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EXPROFUELS, INC.
INDEX TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995
AUDITED FINANCIAL STATEMENTS Page
----
Independent Auditors' Report S-2
Balance Sheets S-3
Statements of Operations S-5
Statements of Stockholders' Equity S-6
Statements of Cash Flows S-7
Notes to Financial Statements S-8
SUPPORTING SCHEDULE
Schedule II - Valuation and Qualifying Reserves S-13
S-1
2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ExproFuels, Inc.
We have audited the balance sheets of ExproFuels, Inc. as of August 31, 1996
and 1995, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended August 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ExproFuels, Inc. as of August
31, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended August 31, 1996, in conformity with
generally accepted accounting principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 2 to the financial
statements, the Company is fully dependent on its former parent, has suffered
recurring losses from operations since inception, has a deficiency of quick
assets to current liabilities of $114,282 and an accumulated deficit in
retained earnings of $2,617,957 at August 31, 1996, all of which raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also discussed in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We have also audited Schedule II of ExproFuels, Inc. for each of the three
years in the period ended August 31, 1996. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
- ----------------------------------------
Akin, Doherty, Klein & Feuge, P.C.
San Antonio, Texas
November 8, 1996
S-2
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EXPROFUELS, INC.
BALANCE SHEETS
AUGUST 31, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
Current Assets:
Cash and equivalents $ 20,871 $ 7,263
Accounts receivable, less allowance for doubtful accounts of
$35,000 in 1996 and $0 in 1995 154,701 221,476
Inventories 143,967 103,956
Prepaid expenses and other 19,346 25,371
----------- ---------
Total current assets 338,885 358,066
Property and Equipment:
Transportation and other equipment 146,473 145,282
Equipment under capital leases 93,326 93,326
Fuel stations 238,484 159,729
Less accumulated depreciation and amortization (203,388) (117,814)
----------- ---------
Net property and equipment 274,895 280,523
Other Assets:
Investments in and advances to venture 592,426 150,000
Other assets 43,321 53,418
----------- ---------
635,747 203,418
----------- ---------
Total Assets $ 1,249,527 $ 842,007
=========== =========
SEE NOTES TO FINANCIAL STATEMENTS.
S-3
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EXPROFUELS, INC.
BALANCE SHEETS
AUGUST 31, 1996 AND 1995
1996 1995
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 247,652 $ 349,279
Accrued payroll and taxes 8,532 6,370
Current portion of long-term debt 13,744 23,409
Current portion of capital lease obligations 19,926 16,693
----------- -----------
Total current liabilities 289,854 395,751
Long-term Liabilities:
Long-term debt 21,684 35,427
Capital lease obligations 29,810 49,731
----------- -----------
Total long-term liabilities 51,494 85,158
Investments and advances by parent - 2,334,041
Stockholders' Deficit:
Common stock, par value $ .01 per share;
authorized 50,000,000 shares; issued
and outstanding 4,000,000 shares
at August 31, 1996 40,000 -
Additional paid-in capital 3,486,136 -
Accumulated deficit (2,617,957) (1,972,943)
----------- -----------
Total stockholders' equity 908,179 (1,972,943)
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,249,527 $ 842,007
=========== ===========
SEE NOTES TO FINANCIAL STATEMENTS.
S-4
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EXPROFUELS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
1996 1995 1994
------------- ------------ ------------
Revenues:
Conversion sales $ 557,641 $ 578,362 $ 627,366
Fuel station construction sales 301,115 97,241 162,603
Alternative fuel sales 187,645 97,748 31,664
---------- ----------- ----------
1,046,401 773,351 821,633
Costs and Expenses:
Cost of sales 752,024 646,078 701,198
Shop general and administrative 484,920 415,944 302,647
Depreciation and amortization 85,574 92,302 77,543
Abandonment of technological rights - - 144,681
General and administrative 404,708 587,916 431,107
---------- ----------- ----------
Total costs and expenses 1,727,226 1,742,240 1,657,176
---------- ----------- ----------
Loss from operations (680,825) (968,889) (835,543)
Other Income (Expense):
Sublease rental income 58,500 6,750 -
Interest income 959 818 3
Interest expense (23,648) (24,560) (37,367)
---------- ----------- ----------
35,811 (16,992) (37,364)
---------- ----------- ----------
Net loss $ (645,014) $ (985,881) $ (872,907)
========== =========== ==========
SEE NOTES TO FINANCIAL STATEMENTS.
S-5
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EXPROFUELS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
Common Stock
---------------------------------- Additional
Paid-in Accumulated
Shares Amount Capital Deficit Total
-------------- --------------- ------------ ------------- -----------
Balance at September 1, 1993 - $ - $ - $ (114,155) $ (114,155)
Net loss for the year - - - (872,907) (872,907)
---------- -------- ----------- ------------ ----------
Balance at August 31, 1994 - - - (987,062) (987,062)
Net loss for the year - - - (985,881) (985,881)
---------- -------- ----------- ------------ ----------
Balance at August 31, 1995 - - - (1,972,943) (1,972,943)
Issuance of common stock
by parent 4,000,000 40,000 (40,000) - -
Contribution of advances by
parent company - - 3,526,136 - 3,526,136
Net loss for the year - - - (645,014) (645,014)
---------- -------- ----------- ------------ ----------
Balance at August 31, 1996 4,000,000 $ 40,000 $ 3,486,136 $ (2,617,957) $ 908,179
========== ======== =========== ============ ==========
SEE NOTES TO FINANCIAL STATEMENTS.
S-6
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EXPROFUELS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
1996 1995 1994
-------- -------- --------
OPERATING ACTIVITIES:
Net loss $ (645,014) $ (985,881) $ (872,907)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 85,574 92,302 77,543
Changes in operating assets and liabilities:
Receivables 66,775 (142,948) 26,481
Inventory (40,011) 17,915 (119,480)
Prepaid expenses and other 6,025 31,314 (53,467)
Accounts payable and accrued expenses (99,465) (127,745) 254,802
------------ ------------ ------------
Net cash (used) in operating activities (626,116) (1,115,043) (687,028)
INVESTING ACTIVITIES:
Purchase of property and equipment (79,946) (101,165) (230,012)
Investments in and advances to venture (442,426) (150,000) -
Other assets 10,097 151,507 (36,809)
------------ ------------ ------------
Net cash (used) in investing activities (512,275) (99,658) (266,821)
FINANCING ACTIVITIES:
Advances from parent company 1,192,095 1,224,085 882,566
Proceeds from long-term debt obligations - 30,967 94,293
Payments on long-term obligations (40,096) (37,799) (21,408)
------------ ------------ ------------
Net cash provided by financing activities 1,151,999 1,217,253 955,451
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 13,608 2,552 1,602
Cash and equivalents at beginning of year 7,263 4,711 3,109
------------ ------------ ------------
CASH AND EQUIVALENTS AT END OF YEAR $ 20,871 $ 7,263 $ 4,711
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 22,636 $ 24,328 $ 35,409
SEE NOTES TO FINANCIAL STATEMENTS.
S-7
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EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995 AND 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
ExproFuels, Inc. (the Company), formerly a division of The Exploration Company
(TXCO), began operating as a wholly-owned subsidiary of TXCO August 15, 1996,
following the issuance of 4,000,000 shares of its common stock. TXCO is
registered with the Securities and Exchange Commission (SEC) and its stock
traded publicly on the National Association of Securities Dealers (NASD)
exchange.
On August 30, 1996, 10% of the outstanding common stock of ExproFuels, Inc. was
exchanged as consideration for services rendered to its Directors, thereby
reducing TXCO's ownership interest from 100% to 90%. On September 3, 1996, the
Company's Board of Directors voted for a distribution of ExproFuels common
stock directly to the shareholders of TXCO (the beneficial owners of 90% of
ExproFuels). The direct distribution of stock reduced TXCO's ownership in the
Company to 40%.
ExproFuels, Inc. is proceeding with plans for filing an Information Statement
on Form 10 with the Securities and Exchange Commission to register its
outstanding common stock.
The financial statements include the accounts of ExproFuels while operated as a
division of TXCO (inception through August 14, 1996) and as a subsidiary of
TXCO (period August 15, 1996 and subsequent). The Company converts vehicle
engines that use gasoline for combustion to propane or natural gas, supplies
alternative fuels to customers and constructs alternative fuels refueling
facilities. Customers are primarily located in Texas and Arizona. The Company
also has a substantial investment, through CNG International, L.L.C., for
alternative fuel operations being developed in Uzbekistan.
Cash and Equivalents
Cash and cash equivalents consist of all demand deposits and funds invested in
short-term investments with original maturities of three months or less.
Inventories
Inventories, consisting principally of finished goods (parts), are valued at
the lower of cost or market using the first-in, first-out method of accounting.
Property and Equipment
Transportation and other equipment, equipment reported under capitalized leases
and fuel stations are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets ranging from
five to fifteen years. Major renewals and betterments are capitalized while
repairs are expensed as incurred.
Federal Income Taxes
For financial reporting purposes, the Company has adopted the provisions of
Financial Accounting Standards Board Statement No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. A valuation allowance
is provided against net deferred assets for which realization is doubtful.
Financial Instruments with Off-Balance-Sheet Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and accounts
receivables. The Company places its temporary cash investments with financial
institutions and limits the amount of credit exposure to any one financial
institution. The Company's raw materials are readily available and the Company
is not dependent on a single supplier or a few suppliers.
S-8
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EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995 AND 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. GOING CONCERN UNCERTAINTY AND REGISTRATION OF COMMON STOCK
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Since its inception, the Company
has been substantially reliant on its parent company to fund its cash
requirements. As shown in the financial statements, the Company has suffered
recurring losses, has a deficiency of quick assets to current liabilities of
$114,282 and an accumulated deficit in retained earnings of $2,617,957 at August
31, 1996. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
going concern.
Management is exploring alternatives, including raising additional debt or
equity financing. The Company has raised $200,000 in debt financing since year
end. See Note 4. The Company is also proceeding with plans for filing an
Information Statement on Form 10 with the SEC to register the Company's
outstanding common stock. The Company's ability to continue to operate is
dependent upon its ability to successfully accomplish some or all of these or
other alternatives, and ultimately to attain profitable operations.
NOTE 3. INVESTMENTS IN AND ADVANCES TO VENTURE
The Company has invested $592,426 in CNG International, L.L.C., a Tennessee
limited liability company formed for the purpose of converting motor vehicles
to operate on alternative fuels, manufacturing and selling of related component
equipment and to develop the necessary infrastructure to support operation of
motor vehicles on alternative fuels primarily in Uzbekistan, a former Soviet
Republic. At August 31, 1996, the Company had acquired an equity interest of
approximately 11% in the venture.
During the years ended August 31, 1996 and 1995, the Company sold equipment and
provided services to CNG International in the amount of $133,505 and $110,611,
respectively.
S-9
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EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995, AND 1994
NOTE 4. LONG TERM DEBT
Long-term debt consists of the following at August 31:
1996 1995
---------- ----------
Notes payable to financial institutions, with interest rates
from 8.50% to 12%,due in monthly installments of $1,950
and secured by certain vehicles. $ 35,428 $ 58,836
Less current portion (13,744) (23,409)
-------- --------
Long-term portion of debt $ 21,684 $ 35,427
======== ========
Subsequent Proceeds from Convertible Debt:
On September 18, 1996, the Company received $200,000 from the issuance of an
unsecured 6% convertible note payable. The note requires interest only
payments quarterly, with the balance due on September 18, 1999. The note is
convertible into one share of $.01 par value common stock for each $1 of debt
outstanding, subject to adjustment in certain circumstances.
The following is a schedule of principal maturities of long-term debt as of
August 31, 1996:
Before After
Fiscal Year Ended Subsequent Subsequent
August 31 Proceeds Proceeds
----------------------- ---------- ----------
1997 $ 13,744 $ 13,744
1998 13,738 13,738
1999 5,839 5,839
2000 2,107 202,107
-------- ---------
$ 35,428 $ 235,428
======== =========
NOTE 5. STOCKHOLDERS' EQUITY
1996 Flexible Incentive Plan:
The Company's 1996 Flexible Incentive Plan provides incentive stock options for
granting to its officers, directors and management, under which options for the
purchase of 400,000 shares of common stock have been reserved. Options for the
purchase of 300,000 shares of common stock were granted under the plan on
September 4, 1996, vesting 50% in one year and 100% in two years. The options
are exercisable at 110% of the fair market value of the common stock on the
date of grant and expire ten years from the date of grant, or upon termination
of employment, if earlier. An appraisal of the common stock fair value is
currently being obtained.
Preferred Stock:
The Company has authorized 10,000,000 shares of preferred stock, none of which
is issued. Terms and rights of the stock have not been established by the
Board of Directors.
S-10
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EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995, AND 1994
NOTE 6. LEASES
Real Estate:
The Company shares office space with its parent company and pays to them, on a
month to month basis, approximately $4,000 per month for the use of office
space and equipment. In addition, the Company leases its conversion facilities
and a fuel station location under noncancellable leases with terms from one to
three years. The Company also has a sublease on one of its conversion
facilities, from which it receives $4,500 per month through January, 1997.
For the years ended August 31, 1996, 1995 and 1994, the Company incurred rent
expense of $141,996, $140,549 and $91,626, respectively and received sublease
rental income of $58,500 in 1996 and $6,750 in 1995. As of August 31, 1996,
future minimum rentals under all noncancellable real estate leases, are as
follows:
1997 $ 69,802
1998 34,400
1999 22,500
----------
Future minimum rentals 126,702
Less sublease income (22,500)
----------
Net future minimum rentals $ 104,202
==========
Capitalized Equipment Leases:
The Company leases certain equipment located at its conversion facilities under
leases accounted for as capital leases. As of August 31, 1996, future minimum
rentals under all capital leases are as follows:
1997 $ 28,211
1998 24,829
1999 8,926
--------
Total minimum rentals 61,966
Less amount representing interest,
executory costs and profit (12,230)
--------
Present value of capital lease obligations $ 49,736
========
S-11
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EXPROFUELS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996, 1995, AND 1994
NOTE 7. FEDERAL INCOME TAXES
The Company began operating as a corporation on August 15, 1996; accordingly,
its tax attributes began on that date. From August 15, 1996 through August 31,
1996, the Company incurred a financial and tax loss of approximately $27,000.
Deferred taxes are as follows at August 31, 1996:
Deferred tax assets:
Net operating loss carryforwards $ 27,000
Statutory tax rate 34%
--------
Net deferred tax asset 9,180
Less valuation allowance (9,180)
--------
Deferred income tax asset recorded $ -0-
========
The net operating loss carryforward of $27,000 expires in 2111.
NOTE 8. RELATED PARTY TRANSACTION
On August 31, 1996, 10% of the outstanding common stock of the Company was
given as consideration for services rendered to the Directors of ExproFuels,
Inc.
Subsequent to year end, TXCO advanced the Company $40,000.
NOTE 9. MAJOR CUSTOMERS
Amounts sold to major customers are as follows:
Customer 1996 1995 1994
------------ ------------ ------------ --------
A $ 259,438 $ - $ -
B 86,110 110,612 -
C 83,663 60,820 231,184
D 42,356 208,938 -
E - 62,227 183,941
S-12
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EXPROFUELS, INC.
SCHEDULE II - VALUATION AND QUALIFYING RESERVES
FOR THE THREE YEARS ENDED AUGUST 31, 1996
Balance Charges to Balance
Beginning Costs and End of
of Period Expense Write-offs Period
----------- ----------- -------------- ----------
YEAR ENDED AUGUST 31, 1996
Allowance for doubtful accounts -
trade accounts $ - $ 35,000 $ - $ 35,000
=========== ======== ========== ========
YEAR ENDED AUGUST 31, 1995
Allowance for doubtful accounts -
trade accounts $ - $ - $ - $ -
=========== ======== ========== ========
YEAR ENDED AUGUST 31, 1994
Allowance for doubtful accounts -
trade accounts $ - $ - $ - $ -
=========== ======== ========== ========
S-13