pacificethanol_8k-031808.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
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Date
of Report (Date of earliest event reported)
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March 18, 2008
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PACIFIC ETHANOL, INC.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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000-21467
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41-2170618
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(State
or other jurisdiction of
incorporation)
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(Commission
File Number)
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(IRS
Employer Identification
No.)
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400
Capitol Mall, Suite 2060
Sacramento,
California
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95814
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
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(916)
403-2123
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(Former
name or former address, if changed since last
report)
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Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General
Instruction A.2. below):
o Written communications pursuant
to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to
Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications
pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
o Pre-commencement communications
pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Cautionary
Statements
This
Form includes forwarding looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 regarding Pacific Ethanol, Inc. and its
business that are not historical facts and are indicated by words such as
“anticipates,” “expected,” “believes” and similar terms. Such forward
looking statements involve risks and uncertainties including, in particular,
whether or on what terms we will be able to obtain the Pending Bank Waiver (as
defined below), complete the Pending Equity Financing (as defined below) and
complete and file our Annual Report on Form 10-K, as well as whether or not our
final audited financial results as of, and for the year ended December 31, 2007,
will comport with the preliminary information summarized
herein. Receipt of the Pending Bank Waiver requires the consent of
the requisite percentage of our lenders and we may be required to make financial
concessions beyond the waiver fee presently contemplated in order to obtain the
waiver. The Pending Equity Financing is subject to conditions to
closing which must be satisfied before those funds are released and over which
we do not have control. Also, during the finalization of our Annual
Report on Form 10-K we may identify further events which constitute material
weaknesses in our internal control over financial reporting or other events
which would constitute further breaches of the Credit Agreement (as defined
below) requiring the receipt of one or more additional waivers from our
lenders. We can not assure you that any such waivers could be
obtained or, if obtained, the terms thereof, or that we will not receive a
qualified audit opinion from our independent registered public accounting
firm. In the absence of the waiver we will be required to reclassify
the obligations under the Credit Agreement as short-term debt in our financial
statements. Further, the receipt of the Pending Equity Financing is
necessary to stabilize our liquidity position. Material risks and
uncertainties exist regarding these matters, and we can not assure you that
these transactions and filings will be completed on the terms described herein,
or at all. In addition, investors should also review the factors
contained in the “Risk Factors” section of Pacific Ethanol’s Form 10-K filed
with the Securities and Exchange Commission on March 12, 2007.
Item
1.01. Entry
into a Material Definitive Agreement.
Investment
by Lyles United, LLC
Securities
Purchase Agreement dated March 18, 2008 between Pacific Ethanol, Inc. and Lyles
United, LLC
On March
18, 2008, Pacific Ethanol, Inc. (referred to as the “Company,” “we,” “us” or similar terms
unless the context otherwise requires) entered into a Securities Purchase
Agreement (the “Purchase Agreement”)
with Lyles United, LLC (the “Purchaser”). The
Purchase Agreement provides for the sale by the Company and the purchase by the
Purchaser of (i) 2,051,282 shares of the Company’s Series B Cumulative
Convertible Preferred Stock (the “Series B Preferred
Stock”) at $19.50 per share, all of which would initially be convertible
into an aggregate of 6,153,846 shares of the Company’s common stock based on an
initial three-for-one conversion ratio, and (ii) a warrant (the “Warrant”) to purchase
an aggregate of 3,076,923 shares of the Company’s common stock at an exercise
price of $7.00 per share, for an aggregate purchase price of $40 million. The
Series B Preferred Stock is to be created under the Certificate of Designations
described below. The transactions contemplated by the Purchase
Agreement are also referred to herein as the “Pending Equity
Financing.”
The
Purchase Agreement includes customary representations and warranties on the part
of both the Company and the Purchaser and other customary terms and
conditions. The closing under the Purchase Agreement is subject to
numerous customary closing conditions, as well as (i) the Company shall have
received any and all consents, waivers or approvals from the holders of Series A
Preferred Stock (as defined below) necessary to issue and deliver the Series B
Preferred Stock, the Warrant, and the related dividend shares, conversion shares
and warrant shares and to consummate the transactions contemplated under the
Certificate of Designations (as defined below) and the related transaction
documents, (ii) the Borrower’s (as defined in the Credit Agreement, as defined
below, and who are indirect subsidiaries of the Company) receipt of waivers from
a sufficient number of lenders party to that certain Credit Agreement, dated as
of February 27, 2007 (as amended, the “Credit Agreement”),
among Pacific Ethanol Madera LLC, Pacific Ethanol Columbia, LLC, Pacific Ethanol
Stockton, LLC, Pacific Ethanol Magic Valley, LLC, Pacific Ethanol Holding Co.
LLC and WestLB AG, New York Branch, as administrative agent, waiving all
defaults under the Credit Agreement existing as of March 17, 2008, in a form
substantially satisfactory to the Purchaser, (iii) after giving effect to the
waivers described above, on the closing date there shall be no Defaults or
Events of Default (as defined in the Credit Agreement) under the Credit
Agreement, nor any defaults or events of default under any other loan agreement
to which the Company or any of its affiliates are party, (iv) the filing of the
Company’s Form 10-K for the year ended December 31, 2007 on or prior to March
31, 2008 with an audit opinion from the Company’s independent registered public
accounting firm contained therein unqualified as to the Company’s ability to
continue as a “going concern,” (v) the Company shall not have restated any of
the Company’s financial statements nor shall the Company have filed a Form 8-K
with the Securities and Exchange Commission (the “SEC”) pursuant to
Item 4.02 thereunder with respect to any of the Company’s financial statements
filed with the SEC, (vi) no class action securities litigation shall have been
commenced against the Company, and (vii) the Company’s common stock shall be
listed for trading on The NASDAQ Global Market. All closing
conditions must be met (or waived) in full prior to April 30, 2008, otherwise
the Purchaser shall not be required to proceed with the closing and the Purchase
Agreement will terminate and be of no further force or effect.
In
addition, the Purchase Agreement provides that the Company shall not undertake
any project or series of projects involving the investment of more than $1.0
million of new capital, for the acquisition or improvement of a fixed asset
which extends the life or increases the productivity of the asset, individually
or in the aggregate, which is not already contemplated by the Company’s cash
flow projections until the Company repays an aggregate of $30.0 million in debt
loaned to the Company by the Purchaser as further described below.
The
Warrant is to be exercisable at any time during the period commencing on the
date that is six months and one day from the date of the Warrant and ending ten
years from the date of the Warrant. The form of Warrant contains
customary anti-dilution provisions for stock splits, stock dividends and the
like and other customary terms and conditions.
Certificate
of Designations, Powers, Preferences and Rights of the Series B Cumulative
Convertible Preferred Stock
The
Certificate of Designations, Powers, Preferences and Rights of the Series B
Cumulative Convertible Preferred Stock (the “Certificate of
Designations”) provides for 3,000,000 shares of preferred stock to be
designated as Series B Cumulative Convertible Preferred Stock. The Certificate
of Designations is to be filed with the State of Delaware prior to the closing
of the purchase and sale of the Series B Preferred Stock (the “Closing”). The
2,051,282 shares of Series B Preferred Stock are to be issued under the Purchase
Agreement at a purchase price of $19.50 per share. The Series B
Preferred Stock ranks senior in liquidation and dividend preferences to the
Company’s common stock and on parity with respect to dividend and liquidation
rights with the Company’s Series A Cumulative Redeemable Convertible Preferred
Stock (“Series A
Preferred Stock”). Holders of Series B Preferred Stock are
entitled to quarterly cumulative dividends payable in arrears in cash in an
amount equal to 7.00% of the purchase price per share of the Series B Preferred
Stock on a pari passu
basis with the holders of Series A Preferred Stock; however, subject to the
provisions of the Letter Agreement described below, such dividends may, at the
option of the Company, be paid in additional shares of Series B Preferred Stock
based initially on the value of the purchase price per share of the Series B
Preferred Stock. The holders of Series B Preferred Stock have a liquidation
preference over the holders of the Company’s common stock equivalent to the
purchase price per share of the Series B Preferred Stock plus any accrued and
unpaid dividends on the Series B Preferred Stock but on a pro rata and pari passu basis with the
holders of Series A Preferred Stock. A liquidation will be deemed to occur upon
the happening of customary events, including transfer of all or substantially
all of the capital stock or assets of the Company or a merger, consolidation,
share exchange, reorganization or other transaction or series of related
transaction, unless holders of 66 2/3% of the Series B Preferred Stock vote
affirmatively in favor of or otherwise consent that such transaction shall not
be treated as a liquidation.
The
holders of the Series B Preferred Stock have conversion rights initially
equivalent to three shares of common stock for each share of Series B Preferred
Stock. The conversion ratio is subject to customary antidilution adjustments. In
addition, antidilution adjustments are to occur in the event that the Company
issues equity securities at a price equivalent to less than $6.50 per share,
including derivative securities convertible into equity securities (on an
as-converted or as-exercised basis). Certain specified issuances will not result
in antidilution adjustments (the “Anti-Dilution Excluded
Securities”), including (i) securities issued to employees, officers or
directors of the Company under any option plan, agreement or other arrangement
duly adopted by the Company, the issuance of which is approved by the
Compensation Committee of the Board of Directors of the Company, (ii) any common
stock issued upon conversion of the Series A Preferred Stock or as payment of
dividends thereon, (iii) Series B Preferred Stock and any common stock issued
upon conversion of the Series B Preferred Stock or as payment of dividends
thereon, (iv) securities issued upon conversion or exercise of any derivative
securities outstanding on the date the Certificate of Designations is first
filed with the Delaware Secretary of State, and (v) securities issued in
connection with a stock split, stock dividend, combination, reorganization,
recapitalization or other similar event for which adjustment to the conversion
ratio of the Series B Preferred Stock is already made. The shares of
Series B Preferred Stock are also subject to forced conversion upon the
occurrence of a transaction that would result in an internal rate of return to
the holders of the Series B Preferred Stock of 25% or more. The forced
conversion is to be based upon the conversion ratio as last adjusted.
Notwithstanding the foregoing, no shares of Series B Preferred Stock will be
subject to forced conversion unless the shares of common stock issued or
issuable to the holders upon conversion of the Series B Preferred Stock are
registered for resale with the SEC and eligible for trading on The NASDAQ Stock
Market or such other exchange approved by holders of 66 2/3% of the then
outstanding shares of Series B Preferred Stock. Accrued but unpaid dividends on
the Series B Preferred Stock are to be paid in cash upon any conversion of the
Series B Preferred Stock.
The
holders of Series B Preferred Stock vote together as a single class with the
holders of the Company’s Series A Preferred Stock and common stock on all
actions to be taken by the Company’s stockholders. Each share of
Series B Preferred Stock entitles the holder to the number of votes equal to the
number of shares of common stock into which each share of Series B Preferred
Stock is convertible on all matters to be voted on by the stockholders of the
Company. Notwithstanding the foregoing, the holders of Series B
Preferred Stock are afforded numerous customary protective provisions with
respect to certain actions that may only be approved by holders of a majority of
the shares of Series B Preferred Stock. These protective provisions include
limitations on (i) the increase or decrease of the number of authorized shares
of Series B Preferred Stock, (ii) increase or decrease of the number of
authorized shares of other capital stock, (iii) generally any actions that have
an adverse effect on the rights and preferences of the Series B Preferred Stock,
(iv) the authorization, creation or sale of any securities senior to or on
parity with the Series B Preferred Stock as to voting, dividend, liquidation or
redemption rights, including subordinated debt, (v) the authorization, creation
or sale of any securities junior to the Series B Preferred Stock as to voting,
dividend, liquidation or redemption rights, including subordinated debt, other
than the Company’s common stock, (vi) the authorization, creation or sale of any
shares of Series B Preferred Stock other than the shares of Series B Preferred
Stock authorized, created and sold under the Purchase Agreement, and (vii)
engaging in a transaction that would result in an internal rate of return to
holders of Series B Preferred Stock of less than 25%.
The
holders of the Series B Preferred Stock are afforded preemptive rights with
respect to certain securities offered by the Company. The preemptive
rights of the holders of the Series B Preferred Stock are subordinate to the
preemptive rights of, and prior exercise thereof by, the holders of the Series A
Preferred Stock. So long as 50% of the shares of Series B Preferred
Stock remain outstanding, and not including any securities of the Company as to
which any holder of the Series A Preferred Stock has exercised its preemptive
rights, each holder of Series B Preferred Stock has the right to purchase a
pro rata portion of
such securities equivalent to the number of shares of common stock then held by
such holder (giving effect to the conversion of all shares of convertible
preferred stock then held by such holder), divided by the total number of shares
of common stock then held by all holders of the Series B Preferred Stock (giving
effect to the conversion of all outstanding shares of convertible preferred
stock then held by such holders), plus any amounts not purchased by other
holders of Series B Preferred Stock. Notwithstanding the foregoing, certain
proposed securities offerings will not result in preemptive rights in favor of
the holders of the Series B Preferred Stock. These offerings include
offerings of Anti-Dilution Excluded Securities as well as the issuance of
securities other than for cash pursuant to a merger, consolidation, acquisition
or similar business combination by the Company approved by the Board of
Directors of the Company.
Registration
Rights Agreement to be entered into between Pacific Ethanol, Inc. and Lyles
United, LLC
A
Registration Rights Agreement between the Company and the Purchaser is to be
executed upon the closing of the transactions contemplated by the Purchase
Agreement. The Registration Rights Agreement is to be effective until the
holders of the Series B Preferred Stock, and their affiliates, as a group, own
less than 10% of the Series B Preferred Stock issued under the Purchase
Agreement, including common stock into which such Series B Preferred Stock has
been converted (the “Termination
Date”). The Registration Rights Agreement provides that
holders of a majority of the Series B Preferred Stock, including common stock
into which such Series B Preferred Stock has been converted, may demand and
cause the Company, at any time after the first anniversary of the Closing, to
register on their behalf the shares of common stock issued, issuable or that may
be issuable upon conversion of the Series B Preferred Stock and as payment of
dividends thereon, and upon exercise of the Warrant as well as upon exercise of
a warrant to purchase 100,000 shares of the Company’s common stock at an
exercise price of $8.00 per share and issued in connection with the extension of
the maturity date of a loan, as discussed further below (collectively, the
“Registrable
Securities”). Following such demand, the Company is required
to notify any other holders of the Series B Preferred Stock or Registrable
Securities of its intent to file a registration statement and, to the extent
requested by such holders, include them in the related registration
statement. The Company is required to keep such registration
statement effective until such time as all of the Registrable Securities are
sold or until such holders may avail themselves of Rule 144 for sales of
Registrable Securities without registration under the Securities Act of 1933, as
amended. The holders are entitled to two demand registrations on Form S-1 and
unlimited demand registrations on Form S-3; provided, however, that the
Company is not obligated to effect more than one demand registration on Form S-3
in any calendar year.
In
addition to the demand registration rights afforded the holders under the
Registration Rights Agreement, the holders are entitled to “piggyback”
registration rights. These rights entitle the holders who so elect to be
included in registration statements to be filed by the Company with respect to
other registrations of equity securities. The holders are entitled to unlimited
“piggyback” registration rights.
Certain
customary limitations to the Company’s registration obligations are included in
the Registration Rights Agreement. These limitations include the right of the
Company to, in good faith, delay or withdrawal registrations requested by the
holders under demand and “piggyback” registration rights, and the right to
exclude certain portions of holders’ Registrable Securities upon the advice of
its underwriters. Following the registration of securities in which holders’
Registrable Securities are included, the Company is obligated to refrain from
registering any of its equity securities or securities convertible into equity
securities until the earlier of the sale of all Registrable Securities subject
to such registration statement and 180-days following the effectiveness of such
registration statement. The Registration Rights Agreement also provides for
customary registration procedures. The Company is responsible for all costs of
registration, plus reasonable fees of one legal counsel for the holders, which
fees are not to exceed $25,000 per registration.
The
Registration Rights Agreement includes customary cross-indemnity provisions
under which the Company is obligated to indemnify the holders and their
affiliates as a result of losses caused by untrue or allegedly untrue statements
of material fact contained or incorporated by reference in any registration
statement under which Registrable Securities are registered, including any
prospectuses or amendments related thereto. The Company’s indemnity obligations
also apply to omissions of material facts and to any failure on the part of the
Company to comply with any law, rule or regulation applicable to such
registration statement. Each holder is obligated to indemnify the Company and
its affiliates as a result of losses caused by untrue or allegedly untrue
statements of material fact contained in any registration statement under which
Registrable Securities are registered, including any prospectuses or amendments
related thereto, which statements were furnished in writing by that holder to
the Company, but only to the extent of the net proceeds received by that holder
with respect to securities sold pursuant to such registration statement. The
holders’ indemnity obligations also apply to omissions of material facts on the
part of the holders.
In
addition, the Registration Rights Agreement provides for reasonable access on
the part of the Purchaser to all of the Company’s books, records and other
information and the opportunity to discuss the same with management of the
Company. The Registration Rights Agreement includes customary
representations and warranties on the part of both the Company and the Purchaser
and other customary terms and conditions.
Relationship
with Lyles United, LLC
The
Company has had a lengthy business relationship with affiliates of, as well as
prior business dealings with, Lyles United, LLC, as further described
below.
In June
2003, Lyles Diversified, Inc., an affiliate of Lyles United, LLC, loaned $5.1
million to Pacific Ethanol California, Inc. (“PEI
California”). As partial consideration for the loan, PEI
California issued 1,000,000 shares of common stock to Lyles Diversified,
Inc. Up to $1.5 million of the loan was convertible into additional
shares of PEI California’s common stock at a rate of $1.50 per
share. Lyles Diversified, Inc. converted portions of the loan from
time to time into an aggregate of 335,121 shares of PEI California’s common
stock. PEI California subsequently became a wholly-owned subsidiary
of the Company’s and in connection therewith, all of Lyles Diversified, Inc.’s
shares of PEI California’s common stock were exchanged for shares of the
Company’s common stock on a one-for-one basis. The loan was
subsequently assigned to the Company and Lyles Diversified, Inc. converted the
remaining balance of the $1.5 million initially eligible to be converted into
664,879 shares of the Company’s common stock. In aggregate, Lyles Diversified,
Inc. received 2,000,000 shares of the Company’s common stock in connection with
the loan transaction and the conversion of $1.5 million of debt. The
loan was later further assigned to Pacific Ethanol Madera LLC (“PEI Madera”), an
indirect subsidiary of the Company.
In
November 2005, PEI Madera entered into a Design-Build Agreement with W.M. Lyles
Co., an affiliate of Lyles United, LLC, that provided for design and build
services to be rendered by W.M. Lyles Co. to PEI Madera with respect to the
Company’s ethanol production facility in Madera, California. The
Madera facility was completed in October 2006.
In
September 2007, Pacific Ethanol Stockton LLC (“PEI Stockton”), an
indirect subsidiary of the Company, entered into a Construction Agreement with
W.M. Lyles Co., an affiliate of Lyles United, LLC, for W.M. Lyles Co. to provide
construction management and construction services to PEI Stockton with respect
to the Company’s ethanol production facility in Stockton,
California. In December 2007, W.M. Lyles Co. assigned the
Construction Agreement to Lyles Mechanical Co., another affiliate of Lyles
United, LLC. The Stockton facility is in the process of being
constructed.
In
November 2007, Pacific Ethanol Imperial, LLC (“PEI Imperial”), an
indirect subsidiary of the Company, borrowed $15.0 million from Lyles United,
LLC under a Secured Promissory Note containing customary terms and
conditions. The loan accrues interest at a rate equal to the Prime
Rate of interest as reported from time to time in The Wall Street Journal, plus
two percent (2.00%), computed on the basis of a 360-day year of twelve 30-day
months. The loan was due 90-days after issuance or, if extended at
the option of PEI Imperial, 365-days after the end of such 90-day period. This
loan was extended by PEI Imperial and is due February 25, 2009. The
Secured Promissory Note provided that if the loan was extended, the Company was
to issue a warrant to purchase 100,000 shares of the Company’s common stock at
an exercise price of $8.00 per share. The Company is to issue this
warrant simultaneously with the closing of the transactions contemplated by the
Purchase Agreement, or alternatively not later than April 30,
2008. The warrant will be exercisable at any time during the 18-month
period after the date of issuance. The loan is secured by
substantially all of the assets of PEI Imperial pursuant to a Security Agreement
dated November 28, 2007 by and between PEI Imperial and Lyles United, LLC that
contains customary terms and conditions and an Amendment No. 1 to Security
Agreement dated December 27, 2007 by and between PEI Imperial and Lyles United,
LLC (collectively, the “Security
Agreement”). The Company has guaranteed the repayment of the
loan pursuant to an Unconditional Guaranty dated November 28, 2007 containing
customary terms and conditions. In connection with the loan, PEI
Imperial entered into a Letter Agreement dated November 28, 2007 with Lyles
United, LLC under which PEI Imperial committed to award the primary construction
and mechanical contract to Lyles United, LLC or one of its affiliates for the
construction of an ethanol production facility at the Company’s Imperial Valley
site near Calipatria, California (the “Project”),
conditioned upon PEI Imperial electing, in its sole discretion, to proceed with
the Project and Lyles United, LLC or its affiliate having all necessary licenses
and is otherwise ready, willing and able to perform the primary construction and
mechanical contract. In the event the foregoing conditions are
satisfied and PEI Imperial awards such contract to a party other than Lyles
United, LLC or one of its affiliates, PEI Imperial will be required to pay to
Lyles United, LLC, as liquidated damages, an amount equal to $5.0
million.
In
December 2007, PEI Imperial borrowed an additional $15.0 million from Lyles
United, LLC under a second Secured Promissory Note containing customary terms
and conditions. The loan accrues interest at a rate equal to the
Prime Rate of interest as reported from time to time in The Wall Street Journal, plus
two percent (2.00%), computed on the basis of a 360-day year of twelve 30-day
months. The loan is due on March 31, 2008 or, if extended at the
option of PEI Imperial, on March 31, 2009. If the loan is extended,
the interest rate increases by two percentage points. The loan is secured by
substantially all of the assets of PEI Imperial pursuant to the Security
Agreement. The Company has guaranteed the repayment of the loan pursuant to an
Unconditional Guaranty dated December 27, 2007 containing customary terms and
conditions. The Company intends to extend the due date of the second
Secured Promissory Note.
Ancillary
Agreements
Letter
Agreement to be entered into by and between Pacific Ethanol, Inc., and Lyles
United, LLC
In
connection with the closing of the transactions contemplated by the Purchase
Agreement, the Company will enter into a Letter Agreement with Lyles United, LLC
under which the Company expressly waives its rights under the Certificate of
Designation to make dividend payments in additional shares of Series B Preferred
Stock in lieu of cash dividend payments without the prior written consent of
Lyles United, LLC.
Item
2.02. Results of
Operations and Financial Condition.
Form 12b-25. In
the Form 12b-25 we filed today with the SEC we provided certain information
regarding our presently expected results of operations for the quarter and year
ended December 31, 2007 and as to our liquidity position. The
information provided was as follows:
Unaudited
Preliminary Results of Operations
The
following results of operations are preliminary and have not been audited or
otherwise reviewed by our independent auditors. The Company’s final,
audited results of operations could be materially different from the unaudited
preliminary results of operations set forth below.
Introductory
Note: Please see the information under the caption “Cautionary
Statements” above which sets forth important disclosure regarding
forward-looking statements contained in this Form.
Three
Months Ended December 31, 2007
The
Company anticipates reporting net sales of approximately $130.4 million for the
fourth quarter of 2007 as compared to net sales of $80.6 million for the same
period in 2006. The increase in net sales resulted primarily from an
increase in the volume of ethanol sold by the Company and was partially offset
by lower average sales prices. The volume of ethanol sold by the
Company in the fourth quarter of 2007 increased by approximately 82% as compared
to the same period in 2006 and by approximately 16% as compared to the third
quarter of 2007. The Company’s average sales price of ethanol
decreased by $0.29 per gallon, or 13%, to $1.97 per gallon in the fourth quarter
of 2007 from an average sales price of $2.26 per gallon in the same period in
2006.
The
Company anticipates reporting gross profit of approximately $1.7 million for the
fourth quarter of 2007 as compared to gross profit of $11.7 million for the same
period in 2006. The Company anticipates reporting that its gross
profit margin was approximately 1.3% for the fourth quarter of 2007 as compared
to a gross profit margin of 14.6% for the same period in 2006. The
decline in the Company’s gross profit and gross profit margins was primarily due
to a lower average sales price of ethanol, as discussed above, and significantly
higher corn costs.
The
Company anticipates reporting a net loss of approximately $14.7 million for the
fourth quarter of 2007 as compared to a net loss of $3.1 million for the same
period in 2006. The Company anticipates that its net loss will
include non-cash expenses of approximately $4.4 million from interest rate
derivatives related to future periods and approximately $2.0 million from
write-downs of deferred financing fees associated with the Company’s suspension
of construction at its Imperial Valley facility near Calipatria,
California. The Company also anticipates its net loss will include a
gain of approximately $0.9 million from mark-to-market adjustments for commodity
derivatives related to future periods.
The
Company anticipates reporting loss available to common stockholders of
approximately $15.8 million for the fourth quarter of 2007, net of preferred
stock dividends, as compared to a loss available to common stockholders of $4.2
million for the fourth quarter of 2006.
The
Company anticipates reporting a diluted net loss per common share of
approximately $0.39 for the fourth quarter of 2007 as compared to a net loss per
common share of $0.11 for the same period in 2006. The Company had
40.1 million weighted-average basic and diluted shares outstanding for the
fourth quarter of 2007.
Year
Ended December 31, 2007
The
Company anticipates reporting net sales of approximately $461.5 million for the
year ended December 31, 2007 as compared to net sales of $226.4 million for
2006. The increase in net sales resulted primarily from an increase
in the volume of ethanol sold by the Company and was partially offset by lower
average sales prices. The volume of ethanol sold by the Company in
year ended December 31, 2007 increased by approximately 87% as compared to
2006. The Company’s average sales price of ethanol decreased by $0.13
per gallon, or 6%, to $2.15 per gallon in the year ended December 31, 2007 from
an average sales price of $2.28 per gallon in 2006.
The
Company anticipates reporting gross profit of approximately $32.9 million for
the year ended December 31, 2007 as compared to gross profit of $24.8 million
for 2006. The Company anticipates reporting that its gross profit
margin was approximately 7.1% for the year ended December 31, 2007 as compared
to a gross profit margin of 11.0% for 2006. The decline in the
Company’s gross profit and gross profit margins were primarily due to a lower
average sales price of ethanol, as discussed above, significantly higher corn
costs and derivative losses from locking in margins during the
year.
The
Company anticipates reporting a net loss of approximately $14.4 million for the
year ended December 31, 2007 as compared to a net loss of $0.1 million for
2006. The Company anticipates that its net loss will include a
non-cash expense of approximately $5.4 million from interest rate derivatives
related to future periods, approximately $3.0 million from mark-to-market
adjustments for commodity derivatives related to future periods, approximately
$2.9 million from amortization of intangible assets related to the Company’s
acquisition of Front Range Energy, LLC, and approximately $2.0 million from
write-downs of deferred financing fees associated with the Company’s suspension
of construction at its Imperial Valley facility near Calipatria,
California.
The
Company anticipates reporting loss available to common stockholders of
approximately $18.6 million for the year ended December 31, 2007, net of
preferred stock dividends, as compared to a loss available to common
stockholders of $87.1 million for 2006, of which $84.0 million was a non-cash
deemed dividend resulting from the Company’s issuance of its Series A Cumulative
Redeemable Convertible Preferred Stock in the second quarter of
2006.
The
Company anticipates reporting a diluted net loss per common share of
approximately $0.47 for the year ended December 31, 2007 as compared to a net
loss per common share of $2.50 for 2006, the latter of which included the
non-cash deemed dividend described above. The Company had 39.9
million weighted-average basic and diluted shares outstanding for the year ended
December 31, 2007.
Liquidity
and Capital Resources
The
Company presently has extremely limited liquidity and requires substantial
additional financing to conduct its operations and achieve its business
objectives. If the Company is unable to obtain substantial additional
financing, it will be unable to achieve its business objectives, will be forced
to delay or abandon the construction of one or more plants and may be forced to
delay or abandon its plant expansion program in its entirety. The
Company’s inability to raise substantial additional financing will also
materially hamper its ongoing operations and have a material adverse effect on
the Company’s results of operations, liquidity and cash flows. In
addition to the $40.0 million Pending Equity Financing described above, the
Company is presently exploring other potential sources of new financing to
provide additional working capital for its business and for the repayment of
liabilities.
As
discussed above, the Company has recently raised $30.0 million in debt financing
from Lyles United, LLC and has signed an agreement with this investor in respect
of the Pending Equity Financing. However, the closing of the Pending
Equity Financing is subject to numerous customary closing conditions as well as
closing conditions distinct to that transaction, many of which are beyond the
Company’s control. Accordingly, the Company may be unable to
successfully close the Pending Equity Financing.
The
Company is currently in default under its Credit Agreement for the construction
and financing of ethanol facilities. The Company is endeavoring to
obtain the Pending Bank Waiver in respect of its defaults from its
lenders. Failure to obtain the Pending Bank Waiver (as defined below)
would permit the lenders under the Credit Agreement to pursue remedies
thereunder, including acceleration of the maturity date of the underlying
borrowings. In addition, if the Company is unable to obtain these
waivers, it will be required to reclassify a substantial amount of long-term
debt as short-term. Obtaining the Pending Bank Waiver is a condition
to the closing of the Pending Equity Financing.
The
Company’s need for additional capital is due to numerous factors that arose or
that the Company identified in the fourth quarter of 2007. The
Company experienced higher than forecast construction costs at its Burley, Idaho
and Stockton, California facilities as a result of unanticipated change
orders. The Company also incurred higher costs related to the
completion of “punch list” items at the Company’s Boardman, Oregon facility and
costs related to the suspension of the Company’s Imperial Valley facility near
Calipatria, California. In aggregate, the cost overruns that arose or
that were identified in the fourth quarter of 2007 were approximately $27
million. In addition, funding under the construction loan facility of
the Credit Agreement will occur later than previously
anticipated. Consequently, the Company expects to fund approximately
$29 million for the ongoing construction of its Burley and Stockton
facilities. A significant portion of the $29 million is expected to
be recovered upon completion of the Burley and Stockton facilities, at which
time the Company expects to draw additional loan proceeds under the terms of its
existing Credit Agreement. In addition to the above factors, the
Company also continued to experience adverse ethanol market conditions in the
fourth quarter of 2007 and extending into 2008 resulting in cash generated from
operations being lower than originally forecast.
Stockholders
Equity.
As of
December 31, 2007, the Company had stockholders equity of approximately
$282,286,000 and 40,606,214 shares were outstanding.
We are
aware of several events or circumstances which constitute defaults under the
Credit Agreement and for which we are seeking waivers from our lenders,
including:
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When
filed, we expect that our Annual Report on Form 10-K will disclose the
existence of a material weakness in our internal control over financial
reporting due to an error our auditors discovered related to the accrual
of construction-related invoices in the fourth quarter of
2007. Amounts totaling $8.2 million were incorrectly recorded
in January 2008 for purposes of our internal financial statements when
they should have been accrued in December 2007. The error,
which constituted a material weakness, involved accruals to the CIP
(construction in progress) account and corresponding accruals to current
liabilities. The error affected the consolidated balance sheet
only. There was no income statement or statement of cash flows
effect, nor was there any impact on the construction
budgets. We have instituted actions designed to remediate this
material weakness. Unless waived, the Company’s disclosure of
any “material weakness in its internal controls” in our Annual Report on
Form 10-K will be a default under the Credit
Agreement.
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Pursuant
to the terms of the Credit Agreement, we are generally required to deposit
all revenues related to the production facilities financed under this
agreement in segregated revenue accounts which are controlled by our
lenders. The Credit Agreement includes specific covenants
governing our use of those funds. On Wednesday, March 12, 2008,
our senior management was informed that an unauthorized deviation from the
Credit Agreement requirements related to the segregated revenue accounts
had occurred. These actions were apparently undertaken for the
purpose of optimizing our cash position but without regard to the
covenants in the Credit Agreement. Our review to date has
established that these actions took place beginning in August
2007. Remedial actions have been taken to rectify this control
deficiency and prevent its recurrence, including the reassignment of cash
management responsibilities to our chief financial
officer. Since at all times the misdirected funds remained
within our consolidated financial group, we do not believe that these
unauthorized internal cash transfers caused our consolidated results of
operations to be misstated. However, unless waived, these
actions resulted in a violation of a number of covenants in the Credit
Agreement and the conditions which permitted these actions to occur may
involve one or more additional material weaknesses in our internal control
over financial reporting. Based on the analysis completed to
date, we believe that the net amount of cash which was diverted from the
segregated revenue accounts to other internal uses was approximately $3.9
million as of February 29, 2008 (the “Deposit
Shortfall”), which constitutes a default of the Credit
Agreement.
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The
Credit Agreement required that, on the date of the initial fundings for
the Madera and Boardman plants, a designated debt service reserve related
to the loans for such borrower should have been deposited into the debt
service reserve account controlled by the lenders. This amount,
$3.4 million in the aggregate (the “DSR
Shortfall”), has not been deposited as required by the Credit
Agreement, which constitutes a default of the Credit
Agreement.
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Unless
waived, the Credit Agreement limits us to no more than seven separate
Eurodollar loans outstanding at any time. There are presently
eight such loans outstanding.
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The
Credit Agreement provides that the “final completion” of the Madera plant
and Boardman plant should already have occurred. One of the
conditions to “final completion” is that the borrowers pay all remaining
project costs related to the construction of the particular
plant. We are still in the process of negotiating final
payments with our contractors. We are proposing to agree with
our lenders to achieve “final completion” on or prior to May 16,
2008. As previously disclosed, both plants have been put into
operation notwithstanding the failure to achieve “final completion” on
time, however that failure constitutes a default of the Credit
Agreement.
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In
connection with a proposed waiver, we are also requesting that the lenders
permit us to perform certain calculations called for by the Credit Agreement on
a weekly, instead of monthly, basis in order to better mach cash flow with
operating requirements.
The agent
bank for the Credit Agreement is aware of the foregoing and has advised us and
the other lenders party to the Credit Agreement that it supports a waiver of the
defaults described above. A written waiver request (the “Pending Bank Waiver”)
was presented to our bank lending group on March 16, 2008 and we are awaiting
the approval of this waiver by the requisite lenders, representing lenders of at
least a majority of the amounts committed under the Credit
Agreement. If the waiver is approved, we will be obligated to pay the
lenders under the Credit Agreement a consent fee in an amount that has not yet
been finalized, but which we are estimating to be approximately
$500,000. As of March 17, 2008, there was $129.5 million principal
amount outstanding under the Credit Agreement.
We have
also advised our lenders under the Credit Agreement that we will deposit the
Deposit Shortfall and the DSR Shortfall, aggregating $7.3 million, in the proper
accounts. Funding this payment will further significantly strain our
present extremely limited liquidity position.
Item
9.01. Financial
Statements and Exhibits.
(a) Financial statements of
businesses acquired. Not applicable.
(b) Pro forma financial
information. Not applicable.
(c) Shell company
transactions. Not applicable.
(c) Exhibits.
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Number
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Description
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10.1
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Securities
Purchase Agreement dated March 18, 2008 between Pacific Ethanol, Inc. and
Lyles United, LLC
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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PACIFIC
ETHANOL, INC.
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By:
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/s/ Christopher
W. Wright |
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Christopher
W. Wright |
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Vice
President, General Counsel & Secretary |
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EXHIBITS
FILED WITH THIS REPORT
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Number
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Description
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10.1
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Securities
Purchase Agreement dated March 18, 2008 between Pacific Ethanol, Inc. and
Lyles United, LLC
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16