailed
in-country studies conducted during 1995 and 1996 support estimates of over
200,000 vehicle conversions and 300 CNG refueling stations to be built during
the first 5 years of the venture. Revenue projections from a portion of the
scheduled conversions and fuels station operations approximate the potential
revenues to be in excess of $200,000,000 to the American parties to the joint
venture.
Throughout fiscal year 1996, ExproFuels has continued to provide
significant support to the joint venture projects in Uzbekistan, while
maintaining its equity stake in the American portion of the venture at 11%.
Significant progress made throughout the current year include 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 American partners, led by American Engineering, Inc., as the
official partner to join with the Uzbek government to convert a large portion
of that country's vehicle fleet to operate on CNG; the signing of the
definitive joint venture agreements between American parties and Uzbek parties
in the U.S. Capital Building in August, 1996; and the
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opening of joint venture offices in Tashkent, the capital city of Uzbekistan
shortly thereafter. Subsequent to year end, final startup activities continue,
with initial vehicle conversions scheduled for the 2nd quarter of fiscal year
1997.
Latin America:
During the current year, ExproFuels has continued to participate in
the development of various Latin American programs relative to its expertise
and the public and private contacts it has gained over the last two years.
Many of these countries or regions are in the early stages of the introduction
of alternative fuels to their general public. The ongoing privatization of
state-owned oil and gas industries in most of these countries offers a special
window of opportunity for ExproFuels to participate in the development of
in-country alternative fuels infrastructure, conversions and associated
operations. Currently, a proposal remains pending with Ecopetrol, the
state-owned oil company of Colombia, for an extensive training program for the
safe use and development of LPG and CNG as motor fuels. Ecopetrol's
alternative fuels program has failed to develop at the rate the Colombian
government originally indicated. During fiscal 1996, the Subsidiary
participated in two trade exhibitions in Colombia which generated approximately
$12,000 in conversion equipment and fuel station parts sales to Ecopetrol, and
is currently pursuing in-country investors and developing local market
knowledge for the establishment of an alternative fuels products distribution
company. The Subsidiary is also participating in industry trade shows,
technical symposiums and other opportunities to introduce itself to the
marketplace in these developing markets. The Subsidiary is currently in the
process of establishing strategic alliances or joint ventures with key industry
participants in various countries and feels strongly that significant revenue
producing opportunities, currently being developed, will be confirmed during
the 2nd quarter of fiscal year 1997 and initiated within the current fiscal
year.
COMPETITION
There are several very large companies that compete with the
Subsidiary in the alternative fuels conversion business. The Subsidiary may be
at a competitive disadvantage since these other companies have much greater
financial resources, larger technical staffs and greater ability to bear the
economic risks inherent in this new industry. The Subsidiary's revenues,
profitability and future rate of growth are substantially dependent on its
ability to compete and increase its sales. In particular, its ability to
compete for the conversion of private fleets depends on its ability to reduce
costs and finance conversions for the customer. ExproFuels' size allows it to
control its cost of conversion; however, its relatively small size limits its
ability to finance clients. See "Certain Special Considerations-Financial
Condition."
CUSTOMERS
During 1996, three purchasers of the ExproFuels' alternative fuels
vehicles conversion services and products accounted for 25%, 8% and 8%,
respectively, of its total sales. In the event any or all these customers do
not continue as customers, the Subsidiary believes that additional customers
will continue to be found for such services and products at comparable prices;
however, should the Subsidiary be unsuccessful in such efforts, its results of
operations and financial condition would be materially and adversely affected.
See "Certain Special Considerations-Dependence on Certain Customers" and Note 9
to the Subsidiary's Financial Statements.
EMPLOYEES
As of January 19, 1996, the Subsidiary employed 14 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 regulation, changes in regulation or re-regulation
relating to the above subjects could adversely affect the Company. A listing of
the more significant current state and federal statutory authority for
regulation of the Subsidiary's current operations and business are provided
herein below.
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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 Clear Air Act authorized the
Environmental Protection Agency ("EPA") to establish maximum concentration
levels for six pollutants: carbon monoxide, nitrogen oxides, ozone, particulate
matter, sulfur dioxide and lead. The Clean Air Act requires that states, where
the concentrations exceed the standards, develop plans to control these
emissions and to reduce these contaminates. States which do not comply face
possible bans on new source construction, freezes on federal grants and
reduction in highway funds. If states fail to implement an adequate plan, the
EPA may implement its own control measures which include downtown parking
restrictions, staggered working hours, and gasoline rationing, as well as many
other actions.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments")
clarified how areas would be designated as non-attainment areas for ozone,
carbon monoxide and particulate matter in accordance with the severity of the
air pollution problem. In November 1991, the EPA identified 98 non-attainment
areas for ozone, 42 areas for carbon monoxide and 71 areas for particulate
matter. Additional areas may be added if their air quality declines below the
standards. Because automobiles, trucks and buses are among the biggest
contaminators, the Subsidiary has recognized the need for businesses and state
and local governments to convert their vehicles to run on clean fuels such as
LPG, CNG or LNG. The Subsidiary believes that these regulations will be strong
motivation to these entities to convert their vehicles, thereby increasing
activity in this newly emerging industry in which the Subsidiary is
participating. For example, beginning with 1998 models, fleets with 10 or more
vehicles capable of being centrally refueled in the 22 smoggiest cities (the
serious, severe and extreme ozone nonattainment areas plus Denver, Colorado for
carbon monoxide nonattainment) must begin to buy clean fuel vehicles.
Beginning in the model-year 1998, 30 percent of new passenger cars and most
categories of light trucks and vans bought for these fleets must be clean fuel
vehicles. The percentage rises to 50 percent in 1999 and 70 percent in 2000.
For heavy-duty vehicles including school buses and delivery vans, the phase-in
stays a constant 50 percent of new purchases beginning in 1998. Past history
has shown that mandates of this type are generally met by the purchase of new
gasoline or diesel vehicles and converting them to run on alternative fuels.
Also under the 1990 CAA Amendments are mandates for the EPA which began testing
urban bus fleets in 1994. If it is found that the buses are not meeting the
new standards in use, the EPA may mandate a switch to cleaner fuels in 48
cities with populations of more than 750,000.
The Energy Policy Act of 1992, as amended (the "Energy Policy Act"),
also provides federal mandates for AFV's. The primary aim of the Energy Policy
Act is to reduce dependence of the United States on crude oil imports. The
Energy Policy Act directly affects light-duty federal, state and some private
fleets of at least 20 vehicles that can be centrally refueled and are operated
in metropolitan areas with populations of 250,000 or more. The minimum federal
fleet requirements for light duty AFV are as follows: 5,000 in 1993; 7,500 in
1994; 10,000 in 1995; 25% in 1996; 33% in 1997; 50% in 1998; and 75% for 1999
and thereafter. In addition, federal fleets are mandated to use commercial
fueling facilities that offer alternative fuels to the public as much as
practicable. Purchases of light-duty vehicles by state governments are
required to be AFV in the following amounts: 10% in 1996; 15% in 1997; 25% in
1998; 50% in 1999; and 75% in 2000 and thereafter. Private sector companies
that make alternative fuels, such as natural gas, electric and LPG producing
companies, are required to introduce AFV's into their fleets as follows: 30% in
1996; 50% in 1997; 70% in 1998; and 90% in 1999 and thereafter. Executive
Order 12844, issued in April 1993, requires federal agencies to acquire,
subject to the availability of funds and life-cycle costs, AFV's in numbers
that exceed by 50% the requirements for 1993 through 1995 set forth in the
Energy Policy Act.
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
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schedules: 18% by 1996; 25% by 1997; 50% by 1999; and 75% by 2001. In
Louisiana, Acts 927 and 954 require that 30% of the state's vehicles be
converted to alternative fuels by September 1, 1994; 50% by September 1, 1996;
and 80% by September 1, 1998. Many states have similar legislation which
either legislates that conversions occur or gives incentives to help with the
conversions although punitive actions have not always followed non-compliance.
In March, 1995 SB 200 was passed by the Texas Legislature which
significantly affects certain sectors of the alternative fuels industry. The
bill reclassified reformulated gasoline as an alternative fuel, in recognition
of its cleaner, less polluting attributes. While effectively diminishing the
effect of upcoming deadlines on state regulatory mandates on some public and
private sector fleets operating in Texas, it established higher standards of
allowable emissions for certain public fleets, such as state agencies and
public transportation fleets. The Subsidiary believes that it will not be
significantly impacted by this legislation. Additionally, the Subsidiary is
closely monitoring the legislative developments in Arizona where it also
operates. HB 2002 was passed by the Arizona Legislature in late 1996 and
includes numerous beneficial provisions intended to encourage the use of LPG
and CNG by various categories of vehicle owners. Incentives include special
reduced rates for AFV license plates, special permission allowing AFV's to use
HOV lanes regardless of number of occupants, and the repeal of an $0.18 per
gallon use fuel tax on alternative fuels. The Subsidiary believes these
incentives, together with other incentives targeted at the public sector, will
allow alternative fuel conversions to be justified economically more readily by
many fleets throughout Arizona. As of year end, the Subsidiary was not aware
of any Arizona legislation which would significantly dilute that state's
mandate and related deadlines effecting the alternative fuel vehicles industry:
however, there can be no assurance that new legislation will not be forthcoming
in some future date which could adversely effect the Company's ability to
conduct its business in Arizona.
Environmental Regulation:
The Clean Air Act and the 1990 CAA Amendments have made improving the
air quality in the United States a major goal. To this end, the EPA has
established maximum permitted levels for six major air pollutants: carbon
monoxide, nitrogen oxide, ozone, particulate matter, sulfur dioxide and lead.
Certain metropolitan areas have been designated as non-compliance areas. These
areas have been classified as marginal, moderate or severe depending upon the
level of contamination. The EPA has established a time schedule for each of
these classifications to be brought within compliance with these two Acts.
ExproFuels converts vehicles to run on LPG, CNG or LNG which lowers the level
of the pollutants being emitted in the non-attainment area because these
alternative fuels are much cleaner-burning fuels than gasoline. ExproFuels is,
consequently, subject to the EPA standards for emissions from vehicles which
have been converted. Some states have adopted their own standards; most of
these have adopted those of the California Air Resources Board ("CARB") which
has been a leader in defining acceptable limits for pollutants. ExproFuels
must also comply with the applicable state regulations regarding the conversion
of vehicles and the sale of alternative fuels.
Federal and State Tax Considerations:
In October of 1992, Congress passed the Comprehensive National Energy
Policy Act which encourages the use of natural gas by providing a deduction for
a portion of the incremental cost of motor vehicles that are propelled by clean
burning fuels. The amount of the deduction depends on the gross vehicle weight
and ranges from $50,000 for heavy trucks and buses, $5,000 for medium weight
trucks and $2,000 for other motor vehicles. This Act also allows a deduction
for the cost of qualified clean fuel vehicle refueling property, defined as
property used to refuel clean-fuel vehicles at the point where the fuel is
delivered. The aggregate cost that may be taken into account in determining
the amount of the deduction may not exceed $100,000 at any location. The
deductions apply to properties placed in service after June 30, 1993. At least
twenty-four states have enacted their own legislation to give additional
incentives to companies desiring to convert or purchase natural gas vehicles.
These incentives vary considerably from state to state. Arizona reduces the
license tax and gives a tax credit of $1,000 for alternative fuel vehicles
purchased in 1994, 1995 and 1996. Oklahoma gives a state income tax credit of
up to $1,500 and has provided interest free loans of up to $1,500,000 to local
government and school districts to convert vehicles. Louisiana provides that
20% of the conversion cost can be deducted as a tax credit. Texas has
legislated that propane and natural gas are exempt from the recent increase of
$0.05 per gallon motor fuels tax.
LITIGATION
The Subsidiary is not involved in any matters of litigation incidental
to its business.
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<PAGE> 23
PROPERTIES
The Subsidiary's administrative offices are located at 500 North Loop
1604 East, Suite 250, San Antonio, Texas. These offices, consisting of
approximately 5,700 square feet, are leased from the Parent, on a month to
month basis, for $4,000 per month. In addition, ExproFuels leases four other
facilities:
<TABLE>
<CAPTION>
Approximate Monthly
Location Type Square Feet Rental Expiration
-------- ---- ----------- ------ ----------
<S> <C> <C> <C> <C>
San Antonio, Texas conversion 5,000 $2,500 May 1999
New Orleans, Louisiana conversion 15,000 4,200 February 1997
Dallas, Texas conversion 7,000 1,900 May 1997
Dallas, Texas fueling 8,200 400 July 1998
</TABLE>
The New Orleans facility has been closed by the Subsidiary, and the facility
has been subleased under a noncancellable lease for $4,500 per month expiring
February, 1997. Management believes these facilities are suitable to
accommodate the anticipated growth of ExproFuels in these cities over the next
several fiscal years. While no additional conversion center locations are
anticipated to be leased in other cities during the next fiscal year, the
Subsidiary is seeking additional fuel station sites.
MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
Following the Distribution, it is intended that the Subsidiary will
continue to be operated in substantially the same manner in which it is
currently operated. Set forth below is information with respect to those
individuals who serve as a director or executive officer of the Subsidiary as
of the Distribution Date.
<TABLE>
<CAPTION>
OTHER POSITIONS AND BUSINESS EXPERIENCE
PRIOR TO BECOMING AN EXECUTIVE OFFICER OF THE SUBSIDIARY
NAME AND TITLE AGE
<S> <C> <C>
Stephen M. Gose, Jr. . . . . . . . . . . . . . . 66 Stephen M. Gose, Jr., has served as Chairman of the Board of
Chairman of the Board of Directors Directors of the Subsidiary since August 1996, and of Parent since
July, 1984. He has been active for more than thirty-five years in
exploration and development of oil and gas properties, in real estate
development, and in ranching through the operations of Cibolo
Properties, Inc., its predecessors and affiliates.
Thomas H. Gose . . . . . . . . . . . . . . . . . 41 Thomas H. Gose has served as the President and a Director of the
President and Director Subsidiary since August 1996. He has also served as Director of the
Parent since February 1989 and as Secretary of the Parent since
January 1, 1992. He is the sole Director, CEO and President of
Cibolo Properties, Inc. He formerly served as President of Spectrum
Resources, Inc. since 1987. Thomas H. Gose is the son of Stephen M.
Gose, Jr.
James E. Sigmon. . . . . . . . . . . . . . . . . 48 James E. Sigmon has served as a Director of the Subsidiary since
Director August 1996. He has served as the Parent's President since February
1985 and a Director of the Parent since July 27, 1984.
</TABLE>
Each of the aforementioned executive officers and/or Directors have been
elected to serve for one year or until his successor is duly elected. The
Board of Directors has no nominating, audit or compensation committee. Members
of the Board of Directors are not compensated for any services provided as
Directors.
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<PAGE> 24
EXECUTIVE COMPENSATION
Prior to the Distribution, ExproFuels has functioned as a division or
a subsidiary of the Parent and its management has been employed by the Parent.
The following Summary Compensation Table sets forth a summary of the
compensation paid during the past fiscal year by the Subsidiary to the
individuals serving as the Subsidiary's chief executive officer and the four
most highly compensated executive officers whose total annual salary and bonus
exceeds $100,000 (the "Named Executives"). The compensation amounts in the
following tables represent all compensation paid to each such individual in
connection with his position with the Subsidiary only.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Securities All Other
Underlying Compen-
Fiscal Year Salary Bonus Options sation
<S> <C> <C> <C> <C> <C>
Name and Principal Position
Thomas H. Gose, President 1996 $72,000 $ 0.00 -0- $ -0-
</TABLE>
STOCK OPTION GRANTS, EXERCISES AND YEAR-END VALUE
The Subsidiary did not grant any options to the Named Executives
during fiscal year 1996 and no options to purchase shares of the Subsidiary's
Common Stock were outstanding in the name of the Named Executives at August 31,
1996.
EMPLOYMENT CONTRACTS
The Subsidiary has no employment contracts with any of its Named
Executives.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is the beneficial ownership of the Subsidiary's Common
Stock at February 1, 1997 by (i) each person who is known to beneficially own
more than 5% of the outstanding shares of the Subsidiary's Common Stock, (ii)
each director of the Subsidiary, (iii) each Named Executive and (iv) executive
officers of the Subsidiary as a group. The address for each director, Named
Executive and The Exploration Company is the Subsidiary's address.
<TABLE>
<CAPTION>
SHARES OF THE SUBSIDIARY'S SHARES OF THE SUBSIDIARY'S
COMMON STOCK BENEFICIALLY COMMON STOCK BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED PRIOR TO THE OWNED AFTER THE
DISTRIBUTION(1) DISTRIBUTION(1)
Number % Number %
------ - ------ -
<S> <C> <C> <C> <C>
Stephen M. Gose . . . . . . . . . . . . . . 3,650,000 91.3 1,740,000 43.5
Thomas H. Gose . . . . . . . . . . . . . . 3,950,000 96.3 2,040,000 49.8
James E. Sigmon . . . . . . . . . . . . . . 3,800,000 92.7 1,890,000 46.1
The Exploration Company . . . . . . . . . . 3,600,000 90.0 1,690,000 42.0
All directors and executive officers as a
group(2) . . . . . . . . . . . . . . . . 4,200,000 100.0 2,290,000 54.5
-----------
</TABLE>
(1) Except as otherwise noted, the Subsidiary believes that each named
individual has sole voting and investment power over the shares beneficially
owned.
(2) The number of shares beneficially owned by Messrs. Stephen M. Gose,
Thomas H. Gose and James E. Sigmon includes 0, 100,000 and 100,000 shares,
respectively, of the Subsidiary's Common Stock reserved for issuance under
options which are exercisable within 60 days and includes all of the shares
of the Subsidiary's Common Stock beneficially owned by the Parent, of which
all three serve as a director and share voting and dispositive power with the
Parent.
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<PAGE> 25
THE SUBSIDIARY'S 1996 FLEXIBLE INCENTIVE PLAN
GENERAL
In January 1996, the Subsidiary's Board of Directors adopted the 1996
Plan and the Subsidiary's only shareholder, the Parent, approved the 1996 Plan
on August 15, 1996.
The purpose of the 1996 Plan is to enable the Subsidiary to attract,
motivate and retain highly talented executive officers by enabling the
Subsidiary to make awards that recognize the creation of long-term value for
the Subsidiary's shareholders and promote the continued growth and success of
the Subsidiary. To accomplish this purpose, the 1996 Plan provides for the
granting to eligible persons of incentive stock options ("ISOs"), as defined in
Section 422A(b) of the Code, options which do not qualify as ISOs ("NQOs"),
stock appreciation rights ("SARs"), restricted stock ("Restricted Share"),
performance shares ("Performance Shares"), performance units ("Performance
Units"), dividend equivalent rights ("DERs") and any combinations thereof. For
purposes of this Information Statement, ISOs, NQ0s, SARs, Restricted Shares,
Performance Shares, Performance Units and DERs are collectively referred to as
"Awards." Recipients of such Awards are hereinafter referred to individually as
an "Awardee" and collectively as "Awardees." ISOs and NQOs are sometimes
referred to individually as an "Option" and collectively as "Options," and an
Awardee of an Option is sometimes referred to individually as an "Optionee" and
collectively as "Optionees."
The 1996 Plan is not a qualified pension, profit sharing or stock
bonus plan under Section 401 (a) of the Code, nor is it an "employee benefit
plan" subject to the provisions of the Employee Retirement Income Security Act
of 1974.
Pursuant to the 1996 Plan, a total of 400,000 shares of Common Stock
may be issued under the 1996 Plan; however, the maximum number of shares of the
Subsidiary's Common Stock with respect to which Awards may be granted in any
fiscal year to any executive officer whose compensation is required to be
reported in the Company's proxy statement pursuant to rules promulgated under
the Exchange Act and whose total compensation is possibly subject to the
limitations on deductions imposed by Section 162(m) of the Code (such executive
officer being hereinafter referred to as a "Named Officer") shall not exceed
80,000. Shares issued under the 1996 Plan may be either authorized and
unissued Subsidiary's Common Stock or the Subsidiary's Common Stock held in or
acquired for the treasury of the Subsidiary. Any shares of the Subsidiary's
Common Stock subject to an Option or SAR that are not issued prior to the
expiration of such awards, or any Restricted Stock or Performance Shares that
are forfeited, will again be available for award under the 1996 Plan. In the
event that shares of the Subsidiary's Common Stock are delivered to the
Subsidiary in payment of the exercise price with respect to any Option granted
under the 1996 Plan, the number of shares available for future awards under the
1995 Plan will be reduced only by the net number of shares issued. There are
no aggregate limits to non-stock based awards which may be granted under the
1996 Plan.
As of November 1, 1996, ISOs to purchase 300,000 shares of the
Subsidiary's Common Stock had been issued under the 1996 Plan. No adjustment
will be made to the outstanding ISOs as a result of the Distribution. As a
result, only 100,000 shares of the Subsidiary's Common Stock will be available
for issuance under the 1996 Plan.
The following description of the 1996 Plan is a summary of certain
provisions of the 1996 Plan. This summary does not purport to be complete, and
is qualified in its entirety by reference to the provisions of the 1996 Plan, a
copy of which is included as an exhibit to the Subsidiary's Form 10-SB
Registration Statement filed with the SEC.
ELIGIBLE PARTICIPANTS
Eligibility for participation in the 1996 Plan is confined to key
employees of the Subsidiary and its subsidiaries, as determined by the
Subsidiary's Board in its sole discretion. There are approximately 6 persons
who will be currently eligible to participate in the 1996 Plan. Unless
otherwise employed by the Subsidiary, non-employee directors will not be
entitled to participate in the 1996 Plan.
ADMINISTRATION
The Subsidiary's Board will administer the 1996 Plan and has broad
powers under the 1996 Plan to, among other things, administer and interpret the
1996 Plan, establish guidelines for the 1996 Plan's operation, select persons
to whom Awards are to be made under the 1996 Plan, determine the types, sizes
and combinations of Awards to be granted under the 1996 Plan, and determine
other terms and conditions of an Award. In addition, except as set forth below
under "Amendment and Termination," the Subsidiary's
23
<PAGE> 26
Board also has the power to modify or waive restrictions or limitations on the
exercisability of Awards and to accelerate and extend existing Awards. The
Subsidiary's Board may also determine whether, and to what extent and under
what conditions to provide loans to eligible participants to purchase the
Subsidiary's Common Stock under the 1996 Plan. In addition, the Subsidiary's
Board has the power to modify the terms of existing Awards, including, in the
case of Options, the exercise price thereof.
OPTIONS
Under the 1996 Plan, the Subsidiary's Board may grant Awards in the
form of Options to purchase shares of the Subsidiary's Common Stock. Options
may be in the form of ISOs or NQ0s. The Subsidiary's Board will, with regard
to each Option, determine the number of shares subject to the Option, the term
of the Option (which, for ISOs, shall not exceed ten years), the exercise price
per share of stock subject to the Option (which, for ISOs, must be not less
than the fair market value of the Common Stock at the time of grant), the
vesting schedule (if any) and the other material terms of the Option. Any
Option granted in the form of an ISO must satisfy the applicable requirements
of Section 422 of the Code. NQOs may have an exercise price that is less than
fair market value (but not less than the par value of the Common Stock).
The Option price upon exercise may, to the extent determined by the
Subsidiary's Board at or after the time of grant, be paid by a participant in
cash, in shares of the Subsidiary's Common Stock owned by the participant, in
shares of stock awarded under the 1996 Plan, including restricted stock, by a
reduction in the number of shares of the Subsidiary's Common Stock issuable
upon the exercise of the Option or by other consideration. The Subsidiary's
Board may offer to buy an Option previously granted on such terms and
conditions as the Subsidiary's Board shall establish. Options may, at the
discretion of the Subsidiary's Board, provide for "reloads," whereby a new
Option is granted for the same number of shares as the number of shares of
Common Stock or restricted stock used by the participant to pay the Option
price upon exercise.
Unless the Subsidiary's Board determines otherwise at the time of
grant, the 1996 Plan provides that upon termination of employment by reason of
death or disability, Options, to the extent vested, will be exercisable for one
year or until the end of the Option term, whichever is shorter. Unless the
Subsidiary's Board determines otherwise at the time of grant or thereafter, the
1996 Plan provides that upon termination of employment for any reason other
than death or disability, Options, to the extent vested, will be exercisable
for three months, or until the end of the Option term, whichever is shorter.
STOCK APPRECIATION RIGHTS
The 1996 Plan authorizes the Subsidiary's Board to grant SARs either
with an Option ("Tandem SARs") or independent of an Option ("Non-Tandem SARs").
An SAR is a right to receive a payment either in cash or the Subsidiary's
Common Stock, as the Subsidiary's Board may determine, equal in value to the
excess of the fair market value of a share of Common Stock on the date of
exercise over the reference price per share of the Subsidiary's Common Stock
established in connection with the grant of the SAR. The reference price per
share covered by an SAR will be the per share exercise price of the related
Option in the case of a Tandem SAR and will be a percentage designated by the
Subsidiary's Board of the per share fair market value of the Subsidiary's
Common Stock on the date of grant (or any other date chosen by the Subsidiary's
Board) in the case of a Non-Tandem SAR.
A tandem SAR may be granted at the time of the grant of the related
Option or, if the related Option is a NQO, at any time thereafter during the
term of the Option. A Tandem SAR generally may be exercised at and only at the
times and to the extent the related Option is exercisable. A Tandem SAR is
exercised by surrendering the same portion of the related Option. A Tandem SAR
expires upon the termination of the related Option.
A Non-Tandem SAR will be exercisable as provided by the Board of
Directors and will have such other terms and conditions as the Subsidiary's
Board may determine. A Non-Tandem SAR may have a term of no longer than ten
years from its date of grant. A Non-Tandem SAR is subject to acceleration of
vesting or immediate termination in certain circumstances, in the same manner
as discussed above in the case of Options.
The Subsidiary's Board is also authorized to grant "limited SARs,"
either as Tandem SARs or Non-Tandem SARs. Limited SARs would become
exercisable only upon the occurrence of a "Change in Control" (as defined in
the 1996 Plan) or such other event as the Subsidiary's Board may designate at
the time of grant or thereafter.
24
<PAGE> 27
RESTRICTED SHARES
The 1996 Plan authorizes the Subsidiary's Board to grant Awards in the
form of restricted Shares of the Subsidiary's Common Stock. These Awards may
be in such amounts and subject to such terms and conditions as the Subsidiary's
Board may determine, including, but not limited to, the price (if any) to be
paid by the Awardee, the time or times within which such Awards may be subject
to forfeiture, the vesting schedule (which may be based on service, performance
or other factors) and rights to acceleration of vesting (including whether
non-vested shares are forfeited or vested upon termination of employment). The
Subsidiary's Board may award performance-based shares of Restricted Shares by
conditioning the grant, vesting or the release, expiration or lapse of
restrictions of such Restricted Shares, or the acceleration of any of such
conditions, upon the attainment of specified performance goals or such other
factors as the Subsidiary's Board may determine.
PERFORMANCE SHARES
The 1996 Plan permits the granting of Performance Shares, consisting
of the right to receive the Subsidiary's Common Stock, restricted stock or cash
of an equivalent value, as the Subsidiary's Board of Directors may determine,
at the end of a specified performance period established by the Subsidiary's
Board. These Awards may be in such number of shares and subject to such
additional terms and conditions as the Subsidiary's Board may determine,
including, but not limited to, the criterion to be used to determine the
vesting of Performance Shares and whether Performance Shares are forfeited or
vest upon termination of employment during the performance period. The
Subsidiary's Board may condition the grant of Performance Shares upon the
attainment of specified performance goals, such as the Subsidiary's achievement
of certain earnings levels or the Subsidiary's performance (or the performance
of its stock) measured against the performance of its competition, or such
other facts as the Subsidiary's Board my determine.
PERFORMANCE UNITS
The 1996 Plan permits the granting of Performance Units, consisting of
the right to receive a fixed dollar amount payable in cash, the Subsidiary's
Common Stock or restricted stock, or any combination thereof, as the
Subsidiary's Board may determine, at the end of a performance cycle established
by the Subsidiary's Board. Except for the fact that the Award is denominated
in dollars rather than shares, the provisions of the 1996 Plan regarding
Performance Units are substantially similar to those regarding Performance
Shares, as described above.
DIVIDEND EQUIVALENT RIGHTS
The Subsidiary's Board of Directors may, in the Board's discretion,
provide that any Option, Restricted Shares, Performance Shares or Units or
other stock-based Awards under the Plan may earn DERs. In respect of any such
Award which is outstanding on a dividend record date for the Subsidiary's
Common Stock, the Subsidiary's Board may credit a participant with an amount
equal to the cash or stock dividends or other distributions that would have
been paid on the shares of Common Stock covered by such Award had such covered
shares been issued and outstanding on such dividend record date. The rules and
procedures governing the crediting of DERs,including the timing, form of
payment and payment contingencies thereof, shall be established by the
Subsidiary's Board.
WRITTEN AGREEMENTS
Awards shall be evidenced by instruments (which need not be identical)
in such forms as the Subsidiary's Board may from time to time approve. Such
instruments shall conform to such terms, conditions and provisions as are
applicable under the 1996 Plan and may contain such other terms and conditions
and provisions as the Subsidiary's Board deems advisable which are not
inconsistent with the 1996 Plan, including restrictions applicable to shares of
the Subsidiary's Common Stock issuable upon exercise of Awards. An Award may
provide for acceleration of exercise in the event of a change in control of the
Subsidiary, in the discretion of and as defined by the Subsidiary's Board.
EXERCISE OF AWARDS
An Award (or any part or installment thereof) shall be exercised as
specified in the written instrument granting such Award, which instrument may
specify any legal method of exercise. The holder of an Award exercisable for
shares shall not have the rights of a shareholder with respect to the shares
covered by his Award until the date of issuance of a stock certificate to him
for such shares.
25
<PAGE> 28
Except as expressly provided in the 1996 Plan with respect to changes in
capitalization and stock dividends, no adjustment shall be made for dividends
or similar rights for which the record date is before the date such stock
certificate is issued.
PAYMENT FOR AWARDS
The purchase price of any shares of the Subsidiary's Common Stock
purchased pursuant to the exercise of an award granted under the 1996 Plan
shall be payable in full on the exercise date in cash, by check, by surrender
to the Subsidiary of shares of the Subsidiary's Common Stock registered in the
name of the participant, by delivery to the Subsidiary of such other lawful
consideration as the Subsidiary's Board may determine, or by a combination of
the foregoing. Any such shares so surrendered shall be deemed to have a value
per share equal to the fair market value of a share of the Subsidiary's Common
Stock on such date.
ADJUSTMENTS; CHANGES IN STOCK; RECAPITALIZATION AND REORGANIZATION
Upon the happening of any of the following events, an Awardee's rights
with respect to Awards granted to him and the Awardee's rights with respect to
the Subsidiary's Common Stock to be acquired (or used for measurement purposes)
pursuant to an Award, shall be adjusted as provided below, unless otherwise
specifically provided, in addition or to the contrary, in the 1996 Plan or the
written agreement between the Awardee and the Subsidiary relating to such
Award.
In the event shares of the Subsidiary's Common Stock shall be
subdivided or combined into a greater or smaller number of shares or if, upon a
merger, consolidation or reorganization of the Subsidiary, the shares of the
Subsidiary's Common Stock shall be exchanged for other securities of the
Subsidiary or of another corporation, the number of shares covered by each
outstanding Award and the exercise price, if applicable, shall be
proportionately increased or decreased. If any Awardee receives new,
additional or different securities in connection with any corporate transaction
described in this paragraph, such new securities shall be subject to all of the
conditions and restrictions applicable to the Subsidiary's Common Stock with
respect to which the new securities were issued.
Upon the happening of any of the foregoing events, the class and
aggregate number of shares reserved for issuance under the 1996 Plan shall also
be appropriately adjusted to reflect the events described above.
AMENDMENT AND TERMINATION
The Subsidiary's Board may at any time and from time to time, amend,
in whole or in part, any or all of the provisions of the 1996 Plan or suspend
or terminate it entirely, retroactively or otherwise; provided, however, that
unless otherwise required by law or specifically provided in the 1996 Plan, the
rights of an Awardee to Options or other Awards grants prior to such amendment,
suspension or termination may not be impaired without the consent of such
Awardee; and, provided further, that without the approval of the shareholders
of the Subsidiary, no amendment may be made which would materially increase the
aggregate number of shares of the Subsidiary's Common Stock that may be issued
under the 1996 Plan; materially change the definition of employees eligible to
receive awards under the 1996 Plan; decrease the minimum option price permitted
under the 1996 Plan; or increase the ten-year maximum option term permitted
under the 1996 Plan.
No Award or grant may be made under the 1996 Plan on or after August
15, 2006 (the tenth anniversary of the effective date of the 1996 Plan).
AWARDS TO CERTAIN OFFICERS
Pursuant to the 1996 Plan, the Named Officers shall only have Awards
(other than Options and SARs granted under the 1996 Plan) based upon the
attainment of certain performance goals. Pursuant to the 1996 Plan, no later
than the earlier of 90 days after the commencement of the applicable fiscal
year or such other award period and the completion of 25% of such award period,
the Subsidiary's Board shall establish in writing the performance goals
applicable to each such Award for any Named Officer. At the time of the
establishment of the goals, the outcome of such goals must be substantially
uncertain. In addition, the goals must be stated in terms of an objective
formula or standard method for computing the amount of compensation payable to
any Named Officer if the goal is obtained. The formula or standard shall be
sufficiently objective so that a third party with knowledge of the relevant
performance results could calculate the amount to be paid to the officer.
Performance measures which may serve as determinants of any such Award shall be
limited to such measures as earnings per share, return on assets, return on
equity, net profits after taxes, etc. Within 90 days after the completion of
any award period, the Subsidiary's Board shall certify in writing whether the
performance goals
26
<PAGE> 29
and any other material terms were satisfied. Pursuant to the 1996 Plan, the
maximum amount of compensation payable as an Award(other than an award which is
an Option or SAR) to any Named Officer during any calendar year may not exceed
$1,000,000. In addition, the material terms of the performance goals for the
Officer and the compensation payable thereunder shall be submitted to the
shareholders of the Subsidiary for their review and approval; and such approval
must be obtained prior to any award being paid to any Named Officer. If not
approved, no amount shall be paid to such officer for such applicable Award
period under the 1996 Plan. In view of the Subsidiary's current financial
situation and compensation being paid to its officers and directors, the
Subsidiary does not currently anticipate that the provisions of the 1996 Plan
applicable to the maximum awards will be applicable in the near future, if
ever.
DESCRIPTION OF THE SUBSIDIARY'S CAPITAL STOCK
GENERAL
The Subsidiary's authorized capital stock consists of 60 million
shares of which ten million will be shares of preferred stock, $0.01 par value,
and 50 million will be shares of the Subsidiary's Common Stock. Four million
shares of the Subsidiary's Common Stock are issued and outstanding prior to the
Distribution Date, on the Distribution Date. 1,190,000 shares of the
Subsidiary's Common Stock, constituting approximately 48% of the issued and
outstanding shares of the Subsidiary's Common Stock, will be distributed to
stockholders of the Parent in the Distribution. All of the shares of the
Subsidiary's Common Stock issued in the Distribution are validly issued, fully
paid and non-assessable.
The Subsidiary's Certificate of Incorporation provides that the
Subsidiary's Board is authorized to provide for the issuance of shares of
preferred stock, from time to time, in one or more series, and to fix any
voting powers, full or limited or none, and the designations, preferences and
relative, participating, optional or other special rights, applicable to the
shares to be included in any such series and any qualifications, limitations or
restrictions thereon. No shares of preferred stock of the Subsidiary are
outstanding or will be outstanding directly following the Distribution.
There will be no material differences between the rights of holders of
capital stock of the Subsidiary and the rights of holders of capital stock in
the Parent following the Distribution.
COMMON STOCK
Voting Rights: Each holder of the Subsidiary's Common Stock will be
entitled to one vote for each share registered in his name on the books of the
Subsidiary on all matters submitted to a vote of stockholders. Except as
otherwise provided by law, the holders of the Subsidiary's Common Stock will
vote as one class. The shares of the Subsidiary's Common Stock will not have
cumulative voting rights. As a result, subject to the voting rights, if any,
of the holders of any shares of the Subsidiary's preferred stock which may at
the time be outstanding, the holders of the Subsidiary's Common Stock entitled
to exercise more than 50% of the voting rights in an election of directors will
be able to elect 100% of the directors to be elected if they choose to do so.
In such event, the holders of the remaining shares of the Subsidiary's Common
Stock voting for the election of directors will not be able to elect any
persons to the Subsidiary's Board. See "Certain Special
Considerations-Concentration of Voting Power."
Dividend Rights: Subject to the rights of the holders of any shares
of the Subsidiary's preferred stock which may at the time be outstanding and
subject to certain contractual restrictions on the payment of dividends
contained in any debt agreements of the Subsidiary, holders of the Subsidiary's
Common Stock will be entitled to such dividends as the Subsidiary's Board may
declare out of funds legally available therefor. The Subsidiary does not
anticipate paying any cash dividends in the foreseeable future. See "Certain
Special Considerations-Dividend Policy."
Liquidation Rights and Other Provisions: Subject to the prior rights
of creditors and the holders of any Subsidiary preferred stock which may be
outstanding from time to time, the holders of the Subsidiary's Common Stock are
entitled in the event of liquidation, dissolution or winding up to share pro
rata in the distribution of all remaining assets.
The Subsidiary's Common Stock is not liable for any calls or
assessments and is not convertible into any other securities. There are no
redemption or sinking fund provisions applicable to the Subsidiary's Common
Stock, and the Subsidiary's Certificate of Incorporation provides that there
are no preemptive rights.
27
<PAGE> 30
The transfer agent and registrar for the Subsidiary's Common Stock is
Boston EquiServe, Boston, Massachusetts.
LIABILITY AND INDEMNIFICATION OF
OFFICERS AND DIRECTORS OF THE SUBSIDIARY
Articles Twelve and Thirteen of the Subsidiary's Certificate of
Incorporation and Section 6 of the Subsidiary's Bylaws (the "Director Liability
and Indemnification Provisions") limit the personal liability of the
Subsidiary's directors to the Subsidiary or its stockholders for monetary
damages for breach of fiduciary duty. The Director liability and
Indemnification Provisions are substantially identical to comparable provisions
contained in the Parent's Articles of Incorporation and Bylaws.
The Director Liability and Indemnification Provisions define and
clarify the rights of certain individuals, including the Subsidiary's directors
and officers, to indemnification by the Subsidiary in the event of personal
liability or expenses incurred by them as a result of certain litigation
against them. Such provisions are consistent with Section 102(b)(7) of the
DGCL, which is designed, among other things, to encourage qualified individuals
to serve as directors of Delaware corporations by permitting Delaware
corporations to include in their articles or certificates of incorporation a
provision limiting or eliminating directors' liability for monetary damages and
with other existing DGCL provisions permitting indemnification of certain
individuals, including directors and officers. The limitations of liability in
the Director Liability and Indemnification Provisions may not affect claims
arising under the federal securities laws.
In performing their duties, directors of a Delaware corporation are
obligated as fiduciaries to exercise their business judgment and act in what
they reasonably determine in good faith, after appropriate consideration, to be
the best interests of the corporation and its stockholders. Decisions made on
that basis are protected by the "business judgment rule." The business judgment
rule is designed to protect directors from personal liability to the
corporation or its stockholders when business decisions are subsequently
challenged. However, the expense of defending lawsuits, the frequency with
which unwarranted litigation is brought against directors and the inevitable
uncertainties with respect to the outcome of applying the business judgment
rule to particular facts and circumstances mean that, as a practical matter,
directors and officers of a corporation rely on indemnity from, and insurance
procured by, the corporation they serve as a financial backstop in the event of
such expenses or unforeseen liability. The Delaware legislature has recognized
that adequate insurance and indemnity provisions are often a condition of an
individual's willingness to serve as director of a Delaware corporation. The
DGCL has for some time specifically permitted corporations to provide indemnity
and procure insurance for its directors and officers.
Set forth below is a description of the Director Liability and
Indemnification Provisions. Such description is intended as a summary only and
is qualified in its entirety by reference to the Subsidiary's Certificate of
Incorporation and the Subsidiary's Bylaws.
Elimination of Liability in Certain Circumstances. Article Twelve of
the Subsidiary's Certificate of Incorporation protects directors against
monetary damages for breaches of their fiduciary duty of care, except as set
forth below. Under the DGCL, absent Article Twelve directors could generally
be held liable for gross negligence for decisions made in the performance of
their duty of care but not for simple negligence. Article Twelve eliminates
director liability for negligence in the performance of their duties, including
gross negligence. Directors remain liable for breaches of their duty of
loyalty to the Subsidiary and its stockholders, as well as acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law and transactions from which a director derives improper
personal benefit. Article Twelve does not eliminate director liability under
Section 174 of the DGCL, which makes directors personally liable for unlawful
dividends or unlawful stock repurchases or redemptions and expressly sets forth
a negligence standard with respect to such liability.
While Article Twelve provides directors with protection from awards of
monetary damages for breaches of the duty of care, it does not eliminate the
directors' duty of care. Accordingly, Article Twelve will have no effect on
the availability of equitable remedies such as an injunction or rescission
based upon a director's breach of the duty of care. The provisions of Article
Twelve which eliminate liability as described above will apply to officers of
the Subsidiary only if they are directors of the Subsidiary and are acting in
their capacity as directors, and will not apply to officers of the Subsidiary
who are not directors. The elimination of liability of directors for monetary
damages in the circumstances described above may deter persons from bringing
third-party or derivative actions against directors to the extent such actions
seek monetary damages.
Indemnification and Insurance. Under Section 145 of the DGCL,
directors and officers as well as other employees and individuals may be
indemnified against expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement in
28
<PAGE> 31
connection with specified actions, suits or proceedings, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporations "derivative action") if they acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the Subsidiary, and with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard of care is applicable in the case of derivative actions,
except that indemnification only extends to expenses (including attorneys'
fees) incurred in connection with defense or settlement of such an action and
the DGCL requires court approval before there can by any indemnification where
the person seeking indemnification has been found liable to the Subsidiary.
Section 8.6 of the Subsidiary Bylaws provides that the Subsidiary
shall indemnify any person to whom, and to the extent, indemnification may be
granted pursuant to Section 145 of the DGCL.
Article Thirteen of the Subsidiary's Certificate of Incorporation
provides that each person who was or is made a party to, or is involved in any
action, suit or proceeding by reason by the fact that he is or was a director,
officer of employee of the Subsidiary will be indemnified by the Subsidiary
against all expenses and liabilities, including counsel feels reasonably
incurred by or imposed upon him, except in such case where the director,
officer or employee is adjudged guilty of willful misfeasance or malfeasance in
the performance of his duties. Article Thirteen also provides that the right
of indemnification shall be in addition to and not exclusive of all other
rights to which such director, officer or employee may be entitled.
AVAILABLE INFORMATION
The Subsidiary has filed with the SEC a Registration Statement on Form
10-SB with respect to the shares of the Subsidiary's Common Stock to be
received by the shareholders of the Parent in the Distribution. This
Information Statement does not contain all of the information set forth in the
Form 10-SB Registration Statement and the exhibits thereto, to which reference
is hereby made. Statements made in this Information Statement as to the
contents of any contract, agreement or other document referred to herein are
not necessarily complete. With respect to each such contract, agreement or
other document referred to herein are not necessarily complete. With respect
to each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and
the exhibits thereto may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Regional Offices of the SEC at Seven World
Trade Center, Suite 1300, New York, New York 10048 and in the Citicorp Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and may be
obtained through the SEC Internet address at http://www.sec.gov.
29
<PAGE> 32
EXPROFUELS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheets at August 31, 1995, August 31, 1996 and November 31, 1996 (unaudited) . . . . . . . . . . . . . . . F-2
Statements of Operations for Fiscal Years
Ended August 31, 1994, August 31, 1995, August 31, 1996 and November 31, 1996 (unaudited) . . . . . . . . F-4
Statements of Cash Flows for Fiscal Years
Ended August 31, 1994, August 31, 1995, August 31, 1996 and November 31, 1996 (unaudited) . . . . . . . . F-6
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-0
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ExproFuels, Inc.
We have audited the balance sheets of ExproFuels, Inc. as of August 31, 1996
and 1995, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended August 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ExproFuels, Inc. as of August
31, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended August 31, 1996, in conformity with
generally accepted accounting principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 2 to the financial
statements, the Company is fully dependent on its former parent, has suffered
recurring losses from operations since inception, has a deficiency of quick
assets to current liabilities of $114,282 and an accumulated deficit in
retained earnings of $2,617,957 at August 31, 1996, all of which raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also discussed in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We have also audited Schedule II of ExproFuels, Inc. for each of the three
years in the period ended August 31, 1996. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
/s/ AKIN, DOHERTY, KLEIN & FEUGE, P.C.
- --------------------------------------
Akin, Doherty, Klein & Feuge, P.C.
San Antonio, Texas
November 8, 1996
F-1
<PAGE> 34
EXPROFUELS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
November 30, --------------------------
1996 1996 1995
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 28,938 $ 20,871 $ 7,263
Accounts receivable, less allowance for doubtful
accounts of $35,000 , $35,000, and $0 159,956 154,701 221,476
Inventories 212,500 143,967 103,956
Prepaid expenses and other 14,326 19,346 25,371
----------- ----------- -----------
Total current assets 415,720 338,885 358,066
Property and Equipment:
Transportation and other equipment 147,381 146,473 145,282
Equipment under capital leases 93,326 93,326 93,326
Fuel stations 239,562 238,484 159,729
Less accumulated depreciation and amortization (224,388) (203,388) (117,814)
----------- ----------- -----------
Net property and equipment 255,881 274,895 280,523
Other Assets:
Investments in and advances to venture 624,224 592,426 150,000
Other assets 49,710 43,321 53,418
----------- ----------- -----------
673,934 635,747 203,418
----------- ----------- -----------
Total Assets $ 1,345,535 $ 1,249,527 $ 842,007
=========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-2
<PAGE> 35
EXPROFUELS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
November 30, --------------------------
1996 1996 1995
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 298,315 $ 256,184 $ 355,649
Accounts payable to affiliate 32,250 -- --
Advance from affiliate 40,000 -- --
Current portion of long-term debt 13,744 13,744 23,409
Current portion of capital lease obligations 19,926 19,926 16,693
----------- ----------- -----------
Total current liabilities 404,235 289,854 395,751
Long-term Liabilities:
Long-term debt 217,982 21,684 35,427
Capital lease obligations 25,689 29,810 49,731
----------- ----------- -----------
Total long-term liabilities 243,671 51,494 85,158
Investments and advances by parent -- -- 2,334,041
Stockholders' Deficit:
Common stock, par value $ .01 per share;
authorized 50,000,000 shares; issued and
outstanding 4,000,000 shares 40,000 40,000 --
Additional paid-in capital 3,486,136 3,486,136 --
Accumulated deficit (2,828,507) (2,617,957) (1,972,943)
----------- ----------- -----------
Total stockholders' equity 697,629 908,179 (1,972,943)
----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 1,345,535 $ 1,249,527 $ 842,007
=========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE> 36
EXPROFUELS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
November 30, Years Ended August 31,
-------------------------- -----------------------------------------
1996 1995 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Conversion sales $ 157,333 $ 91,255 $ 557,641 $ 578,362 $ 627,366
Fuel station construction sales 19,453 75,898 301,115 97,241 162,603
Alternative fuel sales 85,694 33,345 187,645 97,748 31,664
----------- ----------- ----------- ----------- -----------
262,480 200,498 1,046,401 773,351 821,633
Costs and Expenses:
Cost of sales 203,988 135,433 752,024 646,078 701,198
Shop general and administrative 116,000 125,827 484,920 415,944 302,647
Depreciation and amortization 21,833 22,377 85,574 92,302 77,543
Abandonment of technological rights -- -- -- -- 144,681
General and administrative 138,925 94,678 404,708 587,916 431,107
----------- ----------- ----------- ----------- -----------
Total costs and expenses 480,746 378,315 1,727,226 1,742,240 1,657,176
----------- ----------- ----------- ----------- -----------
Loss from operations (218,266) (177,817) (680,825) (968,889) (835,543)
Other Income (Expense):
Sublease rental income 13,500 13,500 58,500 6,750 --
Interest income 208 258 959 818 3
Interest expense (5,992) (6,747) (23,648) (24,560) (37,367)
----------- ----------- ----------- ----------- -----------
7,716 7,011 35,811 (16,992) (37,364)
----------- ----------- ----------- ----------- -----------
Net loss $ (210,550) $ (170,806) $ (645,014) $ (985,881) $ (872,907)
=========== =========== =========== =========== ===========
Net loss per common share $ (.05) $ (.04) $ (.16) $ (.25) $ (.22)
=========== =========== =========== =========== ===========
Weighted average number of
common and common equivalent
shares outstanding 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
=========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE> 37
EXPROFUELS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 1, 1993 -- $ -- $ -- $ (114,155) $ (114,155)
Net loss for the year -- -- -- (872,907) (872,907)
----------- ----------- ----------- ----------- -----------
Balance at August 31, 1994 -- -- -- (987,062) (987,062)
Net loss for the year -- -- -- (985,881) (985,881)
----------- ----------- ----------- ----------- -----------
Balance at August 31, 1995 -- -- -- (1,972,943) (1,972,943)
Issuance of common stock
by parent 4,000,000 40,000 (40,000) -- --
Contribution of advances by
parent company -- -- 3,526,136 -- 3,526,136
Net loss for the year -- -- -- (645,014) (645,014)
----------- ----------- ----------- ----------- -----------
Balance at August 31, 1996 4,000,000 40,000 3,486,136 (2,617,957) 908,179
Net loss for the period (unaudited) -- -- -- (210,550) (210,550)
----------- ----------- ----------- ----------- -----------
Balance at November 30, 1996
(Unaudited) 4,000,000 $ 40,000 $ 3,486,136 $ 2,828,507 $ 697,629
=========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE> 38
EXPROFUELS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
November 30, Years Ended August 31,
-------------------------- -----------------------------------------
1996 1995 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (210,550) $ (170,806) $ (645,014) $ (985,881) $ (872,907)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 21,833 22,377 85,574 92,302 77,543
Changes in operating assets and liabilities:
Receivables (5,255) (24,684) 66,775 (142,948) 26,481
Inventory (68,533) (12,997) (40,011) 17,915 (119,480)
Prepaid expenses and other 5,020 4,013 6,025 31,314 (53,467)
Accounts payable and accrued expenses 73,548 125,935 (99,465) (127,745) 254,802
----------- ----------- ----------- ----------- -----------
Net cash (used) in operating activities (183,937) (56,162) (626,116) (1,115,043) (687,028)
INVESTING ACTIVITIES:
Purchase of property and equipment (1,986) (16,500) (79,946) (101,165) (230,012)
Investments in and advances to venture (31,798) (181,193) (442,426) (150,000) --
Other assets (6,389) 21,692 10,097 151,507 (36,809)
----------- ----------- ----------- ----------- -----------
Net cash (used) in investing activities (40,173) (176,001) (512,275) (99,658) (266,821)
FINANCING ACTIVITIES:
Advances from parent company 40,000 242,346 1,192,095 1,224,085 882,566
Proceeds from long-term debt obligations 200,000 -- -- 30,967 94,293
Payments on long-term obligations (7,823) (3,049) (40,096) (37,799) (21,408)
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 232,177 239,297 1,151,999 1,217,253 955,451
----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 8,067 7,134 13,608 2,552 1,602
Cash and equivalents at beginning of year 20,871 7,263 7,263 4,711 3,109
----------- ----------- ----------- ----------- -----------
CASH AND EQUIVALENTS AT END OF YEAR $ 28,938 $ 14,397 $ 20,871 $ 7,263 $ 4,711
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 3,559 $ 6,984 $ 22,636 $ 24,328 $ 35,409
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE> 39
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995, AND NOVEMBER 30, 1996 (UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
ExproFuels, Inc. (the Company), formerly a division of The Exploration Company
(TXCO), began operating as a wholly-owned subsidiary of TXCO August 15, 1996,
following the issuance of 4,000,000 shares of its common stock. TXCO is
registered with the Securities and Exchange Commission (SEC) and its stock
traded publicly on the National Association of Securities Dealers (NASD)
exchange.
On August 30, 1996, 10% of the outstanding common stock of ExproFuels, Inc. was
exchanged as consideration for services rendered to its Directors, thereby
reducing TXCO's ownership interest from 100% to 90%. On September 3, 1996, the
Company's Board of Directors voted for a distribution of ExproFuels common
stock directly to the shareholders of TXCO (the beneficial owners of 90% of
ExproFuels). The direct distribution of stock reduced TXCO's ownership in the
Company to 40%.
ExproFuels, Inc. is proceeding with plans for filing an Information Statement
on Form 10 with the Securities and Exchange Commission to register its
outstanding common stock.
The financial statements include the accounts of ExproFuels while operated as a
division of TXCO (inception through August 14, 1996) and as a subsidiary of
TXCO (period August 15, 1996 and subsequent). The Company converts vehicle
engines that use gasoline for combustion to propane or natural gas, supplies
alternative fuels to customers and constructs alternative fuels refueling
facilities. Customers are primarily located in Texas and Arizona. The Company
also has a substantial investment, through CNG International, L.L.C., for
alternative fuel operations being developed in Uzbekistan.
Cash and Equivalents
Cash and cash equivalents consist of all demand deposits and funds invested in
short-term investments with original maturities of three months or less.
Inventories
Inventories, consisting principally of finished goods (parts), are valued at
the lower of cost or market using the first-in, first-out method of accounting.
Property and Equipment
Transportation and other equipment, equipment reported under capitalized leases
and fuel stations are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets ranging from
five to fifteen years. Major renewals and betterments are capitalized while
repairs are expensed as incurred.
Federal Income Taxes
For financial reporting purposes, the Company has adopted the provisions of
Financial Accounting Standards Board Statement No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. A valuation allowance
is provided against net deferred assets for which realization is doubtful.
Financial Instruments with Off-Balance-Sheet Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and accounts
receivables. The Company places its temporary cash investments with financial
institutions and limits the amount of credit exposure to any one financial
institution. The Company's raw materials are readily available and the Company
is not dependent on a single supplier or a few suppliers.
F-7
<PAGE> 40
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995, AND NOVEMBER 30, 1996 (UNAUDITED)
NOTE 1. 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.
Earnings (Loss) Per Share: Loss per common and common equivalent share are
computed by dividing net loss by the weighted average number of shares
outstanding during the period. The common stock issued in connection with the
Company's incorporation on August 15, 1996 has been assumed to be outstanding
for all periods presented.
NOTE 2. GOING CONCERN UNCERTAINTY AND REGISTRATION OF COMMON STOCK
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Since its inception, the Company
has been substantially reliant on its parent company to fund its cash
requirements. As shown in the financial statements, the Company has suffered
recurring losses, has a deficiency of quick assets to current liabilities of
$114,282 and an accumulated deficit in retained earnings of $2,617,957 at
November 30, 1996. These factors, among others, raise substantial doubt about
the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as going concern.
Management is exploring alternatives, including raising additional debt or
equity financing. The Company has raised $200,000 in debt financing since year
end. See Note 4. The Company is also proceeding with plans for filing an
Information Statement on Form 10 with the SEC to register the Company's
outstanding common stock. The Company's ability to continue to operate is
dependent upon its ability to successfully accomplish some or all of these or
other alternatives, and ultimately to attain profitable operations.
NOTE 3. INVESTMENTS IN AND ADVANCES TO VENTURE
The Company has invested $592,426 in CNG International, L.L.C., a Tennessee
limited liability company formed for the purpose of converting motor vehicles
to operate on alternative fuels, manufacturing and selling of related component
equipment and to develop the necessary infrastructure to support operation of
motor vehicles on alternative fuels primarily in Uzbekistan, a former Soviet
Republic. At November 30, 1996, the Company had acquired an equity interest of
approximately 11% in the venture.
During the years ended November 30, 1996 and 1995, the Company sold equipment
and provided services to CNG International in the amount of $133,505 and
$110,611, respectively.
F-8
<PAGE> 41
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995, AND NOVEMBER 30, 1996 (UNAUDITED)
NOTE 4. LONG TERM DEBT
Long-term debt consists of the following at August 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Notes payable to financial institutions, with interest rates
from 8.50% to 12%,due in monthly installments of $1,950
and secured by certain vehicles $ 35,428 $ 58,836
Less current portion (13,744) (23,409)
-------- --------
Long-term portion of debt $ 21,684 $ 35,427
======== ========
</TABLE>
Subsequent Proceeds from Convertible Debt:
On September 18, 1996, the Company received $200,000 from the issuance of an
unsecured 6% convertible note payable. The note requires interest only payments
quarterly, with the balance due on September 18, 1999. The note is convertible
into one share of $.01 par value common stock for each $1 of debt outstanding,
subject to adjustment in certain circumstances.
The following is a schedule of principal maturities of long-term debt as of
November 30, 1996:
<TABLE>
<CAPTION>
Before After
Fiscal Year Ended Subsequent Subsequent
August 31 Proceeds Proceeds
--------- -------- --------
<S> <C> <C> <C>
1997 $ 13,744 $ 13,744
1998 13,738 13,738
1999 5,839 5,839
2000 2,107 202,107
-------- ----------
$ 35,428 $ 235,428
======== =========
</TABLE>
NOTE 5. STOCKHOLDERS' EQUITY
1996 Flexible Incentive Plan:
The Company's 1996 Flexible Incentive Plan provides incentive stock options for
granting to its officers, directors and management, under which options for the
purchase of 400,000 shares of common stock have been reserved. Options for the
purchase of 300,000 shares of common stock were granted under the plan on
September 4, 1996, vesting 50% in one year and 100% in two years. The options
are exercisable at 110% of the fair market value of the common stock on the
date of grant and expire ten years from the date of grant, or upon termination
of employment, if earlier. An appraisal of the common stock fair value is
currently being obtained.
Preferred Stock:
The Company has authorized 10,000,000 shares of preferred stock, none of which
is issued. Terms and rights of the stock have not been established by the Board
of Directors.
F-9
<PAGE> 42
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995, AND NOVEMBER 30, 1996 (UNAUDITED)
NOTE 6. LEASES
Real Estate:
The Company shares office space with its parent company and pays to them, on a
month to month basis, approximately $4,000 per month for the use of office
space and equipment. In addition, the Company leases its conversion facilities
and a fuel station location under noncancellable leases with terms from one to
three years. The Company also has a sublease on one of its conversion
facilities, from which it receives $4,500 per month through January, 1997.
For the years ended November 30, 1996, 1995 and 1994, the Company incurred rent
expense of $141,996, $140,549 and $91,626, respectively and received sublease
rental income of $58,500 in 1996 and $6,750 in 1995. As of November 30, 1996,
future minimum rentals under all noncancellable real estate leases, are as
follows:
<TABLE>
<S> <C> <C>
1997 $ 69,802
1998 34,400
1999 22,500
---------
Future minimum rentals 126,702
Less sublease income (22,500)
Net future minimum rentals $ 104,202
=========
</TABLE>
Capitalized Equipment Leases:
The Company leases certain equipment located at its conversion facilities under
leases accounted for as capital leases. As of November 30, 1996, future minimum
rentals under all capital leases are as follows:
<TABLE>
<S> <C> <C>
1997 $ 28,211
1998 24,829
1999 8,926
--------
Total minimum rentals 61,966
Less amount representing interest,
executory costs and profit (12,230)
--------
Present value of capital lease obligations $ 49,736
========
</TABLE>
F-10
<PAGE> 43
EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995, AND NOVEMBER 30, 1996 (UNAUDITED)
NOTE 7. FEDERAL INCOME TAXES
The Company began operating as a corporation on August 15, 1996; accordingly,
its tax attributes began on that date. From August 15, 1996 through November
30, 1996, the Company incurred a financial and tax loss of approximately
$27,000.
Deferred taxes are as follows at November 30, 1996:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 27,000
Statutory tax rate 34%
--------
Net deferred tax asset 9,180
Less valuation allowance (9,180)
--------
Deferred income tax asset recorded $ 0
========
</TABLE>
The net operating loss carryforward of $27,000 expires in 2111.
NOTE 8. RELATED PARTY TRANSACTION
On November 30, 1996, 10% of the outstanding common stock of the Company was
given as consideration for services rendered to the Directors of ExproFuels,
Inc.
Subsequent to year end, TXCO advanced the Company $40,000.
NOTE 9. MAJOR CUSTOMERS
Amounts sold to major customers are as follows:
<TABLE>
<CAPTION>
Customer 1996 1995 1994
- -------- -------- -------- --------
<S> <C> <C> <C>
A $259,438 $ -- $ --
B 86,110 110,612 --
C 83,663 60,820 231,184
D 42,356 208,938 --
E -- 62,227 183,941
</TABLE>
F-11
<PAGE> 44
EXPROFUELS, INC.
SCHEDULE II - VALUATION AND QUALIFYING RESERVES
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994, AND
THREE MONTHS ENDED NOVEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Balance Charges to Balance
Beginning Costs and End of
of Period Expense Write-offs Period
============ ============ ============ ============
<S> <C> <C> <C> <C>
THREE MONTHS ENDED NOVEMBER 30, 1996
(UNAUDITED)
Allowance for doubtful accounts -
trade accounts $ 35,000 $ $ $
============ ============ ============ ============
YEAR ENDED AUGUST 31, 1996
Allowance for doubtful accounts -
trade accounts $ -- $ 35,000 $ -- $ 35,000
============ ============ ============ ============
YEAR ENDED AUGUST 31, 1995
Allowance for doubtful accounts -
trade accounts $ -- $ -- $ -- $ --
============ ============ ============ ============
YEAR ENDED AUGUST 31, 1994
Allowance for doubtful accounts -
trade accounts $ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
F-12
<PAGE> 45
Annex I
C 0 N F I D E N T I A L
VALUATION OF
EXPROFUELS, INC.
COMMON STOCK
This material represents our interpretation and analysis of information
generally available to the public or specifically released by responsible
persons at or associated with ExproFuels, Inc. We believe that our sources of
information are reliable; however, we do not assume any liability for the
accuracy or comprehensiveness of the information. This material is not to be
reproduced in whole or in part without our specific permission in writing.
Under no circumstances is this report to be considered as an offering to buy or
sell securities.
David P. Martin Investment Banking
115 East Travis - Suite 1145
San Antonio, Texas 78205
(210) 225-4900
Valuations o Private Placements o Mergers & Acquisitions
December 1996
<PAGE> 46
TABLE OF CONTENTS
<TABLE>
<S> <C>
Purpose and Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Exploration Company . . . . . . . . . . . . . . . . . . . . . . 1
ExproFuels, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Definition of Fair Market Value . . . . . . . . . . . . . . . . . . 2
Sources of Information . . . . . . . . . . . . . . . . . . . . . . 3
Valuation Considerations and Methods . . . . . . . . . . . . . . . 3
Certification of Independence . . . . . . . . . . . . . . . . . . . 4
Summary Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ExproFuels, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Business Description . . . . . . . . . . . . . . . . . . . . . . . 6
General Economic Considerations . . . . . . . . . . . . . . . . . . 6
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Financial Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Valuation Section - General . . . . . . . . . . . . . . . . . . . . . . . . 11
Valuation Methods . . . . . . . . . . . . . . . . . . . . . . . . . 11
Net Asset Value Method . . . . . . . . . . . . . . . . . . . . . . 11
Transactions Method . . . . . . . . . . . . . . . . . . . . . . . . 13
Capitalized Earnings Method . . . . . . . . . . . . . . . . . . . . 13
Valuation Section - ExproFuels, Inc. . . . . . . . . . . . . . . . . . . . 14
Valuation Approach . . . . . . . . . . . . . . . . . . . . . . . . 14
Asset Valuation Methods . . . . . . . . . . . . . . . . . . . . . . 15
Possible Sale Scenario . . . . . . . . . . . . . . . . . . . . . . 17
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 47
PURPOSE AND SCOPE
We have been asked our opinion of the fair market value, as of September
13, 1996, of 4.0 million shares (100% of the outstanding shares) of the common
stock of ExproFuels, Inc. ("ExproFuels"), a wholly owned subsidiary of The
Exploration Company. We understand that our opinion of value will be used to
assist the management of The Exploration Company in a restructuring involving
possible distribution of ExproFuels' shares to existing shareholders of The
Exploration Company.
THE EXPLORATION COMPANY
All of the common stock of ExproFuels is owned by The Exploration
Company, a publicly-traded company. In September of 1996, The Exploration
Company had approximately 3,500 shareholders and 9.9 million shares
outstanding. The Exploration Company's shares were traded on the NASDAQ
exchange at an average of $3.00 per share during the 30 day period prior to our
September 13, 1996, valuation date.
The Exploration Company was incorporated in the state of Colorado in
1979. The primary business of The Exploration Company is the development,
purchase, and sale of oil and gas production. In an effort to expand into
related areas, The Exploration Company entered into the alternative fuels
vehicles conversion business through the creation of its ExproFuels Division in
late 1992.
1
<PAGE> 48
EXPROFUELS, INC.
ExproFuels operated as a division of The Exploration Company until
August of 1996 when it was incorporated with the issuance of 4.0 million shares
of common stock. ExproFuels converts vehicle engines from gasoline to propane
or natural gas combustion. In addition, the Company supplies propane and
natural gas to customers, and constructs alternative fuels refueling
facilities. The Company's customers are primarily located in Texas and
Arizona. ExproFuels has a minority interest in CNG International, L.L.C., an
alternative fuel operation under development in Uzbekistan.
THE TRANSACTION
On September 3, 1996, The Exploration Company's Board of Directors voted
for distribution of approximately 1.9 million of ExproFuels' common stock to
The Exploration Company's existing shareholders of record at September 13,
1996. The common stock is $0.01 par, and there are no other classes of stock
outstanding.
DEFINITION OF FAIR MARKET VALUE
We define fair market value as the cash price at which ExproFuels'
shares would change hands between a willing buyer and a willing seller, each
having reasonable knowledge of relevant facts and neither being under any
compulsion to act.
2
<PAGE> 49
SOURCES OF INFORMATION
We have examined The Exploration Company's Form 10-K for the fiscal
years ended August 31, 1994, and 1995, The Exploration Company's Form 10-Q for
the quarters ended February 29 and May 31, 1996, and the Forms 8-K dated May
31, 1996, and September 4, 1996. We have also examined the preliminary reports
of the independent certified public accountants currently conducting an audit
of ExproFuels, Inc. as of August 31, 1995, and August 31, 1996.
Our analysis is based on information furnished to us by The Exploration
Company and key personnel at ExproFuels. We have obtained other data from
published and verbal sources of relevant information. We have held discussions
with The Exploration Company and ExproFuels' management regarding the
conditions and outlook for ExproFuels, Inc.'s operations, and made such other
investigations and analyses as we deemed necessary. We have relied on the
reports of independent certified public accountants for the completeness and
accuracy of the historical financial information submitted to us and have made
no independent verification of this information.
VALUATION CONSIDERATIONS AND METHODS
As of September 13, 1996, there was no public market in the common stock
of ExproFuels. Therefore, in arriving at our opinion of fair market value we
have followed the guidelines as set forth in Revenue Ruling 59-60 for the
valuation of securities of closely held companies. This method involves
consideration of all available financial data, as well as all relevant factors
affecting
3
<PAGE> 50
the fair market value, including, but not limited to, the following:
1. the nature and history of the business;
2. the economic outlook in general and the condition and outlook of
the industry;
3. the net asset value of ExproFuels and the financial condition of
the business;
4. the earning capacity of ExproFuels;
5. the capacity for paying dividends;
6. whether or not ExproFuels had goodwill or other intangible value;
7. previous sales or purchases of shares and the size of the block
to be valued;
8. the market price of the securities of companies involved in the
same or similar line of business having their securities actively
traded in a free and open market either on an exchange or over-
the-counter.
In determining the weight to be given to the various factors, we
exercised our judgment based on our experience as investment bankers, and
followed the recommendations in Revenue Ruling 59-60, as amended.
CERTIFICATION OF INDEPENDENCE
The appraiser has no current or anticipated financial interest in any of
the securities being valued. There is no relationship between The Exploration
Company or ExproFuels and the appraiser which would influence his opinion of
fair market value.
4
<PAGE> 51
SUMMARY CONCLUSION
In consideration of all relevant factors, we believe the fair market
value of 100% of the outstanding common stock of ExproFuels, Inc, as of
September 13, 1996, is between $440,000 and $600,000, or between $0.11 and
$0.15 per share. The $520,000 or $0.13 per share midpoint of the range is
ExproFuels's most probable fair market value.
--------------------------
David P. Martin
5
<PAGE> 52
EXPROFUELS, INC.
BUSINESS DESCRIPTION
ExproFuels converts gasoline and diesel engines to operate on compressed
natural gas (CNG), liquified petroleum gas (LPG), and liquified natural gas
(LNG). The Company designs, builds, owns, operates, and supplies alternative
fueling stations.
ExproFuels currently owns and operates nineteen LPG fueling stations in
Texas, and vehicle conversion facilities in San Antonio, Dallas, and Tucson.
GENERAL ECONOMIC CONSIDERATIONS
Economic factors affecting ExproFuels' business include a desire on the
part of the owners of fleets of vehicles to operate cost effectively.
Additionally, ExproFuels provides its customers with a more environmentally
responsible system for operating vehicles. As more stringent emissions
requirements are mandated by the Environmental Protection Agency and the
Department of Energy, systems such as those offered by ExproFuels become more
attractive. These factors in combination form the primary economic basis for
ExproFuels's operations.
CUSTOMERS
The customers of ExproFuels include transit systems, municipalities,
schools, and private transportation companies. Specific contracts include a
subcontract agreement to construct a refueling facility for Southwest ISD in
San Antonio, an agreement
6
<PAGE> 53
to convert twenty-nine school buses for Judson ISD in San Antonio, and
conversion of ten vehicles for the City of Tucson.
COMPETITION
In vehicle conversion and alternative fuels industry is highly
fragmented. While ExproFuels competes with several companies in each area of
its business, it rarely finds competition from one company offering ExproFuels'
wide range of services. Most of the Company's competitors concentrate on one
aspect of the conversion process rather than the "turn key" services such as
those offered by ExproFuels.
FACILITIES
ExproFuels offices in approximately 6,000 square feet of leased office
space in the north San Antonio area. The office space is leased from The
Exploration Company at rates and under terms believed by management to be
comparable to fair market rates.
EMPLOYEES
ExproFuels employs a total of nineteen full-time personnel. Twelve of
these are mechanical/technical employees directly involved in the vehicle
conversion process, and the remaining seven are management, supervisory and
administrative personnel. The Company uses contract employees in its sales
efforts and to supplement the full-time staff in peak periods.
7
<PAGE> 54
MANAGEMENT
Thomas H. Gose - President
Mr. Gose has been president of ExproFuels since its inception. He also
serves on the Board of The Exploration Company. Responsibilities include
managing day-to-day activities, overseeing fuel supply contracts, refueling
station construction, and vehicle conversions.
Frank K Alderman - Vice President, Operations
Mr. Alderman joined ExproFuels in 1993. Previous experience includes
ten years with Petrolane Gas Service, where his responsibilities included
managing Petrolane's conversion center in Louisiana. He also completed the
alternative fuels conversion of 200 materials handling vehicles for the U.S.
Navy. Mr. Alderman serves on the long-range planning and technical standards
committee of the Texas Propane Gas Association, the environmental committee of
the Alamo Area Council of Governments, and the safety and technology committee
of the Austin Clean Cities program.
Silverio M. Garcia - Vice President, Marketing and Sales
Mr. Garcia has over seventeen years experience in the oil and gas
industry, including serving as project manager for the planned conversion of
4,000 public transport buses in Mexico. He also served as international sales
manager for Wilson Technologies, the largest CNG refueling station manufacturer
in the U.S.
8
<PAGE> 55
Roberto R. Thomae - Chief Financial Officer
Mr. Thomae joined ExproFuels in 1995, bringing a diverse background of
management and financial experience to the Company. In addition to
participating in several start-ups, strategic alliances, and both domestic and
international projects, Mr. Thomae has owned his own international consulting
business, and has developed a primary interest in oil and gas production and
alternative fuels marketing.
LITIGATION
At the valuation date, management knows of no litigation pending or
threatened which would have a material adverse effect on the operations
of ExproFuels.
FINANCIAL SECTION
Following is summary income statement data taken from the preliminary
audit reports of Akin, Doherty, Klein & Feuge, P.C., independent certified
public accountants. While the audit is not complete as of the date of this
report, no substantial changes are expected in the final audit results.
9
<PAGE> 56
ExproFuels, Inc.
Summary Income Data
Years Ended August 31 - In Thousands
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues $ 821.6 $ 773.4 $1,046.4
Cost of Sales 701.2 1,071.0 1,236.9
General & Administrative 956.0 671.2 490.3
-------- -------- --------
Total Costs & Expenses $1,657.2 $1,742.2 $1,727.2
Operating Loss (835.5) (968.9) (680.8)
Other Income (Net) $ (37.4) $ (17.0) $ 35.9
Net Loss $ (872.9) $ (958.9) $ (645.0)
======== ======== ========
</TABLE>
10
<PAGE> 57
VALUATION SECTION - GENERAL
VALUATION METHODS
The principal methods used to value a closely held company's securities are
the: (1) Net Asset Value Method; (2) Transactions Method; and (3) Capitalized
Earnings Method. Following is a brief description of each:
Net Asset Value Method
There are several different types of net asset approaches to value
determinations. The most commonly used are as follows:
(a) Stated book value is derived from the company's balance
sheet and reflects the net difference between assets and liabilities as
stated, the remainder of which is reduced by the liquidation or
redemption value of any classes of securities having a preference to
assets ahead of the class being valued. While book value is significant
in valuing securities of regulated public utilities, banks and insurance
companies, book value in the ordinary industrial company seldom, if
ever, bears any direct relationship to the fair market value of the
company's securities. Book value may become meaningful if the company
has an unusually high level of liquid net assets relative to its
indicated value on an earnings basis.
(b) Adjusted book value is an approach which restates a
company's assets to reflect their market values as currently estimated.
This amount is then reduced by existing liabilities and securities
having a liquidation or redemption
11
<PAGE> 58
preference. Adjusted book value is given considerable weight in
determining the fair market value of securities of real estate and
investment holding companies. Adjusted book value may also affect the
fair market value of the stock when a company has acquired assets at a
price substantially over or under stated book value and these assets are
not required in the daily operations of the business.
(c) Replacement value is calculated by restating the assets to
reflect the cost of duplicating those assets at the valuation date.
This approach is a consideration in mergers or acquisitions where a
company must weigh the advantages of buying an existing business against
building its own facilities. This approach is seldom relevant to the
determination of the fair value of a closely held company's securities
unless the facilities in which the operations are conducted could be
disposed of and the company could acquire equally suitable facilities at
a substantially lower price.
(d) Liquidating value relates to the net proceeds that would
be available for distribution to the owners in the event all assets were
sold and liabilities discharged. This estimated net proceeds approach
is relevant to the fair market value of the securities when there is a
question as to whether or not the company is going to be continued as an
ongoing entity. This asset value approach becomes significant when a
company's indicated value based on its earnings is substantially below
its estimated liquidating value and the
12
<PAGE> 59
securities under consideration have the voting power to influence such
liquidation.
Transactions Method
The transactions approach is based on the prices at which transactions
in a company's securities have taken place. In many cases there is some degree
of market activity in a company's securities even though it is a privately held
company. In this regard, Revenue Ruling 59-60 states: "Sales of stock of a
closely held corporation should be carefully investigated to determine whether
they represent transactions at arm's length. Forced or distress sales do not
ordinarily reflect fair market value nor do isolated sales in small amounts
necessarily control as the measure of value. This is especially true in the
valuation of a controlling interest in a corporation."..."such sales as occur
at irregular intervals seldom reflect all of the elements of a representative
transaction as defined by the term fair market value."
Capitalized Earnings Method
This valuation method consists of capitalizing the average or current
earnings at an appropriate rate of return on the investment. An accepted
method used in determining an appropriate capitalization rate for a privately
held company is to study the capitalization rates that exist for comparable
companies whose securities are actively traded in the public market. These
13
<PAGE> 60
capitalization rates vary with the quality of the enterprise, and thus
recognize the longer term profit possibilities which are otherwise difficult to
establish with precision. Among the more important factors to be taken into
consideration in deciding upon a capitalization rate in a particular case are:
(1) the nature of the business; (2) the risks involved; and (3) the stability
or irregularity of earnings. Additional factors that must be considered in
determining an appropriate capitalization rate of a closely held company's
earnings are the liquidity of the investment as compared to those publicly
traded companies, management depth, geographic and/or product diversification,
and the size and degree of control represented by the securities under
consideration.
VALUATION SECTION - EXPROFUELS, INC.
VALUATION APPROACH
ExproFuels is a "start-up" company in the development phase. Since its
inception in late 1992 ExproFuels has relied on its parent for funding.
ExproFuels is experiencing increasing revenues from operations, but has yet to
earn a profit. As a result, valuation approaches based on historical earnings
are not applicable.
The markets in which ExproFuels operates are highly competitive, and the
vehicle conversion processes employed by ExproFuels are not proprietary.
ExproFuels does no manufacturing, and the machinery and equipment purchased and
used by ExproFuels is available from several manufacturers. There is no
discernable
14
<PAGE> 61
goodwill or other intangible value attributable to ExproFuels at this time.
This report will focus on asset values, replacements values, and the
value added by The Exploration Company in terms of time and effort expended to
the valuation date. In general, the approach will be one of determining what a
willing buyer would pay for ExproFuels's stock as compared to the cost of
duplicating the financial and operating position ExproFuels had achieved at the
September 13, 1996, valuation date.
ASSET VALUATION METHODS
As of August 31, 1996, the financial reporting period closest to the
valuation date, the stated book value of ExproFuels's assets net of liabilities
was $908,179 or $0.23 per share.
Adjusting the book values of the assets to estimated fair market values
results in a $511,500 or $0.13 per share adjusted net asset value as shown
below:
15
<PAGE> 62
EXPROFUELS, INC.
Summary Balance Sheet Data
August 31, 1996
Preliminary Audit - In Thousands
-----------------------------------------
<TABLE>
<CAPTION>
As Stated As Adjusted
--------- -----------
<S> <C> <C>
Cash $ 20.8 $ 20.8
Accounts Receivable 154.7 154.7
Inventories 144.0 144.0
Prepaid Expense 19.3 10.0
-------- --------
Total Current $ 338.8 $ 329.5
Net Property, Plant & $ 275.0 200.0
Equipment
Investment - CNG 592.4 300.0
International, LLC
Other Assets 43.3 23.3
-------- --------
Total Assets $1,249.4 $ 852.8
Liabilities $ 341.3 $ 341.3
-------- --------
Book Value - As Stated $ 908.2
Book Value - As Adjusted $ 511.5
Per Share - As Stated $ 0.23
Per Share - As Adjusted $ 0.13
</TABLE>
16
<PAGE> 63
In arriving at the $511,500 or $.013 per share adjusted book value, the
following adjustments were made to the stated values:
Prepaid expenses were reduced from $19,300 to $10,000 to reflect
management's belief that approximately one-half of these expenses could not be
recovered in sale or liquidation.
Property, Plant & Equipment was reduced to $200,000 based on estimates
of proceeds which could be achieved in an unhurried sale of these assets.
The ExproFuels' investment in CNG International, L.L.C. was in the form
of approximately $330,000 cash, with the remainder paid as parts and services
provided by ExproFuels. This investment was adjusted to $300,000 to reflect
the lack of marketability and minority interest discounts appropriate for an
investment of this nature.
POSSIBLE SALE SCENARIO
Because of our experience in structuring, selling, and purchasing
privately held securities, we can construct with a reasonable degree of
confidence a possible 100% sale scenario. In the case of ExproFuels, a
potential buyer would have two choices - either purchase ExproFuels or start
another company. A buyer would include the value of the time saved by
purchasing ExproFuels in his or her calculations.
The seller would attempt to recover the investment and a premium for any
value added during the start-up phase. A major
17
<PAGE> 64
consideration for both buyer and seller would be the value of the investment in
CNG International.
In a transaction involving the sale of 100% of ExproFuels' stock, the
seller is asking the buyer to assume all assets and liabilities on an "as is"
basis. For a purchaser of ExproFuels, the question is: "How much should I pay
for the stock of a company with a history of losses and the certainty of
additional capital requirements of an unknown amount?" For the seller, the
question is: "Can I get my investment back and a little more for my start-up
efforts and the expense of the transaction?"
We believe the buyer would first begin negotiations by offering to take
the assets and assume all liabilities for no payment to the seller. In effect,
the buyer would offer to pay nothing for the stock, but would take on the
liabilities and continue funding the losses.
The seller would counter that purchasing the stock will save the buyer
valuable time as compared to starting a new company. The seller would also
express a desire to recover some of the $2.6 million accumulated loss incurred
from funding the start-up of ExproFuels.
We believe arms-length negotiations for 100% of the ExproFuels' stock
would end with a transaction at the point approximately mid-way between a
$400,000 bid and a $700,000 offer, or at approximately $550,000. Transaction
costs would result in the seller receiving net proceeds of approximately
$500,000 for 100% of the ExproFuels' common stock.
18
<PAGE> 65
CONCLUSION
We believe both the willing buyer and the willing seller would consider
the following primary factors in arriving at the fair market value of 100% of
the outstanding stock of ExproFuels, Inc. at September 13, 1996:
o The potential for realizing substantial gains if the ExproFuels
project proves profitable;
o the probability of having to invest significant additional
capital to reach consistently profitable operations;
o the reluctance of potential customers to shift from established
patterns of providing fuel for their vehicle fleets in favor of a
new company;
o the amount debt on the balance sheet which must be dealt with
prior to compensating the holders of the common stock;
o possible competition from large and well-financed fuels
management companies;
o the fair market value of the underlying assets, and;
o the alternative investments of greater liquidity and lower risk
available to a potential buyer.
In consideration of all relevant factors, and as of September 13, 1996,
we believe the fair market value of 100% of the ExproFuels, Inc. common stock
is between $440,000 and $600,000. A purchase at the $520,000 mid-point of the
range would give the buyer control of an entity which is closer than a new
start-up to generating revenue. The $520,000 figure would allow the seller to
remove a good deal of risk from its balance sheet and eliminate future funding
requirements.
* * * * * * * * * * *
19
