SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) MARCH 23, 2005
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PACIFIC ETHANOL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 000-21467 41-2170618
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
5711 N. WEST AVENUE, FRESNO, CALIFORNIA 93711
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (559) 435-1771
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ACCESSITY CORP., 3300 UNIVERSITY DRIVE, SUITE 201, CORAL SPRINGS, FLORIDA 33065
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(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (SEE General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
PRELIMINARY NOTE
Certain capitalized and other terms used throughout this Report on Form
8-K are defined in "Item 2.01--Completion of Acquisition or Disposition of
Assets" set forth below concerning a reincorporation merger by Accessity Corp.,
a New York corporation ("Accessity"), the predecessor to Pacific Ethanol, Inc.,
a Delaware corporation (the "Company"), into the State of Delaware and a
subsequent share exchange transaction involving the Company, three other
entities and the holders of the shares of capital stock or other equity
interests of those three entities.
ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
In connection with the Reincorporation Merger and the Share Exchange
Transaction, the Company entered into the following material agreements, the
material terms of which, except as otherwise disclosed in the other Items of
this Report on Form 8-K, are briefly described below.
AGREEMENT AND PLAN OF MERGER DATED MARCH 23, 2005 BETWEEN THE COMPANY AND
ACCESSITY CORP.
The disclosures contained in Item 2.01 of this Report on Form 8-K
regarding the Reincorporation Merger are incorporated herein by reference. The
Agreement and Plan of Merger was executed in connection with the Reincorporation
Merger and provides that all shareholders of Accessity immediately prior to the
consummation of the Reincorporation Merger will be stockholders of the Company
immediately thereafter. In addition, the Agreement and Plan of Merger provides
that the officers and directors of the Company immediately prior to the
consummation of the Reincorporation Merger will be the officers and directors of
the Company immediately thereafter. Finally, the Agreement and Plan of Merger
provides that the certificate of incorporation and bylaws of the Company
immediately prior to the consummation of the Reincorporation Merger will be the
certificate of incorporation and bylaws of the Company immediately thereafter.
SHARE EXCHANGE AGREEMENT DATED AS OF MAY 14, 2004, AND AS AMENDED BY
AMENDMENTS NO. 1 THROUGH 5, BY AND AMONG ACCESSITY CORP., PACIFIC ETHANOL,
INC., KINERGY MARKETING, LLC, REENERGY, LLC AND THE OTHER PARTIES NAMED
THEREIN
The disclosures contained in Item 2.01 of this Report on Form 8-K are
incorporated herein by reference. The Share Exchange Agreement was executed May
14, 2004 and its various amendments were executed thereafter. The Share Exchange
Transaction was consummated on March 23, 2005.
CONFIDENTIALITY, NON-COMPETITION, NON-SOLICITATION AND CONSULTING AGREEMENT
DATED MARCH 23, 2005 BETWEEN THE COMPANY AND BARRY SIEGEL
In connection with the Share Exchange Transaction, the Company entered
into a Confidentiality, Non-Competition, Non-Solicitation and Consulting
Agreement with Barry Siegel, the terms of which are substantially the same as
the terms of the Company's Confidentiality, Non-Competition, Non-Solicitation
and Consulting Agreement with Philip B. Kart, as described immediately below;
provided, however, that the agreement with Mr. Siegel provides for the issuance
of 400,000 shares of common stock of the Company and also provides for the
transfer of DriverShield CRM Corp., a wholly-owned subsidiary of the Company, to
Mr. Siegel.
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CONFIDENTIALITY, NON-COMPETITION, NON-SOLICITATION AND CONSULTING AGREEMENT
DATED MARCH 23, 2005 BETWEEN THE COMPANY AND PHILIP B. KART
In connection with the Share Exchange Transaction, the Company entered
into a Confidentiality, Non-Competition, Non-Solicitation and Consulting
Agreement with Philip B. Kart. The agreement provides for certain standard
confidentiality protections in favor of the Company prohibiting Mr. Kart from
disclosure or use of confidential information of the Company. The agreement also
provides that Mr. Kart is prohibited from competing with the Company for a
period of five years. In addition, during the period during which Mr. Kart is
prohibited from competing, Mr. Kart is prohibited from soliciting customers,
employees or consultants of the Company and is further prohibited from making
disparaging comments regarding the Company, its officers or directors, or its
other personnel, products or services. The agreement also provides for various
consulting obligations on the part of Mr. Kart for a period of five years,
including with respect to (i) certain ongoing litigation of the Company, (ii)
transitional matters affecting the Company in connection with the Share Exchange
Transaction, (iii) long-range planning, strategic direction and integration and
rationalization processes, and (iv) various matters relating to the Company's
status as a public company. Mr. Kart also agreed to terminate his employment
agreement with the Company and waive certain compensation that would be due to
him in connection with change of control provisions contained in his employment
agreement. See also Item 1.02 below. In consideration of Mr. Kart's obligations
under the agreement, the Company issued to Mr. Kart 200,000 shares of common
stock of the Company.
CONFIDENTIALITY, NON-COMPETITION AND NON-SOLICITATION AGREEMENTS DATED MARCH
23, 2005 BETWEEN THE COMPANY AND EACH OF NEIL KOEHLER, TOM KOEHLER, WILLIAM
JONES, ANDREA JONES AND RYAN TURNER
In connection with the Share Exchange Transaction, the Company entered
into Confidentiality, Non-Competition and Non-Solicitation Agreements with each
of Neil Koehler, Tom Koehler, William Jones, Andrea Jones and Ryan Turner. The
agreement is substantially the same for each of the foregoing persons, except as
otherwise noted below, and provides for certain standard confidentiality
protections in favor of the Company prohibiting each of the foregoing persons,
each of whom is a stockholder and some of whom are officers and/or directors of
the Company, from disclosure or use of confidential information of the Company.
The agreement also provides that each of the foregoing persons is prohibited
from competing with the Company for a period of five years; however, Neil
Koehler's agreement provides that he is prohibited from competing with the
Company for a period of three years. In addition, during the period during which
each of the foregoing persons is prohibited from competing, they are also
prohibited from soliciting customers, employees or consultants of the Company
and are further prohibited from making disparaging comments regarding the
Company, its officers or directors, or its other personnel, products or
services.
INDEMNIFICATION AGREEMENTS DATED MARCH 23, 2005 BETWEEN THE COMPANY AND EACH
OF ITS EXECUTIVE OFFICERS AND DIRECTORS
Following the Share Exchange Transaction, the Company entered into
Indemnification Agreements with each of its executive officers and directors,
namely, Neil Koehler, Ryan Turner, Maria Tharpe, Tom Koehler, Frank P. Greinke,
John Pimentel, Terry L. Stone and Kenneth J. Friedman (each, an "Indemnitee").
Under the Indemnification Agreements, the Company has agreed to
indemnify each Indemnitee in connection with any third-party proceeding or
threatened proceeding against an Indemnitee or in connection with a proceeding
or threatened proceeding by or in the right of the Company, such as a
stockholder derivative suit, by reason of the fact that an Indemnitee is or was
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an officer and/or director of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another enterprise,
against all expenses, damages, judgments, amounts paid in settlement, fines,
penalties and ERISA excise taxes actually and reasonably incurred by the
Indemnitee in connection with the defense or settlement of any such proceeding,
to the fullest extent permitted by the Delaware General Corporation Law, whether
or not the Indemnitee was the successful party in any such proceeding; provided,
however, that any settlement of a third-party proceeding must be approved in
writing by the Company, and any settlement of a proceeding by or in the right of
the Company is settled with the approval of a court of competent jurisdiction or
indemnification of such amounts is otherwise ordered by a court of competent
jurisdiction in connection with such proceeding.
In addition, the Company is required to advance expenses on behalf of
the Indemnitee in connection with Indemnitee's defense in any such proceeding;
provided, that the Indemnitee undertakes in writing to repay such amounts to the
extent that it is ultimately determined that the Indemnitee is not entitled to
indemnification by the Company.
No indemnification payments or payments for expenses may be made by the
Company under the agreements (i) to indemnify or advance expenses to the
Indemnitee with respect to actions initiated or brought voluntarily by the
Indemnitee and not by way of defense, except with respect to actions brought to
establish or enforce a right to indemnification or advancement of expenses under
the agreement or any other statute or law or otherwise as required under the
Delaware General Corporation Law, but such indemnification or advancement of
expenses may be provided by the Company in specific cases if approved by the
Board of Directors by a majority vote of a quorum thereof consisting of
directors who are not parties to such action, (ii) to indemnify the Indemnitee
for any expenses, damages, judgments, amounts paid in settlement, fines,
penalties or ERISA excise taxes for which payment is actually made to the
Indemnitee under a valid and collectible insurance policy, except in respect of
any excess beyond the amount paid under such insurance, (iii) to indemnify the
Indemnitee for any expenses, damages, judgments, amounts paid in settlement,
fines, penalties or ERISA excise taxes for which the Indemnitee has been or is
indemnified by the Company or any other party otherwise than pursuant to the
agreement, or (iv) to indemnify the Indemnitee for any expenses, damages,
judgments, fines or penalties sustained in any proceeding for an accounting of
profits made from the purchase or sale by Indemnitee of securities of the
Company pursuant to the provisions of Section 16(b) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder or similar
provisions of any federal, state or local statutory law.
The Company is also required under the agreement, at an Indemnitee's
request, to maintain in full force and effect, at its sole cost and expense,
directors' and officers' liability insurance by an insurer, in an amount and
with a deductible reasonably acceptable to the Indemnitee covering the period
during which the Indemnitee is serving in any one or more of the capacities
covered by the agreement and for so long thereafter as the Indemnitee shall be
subject to any possible claim or threatened, pending or completed proceeding by
reason of the fact that the Indemnitee is serving in any of the capacities
covered by the agreement; provided, that the Company shall have no obligation to
maintain such insurance if the Company determines, in good faith, that (i) such
insurance cannot be obtained on terms which are commercially reasonable, (ii)
the premium costs for such insurance is significantly disproportionate to the
amount of coverage provided, (iii) the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit, or (iv) the
Company, after using best efforts, is otherwise unable to obtain such insurance.
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EXECUTIVE EMPLOYMENT AGREEMENTS DATED MARCH 23, 2005 BETWEEN THE COMPANY AND
EACH OF NEIL KOEHLER, RYAN TURNER AND TOM KOEHLER
The Executive Employment Agreement with Neil Koehler provides for a
three-year term and automatic one-year renewals thereafter, unless either the
employee or the Company provides written notice to the other at least 90 days
prior to the expiration of the then-current term. The Executive Employment
Agreements with Ryan Turner and Tom Koehler provide for a one-year term and
automatic one-year renewals thereafter, unless either the employee or the
Company provides written notice to the other at least 90 days prior to the
expiration of the then-current term.
Neil Koehler is to receive a base salary of $200,000 per year and is
entitled to receive a cash bonus not to exceed 50% of his base salary to be paid
based upon performance criteria set by the board on an annual basis and an
additional cash bonus not to exceed 50% of the net free cash flow (defined as
revenues of Kinergy Marketing, LLC, less his salary and performance bonus, less
capital expenditures and all expenses incurred specific to Kinergy Marketing,
LLC), subject to a maximum of $300,000 in any given year; provided that such
bonus will be reduced by ten percentage points each year, such that 2009 will be
the final year of such bonus at 10% of net free cash flow.
Ryan Turner and Tom Koehler are each to receive a base salary of
$125,000 per year and are each entitled to receive cash bonuses not to exceed
50% of their base salary to be paid based upon performance criteria set by the
board on an annual basis.
The Company is also required to provide an office and administrative
support to each of Messrs. Koehler, Turner and Koehler and certain benefits,
including medical insurance (or, if inadequate due to location of permanent
residence, reimbursement of up to $1,000 per month for obtaining health
insurance coverage), three weeks of paid vacation per year, participation in the
stock option plan to be developed in relative proportion to the position in the
organization, and participation in benefit plans on the same basis and to the
same extent as other executives or employees.
Each of Messrs. Koehler, Turner and Koehler are also entitled to
reimbursement for all reasonable business expenses incurred in promoting or on
behalf of the business of the Company, including expenditures for entertainment,
gifts and travel. Upon termination or resignation for any reason, the terminated
employee is entitled to receive severance equal to three months of base salary
during the first year after termination or resignation and six months of base
salary during the second year after termination unless he is terminated for
cause or voluntarily terminates his employment without providing the required
written notice. If the employee is terminated (other than for cause) or
terminates for good reason following, or within the 90 days preceding, any
change in control, in lieu of further salary payments to the employee, the
Company may elect to pay a lump sum severance payment equal to the amount of his
annual base salary.
The term "for good reason" is defined in each of the Executive
Employment Agreements as (i) a general assignment by the Company for the benefit
of creditors or filing by the Company of a voluntary bankruptcy petition or the
filing against the Company of any involuntary bankruptcy which remains
undismissed for 30 days or more or if a trustee, receiver or liquidator is
appointed, (ii) any material changes in the employee's titles, duties or
responsibilities without his express written consent, or (iii) the employee is
not paid the compensation and benefits required under the Employment Agreement.
The term "for cause" is defined in each of the Executive Employment
Agreements as (i) any intentional misapplication by the employee of the
Company's funds or other material assets, or any other act of dishonesty
injurious to the Company committed by the employee; or (ii) the employee's
conviction of (a) a felony or (b) a crime involving moral turpitude; or (iii)
the employee's use or possession of any controlled substance or chronic abuse of
alcoholic beverages, which use or possession the board reasonably determines
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renders the employee unfit to serve in his capacity as a senior executive of the
Company; or (iv) the employee's breach, nonperformance or nonobservance of any
of the terms of his employment agreement with the Company, including but not
limited to the employee's failure to adequately perform his duties or comply
with the reasonable directions of the board; but notwithstanding anything in the
foregoing subsections (iii) or (iv) to the contrary, the Company shall not
terminate the employee unless the board first provides the employee with a
written memorandum describing in detail how his performance thereunder is not
satisfactory and the employee is given a reasonable period of time (not less
than 30 days) to remedy the unsatisfactory performance related by the board to
the employee in that memorandum. A determination of whether the employee has
satisfactorily remedied the unsatisfactory performance shall be promptly made by
a majority of the disinterested directors of the board (or the entire board, but
not including the employee, if there are no disinterested directors) at the end
of the period provided to the employee for remedy, and the board's determination
shall be final.
A "change in control" of the Company is deemed to have occurred if, in
a single transaction or series of related transactions: (i) any person (as such
term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934
("Exchange Act")), other than a trustee or fiduciary holding securities under an
employment benefit program is or becomes a "beneficial owner" (as defined in
Rule 13-3 under the Exchange Act), directly or indirectly of securities of the
Company representing 51% or more of the combined voting power of the Company,
(ii) there is a merger (other than a reincorporation merger) or consolidation in
which the Company does not survive as an independent company, or (iii) the
business of the Company is disposed of pursuant to a sale of assets.
STOCK PURCHASE AGREEMENT AND ASSIGNMENT AND ASSUMPTION AGREEMENT DATED MARCH
23, 2005 BETWEEN THE COMPANY AND BARRY SIEGEL
The Stock Purchase Agreement provides for the sale by the Company, and
the purchase by Barry Siegel, of all of the outstanding capital stock of Sentaur
Corp., which was a wholly-owned subsidiary of the Company, for the cash sum of
$5,000. The Assignment and Assumption Agreement provides for the assignment by
the Company and the assumption by Sentaur Corp. of the obligations under certain
contracts relevant to the business of Sentaur Corp., but that the Company does
not deem to be material to the Company or its business.
LETTER AGREEMENT DATED MARCH 23, 2005 BETWEEN THE COMPANY AND NEIL KOEHLER
In connection with the Share Exchange Transaction, the Company became
the sole owner of the membership interests of Kinergy Marketing, LLC, an Oregon
limited liability company. Neil Koehler, the President and Chief Executive
Officer and a principal shareholder of the Company was formerly the sole owner
of the membership interests of Kinergy Marketing, LLC and personally guaranteed
certain obligations of Kinergy Marketing, LLC to Comerica Bank. As part of the
consummation of the Share Exchange Transaction, the Company executed a Letter
Agreement dated March 23, 2005 with Neil Koehler that provides that the Company
will, as soon as reasonably practical, replace Mr. Koehler as guarantor under
certain financing agreements between Kinergy Marketing, LLC and Comerica Bank.
Under the Letter Agreement, prior to the time that Mr. Koehler is replaced by
the Company as guarantor under such financing agreements, the Company will
defend and hold harmless Mr. Koehler, his agents and representatives for all
losses, claims, liabilities and damages caused or arising from out of (i) the
Company's failure to pay its indebtedness under such financing agreements in the
event that Mr. Koehler is required to pay such amounts to Comerica Bank pursuant
to his guaranty agreement with Comerica Bank, or (ii) a breach of the Company's
duties to indemnify and defend as set forth above.
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ASSIGNMENT OF TERM LOAN AGREEMENT AND DEED OF TRUST DATED MARCH 23, 2005
BETWEEN THE COMPANY, LYLES DIVERSIFIED, INC. AND THE OTHER PARTIES NAMED
THEREIN
In connection with the Share Exchange Transaction, the Company was
assigned and assumed a Term Loan Agreement and Deed of Trust between Lyles
Diversified, Inc. and PEI California. The Term Loan Agreement dated June 16,
2003 between PEI California and Lyles Diversified, Inc. provides for a loan in
the amount of up to $5,100,000 to PEI California. Outstanding principal amounts
accrued interest at the rate of five percent per annum through June 19, 2004 and
accrue interest at a rate per annum equal to the prime rate as published in THE
WALL STREET JOURNAL plus two percentage points from June 20, 2004 until
maturity. One-third of the principal outstanding on June 20, 2006 is payable on
that date and one-half of the principal outstanding on June 20, 2007 is payable
on that date. All remaining outstanding principal, together with any accrued
interest thereon, is due and payable on June 20, 2008. The Company will be
required to prepay principal outstanding in the event that (i) the Company's
construction cost for its Madera facility to be constructed is less than $42.6
million, in which case the Company is then required to pay the difference
between the actual construction cost and $42.6 million, up to the full amount of
the principal outstanding, or (ii) the Company's obtains construction financing
for its second facility to be constructed, in which case the Company is then
required to pay all principal and accrued interest outstanding. Lyles
Diversified, Inc. is entitled to convert up to $1,500,000 of the principal
outstanding into shares of common stock of the Company at a fixed price of $1.50
per share for a period up to and including March 31, 2005. The Term Loan
Agreement contains standard representations and warranties, covenants, events of
default and remedies upon the occurrence of an event of default.
In connection with the Term Loan Agreement, Lyles Diversified, Inc. was
granted a security interest in the real property on which the Company's Madera
facility is to be constructed pursuant to a Deed of Trust (Non-Construction)
Security Agreement and Fixture Filing with Assignment of Rents effective as of
June 20, 2003 by and among PEI California, Lyles Diversified, Inc. and Chicago
Title Company as trustee.
REGISTRATION RIGHTS AGREEMENT DATED MARCH 23, 2005 BETWEEN PEI CALIFORNIA
AND THE PURCHASERS SUBSCRIBING TO A PRIVATE PLACEMENT OF PEI CALIFORNIA
In connection with the Share Exchange Transaction, the Company
effectively became obligated under Registration Rights Agreements dated March
23, 2005 with 63 purchasers subscribing to a private placement of securities of
PEI California to register for resale shares of common stock, and shares of
common stock underlying warrants, issued in connection with the private
placement. As a result of the Share Exchange Transaction, the shares of common
stock of PEI California and the warrants to purchase shares of common stock of
PEI California were exchanged for shares of common stock of the Company and
warrants to purchase shares of common stock of the Company.
Under the Registration Rights Agreement, the Company is obligated to
file, on the 151st day following March 23, 2005, a Registration Statement with
the Securities and Exchange Commission registering for resale shares of common
stock, and shares of common stock underlying investor warrants and certain of
the placement agent warrants, issued in connection with the private placement.
If the Company (i) does not file the Registration Statement within the time
period prescribed, or (ii) fails to file with the Securities and Exchange
Commission a request for acceleration in accordance with Rule 461 promulgated
under the Securities Act of 1933, within five trading days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Securities and Exchange Commission that the Registration Statement will not be
"reviewed," or is not subject to further review, or (iii) the Registration
Statement filed or required to be filed under the Registration Rights Agreement
is not declared effective by the Securities and Exchange Commission on or before
225 days following March 23, 2005, or (iv) after the Registration Statement is
first declared effective by the Securities and Exchange Commission, it ceases
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for any reason to remain continuously effective as to all securities registered
thereunder, or the holders of such securities are not permitted to utilize the
prospectus contained in the Registration Statement to resell such securities,
for more than an aggregate of 45 trading days during any 12-month period (which
need not be consecutive trading days) (any such failure or breach being referred
to as an "Event," and for purposes of clause (i) or (iii) the date on which such
Event occurs, or for purposes of clause (ii) the date on which such five-trading
day period is exceeded, or for purposes of clause (iv) the date on which such
45-trading day-period is exceeded being referred to as "Event Date"), then in
addition to any other rights the holders of such securities may have under the
Registration Statement or under applicable law, then, on each such Event Date
and on each monthly anniversary of each such Event Date (if the applicable Event
shall not have been cured by such date) until the applicable Event is cured, the
Company is required to pay to each such holder an amount in cash, as partial
liquidated damages and not as a penalty, equal to 2.0% of the aggregate purchase
price paid by such holder pursuant to the Securities Purchase Agreement relating
to such securities then held by such holder. If the Company fails to pay any
partial liquidated damages in full within seven days after the date payable, the
Company is required to pay interest thereon at a rate of 18% per annum (or such
lesser maximum amount that is permitted to be paid by applicable law) to such
holder, accruing daily from the date such partial liquidated damages are due
until such amounts, plus all such interest thereon, are paid in full. The
partial liquidated damages are to apply on a daily pro-rata basis for any
portion of a month prior to the cure of an Event.
The Registration Rights Agreement also provides for customary
piggy-back registration rights whereby holders of shares of common stock, or
warrants to purchase shares of common stock, of the Company can cause the
Company to register such shares for resale in connection with the Company's
filing of a Registration Statement with the Securities and Exchange Commission
to register shares in another offering. The Registration Rights Agreement also
contains customary representations and warranties, covenants and limitations.
FORM OF WARRANT DATED MARCH 23, 2005 ISSUED TO 63 PURCHASERS SUBSCRIBING TO
A PRIVATE PLACEMENT OF PEI CALIFORNIA
In connection with a private placement of securities by PEI California
that occurred immediately prior to the consummation of the Share Exchange
Transaction the Company issued to 63 investors warrants to acquire an aggregate
of 2,100,000 shares of common stock of the Company, including warrants to
purchase an aggregate of 1,400,000 shares of common stock of the Company at an
exercise price of $3.00 per share and warrants to purchase an aggregate of
700,000 shares of common stock of the Company at an exercise price of $5.00 per
share. The term of the warrants is two years. The warrants include standard cash
exercise provisions. The warrants also include cashless exercise provisions that
are applicable if, at any time after one year from the date of issuance of the
warrants, there is no effective Registration Statement registering, or no
current prospectus available for, the resale of the shares underlying the
warrants by the holder thereof. The shares of common stock underlying the
warrants are to be registered by the Company for resale as discussed above with
regard to the Registration Rights Agreement dated March 23, 2005. The warrants
also include certain anti-dilution provisions that provide that, in the event
the Company issues equity securities or instruments convertible into equity
securities of the Company, the exercise price of the warrants will be adjusted
downward to be equal to the price at which such equity securities are sold, or
the price at which such instruments are convertible into equity securities of
the Company, as applicable. In addition, the anti-dilution provisions provide
that the number of shares covered by the warrants shall be increased such that
the new number of shares multiplied by the adjusted exercise price will equal
the aggregate exercise price for all shares covered by the warrant and in effect
immediately prior to the dilutive issuance.
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FORM OF WARRANT DATED MARCH 23, 2005 ISSUED TO PLACEMENT AGENTS IN
CONNECTION WITH A PRIVATE PLACEMENT BY PEI CALIFORNIA
In connection with a private placement of securities by PEI California
that occurred immediately prior to the consummation of the Share Exchange
Transaction, the Company issued to four placement agents warrants to acquire an
aggregate of 678,000 shares of common stock of the Company at an exercise price
of $3.00 per share. The term of the warrants is five years. The warrants include
standard cash exercise provisions and also include cashless exercise provisions.
The warrants also provide for customary piggy-back registration rights whereby
holders of the warrants can cause the Company to register such shares for resale
in connection with the Company's filing of a Registration Statement with the
Securities and Exchange Commission to register shares in another offering. The
Company's understanding with the placement agents is that the Company will
register for resale shares underlying the warrants in connection with the
Company's filing of the Registration Statement that is contemplated by the
Registration Rights Agreement described above. The registration rights
provisions contained in the warrant also contain customary representations and
warranties, covenants and limitations.
WARRANT DATED MARCH 23, 2005 ISSUED BY THE COMPANY TO LIVIAKIS
COMMUNICATIONS, INC.
In connection with the consummation of the Share Exchange Transaction,
the Company issued to Liviakis Communications, Inc. a warrant to acquire an
aggregate of 230,000 shares of common stock of the Company at an exercise price
of $0.0001 per share. The warrant includes standard cash exercise provisions and
does not include cashless exercise provisions. The warrant also provides for
customary piggy-back registration rights whereby the holder of the warrant can
cause the Company to register such shares for resale in connection with the
Company's filing of a Registration Statement with the Securities and Exchange
Commission to register shares in another offering. The Company's understanding
with the warrant holder is that the Company will register for resale shares
underlying the warrants in connection with the Company's filing of the
Registration Statement that is contemplated by the Registration Rights Agreement
described above. The registration rights provisions contained in the warrant
also contain customary representations and warranties, covenants and
limitations.
ITEM 1.02. TERMINATION OF A MATERIAL DEFINITIVE AGREEMENT.
TERMINATION OF EMPLOYMENT AGREEMENTS
In connection with the Share Exchange Transaction, Barry Siegel and
Philip B. Kart each resigned from their respective positions with the Company,
and the following agreements were terminated as a result:
EMPLOYMENT AGREEMENT DATED FEBRUARY 4, 2002 BETWEEN THE COMPANY AND BARRY
SIEGEL, AS AMENDED BY THAT CERTAIN FIRST AMENDMENT TO THE EMPLOYMENT
AGREEMENT DATED MARCH 3, 2005 BETWEEN THE COMPANY AND MR. SIEGEL
The Company was a party to an Employment Agreement with Barry Siegel
that commenced on January 1, 2002, and initially expired on December 31, 2004
and which expiration date, under the amendment referenced above, was extended to
December 31, 2007. Mr. Siegel's annual salary was $300,000, and was granted
stock options, under the Company's Amended 1995 Incentive Stock Plan, to
purchase 60,000 shares of the Company's common stock, in addition to certain
other perquisites. The Employment Agreement provided that following a change of
control, which included the Share Exchange Transaction, the Company would be
required to pay Mr. Siegel (i) a severance payment of 300% of his average annual
salary for the past five years, less $100, (ii) the cash value of his
outstanding but unexercised stock options, and (iii) other perquisites should he
be terminated for various reasons specified in the agreement. The agreement
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specified that in no event would any severance payments exceed the amount the
Company could deduct under the provisions of the Internal Revenue Code. In
recognition of the sale of a division of the Company, Mr. Siegel was also
awarded a $250,000 bonus, which was paid in February 2002, and an additional
grant of options to purchase 50,000 shares of common stock of the Company.
In connection with the Share Exchange Transaction and the
Confidentiality, Non-Competition, Non-Solicitation and Consulting Agreement
dated March 23, 2005 between the Company and Mr. Siegel, Mr. Siegel's Employment
Agreement was terminated and he waived the payments that otherwise would have
been due to him under the change of control provisions of his Employment
Agreement.
EMPLOYMENT AGREEMENT DATED FEBRUARY 4, 2002 BETWEEN THE COMPANY AND PHILIP
B. KART, AS AMENDED BY THAT CERTAIN FIRST AMENDMENT TO THE EMPLOYMENT
AGREEMENT DATED NOVEMBER 15, 2002 BETWEEN THE COMPANY AND MR. KART AND AS
FURTHER AMENDED BY THAT CERTAIN SECOND AMENDMENT TO THE EMPLOYMENT AGREEMENT
DATED MARCH 3, 2005 BETWEEN THE COMPANY AND MR. KART
The Company was a party to an Employment Agreement with Philip B. Kart
that commenced on January 1, 2002, and initially expired on January 1, 2004 and
which expiration date, under the amendments referenced above, was extended first
to December 31, 2004 and subsequently to December 31, 2005. Mr. Kart's annual
salary was $155,000 per annum and he was granted stock options, under the
Company's Amended 1995 Incentive Stock Plan, providing the right to purchase
30,000 shares of the Company's common stock, in addition to certain other
perquisites. The Employment Agreement provided that following a change of
control, which included the Share Exchange Transaction, the Company would be
required to pay Mr. Kart a severance payment of 100% of his annual salary. The
Employment Agreement also provided that following a change in control, all stock
options previously granted to him would immediately become fully exercisable.
The amendment to the Employment Agreement dated November 15, 2002 also provided
for relocation expense payments that were conditioned upon Mr. Kart's relocation
to the Company's former headquarters in Florida, which occurred in early 2003.
In connection with the Share Exchange Transaction and the
Confidentiality, Non-Competition, Non-Solicitation and Consulting Agreement
dated March 23, 2005 between the Company and Mr. Kart, Mr. Kart's Employment
Agreement was terminated and he waived the payments that otherwise would have
been due to him under the change of control provisions of his Employment
Agreement.
TERMINATION OF RIGHTS AGREEMENT
In connection with consummation of the Reincorporation Merger, the
Rights Agreement dated December 28, 1998 between Accessity and North American
Transfer Co., as Rights Agent, was terminated.
On December 28, 1998, the Board of Directors of Accessity authorized
the issuance of one preferred share purchase right (a "Right") to each holder of
record as of December 28, 1998 for each outstanding share of common stock of
Accessity held by such holder, and with respect to all shares of common stock of
Accessity that became outstanding after such date and prior to the earliest of
the Distribution Date (as defined below), the redemption of the Rights or
December 28, 2008. Each Right entitled the registered holder to purchase from
Accessity one two-hundredths (1/200th) of a share of Junior Participating
Preferred Stock at an exercise price of $137.50 per one two-hundredths (1/200th)
of a share of Junior Participating Preferred Stock, subject to adjustment under
certain circumstances. The administration of the Rights was governed by the
terms of a Rights Agreement between Accessity and North American Transfer Co.,
as Rights Agent, dated as of December 28, 1998. Until the earlier to occur of
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(i) a public disclosure that a person or group acquired or obtained the right to
acquire (an "Acquiring Person") beneficial ownership of 20% or more (or 10% or
more, in the case of certain "Adverse Persons" as defined in the Rights
Agreement) of the outstanding common stock of Accessity (the "Stock Acquisition
Date") or (ii) the tenth business day after the date (the "Tender Offer Date")
of the commencement or public disclosure of a tender offer in which any person
or group could acquire beneficial ownership of 20% or more (or 10% or more, in
the case of certain "Adverse Persons" as defined in the Rights Agreement) of the
outstanding common stock of Accessity (the earlier of such dates being called
the "Distribution Date"), the Rights were to be evidenced by the shares of
common stock of Accessity and not by separate certificates. Following the
Distribution Date, separate certificates evidencing the Rights were to be mailed
to the holders of record of the common stock of Accessity as of the close of
business on the Distribution Date. The Rights were first exercisable on the
Stock Acquisition Date (unless sooner redeemed or exchanged). The Rights were to
expire on December 28, 2008 unless earlier redeemed or exchanged. At any time
prior to the public disclosure that a person or group had become an Acquiring
Person, the Board of Directors of Accessity could have redeemed the Rights in
whole, but not in part, at a price of $.05 per Right, payable in cash, shares of
common stock of Accessity or any other form of consideration deemed appropriate
by the Board of Directors of Accessity.
ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
On March 23, 2005, the Company completed a Share Exchange Transaction
with the shareholders of Pacific Ethanol, Inc., a California corporation ("PEI
California") and the holders of the membership interests of each of Kinergy
Marketing, LLC, an Oregon limited liability company ("Kinergy"), and ReEnergy,
LLC, a California limited liability company ("ReEnergy"), pursuant to which the
Company acquired all of the issued and outstanding capital stock of PEI
California and all of the outstanding membership interests of Kinergy and
ReEnergy (as further described below, the "Share Exchange Transaction"). The
Share Exchange Transaction has been accounted for as a reverse acquisition
whereby PEI California is deemed to be the accounting acquiror.
The Company's predecessor, Accessity Corp., a New York corporation,
entered into a Share Exchange Agreement dated as of May 14, 2004, as amended on
July 30, 2004, October 1, 2004, January 7, 2005, February 16, 2005 and March 3,
2005 with PEI California, Kinergy, ReEnergy and the holders of the capital stock
and membership interests thereof.
Prior to the consummation of the Share Exchange Transaction, Accessity
reincorporated in the State of Delaware under the name "Pacific Ethanol, Inc"
through a merger of Accessity with and into its then-wholly-owned Delaware
subsidiary named Pacific Ethanol, Inc., which was formed for the purpose of
effecting the reincorporation (the "Reincorporation Merger"). In connection with
the Reincorporation Merger, the shareholders of Accessity became stockholders of
the Company and the Company succeeded to the rights, properties and assets and
assumed the liabilities of Accessity. Also in connection with the
Reincorporation Merger, the former shareholders of Accessity, who collectively
held 2,339,414 shares of common stock of Accessity, became the stockholders of
an equal number of shares of common stock of the Company and holders of options
and warrants to acquire shares common stock of Accessity, who collectively held
options and warrants to acquire 402,667 shares of common stock of Accessity,
became holders of options and warrants to acquire an equal number of shares of
common stock of the Company.
In the Share Exchange Transaction, PEI California shareholders received
one share of the Company's common stock for each share of PEI California common
stock they owned, the sole limited liability company member of Kinergy received
38,750 shares of the Company's common stock for each one percent of outstanding
limited liability company interest he owned, and the limited liability company
members of ReEnergy received 1,250 shares of the Company's common stock for each
one percent of outstanding limited liability company interest they owned. In
addition, holders of options and warrants to acquire shares of common stock of
PEI California became holders of warrants to acquire an equal number of shares
of the Company's common stock.
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The Company issued an aggregate of 20,610,987 shares of common stock to
the shareholders of PEI California, 3,875,000 shares of common stock to the
limited liability company member of Kinergy and an aggregate of 125,000 shares
of common stock to the limited liability company members of ReEnergy. In
addition, holders of options and warrants to acquire an aggregate of 3,157,587
shares of common stock of PEI California are, following the consummation of the
Share Exchange Transaction, deemed to hold warrants to acquire an equal number
of shares of the Company's common stock. Also, a holder of a promissory note
convertible into an aggregate of 664,879 shares of common stock of PEI
California is, following the consummation of the Share Exchange Transaction,
entitled to convert the note into an equal number of shares of the Company's
common stock. The shares of the Company's common stock issued, or issuable upon
exercise of outstanding options and warrants, to the shareholders and holders of
options and warrants of PEI California and limited liability company members of
Kinergy and ReEnergy represented approximately 90% of the outstanding common
stock of the Company on a fully-diluted basis after the consummation of the
Share Exchange Transaction. Immediately following the consummation of the Share
Exchange Transaction, the Company had an aggregate of 27,700,401 shares of
common stock actually issued and outstanding and an aggregate of 31,925,534
shares of common stock issued and outstanding, calculated on a fully-diluted
basis, including the 27,700,401 shares of common stock actually issued and
outstanding and 4,225,133 shares of common stock issuable upon exercise of all
outstanding options, warrants and convertible debt.
In connection with the Share Exchange Transaction, the Company (i)
transferred DriverShield CRM Corp., a wholly-owned subsidiary of the Company
("DriverShield"), to Barry Siegel, the former Chairman of the Board, President
and Chief Executive Officer of the Company (the "Subsidiary Transfer"), (ii)
issued 400,000 shares of the Company's common stock to Mr. Siegel and 200,000
shares of the Company's common stock to Philip B. Kart, the Company's former
Senior Vice President, Chief Financial Officer and Secretary, and (iii) executed
Confidentiality, Non-Competition, Non-Solicitation and Consulting Agreements
with Messrs. Siegel and Kart, in full consideration for the agreement of each of
Messrs. Siegel and Kart to relinquish cash payments that otherwise would be due
to each of them under their respective employment agreements with the Company as
a result of the consummation of the Share Exchange Transaction. In addition, the
Company sold Sentaur Corp., a wholly-owned subsidiary of the Company
("Sentaur"), to Mr. Siegel for the cash sum of $5,000.
ITEM 3.02. UNREGISTERED SALES OF EQUITY SECURITIES.
On March 23, 2005, the Company issued the following equity securities
in connection with the Reincorporation Merger and the Share Exchange
Transaction:
(1) The disclosures contained in Item 2.01 of this Report on Form 8-K
regarding the Reincorporation Merger, the Share Exchange Transaction, the shares
of common stock of the Company and options and warrants to purchase share of
common stock of the Company issued and deemed issued in connection therewith,
are incorporated herein by reference. The aggregate amounts set forth above in
Item 2.01 include the securities described more particularly in (2) through (6)
immediately below.
(2) The disclosures contained in Item 1.01 of this Report on Form 8-K
regarding the Confidentiality, Non-Competition, Non-Solicitation and Consulting
Agreements dated March 23, 2005 between the Company and each of Barry Siegel and
Philip B. Kart, and the 400,000 and 200,000 shares of common stock of the
Company, respectively, issued to such persons are incorporated herein by
reference.
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(3) The Company issued 150,000 shares of common stock to an independent
contractor for services rendered as a finder in connection with the Share
Exchange Transaction.
(4) The Company issued replacement warrants to 63 accredited investors
to purchase an aggregate of 1,400,000 shares of common stock at an exercise
price of $3.00 per share. The Company also issued replacement warrants to 63
accredited investors to purchase an aggregate of 700,000 shares of common stock
at an exercise price of $5.00 per share. These warrants were issued pursuant to
the Share Exchange Transaction and replaced certain warrants to be issued by PEI
California in connection with a private placement transaction by PEI California
that occurred immediately prior to the consummation of the Share Exchange
Transaction in which PEI California raised an aggregate of $21,000,000 through
the sale of 7,000,000 shares of common stock at a price of $3.00 per share. The
disclosures contained in Item 1.01 of this Report on Form 8-K regarding the
warrants issued to the investors are incorporated herein by reference.
(5) The Company issued replacement warrants to four placement agents to
purchase an aggregate of 678,000 shares of common stock at an exercise price of
$3.00 per share. These warrants replaced certain warrants to be issued by PEI
California in connection with the private placement transaction by PEI
California referenced above. The disclosures contained in Item 1.01 of this
Report on Form 8-K regarding the warrants issued to the placement agents are
incorporated herein by reference.
(6) The Company issued to Liviakis Communications, Inc. a warrant to
purchase 230,000 shares of common stock at an exercise price of $.0001 per share
for certain investor relations and other services to be rendered under a
consulting agreement with PEI California. The warrant became issuable upon
consummation of the Share Exchange Transaction. The disclosures contained in
Item 1.01 of this Report on Form 8-K regarding the warrant issued to Liviakis
Communications, Inc. are incorporated herein by reference.
(7) The Company issued a replacement warrant to purchase 25,000 shares
of common stock at an exercise price of $0.01 per share. This warrant replaced
an option issued by PEI California to an employee of PEI California in
accordance with terms of the Share Exchange Transaction.
Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the purchasers were sophisticated with
access to the kind of information registration would provide.
ITEM 3.03. MATERIAL MODIFICATION OF RIGHTS OF SECURITY HOLDERS.
On March 23, 2005, in connection with and immediately prior to the
Share Exchange Transaction, Accessity completed the Reincorporation Merger in
the state of Delaware, and the shareholders of Accessity became stockholders of
the Company, the rights and privileges of which are governed by Delaware law,
the certificate of incorporation and bylaws of the Company, rather than by the
New York Business Corporation Law (the "NYBCL") and the articles of
incorporation, as amended, and bylaws of Accessity. Copies of the Company's
certificate of incorporation and bylaws are attached to this Report on Form 8-K
as Exhibits 3.1 and 3.2, respectively.
The following discussion includes a summary of the material differences
between the rights of Accessity's shareholders before and after the
Reincorporation Merger. In most cases, the rights of shareholders before and
after the Reincorporation Merger are substantially similar, with changes having
been made to the corporate charter documents to maintain this substantial
similarity. In other cases, there are differences that might be considered
material, and these differences may be understood from the following comparison.
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In connection with the consummation of the Reincorporation Merger, the
Rights Agreement dated December 28, 1998 between Accessity and North American
Transfer Co., as Rights Agent, was terminated. See Item 1.02 of this Report on
Form 8-K above regarding the termination of the Rights Agreement.
BOARD OF DIRECTORS
ACCESSITY. Accessity's bylaws provided that the board of directors
shall consist of at least three and no more than seven directors, with the exact
number to be set by the board of directors. The number was set at five. The
board was divided into three classes of directors: Class I, Class II and Class
III. The term of office of each class of directors was three years, with one
class expiring each year at Accessity's annual meeting of shareholders. The
classified board was intended to serve as an anti-takeover defense because it
operated to slow a change in control of Accessity's board of directors by
limiting the number of directors that were elected annually.
The board of directors consisted of three directors, with two
vacancies. Each director was entitled to serve until his successor is elected
and qualified. Directors could have been removed for or without cause by an
affirmative vote of a majority of the shares entitled to vote at a special or
annual meeting of the shareholders.
THE COMPANY. The certificate of incorporation of the Company provides
that the number of directors which shall constitute the board of directors of
the Company will be fixed from time to time by, or in the manner provided in,
the bylaws of the Company or in an amendment thereof duly adopted by the board
of directors or the stockholders of the Company. The Company's bylaws provide
that the board of directors shall consist of seven members. This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to the bylaws duly adopted by the vote or written consent of the
holders of a majority of the stock issued and outstanding and entitled to vote
or by resolution of a majority of the board of directors, except as may be
otherwise specifically provided by statute or by the restated certificate of
incorporation. No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
Each director is entitled to serve until his successor is elected and qualified
or until his earlier death, resignation or removal. Directors may be removed for
or without cause by a majority of the stockholders entitled to vote at a special
or annual meeting of the stockholders.
The Company does not have a classified board and, therefore, does not
have the benefit or burden of any anti-takeover effect relating to a classified
board.
AUTHORIZED SHARES
ACCESSITY. Accessity's certificate of incorporation authorized
30,000,000 shares of common stock, $0.015 par value per share, and 1,000,000
shares of preferred stock, $0.01 par value per share, of which 1,000 shares had
been designated as Series A Convertible Preferred Stock and 200,000 shares had
been designated as Junior Participating Preferred Stock.
THE COMPANY. The certificate of incorporation of the Company authorizes
110,000,000 shares of capital stock consisting of 100,000,000 shares of common
stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par
value $0.001 per share.
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LIMITATION OF DIRECTOR LIABILITY
ACCESSITY. Article Ninth of Accessity's articles of incorporation, as
amended, provided that no provision of the articles of incorporation was
intended by the corporation to be construed as limiting, prohibiting, denying or
abrogating any of the general or specific powers or rights conferred under the
NYBCL upon Accessity and upon its directors in particular, the power of
Accessity to furnish indemnification to directors in their capacities as are
conferred by the NYBCL. Additionally, under Section 717 of the NYBCL, directors
are required to discharge their duties, including their duties as a member of
any committee of the board upon which they may serve, in good faith and with
that degree of care which an ordinarily prudent person in a like position would
use under similar circumstances.
THE COMPANY. The certificate of incorporation of the Company provides
that directors of the Company will not be liable personally to the Company or
the stockholders of the Company 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 (the "DGCL") for unlawful payment of a dividend or approval of an unlawful
stock redemption or repurchase, or (iv) for any transaction from which the
director derived any improper personal benefit. Additionally, if the DGCL is
subsequently amended, then the liability of a director of the Company shall be
eliminated or limited to the fullest extent permitted by the DGCL, as so
amended. This provision, which is substantially similar to Section 719 of the
NYBCL that was applicable to Accessity, protects directors of the Company
against personal liability for monetary damages from breaches of their duty of
care. Under Delaware law, absent adoption of this provision in the certificate
of incorporation of the Company, directors can be held liable for gross
negligence in connection with decisions made on behalf of the corporation in the
performance of their duty of care, but may not be liable for simple negligence.
INDEMNIFICATION
ACCESSITY. Sections 722 and 726 et seq., of the NYBCL provide that
Accessity had the right to indemnify, to purchase indemnity insurance for, and
to pay and advance expenses to directors, officers and other persons who are
eligible for, or entitled to, such indemnification, payments or advances, by
being made or threatened to be made a party to an action or a proceedings,
whether criminal, civil, administrative or investigative by reason of the fact
that he is or was a director, officer or employee of Accessity, or served any
other enterprise as director or officer or employee at the request of Accessity.
THE COMPANY. Under Section 145 of the DGCL, directors, officers,
employees and other individuals may be indemnified against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with specified actions, suits or proceedings, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation, including a derivative action, a "Corporation 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 corporation, and, regarding any criminal
action or proceeding, had no reasonable cause to believe their conduct was
unlawful. A similar standard is applicable in the case of Corporation Actions,
except that indemnification only extends to expenses (including attorneys' fees)
incurred in connection with the defense or settlement of such actions. The DGCL
further requires court approval before there can be any indemnification where
the person seeking indemnification has been found liable to the corporation. To
the extent that a director or officer is otherwise eligible to be indemnified is
successful on the merits of any claim or defense described above,
indemnification for expenses (including attorneys' fees) actually and reasonably
incurred is mandated by the DGCL.
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The provisions regarding indemnification in the bylaws of the Company
are substantially similar to those in the Accessity bylaws. The certificate of
incorporation and bylaws of the Company also provides that the Company may
indemnify, in addition to a person who is or was a director, officer, employee
or agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, a person who is or was a director, officer,
employee or agent of any resulting corporation or any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger with the Company which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents, so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position with respect to the resulting or surviving corporation as
he would have with respect to such constituent corporation if its separate
existence had continued. The right to indemnification is not exclusive of any
other right which any person may have or acquire under any statute, any
provision of the certificate of incorporation or bylaws of the Company, or
otherwise.
ANTI-TAKEOVER STATUTES/PROVISIONS
ACCESSITY. Section 912 of the NYBCL prohibits, in general, any business
combination, such as a merger or consolidation, between a New York corporation
and an "interested shareholder" (which is defined generally as any owner of 20%
or more of the corporation's outstanding voting stock) for five years after the
date on which such shareholder became an interested shareholder unless the
business combination or the stock acquisition which caused the person to become
an interested shareholder was approved in advance by the corporation's board of
directors. This provision of the NYBCL is effective even if all parties should
subsequently decide that they wish to engage in the business combination.
Following the five-year moratorium period, the New York corporation may engage
in certain business combinations with an interested shareholder only if, among
other things, (i) the business combination is approved by the affirmative vote
of the holders of a majority of the outstanding voting shares not beneficially
owned by the interested shareholder proposing the business combination, or (ii)
the business combination meets certain criteria designed to ensure that the
remaining shareholders receive fair consideration for their shares.
Neither Accessity's articles of incorporation, as amended, nor bylaws
specifically addressed the foregoing. Accessity did not opt out of any of the
foregoing anti-takeover provisions.
THE COMPANY. Section 203 of the DGCL is similar, but not identical, to
Section 912 of the NYBCL. Section 203 of the DGCL, which applies to the Company,
regulates transactions with major stockholders after they become major
stockholders. Section 203 of the DGCL prohibits a Delaware corporation from
engaging in mergers, dispositions of ten percent or more of its assets, certain
issuances of stock and other transactions ("business combinations") with a
person or group that owns 15% or more of the voting stock of the corporation (an
"interested stockholder") for a period of three years after the interested
stockholder crosses the 15% threshold. These restrictions on transactions
involving an interested stockholder do not apply if (i) before the interested
stockholder owned 15% or more of the voting stock, the board of directors
approved the business combination or the transaction that resulted in the person
or group becoming an interested stockholder, (ii) in the transaction that
resulted in the person or group becoming an interested stockholder, the person
or group acquired at least 85% of the voting stock other than stock owned by
directors who are also officers and certain employee stock plans, or (iii) after
the person or group became an interested stockholder, the board of directors and
at least two-thirds of the voting stock other than stock owned by the interested
stockholder approves the business combination at a meeting.
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The restrictions contained in Section 203 of the DGCL do not apply to
the Company in connection with the Reincorporation Merger because, under Section
203(b)(4) of the DGCL, such restrictions generally do not apply where a
corporation does not have a class of voting stock that is (i) listed on a
national securities exchange, (ii) authorized for quotation on The Nasdaq Stock
Market, or (iii) held of record by more than 2,000 stockholders.
PREFERRED STOCK
ACCESSITY. Accessity's articles of incorporation, as amended,
authorized the board of directors to issue preferred stock. Section 502 of the
NYBCL provides that if more than one class of shares is authorized by the
articles of incorporation, the articles of incorporation must prescribe the
number of shares in each class and a distinguishing designation for each class
and before the issuance of shares of a class, the preferences, limitations, and
relative rights of each class must be described in the articles of
incorporation. All shares of a class must have preferences, limitations, and
relative rights identical with those of other shares of the same class except to
the extent otherwise permitted by the NYBCL.
THE COMPANY. The certificate of incorporation of the Company authorizes
the board of directors of the Company to issue up to 10,000,000 shares of
preferred stock and to determine the preferences, limitations and relative
rights of any class or series of the Company preferred stock prior to issuance.
CUMULATIVE VOTING
Section 618 of the NYBCL and Section 214 of the DGCL provide that
cumulative voting rights, in respect of the election of directors, will only
exist if provided for in the corporation's articles/certificate of
incorporation. Neither Accessity's articles of incorporation, as amended, nor
the certificate of incorporation of the Company provide for cumulative voting
rights in the election of directors.
ACTION WITHOUT A MEETING
ACCESSITY. Under Section 615 of the NYBCL, any action required or
permitted to be taken at a shareholders' meeting may be taken without a meeting
only by the unanimous written consent signed by all of the shareholders entitled
to vote on such action.
THE COMPANY. Section 228 of the DGCL permits any action required or
permitted to be taken at a stockholders' meeting to be taken by written consent
signed by the holders of the number of shares that would have been required to
effect the action at an actual meeting of the stockholders at which all shares
were present and voted. Section 228 of the DGCL will govern stockholders rights
in the Company.
ANNUAL MEETINGS
ACCESSITY. Section 602 of the NYBCL requires that a corporation hold an
annual meeting of its shareholders. Accessity's bylaws provide that an annual
meeting of its shareholders shall be held five months following the close of the
company's fiscal year to elect directors and transaction such other business as
may be properly come before the meeting.
THE COMPANY. Section 211(d) of the DGCL authorizes the board of
directors or those persons authorized by the corporation's certificate of
incorporation or bylaws to call an annual meeting of the corporation's
stockholders. The bylaws of the Company provide that an annual meeting may be
called by the board of directors, the chairman of the board, the president, the
secretary, any two officers of the Company, and by the secretary of the Company
at the request of not less than 10% of the total voting power of all outstanding
securities of the Company then entitled to vote or as otherwise may be required
by law.
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VOTING, APPRAISAL RIGHTS AND CORPORATE REORGANIZATIONS
ACCESSITY. The NYBCL generally requires a majority vote of shareholders
to approve a plan of merger or share exchange unless the articles of
incorporation or board requires a greater vote. Section 910 of the NYBCL does
not provide for dissenters' rights for a merger or plan of share exchange by a
corporation the shares of which are listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.
THE COMPANY. The DGCL generally requires a majority vote of
stockholders to approve a merger, sale of assets or similar reorganization
transaction. Section 262 of the DGCL does not provide for dissenters' rights of
appraisal for (i) the sale, lease or exchange of all or substantially all of the
assets of a corporation, (ii) a merger by a corporation, the shares of which are
either listed on a national securities exchange or held by more than 2,000
stockholders if such stockholders receive shares of the surviving corporation or
of a listed or widely held corporation, or (iii) certain mergers not requiring
stockholder approval.
AMENDMENT TO CERTIFICATE/ARTICLES OF INCORPORATION
ACCESSITY. Except as otherwise provided in the NYBCL, an amendment to
the articles of incorporation must be approved by (i) a majority of the votes
cast when a quorum is present, unless shareholders have dissenters' rights on
the amendment, and (ii) a majority of the outstanding shares entitled to vote,
if shareholders have dissenters' rights on the amendment.
THE COMPANY. The DGCL provides that an amendment to the certificate of
incorporation must be approved by a majority of the outstanding stock entitled
to vote. The certificate of incorporation of the Company reserves the right of
the Company to amend, alter, change or repeal any provision contained in its
certificate of incorporation, in the manner now or hereafter prescribed by
statute.
AMENDMENT TO BYLAWS
ACCESSITY. Article IX, Section 1 of Accessity's bylaws provided that
the bylaws may be amended by an affirmative vote of two-thirds of all shares
eligible to be cast on such amendment or, if the board of directors recommends
such an amendment, then only a majority of all shares eligible to be cast on
such amendment is required.
THE COMPANY. Section 109 of the DGCL places the power to adopt, amend
or repeal bylaws in the corporation's stockholders, but permits the corporation,
in its certificate of incorporation, also to vest such power in the board of
directors. Although the board of directors is vested with such authority
pursuant to the certificate of incorporation of the Company, the stockholders'
power to make, repeal, alter, amend and rescind bylaws will remain unrestricted.
PREEMPTIVE RIGHTS
ACCESSITY. NYBCL Section 622 provides that the shareholders of a
corporation do not have a preemptive right to acquire a corporation's unissued
shares except to the extent the articles of incorporation so provide.
Accessity's articles of incorporation, as amended, did not provide Accessity's
shareholders with preemptive rights.
-18-
THE COMPANY. Under Section 102 of the DGCL, no statutory preemptive
rights will exist, unless a corporation's certificate of incorporation specifies
otherwise. The certificate of incorporation of the Company does not provide for
any such preemptive rights.
DIVIDEND RIGHTS
ACCESSITY. The NYBCL does not permit dividend distributions if, after
giving effect to the proposed dividend, (i) the corporation would be unable to
pay its debts as they become due in the usual course of business, or (ii) the
corporation's total assets would be less than the sum of its total liabilities
plus (unless the articles of incorporation permit otherwise) the amount that
would be needed, if the corporation were to be dissolved at the time of
distribution, to satisfy the preferential rights (if any) of shareholders whose
preferential rights are superior to those of shareholders receiving the
distribution.
THE COMPANY. Delaware corporations may pay dividends out of the excess
of the net assets of the corporation (the "Surplus") less the consideration
received by the corporation for any shares of its capital stock (the "Capital")
or, if there is no Surplus, out of net profits for the fiscal year in which
declared and/or the preceding fiscal year. Section 170 of the DGCL also provides
that dividends may not be paid out of net profits if, after the payment of the
dividend, Capital is less than the Capital represented by the outstanding stock
of all classes having a preference upon the distribution of assets.
ITEM 4.01. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
(a) On March 24, 2005, the Company dismissed Nussbaum Yates & Wolpow,
P.C. as the Company's independent registered public accountant.
The reports of Nussbaum Yates & Wolpow, P.C. on the Company's financial
statements for the years ended December 31, 2004 and 2003 did not contain an
adverse opinion or a disclaimer of opinion, and were not modified as to
uncertainty, audit scope or accounting principles.
The decision to change the Company's independent registered public
accountant was authorized and approved by the Audit Committee of the Board of
Directors of the Company.
In connection with its audit of the financial statements of the Company
as of and for the years ended December 31, 2004 and 2003 and during the interim
period through March 24, 2005, the date of dismissal, the Company had no
disagreement with Nussbaum Yates & Wolpow, P.C. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Nussbaum
Yates & Wolpow, P.C. would have caused them to make reference thereto in their
report on the financial statements for such years.
The Company provided Nussbaum Yates & Wolpow, P.C. with a copy of this
Report prior to its filing with the Commission. Nussbaum Yates & Wolpow, P.C.
has provided the Company with letters, dated March 28, 2005 and March 31, 2005,
and addressed to the Commission, which letters are attached to this Report on
Form 8-K as Exhibits 16.1 and 16.2, respectively, and are incorporated herein by
reference.
(b) The Company engaged Hein & Associates LLP on March 24, 2005, as the
Company's independent registered public accountant.
-19-
ITEM 5.01. CHANGES IN CONTROL OF REGISTRANT.
(a) The disclosures contained in Item 2.01 of this Report on Form 8-K
are incorporated herein by reference. A change in control of the Company
occurred in connection with the Share Exchange Transaction. The persons who
acquired control of the Company were the former shareholders of PEI California
and the former members of Kinergy and ReEnergy who, in connection with the Share
Exchange Transaction, exchanged their shares and equity interests in such
entities for shares of common stock of the Company. However, to the knowledge of
the Company, no person or group of persons, as such terms are used in Section
13(d)(3) of the Securities Exchange Act of 1934, is in control of the Company.
(b) Not applicable.
ITEM 5.02. DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS.
(a) Not applicable.
(b) On March 23, 2005, in connection with the Share Exchange
Transaction, Barry Siegel and Bruce Udell both resigned as members of the Board
of Directors of the Company.
On March 23, 2005, also in connection with the Share Exchange
Transaction, Mr. Siegel resigned from all officer and employee capacities with
the Company, including in his capacity as President and Chief Executive Officer
of the Company, and Philip B. Kart resigned from all officer and employee
capacities with the Company, including in his capacity as Senior Vice President,
Chief Financial Officer and Secretary of the Company.
(c) On March 23, 2005, in connection with the Share Exchange
Transaction, the Board of Directors of the Company appointed the following
persons to the following positions:
NAME POSITION
---- --------
Neil Koehler.......... President and Chief Executive Officer
Ryan Turner........... Chief Operating Officer and Secretary
Maria Tharpe (1)...... Chief Financial Officer
Tom Koehler........... Vice President, Public Policy and Markets
_____________
(1) On April 18, 2005, Ms. Tharpe was replaced as Chief
Financial Officer and became the Company's
Controller, as further described below.
NEIL KOEHLER served as Chief Executive Officer of PEI California since
its formation in January 2003 and as Chairman of the Board since March 2004.
Prior to his association with PEI California, Mr. Koehler was the co-founder and
General Manager of Parallel Products, one of the first ethanol production
facilities in California (and one of only two currently existing ethanol
production facilities in California), which was sold to a public company in
1997. Mr. Koehler was also the sole manager and sole limited liability company
member of Kinergy, which he founded in September 2000. Mr. Koehler has over 20
years of experience in the ethanol production, sales and marketing industry in
the Western United States. Mr. Koehler is the Director of the California
Renewable Fuels Partnership and a speaker on the issue of renewable fuels and
ethanol production in California. Mr. Koehler has a B.A. degree in Government,
from Pomona College and is the brother of Tom Koehler.
-20-
RYAN TURNER is a co-founder of PEI California and served as Chief
Operating Officer, Secretary and a director of PEI California and led the
business development efforts of PEI California since its inception in January
2003. Prior to co-founding and joining PEI California, Mr. Turner served as
Chief Operating Officer of Bio-Ag, LLC from March 2002 until January 2003. Prior
to joining Bio-Ag, LLC, Mr. Turner served as General Manager of J & J Farms, a
large-scale, diversified agriculture operation of the west side of Fresno
County, California from June 1997 to March 2002, where he guided the production
of corn, cotton, tomatoes, melons, alfalfa and asparagus crops and operated a
custom beef lot. Mr. Turner has a B.A. degree in Public Policy from Stanford
University and is a graduate of the California Agricultural Leadership Program
and is currently pursuing an M.B.A. at Fresno State University.
MARIA THARPE served as Chief Financial Officer of PEI California since
November 2004. Ms. Tharpe joined PEI California in June 2004 with over eight
years experience in public accounting and over 16 years of experience as a
controller and finance director. Prior to joining PEI California, Ms. Tharpe was
an accountant with Cassabon, McIlhatton & Associates of Fresno, California from
October 2003 until June 2004 and served as Controller and General Manager of
Kelbo, Inc. from October 2000 until August 2003. Prior to that time, Ms. Tharpe
was Finance Director and Controller for a multi-site subsidiary division of
Beverly Enterprises, Inc., doing business as HCPC, Inc. and MK Medical, with
operations in California and Nevada.
TOM KOEHLER served as Vice President, Public Policy and Markets of PEI
California since January 2003. Mr. Koehler was a limited liability company
member and manager of ReEnergy. Mr. Koehler has over 10 years of experience in
governmental affairs and marketing in the ethanol industry. As a consultant for
the Renewable Fuels Association, Mr. Koehler has played an integral role in
expanding the market for ethanol in California and is actively engaged in
pursuing the replacement of MTBE with ethanol in the Pacific Northwest and in
the Northeastern United States. Mr. Koehler has a B.A. degree in Economics from
Oregon State University and is the brother of Neil Koehler.
Effective April 18, 2005, the Board of Directors of the Company
appointed William G. Langley as Chief Financial Officer of the Company to
replace Maria Tharpe, who has continued with the Company as its Controller.
WILLIAM G. LANGLEY has been a partner in Tatum CFO Partners, LLP
("Tatum"), a national partnership of more than 350 professional
highly-experienced chief financial officers, since November 2002. During this
time, Mr. Langley has acted as the full-time Chief Financial Officer for
Ensequence, Inc., an inter-active television software company, Norton
Motorsports, Inc., a motorcycle manufacturing and marketing company and
Auctionpay, Inc., a software and fundraising management company. From 2001 to
2002, Mr. Langley served as the President, Chief Financial Officer and Chief
Operating Officer for Laservia Company, which specializes in advanced laser
system technology. From 2000 to 2001, Mr. Langley acted as the Chief Financial
Officer of Rulespace, Inc., a developer of artificial intelligence software. Mr.
Langley has prior public company experience, is licensed both as an attorney and
C.P.A. and will remain a partner in Tatum during his employment with the
Company. Mr. Langley has a B.A. degree in accounting and political science from
Albertson College, a J.D. degree from Lewis & Clark School of Law and an LL.M.
degree from the New York University School of Law.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 23, 2005, in connection with the Share Exchange Transaction,
the Company entered into Executive Employment Agreements with Neil Koehler, Ryan
Turner and Tom Koehler. On March 23, 2005, also in connection with the Share
Exchange Transaction, the Company entered into Indemnification Agreements with
each executive officer of the Company. Each of these agreements is described
above, and the disclosures contained in Item 2.01 of this Report on Form 8-K are
incorporated herein by reference.
-21-
Please note that the Certain Relationships and Related Transactions set
forth below are with regard PEI California, Kinergy and ReEnergy, which became
wholly-owned subsidiaries of the Company in connection with the Share Exchange
Transaction, and which collectively comprise the business of the Company.
PEI CALIFORNIA
Neil Koehler is the Chief Executive Officer of PEI California and was
the sole manager and sole limited liability company member of Kinergy and a
limited liability company member of Kinergy Resources, LLC, which was a member
of ReEnergy. Mr. Koehler did not receive compensation from PEI California.
Tom Koehler, the Vice President of Public Policy and Markets of PEI
California, was a limited liability company member of ReEnergy. Mr. Koehler is
the brother of Neil Koehler and received compensation from PEI California
(through Celilo Group, LLC) as an independent contractor.
PEI California and ReEnergy are parties to an Option to Purchase Land
dated August 28, 2003, pursuant to which ReEnergy has agreed to sell
approximately 89.3 acres of real property in Visalia, California to PEI
California at a price of $12,000 per acre, with respect to which real property
ReEnergy has executed and Option Agreement dated as of July 20, 2003 with Kent
Kaulfuss, who was a limited liability company member of ReEnergy, and his wife,
which Option Agreement grants ReEnergy an option to purchase such real property
for a purchase price of $1,071,600 on or before June 15, 2005 and requires
ReEnergy to lease the Wood Industries plant (comprising 35 acres) to Wood
Industries (which is owned by Kent Kaulfuss and his wife) for an indefinite
period of time for a monthly rental of $800. Accordingly, if the real property
is purchased by PEI California pursuant to the terms of the Option to Purchase
Land dated August 28, 2003, Kent Kaulfuss and his wife will realize a gain on
sale of approximately $178,600.
PEI California entered into a consulting agreement with Ryan Turner for
consulting services at $6,000 per month. During 2004, PEI California paid Mr.
Turner a total of $72,000 pursuant to such consulting contract. This consulting
agreement was terminated in connection with Mr. Turner's entry into an Executive
Employment Agreement with the Company as provided in Item 1.01 of this Report on
Form 8-K above.
PEI California sold various cattle feed products in 2003 totaling
$109,698, to a business owned by William Jones, who was a principal shareholder
of PEI California and is now a principal shareholder of the Company and who is
the father-in-law of Ryan Turner.
PEI California reimbursed Mr. Jones an aggregate of $200,000 during
2003 for expenses paid on behalf of PEI California.
On October 27, 2003, William and Maurine Jones, Ryan and Wendy Turner
and Andrea Jones entered into an agreement with Southern Counties Oil Co., a
former shareholder of PEI California, of which Frank P. Greinke, a director of
PEI California and of the Company, is the owner and CEO, to sell 1,500,000
shares of common stock of PEI California personally held by them at $1.50 per
share for total proceeds of $2,250,000. In connection with the sale of the
shares, the parties entered into a Voting Agreement under which William and
Maurine Jones, Ryan and Wendy Turner and Andrea Jones agreed to vote a
significant number of their existing shares of common stock of PEI California in
favor of Mr. Greinke to be elected to the board of directors of PEI California
or any successor-in-interest to PEI California, including the Company.
-22-
Barry Siegel, on the one hand, and William and Maurine Jones, Ryan and
Wendy Turner and Andrea Jones, on the other, negotiated the terms of a stock
purchase agreement that provided for, among other things, the sale of an
aggregate of 250,000 shares of common stock of PEI California to Mr. Siegel for
an aggregate purchase price of $25.00.
Immediately prior to the closing of the Share Exchange Transaction,
William Jones sold 200,000 shares of common stock of PEI California to the
individual members of ReEnergy at $.01 per share, to compensate them for
facilitating the closing of the Share Exchange Transaction.
Immediately prior to the closing of the Share Exchange Transaction,
William Jones sold 300,000 shares of common stock of PEI California to Neil
Koehler, the sole member of Kinergy and an officer and director of PEI
California, at $.01 per share to compensate Mr. Koehler for facilitating the
closing of the Share Exchange Transaction.
Immediately prior to the closing of the Share Exchange Transaction,
William Jones sold 100,000 shares of common stock of PEI California to Tom
Koehler, a member of ReEnergy and brother of Neil Koehler, at $.01 per share to
compensate Tom Koehler for facilitating the closing of the Share Exchange
Transaction.
KINERGY
Neil Koehler is the Chief Executive Officer of PEI California and was
the sole manager and sole limited liability company member of Kinergy and was a
limited liability company member of Kinergy Resources, LLC, which was a member
of ReEnergy. Mr. Koehler did not receive compensation from PEI California and
did not receive compensation in his capacity as the sole manager of Kinergy.
Neil Koehler is the brother of Tom Koehler. Tom Koehler was a limited
liability company member of ReEnergy.
One of Kinergy's larger customers is SC Fuels, Inc. Southern Counties
Oil Co., an affiliate of SC Fuels, Inc., was a principal shareholder of PEI
California and is now a shareholder of the Company and owns 1,500,000 shares of
the issued and outstanding common stock of the Company. Mr. Frank P. Greinke,
the President of SC Fuels, Inc., is a director of both the Company and PEI
California. During the fiscal year ended December 31, 2004, SC Fuels, Inc.
accounted for approximately 13% of the total revenues of Kinergy.
REENERGY
Tom Koehler, the Vice President of Public Policy and Markets of PEI
California, was a limited liability company member of ReEnergy. Mr. Koehler is
the brother of Neil Koehler and received compensation from PEI California
(through Celilo Group, LLC) as an independent contractor.
PEI California and ReEnergy are parties to an Option to Purchase Land
dated August 28, 2003, pursuant to which ReEnergy has agreed to sell
approximately 89.3 acres of real property in Visalia, California to PEI
California at a price of $12,000 per acre, with respect to which real property
ReEnergy has executed and Option Agreement dated as of July 20, 2003 with Kent
Kaulfuss, who was a limited liability company member of ReEnergy, and his wife,
which Option Agreement grants ReEnergy an option to purchase such real property
for a purchase price of $1,071,600 on or before June 15, 2005 and requires
-23-
ReEnergy to lease the Wood Industries plant (comprising 35 acres) to Wood
Industries (which is owned by Kent Kaulfuss and his wife) for an indefinite
period of time for a monthly rental of $800. Accordingly, if the real property
is purchased by PEI California pursuant to the terms of the Option to Purchase
Land dated August 28, 2003, Kent Kaulfuss and his wife will realize a gain on
sale of approximately $178,600.
(d) On March 23, 2005, in connection with the Share Exchange
Transaction, the Board of Directors of the Company appointed Neil Koehler, Ryan
Turner, Frank P. Greinke, John Pimentel and Terry L. Stone as members of the
Board of Directors of the Company. Kenneth J. Friedman was a director of the
Company prior to the consummation of the Share Exchange Transaction and
continues as a member of the Board of Directors of the Company. In addition, on
March 23, 2005, the Board of Directors of the Company appointed Messrs. Stone
and Friedman to serve as members of the Audit Committee of the Board of
Directors of the Company.
NEIL KOEHLER--please see Item 5.02(c) of this Report on Form 8-K above.
RYAN TURNER--please see Item 5.02(c) of this Report on Form 8-K above.
FRANK P. GREINKE served as a director of PEI California since October
2003. Mr. Greinke is currently, and has been for at least the past five years,
the CEO and sole owner of SC Fuels, Inc., a petroleum distributor. Mr. Greinke
is also a director of the Society of Independent Gasoline Marketers of America,
the Chairman of the Southern California Chapter of the Young Presidents
Organization and serves on the Board of Directors of The Bank of Hemet and on
the Advisory Board of Solis Capital Partners, Inc.
JOHN PIMENTEL served as a director of PEI California since April 2004.
Since 2003, Mr. Pimentel has been a consultant to Cagan-McAfee Capital Partners,
LLC, where he consults in the areas of business development, investment
structuring, and portfolio company management. Prior to joining Cagan-McAfee
Capital Partners, Mr. Pimentel worked with Bain & Company in the firm's Private
Equity Group and the general consulting practice from 1998 to 2002. From 1993 to
1996 Mr. Pimentel served as Deputy Secretary for Transportation for the State of
California where he oversaw a $4.5 billion budget and 28,000 employees,
including the Department of Transportation, the California Highway Patrol, and
parts of the Department of Motor Vehicles. Mr. Pimentel has an M.B.A. from
Harvard Business School and a B.A. from University of California at Berkeley.
TERRY L. STONE is a Certified Public Accountant with over thirty years
of experience in accounting and taxation. He has been the owner of his own
accountancy firm since 1990. Mr. Stone has experience in accounting and taxation
in a wide range of industries, including agriculture, manufacturing, retail,
equipment leasing, professionals and not-for-profit organizations. Mr. Stone
served as a part-time instructor at California State University, Fresno at
various times throughout the 1990s and taught classes in taxation, auditing, and
financial and management accounting. Mr. Stone also has various professional
certifications in addition to his Certified Public Accountant certification,
including Series 7 and 66 NASD securities licenses. Mr. Stone has a B.S. in
Accounting from California State University, Fresno.
KENNETH J. FRIEDMAN was a director of Accessity, the Company's
predecessor, since October 1998. Mr. Friedman has for more than five years
served as President of the Primary Group, Inc., an executive search consultancy
firm.
-24-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 23, 2005, in connection with the Share Exchange Transaction,
the Company entered into Indemnification Agreements with each member of its
Board of Directors. Each of these agreements is described above, and the
disclosures contained in Item 2.01 of this Report on Form 8-K are incorporated
herein by reference.
Please also see Item 5.02(c) of this Report on Form 8-K above with
respect to Certain Relationships and Related Transactions with the Company's new
directors.
ITEM 5.03. AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGES IN FISCAL
YEAR.
The disclosures contained in Item 3.03 of this Report on Form 8-K are
incorporated herein by reference. Copies of the Company's certificate of
incorporation and bylaws are attached to this Report on Form 8-K as Exhibits 3.1
and 3.2, respectively.
ITEM 5.05. AMENDMENTS TO THE REGISTRANT'S CODE OF ETHICS, OR WAIVER OF A
PROVISION OF THE CODE OF ETHICS.
(a) In connection with the Reincorporation Merger and the Share
Exchange Transaction, the Company adopted a new Code of Ethics applicable to its
employees generally and also adopted a new Code of Ethics applicable to its
Chief Executive Officer and senior financial officers. The Company's Code of
Ethics and its Code of Ethics for Chief Executive Officer and Senior Financial
Officers are attached to this Report on Form 8-K as Exhibits 14.1 and 14.2,
respectively, and are incorporated herein by reference.
(b) Not applicable.
-25-
ITEM 8.01 OTHER EVENTS.
As a result of the Share Exchange Transaction, the business of the
Company is comprised of the businesses of PEI California, Kinergy and ReEnergy.
In the following description of the Company's business and in the "Risk Factors"
that follow, the words "we," "us" and "our" and similar terms refer to Pacific
Ethanol, Inc., a Delaware corporation, together with its subsidiaries PEI
California, Kinergy and ReEnergy.
BUSINESS
OVERVIEW
Our primary goal is to become a leader in the production, marketing and
sale of ethanol and other renewable fuels in the United States.
In March 2005, we completed a share exchange transaction, or the Share
Exchange Transaction, with the shareholders of PEI California, and the holders
of the membership interests of each of Kinergy and ReEnergy, pursuant to which
we acquired all of the issued and outstanding shares of capital stock of PEI
California and all of the outstanding membership interests of each of Kinergy
and ReEnergy. Immediately prior to the consummation of the share exchange, our
predecessor, Accessity Corp., a New York corporation, or Accessity,
reincorporated in the State of Delaware under the name Pacific Ethanol, Inc.
through a merger of Accessity with and into its then-wholly-owned Delaware
subsidiary named Pacific Ethanol, Inc., which was formed for the purpose of
effecting the reincorporation. We are the surviving entity resulting from the
reincorporation merger and have three principal wholly-owned subsidiaries:
Kinergy, PEI California and ReEnergy.
We are currently in the business of marketing ethanol in the Western
United States. Through third-party service providers, we provide transportation,
storage and delivery of ethanol. We sell ethanol primarily into California,
Nevada, Arizona and Oregon and have extensive customer relationships throughout
the Western United States and extensive supplier relationships throughout the
Western and Midwestern United States.
We believe that we have a competitive advantage due to the market niche
that we have developed by supplying ethanol to customers in several major
metropolitan and rural markets in California and other Western states. We also
believe that the experience of our management over the past two decades and the
operations Kinergy has conducted over the past four years have enabled us to
establish valuable relationships in the ethanol marketing industry and
understand the business of marketing ethanol.
We intend in the near-term to construct an ethanol production facility
to begin the production and sale of ethanol and its co-products if we are able
to secure all the necessary financing to complete construction of this facility.
To date, we have not obtained all of this financing. See "Risk Factors." We also
intend to construct or otherwise acquire one or more additional ethanol
production facilities as financing resources and business prospects make the
construction or acquisition of these facilities advisable. PEI California has,
to date, not conducted any significant business operations other than the
acquisition of real property located in Madera County, California, on which it
intends to construct its first ethanol production facility. ReEnergy, does not
presently have any significant business operations or plans but does hold an
option to acquire real property in Visalia, California, on which we may build an
ethanol production facility.
-26-
INDUSTRY OVERVIEW
OVERVIEW OF ETHANOL MARKET
Methyl tertiary-butyl ether, or MTBE, was used for over 20 years in
California and other states as an oxygenate. An oxygenate is a substance that,
when added to gasoline, increases the amount of oxygen in the gasoline blend and
improves its air quality characteristics. Oxygenated fuels sometimes are
mandated by the Environmental Protection Agency, or EPA, for sale and use in
geographical areas which fail to achieve certain air quality standards. MTBE is,
however, a known carcinogen that contaminates groundwater, and California banned
the addition of MTBE to motor fuels effective January 1, 2004. The EPA lists on
its website at least 20 states with partial or complete bans on the use of MTBE.
Ethyl alcohol, or ethanol, has recently replaced MTBE as a fuel additive and an
oxygenate in California, New York and Connecticut. According to the California
Air Resources Board, ethanol is the only commercially available fuel additive
that can replace MTBE to meet the federal Clean Air Act's oxygenate requirement
in the State of California. According to the USEIA, ethanol accounted for more
than 67% of the oxygenate market nationwide during February 2005.
California is the nation's largest market for gasoline. According to
California Department of Motor Vehicles, approximately 28 million motor vehicles
were registered in California 2003 and were estimated to use over 15 billion
gallons of gasoline during 2003. California's last oil refinery was built in
1969. We believe that California's stringent permitting process and the
economics of constructing and operating an oil refinery in California present
difficult barriers to entry into the oil refining market. In addition, we
believe that California is in a volatile and highly sensitive energy situation
due to its relative geographic isolation from oil refiners located elsewhere in
the United States coupled with what we believe is an overall decline in
production capacity in the United States. According to the California Energy
Commission, California imports approximately 10% of its finished fuel products
and during 2004 over 55% of its total petroleum supply.
We expect the ethanol industry to produce up to 4.0 billion gallons of
ethanol in 2005, an increase of approximately 18% from the approximately 3.4
billion gallons of ethanol produced in 2004. According to the Renewable Fuels
Association, in its ETHANOL INDUSTRY OUTLOOK 2004, the ethanol market in
California was expected to exceed 950 million gallons, or more than 25% of the
national market. However, also according to the Renewable Fuels Association, in
its ETHANOL INDUSTRY OUTLOOK 2004, California has only two small ethanol plants
with a combined production capacity of less than 10 million gallons per year,
leaving California with ethanol production levels substantially below the demand
for ethanol in California. The balance of ethanol is shipped via rail from the
Midwest to California. Gasoline and diesel products that supply the major fuel
terminals are shipped in pipelines throughout the northern and southern portions
of California. Unlike gasoline and diesel, however, ethanol cannot be shipped in
these pipelines because ethanol has an affinity for mixing with water already
present in the pipelines. When mixed, water dilutes ethanol and creates
significant quality control issues. Therefore, ethanol must be trucked from rail
terminals to regional fuel terminals, or blending racks.
According to material published by the Renewable Fuels Association,
approximately 95% of the ethanol produced in the United States is made in the
Midwest from corn. According to the U.S. Department of Energy, ethanol is
typically blended at 5.7% to 10% by volume in the United States, but is also
blended at up to 85% for vehicles designed to operate on 85% ethanol. Compared
to gasoline, ethanol is generally considered to be less expensive and cleaner
burning and contains higher octane. We anticipate that the increasing demand for
transportation fuels coupled with limited opportunities for gasoline refinery
expansions and the growing importance of reducing CO2 emissions through the use
of renewable fuels will generate additional growth in the California ethanol
market.
-27-
Ethanol sold into the Central Valley region of California, or Central
Valley, is currently shipped via rail from the Midwest, and then
"double-handled" into trucks and shipped to blending racks in Sacramento,
Stockton, Fresno and Bakersfield. We believe that this one to two thousand mile
transport and "double handling" can add significantly to the final price of
ethanol. We estimate that ethanol demand in the Central Valley was approximately
200 million gallons in 2004. We believe that through Kinergy, we could market
and sell locally all or substantially all of the 35 million gallons of ethanol
expected to be produced at our initial ethanol production facility.
According to BBI International, in a March 2003 Ethanol Feasibility
Study produced for ReEnergy, over the course of a decade, prices for ethanol
delivered by rail car into California have ranged between $.90 and $1.75 per
gallon, averaging approximately $1.27 per gallon. Of the many factors
influencing the price of ethanol, we believe that the price of gasoline has the
largest influence. We believe that ethanol prices, net of tax incentives offered
by the federal government, are positively correlated to fluctuations in gasoline
prices. In addition, we believe that ethanol prices in California are typically
$.10 to $.12 per gallon higher than in the Midwest due to the freight costs of
delivering ethanol from Midwest production facilities.
Ethanol prices have recently been affected by an imbalance of
short-term supply relative to short-term demand and have declined by
approximately 30% from their peaks in 2004 through May 2005. Although ethanol
prices were in excess of their historical average during most of 2004, ethanol
prices have thus far trended down toward long-term averages during 2005. Ethanol
represents only up to 3% of the total annual gasoline supply in the United
States, therefore we believe that the ethanol industry has substantial room to
grow to reach what we believe is an achievable level of 10% of the total annual
gasoline supply in the United States. In California alone, an increase in the
demand for ethanol to 10% of the total annual gasoline supply would result in
annual demand for approximately 650 million additional gallons of ethanol, which
represents an increase in demand on a national basis of approximately 16%.
Although the short-term supply of ethanol has recently increased at a faster
rate than the increase in demand over the same period, we believe that in the
long-term supply and demand for ethanol will be more balanced.
OVERVIEW OF ETHANOL PRODUCTION PROCESS
The production of ethanol from starch or sugar-based feedstocks has
been practiced for thousands of years. While the basic production steps remain
the same, the process has been refined considerably in recent years, leading to
a highly-efficient process that now yields more energy in the ethanol and
co-products than is required to make the products. The modern production of
ethanol requires large amounts of corn, or other high-starch grains, and water
as well as chemicals, enzymes and yeast, and denaturants such as unleaded
gasoline or liquid natural gas, in addition to natural gas and electricity.
In the dry milling process, corn or other high-starch grains are first
ground into meal and then slurried with water to form a mash. Enzymes are then
added to the mash to convert the starch into the simple sugar, dextrose. Ammonia
is also added for acidic (pH) control and as a nutrient for the yeast. The mash
is processed through a high temperature cooking procedure, which reduces
bacteria levels prior to fermentation. The mash is then cooled and transferred
to fermenters, where yeast is added and the conversion of sugar to ethanol and
CO2 begins.
After fermentation, the resulting "beer" is transferred to
distillation, where the ethanol is separated from the residual "stillage." The
ethanol is concentrated to 190 proof using conventional distillation methods and
then is dehydrated to approximately 200 proof, representing 100% alcohol levels,
in a molecular sieve system. The resulting anhydrous ethanol is then blended
with about 5% denaturant, which is usually gasoline, and is then ready for
shipment to market.
-28-
The residual stillage is separated into a coarse grain portion and a
liquid portion through a centrifugation process. The soluble liquid portion is
concentrated to about 30% dissolved solids by an evaporation process. This
intermediate state is called condensed distillers solubles, or syrup. The coarse
grain and syrup portions are then mixed to produce wet distillers grains, or
WDG, or can be mixed and dried to produce dried distillers grains with solubles,
or DDGS. Both WDG and DDGS are high-protein animal feed products.
OVERVIEW OF DISTILLERS GRAINS MARKET
We believe that approximately 4.0 million tons of dried distillers
grains are produced and sold every year in North America. Dairy cows and beef
cattle are the primary consumers of distillers grains. According to Rincker and
Berger, in their 2003 article entitled OPTIMIZING THE USE OF DISTILLER GRAIN FOR
DAIRY-BEEF PRODUCTION, a dairy cow can consume 12-15 lbs of WDG per day in a
balanced diet. At this rate, the WDG output of an ethanol facility that produces
35 million gallons of ethanol per year can feed approximately 105,000-130,000
dairy cows. We believe that the only distillers grains currently available in
California are shipped from the Midwest via rail cars in dry form.
Successful and profitable delivery of DDGS from the Midwest faces a
number of challenges, including product inconsistency, handling difficulty and
lower feed values. All of these challenges are mitigated with a consistent
supply of WDG from a local plant. DDGS delivered via rail to California from the
Midwest undergoes an intense drying process and exposure to extreme heat at the
production facility and in the railcars, during which various nutrients are
burned off which reduces the nutritional composition of the final product. In
addition, DDGS shipped via rail can take as long as two weeks to be delivered to
California, and scheduling errors or rail yard mishaps can extend delivery time
even further. DDGS tends to solidify and set in place as it sits in a rail car
and thus expedient delivery is important. After solidifying and setting in
place, DDGS becomes very difficult and thus expensive to unload. During the
summer, rail cars typically take a full day to unload but can take longer. Also,
DDGS shipped from the Midwest can be inconsistent because some Midwest producers
use a variety of feedstocks depending on the availability and price of competing
crops. Corn, milo sorghum, barley and wheat are all common feedstocks used for
the production of ethanol but lead to significant variability in the nutritional
composition of distillers grains. California dairies depend on rations that are
calculated with precision and a subtle difference in the makeup of a key
ingredient can significantly affect milk production at dairies. By not drying
the distillers grains and by shipping them locally, we believe that we will be
able to preserve the feed integrity of these grains.
Historically, the market price for distillers grains has been stable in
comparison to the market price for ethanol. We believe that the market price of
DDGS is determined by a number of factors, including the market value of corn,
soybean meal and other competitive protein ingredients, the performance or value
of DDGS in a particular feed formulation and general market forces of supply and
demand. We also believe that nationwide, the market price of distillers grains
historically has been influenced by producers of distilled spirits and more
recently by the large corn dry-millers that operate fuel ethanol plants. In
California, the market price of distillers grains is often influenced by
nutritional models that calculate the feed value of distillers grains by
nutritional content.
OUR STRATEGY
Our primary goal is to become the leader in the production, marketing
and sale of ethanol and other renewable fuels in the Western United States. Our
business strategy to achieve this goal includes the following elements:
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o CONTINUE TO DEVELOP AND EXPAND OUR ETHANOL DISTRIBUTION NETWORK.
We have developed and plan to continue to develop and expand, our
ethanol distribution network for delivery of ethanol by truck to
virtually every significant fuel terminal as well as to numerous
smaller fuel terminals throughout California. Fuel terminals have
limited storage capacity and we have been successful in securing
storage tanks in California. In addition, we have an extensive
network of third-party delivery trucks available to deliver
ethanol throughout California.
o CONTINUE TO EXPAND OUR BUSINESS IN GROWING GEOGRAPHIC MARKETS. We
intend to continue to expand our business in regions where MTBE
has been banned and that represent growing markets for ethanol,
including Phoenix, Arizona, Las Vegas, Nevada and Portland,
Oregon.
o CONSTRUCT AN ETHANOL PRODUCTION FACILITY AND BEGIN PRODUCING
ETHANOL AND CO-PRODUCTS. We plan to construct an ethanol
production facility and begin producing ethanol and its
co-products, specifically, WDG and CO2, for sale in the Central
Valley. We believe that, following the construction of our first
35 million gallon per year ethanol plant, we will be the largest
producer of ethanol in California and that our proximity to the
geographic market in which we plan to sell our ethanol provides us
significant competitive advantages over ethanol producers in the
Midwest.
o IDENTIFY AND EXPLOIT NEW RENEWABLE FUELS AND TECHNOLOGIES. We plan
to undertake to identify and exploit new renewable fuels and
technologies. For example, we are examining the feasibility of
producing and/or marketing bio-diesel fuels and we are examining
new technologies enabling the conversion of cellulose, which is
generated predominantly from wood waste, paper waste and
agricultural waste, into ethanol.
KINERGY CUSTOMERS
We purchase and resell ethanol to various customers in the Western
United States. We also arrange for transportation, storage and delivery of
ethanol purchased by our customers through our agreements with third-party
service providers. Our revenue is obtained primarily from sales of ethanol to
large oil companies.
During 2004, we purchased and resold an aggregate of approximately 52.5
million gallons of fuel grade ethanol to approximately 25 customers. Sales to
Kinergy's five largest customers represented in the aggregate approximately 58%
of Kinergy's total revenues in 2004. Sales to each of our other customers did
not represent more than approximately 5% of our revenue in 2004.
Most of the major metropolitan areas in California have fuel terminals
served by rail, but other major metropolitan areas and more remote smaller
cities and rural areas in California do not. We believe that we have developed a
valuable niche in California by growing our business to supply customers in
areas without rail access at fuel terminals, which are primarily located in the
Sacramento, San Joaquin and Imperial Valleys of California. We manage the
complicated logistics of shipping ethanol from the Midwest by rail to
intermediate storage locations throughout the Western United States and trucking
the ethanol from these storage locations to blending racks where the ethanol is
blended with gasoline. We believe that by establishing an efficient service for
truck deliveries to these more remote locations, we have differentiated
ourselves from our competitors which has resulted in increased sales and
profitability. In addition, by producing ethanol in California, we believe that
we will benefit from our ability to increase spot sales of ethanol from this
additional supply following ethanol price spikes caused from time to time by
rail delays in delivering ethanol from the Midwest to California.
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We typically match ethanol purchase and sale contracts of like
quantities and delivery period, which ordinarily range from one to twelve
months. From time to time, we attempt to take advantage of what we perceive to
be favorable industry trends and maintain net long or short ethanol positions.
This practice does subject us to the risk of prices moving in unanticipated
directions, which may result in losses, but also enables us to benefit from
above normal gross profit margins. Historically, our gross profit as a
percentage of sales has averaged between 2.0% to 4.4%, primarily due to
increases in the values of our inventory we held for sale during periods in
which ethanol prices generally increased. However, in light of recent declines
in ethanol prices, we anticipate that until we complete our facility and
commence the business of ethanol production thereby obtaining the benefits of
higher profit margins associated with production activities as compared to
marketing and distribution activities, our gross profit as a percentage of sales
will be approximately 1.0%. This is especially true in light of our recent entry
into a marketing agreement with Phoenix Bio-Industries ("PBI") to market and
sell all of PBI's ethanol production from its plant located in Goshen,
California. We expect initial production to be approximately 2.0 to 2.5 million
gallon per month once PBI completes construction of its ethanol production
facility, which is anticipated to occur during the third quarter of 2005. We
also expect to obtain a 1.0% gross profit on the sale of PBI's ethanol, a profit
level which we believe to be more typical of the ethanol marketing industry.
We will begin to market and sell ethanol we produce upon completion of
construction of our first ethanol production plant at our Madera County site. We
believe that most or all of the ethanol produced upon completion of construction
of our Madera County facility can be sold locally into the Fresno market. We
will continue to market ethanol and manage the shipping, storage and delivery of
ethanol from the Midwest to existing and new customers in the Western United
States. In addition, we intend to continue to expand our business in regions
that represent growing markets for ethanol, including Phoenix, Arizona, Las
Vegas, Nevada and Portland, Oregon.
KINERGY SUPPLIERS
We do not presently engage in any ethanol production activities.
However, we are in the process of constructing an ethanol plant in Madera County
for the production of up to 35 million gallons of ethanol per year. We are a
marketer and reseller of ethanol throughout the Western United States.
Accordingly, we are dependent upon various producers of fuel grade ethanol for
our ethanol supplies. In addition, we provide ethanol transportation, storage
and delivery services through third-party service providers.
We assume risk of loss with respect to each shipment of ethanol once
the ethanol is delivered to us by our suppliers at the agreed upon delivery
location. We maintain this risk of loss until the ethanol is delivered to a fuel
terminal. In the event that our suppliers ship ethanol directly to our
customers, risk of loss passes directly from our suppliers to our customers and
we do not assume any risk of loss. We maintain insurance to cover the risks
associated with our activities.
We do not own or lease any rail cars, tanker trucks or other fuel
transportation vehicles. Instead, we contract with third-party providers to
receive ethanol at agreed upon locations from our suppliers and to store and/or
deliver the ethanol to agreed upon locations on behalf of our customers. These
contracts generally run from year-to-year, subject to termination by either
party upon advance written notice before the end of the then-current annual
term.
PEI CALIFORNIA CUSTOMERS
Upon completion of our ethanol plant in Madera County, we expect to
market and sell ethanol produced at this plant through Kinergy. Kinergy's
business focus has been on growing its market share at the Fresno fuel terminal,
which is the only wholesale distribution point for gasoline for over 200 miles
between Stockton and Bakersfield, California. The Fresno fuel terminal is only
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20 miles southeast of our Madera County site and 35 miles northwest of our
potential Visalia site. The greater Fresno area is experiencing rapid population
growth. The Fresno/Clovis metro area population is nearly 700,000. In addition,
the Fresno fuel terminal serves the Central Valley, which is one of the largest
agricultural regions in the world. We are currently purchasing and reselling
over 50% of the ethanol distributed out of the Fresno fuel terminal. We expect
that all of the ethanol generated by the Madera County plant will be able to be
sold locally in the Fresno market that Kinergy has developed, capturing a key
competitive advantage over Midwest ethanol producers who must incur the costs of
delivering ethanol from thousands of miles away and subject their supplies to
rail delays and other challenges.
The San Joaquin Valley of California (located in the southern half of
the Central Valley) has one of the highest concentrations of dairy cows in the
world, with over 1.3 million head of cattle in an area covering approximately
30,000 square miles. There are approximately 500,000 dairy cows within a 50-mile
radius of our planned production site in Madera County and within the same
distance of our potential site in Visalia, California, for a combined total,
excluding any overlap, of over 1.0 million dairy cows. We expect that our
planned ethanol production facility in Madera County as well as our potential
site in Visalia, California will each be able to produce enough WDG to feed
105,000 to 130,000 dairy cows each year.
We expect to be one of the few WDG producers with production facilities
located in California. We intend to position WDG as the protein feed of choice
based on its nutritional composition, consistency of quality and delivery, ease
of handling and its mixing ability with minerals and other feed ingredients. We
believe that WDG has an ideal moisture level to carry minerals and other feed
ingredients and we expect to capture a higher combined profit margin by
providing WDG to the feed market in California.
We also have a proposal from Airgas Dry Ice to purchase all the CO2
from our Madera County facility once construction is completed and production of
ethanol is commenced. The proposal also provides that Airgas Dry Ice would lease
land adjacent to the Madera County ethanol plant and capitalize the costs of the
CO2 recovery and processing plant.
PEI CALIFORNIA SUPPLIERS
The production of ethanol requires a significant amount of raw
materials and supplies, such as corn, natural gas, electricity and water. The
cost of corn is the most important variable cost associated with the production
of ethanol. A 35 million gallon per year ethanol facility requires approximately
12.5 million bushels of corn each year or, according to the United States
Department of Agriculture--National Agricultural Statistics Survey, nearly 50%
of California's total 2004 annual corn production of 26.25 million bushels.
Therefore, a California ethanol plant must be able to efficiently ship corn from
the Midwest via rail and then cheaply and reliably truck processed ethanol to
local markets. Once built, we expect that the Madera County facility will be one
of the most efficient grain receiving facilities in the United States. The
unloading system was designed to unload 110 rail cars consistently in less than
fifteen hours. The plant will have the capacity to store a 49-day supply of
corn, or approximately 1.8 million bushels.
We plan to source corn using standard contracts, such as spot
purchases, forward purchases and basis contracts. We plan to establish a
relationship with a forwarding broker at the Chicago Board of Trade and expect
to establish allowable limits of open and un-hedged grain transactions that its
merchants will be required to follow pursuant to a risk management program. The
limits established are expected to be reviewed and adjusted on a regular basis.
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CONSTRUCTION OF ETHANOL PLANT
PEI California has entered into a construction agreement with W.M.
Lyles Co. for the construction of an ethanol plant at our Madera County site and
a potential second ethanol plant, currently considered for location in Visalia,
California. The construction agreement provides that W.M. Lyles Co. will provide
pricing choices in the construction of the plant. The first option is a lump sum
pricing option in which W.M. Lyles Co. sets a fixed price for the construction
of the plant. The second pricing option is a guaranteed maximum price, or GMP,
contract that sets a cap on total construction costs while providing for shared
savings if the actual cost falls below the GMP price. W.M. Lyles Co. provided us
with a lump sum price bid of $51.8 million and a GMP price of $52.8 million in
January 2005, that expired on April 1, 2005. We expect to receive a final price
for both of these options from W.M. Lyles Co. in the near future. In addition,
the contract provides that if we cancel the construction contract in favor of
another contractor, we would be required to pay a termination fee of $5.0
million. We are working to secure the financing necessary to complete
construction of this facility. See "Risk Factors."
Responsibility for the proper and timely construction of our planned
ethanol production facility rests with W.M. Lyles Co. We are requiring a payment
and performance bond to guarantee the quality and the timeliness of the
construction of this facility. We are currently negotiating the appropriate
levels of performance guarantees and associated liquidated damages. We have
currently authorized W. M. Lyles Co. to expend up to $3.0 million on site
development work.
Water supply is one of the most critical issues in developing a project
in the state of California. There is a pervasive water shortage in the Central
Valley, often causing spikes in the price of available water. We have taken a
number of steps to reduce our exposure to interruptions in our water supply and
to fluctuations in the market price of water. We have selected Delta-T
Corporation, a process design and technology provider, that we believe is
recognized in its industry for assisting in the minimization of water use. Also,
our Madera County property has two deep-water wells on the property which we
believe are able to supply nearly twice the annual requirements of our proposed
ethanol production facility. In addition, we have initiated the application
process to annex the Madera County property into the Madera Irrigation District,
or the MID. Having the Madera County site in the MID would allow us to buy water
from the MID if water quality degradation issues arise from drawing down the
water table on the property.
COMPETITION
We operate in the highly-competitive ethanol marketing industry and
plan to construct an ethanol production facility to begin producing our own
ethanol. The largest ethanol producer in the United States is
Archer-Daniels-Midland Company, or ADM, with wet and dry mill plants in the
Midwest and a total production capacity of about 1.0 billion gallons per year,
or about 30% of total United States ethanol production. According to the
Renewable Fuels Association, in its May 2005 report entitled U.S. FUEL ETHANOL
PRODUCTION CAPACITY, there are approximately 100 ethanol plants currently
operating or under construction located primarily in the Midwest with a combined
annual production capacity of approximately 4.5 billion gallons. We believe that
most of the growth in ethanol production over the last ten years has been by
farmer-owned cooperatives that have commenced or expanded ethanol production as
a strategy for enhancing demand for corn and adding value through processing. We
believe that many smaller ethanol plants rely on marketing groups such as
Ethanol Products, Aventine Renewable Energy, Inc. and Renewable Products
Marketing Group to move their product to market. We believe that, because
ethanol is a commodity, many of the Midwest ethanol producers can target
California, though ethanol producers further west in states such as Nebraska and
Kansas often enjoy delivery cost advantages.
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We are aware of one ethanol production facility currently under
construction in Goshen, California, located approximately fifty miles southeast
of our Madera County site. On March 4, 2005, we agreed with Phoenix
Bio-Industries, Inc., or PBI, the owner of the Goshen production facility, to
market and sell PBI's entire ethanol production from this facility. We expect
initial production to be approximately 2.0 to 2.5 million gallons per month once
PBI completes construction of the facility, which is anticipated to occur during
the third quarter of 2005. The term of the agreement is two years from the date
that ethanol is first available for marketing from PBI's production facility.
We believe that our ability to successfully compete in the ethanol
marketing industry depends on many factors, including:
o OUR ETHANOL DISTRIBUTION NETWORK. We believe that we have a
competitive advantage due to the market niche that we have
developed by supplying ethanol to customers in areas and markets
in the Western United States that are not served by rail. We have
developed an ethanol distribution network for delivery of ethanol
by truck to virtually every significant fuel terminal as well as
to numerous smaller fuel terminals throughout California. Fuel
terminals have limited storage capacity and we have been
successful in securing storage tanks in California. In addition,
we have an extensive network of third-party delivery trucks
available to deliver ethanol throughout California.
o OUR CUSTOMER AND SUPPLIER RELATIONSHIPS. We have developed
business relationships with our customers and suppliers. In
particular, we have developed business relationships with major
and independent un-branded customers who collectively control the
majority of all gasoline sales in California. In addition, we have
developed business relationships with ethanol suppliers throughout
the Western and Midwestern United States.
We believe that our ability to successfully compete in the ethanol
production industry depends on many factors, including:
o OUR LOCATION IN CALIFORNIA. We believe that, after the
construction or our ethanol production plant, we will have a
competitive advantage in the Central Valley market for ethanol
because competing Midwest-sourced ethanol must be "double-handled"
to reach Central Valley distribution racks and Midwest ethanol
producers must incur the costs of delivering ethanol from hundreds
of miles away and subject their supplies to rail delays and other
challenges. In addition, the San Joaquin Valley has over 1.3
million head of dairy cattle in an area less than 30,000 square
miles, which we expect will provide an excellent market for WDG, a
co-product of ethanol and an important protein source for dairy
cows.
o OUR ETHANOL MARKETING DIVISION. Upon completion of our ethanol
production facility in Madera County, we expect to market and sell
ethanol produced at this facility through Kinergy. We estimate
that ethanol demand in the Central Valley was approximately 200
million gallons in 2004. Kinergy is currently purchasing and
reselling over 50% of the ethanol distributed out of the Fresno
fuel terminal. We expect that all of the ethanol generated by the
Madera County facility will be able to be sold locally in the
Fresno market that Kinergy has developed.
Although we believe that we have certain competitive advantages over
our competitors, realizing and maintaining those advantages will require a
continued high level of investment in marketing and customer service and
support. We may not have sufficient resources to continue to make such
investments. Even if sufficient funds are available, we may not be able to make
the modifications and improvements necessary to maintain our competitive
advantages.
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GOVERNMENTAL REGULATION
We and our existing and proposed business operations are subject to
extensive and frequently changing federal, state and local laws and regulations
relating to the protection of the environment. These laws, their underlying
regulatory requirements and the enforcement thereof, some of which are described
below, impact, or may impact, our existing and proposed business operations by
imposing:
o restrictions on our existing and proposed business operations
and/or the need to install enhanced or additional controls;
o the need to obtain and comply with permits and authorizations;
o liability for exceeding applicable permit limits or legal
requirements, in certain cases for the remediation of contaminated
soil and groundwater at our facilities, contiguous and adjacent
properties and other properties owned and/or operated by third
parties; and
o specifications for the ethanol we market and plan to produce.
In addition, some of the governmental regulations to which we are
subject are helpful to our ethanol marketing business and proposed ethanol
production business. The ethanol fuel industry is greatly dependent upon tax
policies and environmental regulations that favor the use of ethanol in motor
fuel blends in North America. Some of the governmental regulations applicable to
our ethanol marketing business and proposed ethanol production business are
briefly described below.
FEDERAL EXCISE TAX EXEMPTION
Ethanol blends have been either wholly or partially exempt from the
federal excise tax, or FET, on gasoline since 1978. The exemption has ranged
from $0.04 to $0.06 per gallon of gasoline during that 25-year period. Current
law provides a $0.051 per gallon exemption from the $0.183 per gallon FET on
gasoline if the taxable product is blended in a mixture containing at least 10%
ethanol. The FET exemption was revised and its expiration date was extended for
the sixth time since its inception as part of the Jumpstart Our Business
Strength, or JOBS, Act enacted in October 2004. The new expiration date of the
FET exemption is December 31, 2010. We believe that it is highly likely that
this tax incentive will be extended beyond 2010 if Congress deems it necessary
for the continued growth and prosperity of the ethanol industry. Practically
speaking, the ethanol industry wields extensive power, especially in the United
States Senate, and we believe that it has consolidated the support needed for
the continuation of the FET exemption for ethanol.
CLEAN AIR ACT AMENDMENTS OF 1990
In November 1990, a comprehensive amendment to the Clean Air Act of
1977 established a series of requirements and restrictions for gasoline content
designed to reduce air pollution in identified problem areas of the United
States. The two principal components affecting motor fuel content are the
Oxygenated Fuels Program, which is administered by states under federal
guidelines, and a federally supervised Reformulated Gasoline Program.
Oxygenated Fuels Program
------------------------
Federal law requires the sale of oxygenated fuels in certain carbon
monoxide non-attainment Metropolitan Statistical Areas ("MSA") during at least
four winter months, typically November through February. Any additional MSA not
in compliance for a period of two consecutive years in subsequent years may also
be included in the program. The EPA Administrator is afforded flexibility in
requiring a shorter or longer period of use depending upon available supplies of
oxygenated fuels or the level of non-attainment. This law currently affects the
Los Angeles area, where over 150 million gallons of ethanol are blended with
gasoline each winter.
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Reformulated Gasoline Program
-----------------------------
The Clean Air Act Amendments of 1990 established special standards
effective January 1, 1995 for the most polluted ozone non-attainment areas: Los
Angeles Basin, Baltimore, Chicago Area, Houston Area, Milwaukee Area, New
York-New Jersey, Hartford Region, Philadelphia Area and San Diego, with
provisions to add other areas in the future if conditions warrant. California's
Central Valley was added in 2002. At the outset of the program there were a
total of ninety-six MSAs not in compliance with clean air standards for ozone,
which currently represents approximately 60% of the national market.
The legislation requires a minimum of 2.0% oxygen by weight in
reformulated gasoline as a means of reducing carbon monoxide pollution and
replacing octane lost by reducing aromatics which are high octane portions of
refined oil. The Reformulated Gasoline Program also includes a provision that
allows individual states to "opt into" the federal program by request of the
governor, to adopt standards promulgated by California that are stricter than
federal standards, or to offer alternative programs designed to reduce ozone
levels. Nearly all of the Northeast and middle Atlantic areas from Washington,
D.C., to Boston not under the federal mandate have "opted into" the federal
standards.
These state mandates in recent years have created a variety of gasoline
grades to meet different regional environmental requirements. Reformulated
gasoline accounts for about 30% of nationwide gasoline consumption. Under
current law, California refiners must blend a minimum of 2.0% oxygen by weight.
This is the equivalent of 5.7% ethanol in every gallon of gas, or roughly 900
million gallons of ethanol per year in California alone.
PROPOSED NATIONAL ENERGY LEGISLATION
We believe that a national energy bill has become a priority for
President George Bush and that an energy bill may pass during the current
legislative session. The United States House of Representatives has passed a
bill that includes a national renewable fuels standard that requires refiners to
blend a percentage of renewable fuels into their gasoline. This bill sets the
renewable fuels standard beginning at 3.0 billion gallons per year and we
believe ending at 5 to 8 billion gallons per year by 2012. The United States
Senate has yet to address the bill, but we expect that if the Senate does pass a
version of the bill, it will pass a version of the bill with a larger beginning
and ending renewable fuels standard. If the Senate passes a version of the bill
different from the version passed by the House of Representatives, the
Congressional Conference Committee will be required to reach a compromise in
order to send the bill to President Bush for approval or veto. We believe that
all versions of the renewable fuels standard substitute the standard for the
existing oxygenate requirement in the current Reformulated Gasoline Program. We
anticipate that the effects of this legislation, if it is passed, on the market
for ethanol will be to increase the overall size of the market for ethanol on a
national basis. In addition, we believe that the market for ethanol in
geographic areas such as California could experience either increases or
decreases in the demand for ethanol depending on the preferences of petroleum
refiners. See "Risk Factors."
ADDITIONAL ENVIRONMENTAL REGULATIONS
In addition to the governmental regulations applicable to the ethanol
marketing and production industries described above, our business is subject to
additional federal, state and local environmental regulations, including
regulations established by the EPA, the California Air Quality Management
District, the San Joaquin Valley Air Pollution Control District and the
California Air Resources Board, or CARB. We cannot predict the manner or extent
to which these regulations will harm or help our business or the ethanol
production and marketing industry in general.
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EMPLOYEES
As of May 20, 2005, we employed nine persons on a full-time basis,
including through our Kinergy and PEI California subsidiaries. Our employees are
highly skilled, and our success will depend in part upon our ability to retain
such employees and attract new qualified employees who are in great demand. We
have never had a work stoppage or strike, and no employees are presently
represented by a labor union or covered by a collective bargaining agreement. We
consider our relations with our employees to be good.
FACILITIES
Our corporate headquarters, located in Fresno, California, consists of
a 3,000 square foot office rented on a month-to-month basis. We also rent on an
annual basis an office in Davis, California, consisting of 500 square feet.
We have acquired real property located in Madera County consisting of
approximately 137 acres on which we intend to construct an ethanol production
facility. We have an option to acquire additional real property located in
Visalia, California consisting of approximately 89.3 acres on which we may
construct another ethanol production facility and expand our operations.
LEGAL PROCEEDINGS
We are subject to legal proceedings, claims and litigation arising in
the ordinary course of business. While the amounts claimed may be substantial,
the ultimate liability cannot presently be determined because of considerable
uncertainties that exist. Therefore, it is possible that the outcome of those
legal proceedings, claims and litigation could adversely affect our quarterly or
annual operating results or cash flows when resolved in a future period.
However, based on facts currently available, management believes such matters
will not adversely affect our financial position, results of operations or cash
flows.
R.A. DAVIS COMMODITIES
On September 22, 2004, R.A. Davis Commodities, LLC filed a complaint
for breach of contract, promissory estoppel and negligence in the Superior Court
of the State of California for the County of Fresno against PEI California. The
complaint seeks actual and consequential damages in the amount of approximately
$700,000 based on PEI California's alleged breach of certain rolled corn
purchase contracts. PEI California responded to the complaint on January 27,
2005. PEI California also filed a cross-complaint against R.A. Davis on that
date, alleging breach of oral and written contract in connection with sales of
feed product as well as "transloading" services performed for R.A. Davis. The
cross-complaint seeks damages in the amount of $121,435. The trial in this
matter is set for March 13, 2006. We believe that the claims made in the
complaint are without merit and we expect to vigorously defend this lawsuit.
INSURANCE CORPORATION OF HANOVER
On November 8, 2004, Insurance Corporation of Hanover and Kruse
Investments d/b/a Western Milling, LLC (collectively, the "Plaintiffs") filed a
complaint for damages in the Superior Court of the State of California for the
County of Madera against PEI California. The complaint sought actual and
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consequential damages in the amount of approximately $960,800 based on PEI
California's alleged breach of contract and negligence in connection with losses
suffered by Plaintiffs which arose out of damage caused to Western Milling's
canola meal that was stored at PEI California's grain silos located at PEI
California's Madera County facility, which facility was the subject of a grain
silo fire on January 12, 2004. PEI California's insurance company has settled
this matter. Plaintiffs have dismissed the action against PEI California with
prejudice and have provided PEI California a written release.
GERALD ZUTLER
In January 2003, DriverShield CRM Corp. ("DriverShield"), then a
wholly-owned subsidiary of our predecessor, Accessity, was served with a
complaint filed by Mr. Gerald Zutler, its former President and Chief Operating
Officer, alleging, among other things, that DriverShield breached his employment
contract, that there was fraudulent concealment of DriverShield's intention to
terminate its employment agreement with Mr. Zutler, and discrimination on the
basis of age and aiding and abetting violation of the New York State Human
Rights Law. Mr. Zutler is seeking damages aggregating $3.0 million, plus
punitive damages and reasonable attorneys' fees. DriverShield's management
believes that DriverShield properly terminated Mr. Zutler's employment for
cause, and intends to vigorously defend this suit. An Answer to the complaint
was served by DriverShield on February 28, 2003. In 2003, Mr. Zutler filed a
motion to have DriverShield's attorney removed from the case. The motion was
granted by the court, but was subsequently overturned by an appellate court.
DriverShield has filed a claim with its insurance carrier under its directors
and officers and employment practices' liability policy. The carrier has agreed
to cover certain portions of the claim as they relate to Mr. Siegel,
DriverShield's former Chief Executive Officer. The policy has a $50,000
deductible and a liability limit of $3.0 million per policy year. At the present
time, the carrier has agreed to cover the portion of the claim that relates to
Mr. Siegel and has agreed to a fifty percent allocation of expenses.
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION IN THIS REPORT AND IN OUR OTHER FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING OUR SUBSEQUENT REPORTS ON
FORMS 10-QSB AND 8-K, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK OR TO MAINTAIN OR
INCREASE YOUR INVESTMENT IN SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCUR, IT IS LIKELY THAT OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS COULD BE SERIOUSLY HARMED. AS A RESULT, THE TRADING PRICE
OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL OF YOUR
INVESTMENT.
RISKS RELATED TO OUR COMBINED OPERATIONS
WE HAVE INCURRED SIGNIFICANT LOSSES IN THE PAST AND WE MAY INCUR SIGNIFICANT
LOSSES IN THE FUTURE. IF WE CONTINUE TO INCUR LOSSES, WE WILL EXPERIENCE
NEGATIVE CASH FLOW, WHICH MAY HAMPER OUR OPERATIONS, MAY PREVENT US FROM
EXPANDING OUR BUSINESS AND MAY CAUSE OUR STOCK PRICE TO DECLINE.
We have incurred losses in the past. As of March 31, 2005, we had an
accumulated deficit of approximately $4.5 million. For the three months ended
March 31, 2005, we incurred a loss of approximately $800,000. We expect to incur
losses for the foreseeable future and at least until the completion of our
planned ethanol production facility. We estimate that the earliest completion
date of our ethanol production facility in Madera County will not occur until
the third quarter of 2006. We expect to rely on cash from operations and debt
and equity financing to fund all of the cash requirements of our business. If
our net losses continue, we will experience negative cash flow, which may hamper
current operations and may prevent us from expanding our business. We cannot
assure you that we will attain, sustain or increase profitability on a quarterly
or annual basis in the future. If we do not achieve, sustain or increase
profitability, our business will be adversely affected and our stock price may
decline.
THE HIGH CONCENTRATION OF OUR SALES WITHIN THE ETHANOL PRODUCTION AND
MARKETING INDUSTRY COULD RESULT IN A SIGNIFICANT REDUCTION IN SALES AND
NEGATIVELY AFFECT OUR PROFITABILITY IF DEMAND FOR ETHANOL DECLINES.
Our revenue is and will continue to be derived primarily from sales of
ethanol. Currently, the predominant oxygenate used to blend with gasoline is
ethanol. Ethanol competes with several other existing products and other
alternative products could also be developed for use as fuel additives. In
addition, some studies, including a study conducted at the University of
California, Berkeley in 2003, suggest that producing ethanol from corn requires
burning as much as twice the amount of gasoline already used in cars, thereby
harming the environment more than pure gasoline. We expect to be completely
focused on the production and marketing of ethanol and its co-products for the
foreseeable future. There can be no assurance that we will be able to shift our
business focus away from the production and marketing of ethanol to other
renewable fuels or competing products. Accordingly, an industry shift away from
ethanol or the emergence of new competing products may reduce the demand for
ethanol. As a result, our sales and profitability would be significantly and
adversely impacted by a downturn in the demand for ethanol.
WE PLAN TO FUND A SUBSTANTIAL MAJORITY OF THE CONSTRUCTION COSTS OF OUR
PLANNED ETHANOL PRODUCTION FACILITY THROUGH THE ISSUANCE OF A SUBSTANTIAL
AMOUNT OF DEBT, RESULTING IN SUBSTANTIAL DEBT SERVICE REQUIREMENTS THAT
COULD REDUCE THE VALUE OF YOUR INVESTMENT.
We plan to fund a substantial majority of the construction costs of our
planned ethanol production facility through the issuance of a substantial amount
of debt. We anticipate that we will need to raise approximately $60.0 million in
debt financing to construct our first ethanol production facility. As a result,
our capital structure will be highly leveraged. Our debt levels and debt service
requirements could have important consequences which could reduce the value of
your investment, including:
-39-
o limiting our ability to borrow additional amounts for operating
capital or other purposes and causing us to be able to borrow
additional funds only on unfavorable terms;
o reducing funds available for operations and distributions because
a substantial portion of our cash flow will be used to pay
interest and principal on our debt;
o making us vulnerable to increases in prevailing interest rates;
o placing us at a competitive disadvantage because we may be
substantially more leveraged than some of our competitors;
o subjecting all or substantially all of our assets to liens, which
means that there may be no assets left for our stockholders in the
event of a liquidation; and
o limiting our ability to adjust to changing market conditions,
which could increase our vulnerability to a downturn in our
business or general economic conditions.
If we are unable to pay our debt service obligations, we could be
forced to reduce or eliminate dividends to our stockholders, if they were to
commence, and/or reduce or eliminated needed capital expenditures. It is
possible that we could be forced to sell assets, seek to obtain additional
equity capital or refinance or restructure all or a portion of our debt on
substantially less favorable terms. In the event that we are unable to refinance
our all or a portion of our debt or raise funds through asset sales, sales of
equity or otherwise, our business may be adversely affected, we may be forced to
liquidate and you could lose your entire investment.
FOLLOWING THE CLOSING OF OUR ANTICIPATED DEBT FINANCING, OUR LENDERS MAY
REQUIRE US TO ABIDE BY RESTRICTIVE LOAN COVENANTS THAT MAY HINDER OUR
ABILITY TO OPERATE AND REDUCE OUR PROFITABILITY.
We expect that following the closing of our anticipated debt financing,
the loan agreements governing our debt financing will contain a number of
restrictive affirmative and negative covenants. These covenants may limit our
ability to, among other things:
o incur additional indebtedness;
o make capital expenditures in excess of prescribed thresholds;
o pay dividends to our stockholders;
o make various investments;
o create liens on our assets;
o utilize the proceeds of asset sales; or
o merge or consolidate or dispose of all or substantially all of our
assets.
We also will likely be required to maintain specified financial ratios,
including minimum cash flow coverage, minimum working capital and minimum net
worth. We also may be required to utilize a portion of any excess cash flow
generated by operations to prepay our debt. A breach of any of these covenants
or requirements could result in a default under our debt agreements. If we
default, and if such default is not cured or waived, a lender could, among other
remedies, accelerate our debt and declare the debt immediately due and payable.
If this occurs, we may not be able to repay or borrow sufficient funds to
refinance our debt. Even if new financing is available, it may not be on terms
that are acceptable. Such an occurrence could cause us to cease building our
ethanol production facility, or if our facility is already constructed, such an
occurrence could cause us to cease or curtail operations. We cannot assure you
that our future operating results will be sufficient to achieve compliance with
such covenants and requirements, or in the event of a default, to remedy such
default.
-40-
GOVERNMENTAL REGULATIONS OR THE REPEAL OR MODIFICATION OF VARIOUS TAX
INCENTIVES FAVORING THE USE OF ETHANOL COULD ADVERSELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our business is subject to extensive regulation by federal, state and
local governmental agencies. We cannot predict in what manner or to what extent
governmental regulations will harm our business or the ethanol production and
marketing industry in general. For example, the United States House of
Representatives has passed a bill that includes a national renewable fuels
standard that would require refiners to blend a percentage of renewable fuels
into gasoline. If passed, this legislation would replace the current oxygenate
requirements in the State of California thereby potentially decreasing the
demand for ethanol in the State of California. If this were to occur, our
business, financial condition and results of operations would be materially and
adversely affected.
The fuel ethanol business benefits significantly from tax incentive
policies and environmental regulations that favor the use of ethanol in motor
fuel blends in the United States. Currently, a gasoline marketer that sells
gasoline without ethanol must pay a federal tax of $0.18 per gallon compared to
$0.13 per gallon for gasoline that is blended with 10% ethanol. Smaller credits
are available for gasoline blended with lesser percentages of ethanol. The
repeal or substantial modification of the federal excise tax exemption for
ethanol-blended gasoline or, to a lesser extent, other federal or state policies
and regulations that encourage the use of ethanol could have a detrimental
effect on the ethanol production and marketing industry and materially and
adversely affect our business and results of operations.
VIOLATIONS OF ENVIRONMENTAL REGULATIONS COULD SUBJECT US TO SEVERE PENALTIES
AND MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The production and sale of ethanol is subject to regulation by agencies
of the federal government, including, but not limited to, the EPA, as well as
other agencies in each jurisdiction in which ethanol is produced, sold, stored
or transported. Environmental laws and regulations that affect our operations
are extensive and have become progressively more stringent. Applicable laws and
regulations are subject to change, which could be made retroactively. Violations
of environmental laws and regulations or permit conditions can result in
substantial penalties, injunctive orders compelling installation of additional
controls, civil and criminal sanctions, permit revocations and/or facility
shutdowns. If significant unforeseen liabilities arise for corrective action or
other compliance, our business, results of operations and financial condition
could be materially and adversely affected.
WE RELY HEAVILY ON OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, NEIL KOEHLER.
THE LOSS OF HIS SERVICES COULD ADVERSELY AFFECT OUR ABILITY TO SOURCE
ETHANOL FROM OUR KEY SUPPLIERS AND OUR ABILITY TO SELL ETHANOL TO OUR
CUSTOMERS.
Our success depends, to a significant extent, upon the continued
services of Neil Koehler, who is our President and Chief Executive Officer. For
example, Mr. Koehler has developed key personal relationships with our ethanol
suppliers and customers. We greatly rely on these relationships in the conduct
of our operations and the execution of our business strategies. The loss of Mr.
Koehler could, therefore, result in the loss of our favorable relationships with
one or more of our ethanol suppliers and customers. In addition, Mr. Koehler has
considerable experience in the construction, start-up and operation of ethanol
production facilities and in the ethanol marketing business. Although we have
entered into an employment agreement with Mr. Koehler, that agreement is of
limited duration and is subject to early termination by Mr. Koehler under
certain circumstances. In addition, we do not maintain "key person" life
insurance covering Mr. Koehler or any other executive officer. The loss of Mr.
Koehler could significantly delay or prevent the achievement of our business
objectives. Consequently, the loss of Mr. Koehler could adversely affect our
business, financial condition and results of operations.
-41-
THE ETHANOL PRODUCTION AND MARKETING INDUSTRY IS EXTREMELY COMPETITIVE. MANY
OF OUR SIGNIFICANT COMPETITORS HAVE GREATER FINANCIAL AND OTHER RESOURCES
THAN WE DO AND ONE OR MORE OF THESE COMPETITORS COULD USE THEIR GREATER
RESOURCES TO GAIN MARKET SHARE AT OUR EXPENSE.
The ethanol production and marketing industry is extremely competitive.
Many of our significant competitors in the ethanol production and marketing
industry, have substantially greater production, financial, research and
development, personnel and marketing resources than we do. As a result, each of
these companies may be able to compete more aggressively and sustain that
competition over a longer period of time than we could. Our lack of resources
relative to many of our significant competitors may cause us to fail to
anticipate or respond adequately to new developments and other competitive
pressures. This failure could reduce our competitiveness and cause a decline in
our market share and sales.
OUR FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our future success is dependent in part on our ability to attract and
retain certain key personnel. We currently have few employees and need to
attract additional skilled technical, clerical and managerial personnel in all
areas of our business to continue to grow. The competition for such individuals
in the growing ethanol production and marketing industry is intense. There can
be no assurance that we will be able to retain our existing personnel or attract
additional qualified personnel in the future. If we are unable to attract and
retain key personnel, our business, financial condition and results of
operations could be adversely affected.
OUR MANAGEMENT MAY FAIL TO SUCCESSFULLY INTEGRATE THE BUSINESS OF KINERGY
WITH THE PROPOSED ETHANOL PRODUCTION BUSINESS OF PEI CALIFORNIA, WHICH COULD
ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Integrating the business of Kinergy with the proposed ethanol
production business of PEI California will be complex, time-consuming and
expensive, and our management may fail to successfully integrate these
businesses. Each of Kinergy and PEI California were previously operated
independently, each with its own business or proposed business, culture,
clients, employees and systems. Kinergy and PEI California will now be operated
as a combined organization, utilizing common information and communication
systems, operating procedures, financial controls and human resources practices,
including benefits, training and professional development programs. We may
experience substantial difficulties, costs and delays relating to our efforts to
integrate the business of Kinergy and the proposed ethanol production business
of PEI California. These may include the diversion of management resources from
our core ethanol marketing business, the potential incompatibility of business
cultures and the costs and delays in implementing common systems and procedures.
Any one or all of these factors may cause increased operating costs or the loss
of key customers and employees, either of which could adversely affect our
business, financial condition and results of operations.
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS.
Our strategy envisions a period of rapid growth that may impose a
significant burden on our administrative and operational resources. The growth
of our business, and in particular, the construction of our planned ethanol
production facility, will require significant investments of capital and
management's close attention. Our ability to effectively manage our growth will
require us to substantially expand the capabilities of our administrative and
operational resources and to attract, train, manage and retain qualified
management, technicians and other personnel. There can be no assurance that we
will be able to do so. In addition, our failure to successfully manage our
growth could result in our sales not increasing commensurately with our capital
investments. If we are unable to successfully manage our growth, our business,
financial condition and results of operations could be materially and adversely
affected.
-42-
INSURANCE COVERAGE MAY BE INADEQUATE OR UNAVAILABLE TO PROTECT US FROM
LOSSES ASSOCIATED WITH OUR PLANS AND OPERATIONS, WHICH MAY ADVERSELY AFFECT
OUR BUSINESS AND FINANCIAL CONDITION.
Insurance coverage may be inadequate or unavailable to protect us from
losses associated with our plans and operations. Events may occur for which no
insurance is available or for which insurance is not available on terms that are
reasonably acceptable. In addition, events may occur for which our insurance
inadequately covers the associated losses. Losses from an uninsured or
underinsured event, such as, but not limited to, earthquakes, floods, war, riot,
acts of terrorism or other risks may be uninsured or underinsured and such a
loss may adversely affect our business and financial condition. In addition, we
operate in an industry that is subject to heavy environmental regulation and we
are undertaking to construct an ethanol production facility, both of which
subject us to substantial losses upon the occurrence of certain events such as
the discharge of a hazardous substance or a catastrophic event such as an
explosion or fire during or following the construction of our ethanol production
facility. In the event of a loss, any failure to obtain and maintain insurance,
with adequate policy limits and/or self-retention limits, may adversely affect
our business and financial condition.
RISKS RELATED TO OUR COMMON STOCK
OUR COMMON STOCK HAS A SMALL PUBLIC FLOAT AND SHARES OF OUR COMMON STOCK
ELIGIBLE FOR PUBLIC SALE COULD CAUSE THE MARKET PRICE OF OUR STOCK TO DROP,
EVEN IF OUR BUSINESS IS DOING WELL, AND MAKE IT DIFFICULT FOR US TO RAISE
ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.
As of May 20, 2005, we had outstanding approximately 27.7 million
shares of our common stock. Approximately 16.0 million of these shares were
restricted under the Securities Act of 1933, including 11.7 million shares
beneficially owned, as a group, by our executive officers, directors and 10%
stockholders. Accordingly, our common stock has a public float of approximately
3.1 million shares held by a relatively small number of public investors.
We have agreed to register for resale approximately 11.25 million
shares of our common stock, including shares of our common stock underlying
warrants, issued in connection with a private placement transaction completed in
March 2005. If and when a registration statement covering these shares of common
stock is declared effective, holders of these shares will be permitted, subject
to few limitations, to freely sell such shares of common stock. We cannot
predict the effect, if any, that future sales of shares of our common stock into
the public market will have on the market price of our common stock. However, as
a result of our small public float, sales of substantial amounts of common
stock, including shares issued upon the exercise of stock options or warrants,
or an anticipation that such sales could occur, may materially and adversely
affect prevailing market prices for our common stock. Any adverse effect on the
market price of our common stock could make it difficult for us to raise
additional capital through sales of equity securities at a time and at a price
that we deem appropriate.
OUR STOCK PRICE IS HIGHLY VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INVESTORS PURCHASING SHARES OF OUR COMMON STOCK AND IN LITIGATION
AGAINST US.
The market price of our common stock has fluctuated significantly in
the past and may continue to fluctuate significantly in the future. The market
price of our common stock may continue to fluctuate in response to one or more
of the following factors, many of which are beyond our control:
-43-
o the volume and timing of the receipt of orders for ethanol from
major customers;
o competitive pricing pressures;
o our ability produce, sell and deliver ethanol on a cost-effective
and timely basis;
o our inability to obtain construction, capital equipment and/or
working capital financing;
o the introduction and announcement of new products and processes by
our competitors;
o changing conditions in the ethanol and fuel markets;
o changes in market valuations of similar companies;
o stock market price and volume fluctuations generally;
o regulatory developments or increased enforcement;
o fluctuations in our quarterly or annual operating results;
o additions or departures of key personnel; and
o future sales of our common stock or other securities.
Furthermore, we believe that the economic conditions in California and
other states, as well as the United States as a whole, could have a negative
impact on our results of operations. Demand for ethanol products could also be
adversely affected by a slow down in overall demand for oxygenate and gasoline
additive products. The levels of our ethanol production and purchases for resale
will be based upon forecasted demand. Accordingly, any inaccuracy in forecasting
anticipated revenues and expenses could adversely affect our business.
Furthermore, we recognize revenues from ethanol sales at the time of delivery.
The failure to receive anticipated orders or to complete delivery in any
quarterly period could adversely affect our results of operations for that
period. Quarterly results are not necessarily indicative of future performance
for any particular period, and we may not experience revenue growth or
profitability on a quarterly or annual basis.
The price at which you purchase shares of our common stock may not be
indicative of the price that will prevail in the trading market. You may be
unable to sell your shares of common stock at or above your purchase price,
which may result in substantial losses to you and which may include the complete
loss of your investment. In the past, securities class action litigation has
often been brought against a company following periods of stock price
volatility. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and our resources away from our business. Any of the risks described above could
adversely affect our business, financial condition and results of operations and
also the price of our common stock.
RISKS RELATING TO THE BUSINESS OF KINERGY
KINERGY'S PURCHASE AND SALE COMMITMENTS AS WELL AS ITS INVENTORY OF ETHANOL
HELD FOR SALE SUBJECT US TO THE RISK OF FLUCTUATIONS IN THE PRICE OF
ETHANOL, WHICH MAY RESULT IN LOWER OR EVEN NEGATIVE GROSS MARGINS AND WHICH
COULD MATERIALLY AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Kinergy's purchases and sales of ethanol are not always matched with
sales and purchases of ethanol at established prices. As a standard business
practice, Kinergy commits from time to time to the sale of ethanol to its
customers without corresponding and commensurate commitments for the supply of
ethanol from its suppliers, which subjects us to the risk of an increase in the
price of ethanol. As a standard business practice, Kinergy also commits from
time to time to the purchase of ethanol from its suppliers without corresponding
and commensurate commitments for the purchase of ethanol by its customers, which
subjects us to the risk of a decline in the price of ethanol. In addition,
Kinergy's inventory of ethanol held for sale subjects us to the risk of a
decline in the price of ethanol. Accordingly, our business is subject to
fluctuations in the price of ethanol and these fluctuations may result in lower
or even negative gross margins and which could materially and adversely affect
our results of operations.
-44-
KINERGY DEPENDS ON A SMALL NUMBER OF CUSTOMERS FOR THE VAST MAJORITY OF ITS
SALES. A REDUCTION IN BUSINESS FROM ANY OF THESE CUSTOMERS COULD CAUSE A
SIGNIFICANT DECLINE IN OUR SALES AND RESULTS OF OPERATIONS.
The vast majority of Kinergy's sales are generated from a small number
of customers. During 2004, sales to Kinergy's four largest customers represented
approximately 13%, 12%, 12% and 12%, respectively, representing an aggregate of
approximately 49%, of our total sales. We expect that Kinergy will continue to
depend for the foreseeable future upon a small number of customers for a
significant majority of its sales. Kinergy's agreements with these customers
generally do not require them to purchase any specified amount of ethanol or
dollar amount of sales or to make any purchases whatsoever. Therefore, we cannot
assure you that, in any future period, Kinergy's sales generated from these
customers, individually or in the aggregate, will equal or exceed historical
levels. We also cannot assure you that, if sales to any of these customers cease
or decline, Kinergy will be able to replace these sales with sales to either
existing or new customers in a timely manner, or at all. A cessation or
reduction of sales to one or more of these customers could cause a significant
decline in our net sales and results of operations.
KINERGY'S LACK OF LONG-TERM ETHANOL ORDERS AND COMMITMENTS BY ITS CUSTOMERS
COULD LEAD TO A RAPID DECLINE IN OUR SALES AND PROFITABILITY.
Kinergy cannot rely on long-term ethanol orders or commitments by its
customers for protection from the negative financial effects of a decline in the
demand for ethanol or a decline in the demand for Kinergy's services. The
limited certainty of ethanol orders can make it difficult for us to forecast our
sales and allocate our resources in a manner consistent with our actual sales.
Moreover, our expense levels are based in part on our expectations of future
sales and, if our expectations regarding future sales are inaccurate, we may be
unable to reduce costs in a timely manner to adjust for sales shortfalls.
Furthermore, because Kinergy depends on a small number of customers for the vast
majority of its sales, the magnitude of the ramifications of these risks is
greater than if Kinergy's sales were less concentrated within a small number of
customers. As a result of Kinergy's lack of long-term ethanol orders and
commitments, we may experience a rapid decline in our sales and profitability.
KINERGY DEPENDS ON A SMALL NUMBER OF SUPPLIERS FOR THE VAST MAJORITY OF THE
ETHANOL THAT IT SELLS. IF ANY OF THESE SUPPLIERS IS UNABLE OR DECIDES NOT TO
CONTINUE TO SUPPLY KINERGY WITH ETHANOL, KINERGY MAY BE UNABLE TO SATISFY
THE DEMANDS OF ITS CUSTOMERS AND OUR BUSINESS AND RESULTS OF OPERATIONS WILL
BE ADVERSELY AFFECTED.
Kinergy depends on a small number of suppliers for the vast majority of
the ethanol that it sells. During 2004, Kinergy's three largest suppliers
represented approximately 27%, 23% and 14%, respectively, representing an
aggregate of approximately 64%, of the total ethanol Kinergy purchased for
resale. We expect that Kinergy will continue to depend for the foreseeable
future upon a small number of suppliers for a significant majority of the
ethanol that it purchases. We cannot assure you that, if any of these suppliers
is unable or declines for any reason to continue to supply Kinergy with ethanol,
Kinergy will be able to replace that supplier and source other supplies of
ethanol in a timely manner, or at all, to satisfy the demands of its customers.
If any of these suppliers is unable or decides not to continue to supply Kinergy
with ethanol, Kinergy may be unable to satisfy the demands of its customers and
our business and results of operations will be adversely affected.
-45-
INTERRUPTIONS OR DELAYS IN KINERGY'S SUPPLY OF ETHANOL COULD CAUSE KINERGY
TO BE UNABLE TO SATISFY THE DEMANDS OF ITS CUSTOMERS AND ADVERSELY AFFECT
OUR BUSINESS AND RESULTS OF OPERATIONS.
Kinergy sources the ethanol that it sells primarily from suppliers
thousands of miles away in the Midwestern United States. The delivery of the
ethanol that Kinergy sells is therefore subject to delays resulting from
inclement weather and other conditions. The quantity of ethanol in Kinergy's
inventory fluctuates and during periods of low inventory levels, Kinergy is more
vulnerable to the effects of interruptions and delays in its supply of ethanol.
Accordingly, interruptions or delays in Kinergy's supply of ethanol from the
Midwest could cause Kinergy to be unable to satisfy the demands of its customers
and adversely affect our business and results of operations.
RISKS RELATING TO THE BUSINESS OF PEI CALIFORNIA
THE CONSTRUCTION OF OUR PLANNED ETHANOL PRODUCTION FACILITY WILL REQUIRE
SIGNIFICANT ADDITIONAL FUNDING, WHICH WE EXPECT TO RAISE THROUGH DEBT
FINANCING. WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN RAISING
ADEQUATE CAPITAL.
We anticipate that we will need to raise approximately $60 million in
debt financing to construct our first ethanol production facility in Madera
County. We have no contracts with or binding commitments from any bank, lender
or financial institution for this debt financing. We cannot assure you that any
funding from one or more lenders will be obtained, or if it is obtained, that it
will be on terms that we have anticipated or that are otherwise acceptable to
us. If we are unable to secure adequate debt financing, or debt financing on
acceptable terms is unavailable for any reason, we may be forced to abandon our
plans for the construction of an ethanol production facility.
PEI CALIFORNIA HAS NOT CONDUCTED ANY SIGNIFICANT BUSINESS OPERATIONS AND HAS
BEEN UNPROFITABLE TO DATE. IF PEI CALIFORNIA FAILS TO COMMENCE SIGNIFICANT
BUSINESS OPERATIONS, IT WILL BE UNSUCCESSFUL, WILL FAIL TO CONTRIBUTE
POSITIVELY TO OUR PROFITABILITY AND WILL HAVE AN ADVERSE EFFECT ON OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
PEI California has not conducted any significant business operations
and has been unprofitable to date. Accordingly, there is no prior operating
history by which to evaluate the likelihood of PEI California's success or its
contribution to our profitability. We cannot assure you that PEI California will
ever complete construction of an ethanol production facility and commence
significant operations or, if PEI California does complete the construction of
an ethanol production facility, that PEI California will ever be successful or
contribute positively to our profitability. If PEI California fails to commence
significant business operations, it will be unsuccessful and will fail to
contribute positively to our profitability, which will have an adverse effect on
our financial condition and results of operations.
THE MARKET PRICE OF ETHANOL IS VOLATILE AND SUBJECT TO SIGNIFICANT
FLUCTUATIONS, WHICH MAY CAUSE OUR RESULTS OF OPERATIONS TO FLUCTUATE
SIGNIFICANTLY.
The market price of ethanol is somewhat dependent on the price of
gasoline, which is in turn dependent on the price of petroleum. Petroleum prices
are highly volatile and difficult to forecast due to frequent changes in global
politics and the world economy. The distribution of petroleum throughout the
world is affected by incidents in unstable political environments, such as Iraq,
Iran, Kuwait, Saudi Arabia, the former U.S.S.R. and other countries and regions.
The industrialized world depends critically on oil from these areas, and any
disruption or other reduction in oil supply can cause significant fluctuations
in the prices of oil and gasoline. We cannot predict the future price of oil or
gasoline and may establish unprofitable prices for the sale of ethanol due to
significant fluctuations in market prices. For example, the price of ethanol has
declined by approximately 30% in only three months from January 2005 to March
2005. If PEI California fails to price its ethanol consistently in a manner that
is profitable, our business, financial condition and results of operations will
be adversely affected.
-46-
We believe that the production of ethanol is expanding rapidly. There
are a number of new plants under construction and planned for construction, both
inside and outside California. We expect existing ethanol plants to expand by
increasing production capacity and actual production. We cannot assure you that
there will be any material or significant increases in the demand for ethanol
commensurate with increasing supplies of ethanol. Accordingly, increased
production of ethanol may lead to lower ethanol prices. The increased production
of ethanol could also have other adverse effects. For example, increased ethanol
production could lead to increased supplies of co-products from the production
of ethanol, such as WDG. Those increased supplies could lead to lower prices for
those co-products. Also, the increased production of ethanol could result in
increased demand for corn. This could result in higher prices for corn and cause
higher ethanol production costs and, in the event that PEI California is unable
to pass increases in the price of corn to its customers, will result in lower
profits. We cannot predict the future price of ethanol or WDG. Any material
decline in the price of ethanol or WDG may adversely affect our business,
financial condition and results of operations.
THE CONSTRUCTION AND OPERATION OF OUR PLANNED ETHANOL PRODUCTION FACILITY
MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL REGULATIONS AND PERMIT
REQUIREMENTS.
The production of ethanol involves the emission of various airborne
pollutants, including particulates, carbon monoxide, oxides of nitrogen and
volatile organic compounds. PEI California will be subject to extensive air,
water and other environmental regulations in connection with the construction
and operation of our planned ethanol production facility. PEI California also
may be required to obtain various other water-related permits, such as a water
discharge permit and a storm-water discharge permit, a water withdrawal permit
and a public water supply permit. If for any reason PEI California is unable to
obtain any of the required permits, construction costs for our planned ethanol
production facility are likely to increase; in addition, the facility may not be
constructed at all. It is also likely that operations at the facility will be
governed by the federal regulations of the Occupational Safety and Health
Administration, or OSHA, and other regulations. Compliance with OSHA and other
regulations may be time-consuming and expensive and may delay or even prevent
sales of ethanol in California or in other states, which could have a material
and adverse effect on our business and results of operations.
VARIOUS RISKS ASSOCIATED WITH THE CONSTRUCTION OF OUR PLANNED ETHANOL
PRODUCTION FACILITY MAY ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL
CONDITION.
We cannot assure you that delays in the construction of our planned
ethanol production facility or defects in materials and/or workmanship will not
occur. Any defects could delay the commencement of operations of the facility,
or, if such defects are discovered after operations have commenced, could halt
or discontinue operation of the facility indefinitely. In addition, construction
projects often involve delays in obtaining permits and encounter delays due to
weather conditions, fire, the provision of materials or labor or other events.
For example, PEI California experienced a fire at its Madera County site during
the first quarter of 2004. PEI California incurred additional expenses to repair
areas and equipment damaged by the fire. In addition, changes in interest rates
or the credit environment or changes in political administrations at the
federal, state or local levels that result in policy change towards ethanol or
our project in particular, could cause construction and operation delays. Any of
these events may adversely affect our business and financial condition.
There can be no assurance that PEI California will not encounter
hazardous conditions at the Madera County site. PEI California may encounter
conditions at the site that may delay construction of the facility. If PEI
California encounters a hazardous condition at the site, work may be suspended
-47-
and PEI California may be required to correct the condition prior to continuing
construction. The presence of a hazardous condition would likely delay
construction of the facility and may require significant expenditure of
resources to correct the condition. In addition, W. M. Lyles Co. may be entitled
to an increase in its fees and afforded additional time for performance if it
has been adversely affected by the hazardous condition. If PEI California
encounters any hazardous condition during construction, our business and
financial condition may be adversely affected.
We have based our estimated capital resource needs on a design for the
planned ethanol production facility and related co-generation facility that we
estimate will cost approximately $60 million. The estimated cost of the facility
is based on preliminary discussions and estimates, and we cannot assure you that
the final construction cost of the facility will not be significantly higher.
Any significant increase in the final construction cost of the facility may
adversely affect our business, financial condition and results of operations.
PEI CALIFORNIA'S DEPENDENCE ON AND AGREEMENTS WITH W. M. LYLES CO. FOR THE
CONSTRUCTION OF OUR PLANNED ETHANOL PRODUCTION FACILITY COULD ADVERSELY
AFFECT OUR BUSINESS AND FINANCIAL CONDITION.
PEI California will be highly dependent upon W. M. Lyles Co. to design
and build our planned ethanol production facility in Madera County. PEI
California has entered into agreements with W. M. Lyles Co. for the construction
of this facility. These agreements contain a number of provisions that are
favorable to W. M. Lyles Co. and unfavorable to PEI California. These agreements
also include a provision that requires PEI California to pay a termination fee
of $5.0 million to W. M. Lyles Co. if PEI California terminates it in favor of
another contractor, in addition to payment of all costs incurred by W. M. Lyles
Co. for services rendered through the date of termination. Consequently, if PEI
California terminates these agreements, the requirement that it pay the
termination fee and costs could adversely affect our business and financial
condition. In addition, if W. M. Lyles Co. has entered into or enters into a
construction contract with one or more other parties, it may be under pressure
to complete another project or projects and may prioritize the completion of
another project or projects ahead of our planned facility. As a result, PEI
California's ability to commence production of and sell ethanol would be
delayed, which would adversely affect our business, financial condition and
results of operations.
THE RAW MATERIALS AND ENERGY NECESSARY TO PRODUCE ETHANOL MAY BE UNAVAILABLE
OR MAY INCREASE IN PRICE, ADVERSELY AFFECTING OUR BUSINESS AND RESULTS OF
OPERATIONS.
The production of ethanol requires a significant amount of raw
materials and energy, primarily corn, water, electricity and natural gas. In
particular, we estimate that our planned ethanol production facility will
require approximately 12.5 million bushels or more of corn each year and
significant and uninterrupted supplies of water, electricity and natural gas.
The prices of corn, electricity and natural gas have fluctuated significantly in
the past and may fluctuate significantly in the future. In addition, droughts,
severe winter weather in the Midwest, where we expect to source corn, and other
problems may cause delays or interruptions of various durations in the delivery
of corn to California, reduce corn supplies and increase corn prices. We cannot
assure you that local water, electricity and gas utilities will be able to
reliably supply the water, electricity and natural gas that our planned ethanol
production facility will need or will supply such resources on acceptable terms.
In addition, if there is an interruption in the supply of water or energy for
any reason, we may be required to halt ethanol production. We may not be able to
successfully anticipate or mitigate fluctuations in the prices of raw materials
and energy through the implementation of hedging and contracting techniques. PEI
California's hedging and contracting activities may not lower its prices of raw
materials and energy, and in a period of declining raw materials or energy
prices, these hedging and contracting strategies may result in PEI California
paying higher prices than its competitors. In addition, PEI California may be
unable to pass increases in the prices of raw materials and energy to its
customers. Higher raw materials and energy prices will generally cause lower
profit margins and may even result in losses. Accordingly, our financial
condition and results of operation will be significantly affected by the prices
and supplies of raw materials and energy.
-48-
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
--------------------------------------------
The following financial statements of PEI California, Kinergy and
ReEnergy and their respective subsidiaries, if any, are included in this report:
Page
----
Pacific Ethanol, Inc.
---------------------
Report of Independent Registered Public Accounting Firm...............................................F-1
Consolidated Balance Sheets as of December 31, 2003 and 2004..........................................F-2
Consolidated Statement of Operations for the period from January 30, 2003 (inception)
to December 31, 2003 and the Year Ended December 31, 2004........................................F-3
Consolidated Statement of Stockholders' Equity for the period from January 30, 2003 (inception)
to December 31, 2003 and the Year Ended December 31, 2004........................................F-4
Consolidated Statements of Cash Flows for the period from January 30, 2003 (inception)
to December 31, 2003 and the Year Ended December 31, 2004........................................F-5
Notes to Consolidated Financial Statements for the Year Ended December 31, 2004.......................F-6
Kinergy Marketing, LLC
----------------------
Report of Independent Registered Public Accounting Firm...............................................F-24
Balance Sheets as of December 31, 2003 and 2004.......................................................F-25
Statements of Income and Member's Equity for the Years Ended December 31, 2003 and 2004..............F-26
Statements of Cash Flows for the Years Ended December 31, 2003 and 2004...............................F-27
Notes to Financial Statements for the Year Ended December 31, 2004....................................F-28
ReEnergy, LLC
-------------
Report of Independent Registered Public Accounting Firm...............................................F-33
Balance Sheets as of December 31, 2003 and 2004.......................................................F-34
Statements of Operations for the Years Ended December 31, 2003 and 2004...............................F-35
Statements of Member's Equity (Deficit) for the Years Ended December 31, 2003 and 2004................F-36
Statements of Cash Flows for the Years Ended December 31, 2003 and 2004...............................F-37
Notes to Financial Statements for the Year Ended December 31, 2004....................................F-38
-49-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
May 23, 2005
To the Stockholders and Board of Directors
Pacific Ethanol, Inc.
Fresno, California
We have audited the consolidated balance sheets of Pacific Ethanol, Inc. (the
"Company") as of December 31, 2003 and 2004 and the related consolidated
statements of operations, stockholders' equity and cash flows for the period
from January 30, 2003 (inception) through December 31, 2003 and for the year
ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 provided a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pacific
Ethanol, Inc., as of December 31, 2003 and 2004 and the consolidated results of
its operations and its cash flows for the period from January 30, 2003
(inception) through December 31, 2003 and the year ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.
/s/ HEIN & ASSOCIATES LLP
F-1
PACIFIC ETHANOL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of December 31,
2003 2004
----------- -----------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 249,084 $ 42
Accounts receivable 24,188 8,464
Inventories 1,734 --
Prepaid expenses 21,677 293,115
Related party notes receivable 205,035 5,286
Business acquisition costs -- 430,393
Other receivables 305,370 48,806
----------- -----------
Total current assets 807,088 786,106
PROPERTY, PLANT AND EQUIPMENT, net 5,664,213 6,324,824
DEBT ISSUANCE COSTS, net 88,333 68,333
----------- -----------
TOTAL ASSETS $ 6,559,634 $ 7,179,263
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 295,957 $ 383,012
Accounts payable (related party) 450,021 846,211
Accrued payroll 13,359 18,963
Accrued interest payable 152,180 30,864
Other accrued liabilities 253,147 531,803
----------- -----------
Total liabilities 1,164,664 1,810,853
RELATED-PARTY NOTE PAYABLE 4,027,142 4,012,678
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 30,000,000 shares authorized,
no shares issued and outstanding as of December 31, 2003 -- --
and December 31, 2004
Common stock, no par value; 30,000,000 shares authorized,
11,733,200 and 13,445,866 shares issued and outstanding as
of December 31, 2003 and December 31, 2004, respectively 2,227,507 3,705,078
Additional paid-in capital -- 1,380,000
Due from stockholders (1,000) (68,100)
Accumulated deficit (858,679) (3,661,246)
----------- -----------
Total stockholders' equity 1,367,828 1,355,732
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,559,634 $ 7,179,263
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-2
PACIFIC ETHANOL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
From January
30, 2003
(inception) to For Year Ended
December 31, December 31,
----------- -----------
2003 2004
----------- -----------
NET SALES $ 1,016,594 $ 19,764
COST OF GOODS SOLD 946,012 12,523
----------- -----------
GROSS PROFIT 70,582 7,241
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 647,731 1,070,010
NONCASH COMPENSATION FOR CONSULTING FEES -- 1,207,500
----------- -----------
OPERATING LOSS (577,149) (2,270,269)
OTHER INCOME (EXPENSE)
Other income 1,292 (2,166)
Interest expense (281,222) (528,532)
----------- -----------
Total other income (expense) (279,930) (530,698)
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (857,079) (2,800,967)
PROVISION FOR INCOME TAXES 1,600 1,600
----------- -----------
NET LOSS $ (858,679) $(2,802,567)
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
PACIFIC ETHANOL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 30, 2003 (INCEPTION) TO DECEMBER 31, 2003
AND THE YEAR ENDED DECEMBER 31, 2004
Series A
Redeemable
Convertible
Preferred Stock Common Stock Additional
-------------- ------------------------- Paid-In Due from Accumulated
Shares Amount Shares Amount Capital Stockholders Deficit Total
------ ------ ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, January
30, 2003 (inception) -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock to the founders -- -- 10,000,000 1,000 -- (1,000) -- --
Issuance of common stock
for note payable -- -- 1,000,000 1,202,682 -- -- -- 1,202,682
Issuance of common stock
to friends and family,
net of offering costs
of $75,975 -- -- 733,200 1,023,825 -- -- -- 1,023,825
Net loss -- -- -- -- -- -- (858,679) (858,679)
------ ------ ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2003 -- -- 11,733,200 2,227,507 -- (1,000) (858,679) 1,367,828
Issuance of common
stock to friends and family,
net of offering costs of $7,127 -- -- 19,000 21,373 -- -- -- 21,373
Issuance of warrants to
purchase 920,000 shares of
common stock for noncash
compensation to nonemployee
for services -- -- -- -- 1,380,000 -- -- 1,380,000
Exercise of warrants -- -- 920,000 92 -- -- -- 92
Collection of
shareholder receivable -- -- -- -- -- 400 -- 400
Issuance of common stock
in working capital round, net
of offering costs of $107,418 -- -- 500,000 892,582 -- (67,500) -- 825,082
Issuance of common stock
in working capital round,
net of offering costs of $2,475 -- -- 103,666 308,524 -- -- -- 308,524
Conversion of LDI debt -- -- 170,000 255,000 -- -- -- 255,000
Net loss -- -- -- -- -- -- (2,802,567) (2,802,567)
------ ------ ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 -- $ -- 13,445,866 $ 3,705,078 $ 1,380,000 $ (68,100) $(3,661,246) $ 1,355,732
====== ====== =========== =========== =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
PACIFIC ETHANOL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
From January 30,
2003 (inception) For Year Ended
to December 31, December 31,
-------------- --------------
2003 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (858,679) $ (2,802,567)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 46,684 78,743
Amortization of debt issuance costs 11,667 20,000
Interest expense relating to amortization of debt
discount on related party note payable 129,824 240,536
Non cash compensation for consulting services - 1,207,500
Changes in operating assets and liabilities:
Accounts receivable (24,188) 15,724
Other receivable (305,370) 256,564
Inventories (1,734) 1,734
Prepaid expenses (21,677) (98,938)
Accounts payable 295,957 87,055
Accounts payable (related party) 450,021 396,190
Interest payable 152,180 (121,316)
Payroll taxes payable 13,359 5,604
Accrued liabilities 253,147 278,656
-------------- --------------
Net cash provided by (used in) operating activities 141,191 (434,515)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (610,897) (739,354)
Issuance of related party notes receivable (205,035) -
Payments received on related party notes receivable - 199,749
Costs associated with business acquisition - (430,393)
-------------- --------------
Net cash used in investing activities (815,932) (969,998)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock, net 1,023,825 1,155,379
Proceeds from exercise of warrants - 92
Payments of debt issuance costs (100,000) -
-------------- --------------
Net cash provided by financing activities 923,825 1,155,471
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 249,084 (249,042)
CASH AND CASH EQUIVALENTS, beginning of period - 249,084
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 249,084 $ 42
============== ==============
SUPPLEMENTAL INFORMATION:
Interest paid $ 487 $ 422,233
============== ==============
Income taxes paid $ 1,600 $ 2,400
============== ==============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Purchase of grain facility with note payable $ 5,100,000 $ -
============== ==============
Issuance of stock for receivable $ 1,000 $ 67,100
============== ==============
Conversion of debt to equity $ - $ 255,000
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
--------------------------------------
Pacific Ethanol, Inc. (the "Company") was incorporated in California on
January 30, 2003 to construct an ethanol production facility and
manufacture and distribute ethanol fuel in California.
On June 11, 2003, the Company and an individual formed Pacific Ag Products,
LLC ("Pacific Ag Products"), which was organized in the State of California
as a limited liability company to market and sell wet distillers grain, a
by-product of ethanol production, to dairies. The Company has a 90%
interest in Pacific Ag Products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
LIQUIDITY AND FINANCIAL CONDITION - The accompanying financial statements
have been prepared in conformity with accounting principles generally
accepted in the United States, which contemplate continuation of the
Company as a going concern.
On March 23, 2005, the Company completed a private offering of equity
securities which raised $21,000,000 through the sale of 7,000,000 shares of
the Company's common stock at $3.00 per share. In addition, in connection
with the sale of these shares, warrants to purchase 1,400,000 shares of
common stock at an exercise price of $3.00 per share, and warrants to
purchase 700,000 shares of common stock at an exercise price of $5.00 per
share, were issued. This transaction was completed just prior to the
completion of a Share Exchange Transaction, described below. (See Note 11)
On March 23, 2005, the shareholders of the Company completed a Share
Exchange Transaction with Accessity Corp., a New York corporation
("Accessity"), and the holders of the membership interests of each of
Kinergy Marketing, LLC, an Oregon limited liability company ("Kinergy"),
and ReEnergy, LLC, a California limited liability company ("ReEnergy"),
pursuant to which Accessity acquired all of the issued and outstanding
shares of common stock of the Company and all of the outstanding membership
interests of each of Kinergy and ReEnergy (the "Share Exchange
Transaction"). This transaction has been accounted for as a reverse
acquisition whereby the Company is the accounting acquiror. Immediately
prior to the closing of the Share Exchange Transaction, Accessity
reincorporated in the State of Delaware under the name Pacific Ethanol,
Inc. through a merger of Accessity with and into its then-wholly-owned
Delaware subsidiary named Pacific Ethanol, Inc. ("Pacific Ethanol
Delaware"), which was formed for the purpose of effecting the
reincorporation. Pacific Ethanol Delaware is the surviving entity resulting
from the reincorporation merger and the Share Exchange Transaction and has
three principal wholly-owned subsidiaries: Kinergy, the Company and
ReEnergy. (See Note 11).
The Company is in the business of marketing ethanol and intends, during the
next 12 months, to commence construction of an ethanol production facility.
Based on its current cash position and anticipated use of cash in
operations and planned ethanol plant construction, management believes that
the Company has sufficient funds to operate over the next 12 months.
F-6
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the company and its subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS - For financial statement purposes, the Company
considers all highly liquid investments with an original maturity of three
months or less, to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The allowance is determined through an
analysis of the aging of accounts receivable and assessments of risk that
are based on historical trends and an evaluation of the impact of current
and projected economic conditions. The Company evaluates the past-due
status of its accounts receivable based on contractual terms of sale. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. At December 31, 2003 and 2004, management of
the Company believes that all receivables are collectible, and therefore
has not established an allowance for bad debt. The Company has had no bad
debt expense for the period from January 30, 2003 (inception) to December
31, 2004.
INVENTORIES - In connection with the acquisition of the grain facility in
June 2003 (See Note 4), the Company acquired inventory, primarily
representing whole corn for a total of $770,298. During 2003, the majority
of the inventory acquired was sold and at December 31, 2004 the balance was
$0. Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company provides inventory reserves for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of
inventory and the estimated realizable value based upon assumptions about
future demand and market conditions.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
following estimated useful lives:
Facilities 10 - 25 years
Equipment and vehicles 7 years
Office furniture, fixtures and equipment 5 - 10 years
The cost of normal maintenance and repairs is charged to operations as
incurred. Material expenditures that increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of fixed assets sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the
accounts, and any resulting gains or losses are reflected in current
operations.
IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and circumstances
indicate that the cost of long-lived assets used in operations might be
impaired, an evaluation of recoverability would be performed. If an
evaluation were required, the estimated undiscounted cash flows estimated
to be generated by those assets would be compared to their carrying amounts
to determine if a write-down to market value or discounted cash flows is
required.
F-7
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION - During 2003, the Company sold corn from inventory
acquired in the purchase of a grain facility (see "inventories" above), and
during 2003 and for the year ended December 31, 2004, received a handling
fee from its trans-loading capabilities. Revenue from the sale of grains
was recognized upon shipment to customers. Revenue from trans-loading
services was recognized when unloading the rail cars, thus at the time that
the service was completed.
STOCK-BASED COMPENSATION - SFAS 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123") encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company may elect to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations. Under APB 25 and the intrinsic value method, the exercise
price of the Company's employee stock options equals the market price of
the underlying stock on the date of grant or, in the case of the Company's
employee stock purchase plans since the plans are non-compensatory, no
compensation expense is recognized. In December 2002, the Financial
Accounting Standards Board ("FASB") issued SFAS 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE ("SFAS148"). FAS 148
amends the disclosure requirements of FAS 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results.
INCOME TAXES - Income taxes are accounted for under Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under
SFAS No. 109, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and
liabilities, and are measured using enacted tax rates and laws that are
expected to be in effect when the differences reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision.
The following methods and assumptions were used in estimating the indicated
fair values of the Company's financial instruments:
o Cash and cash equivalents, accounts receivable, notes receivable,
accounts payable and other short term liabilities: The carrying
amounts approximate fair value because of the short maturity of
those instruments.
o Debt: The fair value of the Company's debt is estimated based on
current rates offered to the Company for similar debt and
approximates carrying value.
F-8
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK - Credit risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk (whether
on or off balance sheet) that arise from financial instruments exist for
groups of customers or counterparties when they have similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions described below.
Financial instruments that subject the Company to credit risk consist of
cash balances maintained in excess of federal depository insurance limits
and accounts receivable, which have no collateral or security. The accounts
maintained by the Company at the financial institution are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000. At December
31, 2003, the uninsured balance was $65,446 and at December 31, 2004, the
uninsured balance was $0. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant risk of
loss on cash.
During 2003, the Company sold corn from inventory acquired in the purchase
of a grain facility, and in 2004 and 2003, received a handling fee from its
trans-loading capabilities. During the period from January 30, 2003
(inception) to December 31, 2003, and the year ended December 31, 2004, the
Company had sales from customers representing 10% or more of sales as
follows:
2004 2003
------ ------
Customer A 36% 49%
Customer B 25% 0%
Customer C 22% 0%
Customer D 15% 0%
Customer E 0% 36%
Customer F 0% 11%
As of December 31, 2003 and 2004, the Company had receivables of
approximately $22,479 and $8,464 from these customers, representing 100%
and 93%, respectively, of total accounts receivable. The Company does not
require collateral of its customers and as of December 31, 2003 and 2004,
has not incurred significant credit losses.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the current presentation. Such reclassification had no effect on
net loss.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In December 2004, the FASB
issued SFAS 123R, SHARE-BASED PAYMENT ("SFAS 123R") which is a revision of
SFAS 123 and supersedes APB 25. Among other items, SFAS 123R eliminates the
use of APB 25 and the intrinsic value method of accounting, and requires
companies to recognize the cost of employee services received in exchange
for awards of equity instruments, based on the grant date fair value of
those awards, in the financial statements. The effective date of SFAS 123R
is the first reporting period beginning after December 15, 2005. SFAS 123R
permits companies to adopt its requirements using either a "modified
prospective" method, or a "modified retrospective" method. Under the
"modified prospective" method, compensation cost is recognized in the
F-9
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financial statements beginning with the effective date, based on the
requirements of SFAS 123R for all share-based payments granted after that
date, and based on the requirements of SFAS 123 for all unvested awards
granted prior to the effective date of SFAS 123R. Under the "modified
retrospective" method, the requirements are the same as under the "modified
prospective" method, but it also permits entities to restate financial
statements of previous periods based on pro forma disclosures made in
accordance with SFAS 123.
While SFAS 123R permits entities to continue to use a standard option
pricing model (e.g., Black-Scholes) to measure the fair value of stock
options granted to employees, the standard also permits the use of a
"lattice" model. The Company has not yet determined which model it will use
to measure the fair value of employee stock options upon the adoption of
SFAS 123R.
The Company currently has only one stock option outstanding which vested in
the first quarter of 2005, and expects to adopt SFAS 123R effective January
1, 2006. However, because the Company has not yet determined which of the
adoption methods it will use, the Company has not yet determined the impact
of adopting SFAS 123R. (See Note 8)
3. RELATED PARTY NOTES RECEIVABLE:
-------------------------------
On November 5, 2003, the Company issued a short-term note in the amount of
$200,000 to Kinergy, which at the time was owned by an officer and director
of the Company. The short-term note was due and payable January 4, 2004,
with interest at a rate of 5% per annum. As of December 31, 2003, interest
income relating to this note was not significant. Payment of the principal
and all accrued interest was received in January 2004.
On November 10, 2003, the Company issued a short-term note in the amount of
$5,000 to Doug and Jane Dickson, husband and wife, who hold a minority
interest in the Pacific Ag Products. The short-term note is due and payable
November 9, 2005, with interest at a rate of 5% per annum. As of December
31, 2003 and 2004, interest income relating to this note was not
significant.
4. PROPERTY AND EQUIPMENT:
-----------------------
In June 2003, the Company acquired a grain facility in Madera, California
for approximately $5,100,000 from bankruptcy proceedings of Coast Grain
Company. The Company intends to construct an ethanol plant at the grain
facility. In July 2003, the Company entered into a design-build contract
with W.M. Lyles Co., a subsidiary of Lyles Diversified, Inc. ("LDI") (See
Note 5), for the design and construction of the ethanol plant, which will
be billed at its standard time and material rates. W.M. Lyles, Co. will
discount its normal construction management fee by 5% from its standard
rates. The Company's cost for the construction of the facility has been
estimated to be approximately $52,000,000. In addition, should the Company
build a second ethanol plant W.M. Lyles, Co. will be engaged for the design
and construction of the facility.
The Company is currently in process of renegotiating a revised bid with
W.M. Lyles Co. that expired on April 1, 2005.
F-10
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2003 and 2004, the Company had incurred costs of
$578,159 and $1,306,926 under the design-build contract planning phase,
which has been included in construction in progress at December 31, 2003
and 2004, respectively. Included in this amount is a total of $229,078 and
$453,325 related to the construction management fee of W.M. Lyles Co., of
which $217,066 and $236,259 had not been paid at December 31, 2003 and
2004, respectively. Included in construction in progress at December 31,
2004 is capitalized interest of $45,995.
Property and equipment consist of the following:
December 31,
--------------------------
2003 2004
----------- -----------
Land $ 515,298 $ 515,298
Facilities 4,234,703 4,234,703
Equipment and vehicles 350,000 350,000
Office furniture, fixtures and equipment 32,737 43,324
----------- -----------
5,132,738 5,143,325
Accumulated depreciation (46,684) (125,427)
----------- -----------
5,086,054 5,017,898
Construction in progress 578,159 1,306,926
----------- -----------
$ 5,664,213 $ 6,324,824
=========== ===========
As of December 31, 2003 and 2004, property and equipment totaling
$3,897,328 had not been placed in service. Depreciation expense was $46,684
from January 30, 2003 (inception) to December 31, 2003 and $78,743 for the
year ended December 31, 2004.
5. RELATED PARTY NOTE PAYABLE:
---------------------------
In connection with the acquisition of the grain facility in March 2003, the
Company issued a convertible promissory note in the amount of $5,100,000 to
LDI. The loan bears interest at a fixed rate of 5% through June 19, 2004,
at which time it converted to a variable rate based on the Wall Street
Journal Prime Rate (5.25% as of December 31, 2004) plus 2%. The first
payment, consisting of interest only, was due June 19, 2004, after which
interest is due and payable monthly. Principal payments are due annually in
three equal installments beginning June 20, 2006 and ending June 20, 2008.
Should the construction costs of the ethanol production facility be less
than $42,600,000, the Company must prepay principal owing under the loan
equal to the difference between the actual construction cost and
$42,600,000.
In addition, should the Company obtain construction funding for a second
ethanol plant, all principal and accrued interest outstanding at the time
becomes due. The note is collateralized by a first deed of trust on the
grain facility and a personal guaranty for up to a maximum amount of
$1,000,000 by an individual shareholder. LDI has the option to convert up
to $1,500,000 of the debt into the Company's common stock at a purchase
price of $1.50 per share until June 1, 2005. On July 31, 2004, September
24, 2004 and November 15, 2004, LDI converted $150,000, $90,000 and $15,000
of debt into 100,000, 60,000 and 10,000 shares of common stock,
respectively, at a conversion price equal to $1.50 per share. (See Note 7)
F-11
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As part of the terms of the note, W.M. Lyles Co., a subsidiary of LDI,
shall supply construction services to the Company for the construction of
the ethanol plant. (See Note 4)
In partial consideration for the above loan, the Company issued 1,000,000
shares of the Company's conversion stock to LDI. The fair value of the
common stock on the date of issuance, $1,202,682, was recorded as a debt
discount and is being amortized over the life of the loan and recorded as
interest expense. As of December 31, 2003 and 2004, the unamortized debt
discount was $1,072,858 and $832,322, respectively. The Company also
incurred fees to obtain the loan in the amount of $100,000, which is also
being expensed over the life of the loan. These fees were paid to Cagan
McAfee Capital Partners, LLC ("CMCP"), a founding shareholder of the
Company.
The aggregate maturities of the note at December 31, 2004 are as follows:
Year ending December 31,
2005 $ --
2006 1,615,000
2007 1,615,000
2008 1,615,000
----------
4,845,000
Less: Unamortized original issuance discount (832,322)
----------
$4,012,678
==========
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
---------------------------------------
The Company has a total of 30,000,000 shares of no par value preferred
stock authorized, 7,000,000 shares of which have been designated Series A
8% Cumulative Convertible Redeemable Preferred Stock (the "Series A
Preferred Stock"). Holders of Series A Preferred Stock will (i) have
priority rights to dividends from funds legally available therefore at the
rate of 8% per annum payable in cash or stock, accrued from the closing of
the offer and sale of the Series A Preferred Stock, per share, cumulative,
payable pro rata; and (ii) be entitled to preference in all of the assets
of the Company available for distribution to holders of preferred stock
upon liquidation, dissolution, or winding up of the affairs of the Company.
In certain circumstances the Company has the right, at any time after
December 31, 2005, to force conversion of the Series A Preferred Stock into
fully-paid and non-assessable shares of common stock at the ratio of one
share of common stock for every one share of Series A Preferred Stock
(shares of common stock are reserved for any such conversion).
No dividends accrue on the shares of Series A Preferred Stock until after
the closing of the offering and sale of the Series A Preferred Stock.
Thereafter, dividends accrue, whether or not earned or declared, and become
payable commencing January 15, 2005 and on each January 15th thereafter;
provided that such dividends shall only be paid upon a determination by the
Board of Directors of the Company that funds are legally available
therefore and that payment is in the best interests of the Company. The
shares of Series A Preferred Stock are non-participating with regard to
dividends, if any, which may be declared and paid to the holders of any
other classes of the Company's stock.
F-12
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
No shares of Series A Preferred Stock have been issued, but any shares of
Series A Preferred Stock issued may at the sole election of the Company be
redeemed at any time, and from time to time, during the four (4) years
following the issuance thereof, for a price per share of $6.50 plus (i) all
accrued but unpaid dividends on such shares and (ii) 10% per share per
annum. Any redemption shall be applied ratably among all shares of Series A
Preferred Stock outstanding at the time of redemption.
In the event of any liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary, holders of the Series A Preferred Stock
shall be entitled to receive a distribution of $6.50 per share plus all
declared but unpaid dividends on each share out of assets of the Company,
prior to any distribution of assets with respect to any shares of common
stock of the Company as a result of such liquidation, distribution, or
winding up of the Company. If, in the case of any such liquidation,
dissolution, or winding up of the Company, the assets of the Company or
proceeds thereof shall be insufficient to make the full liquidation payment
of $6.50 per share, then such assets and proceeds shall be distributed
ratably among the holders of the Series A Preferred Stock. A consolidation
or merger of the Company with or into one or more corporations, or a sale
of all or substantially all of the assets of the Company in consideration
for the issuance of equity securities of another corporation shall be
deemed to be a liquidation, dissolution, or winding up of the Company.
7. COMMON STOCK:
-------------
In February 2003, the Company sold 10,000,000 shares of common stock to the
founders of the Company at $0.0001.
In March 2003, the Company issued 1,000,000 common shares of the Company's
stock to LDI. (See Note 5)
From August through December 2003, the Company sold 733,200 shares of
common stock in a private offering at $1.50 per share for net proceeds of
$1,023,825. In connection with the sale of these shares, the Company paid
offering costs of $75,975, including a finder's fee of $21,250 to CMCP. In
addition, the Company issued warrants to purchase 41,587 shares of common
stock at an exercise price of $1.50 per share and an expiration date five
years from the date of issuance. Of the total warrants issued, warrants to
purchase 14,167 shares of common stock were issued to CMCP.
From January 2004 through February 2004, the Company sold 19,000 shares of
common stock in a private offering at $1.50 per share for net proceeds of
$21,373. In connection with the sale of these shares, the Company paid
offering costs of $7,127, including a finder's fee of $2,850 to Prima
Capital Group, Inc. As payment of commissions earned in connection with the
sale of these shares, the Company issued warrants to purchase 1,900 shares
of common stock at an exercise price of $1.50 per share and an expiration
date five years from the date of issuance.
F-13
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
From April 2004 through June 2004, the Company sold 500,000 shares of
common stock in a private offering at $2.00 per share for net proceeds of
$892,582 as of September 30, 2004. (Of this amount $67,500 is included in
due from stockholders in the equity section). In connection with the sale
of these shares, the Company paid offering costs of $107,418 including a
finder's fee of $100,000 to CMCP. In addition, the Company issued warrants
to CMCP to purchase 50,000 shares of common stock at an exercise price of
$2.00 per share and an expiration date five years from the date of
issuance.
On July 31, 2004, September 24, 2004 and November 15, 2004, LDI converted
$150,000, $90,000 and $15,000 of debt into 100,000, 60,000 and 10,000
shares of common stock, respectively, at a conversion price of $1.50 per
share. (See Note 5)
On September 29, 2004, a consulting company exercised warrants to purchase
920,000 shares of the Company's stock at an aggregate exercise price of
$92. (See Note 8)
From October 2004 through December 2004, the Company sold 103,666 shares of
common stock in a private offering at $3.00 per share for net proceeds of
$308,524 as of December 31, 2004. In connection with the sale of these
shares, the Company paid offering costs of $2,475.
STOCK OPTIONS - In February 2004, the Board of Directors of the Company
ratified the grant of options on December 10, 2003 to a member of
management to acquire 25,000 shares of the Company's common stock at an
exercise price of $0.01 per share. The options vested upon the closing of
the Share Exchange Transaction. (See Note 11)
8. COMMITMENTS AND CONTINGENCIES:
------------------------------
OPERATING LEASES - The Company leases shared office space in Fresno,
California on a month-to-month basis at $2,934 per month. Rent expense was
$5,600 and $24,983 for the period from January 30, 2003 (inception) to
December 31, 2003, and the year ended December 31, 2004, respectively.
SETTLEMENT OF CORN CONTRACTS - In July and August 2003, the Company,
through its subsidiary entered into contracts to sell corn to two customers
at fixed rates. At the same time, the Company entered into contracts to
purchase corn from a vendor at fixed rates. These purchase and sale
contracts contained shipping periods ranging from October 2003 to September
2004. In the fourth quarter of 2003, the Company cancelled the contracts
and settled them based on the net settlement provisions standard in the
grain industry. At December 31, 2003, the Company recorded a receivable
related to the settlement of the corn contracts in the amount of $274,259,
which is reflected in other receivables in the consolidated balance sheet.
There were no receivables at December 31, 2004. In addition, the Company
has recorded a payable related to the settlement of the corn contract in
the amount of $204,811 and $16,509 as of December 31, 2003 and 2004,
respectively, which is reflected in accrued liabilities in the consolidated
balance sheets.
F-14
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A party to one of the sales agreements did not perform according to the net
settlement provisions standard in the grain industry and thus continued to
engage in contracts without the consent or approval of the Company. The
Company has attempted to settle with the entity with no success.
On September 22, 2004, R.A. Davis Commodities, LLC filed a complaint for
breach of contract, promissory estoppel and negligence in the Superior
Court of the State of California for the County of Fresno against the
Company. The complaint seeks actual and consequential damages in the amount
of approximately $700,000 based on the Company's alleged breach of certain
rolled corn purchase contracts. The Company responded to the complaint on
January 27, 2005. The Company also filed a cross-complaint against R.A.
Davis on that date, alleging breach of oral and written contract in
connection with sales of feed product as well as "transloading" services
performed for R.A. Davis. The cross-complaint seeks damages in the amount
of $121,435. The trial in this matter is set for March 13, 2006. The
Company believes that the claims made in the complaint are without merit
and the Company expects to vigorously defend this lawsuit.
On November 8, 2004, Insurance Corporation of Hanover and Kruse Investments
dba Western Milling, LLC (collectively, the "Plaintiffs") filed a Complaint
for Damages in the Superior Court of the State of California for the County
of Madera against the Company. The Complaint seeks actual and consequential
damages in the amount of at least $960,800 based on the Company's alleged
breach of contract and negligence in connection with losses suffered by
Plaintiffs arising out of damage caused to Western Milling's canola meal
that was stored at the Company's grain silos located at the Company's
Madera County facility, which facility was the subject of a grain silo fire
on January 12, 2004. The Company's insurance company has settled this
matter. Plaintiff's have dismissed the action against the Company with
prejudice and have provided the Company a written release.
ADVISORY FEE - The Company entered into an agreement with CMCP dated April
14, 2004, in connection with raising funding for an ethanol production
facility. The agreement provides that upon raising a minimum of $15,000,000
the Company would pay CMCP a fee, through that date, equal to $10,000 per
month starting from April 15, 2003. In addition, the agreement provided for
payment of $25,000 per month for a minimum of 12 months upon the completion
of a merger between the Company and a public company, running from the date
of close of such merger, as well as an advisory fee of 3% of any equity
amount raised through the efforts of CMCP, including cash amounts received
through a merger with another corporate entity. (See Note 11)
In a separate agreement, certain founders of the Company agreed to sell an
aggregate of 500,000 shares of the Company's common stock owned by such
founders to CMCP, at $0.01 per share, if certain funding were secured by
March 31, 2005. (See Note 11)
CASUALTY LOSS - In January 2004, canola stored in one of the silos at the
Company's Madera County, California facility caught on fire. The facility
was fully insured with $10 million of property and general liability
insurance. The canola was owned by a third party who was also insured. The
Company's insurance provider advanced the Company $1,000,000 towards fire
damage repair costs. As of December 31, 2004, the Company has incurred
costs of $580,374. The difference of $419,626 is included in other accrued
liabilities. The Company is anticipating $1,000,000 in additional estimated
insurance proceeds to complete the reconstruction of the facility based on
a detailed engineering estimate for full restoration received by the
Company. The Company is proceeding with the restoration.
F-15
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NON-CASH COMPENSATION - On February 12, 2004, the Company entered into a
consulting agreement with an unrelated party to represent the Company in
investors' communications and public relations with existing shareholders,
brokers, dealers and other investment professionals as to the Company's
current and proposed activities. As compensation for such services, the
Company issued warrants to the consultant to purchase 920,000 shares of the
Company's common stock. These warrants vested upon the effective date of
the agreement. Based on the fair value of these warrants on the date of
issuance, prepaid consulting fees were recorded in the amount of
$1,380,000, which are being amortized over one year. As of December 31,
2004, the Company recorded non-cash expense of $1,207,500 relating to these
warrants. On September 29, 2004, the consulting company exercised warrants
to purchase 920,000 shares of the Company's common stock at an aggregate
exercise price equal to $92.
Contingent upon completing a merger, acquisition or share exchange with a
public company by March 31, 2005, the Company will issue warrants to
purchase up to 230,000 additional shares of common stock that will vest
over a period of two years. (See Note 11)
9. INCOME TAXES:
-------------
For the years ended December 31, 2003 and 2004, the provision for income
taxes differs from that computed by applying federal statutory rates to
loss before income taxes, as follows:
2003 2004
----------- -----------
Benefit computed at the statutory rate $ (299,978) $(1,265,535)
Reduction resulting from:
Valuation allowance 300,538 1,266,095
State taxes, net of federal benefit 1,040 1,040
----------- -----------
Income tax expense $ 1,600 $ 1,600
=========== ===========
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's deferred tax assets (liabilities) at December 31, 2003 and 2004
are as follows:
2003 2004
----------- -----------
Long-term deferred tax assets (liabilities)
Net operating loss carryforward $ 356,569 $ 1,488,430
Depreciation (10,519) (29,010)
----------- -----------
Net deferred non-current deferred
liabilities 346,050 1,459,420
Valuation allowance (346,050) (1,459,420)
----------- -----------
Net deferred current tax assets
(liabilities) $ - $ -
=========== ===========
As of December 31, 2004, the Company had federal and California net
operating loss carry forwards of approximately $3,807,483 and $2,193,278,
respectively, available to reduce future taxable income, which expire
beginning in the years 2024 for federal and in 2014 for state purposes.
Under Section 382 of the Internal Revenue Code, the utilization of the net
operating loss carry forwards can be limited based on changes in the
percentage of ownership of the Company.
F-16
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS:
---------------------------
The Company entered into a consulting contract with a shareholder of the
Company for consulting services related to the development of the ethanol
plant at $6,000 per month. The Company paid a total of $54,000 and $72,000
for the period from January 30, 2003 (inception) to December 31, 2003 and
the year ended December 31, 2004, respectively.
In 2003, the Company sold various cattle feed products totaling $109,698 to
a business owned by a shareholder. Of this amount, $76,903 was sold to the
shareholder's business during the period January 30, 2003 (inception) to
December 31, 2003. There were no such sales made during the year ended
December 31, 2004.
The Company reimbursed a stockholder for expenses paid on behalf of the
Company. The total amount reimbursed from January 30, 2003 (inception) to
December 31, 2003 was $200,000. There were no such expenses reimbursed
during the year ended December 31, 2004.
On August 28, 2003, the Company entered into an agreement with ReEnergy,
LLC for an option to buy 89.3 acres in Visalia, California at a price of
$12,000 per acre for the purpose of building an ethanol production
facility.
The Company entered into a consulting agreement for $3,000 per month with a
company owned by a member of ReEnergy for consulting services related to
environmental regulations and permitting. The Company paid a total of
$40,542 for the year ended December 31, 2004.
On October 27, 2003, certain founders of the Company entered into an
agreement with an unrelated third party to sell 1,500,000 shares of the
Company's common stock owned by such founders at $1.50 per share for total
proceeds of $2,250,000. In addition, under the terms of the agreement, the
founders involved in the transaction agreed to vote a certain number of
their existing shares in favor of the third party principal's election to
the Board of Directors of the Company.
On December 28, 2004, William Jones, a related party, advanced the Company
$20,000 at 5% interest, due and payable upon close of the Share Exchange
Transaction. (See Note 11)
11. SUBSEQUENT EVENTS (UNAUDITED):
------------------------------
LOANS TO THE COMPANY - On January 10, 2005 and February 22, 2005, William
Jones, a related party, advanced the Company $60,000 and $20,000,
respectively, at 5% interest, due and payable upon close of the Share
Exchange Transaction. The accumulated principal due was repaid on March 24,
2005 and the related accrued interest was paid on April 15, 2005. (See Note
9)
F-17
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On January 10, 2005, Neil Koehler, a related party, advanced the Company
$100,000 at 5% interest, due and payable upon close of the Share Exchange
Transaction. The principal was repaid on March 24, 2005 and the related
accrued interest was paid on April 15, 2005.
On January 31, 2005, Eric McAfee, a principal of CMCP, advanced the Company
$100,000 at 5% interest, due and payable upon close of the Share Exchange
Transaction. The principal was repaid on March 24, 2005 and the related
accrued interest was paid on April 15, 2005.
On January 14, 2005, February 4, 2005 and March 10, 2005, LDI converted
$36,000, $114,000, and $97,682 of debt into 24,000, 76,000 and 65,121
shares of the Company's common stock, respectively, at a conversion price
equal to $1.50 per share. (See Notes 5 and 6)
PRIVATE OFFERING - On March 23, 2005, the Company issued to 63 accredited
investors in a private offering an aggregate of 7,000,000 shares of common
stock at a purchase price of $3.00 per share, two-year investor warrants to
purchase 1,400,000 shares of common stock at an exercise price of $3.00 per
share and two-year investor warrants to purchase 700,000 shares of common
stock at an exercise price of $5.00 per share, for total gross proceeds of
approximately $21,000,000. The Company paid cash placement agent fees and
expenses of approximately $1,850,400 and issued five-year placement agent
warrants to purchase 678,000 shares of common stock at an exercise price of
$3.00 per share in connection with the offering. Additional costs related
to the financing include legal, accounting and consulting fees that totaled
approximately $255,048 through March 31, 2005 and continue to be incurred
in connection with various securities filings and the resale registration
statement described below.
The Company is obligated under a Registration Rights Agreement to file, on
the 151st day following March 23, 2005, a Registration Statement with the
Securities and Exchange Commission registering for resale shares of common
stock, and shares of common stock underlying investor warrants and certain
of the placement agent warrants, issued in connection with the private
offering. If the Company (i) does not file the Registration Statement
within the time period prescribed, or (ii) fails to file with the
Securities and Exchange Commission a request for acceleration in accordance
with Rule 461 promulgated under the Securities Act of 1933, within five
trading days of the date that the Company is notified (orally or in
writing, whichever is earlier) by the Securities and Exchange Commission
that the Registration Statement will not be "reviewed," or is not subject
to further review, or (iii) the Registration Statement filed or required to
be filed under the Registration Rights Agreement is not declared effective
by the Securities and Exchange Commission on or before 225 days following
March 23, 2005, or (iv) after the Registration Statement is first declared
effective by the Securities and Exchange Commission, it ceases for any
reason to remain continuously effective as to all securities registered
thereunder, or the holders of such securities are not permitted to utilize
the prospectus contained in the Registration Statement to resell such
securities, for more than an aggregate of 45 trading days during any
12-month period (which need not be consecutive trading days) (any such
failure or breach being referred to as an "Event," and for purposes of
clause (i) or (iii) the date on which such Event occurs, or for purposes of
clause (ii) the date on which such five-trading day period is exceeded, or
for purposes of clause (iv) the date on which such 45-trading day-period is
exceeded being referred to as "Event Date"), then in addition to any other
rights the holders of such securities may have under the Registration
Statement or under applicable law, then, on each such Event Date and on
each monthly anniversary of each such Event Date (if the applicable Event
F-18
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shall not have been cured by such date) until the applicable Event is
cured, the Company is required to pay to each such holder an amount in
cash, as partial liquidated damages and not as a penalty, equal to 2.0% of
the aggregate purchase price paid by such holder pursuant to the Securities
Purchase Agreement relating to such securities then held by such holder. If
the Company fails to pay any partial liquidated damages in full within
seven days after the date payable, the Company is required to pay interest
thereon at a rate of 18% per annum (or such lesser maximum amount that is
permitted to be paid by applicable law) to such holder, accruing daily from
the date such partial liquidated damages are due until such amounts, plus
all such interest thereon, are paid in full. The partial liquidated damages
are to apply on a daily pro-rata basis for any portion of a month prior to
the cure of an Event.
The Registration Rights Agreement also provides for customary piggy-back
registration rights whereby holders of shares of the Company's common
stock, or warrants to purchase shares of common stock, can cause the
Company to register such shares for resale in connection with the Company's
filing of a Registration Statement with the Securities and Exchange
Commission to register shares in another offering. The Registration Rights
Agreement also contains customary representations and warranties, covenants
and limitations. (See Note 1)
ADVISORY FEE. - The Company paid an advisory fee to CMCP in the amount of
$235,000 on March 24, 2005, pursuant to the terms of the agreement between
CMCP (See Note 8) and the Company and in connection with the private
offering described above. In addition, $83,000 was payable in connection
with cash received from Accessity in connection with the Share Exchange
Transaction. Pursuant to the terms of the consulting agreement, CMCP will
continue to receive payments of $25,000 per month until at least March
2006.
On January 5, 2005, the Company entered into an agreement with Northeast
Securities, Inc. ("NESC") and Chadbourn Securities, Inc. ("Chadbourn"), a
related party, in connection with the private placement described above.
The agreement provides that upon completion of a financing within the
time-frame of the engagement covered by the agreement, the Company will pay
NESC 6% (plus a 1% non-accountable expense allowance) of gross proceeds
received by the Company, and warrants exercisable at the offering price in
an amount equal to 7% of the aggregate number of shares of common stock
sold in the financing. In addition, the agreement provides that Chadbourn
will receive 2% (plus a 1% non-accountable expense allowance) of gross
proceeds and warrants exercisable at the offering price in an amount equal
to 3% of the aggregate number of shares of common stock sold in the
financing. Pursuant to the terms of the agreement and in connection with
the completion of the private placement described above, the Company paid
NESC $1,168,800, (net of a reduction of $183,600, as agreed on March 18,
2005), and issued to NESC placement warrants to purchase 450,800 shares of
the Company's common stock exercisable at $3.00 per share. The Company also
paid Chadbourn $627,600 and issued to Chadbourn placement warrants to
purchase 212,700 shares of the Company's common stock exercisable at $3.00
per share.
SHARE EXCHANGE TRANSACTION - On March 23, 2005, the Company completed a
Share Exchange Transaction with Accessity and the holders of the membership
interests of each of Kinergy and ReEnergy, pursuant to which Accessity
acquired all of the issued and outstanding capital stock of the Company and
all of the outstanding membership interests of Kinergy and ReEnergy. This
transaction has been accounted for as a reverse acquisition whereby the
Company is the accounting acquiror.
F-19
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Share Exchange Transaction was consummated pursuant to the terms of a
Share Exchange Agreement dated as of May 14, 2004, as amended on July 30,
2004, October 1, 2004, January 7, 2005, February 16, 2005 and March 3, 2005
executed by Accessity, the Company, Kinergy, ReEnergy and the holders of
the common stock and membership interests of the Company and Kinergy and
ReEnergy, respectively.
Immediately prior to the consummation of the Share Exchange Transaction,
Accessity reincorporated in the State of Delaware under the name "Pacific
Ethanol, Inc" through a merger of Accessity with and into Pacific Ethanol
Delaware (the "Reincorporation Merger"). In connection with the
Reincorporation Merger, the shareholders of Accessity became stockholders
of Pacific Ethanol Delaware and Pacific Ethanol Delaware succeeded to the
rights, properties and assets and assumed the liabilities of Accessity.
Also in connection with the Reincorporation Merger, the former shareholders
of Accessity, who collectively held 2,339,414 shares of common stock of
Accessity, became the stockholders of an equal number of shares of common
stock of Pacific Ethanol Delaware and holders of options and warrants to
acquire shares of common stock of Accessity, who collectively held options
and warrants to acquire 402,667 shares of common stock of Accessity, became
holders of options and warrants to acquire an equal number of shares of
common stock of Pacific Ethanol Delaware.
In the Share Exchange Transaction, each shareholder of the Company received
one share of common stock of Pacific Ethanol Delaware for each share of
common stock of the Company they owned, the sole limited liability company
member of Kinergy received 38,750 shares of common stock of Pacific Ethanol
Delaware for each one percent of outstanding limited liability company
interest he owned, and each limited liability company member of ReEnergy
received 1,250 shares of common stock of Pacific Ethanol Delaware for each
one percent of outstanding limited liability company interest they owned.
In addition, holders of options and warrants to acquire shares of common
stock of the Company became holders of warrants to acquire an equal number
of shares of common stock of Pacific Ethanol Delaware.
Pacific Ethanol Delaware issued an aggregate of 20,610,987 shares of common
stock to the shareholders of the Company, 3,875,000 shares of common stock
to the limited liability company member of Kinergy and an aggregate of
125,000 shares of common stock to the limited liability company members of
ReEnergy. In addition, holders of options and warrants to acquire an
aggregate of 3,157,587 shares of common stock of the Company are, following
the consummation of the Share Exchange Transaction, deemed to hold warrants
to acquire an equal number of shares of common stock of Pacific Ethanol
Delaware. Also, following the consummation of the Share Exchange
Transaction, LDI is entitled to convert a certain portion of its promissory
note into shares of common stock of Pacific Ethanol Delaware at the same
conversion rate that was in existence immediately prior to the Share
Exchange Transaction.
F-20
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The shares of common stock of Pacific Ethanol Delaware issued, or issuable
upon exercise of outstanding options and warrants, to the shareholders and
holders of options and warrants of the Company and limited liability
company members of Kinergy and ReEnergy represented approximately 90% of
the outstanding common stock of Pacific Ethanol Delaware on a fully-diluted
basis after the closing of the Share Exchange Transaction. Immediately
following the closing of the Share Exchange Transaction, Pacific Ethanol
Delaware had an aggregate of 27,700,401 shares of common stock issued and
outstanding and an aggregate of 31,925,534 shares of common stock issued
and outstanding, calculated on a fully-diluted basis, including 4,225,133
shares of common stock issuable upon exercise of all outstanding options,
warrants and convertible debt.
The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with the Share Exchange Transaction:
Current assets............................... $ 7,014,196
Property, plant and equipment................ 6,224
Intangibles, including goodwill.............. 11,788,000
------------
Total assets acquired..................... 18,808,420
Current liabilities.......................... 4,253,177
Other liabilities............................ 83,017
------------
Total liabilities assumed................. 4,336,194
------------
Net assets acquired.......................... $ 14,472,226
============
Shares of common stock issued................ 6,489,414
============
The purchase price represented a significant premium over the recorded net
worth of the acquired entities' assets. In deciding to pay this premium,
the Company considered various factors, including the value of Kinergy's
trade name, Kinergy's extensive market presence and history, Kinergy's
industry knowledge and expertise, Kinergy's extensive customer
relationships and expected synergies among Kinergy's and ReEnergy's
businesses and assets and the Company's planned entry into the ethanol
production business.
In connection with the Share Exchange Transaction and the Company's
acquisition of Kinergy and ReEnergy, the Company engaged a valuation firm
to determine what portion of the purchase price should be allocated to
identifiable intangible assets. Through that process, the Company has
estimated that for Kinergy, the distribution backlog is valued at $136,000,
the customer relationships are valued at $5,600,000 and the trade name is
valued at $3,100,000. The Company made a $150,000 cash payment and issued
stock valued at $316,250 for the acquisition of ReEnergy. In addition,
certain stockholders sold stock to the members of ReEnergy, increasing the
purchase price by $506,000 (see further discussion below). The purchase
price for ReEnergy totaled $972,250. The Company issued stock valued at
$9,803,750 for the acquisition of Kinergy. In addition, certain
stockholders sold stock to the sole member Kinergy and a related party,
increasing the purchase price by $1,012,000. The purchase price for Kinergy
totaled $10,815,750. Goodwill directly associated with the Kinergy and
ReEnergy acquisitions therefore totaled $2,952,000.
F-21
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Kinergy trade name is determined to have an indefinite life and
therefore, rather than being amortized, will be periodically tested for
impairment. The distribution backlog has an estimated life of six months
and customer relationships were estimated to have a ten-year life and, as a
result, will be amortized accordingly, unless otherwise impaired at an
earlier time.
In connection with the Share Exchange Transaction, Pacific Ethanol Delaware
(i) transferred DriverShield CRM Corp., a wholly-owned subsidiary of
Pacific Ethanol Delaware, to Barry Siegel, the former Chairman of the
Board, President and Chief Executive Officer of Pacific Ethanol Delaware,
(ii) issued 400,000 shares of Pacific Ethanol Delaware's common stock to
Mr. Siegel and 200,000 shares of Pacific Ethanol Delaware's common stock to
Philip B. Kart, Pacific Ethanol Delaware's former Senior Vice President,
Chief Financial Officer and Secretary, and (iii) executed Confidentiality,
Non-Competition, Non-Solicitation and Consulting Agreements with Messrs.
Siegel and Kart, in full consideration for the agreement of each of Messrs.
Siegel and Kart to relinquish cash payments that otherwise would be due to
each of them under their respective employment agreements with Pacific
Ethanol Delaware as a result of the closing of the Share Exchange
Transaction. In addition, Pacific Ethanol Delaware sold Sentaur Corp., a
wholly-owned subsidiary of Pacific Ethanol Delaware, to Mr. Siegel for the
cash sum of $5,000.
Immediately prior to the closing of the Share Exchange Transaction, the
founders sold these shares at the agreed upon price to CMCP. The
contribution of these shares is accounted for as a capital contribution.
However, because the shares were issued as a finder's fee in a private
offering (See Note 8), the related expense is offset against the proceeds
received, resulting in no effect on equity.
Immediately prior to the closing of the Share Exchange Transaction, certain
stockholders of the Company sold an aggregate of 250,000 shares of the
Company's common stock owned by them to the then-Chief Executive Officer of
Accessity at $0.01 per share to compensate him for facilitating the closing
of the Share Exchange Transaction. The contribution of these shares is
accounted for as a capital contribution. However, because the shares are
deemed issued to Accessity in connection with the Share Exchange
Transaction, the related expense is offset against the cash received from
Accessity, resulting in no effect on equity.
Immediately prior to the closing of the Share Exchange Transaction, a
stockholder of the Company sold 200,000 shares of the Company's common
stock to the individual members of ReEnergy at $.01 per share, to
compensate them for facilitating the closing of the Share Exchange
Transaction. The contribution of these shares resulted in additional
goodwill of $506,000.
Immediately prior to the closing of the Share Exchange Transaction, a
founder of the Company sold 300,000 shares of the Company's common stock to
Neil Koehler, the sole member of Kinergy and an officer and director of the
Company, at $.01 per share to compensate him for facilitating the closing
of the Share Exchange Transaction. The contribution of these shares
resulted in additional goodwill of $759,000.
Immediately prior to the closing of the Share Exchange Transaction, a
founder of the Company sold 100,000 shares of the Company's common stock to
Tom Koehler, a member of ReEnergy and a related party of the sole member of
Kinergy, at $.01 per share to compensate him for facilitating the closing
of the Share Exchange Transaction. The contribution of these shares
resulted in additional goodwill of $253,000.
F-22
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RELATED PARTY NOTES PAYABLE - Pursuant to the terms of the Share Exchange
Transaction, Kinergy distributed to its sole member in the form of a
promissory note, in the amount of $ 2,095,614 Kinergy's net worth as set
forth on Kinergy's balance sheet prepared in accordance with GAAP, as of
March 23, 2005. A holdback amount of $100,000 for 30 days was provided to
allow Kinergy to settle its accounts. In April 2005, Kinergy paid the
balance of its net worth, up to the holdback amount of $100,000.
Pursuant to the terms of the Share Exchange Transaction, ReEnergy
distributed to its members in the form of a promissory note in the amount
of $1,439 ReEnergy's net worth as set forth on ReEnergy's balance sheet
prepared in accordance with GAAP, as of March 23, 2005.
Effective March 30, 2005, the personal guaranty for up to a maximum amount
of $1,000,000 granted by an individual shareholder of the Company with
respect to the convertible promissory note issued to LDI was terminated.
STOCK OPTIONS - One outstanding option granted to an employee of the
Company to acquire 25,000 shares of common stock vested on March 23, 2005
and was converted into a warrant. Non-cash compensation expense of $232,250
was recognized to record the fair value of the warrant.
NON-CASH COMPENSATION - Pursuant to a consulting agreement (See Note 8),
upon completion of the Share Exchange Transaction, the Company issued
warrants to the consultant to purchase 230,000 additional shares of common
stock that will vest ratably over a period of two years. The warrants were
recognized at the fair value as of the start of business on March 24, 2005
in the amount of $2,139,000. The Company recorded non-cash expense of
$20,511 for consulting services vested during the period from March 24,
2005 to March 31, 2005. The unvested warrants in the amount of $2,118,489
will vest ratably at $89,125 per month over the remainder of the two year
period.
SERIES A PREFERRED STOCK - Effective May 17, 2005, the Company's articles
of incorporation were amended and restated, which amendment and restatement
had the effect of eliminating the Company's previously authorized shares of
Series A Preferred Stock and changing its name to Pacific Ethanol
California, Inc.
F-23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
May 23, 2005
To the Member
Kinergy Marketing, LLC
Davis, California
We have audited the balance sheets of Kinergy Marketing, LLC (the "Company") as
of December 31, 2003 and 2004, and the related statements of income and member's
equity (deficit) and cash flows for each of the years then ended. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 Kinergy Marketing, LLC as of
December 31, 2003 and 2004, and the results of its operations and its cash flows
for the years then ended, in conformity with U.S. generally accepted accounting
principles.
/S/ HEIN & ASSOCIATES LLP
F-24
KINERGY MARKETING LLC
BALANCE SHEETS
As of December 31,
-------------------------
2003 2004
----------- -----------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ - $ 674,195
Accounts receivable 2,583,287 2,010,531
Inventories 474,388 404,833
Deposit on product in transit - 428,358
----------- -----------
Total current assets 3,057,675 3,517,917
PROPERTY, PLANT AND EQUIPMENT, net 2,124 6,564
----------- -----------
TOTAL ASSETS $ 3,059,799 $ 3,524,481
=========== ===========
LIABILITIES AND MEMBER'S EQUITY
-------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,710,879 $ 1,106,712
Bank overdraft 59,668 -
Other Liabilities - 3,261
Payable to related party 200,000 -
----------- -----------
Total Current liabilities 1,970,547 1,109,973
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)
MEMBER'S EQUITY 1,089,252 2,414,508
----------- -----------
TOTAL LIABILITIES AND MEMBER'S EQUITY $ 3,059,799 $ 3,524,481
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-25
KINERGY MARKETING LLC
STATEMENTS OF INCOME AND MEMBER'S EQUITY
For the years ended
December 31,
----------------------------
2003 2004
------------ ------------
NET SALES $ 35,539,636 $ 82,790,404
COST OF GOODS SOLD 33,982,527 79,580,897
------------ ------------
GROSS PROFIT 1,557,109 3,209,507
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 169,582 275,588
------------ ------------
OPERATING INCOME 1,387,527 2,933,919
OTHER INCOME (EXPENSE):
Interest income (expense) 267 (3,537)
Other income (expense) (10,800) (1,300)
------------ ------------
Total other income (expense) (10,533) (4,837)
------------ ------------
NET INCOME 1,376,994 2,929,082
MEMBER'S EQUITY
beginning of period (15,742) 1,089,252
MEMBER'S DISTRIBUTIONS (272,000) (1,603,826)
------------ ------------
MEMBER'S EQUITY
end of period $ 1,089,252 $ 2,414,508
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-26
KINERGY MARKETING LLC
STATEMENTS OF CASH FLOWS
For the years ended
December 31,
----------------------------
2003 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,376,994 $ 2,929,082
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 893 253
Changes in operating assets
and liabilities:
Accounts receivable (2,171,433) 572,756
Inventories (355,262) 69,555
Deposit on product in transit - (428,358)
Bank overdraft 59,668 (59,668)
Accounts payable 929,458 (604,167)
Other liabilities - 3,261
------------ ------------
Net cash provided by (used in)
operating activities (159,682) 2,482,714
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment - (4,693)
------------ ------------
Net cash used in investing activities - (4,693)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party note payable 200,000 -
Payments on related party note payable - (200,000)
Distributions to member (272,000) (1,603,826)
------------ ------------
Net cash used in financing activities (72,000) (1,803,826)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (231,682) 674,195
CASH AND CASH EQUIVALENTS,
beginning of period 231,682 -
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ - $ 674,195
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ - $ 5,519
============ ============
Income taxes paid $ 800 $ 800
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-27
KINERGY MARKETING LLC
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
--------------------------------------
Kinergy Marketing, LLC, (the "Company") was incorporated as a limited
liability company on September 13, 2000, under the laws of the state of
Oregon, to acquire and distribute ethanol fuel in California, Nevada,
Arizona and Oregon. The Company is located in Davis, California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
CASH AND CASH EQUIVALENTS - For financial statement purposes, the Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The allowance is determined through an
analysis of the aging of accounts receivable and assessments of risk that
are based on historical trends and an evaluation of the impact of current
and projected economic conditions. The Company evaluates the past-due
status of its accounts receivable based on contractual terms of sale. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. At December 31, 2003 and 2004, management of
the Company believed that all receivables were collectible, and thus an
allowance for bad debt was not established. The Company had no bad debt
expense for the years ended December 31, 2003 and 2004.
INVENTORY - Inventory consists of bulk ethanol fuel and is valued at the
lower of cost or market; cost being determined on a first-in first-out
basis. Shipping and handling costs are classified as a component of cost of
goods sold in the accompanying statements of income and member's equity.
PROPERTY, PLANT AND EQUIPMENT - Property and equipment is recorded at cost.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives from 3 to 5 years. The cost of
normal maintenance and repairs is charged to operations as incurred.
Material expenditures that increase the life of an asset are capitalized
and depreciated over the estimated remaining useful life of the asset. The
cost of fixed assets sold, or otherwise disposed of, and the related
accumulated depreciation or amortization are removed from the accounts, and
any resulting gains or losses are reflected in current operations.
IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and circumstances
indicate that the cost of long-lived assets used in operations might be
impaired, an evaluation of recoverability would be performed. If an
evaluation were required, the estimated undiscounted cash flows estimated
to be generated by those assets would be compared to their carrying amounts
to determine if a write-down to market value or discounted cash flows is
required.
REVENUE RECOGNITION - The Company recognizes revenue upon delivery of
ethanol to customers' designated ethanol tank. Shipments are made to
customers both directly from suppliers and from the Company's inventory.
Shipment modes are by truck or rail. Ethanol that is shipped by rail
originates primarily in the Midwest and takes from 10 to 14 days from
departure of shipment, for delivery to the customer or to one of four
terminals in California and Oregon. Trucks are used for local deliveries
and such deliveries are completed the same day as shipment.
F-28
KINERGY MARKETING LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES - As a limited liability company, the Company is generally not
subject to federal and state income taxes directly. Rather, each member is
subject to federal and state income taxes based on its share of the
Company's income or loss.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision.
The following methods and assumptions were used in estimating the indicated
fair values of the Company's financial instruments:
o Cash and cash equivalents, accounts receivable and accounts
payable: The carrying amounts approximate fair value because of
the short maturity of those instruments.
o Debt: The fair value of the Company's debt is estimated based on
current rates offered to the Company for similar debt and
approximates carrying value.
CONCENTRATION OF CREDIT RISK - Financial instruments that subject the
Company to credit risk consist of cash balances maintained in excess of
federal depository insurance limits and accounts receivable, which have no
collateral or security. The accounts maintained by the Company at financial
institutions are insured by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000. At December 31, 2003, the uninsured balance was $0
and at December 31, 2004 the uninsured balance was $1,091,967. The Company
has not experienced any losses in such accounts and believes it is not
exposed to any significant risk of loss on cash.
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance sheet)
that arise from financial instruments exist for groups of customers or
counterparties when they have similar economic characteristics that would
cause their ability to meet contractual obligations to be similarly
affected by changes in economic or other conditions described below.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of accounts receivable, which have no
collateral or security. The Company sells ethanol fuel on account to select
companies located in California, Nevada, Arizona and Oregon. During the
year ended December 31, 2003, the Company had sales to four customers that
represented 20%, 14%, 13% and 10% of net sales. During the year ended
December 31, 2004, the Company had sales to four customers that represented
13%, 12%, 12% and 12% of net sales. As of December 31, 2003 and 2004, the
Company had receivables of approximately $1,337,240 and $865,175 from these
customers, representing, in the aggregate, 52% and 43%, respectively, of
total accounts receivable. The Company performs periodic credit evaluations
of its ongoing customers and generally does not require collateral. Credit
losses have traditionally been minimal and such losses have been within
management's expectations.
F-29
KINERGY MARKETING LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RISKS AND UNCERTAINTIES - The Company purchases ethanol fuel from companies
located primarily in the Midwest. During the year ended December 31, 2003,
the Company purchased ethanol from three vendors that represented 44%, 27%
and 15% of all purchases. During the year ended December 31, 2004, the
Company purchased ethanol from three vendors that represented 27%, 23% and
14% of all purchases.
LIMITATION ON LIABILITY - Members are generally not liable for the debts,
obligations or liabilities of the Company.
3. RELATED PARTY NOTE PAYABLE:
---------------------------
On November 5, 2003, the Company executed an unsecured note payable in the
amount of $200,000 payable to Pacific Ethanol, Inc., a California
corporation ("PEI California"), which bears an annual interest of 5%. The
note and related accrued interest was due in one payment on January 4,
2004. On January 23, 2004, the Company paid the principal balance plus
accrued interest of $2,164 on the note payable to PEI California. The sole
member of the Company is an officer and director of PEI California.
4. COMMITMENTS AND CONTINGENCIES:
------------------------------
OPEN LETTERS-OF-CREDIT - On October 1, 2004, the Company was issued an
Irrevocable Standby Letter of Credit by Comerica Bank, for any sum not to
exceed a total of $300,000. The designated beneficiary is a vendor of the
Company, and the letter was valid through March 31, 2005. (See Note 6)
On October 1, 2004, the Company was issued an Irrevocable Standby Letter of
Credit by Comerica Bank, for any sum not to exceed a total of $300,000. The
designated beneficiary is a vendor of the Company, and the letter was valid
through March 31, 2005. (See Note 6)
At December 31, 2003 and 2004 there was no debt outstanding related to
these open letters of credit.
LINE OF CREDIT - On March 22, 2004, the Company entered into a $2,000,000
revolving line of credit with Washington Mutual Bank, FA which was
terminated on September 24, 2004. The line is collateralized by inventory,
receivables and general intangibles of the Company.
On September 24, 2004, the Company entered into a $2,000,000 revolving line
of credit with Comerica Bank which expires on October 5, 2005. This line
replaced the Washington Mutual Bank line and is collateralized by
inventory, receivables and general intangibles of the Company. The line of
credit is personally guaranteed by Neil Koehler, sole member of the
Company. There were no outstanding borrowings as of December 31, 2003 and
2004.
F-30
KINERGY MARKETING LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TERMINAL CONTRACT - The Company is party to four terminal contracts
relating to the storage of ethanol. The contracts expire on different
dates, ranging from March 31, 2005 through October 31, 2005, and are
renewable on a year-to-year basis at end of the term. All four agreements
are cancelable by either party at the end of the base term, or with 30 - 90
days notice prior to the end of any extended term. Fees associated with
these contracts vary, and are dependent either on the volume of product in
storage or on the volume of product delivered. One of the terminals charges
a minimum monthly fee of $1,004 in addition to the variable rate. Storage
fees paid to these terminals were $24,742 and $117,526 for December 31,
2003 and 2004, respectively, and are recorded as cost of goods sold in the
accompanying statements of income and member's equity.
PURCHASE COMMITMENTS - During 2003 and 2004, the Company entered into
six-month purchase contracts with its major vendors to acquire certain
quantities of ethanol, at specified prices. The contracts run from April
through September, and from October through March. On October 1, 2004, the
contracts were renewed and renegotiated to extend through March 31, 2005.
The outstanding balance on the new contracts was $16,663,287 at December
31, 2004.
SALES COMMITMENTS - During 2003 and 2004, the Company entered into
six-month sales contracts with its major customers to sell certain
quantities of ethanol, at specified prices. The contracts run from April
through September, and from October through March. On October 1, 2004, the
contracts were renewed and renegotiated to extend through March 31, 2005.
The outstanding balance on the new contracts was $22,757,891 at December
31, 2004.
OPERATING LEASES - The Company leases office space in Davis, California.
The Company entered into a 12 month lease on December 1, 2004 at a rate of
$1,120 per month. The Company also continues to rent the prior existing
office space month-to-month with plans to vacate in 2005. Total rent paid
for the years ended December 31, 2003 and 2004 was $3,070 and $4,320,
respectively.
5. RELATED PARTY TRANSACTIONS:
---------------------------
For the year ended December 31, 2003, the Company paid consulting fees of
approximately $10,000 to Kinergy Resources, LLC, an entity owned in part by
the Company's sole member. There were no payments made to Kinergy
Resources, LLC during the year ended December 31, 2004.
During the years ended December 31, 2003 and 2004, the Company paid
accounting fees totaling $24,000 and $20,798, respectively to Kinergy, LLC,
a company owned by a relative of the Company's sole member.
The Company paid consulting fees related to market development, sales
support, regulatory and governmental affairs of $15,000 and $110,000 to a
relative of the Company's sole member for the years ended December 31, 2003
and 2004, respectively.
On August 31, 2004, the Company reimbursed PEI California, a related party,
for audit fees paid on behalf of the Company.
F-31
KINERGY MARKETING LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SUBSEQUENT EVENTS:
------------------
LETTERS OF CREDIT - On April 1, 2005, the Company renewed an Irrevocable
Standby Letter of Credit by Comerica Bank, for any sum not to exceed a
total of $400,000. The designated beneficiary is a vendor of the Company,
and the letter is valid through September 30, 2005.
On April 1, 2005, the Company renewed an Irrevocable Standby Letter of
Credit by Comerica Bank, for any sum not to exceed a total of $300,000. The
designated beneficiary is a vendor of the Company, and the letter is valid
through September 30, 2005.
SALE OF THE COMPANY - The Company and its sole member are parties to a
Share Exchange Agreement with Pacific Ethanol, Inc, a Delaware corporation
("Pacific Ethanol Delaware"), PEI California, the shareholders of PEI
California, ReEnergy, LLC, a California limited liability company
("ReEnergy"), and the holders of the membership interests of ReEnergy,
pursuant to which the Company was acquired on March 23, 2005. All of the
issued and outstanding shares of common stock of PEI California and all of
the outstanding membership interests of each of the Company and ReEnergy
were acquired by Pacific Ethanol Delaware. Immediately prior to the
consummation of the share exchange transaction, Pacific Ethanol Delaware's
predecessor, Accessity Corp., a New York corporation ("Accessity"),
reincorporated in the State of Delaware under the name Pacific Ethanol,
Inc. through a merger of Accessity with and into its then-wholly-owned
Delaware subsidiary named Pacific Ethanol, Inc., which was formed for the
purpose of effecting the reincorporation. The Company is now a wholly-owned
subsidiary of Pacific Ethanol Delaware.
F-32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
May 23, 2005
To the Members
ReEnergy LLC
Davis, California
We have audited the balance sheets of ReEnergy LLC (the "Company") as of
December 31, 2003 and 2004, and the related statements of operations, members'
equity (deficit) and cash flows for each of the years then ended. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 ReEnergy LLC as of December 31,
2003 and 2004, and the results of its operations and its cash flows for the
years then ended, in conformity with U.S. generally accepted accounting
principles.
/S/ HEIN & ASSOCIATES LLP
F-33
REENERGY LLC
BALANCE SHEETS
As of December 31,
---------------------
2003 2004
--------- ---------
ASSETS
CURRENT ASSETS
Cash $ 12,739 $ 2,739
--------- ---------
TOTAL ASSETS $ 12,739 $ 2,739
========= =========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ - $ 154
COMMITMENT (Note 4)
MEMBERS' EQUITY
Members' Equity 12,739 2,585
--------- ---------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 12,739 $ 2,739
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-34
REENERGY LLC
STATEMENTS OF OPERATIONS
For the years ended
December 31,
------------------------
2003 2004
---------- ----------
NET SALES $ - $ -
COST OF SALES - -
---------- ----------
GROSS PROFIT - -
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 48,803 9,854
---------- ----------
OPERATING LOSS (48,803) (9,854)
OTHER INCOME (EXPENSE)
Provision for Income Taxes (800) (800)
---------- ----------
NET LOSS $ (49,603) $ (10,654)
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-35
REENERGY LLC
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004
Members
--------------------------------------------------------
Kinergy
Flin-Mac, Resources Kent Tom
Inc. LLC Kaulfus Koehler Total
----------- ----------- ----------- ----------- -----------
Beginning balance,
January 1, 2003, as
originally reported $ 32,683 $ 32,685 $ - $ - 65,368
Prior period adjustment (Note 1) (16,512) (16,514) - - (33,026)
----------- ----------- ----------- ----------- -----------
Beginning balance, January 1, 2003, as restated 16,171 16,171 - - 32,342
Contributions 15,000 15,000 - - 30,000
Net loss (16,534) (16,534) (16,535) - (49,603)
----------- ----------- ----------- ----------- -----------
Ending balance,
December 31, 2003 14,637 14,637 (16,535) - 12,739
Contributions - - - 500 500
Net loss (2,503) (2,503) (2,503) (3,145) (10,654)
----------- ----------- ----------- ----------- -----------
Ending balance,
December 31, 2004 12,134 12,134 (19,038) (2,645) 2,585
=========== =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-36
REENERGY LLC
STATEMENTS OF CASH FLOWS
For the years ended
December 31,
------------------------
2003 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (49,603) $ (10,654)
Adjustments to reconcile net loss
to net cash used in operating activities:
Changes in operating assets and liabilities:
Accounts Payable (10,428) 154
---------- ----------
Net cash used in
operating activities (60,031) (10,500)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributed capital 30,000 500
---------- ----------
Net cash provided by
financing activities 30,000 500
---------- ----------
NET DECREASE IN CASH (30,031) (10,000)
CASH, beginning of period 42,770 12,739
---------- ----------
CASH, end of period $ 12,739 $ 2,739
========== ==========
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 800 $ 800
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-37
REENERGY LLC
NOTES TO FINANCIAL STATEMENTS
1. RESTATEMENT OF YEAR ENDED 2003
------------------------------
Upon consideration by current management of the previous accounting
treatment of certain expenditures in the years 2002 and 2003, in the
amounts of $33,026 and $48,803 respectively, it has been determined that
such amounts, pursuant to SOP 98-5 ("Statement of Position 98-5 Reporting
on the Costs of Start-Up Activities"), should be expensed rather than
capitalized. These financial statements have been restated to account for
that change.
2. ORGANIZATION AND NATURE OF OPERATIONS:
--------------------------------------
ReEnergy LLC ("the Company"), a California limited liability corporation,
was formed on October 4, 2001. ReEnergy LLC is a project development
company formed to evaluate the feasibility of building an ethanol
production facility in California.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
CASH EQUIVALENTS - For financial statement purposes, the Company considers
all highly liquid investments with original maturities of three months or
less to be cash equivalents. There were no cash equivalents as of December
31, 2003 and 2004.
LIMITATION ON LIABILITY - Members are generally not liable for the debts,
obligations or liabilities of the Company.
INCOME TAXES - As a limited liability company, the Company is generally not
subject to federal and state income taxes directly. Rather, each member is
subject to federal and state income taxes based on its share of the
Company's income or loss.
4. RELATED PARTY TRANSACTIONS:
---------------------------
The Company has entered into a lease agreement with a member along with an
option on 89 acres of land that is owned personally by this member. The
member has received a 33.33% interest in ReEnergy for this option and his
expertise in the bio-product area. The property has been appraised and if
the option is exercised the member will receive fair market value for his
property based on the appraised value. As of May 2004, the member's
interest was changed to 23.5%.
On August 28, 2003, the Company entered into an agreement with Pacific
Ethanol, Inc., a California corporation ("PEI California"), for an option
to sell 89.3 acres in Visalia, California at a price of $12,000 per acre
for the purpose of building an ethanol production facility.
For the year ended December 31, 2003, the Company paid consulting fees of
$27,000 to Celilo Group an entity owned in part by one of the Company's
members. There were no payments made to Celilo Group during the year ended
December 31, 2004.
F-38
REENERGY LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In May 2004, Tom Koehler, as an individual, acquired a 29.5% Membership
interest in the Company. Mr. Koehler also holds a membership interest
through his ownership in Kinergy Resources, LLC.
5. SUBSEQUENT EVENTS:
------------------
SALE OF THE COMPANY - The Company and its members are parties to a Share
Exchange Agreement with Pacific Ethanol, Inc, a Delaware corporation
("Pacific Ethanol Delaware"), PEI California, the shareholders of PEI
California, Kinergy Marketing, LLC, an Oregon limited liability company
("Kinergy"), and the holders of the membership interests of Kinergy,
pursuant to which the Company was acquired on March 23, 3005. All of the
issued and outstanding shares of common stock of PEI California and all of
the outstanding membership interests of each of the Company and Kinergy
were acquired by Pacific Ethanol Delaware. Immediately prior to the
consummation of the share exchange transaction, Pacific Ethanol Delaware's
predecessor, Accessity Corp., a New York corporation ("Accessity"),
reincorporated in the State of Delaware under the name Pacific Ethanol,
Inc. through a merger of Accessity with and into its then-wholly-owned
Delaware subsidiary named Pacific Ethanol, Inc., which was formed for the
purpose of effecting the reincorporation. The Company is now a wholly-owned
subsidiary of Pacific Ethanol Delaware.
F-39
(b) Pro Forma Financial Information.
--------------------------------
On March 23, 2005, the Company completed a Share Exchange Transaction with
Accessity and the holders of the membership interests of each of Kinergy and
ReEnergy, pursuant to which Accessity acquired all of the issued and outstanding
capital stock of the Company and all of the outstanding membership interests of
Kinergy and ReEnergy. This transaction has been accounted for as a reverse
acquisition whereby the Company is the accounting acquiror.
The unaudited pro forma combined consolidated statements of operations do
not reflect any potential cost savings that may be realized following the
acquisition. The pro forma adjustments and assumptions are based on estimates,
evaluations and other data currently available and, in the Company's opinion,
provide a reasonable basis for the fair presentation of the estimated effects
directly attributable to the acquisition and related transactions. The unaudited
pro forma combined statements of operations are provided for illustrative
purposes only and are not necessarily indicative of what the consolidated
results of operations or financial position would actually have been had the
acquisition occurred on January 1, 2004, nor do they represent a forecast of the
consolidated results of operations or financial position for any future period
or date.
All information contained herein should be read in conjunction with
Accessity's annual report on Form 10-KSB for the year ended December 31, 2004,
the financial statements and notes thereto of PEI California, Kinergy and
ReEnergy included in Item 9.01(a) of this Form 8-K and the notes to unaudited
pro forma financial information included herein. The following pro forma
financial information is included in this report:
Page
----
Unaudited Pro Forma Combined Consolidated Balance Sheets
at December 31, 2004.......................................................52
Notes to Unaudited Pro Forma Combined Consolidated Balance
Sheets at December 31, 2004................................................53
Unaudited Pro Forma Combined Consolidated Statements of Operations
for the Year Ended December 31, 2004.......................................55
Notes to Unaudited Pro Forma Combined Consolidated Statements
of Operations for the Year Ended December 31, 2004.........................56
-51-
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
BALANCE SHEETS
December 31, 2004
PEI Accessity
ReEnergy Kinergy California Corp.
------------ ------------ ------------ ------------
ASSETS (Note 1)
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,739 $ 674,195 $ 42 $ 188,444
- - - -
Accounts receivable - 2,010,531 8,464 124,800
Related party notes receivable - - 5,286 13,775
Investments - - - 3,228,109
Inventories, net - 404,833 - -
Prepaid expenses - 428,358 293,115 99,432
- - - -
Business acquisition costs - - 430,393 -
Restricted funds - - - 300,000
Security deposits - - - 4,026
Other receivables - - 48,806 -
------------ ------------ ------------ ------------
TOTAL CURRENT ASSETS 2,739 3,517,917 786,106 3,958,586
PROPERTY AND EQUIPMENT, net of accumulated depreciation - 6,564 6,324,824 86,489
INTANGIBLE ASSETS - - - -
GOODWILL - - - -
- - -
- - -
DEBT ISSUANCE COSTS, net of accumulated amortization - - 68,333 -
------------ ------------ ------------ ------------
TOTAL ASSETS $ 2,739 $ 3,524,481 $ 7,179,263 $ 4,045,075
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable 154 1,106,712 383,012 55,446
Accounts payable, related party - - 846,211 -
Accrued expenses and other current liabilities - 3,261 581,630 416,789
- - - -
- - - -
- - - -
Related party payable - - - -
------------ ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 154 1,109,973 1,810,853 472,235
RELATED-PARTY NOTE PAYABLE - - 4,012,678 -
(TABLE CONTINED ON NEXT PAGE)
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEETS
-52-
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
BALANCE SHEETS (CONTINUED)
December 31, 2004
(TABLE CONTINUED FROM PREVIOUS PAGE)
PEI California Accessity
Pro Forma Pro Forma Pro Forma
Adjustments Adjustments Combined
------------ ------------ ------------
ASSETS (Note 2) (Note 3)
------
CURRENT ASSETS:
Cash and cash equivalents $ - $ (140,023)(b) $ -
- 18,894,552 (b) 19,619,949
Accounts receivable - (43,771)(a) 2,100,024
Related party notes receivable - (13,775)(a) 5,286
Investments - (406,260)(b) 2,821,849
Inventories, net - - 404,833
Prepaid expenses - (99,432)(a) -
- 232,250 (g) 953,723
Business acquisition costs (430,393)(a) - -
Restricted funds - (20,000)(b) 280,000
Security deposits - (4,026)(a) -
Other receivables - - 48,806
------------ ------------ ------------
TOTAL CURRENT ASSETS (430,393) 18,399,515 26,234,470
PROPERTY AND EQUIPMENT, net of accumulated depreciation - (86,489)(a) 6,331,388
INTANGIBLE ASSETS - 8,836,000 (d) 8,836,000
GOODWILL 150,000 (b) 1,284,000 (d) -
- 1,012,000 (d) -
- 506,000 (d) 2,952,000
DEBT ISSUANCE COSTS, net of accumulated amortization - - 68,333
------------ ------------ ------------
TOTAL ASSETS $ (280,393) $ 29,951,026 $ 44,422,191
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable - (7,115)(a) 1,538,209
Accounts payable, related party - - 846,211
Accrued expenses and other current liabilities 307,005 (a) (240,378)(a) -
- 280,000 (b) -
- (40,686)(b) -
- 83,017 (b) 1,390,638
Related party payable 2,567,093 (b) - 2,567,093
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 2,874,098 74,838 6,342,151
RELATED-PARTY NOTE PAYABLE - - 4,012,678
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEETS
-52A-
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
BALANCE SHEETS (CONTINUED)
December 31, 2004
PEI Accessity
ReEnergy Kinergy California Corp.
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Member's Equity 2,585 2,414,508 - -
Common stock, $.001 par value for Pacific
Ethanol, Inc., a Delaware Corporation - - 13,446 37,821
- - - -
- - - -
- - - -
- - - -
- - - -
Additional paid in capital - - 5,071,632 11,107,158
- - - -
- - - -
- - - -
- - - -
- - - -
- - - -
- - - -
Unvested warrants for consulting fees - - - -
Due from stockholders - - (68,100) -
Accumulated other comprehensive loss - - - 33,195
Accumulated deficit - - (3,661,246) (5,875,892)
------------ ------------ ------------ ------------
Sub-total - Equity 2,585 2,414,508 1,355,732 5,302,282
Less common shares held in treasury, at cost - - - (1,729,442)
------------ ------------ ------------ ------------
Total stockholders' equity 2,585 2,414,508 1,355,732 3,572,840
============ ============ ============ ============
Total Liabilities and Stockholders' Equity 2,739 3,524,481 7,179,263 4,045,075
============ ============ ============ ============
(TABLE CONTINUED ON NEXT PAGE)
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEETS
-53-
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
BALANCE SHEETS (CONTINUED)
December 31, 2004
(TABLE CONTINUED FROM PREVIOUS PAGE)
PEI California Accessity
Pro Forma Pro Forma Pro Forma
Adjustments Adjustments Combined
------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Member's Equity (2,417,093)(b) - -
Common stock, $.001 par value for Pacific
Ethanol, Inc., a Delaware Corporation - (37,821)(b) -
- 2,339 (b) -
- 7,000 (c) -
- 4,000 (d) -
- 750 (g) -
- - 27,535
Additional paid in capital (737,398)(a) - -
- 2,681,887 (b) -
- (11,107,158)(b) -
- 18,887,552 (c) -
- 11,634,000 (d) -
- 2,139,000 (e) -
- 232,250 (f) -
- (750)(g) 39,908,173
Unvested warrants for consulting fees - (2,139,000)(e) (2,139,000)
Due from stockholders - - (68,100)
Accumulated other comprehensive loss - (33,195)(b) -
Accumulated deficit - 5,875,892 (b) (3,661,246)
------------ ------------ ------------
Sub-total - Equity (3,154,491) 28,146,746 34,067,362
Less common shares held in treasury, at cost - 1,729,442 (b) -
------------ ------------ ------------
Total stockholders' equity (3,154,491) 29,876,188 34,067,362
============ ============ ============
Total Liabilities and Stockholders' Equity (280,393) 29,951,026 44,422,191
============ ============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEETS
-53A-
NOTES TO UNAUDITED PRO FORMA
COMBINED CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2004
NOTE 1: Reflects the financial data reported in Accessity's Form 10-KSB for
the year ended December 31, 2004.
NOTE 2: PEI CALIFORNIA PRO FORMA ADJUSTMENTS
(a) To reclassify business acquisition costs to equity.
(b) To reflect distribution out to the owners of ReEnergy and Kinergy of
the amount of the net worth of their respective businesses, through
the issuance of notes, in accordance with the terms of the Share
Exchange Transaction and reflect the reimbursement of $150,000 for
costs paid and services rendered by ReEnergy members.
NOTE 3: ACCESSITY PRO FORMA ADJUSTMENTS
(a) To eliminate the accounts of Sentaur sold to Barry Siegel and the
accrued royalty amounts related to DriverShield, along with the assets
related to the DriverShield business and other personal property, and
those used for the Sentaur and other corporate businesses, which were
conveyed or sold to Barry Siegel, in part, in lieu of cash severance
payments pursuant to his employment agreement.
(b) To record the issuance of 20,469,866 shares of the Company's common
stock to shareholders of PEI California in connection with the Share
Exchange Transaction, based on PEI California's outstanding shares at
December 31, 2004.
(c) In addition, to record the estimated 7,000,000 shares issued upon the
completion of PEI California's $21 million private offering of equity
securities. These funds are to be used for general corporate purposes
after the closing. The Company estimates cash placement agent fees and
expenses of approximately $1,850,400 and issued five-year placement
agent warrants to purchase 678,000 shares of common stock at an
exercise price of $3.00 per share in connection with the offering.
Additional costs related to the financing include legal, accounting
and consulting fees that total approximately $255,048.
(d) To record the acquisitions of ReEnergy and Kinergy through the
issuance 125,000 shares and 3,875,000 shares of common stock,
respectively, at their valuation values, with an allocation between
goodwill and other intangible assets. In addition, to record the value
of 400,000 shares of stock sold to the sole Kinergy member and a
related party, by a founder of PEI California, increasing the purchase
price by $1,012,000 and to record the value of stock sold to the
ReEnergy members, by certain shareholders, increasing the purchase
price by $506,000.
(e) The Company entered into a consulting agreement with an unrelated
party to represent the Company in investors' communications and public
relations with existing shareholders, brokers, dealers and other
investment professionals as to the Company's current and proposed
activities. Pursuant to the consulting agreement, upon completion of
the Share Exchange Transaction, the Company issued warrants to the
consultant to purchase 230,000 additional shares of common stock that
will vest ratably over a period of two years. The warrants will be
recognized based on the estimated fair value of the Company's stock as
of the start of business on day following the close of the Share
Exchange Transaction in the amount of $2,139,000. The Company will
ratably record non-cash expense for consulting services at $89,125 per
month over the two year vesting period.
-54-
NOTES TO UNAUDITED PRO FORMA
COMBINED CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2004 (CONT'D)
(f) To record the value of an employee stock option to acquire up to
25,000 shares of common stock at an exercise price of $.01 per share,
contingent upon the Company's success in closing the Share Exchange
Transaction. The stock option vested in full upon close of the Share
Exchange Transaction and converted into a warrant to acquire up to
25,000 shares of common stock of the Company. Non-cash prepaid
compensation expense was recorded in the amount of $232,250 based on
the fair value of the Company's stock at the start of business on the
day following the close of the Share Exchange Transaction.
(g) To reclassify amounts so that the common stock of the recapitalized
company reflects the total shares outstanding at the new par value
of $.001.
-55-
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
PEI ACCESSITY PRO FORMA PRO FORMA
REENERGY KINERGY CALIFORNIA CORP. ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------ ------------
(NOTE 1) (NOTE 2)
NET SALES $ - $ 82,790,404 $ 19,764 $ 824,637 $ (824,637)(a) $ 82,810,168
COST OF GOODS SOLD - (79,580,897) (12,523) - - (79,568,374)
------------ ------------ ------------ ------------ ------------ ------------
GROSS PROFIT - 3,209,507 7,241 824,637 (824,637) 3,216,748
------------ ------------ ------------ ------------ ------------ ------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 9,854 275,588 1,070,010 2,684,394 (2,150,848)(a)
695,667 (d) 2,584,665
NON-CASH CONSULTING FEES - - 1,207,500 - 172,500 (e) -
696,000 (f) 2,076,000
OPERATING LOSS (9,854) 2,933,919 (2,270,269) (1,859,757) (237,956) (1,443,917)
OTHER INCOME (EXPENSE):
Other income - - 3,119 363,462 - 366,581
Other expense (500) (5,285) - (5,785)
Interest expense - (3,537) (528,532) (1,045) - (533,114)
------------ ------------ ------------ ------------ ------------ ------------
Total other income (expense) - (4,037) (530,698) 362,417 - (172,318)
------------ ------------ ------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR
INCOME TAXES (9,854) 2,929,882 (2,800,967) (1,497,340) (237,956) (1,616,235)
PROVISION FOR INCOME TAXES (800) (800) (1,600) 11,525 - 8,325
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (10,654) $ 2,929,082 $ (2,802,567) $ (1,485,815) $ (237,956) $ (1,607,910)
============ ============ ============ ============ ============ ============
EARNINGS (LOSS) PER SHARE
Basic $(0.635) $(0.058)
Diluted $(0.635) $(0.058)
Weighted average number of
common shares 2,339,414 25,195,866 (b) 27,535,280
Weighted average number of
diluted common shares 2,339,414 29,420,999 (c) 31,760,413
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004
-56-
NOTES TO UNAUDITED PRO FORMA
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
1. Reflects the financial data as reported in Accessity's Form 10-KSB for the
year ended December 31, 2004.
2. (a) The pro forma adjustments eliminate the operating results of
Accessity's former subsidiaries, Sentaur and DriverShield. These
businesses were transferred or sold to Barry Siegel in lieu of certain
cash payments which would otherwise be required pursuant to his
employment contract. In addition, it removes salaries of all former
personnel and related costs in accordance with the Share Exchange
Transaction, which required the termination of all Accessity
employees. Occupancy costs for the premises in Florida are also
removed, as they are being paid by Barry Siegel or Sentaur until the
building is sold except for $50,000 of expenses to be retained by the
Company. The personal property and related depreciation has been
eliminated as those are being transferred with Sentaur. Certain
amounts for the administration of the 401(k) plan, file retention of
historic data, and Nasdaq fees, audit expenses, all legal costs
(excluding direct costs of the Share Exchange Transaction), directors'
and officers' insurance and others have also been retained.
(b) Reflects 27,535,280 shares to be issued in connection with the Share
Exchange Transaction.
(c) Would reflect the items in 2(b) above, plus all options, warrants and
convertible securities of all the entities that would be considered
common share equivalents and be dilutive, aggregating 31,760,413.
However, because the use of these would be anti-dilutive and result in
a lower loss per share, the presentation uses the same shares as for
basic loss per share.
(d) To reflect compensation arrangements for the new management upon the
consummation of the Share Exchange Transaction.
(e) To record warrants granted to a consultant for public and investor
relations during 2004 directly associated with the Share Exchange
Transaction, and amortization of non-cash charges for the year ended
December 31, 2004.
(f) To record the amortization of certain acquired intangible assets
relating to distribution backlog and customer relationships over their
estimated useful lives of six months and 10 years, respectively.
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(c) Exhibits.
---------
Number Description
------ -----------
2.1 Agreement and Plan of Merger dated March 23, 2005 between
the Company and Accessity Corp. (1)
2.2 Share Exchange Agreement dated as of May 14, 2004 by and
among Accessity Corp., Pacific Ethanol, Inc., Kinergy
Marketing, LLC, ReEnergy, LLC and the other parties named
therein (1)
2.3 Amendment No. 1 to Share Exchange Agreement dated as of July
29, 2004 by and among Accessity Corp., Pacific Ethanol,
Inc., Kinergy Marketing, LLC, ReEnergy, LLC and the other
parties named therein (1)
2.4 Amendment No. 2 to Share Exchange Agreement dated as of
October 1, 2004 by and among Accessity Corp., Pacific
Ethanol, Inc., Kinergy Marketing, LLC, ReEnergy, LLC and the
other parties named therein (1)
2.5 Amendment No. 3 to Share Exchange Agreement dated as of
January 7, 2005 by and among Accessity Corp., Pacific
Ethanol, Inc., Kinergy Marketing, LLC, ReEnergy, LLC and the
other parties named therein (1)
2.6 Amendment No. 4 to Share Exchange Agreement dated as of
February 16, 2005 by and among Accessity Corp., Pacific
Ethanol, Inc., Kinergy Marketing, LLC, ReEnergy, LLC and the
other parties named therein (1)
2.7 Amendment No. 5 to Share Exchange Agreement dated as of
March 3, 2005 by and among Accessity Corp., Pacific Ethanol,
Inc., Kinergy Marketing, LLC, ReEnergy, LLC and the other
parties named therein (1)
3.1 Certificate of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (1)
10.1 Confidentiality, Non-Competition, Non-Solicitation and
Consulting Agreement dated March 23, 2005 between the
Company and Barry Siegel (1)
10.2 Confidentiality, Non-Competition, Non-Solicitation and
Consulting Agreement dated March 23, 2005 between the
Company and Philip B. Kart (1)
10.3 Form of Confidentiality, Non-Competition and
Non-Solicitation Agreement dated March 23, 2005 between the
Company and each of Neil Koehler, Tom Koehler, William
Jones, Andrea Jones and Ryan Turner (1)
10.4 Confidentiality, Non-Competition and Non-Solicitation
Agreement dated March 23, 2005 between the Company and Neil
Koehler (1)
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Number Description
------ -----------
10.5 Form of Indemnification Agreement dated March 23, 2005
between the Company and each of its Executive Officers and
Directors (1)
10.6 Executive Employment Agreement dated March 23, 2005 between
the Company and Neil Koehler (1)
10.7 Executive Employment Agreement dated March 23, 2005 between
the Company and Ryan Turner (1)
10.8 Executive Employment Agreement dated March 23, 2005 between
the Company and Tom Koehler (1)
10.9 Stock Purchase Agreement and Assignment and Assumption
Agreement dated March 23, 2005 between the Company and Barry
Siegel (1)
10.10 Letter Agreement dated March 23, 2005 between the Company
and Neil Koehler (1)
10.11 Assignment of Term Loan Agreement and Deed of Trust dated
March 23, 2005 between the Company, Lyles Diversified, Inc.
and the other parties named therein (1)
10.12 Term Loan Agreement dated June 16, 2003 and Deed of Trust
dated June 20, 2003 between Pacific Ethanol, Inc., a
California corporation and Lyles Diversified, Inc. (1)
10.13 Form of Registration Rights Agreement dated effective March
23, 2005 between Pacific Ethanol, Inc., a California
corporation and the investors who are parties thereto (1)
10.14 Form of Warrant dated March 23, 2005 issued by the Company
to subscribers to a private placement of securities by
Pacific Ethanol, Inc., a California corporation (1)
10.15 Form of Placement Warrant dated March 23, 2005 issued by the
Company to certain placement agents (1)
10.16 Warrant dated March 23, 2005 issued by the Company to
Liviakis Communications, Inc. (1)
14.1 Code of Ethics (1)
14.2 Code of Ethics for Chief Executive Officer and Senior
Financial Officers (1)
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Number Description
------ -----------
16.1 Letter of Nussbaum Yates & Wolpow, P.C. dated March 28, 2005
(1)
16.2 Letter of Nussbaum Yates & Wolpow, P.C. dated March 31, 2005
(2)
-----------------
(1) Filed with the Securities and Exchange Commission on March 29,
2005 as an exhibit to the initial filing of this Report on Form
8-K and incorporated herein by reference.
(2) Filed with the Securities and Exchange Commission on April 1,
2005 as an exhibit to Amendment No. 1 to this Report on Form 8-K
and incorporated herein by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registration has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: June 3, 2005 PACIFIC ETHANOL, INC.
By: /S/ RYAN TURNER
------------------------------------
Ryan Turner, Chief Operating Officer
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