pei_10q-093007.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended September 30, 2007
o
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from ______ to _______
Commission
File Number: 000-21467
PACIFIC
ETHANOL, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction
of
incorporation or organization)
|
41-2170618
(I.R.S.
Employer
Identification
No.)
|
400
Capitol Mall, Suite 2060, Sacramento,
California 95814
(Address
of principal executive offices)
(916)
403-2123
(Registrant’s
telephone number, including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes |X|
No
| |
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer x
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As
of
November 8, 2007, there were 40,604,714 shares of Pacific Ethanol, Inc. common
stock, $0.001 par value per share, outstanding.
PART
I
FINANCIAL
INFORMATION
|
Page
|
Item
1. Financial Statements
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2007 (Unaudited) and December
31,
2006
|
F-1
|
|
|
Consolidated
Statements of Operations for the Three and Nine Months Ended September
30,
2007 and 2006 (Unaudited)
|
F-3
|
|
|
Consolidated
Statements of Comprehensive Income (Loss) for the Three and Nine
Months
Ended September 30, 2007 and 2006 (Unaudited)
|
F-4
|
|
|
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30,
2007 and
2006 (Unaudited)
|
F-5
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
F-7
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
|
2
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
|
12
|
|
|
Item
4. Controls and Procedures.
|
13
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
Item
1. Legal Proceedings.
|
15
|
|
|
Item
1A. Risk Factors
|
16
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
|
16
|
|
|
Item
3. Defaults Upon Senior Securities.
|
17
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders.
|
17
|
|
|
Item
5. Other Information.
|
17
|
|
|
Item
6. Exhibits.
|
17
|
|
|
Signatures
|
18
|
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
|
|
September
30,
|
|
|
December
31,
|
|
ASSETS
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
*
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
10,290
|
|
|
$ |
44,053
|
|
Investments
in marketable securities
|
|
|
19,177
|
|
|
|
39,119
|
|
Accounts
receivable, net
|
|
|
22,767
|
|
|
|
29,322
|
|
Restricted
cash
|
|
|
2,295
|
|
|
|
1,567
|
|
Inventories
|
|
|
25,349
|
|
|
|
7,595
|
|
Prepaid
expenses
|
|
|
1,218
|
|
|
|
1,053
|
|
Prepaid
inventory
|
|
|
4,122
|
|
|
|
2,029
|
|
Other
current assets
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
|
|
|
Property
and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
42,949
|
|
|
|
24,851
|
|
Deposits
and advances
|
|
|
67
|
|
|
|
9,040
|
|
Goodwill
|
|
|
85,307
|
|
|
|
85,307
|
|
Intangible
assets, net
|
|
|
6,551
|
|
|
|
10,155
|
|
Other
assets
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
|
|
|
$ |
|
|
_______________
* Amounts
derived from the audited financial statements for the year ended December 31,
2006.
See
accompanying notes to consolidated financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(in
thousands, except par value and shares)
|
|
September
30,
|
|
|
December
31,
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
*
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable – trade
|
|
$ |
26,698
|
|
|
$ |
8,959
|
|
Accrued
liabilities
|
|
|
3,821
|
|
|
|
3,129
|
|
Contract
retentions
|
|
|
6,193
|
|
|
|
—
|
|
Other
liabilities - related parties
|
|
|
4,258
|
|
|
|
9,422
|
|
Current
portion – notes payable
|
|
|
3,549
|
|
|
|
4,125
|
|
Derivative
instruments
|
|
|
4,478
|
|
|
|
97
|
|
Other
current liabilities
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
52,261
|
|
|
|
27,563
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
|
123,357
|
|
|
|
28,970
|
|
|
|
|
|
|
|
|
|
|
Construction-related
liabilities
|
|
|
42,949
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liability
|
|
|
1,091
|
|
|
|
1,091
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest in variable interest entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 10,000,000 shares authorized; 5,250,000
shares
issued and outstanding as of
September
30, 2007 and December 31, 2006
|
|
|
5
|
|
|
|
5
|
|
Common
stock, $0.001 par value; 100,000,000 shares authorized; 40,632,978
and
40,269,627 shares issued and
outstanding
as of September 30, 2007 and December 31,
2006, respectively
|
|
|
41
|
|
|
|
40
|
|
Additional
paid-in capital
|
|
|
401,436
|
|
|
|
397,535
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(1,810 |
) |
|
|
545
|
|
Accumulated
deficit
|
|
|
(102,541 |
) |
|
|
(99,680 |
) |
Total
stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
|
|
|
$ |
|
|
_______________
* Amounts
derived from the audited financial statements for the year ended December 31,
2006.
See
accompanying notes to consolidated financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited,
in thousands, except per share data)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
118,118
|
|
|
$ |
61,102
|
|
|
$ |
331,123
|
|
|
$ |
145,802
|
|
Cost
of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,759
|
|
|
|
7,448
|
|
|
|
31,221
|
|
|
|
13,081
|
|
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(1,161 |
) |
|
|
1,900
|
|
|
|
7,479
|
|
|
|
(210 |
) |
Other
income (loss), net
|
|
|
(998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before non-controlling interest in variable interest
entity
|
|
|
(2,159 |
) |
|
|
3,755
|
|
|
|
7,791
|
|
|
|
2,961
|
|
Non-controlling
interest in variable interest entity
|
|
|
(2,683 |
) |
|
|
|
|
|
|
(7,502 |
) |
|
|
|
|
Net
income (loss) before provision for income taxes
|
|
|
(4,842 |
) |
|
|
3,755
|
|
|
|
289
|
|
|
|
2,961
|
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(4,842 |
) |
|
|
3,755
|
|
|
|
289
|
|
|
|
2,961
|
|
Preferred
stock dividends
|
|
|
(1,050 |
) |
|
|
(1,050 |
) |
|
|
(3,150 |
) |
|
|
(1,948 |
) |
Deemed
dividend on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84,000 |
) |
Income
(loss) available to common stockholders
|
|
$ |
(5,892 |
) |
|
$ |
|
|
|
$ |
(2,861 |
) |
|
$ |
(82,987 |
) |
Net
income (loss) per share, basic
|
|
$ |
(0.15 |
) |
|
$ |
|
|
|
$ |
(0.07 |
) |
|
$ |
(2.49 |
) |
Net
income (loss) per share, diluted
|
|
$ |
(0.15 |
) |
|
$ |
|
|
|
$ |
(0.07 |
) |
|
$ |
(2.49 |
) |
Weighted-average
shares outstanding, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited,
in thousands)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(4,842 |
) |
|
$ |
3,755
|
|
|
$ |
289
|
|
|
$ |
2,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in the fair value of
derivatives, cash flow hedges
|
|
|
1,573
|
|
|
|
(758 |
) |
|
|
2,006
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on
available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$ |
(3,269 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
See
accompanying notes to consolidated financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited,
in thousands)
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
289
|
|
|
$ |
2,961
|
|
Adjustments
to reconcile net income to
cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of intangibles
|
|
|
12,816
|
|
|
|
711
|
|
Loss
on disposal of equipment
|
|
|
216
|
|
|
|
—
|
|
Amortization
of deferred financing fees
|
|
|
2,315
|
|
|
|
604
|
|
Non-cash
compensation expense
|
|
|
1,557
|
|
|
|
835
|
|
Non-cash
consulting expense
|
|
|
151
|
|
|
|
1,491
|
|
Loss
on derivatives
|
|
|
2,668
|
|
|
|
323
|
|
Bad
debt expense
|
|
|
48
|
|
|
|
103
|
|
Non-controlling
interest in variable interest entity
|
|
|
7,502
|
|
|
|
—
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
6,507
|
|
|
|
(10,698 |
) |
Restricted
cash
|
|
|
(728 |
) |
|
|
(1,784 |
) |
Notes
receivable, related party
|
|
|
—
|
|
|
|
136
|
|
Inventories
|
|
|
(17,754 |
) |
|
|
(5,364 |
) |
Prepaid
expenses and other assets
|
|
|
(2,060 |
) |
|
|
(10,041 |
) |
Prepaid
inventory
|
|
|
(2,093 |
) |
|
|
(37 |
) |
Increase
in derivative assets
|
|
|
—
|
|
|
|
(517 |
) |
Accounts
payable and accrued expenses
|
|
|
14,698
|
|
|
|
4,285
|
|
Accounts
payable and accrued expenses (related party)
|
|
|
(5,164 |
) |
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
|
|
|
|
(12,680 |
) |
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(137,046 |
) |
|
|
(57,639 |
) |
Proceeds
from sales of available-for-sale investments
|
|
|
19,593
|
|
|
|
2,750
|
|
Proceeds
from sale of equipment
|
|
|
10
|
|
|
|
—
|
|
Increase
in restricted cash designated for construction projects
|
|
|
(18,099 |
) |
|
|
(60,642 |
) |
Net
cash used in investing activities
|
|
|
(135,542 |
) |
|
|
(115,531 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from borrowing on long-term debt
|
|
|
87,500
|
|
|
|
—
|
|
Proceeds
from borrowing on lines of credit
|
|
|
14,005
|
|
|
|
—
|
|
Proceeds
from exercise of warrants and stock options
|
|
|
2,193
|
|
|
|
9,927
|
|
Cash
paid for debt issuance costs
|
|
|
(10,063 |
) |
|
|
(1,190 |
) |
Principal
payments paid on borrowings
|
|
|
(7,897 |
) |
|
|
—
|
|
Principal
payments paid on borrowings, related party
|
|
|
—
|
|
|
|
(3,600 |
) |
Proceeds
from sale of common stock, net
|
|
|
—
|
|
|
|
137,622
|
|
Proceeds
from sale of preferred stock, net
|
|
|
—
|
|
|
|
82,567
|
|
Dividends
paid on non-controlling interest in variable interest
entity
|
|
|
(2,827 |
) |
|
|
—
|
|
Preferred
share dividends paid
|
|
|
(2,100 |
) |
|
|
(898 |
) |
Net
cash provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(33,763 |
) |
|
|
96,217
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
|
|
|
$ |
|
|
See
accompanying notes to consolidated financial statements.
PACIFIC
ETHANOL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited,
in thousands)
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
|
|
|
$ |
|
|
Taxes
paid
|
|
$ |
|
|
|
$ |
|
|
Non-cash
financing and investing activities:
|
|
|
|
|
|
|
|
|
Capital
lease
|
|
$ |
|
|
|
$ |
|
|
Non-cash
additions to property and equipment
|
|
$ |
|
|
|
$ |
|
|
Preferred
stock dividend declared
|
|
$ |
|
|
|
$ |
|
|
Deemed
dividend on preferred stock
|
|
$ |
|
|
|
$ |
|
|
See
accompanying notes to consolidated financial statements.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
AND BASIS OF PRESENTATION.
Organization
and Business– The consolidated financial statements include the
accounts of Pacific Ethanol, Inc., a Delaware corporation (“Pacific Ethanol”),
and all of its wholly-owned subsidiaries, including Pacific Ethanol California,
Inc., a California corporation (“PEI California”), and Kinergy Marketing, LLC,
an Oregon limited liability company and, effective October 17, 2006, the
consolidated financial statements also include Front Range Energy, LLC, a
Colorado limited liability company (“Front Range”), a variable interest entity
of which Pacific Ethanol owns 42% and is the primary beneficiary (collectively,
the “Company”).
The
Company is engaged in the business of marketing and producing ethanol and its
co-products, including wet distillers grain (“WDG”).
Basis
of Presentation–Interim Financial
Statements –
The accompanying unaudited consolidated financial statements and related notes
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results
for interim periods should not be considered indicative of results for a full
year. These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006. Except as disclosed in Note 2 below, the accounting
policies used in preparing these consolidated financial statements are the
same
as those described in Note 1 to the consolidated financial statements in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2006. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair statement of the results for
interim periods have been included. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Activity
occurring during the three and nine months ended September 30, 2006 and
reflected in the consolidated statements of operations, consolidated statements
of comprehensive income (loss) and consolidated statements of cash flows does
not include the operations or transactions of Front Range, the Company’s
variable interest entity, as the Company did not obtain a variable interest
in
Front Range until October 17, 2006.
Reclassifications
of prior year’s data have been made to conform to 2007
classifications.
2. NEW
ACCOUNTING STANDARDS.
The
disclosure requirements and cumulative effect of adopting Financial Accounting
Standards Board (“FASB”) Interpretation No. (“FIN”) 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109, are presented in Note 8.
In
September 2006, the FASB issued FASB Staff Position (“FSP”) AUG AIR-1,
Accounting for Planned Major Maintenance Activities. The principal
source of guidance on the accounting for planned major maintenance activities
is
the Airline Guide. The Airline Guide permitted four alternative methods of
accounting for planned major maintenance activities: direct expense,
built-in overhaul, deferral and accrual (accrue-in-advance). FSP AUG AIR-1
amended the Airline Guide by prohibiting the use of the accrue-in-advance method
of accounting for planned major maintenance activities in annual and interim
financial reporting periods. The Company adopted the direct expense method
of
accounting for major maintenance activities on January 1, 2007 and did not
have
a material effect on its consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value Measurements. This new statement provides
a single definition of fair value, together with a framework for measuring
it,
and requires additional disclosure about the use of fair value to measure assets
and liabilities. SFAS No. 157 also emphasizes that fair value is a market-based
measurement, not an entity-specific measurement, and sets out a fair value
hierarchy with the highest priority being quoted prices in active markets.
The
required effective date of SFAS No. 157 is the first quarter of 2008. The
provisions of SFAS No. 157 will be applied prospectively to fair value
measurements and disclosures beginning in the first quarter of
2008.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 permits an entity
to irrevocably elect fair value on a contract-by-contract basis as the initial
and subsequent measurement attribute for many financial assets and liabilities
and certain other items including insurance contracts. Entities electing the
fair value option would be required to recognize changes in fair value in
earnings and to expense upfront costs and fees associated with the item for
which the fair value option is elected. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted as of
the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of SFAS No. 157. The fair value
measurement election is irrevocable and subsequent changes in fair value must
be
recorded in earnings.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. MARKETABLE
SECURITIES.
The
cost,
gross unrealized gains (losses) and fair value of available-for-sale securities
by security type were as follows (in thousands):
|
|
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized (Losses)
|
|
|
Fair
Value
|
|
September
30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
marketable securities
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total
marketable securities
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$ |
27,651
|
|
|
$ |
349
|
|
|
$ |
—
|
|
|
$ |
28,000
|
|
Short-term
marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
marketable securities
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
4. INVENTORIES.
Inventories
consist primarily of bulk ethanol, unleaded fuel and corn, and are valued at
the
lower-of-cost-or-market, with cost determined on a first-in, first-out basis.
Inventory balances consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
11,616
|
|
|
$ |
3,709
|
|
Work
in progress
|
|
|
1,782
|
|
|
|
873
|
|
Finished
goods
|
|
|
10,978
|
|
|
|
2,452
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
|
|
5. GOODWILL
AND
OTHER INTANGIBLE ASSETS.
The
Company performed its annual review of impairment of goodwill under SFAS No.
142, Goodwill and Other Intangible Assets, as of March 31,
2007. The Company did not recognize any impairment losses to previously recorded
goodwill or intangible assets as a result of its annual review.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. NOTES
PAYABLE.
The
following table summarizes the Company’s long term borrowings and capital lease
obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
rate, secured construction/term loan due 2015
|
|
$ |
87,500
|
|
|
$ |
—
|
|
Variable
rate, secured term loans due 2011
|
|
|
24,289
|
|
|
|
31,882
|
|
Lines
of credit
|
|
|
14,005
|
|
|
|
—
|
|
Capital
lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
126,906
|
|
|
|
33,095
|
|
Less
short-term portion of long-term debt
|
|
|
(3,549 |
) |
|
|
(4,125 |
) |
Notes
payable
|
|
$ |
|
|
|
$ |
|
|
Debt
Financing –On February 27, 2007, the Company closed a
debt financing transaction in the aggregate amount of up to $325,000,000 through
certain of its wholly-owned indirect subsidiaries (the “Borrowers”). The primary
purpose of the debt financing (the “Debt Financing”) is to provide debt
financing for the development, construction, installation, engineering,
procurement, design, testing, start-up, operation and maintenance of five
ethanol production facilities. As of September 30, 2007, the outstanding balance
under the Debt Financing was $92,500,000, comprised of $87,500,000 in
construction loans and $5,000,000 in used lines of credit.
The
Debt
Financing includes:
|
·
|
five
construction loan facilities in an aggregate amount of up to
$300,000,000. Loans made under the construction loan facilities
do not amortize, but require payment of accrued interest, and are
fully
due and payable on the earlier of October 27, 2008 or the date the
construction loans made thereunder are converted into term loans
(the
“Conversion Date”), the latter of which is to be the date the last of the
five plants achieves commercial operations. On the Conversion Date,
the
construction loans are to be converted into term
loans;
|
|
·
|
five
term loan facilities in an aggregate amount of up to $300,000,000,
which
are intended to refinance the loans made under the construction loan
facilities. The term loans are to be repaid ratably by each
Borrower on a quarterly basis from and after the Conversion Date
in an
amount equal to 1.5% of the aggregate original principal amount of
the
corresponding term loan. The remaining principal balance and
all accrued and unpaid interest on the term loans are fully due and
payable on the date that is 84 months after the Conversion
Date; and
|
|
·
|
a
working capital and letter of credit facility in an aggregate amount
of up
to $25,000,000 ($5,000,000 per facility) that is fully due and payable
on
the date that is 12 months after the Conversion Date, but is expected
to
be renewed on similar terms and conditions. During the term of
the working capital and letter of credit facility, the Borrowers
may
borrow, repay and re-borrow amounts available under the
facility.
|
Loans
and
letters of credit under the Debt Financing are subject to conditions precedent,
including, among others, the absence of a material adverse effect; the absence
of defaults or events of defaults; the accuracy of certain representations
and
warranties; the maintenance of a debt-to-equity ratio that is not in excess
of
65:35; the contribution of all required equity by the Company to the Borrowers,
which is expected to be approximately $218,800,000 in the aggregate; and the
attainment of at least a 1.5-to-1.0 debt service coverage ratio. Also, the
Borrowers may not be able to fully utilize the Debt Financing if the completed
ethanol plants fail to meet certain minimum performance
standards. Loans made under the construction and term loan facilities
may not be re-borrowed once repaid or re-borrowed once prepaid. Finally, loan
amounts under the construction and term loan facilities are limited to a
percentage of project costs of the corresponding plant but are not to exceed
approximately $1.15 per gallon of annual production capacity of the
plant.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Borrowers have the option to select from multiple interest rates that float
with
common interest rate indices, such as the LIBOR, with reset periods of differing
durations. Depending upon the floating interest rate selected, the
type of loan and whether the loan is made under a construction loan facility,
a
term loan facility or the working capital and letter of credit facility, loans
under the Debt Financing bear interest at rates ranging from 2.25% to 4.35%
over
the selected interest rate index.
In
addition to scheduled principal payments, starting after the Conversion Date,
the term loan facilities require mandatory repayments of principal in amounts
based on the Borrowers’ free cash flow. The percentage of the Borrowers’ free
cash flow to be applied to principal repayments is to vary from 50% in the
first
two years following the Conversion Date to 75-100% in succeeding years, based
upon repayment amounts measured against targeted balances.
Borrowings
and the Borrowers’ obligations under the Debt Financing are secured by a
first-priority security interest in all of the equity interests in the Borrowers
and substantially all the assets of the Borrowers. The security interests
granted by the Borrowers under the Debt Financing restrict the assets and
revenues of the Borrowers and therefore may inhibit the Company’s ability to
obtain other debt financing. The Borrowers are subject to certain financial
and
other covenants, with which the Company believes they are in compliance as
of
September 30, 2007.
In
connection with the Debt Financing, the Company also entered into a Sponsor
Support Agreement under which the Company is to provide limited contingent
equity support in connection with the development, construction, installation,
engineering, procurement, design, testing, start-up and maintenance of the
five
ethanol production facilities. In particular, the Company has agreed
to contribute to the Borrowers up to an aggregate of approximately $42,400,000
(the “Sponsor Funding Cap”) of contingent equity in the event the Borrowers have
insufficient funds to either pay their project costs as they become due and
payable or, by delay in payment, cause the ethanol production facilities to
fail
to be completed by the Conversion Date. The Company has agreed to
provide a warranty with respect to all ethanol plants other than its Madera
facility, which is under standard warranty through the
contractor. The warranty obligations of the Company with respect to
the other four facilities extend one year beyond final completion of each
facility. The warranty obligation will cease one year from the date
the fifth ethanol plant achieves final completion. The Company’s
obligations under the warranty are capped at the Sponsor Funding Cap. Until
the
Company’s contingent equity obligations have been fully performed or the
warranty period has expired, the Company may not incur any secured indebtedness
for borrowed money, grant liens on its assets or provide any secured credit
enhancements in an aggregate amount in excess of $10,000,000 unless the Company
provides the lenders under the Debt Financing with the same liens or credit
support.
The
Company incurred $10,699,000 of costs associated with the completion of the
Debt
Financing arrangement and has capitalized these costs in other assets, except
the portion amortizing during the next twelve months, which is classified in
other current assets. These costs are being amortized over a six year
life.
Operating
Line of Credit Facility– In addition to the Debt Financing, in August
2007, a subsidiary of the Company entered into an operating line of credit
facility that allows for borrowings not to exceed the lesser of $25,000,000
or
the sum of 80% of eligible accounts receivable and 70% of eligible inventory
of
the subsidiary. Advances under the operating line of credit bear interest at
spreads typical in the industry for this type of financing over standard
indices, such as the prime rate and/or LIBOR. Interest payments are due monthly
or at the applicable LIBOR period. As of September 30, 2007, the
outstanding balance under the line of credit was $9,005,000 and incurred
interest at two separate variable interest rates ranging from 6.48% to
7.25%. The line of credit expires in July 2009, at which time
the outstanding balance becomes due and payable. Borrowings under the line
of
credit are secured by substantially all of the assets of the subsidiary and
are
also secured by a limited guaranty by the Company. Under the terms of
the line of credit, the subsidiary is required to maintain certain financial
and
non-financial covenants; the financial covenants become effective beginning
the
quarter ending December 31, 2007. The Company believes that the subsidiary
is in
compliance with the required covenants as of September 30,
2007.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Construction
and Term Loan Financing– On April 13, 2006, the Company entered into a
Construction and Term Loan Agreement with TD BankNorth, N.A. and Comerica Bank
for debt financing in the aggregate amount of up to approximately $34,000,000.
In December 2006, the Company paid $1,000,000 to amend this agreement to extend
the termination date through the end of February 2007. In February 2007, this
debt financing was unused and terminated.
7. CONSTRUCTION-RELATED
LIABILITIES.
Construction-related
liabilities comprise unpaid invoices and accrued expenses for plant construction
that will be paid out of the Company’s noncurrent restricted cash balance, which
was $42,949,000 as of September 30, 2007 and $3,031,000 as of December 31,
2006.
8. STOCK-BASED
COMPENSATION.
The
Company has three equity incentive compensation plans: an Amended 1995 Incentive
Stock Plan, a 2004 Stock Option Plan and a 2006 Stock Incentive
Plan.
Total
stock-based compensation expense related to SFAS No. 123 (Revised 2004),
Share-Based Payments, included in selling, general and administrative
expenses was $493,000 and $1,124,000 for the three months ended September 30,
2007 and 2006, respectively, and $1,708,000 and $2,326,000 for the nine months
ended September 30, 2007 and 2006, respectively. These compensation expenses
were charged to selling, general and administrative expenses. As of September
30, 2007, $6,909,000 of compensation cost attributable to future services
related to plan awards that are probable of being achieved had not yet been
recognized. This amount will be recognized as expense over a
weighted-average period of 3.74 years.
The
Company’s accounting for income taxes is based on an asset and liability
approach. The Company recognizes the amount of taxes payable or
refundable for the current year, and deferred tax assets and liabilities for
the
future tax consequences that have been recognized in its financial statements
or
tax returns. The measurement of tax assets and liabilities is based
on the provisions of enacted tax laws.
The
effective tax rate for the three and nine months ended September 30, 2007 was
0.0% and remained constant with the effective tax rates for the three and nine
months ended September 30, 2006 of 0.0%. The provision for income
taxes for all periods presented is primarily attributable to the cumulative
tax
net operating losses that the Company has generated in the prior periods for
which a valuation allowance has been established under the rules of SFAS
No. 109, Accounting for Income Taxes.
The
Company adopted the provisions of FIN 48 on January 1, 2007. As of the date
of
adoption, the Company had no unrecognized income tax benefits. Accordingly,
the
annual effective tax rate was not affected by the adoption of FIN 48.
Unrecognized tax benefits are not expected to increase or decrease within the
next twelve months as a result of the anticipated lapse of an applicable statute
of limitations. Interest and penalties related to unrecognized income tax
benefits will be accrued in interest expense and operating expense,
respectively. The Company has not accrued interest or penalties as of the date
of adoption because they are not applicable.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company may be audited by applicable federal and state taxing authorities in
the
following income tax jurisdictions in which the Company previously filed or
expects to file income tax returns for the years indicated:
|
Jurisdiction
|
Tax
Years
|
|
Federal
|
2003
– 2006
|
|
California
|
2002
– 2006
|
|
Oregon
|
2006
|
|
Colorado
|
2006
|
|
Idaho
|
2006
|
However,
because the Company had net operating losses and credits carried forward in
several of the jurisdictions including federal and California, certain items
attributable to closed tax years are still subject to adjustment by applicable
taxing authorities through an adjustment to tax attributes carried forward
to
open years.
The
following table computes basic and diluted earnings per share (in thousands,
except per share data):
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(4,842 |
) |
|
|
|
|
|
|
Less: Preferred
stock dividends
|
|
|
(1,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
$ |
(5,892 |
) |
|
|
|
|
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
$ |
(5,892 |
) |
|
|
|
|
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,755
|
|
|
|
|
|
|
|
|
|
Less: Preferred
stock dividends
|
|
|
(1,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of outstanding options and warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders, including assumed
conversions
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
289
|
|
|
|
|
|
|
|
Less: Preferred
stock dividends
|
|
|
(3,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
$ |
(2,861 |
) |
|
|
|
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders, including assumed
conversions
|
|
$ |
(2,861 |
) |
|
|
|
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,961
|
|
|
|
|
|
|
|
|
|
Less: Actual
and deemed preferred stock dividends
|
|
|
(85,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
$ |
(82,987 |
) |
|
|
|
|
|
$ |
(2.49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders, including assumed
conversions
|
|
$ |
(82,987 |
) |
|
|
|
|
|
$ |
(2.49 |
) |
11. COMMITMENTS
AND CONTINGENCIES.
Commitments–
The following is a description of significant commitments at September 30,
2007:
Purchase
Commitments– At September 30, 2007, the Company had purchase contracts with
its suppliers to purchase certain quantities of ethanol, corn, natural gas
and
denaturant. Outstanding balances on fixed-price contracts for the
purchases of materials are indicated below and volumes indicated in the
indexed-price table are additional purchase commitments at publicly-indexed
sales prices determined by market prices in effect on their respective
transaction dates (in thousands):
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
Ethanol
|
|
$ |
65,431
|
|
Corn
|
|
|
7,446
|
|
Natural
gas
|
|
|
3,728
|
|
Denaturant
|
|
|
|
|
Total
|
|
$ |
|
|
|
Indexed-Price
Contracts
(Volume)
|
Ethanol
|
11,525
gallons
|
Corn
|
5,240 bushels
|
Denaturant
|
293 gallons
|
Sales
Commitments– At September 30, 2007, the Company had entered into sales
contracts with customers to sell certain quantities of ethanol and
WDG. The volumes indicated in the indexed-price contracts table are
additional committed sales and will be sold at publicly-indexed sales prices
determined by market prices in effect on their respective transaction dates
(in
thousands):
|
|
|
|
Ethanol
|
|
$ |
40,647
|
|
Wet
distillers grain
|
|
|
11,529
|
|
Total
|
|
$ |
|
|
|
Indexed-Price
Contracts
(Volume)
|
Ethanol
|
64,889
gallons
|
Carbon
Dioxide Plant– On April 4, 2007, the Company entered into a long-term
agreement to sell substantially all the carbon dioxide gas (“CO2”) produced
by the
Company’s Madera ethanol production facility to a third party. Under this
agreement the Company will modify its Madera plant, at a cost of approximately
$1,500,000, to capture and further process CO2 for delivery
to the
third party. The agreement calls for the third party to reimburse the Company
for its capital investment through a recovery fee included in the agreed upon
sales price and has a take or pay component which requires the third party
to
purchase, or if it does not purchase, pay for a minimum quantity of raw CO2. The agreement
has
a fifteen year term and will automatically renew for successive five year
periods unless terminated by either party.
Capital
Commitments– As of September 30, 2007, contractual construction commitments
for ethanol processing facilities for the remainder of 2007 and for 2008 were
$104,702,000 and $79,682,000, respectively.
Contingencies–
The following is a description of significant contingencies at September 30,
2007:
Litigation
– General – The Company is 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 the Company’s 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 the Company’s
financial position, results of operations or cash flows.
Litigation
– Barry Spiegel – State Court Action– On December 23, 2005, Barry J.
Spiegel, a former shareholder and director of the Company’s predecessor,
Accessity Corp. (“Accessity”), filed a complaint in the Circuit Court of the
17th Judicial District in and for Broward County, Florida (Case No. 05018512)
(the “State Court Action”) against Barry Siegel, Philip Kart, Kenneth Friedman
and Bruce Udell (collectively, the “Individual Defendants”). Messrs. Siegel,
Udell and Friedman are former directors of Accessity and Pacific Ethanol. Mr.
Kart is a former executive officer of Accessity and the Company. The State
Court
Action relates to a share exchange transaction (“Share Exchange Transaction”)
among Accessity, Pacific Ethanol and two other entities, and purports to state
the following five counts against the Individual Defendants: (i)
breach of fiduciary duty, (ii) violation of the Florida Deceptive and Unfair
Trade Practices Act, (iii) conspiracy to defraud, (iv) fraud, and (v) violation
of Florida’s Securities and Investor Protection Act. Mr. Spiegel bases his
claims on allegations that the actions of the Individual Defendants in approving
the Share Exchange Transaction caused the value of his Accessity common stock
to
diminish and is seeking approximately $22,000,000 in damages. On March 8, 2006,
the Individual Defendants filed a motion to dismiss the State Court Action.
Mr.
Spiegel filed his response in opposition on May 30, 2006. The Court granted
the
motion to dismiss by Order dated December 1, 2006 (the “Order”), on the grounds
that, among other things, Mr. Spiegel failed to bring his claims as a
derivative action.
On
February 9, 2007, Mr. Spiegel filed an amended complaint which purports to
state
the following five counts: (i) breach of fiduciary duty, (ii) fraudulent
inducement, (iii) violation of Florida’s Securities and Investor Protection Act,
(iv) fraudulent concealment, and (v) breach of fiduciary duty of disclosure.
The
amended complaint includes the Company as a defendant. The breach of fiduciary
duty counts are alleged solely against the Individual Defendants and not the
Company. On June 19, 2007, the Company filed a motion to dismiss the amended
complaint. The Court denied the motion to dismiss the amended complaint by
order
dated July 31, 2007. Mr. Spiegel, however, voluntarily dismissed without
prejudice the case against the Company on August 27, 2007, and therefore the
Company is no longer a party to the state action.
Litigation
– Barry Spiegel – Federal Court Action– On December 22, 2006, Barry J.
Spiegel, filed a complaint in the United States District Court, Southern
District of Florida (Case No. 06-61848) (the “Federal Court Action”) against the
Individual Defendants and the Company. The Federal Court Action relates to
the
Share Exchange Transaction and purports to state the following three counts:
(i)
violations of Section 14(a) of the Securities Exchange Act of 1934 and Rule
14a-9 promulgated thereunder, (ii) violations of Section 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder, and (iii) violation of Section 20(A)
of the Exchange Act. The first two counts are alleged against the Individual
Defendants and the Company and the third count is alleged solely against the
Individual Defendants. Mr. Spiegel bases his claims on, among other things,
allegations that the actions of the Individual Defendants and the Company in
connection with the Share Exchange Transaction resulted in a share exchange
ratio that was unfair and resulted in the preparation of a proxy statement
seeking shareholder approval of the Share Exchange Transaction that contained
material misrepresentations and omissions. Mr. Spiegel is seeking in excess
of
$15,000,000 in damages. Mr. Spiegel amended the Federal Court Action on
February 9, 2007 and then sought to stay his own federal case, but the
Motion was denied on July 17, 2007. Mr. Spiegel filed his reply to the Company’s
Motion to Dismiss and that Motion remains pending. The Company intends to
vigorously defend the Federal Court Action.
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Litigation
– Mercator– In 2003, the Company filed a lawsuit seeking damages in excess
of $100,000,000 against: (i) Presidion Corporation, f/k/a MediaBus Networks,
Inc., the parent corporation of Presidion Solutions, Inc. (“Presidion”), (ii)
Presidion’s investment bankers, Mercator Group, LLC (“Mercator”) and various
related and affiliated parties, and (iii) Taurus Global LLC (“Taurus”)
(collectively referred to as the “Mercator Action”), alleging that these parties
committed a number of wrongful acts, including, but not limited to tortiously
interfering in a transaction between the Company and Presidion. In 2004, the
Company dismissed this lawsuit without prejudice, which was filed in Florida
state court. In January 2005, the Company refiled this action in the State
of
California, for a similar amount, as the Company believes that to be the proper
jurisdiction. On August 18, 2005, the court stayed the action and ordered the
parties to arbitration. The parties agreed to mediate the matter. Mediation
took
place on December 9, 2005 and was not successful. On December 5, 2005, the
Company filed a Demand for Arbitration with the American Arbitration
Association. On April 6, 2006, a single arbitrator was appointed.
Arbitration hearings have been scheduled to commence in July 2007. In April
2007, the arbitration proceedings were suspended due to non-payment of
arbitration fees by Presidion and Taurus. As a result of non-payment of
arbitration fees, a default order was entered against Taurus by the Los Angeles
Superior Court. In July, 2007, the Company entered into a
confidential settlement agreement with Presidion and its former
officers. On July 23, 2007, the Company dismissed Presidion from the
arbitration. On July 23, 2007, Taurus filed a Voluntary Petition for Chapter
7
Bankruptcy in the United States District Court, Central District of California,
Case Number SV07-12547 GM. The Company continues to prosecute the arbitration
proceedings against Mercator. The arbitration hearings are presently scheduled
to be held in February 2008. The share exchange agreement relating to the Share
Exchange Transaction provides that following full and final settlement or other
final resolution of the Mercator Action, after deduction of all fees and
expenses incurred by the law firm representing the Company in this action and
payment of the 25% contingency fee to the law firm, shareholders of record
of
Accessity on the date immediately preceding the closing date of the Share
Exchange Transaction will receive two-thirds and the Company will retain the
remaining one-third of the net proceeds from any Mercator Action
recovery.
Commodity
Risk– Cash Flow Hedges– The Company uses
derivative instruments to protect cash flows from fluctuations caused by
volatility in commodity prices for periods of up to twelve months to protect
gross profit margins to reduce the potentially adverse effects of market
volatility. For the three months ended September 30, 2007, gains from
ineffectiveness in the amount of $2,381,000 and an effective loss in the amount
of $898,000 were recorded in cost of goods sold. For the three months
ended September 30, 2006, losses from ineffectiveness in the amounts of $29,000
and $298,000 were recorded in cost of goods sold and other income, respectively,
and an effective gain in the amount of $339,000 was recorded in net
sales. For the nine months ended September 30, 2007, gains from
ineffectiveness in the amount of $3,894,000 and an effective loss in the amount
of $2,008,000 were recorded in cost of goods sold. For the nine months ended
September 30, 2006, losses from ineffectiveness in the amounts of $11,000 and
$110,000 were recorded in cost of goods sold and other income, respectively,
and
an effective gain in the amount of $1,057,000 was recorded in net sales. Amounts
remaining in accumulated other comprehensive income (loss) will be reclassified
to earnings upon the recognition of the related purchase or sale. Accumulated
other comprehensive gain in the amount of $151,000 associated with commodity
cash flow hedges is expected to be recognized in income over the next twelve
months. The fair value notional balances remaining on these derivatives as
of
September 30, 2007 and December 31, 2006 were $15,157,000 and $11,588,000,
respectively.
Commodity
Risk– Non-Designated Derivatives –
As part of the Company’s risk management strategy, the
Company uses forward
contracts on corn, crude oil and reformulated blendstock for oxygenate blending
gasoline to lock in the price for certain amounts of corn, denaturant and
ethanol, respectively. These derivatives are not designated under
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, for special hedge accounting treatment. The changes
in fair value of these contracts are recorded on the balance sheet and
recognized immediately in earnings. The Company recognized a loss of
$3,092,000 (of which $1,526,000 is related to settled non-designated hedges)
and
$0 as the change in the fair value of these contracts for the three months
ended
September 30, 2007 and 2006, respectively. The Company recognized a
loss of $6,339,000 (of which $2,504,000 is related to settled non-designated
hedges) and $0 as the change in the fair value of these contracts for the nine
months ended September 30, 2007 and 2006, respectively.
Interest
Rate Risk– The Company uses derivative instruments to minimize
significant unanticipated earnings fluctuations that may arise from rising
variable interest rate costs associated with existing and anticipated
borrowings. For the three months ended September 30, 2007 and 2006,
losses from ineffectiveness in the amount of $1,528,000 and $38,000 and
effective losses of $19,000 and $0, respectively, were recorded in other income
(expense). For the nine months ended September 30, 2007 and 2006,
losses from ineffectiveness in the amount of $896,000 and $29,000 and effective
losses of $125,000 and $0, respectively were recorded in other income
(expense).
The
Company marked its derivative instruments to fair value at each period end,
except for those derivative contracts that qualified for the normal purchase
and
sale exemption under SFAS No. 133. According to the Company’s designation of the
derivatives, changes in the fair value of derivatives are reflected in earnings
or accumulated other comprehensive income.
Accumulated
Other Comprehensive Income– Accumulated other comprehensive
income relative to derivatives was as follows (in thousands):
|
|
Commodity
Derivatives
|
|
|
Interest
Rate
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2007
|
|
$ |
461
|
|
|
$ |
(265 |
) |
Net
changes
|
|
|
(2,318 |
) |
|
|
(1,821 |
) |
Less: Amount
reclassified to cost of goods sold
|
|
|
(2,008 |
) |
|
|
—
|
|
Less: Amount
reclassified to other income (expense)
|
|
|
|
|
|
|
(125 |
) |
Ending
balance, September 30, 2007
|
|
$ |
|
|
|
$ |
(1,961 |
) |
—————
*Calculated
on a pretax basis
PACIFIC
ETHANOL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
estimated fair values of the Company’s derivatives as of September 30, 2007 and
December 31, 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
futures
|
|
$ |
(1,570 |
) |
|
$ |
329
|
|
Interest
rate swaps
|
|
|
(2,649 |
) |
|
|
|
|
Total
|
|
$ |
(4,219 |
) |
|
$ |
|
|
13. RELATED
PARTY
TRANSACTIONS.
During
2006, the Company signed a sales contract at market terms with an entity which
at the time was owned by a member of the Company’s Board of Directors. The
contracts were in effect after the beginning of the year and expired on March
31, 2007. The Company recorded sales of $0 and $6,039,000 for the
three and nine months ended September 30, 2007 and $3,400,000 and $11,985,000
for the three and nine months ended September 30, 2006, respectively, related
to
these contracts.
In
2006,
the Company entered into an agreement with a construction company to build
an
ethanol production facility in Madera County, California. An officer of the
construction company was a former member of the board of directors of PEI
California. The Company had outstanding liabilities to the construction company
in the amount of $4,258,000 as of September 30, 2007.
On
November 2, 2007, as a result of the Company’s completion of the Boardman plant,
the restricted cash balance of $42,949,000 was
released. Additionally, the Company received a draw on the Debt
Financing of $8,205,000.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and notes to consolidated financial statements
included elsewhere in this report. This report and our consolidated financial
statements and notes to consolidated financial statements contain
forward-looking statements, which generally include the plans and objectives
of
management for future operations, including plans and objectives relating to
our
future economic performance and our current beliefs regarding revenues we might
generate and profits we might earn if we are successful in implementing our
business and growth strategies. The forward-looking statements and associated
risks may include, relate to or be qualified by other important factors,
including, without limitation:
|
·
|
fluctuations
in the market price of ethanol and its
co-products;
|
|
·
|
the
projected growth or contraction in the ethanol and co-product markets
in
which we operate;
|
|
·
|
our
strategies for expanding, maintaining or contracting our presence
in these
markets;
|
|
·
|
our
ability to successfully develop, finance, construct and operate our
planned ethanol production
facilities;
|
|
·
|
anticipated
trends in our financial condition and results of operations;
and
|
|
·
|
our
ability to distinguish ourselves from our current and future
competitors.
|
We
do not
undertake to update, revise or correct any forward-looking
statements.
Any
of
the factors described above or in the “Risk Factors” section of our Annual
Report on Form 10-K for the year ended December 31, 2006, could cause our
financial results, including our net income or loss or growth in net income
or
loss to differ materially from prior results, which in turn could, among other
things, cause the price of our common stock to fluctuate
substantially.
Overview
Our
primary goal is to become the leading marketer and producer of low carbon
renewable fuels in the Western United States.
We
produce and sell ethanol and its co-products and provide transportation, storage
and delivery of ethanol through third-party service providers in the Western
United States, primarily in California, Nevada, Arizona, Oregon and Colorado.
We
have extensive customer relationships throughout the Western United States
and
extensive supplier relationships throughout the Western and Midwestern United
States.
Our
customers are integrated oil companies and gasoline marketers who blend ethanol
into gasoline. We supply ethanol to our customers either from our own ethanol
production facilities located within the regions we serve, or with ethanol
procured in bulk from other producers. In some cases, we have marketing
agreements with other ethanol producers to market all of the output of their
facilities. Additionally, we have customers who purchase our
co-products for animal feed.
In
October 2006, we achieved commercial operations of an ethanol production
facility with an annual production capacity of approximately 40 million gallons
located in Madera, California. In October 2006, we also acquired approximately
42% of the outstanding membership interests of Front Range Energy, LLC, or
Front
Range, which owns and operates an ethanol production facility with an
annual production capacity of approximately 50 million gallons located in
Windsor, Colorado. In September 2007, we achieved commercial operations of
our
second ethanol production facility with an annual production capacity of
approximately 40 million gallons located in Boardman, Oregon. In addition,
we
have three additional facilities at various stages of
construction. We also intend to construct or otherwise
acquire additional ethanol production facilities as financial resources and
business prospects make the construction or acquisition of these facilities
advisable.
In
2006,
total annual gasoline consumption in the United States was approximately 140
billion gallons. Total annual ethanol consumption currently represents less
than
4% of annual gasoline consumption, or approximately 5.6 billion gallons of
ethanol. We believe that the domestic ethanol industry has substantial potential
for growth to reach what we estimate is an achievable level of at least 10%
of
the total annual gasoline consumption in the United States, or approximately
14
billion gallons of ethanol. In California alone, an increase in the consumption
of ethanol from California’s current level of 5.7%, or approximately 1.0 billion
gallons of ethanol per year, to at least 10% of total annual gasoline
consumption would result in consumption of approximately 700 million additional
gallons of ethanol, representing an increase in annual ethanol consumption
in
California alone of approximately 75% and an increase in annual ethanol
consumption in the entire United States of approximately 13%.
We
intend
to achieve our goal of becoming the leading marketer and producer of renewable
fuels in the Western United States in part by expanding our relationships with
customers and third-party ethanol producers to market higher volumes of ethanol
throughout the Western United States, by expanding our relationships with animal
feed distributors and end users to build local markets for wet distillers
grains, or WDG, the primary co-product of our ethanol production, and by
expanding the market for ethanol by continuing to work with state governments
to
encourage the adoption of policies and standards that promote ethanol as a
fuel
additive and ultimately as a primary transportation fuel. In
addition, we intend to achieve this goal in part by expanding our production
capacity to 220 million gallons of annual production capacity in 2008 and 420
million gallons of annual production capacity in 2010. We
also intend to expand our distribution infrastructure by expanding our ability
to provide transportation, storage and related logistical services to our
customers throughout the Western United States.
Critical
Accounting Policies
The
preparation of our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America,
requires us to make judgments and estimates that may have a significant impact
upon the portrayal of our financial condition and results of
operations. We believe that of our significant accounting policies,
the following require estimates and assumptions that require complex, subjective
judgments by management that can materially impact the portrayal of our
financial condition and results of operations: revenue recognition;
consolidation of variable interest entities; impairment of intangible and
long-lived assets; stock-based compensation; derivative instruments and hedging
activities; allowance for doubtful accounts; and costs of start-up
activities. These significant accounting principles are more fully
described in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Critical Accounting Policies” in our Annual Report on Form
10-K for the year ended December 31, 2006.
Results
of Operations
The
tables below, which compare our results of operations between or among periods,
present the results for each period, the change in those results from one period
to another in both dollars and percentage change, and the results for each
period as a percentage of net sales.
Net
Sales and Gross Profit
The
following table presents our net sales, cost of goods sold and gross profit
in
dollars and gross profit as a percentage of net sales (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
118,118
|
|
|
$ |
61,102
|
|
|
$ |
57,016
|
|
|
|
93.3% |
|
|
$ |
331,123
|
|
|
$ |
145,802
|
|
|
$ |
185,321
|
|
|
|
127.1% |
|
Cost
of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126.0% |
|
Gross
profit
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,689 |
) |
|
|
(36.1% |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
138.7% |
|
Percentage
of net
sales
|
|
|
4.0% |
|
|
|
12.2% |
|
|
|
|
|
|
|
|
|
|
|
9.4% |
|
|
|
9.0% |
|
|
|
|
|
|
|
|
|
The
increase in our net sales for the three months ended September 30, 2007 as
compared to the three months ended September 30, 2006 was due to increased
sales
volume, which was partially offset by a decrease in our average sales price
per
gallon. For the three months ended September 30, 2007, total volume of ethanol
sold increased by 27.3 million gallons, or 120.3%, to 50.0 million gallons
as
compared to 22.7 million gallons for the three months ended September 30, 2006.
For the three months ended September 30, 2007, our average sales price of
ethanol decreased by $0.35 per gallon, or 14.3%, to $2.11 per gallon for all
gallons sold as a principal and an agent as compared to $2.46 per gallon for
the
three months ended September 30, 2006. The substantial increase in
sales volume is primarily due to commencement of ethanol
production. In the fourth quarter of 2006, we began producing ethanol
and its co-products at our Madera facility and, based on our ownership interest
in Front Range, began recording its net sales. Also, in September 2007, we
began
producing ethanol and its co-products at our Boardman facility. The production
and sale of ethanol and its co-products at our Madera and Boardman facilities
and through Front Range contributed an aggregate of $55,191,000 in net sales
for
the three months ended September 30, 2007, whereas there were no such sales
during the three months ended September 30, 2006.
The
decrease in our gross profit for the three months ended September 30, 2007
as
compared to the three months ended September 30, 2006, both in dollars and
as a
percentage of net sales, is primarily due to a lower average sales price per
gallon, as discussed above. We also marked our ethanol inventories at September
30, 2007 down from cost to our anticipated market price, which caused us to
recognize a $1,162,000 charge to cost of goods sold. In addition, we recognized
a loss of $1,610,000 related to derivative instruments, of which $83,000 was
from a change in fair value of derivative instruments that will settle in future
periods.
The
increase in our net sales for the nine months ended September 30, 2007 as
compared to the nine months ended September 30, 2006 was due to increased sales
volume. For the nine months ended September 30, 2007, total volume of ethanol
sold increased by 70.4 million gallons, or 112.8%, to 132.8 million gallons
as
compared to 62.4 million gallons for the nine months ended September 30, 2006.
For the nine months ended September 30, 2007, our average sales price of ethanol
decreased by $0.03 per gallon, or 1.3%, to $2.22 per gallon for all gallons
sold
as a principal and an agent as compared to $2.25 per gallon for the nine months
ended September 30, 2006. The substantial increase in sales volume is due to
additional volume sold to existing customers under our ethanol marketing
agreements and new customers based on our increased ethanol production at our
Madera and Boardman facilities and through Front Range. The production and
sale
of ethanol and its co-products at our Madera and Boardman facilities and through
Front Range contributed an aggregate of $152,987,000 in sales for the nine
months ended September 30, 2007, whereas there were no such sales during the
nine months ended September 30, 2006.
The
increase in our gross profit for the nine months ended September 30, 2007 as
compared to the nine months ended September 30, 2006, both in dollars and as
a
percentage of net sales, is primarily due to the commencement of ethanol
production at our Madera facility and the gross profit generated from Front
Range. Ethanol production typically generates higher gross profit margins than
ethanol marketing arrangements. This increase in gross profit was partially
offset by a loss of $4,453,000 related to derivative instruments, of which
$1,235,000 was from a change in fair value of derivative instruments that will
settle in future periods.
Future
gross profit margins will vary based upon, among other things, the size and
timing of our net long or short positions during our various contract periods
and the volatility of the market price of ethanol.
Selling,
General and Administrative Expenses
The
following table presents our selling, general and administrative expenses in
dollars and as a percentage of net sales (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
6.7% |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
78.6% |
|
Percentage
of net sales
|
|
|
5.0% |
|
|
|
9.1% |
|
|
|
|
|
|
|
|
|
|
|
7.2% |
|
|
|
9.1% |
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses increased during the three and nine months
ended September 30, 2007 as compared to the three and nine months ended
September 30, 2006, but decreased as a percentage of net sales during both
periods in 2007.
The
increase in selling, general and administrative expenses during the three months
ended September 30, 2007 as compared to the three months ended September 30,
2006 was primarily due to an increase of $1,160,000 in employee wages and
salaries related to the hiring of additional staff. These increases were
partially offset by a $630,000 decrease in non-cash compensation
expenses.
The
increase in selling, general and administrative expenses during the nine months
ended September 30, 2007 as compared to the nine months ended September 30,
2006 was primarily due to an increase of $3,075,000 of amortization of
intangible assets associated with our acquisition of our 42% interest in Front
Range, an increase of $4,316,000 in employee wages and salaries related to
the
hiring of additional staff, and an increase of $1,977,000 in consulting
expenses. These increases were partially offset by a $618,000
decrease in non-cash compensation expenses.
Our
cost-control efforts are ongoing and we expect that over the near-term, our
selling, general and administrative expenses will continue to decrease as a
percentage of net sales as our net sales increase from the continued expansion
of our marketing and production operations.
Other
Income (Loss)
The
following table presents our other income (loss) in dollars and our other income
(loss) as a percentage of net sales (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (loss), net
|
|
$ |
(998 |
) |
|
$ |
|
|
|
$ |
(2,853 |
) |
|
|
(153.8% |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,859 |
) |
|
|
(90.2% |
) |
Percentage
of net sales
|
|
|
(0.8% |
) |
|
|
3.0% |
|
|
|
|
|
|
|
|
|
|
|
0.1% |
|
|
|
2.2% |
|
|
|
|
|
|
|
|
|
Other
income (loss) decreased during the three months ended September 30, 2007 as
compared to the three months ended September 30, 2006 primarily due to a
decrease of $1,372,000 in interest income and an increased loss from
ineffectiveness of interest rate hedges of $1,490,000. The decrease in interest
income was due to lower average interest-earning cash balances.
Other
income (loss) decreased during the nine months ended September 30, 2007 as
compared to the nine months ended September 30, 2006 primarily due to a decrease
of $3,089,000 in interest-related expenses net of capitalized interest and
a
decrease in loss from ineffectiveness of interest rate hedges of $896,000,
which
were partially offset by an increase in other income of $450,000 and $748,000
in
interest income due to higher average interest-earning cash
balances.
Non-Controlling
Interest in Variable Interest Entity
The
following table presents the proportionate share of the non-controlling interest
in Front Range, a variable interest entity, and this charge as a percentage
of
net sales (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest in variable interest entity
|
|
$ |
(2,683 |
) |
|
$ |
|
|
|
$ |
(2,863 |
) |
|
|
|
|
|
$ |
(7,502 |
) |
|
$ |
|
|
|
$ |
(7,502 |
) |
|
|
|
|
Percentage
of net sales
|
|
|
(2.3% |
) |
|
|
–% |
|
|
|
|
|
|
|
|
|
|
|
(2.3% |
) |
|
|
–% |
|
|
|
|
|
|
|
|
|
*
Not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
non-controlling interest in variable interest entity relates to the consolidated
treatment of Front Range, a variable interest entity, and represents the
non-controlling interest of others in the earnings of Front
Range.
Net
Income (Loss)
The
following table presents our net income (loss) in dollars and our net income
(loss) as a percentage of net sales (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(4,842 |
) |
|
$ |
|
|
|
$ |
(8,597 |
) |
|
|
228.9% |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
90.2% |
|
Percentage
of net sales
|
|
|
(4.1% |
) |
|
|
6.1% |
|
|
|
|
|
|
|
|
|
|
|
0.1% |
|
|
|
2.0% |
|
|
|
|
|
|
|
|
|
Net
income (loss) decreased during the three and nine months ended September 30,
2007 as compared to the three and nine months ended September 30, 2006,
primarily due to the decrease in our gross profit margins and increased selling,
general and administrative expenses over those same periods.
Preferred
Stock Dividends and Income (Loss) Available to Common
Stockholders
The
following table presents the preferred stock dividends in dollars for our Series
A Cumulative Redeemable Convertible Preferred Stock, or Series A Preferred
Stock, these preferred stock dividends as a percentage of net sales, and our
income (loss) available to common stockholders in dollars and our income (loss)
available to common stockholders as a percentage of net sales (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
$ |
(1,050 |
) |
|
$ |
(1,050 |
) |
|
$ |
|
|
|
|
—% |
|
|
$ |
(3,150 |
) |
|
$ |
(1,948 |
) |
|
$ |
(1,202 |
) |
|
|
61.7% |
|
Percentage
of net sales
|
|
|
(1.0% |
) |
|
|
(1.7% |
) |
|
|
|
|
|
|
|
|
|
|
(1.0% |
) |
|
|
(1.3% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) available to common stock-holders
|
|
$ |
(5,892 |
) |
|
$ |
|
|
|
$ |
(8,597 |
) |
|
|
(317.8% |
) |
|
$ |
(2,861 |
) |
|
$ |
(82,987 |
) |
|
$ |
(80,126 |
) |
|
|
96.6% |
|
Percentage
of net sales
|
|
|
(5.0% |
) |
|
|
4.4% |
|
|
|
|
|
|
|
|
|
|
|
(0.9% |
) |
|
|
(56.9% |
) |
|
|
|
|
|
|
|
|
For
the
three months ended September 30, 2007 and 2006, we declared cash dividends
on
shares of our Series A Preferred Stock in the aggregate amount of $1,050,000
and
$1,050,000, respectively. For the nine months ended September 30, 2007 and
2006,
we declared cash dividends on shares of our Series A Preferred Stock in the
aggregate amount of $3,150,000 and $1,948,000, respectively. Shares of our
Series A Preferred Stock are entitled to quarterly cumulative dividends payable
in arrears in cash in an amount equal to 5% per annum of the purchase price
per
share of the Series A Preferred Stock, or, at our option, these dividends may
be
paid in additional shares of Series A Preferred Stock based on the value of
the
purchase price per share of the Series A Preferred Stock.
Liquidity
and Capital Resources
Working
Capital and Cash and Marketable Securities. The following table
presents working capital and cash and marketable securities (in
thousands):
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(62,790 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
10,290
|
|
|
$ |
44,053
|
|
|
$ |
(33,763 |
) |
Investments
in marketable securities
|
|
|
|
|
|
|
|
|
|
|
(19,942 |
) |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(53,705 |
) |
Change
in Working Capital
Working
capital decreased to $36,692,000 at September 30, 2007 from $99,482,000 at
December 31, 2006 as a result of a decrease in current assets of
$38,092,000 and an increase in current liabilities of $24,698,000.
Current
assets decreased primarily due to net decreases in cash and cash equivalents
and
investments in marketable securities of $33,763,000 and $19,942,000,
respectively, the proceeds of which were predominantly used for costs associated
with the construction of ethanol production facilities, and a decrease in
accounts receivable of $6,555,000, which were partially offset by an increase
in
inventory of $17,754,000, primarily resulting from an increase in ethanol held
in inventory, and an increase in all other current assets of
$4,414,000.
Current
liabilities increased primarily due to an increase in accounts payable of
$17,739,000, an increase in contract retentions of $6,193,000, an increase
in
derivative liabilities of $4,381,000, an increase in accrued liabilities of
$692,000 and an increase in all other liabilities of $857,000, which were
partially offset by a net decrease in other liabilities – related parties of
$5,164,000.
The
decrease in working capital was primarily due to an increase in accounts payable
from our increased production activities at both our Madera and Boardman plants
and plant construction costs.
Change
in Cash and Cash Equivalents
Cash
and
cash equivalents decreased to $10,290,000 at September 30, 2007 from $44,053,000
at December 31, 2006 as a result of cash used in investing activities of
$135,542,000 which was partially offset by cash provided by operating activities
of $20,968,000 and cash provided by financing activities of
$80,811,000.
Cash
provided by operating activities of $20,968,000 resulted primarily from an
increase in accounts payable and accrued expenses of $14,698,000, depreciation
and amortization of intangibles of $12,816,000, non-controlling interest in
our
variable interest entity of $7,502,000 and a decrease in accounts receivable
of
$6,507,000, which were partially offset by an increase in inventories of
$17,754,000 and other liabilities – related parties of
$5,164,000.
Cash
used
in investing activities of $135,542,000 resulted from purchases of additional
property and equipment of $137,046,000 and an increase in restricted cash
designated for construction of $18,099,000, which were partially offset by
proceeds from sales of marketable securities of $19,593,000.
Cash
provided by financing activities of $80,811,000 resulted primarily from proceeds
on debt financing of $87,500,000 and proceeds from lines of credit of
$14,005,000, which were partially offset by cash paid for debt issuance costs
of
$10,063,000, principal payments paid on borrowings of $7,897,000 and preferred
stock dividends paid of $2,100,000.
Other
Assets and Liabilities. The following table presents certain
other assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$ |
383,342
|
|
|
$ |
196,156
|
|
|
$ |
187,186
|
|
Restricted
cash
|
|
$ |
42,949
|
|
|
$ |
24,851
|
|
|
$ |
18,098
|
|
Notes
payable, net of current portion
|
|
$ |
123,357
|
|
|
$ |
28,970
|
|
|
$ |
94,387
|
|
Changes
in Other Assets and Liabilities
Property
and equipment increased to $383,342,000 at September 30, 2007 from $196,156,000
at December 31, 2006 primarily as a result of the construction of ethanol
plants.
Restricted
cash increased to $42,949,000 at September 30, 2007 from $24,851,000 at
December 31, 2006 as a result of the closing of our debt financing
described below. As our plants are built, and after we have made
required equity contributions and met certain other requirements, some funds
to
pay construction costs are initially deposited in a restricted bank account
from
borrowings on our loan agreements and are then paid out to contractors as
construction progresses.
Notes
payable, net of current portion, increased to $123,357,000 at September 30,
2007
from $28,970,000 at December 31, 2006 primarily as a result of activities at
our
ethanol plants under construction. The proceeds from these notes payable were
primarily from our debt financing arrangement described below.
Debt
Financing.
On
February 27, 2007, we closed a debt financing transaction in the aggregate
amount of up to $325,000,000 through certain of our wholly-owned indirect
subsidiaries, or Borrowers. The primary purpose of the debt financing, or Debt
Financing, is to provide debt financing for the development, construction,
installation, engineering, procurement, design, testing, start-up, operation
and
maintenance of five ethanol production facilities. As of September
30, 2007, the outstanding balance under the Debt Financing was $92,500,000,
comprised of $87,500,000 in construction loans and $5,000,000 in used lines
of
credit.
The
Debt
Financing includes:
|
·
|
five
construction loan facilities in an aggregate amount of up to
$300,000,000. Loans made under the construction loan facilities
do not amortize, but require payment of accrued interest, and are
fully
due and payable on the earlier of October 27, 2008 or the date, or
Conversion Date, the construction loans made thereunder are converted
into
term loans, the latter of which is to be the date the last of the
five
plants achieves commercial operations. On the Conversion Date, the
construction loans are to be converted into term
loans;
|
|
·
|
five
term loan facilities in an aggregate amount of up to $300,000,000,
which
are intended to refinance the loans made under the construction loan
facilities. The term loans are to be repaid ratably by each
Borrower on a quarterly basis from and after the Conversion Date
in an
amount equal to 1.5% of the aggregate original principal amount of
the
corresponding term loan. The remaining principal balance and
all accrued and unpaid interest on the term loans are fully due and
payable on the date that is 84 months after the Conversion
Date; and
|
|
·
|
a
working capital and letter of credit facility in an aggregate amount
of up
to $25,000,000 ($5,000,000 per facility) that is fully due and payable
on
the date that is 12 months after the Conversion Date, but is expected
to
be renewed on similar terms and conditions. During the term of
the working capital and letter of credit facility, the Borrowers
may
borrow, repay and re-borrow amounts available under the
facility.
|
Loans
and
letters of credit under the Debt Financing are subject to conditions precedent,
including, among others, the absence of a material adverse effect; the absence
of defaults or events of defaults; the accuracy of certain representations
and
warranties; the maintenance of a debt-to-equity ratio that is not in excess
of
65:35; the contribution of all required equity by us to the Borrowers, which
is
expected to be approximately $218,800,000 in the aggregate; and the attainment
of at least a 1.5-to-1.0 debt service coverage ratio. Also, the Borrowers may
not be able to fully utilize the Debt Financing if the completed ethanol plants
fail to meet certain minimum performance standards. Loans made under
the construction and term loan facilities may not be re-borrowed once repaid
or
re-borrowed once prepaid. Finally, loan amounts under the construction and
term
loan facilities are limited to a percentage of project costs of the
corresponding plant but are not to exceed approximately $1.15 per gallon of
annual production capacity of the plant.
The
Borrowers have the option to select from multiple interest rates that float
with
common interest rate indices, such as the LIBOR, with reset periods of differing
durations. Depending upon the floating interest rate selected, the
type of loan and whether the loan is made under a construction loan facility,
a
term loan facility or the working capital and letter of credit facility, loans
under the Debt Financing bear interest at rates ranging from 2.25% to 4.35%
over
the selected interest rate index.
In
addition to scheduled principal payments, starting after the Conversion Date,
the term loan facilities require mandatory repayments of principal in amounts
based on the Borrowers’ free cash flow. The percentage of the Borrowers’ free
cash flow to be applied to principal repayments is to vary from 50% in the
first
two years following the Conversion Date to 75-100% in succeeding years, based
upon repayment amounts measured against targeted balances.
Borrowings
and the Borrowers’ obligations under the Debt Financing are secured by a
first-priority security interest in all of the equity interests in the Borrowers
and substantially all the assets of the Borrowers. The security interests
granted by the Borrowers under the Debt Financing restrict the assets and
revenues of the Borrowers and therefore may inhibit our ability to obtain other
debt financing. The Borrowers are subject to certain financial and other
covenants, with which we believe they are in compliance as of September 30,
2007.
In
connection with the Debt Financing, we also entered into a Sponsor Support
Agreement under which we are to provide limited contingent equity support in
connection with the development, construction, installation, engineering,
procurement, design, testing, start-up and maintenance of the five ethanol
production facilities. In particular, we have agreed to contribute to
the Borrowers up to an aggregate of approximately $42,400,000, or Sponsor
Funding Cap, of contingent equity in the event the Borrowers have insufficient
funds to either pay their project costs as they become due and payable or,
by
delay in payment, cause the ethanol production facilities to fail to be
completed by the Conversion Date. We have agreed to provide a
warranty with respect to all ethanol plants other than its Madera facility,
which is under standard warranty through the EPC contractor. Our
warranty obligations with respect to the other four facilities extend one year
beyond final completion of each facility. The warranty obligation
will cease one year from the date the fifth ethanol plant achieves final
completion. Our obligations under the warranty are capped at the
Sponsor Funding Cap. Until our contingent equity obligations have been fully
performed or the warranty period has expired, we may not incur any secured
indebtedness for borrowed money, grant liens on its assets or provide any
secured credit enhancements in an aggregate amount in excess of $10,000,000
unless we provide the lenders under the Debt Financing with the same liens
or
credit support.
We
incurred $10,699,000 of costs associated with the completion of the Debt
Financing arrangement and have capitalized these costs in other assets, except
the portion amortizing during the next 12 months, which is classified in other
current assets. These costs are being amortized over a six year
life.
Line
of Credit
In
addition to the Debt Financing, in August 2007, we entered into an operating
line of credit facility of up to $25,000,000, which expires in July 2009. As
of
September 30, 2007, we had $9,005,000 outstanding under this line of credit
under two separate variable interest rates ranging from 6.48% to
7.25%.
Prospective
Capital Needs.
We
believe that current capital resources, revenues generated from operations
and
other existing sources of liquidity, including proceeds from our debt financing
described above, will be adequate to meet our anticipated working capital and
capital expenditure requirements to reach our goal of 220 million gallons of
annual production capacity in 2008 from our completed Madera and Boardman
facilities, our interest in Front Range and two additional facilities under
construction in Stockton, California and Burley, Idaho. We will need
additional financing during the next twelve months to achieve other significant
capital expenditure projects and other business objectives. We will also need
additional financing to implement our planned expansion beyond 220 million
gallons to 420 million gallons of annual production capacity in
2010. If our capital requirements or cash flow vary materially and
adversely from our current projections, if other adverse unforeseen
circumstances occur or if we require a significant amount of cash to fund one
or
more future acquisitions, we will likely require additional financing beyond
our
existing requirements. Our failure to raise capital as and when needed will
restrict our growth and may hinder our competitiveness.
Inflation
has not had a significant impact on our financial condition or results of
operations or those of our operating subsidiaries.
Impact
of New Accounting Pronouncements
The
disclosure requirements and impacts of new accounting pronouncements are
described in “Note 2—New Accounting Standards” of the Notes to Consolidated
Financial Statements contained elsewhere in this report.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
We
are
exposed to various market risks. Market risk is the potential loss arising
from
adverse changes in market rates and prices. In the ordinary course of business,
we enter into various types of transactions involving financial instruments
to
manage and reduce the impact of changes in market risk. We do not enter into
derivatives or other financial instruments for trading or speculative
purposes.
Commodity
Risk– Cash Flow Hedges
We
use
derivative instruments to protect cash flows from fluctuations caused by
volatility in commodity prices for periods of up to twelve months to protect
gross profit margins to reduce the potentially adverse effects of market
volatility.
For
the
three months ended September 30, 2007, gains from ineffectiveness in the amount
of $2,381,000 and an effective loss in the amount of $898,000 were recorded
in
cost of goods sold. For the three months ended September 30, 2006, losses from
ineffectiveness in the amounts of $29,000 and $298,000 were recorded in cost
of
goods sold and other income, respectively, and an effective gain in the amount
of $339,000 was recorded in net sales.
For
the
nine months ended September 30, 2007, gains from ineffectiveness in the amount
of $3,894,000 and an effective loss in the amount of $2,008,000 were recorded
in
cost of goods sold. For the nine months ended September 30, 2006, losses from
ineffectiveness in the amounts of $11,000 and $110,000 were recorded in cost
of
goods sold and other income, respectively, and an effective gain in the amount
of $1,057,000 was recorded in net sales.
Amounts
remaining in accumulated other comprehensive income (loss) will be reclassified
to earnings upon the recognition of the related purchase or sale. An
accumulated other comprehensive gain in the amount of $151,000 associated with
commodity cash flow hedges is expected to be recognized in income over the
next
twelve months. The fair value notional balances remaining on these
derivatives as of September 30, 2007 and December 31, 2006 were $15,157,000
and
$11,588,000, respectively.
Commodity
Risk– Non-Designated Derivatives
As
part
of our risk management strategy, we use forward contracts on corn, crude oil
and
reformulated blendstock for oxygenate blending gasoline to lock in prices for
certain amounts of corn, denaturant and ethanol, respectively. These
derivatives are not designated under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, for special hedge accounting
treatment. The changes in fair value of these contracts are recorded
on the balance sheet and recognized immediately in earnings. We
recognized a loss of $3,092,000 (of which $1,526,000 is related to settled
non-designated hedges) and $0 as the change in the fair value of these contracts
for the three months ended September 30, 2007 and 2006,
respectively. We recognized a loss of $6,339,000 (of which $2,504,000
is related to settled non-designated hedges) and $0 as the change in the fair
value of these contracts for the nine months ended September 30, 2007 and 2006,
respectively.
We
marked
all of our derivative instruments to fair value at each period end, except
for
those derivative contracts which qualified for the normal purchase and sale
exemption pursuant to SFAS No. 133. According to our designation of the
derivatives, changes in the fair value of derivatives are reflected in net
income or other comprehensive income.
Accumulated
Other Comprehensive Income (Loss)
Accumulated
other comprehensive income (loss) relative to derivatives for the nine months
ended September 30, 2007 was as follows (in thousands):
|
|
Commodity
Derivatives
|
|
|
Interest
Rate Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2007
|
|
$ |
461
|
|
|
$ |
(265 |
) |
Net
changes
|
|
|
(2,318 |
) |
|
|
(1,821 |
) |
Less: Amount
reclassified to cost of goods sold
|
|
|
(2,008 |
) |
|
|
—
|
|
Less: Amount
reclassified to other income (expense)
|
|
|
|
|
|
|
(125 |
) |
Ending
balance, September 30, 2007
|
|
$ |
|
|
|
$ |
(1,961 |
) |
—————
*Calculated
on a pretax basis
The
estimated fair values of our derivatives as of September 30, 2007 and December
31, 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
futures
|
|
$ |
(1,570 |
) |
|
$ |
329
|
|
Interest
rate swaps
|
|
|
(2,649 |
) |
|
|
|
|
Total
|
|
$ |
(4,219 |
) |
|
$ |
|
|
Material
Limitations
The
disclosures with respect to the above noted risks do not take into account
the
underlying commitments or anticipated transactions. If the underlying items
were
included in the analysis, the gains or losses on the futures contracts may
be
offset. Actual results will be determined by a number of factors that are not
generally under our control and could vary significantly from those factors
disclosed.
We
are
exposed to credit losses in the event of nonperformance by counterparties on
the
above instruments, as well as credit or performance risk with respect to our
hedged customers’ commitments. Although nonperformance is possible, we do not
anticipate nonperformance by any of these parties.
ITEM
4.
|
CONTROLS
AND PROCEDURES.
|
|
Evaluation
of Disclosure Controls and
Procedures
|
We
conducted an evaluation under the supervision and with the participation of
our
management, including our Chief Executive Officer and Acting Chief Financial
Officer, who is also our Chief Operating Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. The
term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange
Act”), means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by the company in the reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and procedures also
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate, to allow
timely decisions regarding required disclosure. Based on this
evaluation, our Chief Executive Officer and Acting Chief Financial Officer
concluded as of September 30, 2007 that our disclosure controls and procedures
were effective at a reasonable assurance level.
Management
concluded as of December 31, 2006 in our Annual Report on Form 10-K, or Annual
Report, for the year then ended, that our internal control over financial
reporting was not effective and identified seven material weaknesses in our
internal control over financial reporting. You should refer to
management’s discussion under “Item 9A—Controls and Procedures” in our Annual
Report for a complete description of the criteria applied by management and
the
factors based upon which management concluded that our internal control over
financial reporting was not then effective.
Management’s
evaluation and conclusions set forth above as to the quarterly period ended
September 30, 2007 have not been audited by our independent registered public
accounting firm. Because of the possibility of changed circumstances
between now and year-end, and because the testing of our internal control over
financial reporting that will be required under Section 404 of the
Sarbanes-Oxley Act of 2002 in connection with our annual audit is more
comprehensive and rigorous than the evaluation we performed, we cannot assure
you that management and our independent registered public accounting firm will
not identify material weaknesses in our internal control over financial
reporting and conclude that our disclosure controls and procedures were not
effective at a reasonable assurance level and that we did not maintain effective
internal control over financial reporting as of December 31, 2007.
Changes
in Internal Control over Financial Reporting
There
were no changes during the most recently completed fiscal quarter that have
materially affected or are reasonably likely to material affect, our internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act.
Inherent
Limitations on the Effectiveness of Controls
Management
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all errors and all
fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of
the
control systems are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the
inherent limitations in a cost-effective control system, no evaluation of
internal control over financial reporting can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, have been or will be detected.
These
inherent limitations include the realities that judgments in decision-making
can
be faulty and that breakdowns can occur because of a simple error or
mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override
of
the controls. The design of any system of controls is based in part
on certain assumptions about the likelihood of future events, and there can
be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over
time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or
procedures.
PART
II - OTHER INFORMATION
ITEM
1.
|
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.
Barry
Spiegel – State Court Action
On
December 23, 2005, Barry J. Spiegel, a former shareholder and director of our
predecessor, Accessity Corp., or Accessity, filed a complaint in the Circuit
Court of the 17th Judicial District in and for Broward County, Florida (Case
No.
05018512), or State Court Action, against Barry Siegel, Philip Kart, Kenneth
Friedman and Bruce Udell, or collectively, the Individual Defendants. Messrs.
Siegel, Udell and Friedman are former directors of Accessity and Pacific
Ethanol. Mr. Kart is a former executive officer of Accessity and Pacific
Ethanol. The State Court Action relates to a share exchange transaction, or
Share Exchange Transaction, among Accessity, Pacific Ethanol and two other
entities, and purports to state the following five counts against the Individual
Defendants: (i) breach of fiduciary duty, (ii) violation of the
Florida Deceptive and Unfair Trade Practices Act, (iii) conspiracy to defraud,
(iv) fraud and (v) violation of Florida’s Securities and Investor Protection
Act. Mr. Spiegel bases his claims on allegations that the actions of the
Individual Defendants in approving the Share Exchange Transaction caused the
value of his Accessity common stock to diminish and is seeking approximately
$22,000,000 in damages. On March 8, 2006, the Individual Defendants filed a
motion to dismiss the State Court Action. Mr. Spiegel filed his response in
opposition on May 30, 2006. The Court granted the motion to dismiss by Order
dated December 1, 2006, or the Order, on the grounds that, among other things,
Mr. Spiegel failed to bring his claims as a derivative action.
On
February 9, 2007, Mr. Spiegel filed an amended complaint which purports to
state
the following five counts: (i) breach of fiduciary duty, (ii) fraudulent
inducement, (iii) violation of Florida’s Securities and Investor Protection Act,
(iv) fraudulent concealment and (v) breach of fiduciary duty of disclosure.
The
amended complaint includes Pacific Ethanol as a defendant. The breach of
fiduciary duty counts are alleged solely against the Individual Defendants
and
not Pacific Ethanol. On June 19, 2007, we filed a motion to dismiss the
amended complaint. The Court denied the motion to dismiss the amended complaint
by order dated July 31, 2007. Mr. Spiegel, however, voluntarily
dismissed without prejudice the case against Pacific Ethanol on August 27,
2007,
and therefore we are no longer a party to the state action.
Barry
Spiegel – Federal Court Action
On
December 22, 2006, Barry J. Spiegel, filed a complaint in the United States
District Court, Southern District of Florida (Case No. 06-61848), or the Federal
Court Action, against the Individual Defendants and us. The Federal Court Action
relates to the Share Exchange Transaction and purports to state the following
three counts: (i) violations of Section 14(a) of the Exchange Act and Rule
14a-9
promulgated thereunder, (ii) violations of Section 10(b) of the Exchange Act
and
Rule 10b-5 promulgated thereunder and (iii) violation of Section 20(A) of the
Exchange Act. The first two counts are alleged against the Individual Defendants
and Pacific Ethanol and the third count is alleged solely against the Individual
Defendants. Mr. Spiegel bases his claims on, among other things, allegations
that the actions of the Individual Defendants and Pacific Ethanol in connection
with the Share Exchange Transaction resulted in a share exchange ratio that
was
unfair and resulted in the preparation of a proxy statement seeking shareholder
approval of the Share Exchange Transaction that contained material
misrepresentations and omissions. Mr. Spiegel is seeking in excess of
$15,000,000 in damages. Mr. Spiegel amended the Federal Court Action on February
9, 2007 and then sought to stay his own federal case, but the Motion was denied
on July 17, 2007. Mr. Spiegel filed his reply to our Motion to
Dismiss and that Motion remains pending. We intend to vigorously defend the
Federal Court Action.
Mercator
Group, LLC
In
2003,
we filed a lawsuit seeking damages in excess of $100,000,000 against: (i)
Presidion Corporation, f/k/a MediaBus Networks, Inc., the parent corporation
of
Presidion Solutions, Inc., or Presidion, (ii) Presidion’s investment bankers,
Mercator Group, LLC, or Mercator, and various related and affiliated parties
and
(iii) Taurus Global LLC, or Taurus, (collectively referred to as the “Mercator
Action”), alleging that these parties committed a number of wrongful acts,
including, but not limited to tortiously interfering in a transaction between
us
and Presidion. In 2004, we dismissed this lawsuit without prejudice, which
was
filed in Florida state court. In January 2005, we refiled this action in the
State of California, for a similar amount, as we believe that to be the proper
jurisdiction. On August 18, 2005, the court stayed the action and ordered the
parties to arbitration. The parties agreed to mediate the matter. Mediation
took
place on December 9, 2005 and was not successful. On December 5, 2005, we
filed a Demand for Arbitration with the American Arbitration Association. On
April 6, 2006, a single arbitrator was appointed. Arbitration hearings have
been scheduled to commence in July 2007. In April 2007, the arbitration
proceedings were suspended due to non-payment of arbitration fees by Presidion
and Taurus. As a result of non-payment of arbitration fees, a default
order was entered against Taurus by the Los Angeles Superior
Court. In July, 2007, we entered into a confidential settlement
agreement with Presidion and its former officers. On July 23, 2007,
we dismissed Presidion from the arbitration. On July 23, 2007, Taurus filed
a
Voluntary Petition for Chapter 7 Bankruptcy in the United States District Court,
Central District of California, Case Number SV07-12547 GM. We continue to
prosecute the arbitration proceedings against Mercator. The arbitration hearings
are presently scheduled to be held in February 2008. The share exchange
agreement relating to the Share Exchange Transaction provides that following
full and final settlement or other final resolution of the Mercator Action,
after deduction of all fees and expenses incurred by the law firm representing
us in this action and payment of the 25% contingency fee to the law firm,
shareholders of record of Accessity on the date immediately preceding the
closing date of the Share Exchange Transaction will receive two-thirds and
we
will retain the remaining one-third of the net proceeds from any Mercator Action
recovery.
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed under “Risk Factors” in our Annual Report on Form
10-K for the year ended December 31, 2006, which could materially affect
our business, financial condition and results of operations. The
risks described in our Annual Report on Form 10-K for the year ended December
31, 2006 are not the only risks we face. Additional risks and uncertainties
not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and results of
operations.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
|
Unregistered
Sales of Equity Securities
None.
Dividends
For
the
three and nine months ended September 30, 2007, we declared $1,050,000 and
$3,150,000 in dividends on our Series A Preferred Stock,
respectively. We have never declared or paid cash dividends on our
common stock and do not currently intend to pay cash dividends on our common
stock in the foreseeable future. We currently anticipate that we will
retain any earnings for use in the continued development of our
business.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES.
|
None.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
|
None.
ITEM
5. OTHER
INFORMATION.
None.
Exhibit
Number
|
Description
|
10.1
|
Separation
Agreement dated July 19, 2007 between Pacific Ethanol, Inc. and Douglas
Jeffries (*)
|
|
|
31.1
|
Certifications
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,
as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002 (**)
|
|
|
31.2
|
Certifications
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,
as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002 (**)
|
|
|
32.1
|
Certification
of President and Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(**)
|
(*)
|
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K for July 18,
2007 (File No. 021467) filed with the Securities and Exchange Commission
on July 23, 2007.
|
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November
9, 2007
|
By:
/S/ JOHN T.
MILLER
|
|
|
Chief
Operating Officer and Acting Chief Financial
Officer
|
|
(Principal
Financial and Accounting
Officer)
|
EXHIBITS
FILED WITH THIS REPORT
Exhibit
Number
|
Description
|
|
|
31.1
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,
as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002
|
|
|
31.2
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,
as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002
|
|
|
32.1
|
Certification
of President and Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002
|