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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _____________________
Commission file number: 000-24394
PENN OCTANE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1790357
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
77-530 ENFIELD LANE, BUILDING D, PALM DESERT, CALIFORNIA 92211
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (760) 772-9080
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of October 13, 2000 was $48,616,328. The last reported sale
price of the Registrant's Common Stock as reported on the Nasdaq SmallCap Market
on October 13, 2000 was $5.25 per share.
The number of shares of Common Stock, par value $.01 per share, outstanding
on October 13, 2000 was 13,686,795.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
ITEM PAGE NO.
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Part I 1. Business 3
2. Properties 13
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 18
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters 19
6. Selected Financial Data 21
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
7A. Quantitative and Qualitative Disclosures About Market Risks 33
8. Financial Statements and Supplementary Data 34
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 74
Part III 10. Directors and Executive Officers of the Registrant 75
11. Executive Compensation 77
12. Security Ownership of Certain Beneficial Owners and Management 83
13. Certain Relationships and Related Transactions 84
Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 86
2
PART I
The statements contained in this Annual Report that are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933. These forward-looking statements may be identified by the use of
forward-looking terms such as "believes," "expects," "may," "will", "should" or
anticipates" or by discussions of strategy that involve risks and uncertainties.
From time to time, we have made or may make forward-looking statements, orally
or in writing. These forward-looking statements include statements regarding
anticipated future revenues, sales, operations, demand, competition, capital
expenditures, the deregulation of the LPG market in Mexico, the completion and
operations of the US - Mexico Pipelines, the Matamoros Terminal Facility and the
Saltillo Terminal Facility, other upgrades to our facilities, foreign ownership
of LPG operations, credit arrangements and other statements regarding matters
that are not historical facts, and involve predictions which are based upon a
number of future conditions that ultimately may prove to be inaccurate. Actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Factors that may
cause or contribute to such differences include those discussed under "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as those discussed elsewhere in this Annual Report. We
caution you, however, that this list of factors may not be complete.
ITEM 1. BUSINESS.
INTRODUCTION
Penn Octane Corporation (the "Company"), formerly known as International
Energy Development Corporation ("International Energy"), was incorporated in
Delaware in August 1992. The Company has been principally engaged in the
purchase, transportation and sale of liquefied petroleum gas ("LPG"). From 1997
until March 1999, the Company was also involved in the provision of equipment
and services to the compressed natural gas ("CNG") industry. The Company owns
and operates a terminal facility in Brownsville, Texas (the "Brownsville
Terminal Facility") and owns a 50% interest and leases the remaining 50%
interest in a LPG terminal facility in Matamoros, Tamaulipas, Mexico (the
"Matamoros Terminal Facility") and pipelines (the "US - Mexico Pipelines") which
connects the Brownsville Terminal Facility to the Matamoros Terminal Facility.
The Company has a long-term lease agreement for approximately 132 miles of
pipeline (the "Leased Pipeline") which connects Exxon Company, U.S.A.'s
("Exxon") King Ranch Gas Plant in Kleberg County, Texas and Duke Energy's La
Gloria Gas Plant in Jim Wells County, Texas, to the Company's Brownsville
Terminal Facility. In addition, the Company has access to a twelve-inch
pipeline (the "ECCPL"), which connects from Exxon's Viola valve station in
Nueces County, Texas to the inlet of the King Ranch Gas Plant. In connection
with the Company's lease agreement for the Leased Pipeline, the Company has
access to 21 million gallons of storage located in Markham, Texas ("Markham") as
well as potential propane pipeline exchange suppliers via approximately 155
miles of pipeline located between Markham and the Exxon King Ranch Gas Plant.
On October 21, 1993, International Energy purchased 100% of the common
stock of Penn Octane Corporation, a Texas corporation, and merged it into
International Energy as a division. As a result of the merger, the Company
assumed the lease agreement with Seadrift Pipeline Corporation ("Seadrift") for
the use of the Leased Pipeline. In January 1995, the Board of Directors
approved the change of the Company's name to Penn Octane Corporation.
The Company commenced commercial operations for the purchase, transport and
sale of LPG in the fiscal year ended July 31, 1995, upon completion of
construction of the Brownsville Terminal Facility. The primary market for the
Company's LPG is the northeast region of Mexico, which includes the states of
Coahuila, Nuevo Leon and Tamaulipas. The Company believes it has a competitive
advantage in the supply of LPG for the northeast region of Mexico because of the
Company's access to pipelines and terminal facilities which allow the Company to
bring supplies of LPG close to consumers of LPG in major cities in that region.
The Company sells LPG primarily to P.M.I. Trading Limited ("PMI") who
distributes the LPG purchased from the Company into the northeast region of
Mexico. PMI is the exclusive importer of LPG into Mexico. PMI is also a
subsidiary of Petroleos Mexicanos, the state-owed Mexican oil company, which is
commonly known by its trade name "PEMEX." Since operations commenced, the
Company's primary customer for LPG has been PMI.
3
In March 1997, the Company, through its wholly-owned subsidiary PennWilson
CNG, Inc., a Delaware corporation ("PennWilson"), acquired certain assets,
including inventory, equipment and intangibles, from Wilson Technologies
Incorporated ("WTI"), a company formerly engaged in the design, construction,
installation and maintenance of turnkey CNG fueling stations, hired certain of
WTI's former employees and commenced operations for the provision of equipment
and services used in the CNG industry. In May 1999, the Company discontinued
operation of its CNG business and most of the Company's CNG assets were sold
(see notes D and E to the consolidated financial statements).
The Company's principal executive offices are located at 77-530 Enfield
Lane, Building D, Palm Desert, California 92211, and its telephone number is
(760) 772-9080. The offices of PennWilson are located at 12631 Imperial
Highway, Bldg. A, Suite 120A, Santa Fe Springs, California 90670, and its
telephone number is (562) 929-1984.
LIQUEFIED PETROLEUM GAS
OVERVIEW. Since operations commenced, the primary business of the Company
has been the purchase, transportation and sale of LPG. LPG is a mixture of
propane and butane principally used for residential and commercial heating and
cooking. The demand for propane is also growing as a motor fuel substitute for
motor gasoline.
The primary market for the Company's LPG is the northeast region of Mexico,
which includes the states of Coahuila, Nuevo Leon and Tamaulipas. Mexico is one
of the largest markets for LPG consumption in the world. LPG is the most widely
used domestic fuel in Mexico and is the primary energy source for Mexican
households using such domestic fuels. Domestic consumption of LPG in Mexico
increased from an average of 386.6 million gallons per month in 1999 to an
average of 415.6 million gallons per month from January 1, 2000 to September 30,
2000, an estimated annual increase of 7.5%. The future of LPG in Mexico
continues to favor the Company for the following reasons: (i) Mexico's domestic
consumption of LPG exceeds current domestic production capacity and such short
fall is expected to increase (ii) limited sources of competitive LPG supply for
importation into Mexico, (iii) the Mexican government's current plans to
deregulate the LPG industry, (iv) the expanding use of propane as an automotive
fuel, and (v) the location of Mexico's major domestic LPG production, which is
in the southeastern region of Mexico, combined with the lack of pipeline
infrastructure within Mexico from those production centers, resulting in higher
distribution costs to transport the LPG to areas where consumption is heaviest
including the central, northern and Pacific coast regions of Mexico.
The Company has been able to successfully compete with other LPG suppliers
in the provision of LPG to customers in northeast Mexico primarily as a result
of the Leased Pipeline and the geographic proximity of its Brownsville Terminal
Facility to consumers of LPG in such major cities in Mexico as Matamoros,
Reynosa and Monterrey. Beginning in April 2000, the Company enhanced its
strategic position in the supply of LPG in northeast Mexico by commencing
operations of the US - Mexico Pipelines and Matamoros Terminal Facility. With
the commencement of operations of the Matamoros Terminal Facility, the previous
logistical inefficiencies and sales limitations resulting from delays crossing
the United States-Mexico border or the ability of PMI to provide United States
certified trucks or trailers capable of receiving LPG at the Brownsville
Terminal Facility have been reduced. Prior to the commencement of operations by
the Company at its Brownsville Terminal Facility, LPG exports to northeast
Mexico from the United States had been transported by truck and rail primarily
through Eagle Pass, Texas which is approximately 240 miles northwest of
Brownsville. The Company's Brownsville Terminal Facility and Matamoros Terminal
Facility provide reduced trucking distances and trucking costs to points of
distribution in northeast Mexico than the principal LPG supply centers (other
than Brownsville) historically used by PMI. The Company believes that the
Matamoros Terminal Facility and the Saltillo Terminal Facility (as defined
below) will further enhance its strategic position for the supply of LPG in
northeast Mexico.
4
THE BROWNSVILLE TERMINAL FACILITY. The Company's Brownsville Terminal
Facility occupies approximately 31 acres of land located adjacent to the
Brownsville Ship Channel, a major deep-water port serving northeastern Mexico,
including the city of Monterrey, and southeastern Texas. The Brownsville
Terminal Facility also contains a railroad spur. Total rated storage capacity
of the Brownsville Terminal Facility is approximately 675,000 gallons of LPG.
The Brownsville Terminal Facility includes eleven storage and mixing tanks, four
mixed product truck loading racks, one specification product propane loading
rack and two racks capable of receiving LPG delivered by truck and three railcar
loading racks which permit the loading and unloading of LPG by railcar. The
truck loading racks and railcar loading racks are linked to a
computer-controlled loading and remote accounting system.
The Company leases the land on which the Brownsville Terminal Facility is
located from the Brownsville Navigation District (the "District") under a lease
agreement (the "Brownsville Lease") that expires on October 15, 2003.
Currently, substantially all of the Company's LPG supply is received through the
Leased Pipelines, which are connected to the facilities located at the
Brownsville Terminal Facility. The US - Mexico Pipelines also connect to the
facilities located at the Brownsville Terminal Facility. The Brownsville Lease
contains a pipeline easement to the District's water dock facility at the
Brownsville Ship Channel.
The Company anticipates renewing the Brownsville Lease prior to its
expiration for the same term as the Pipeline Lease Amendment (as defined below).
The Brownsville Lease provides, among other things, that if the Company complies
with all the conditions and covenants therein, the leasehold improvements made
to the Brownsville Terminal Facility by the Company may be removed from the
premises or otherwise disposed of by the Company at the termination of the
Brownsville Lease. In the event of a breach by the Company of any of the
conditions or covenants of the Brownsville Lease, all improvements owned by the
Company and placed on the premises shall be considered part of the real estate
and shall become the property of the District.
THE US - MEXICO PIPELINES AND MATAMOROS TERMINAL FACILITY. On July 26,
1999, the Company was granted a permit by the United States Department of State
authorizing the Company to construct, maintain and operate two pipelines (the
"US Pipelines") crossing the international boundary line between the United
States and Mexico (from the Brownsville Terminal Facility near the Port of
Brownsville, Texas and El Sabino, Mexico) for the transport of LPG and refined
products (motor gasoline and diesel fuel) [the "Refined Products"].
On July 2, 1998, Penn Octane de Mexico, S.A. de C.V. ("PennMex"), an
affiliated company (see "Foreign Ownership of LPG Operations"), received a
permit from the Comision Reguladora de Energia (the "Mexican Energy Commission")
to build and operate one pipeline to transport LPG (the "Mexican Pipeline")
[collectively, the US Pipelines and the Mexican Pipeline are referred to as the
"US - Mexico Pipelines"] from El Sabino (at the point north of the Rio Bravo) to
the Matamoros Terminal Facility.
In connection with the construction of the US - Mexico Pipelines and the
Matamoros Terminal Facility, the Company and CPSC International, Inc. ("CPSC")
entered into two separate Lease / Installation Purchase Agreements, as amended
("the Lease Agreements"), whereby CPSC was required to construct and operate the
US - Mexico Pipelines (including an additional pipeline to accommodate Refined
Products) and the Matamoros Terminal Facility and lease these assets to the
Company. Under the terms of the Lease Agreements, the Company was required to
pay monthly rentals of approximately $157,000, beginning the date that the US -
Mexico Pipelines and Matamoros Terminal Facility were physically capable to
transport and receive LPG in accordance with technical specifications required
(the "Substantial Completion Date"). In addition, the Company agreed to provide
a lien (the "Liens") on certain assets, leases and contracts, which are
currently pledged to RZB Finance, L.L.C. ("RZB"), which Liens would require the
consent of RZB, and provide CPSC with a letter of credit of approximately $1.0
million. The Company also had the option to purchase the US - Mexico Pipelines
and the Matamoros Terminal Facility at the end of the 10th year anniversary and
15th year anniversary for $5.0 million and $100,000, respectively. Under the
terms of the Lease Agreements, CPSC was required to pay all costs associated
with the construction and maintenance of the US - Mexico Pipelines and Matamoros
Terminal Facility.
5
During September 1999, December 1999 and February 2000, the Company and
CPSC amended the Lease Agreements whereby the Company agreed to acquire up to a
100% interest in the Lease Agreements which, as of July 31, 2000 the Company had
acquired a 50% interest pursuant to the December 1999 amendment. During
February 2000, the Company determined that CPSC did not comply with certain
obligations under the Lease Agreements. In March 2000, CPSC filed for
protection under Chapter 11 of the United States Bankruptcy Code. Since that
date, the Company has also determined that CPSC did not comply with other
obligations provided for under the Lease Agreements. The parties are close to a
renewed negotiated settlement of all disputes between them and have signed a
number of term sheets that contain virtually all of the substantive provisions
necessary to a global resolution, which would provide for 100% ownership of the
US - Mexico Pipelines and Matamoros Terminal Facility by the Company or its
affiliates (the "Settlement") and eliminate the requirement for the Liens.
Until the Settlement is completed, the Company will continue to record the
remaining 50% portion of the US - Mexico Pipelines and Matamoros Terminal
Facility as a capital lease (see notes G, J and M to the consolidated financial
statements).
With the completion of the US-Mexico Pipelines and Matamoros Terminal
Facility, the Company has established a pipeline infrastructure that allows it
to transport LPG from the United States to Mexico (the "Expansion"). Management
believes that as a result of the Expansion, the Company will have the
opportunity to: i) further penetrate the Mexican market for the sale of LPG, ii)
provide greater volumes of LPG into Mexico as a result of reduced cross border
trucking delays and greater access to Mexican distribution resources, and iii)
achieve greater margins on its LPG sales.
The Company or its Mexican affiliates own, lease, or intend to obtain the
land or rights of way used in the construction of the US - Mexico Pipelines, and
own the assets comprising the US - Mexico Pipelines and Matamoros Terminal
Facility. The Company's Mexican affiliate Tergas, S.A. de C.V. ("Tergas") has
been granted the permit to operate the Matamoros Terminal Facility (see "Foreign
Ownership of LPG Operations").
US - MEXICO PIPELINES. The Company's US-Mexico Pipelines consist of two
parallel pipelines, one of approximately six inch diameter and the other of
approximately eight inch diameter, running approximately 25 miles and connecting
the Brownsville Terminal Facility to the Matamoros Terminal Facility. The
planned capacity of the six inch pipeline and eight inch pipeline is
approximately 840,000 gallons per day and 1.7 million gallons per day,
respectively. Each of the pipelines can flow product bi-directionally and can
accommodate LPG or Refined Products.
THE MATAMOROS TERMINAL FACILITY. The Company's Matamoros Terminal Facility
occupies approximately 35 acres of land located approximately seven miles from
the United States-Mexico border and is linked to the Brownsville Terminal
Facility via the US - Mexico Pipelines. The Matamoros Terminal Facility is
located in an industrial zone west of the city of Matamoros, and the Company
believes that it is strategically positioned to be a centralized distribution
center of LPG for the northeast region of Mexico. Total rated storage capacity
of the Matamoros Terminal Facility is approximately 270,000 gallons of LPG and
there are plans to install additional storage capacity totaling approximately
630,000 gallons. The Matamoros Terminal Facility includes three storage tanks
and ten specification product truck loading racks for LPG product. The truck
loading racks are linked to a computer-controlled loading and remote accounting
system and to the Company's Brownsville Terminal Facility. The Matamoros
Terminal Facility receives its LPG supply directly from the US - Mexico
Pipelines which connect to the Leased Pipelines at the Brownsville Terminal
Facility.
THE SALTILLO TERMINAL FACILITY. Termatsal, S.A. de C.V. ("Termatsal") has
completed construction of an additional LPG terminal facility in Saltillo,
Mexico (the "Saltillo Terminal Facility") for an estimated cost of $800,000.
The Saltillo Terminal Facility is capable of off loading LPG from railcars to
trucks. The Saltillo Terminal Facility contains storage to accommodate
approximately 90,000 gallons of LPG with additional storage planned for 180,000
gallons. The Saltillo Terminal Facility has three railcar off loading racks and
three truck loading racks. As a result of the Saltillo Terminal Facility, the
Company can directly transport LPG via railcar from the Brownsville Terminal
Facility to the Saltillo Terminal Facility. The Company further believes that
by having the capability to deliver LPG to the Saltillo Terminal Facility, the
Company will be able to further penetrate the Mexican market for the sale of
LPG. The Saltillo Terminal Facility will begin operations upon final approval
from local governmental authorities, expected to be by December 2000.
Tergas leases the land on which the Saltillo Terminal Facility is located
and has been granted the permit to operate the Saltillo Terminal Facility.
Termatsal owns the assets comprising the Saltillo Terminal Facility. Under the
terms of the land lease agreement, any leasehold improvements at the termination
of the lease may be removed.
6
In connection with the planned operations of the Saltillo Terminal
Facility, Termatsal has leased approximately 50 railcars to transport LPG
between the Brownsville Terminal Facility and the Saltillo Terminal Facility.
THE LEASED PIPELINE. The Company has a lease agreement (the "Pipeline
Lease") with Seadrift, a subsidiary of Union Carbide Corporation ("Union
Carbide"), for approximately 132 miles of pipeline which connects Exxon's King
Ranch Gas Plant in Kleberg County, Texas and Duke Energy Corporation's La Gloria
Gas Plant in Jim Wells County, Texas, to the Company's Brownsville Terminal
Facility (the "Leased Pipeline"). As provided for in the Pipeline Lease, the
Company has the right to use the Leased Pipeline solely for the transportation
of LPG and refined products belonging only to the Company and not to any third
party.
The Pipeline Lease currently expires on December 31, 2013, pursuant to an
amendment (the "Pipeline Lease Amendment") entered into between the Company and
Seadrift on May 21, 1997, which became effective on January 1, 1999 (the
"Effective Date"). The Pipeline Lease Amendment provides, among other things,
access to 21 million gallons of storage located in Markham as well as potential
propane pipeline exchange suppliers via approximately 155 miles of pipeline
located between Markham and the Exxon King Ranch Gas Plant. Pursuant to the
Pipeline Lease Amendment, the Company's fixed annual rent for the use of the
Leased Pipeline was increased by $350,000, less certain adjustments during the
first two years from the Effective Date, and the Company is required to pay a
minimum charge for storage of $300,000 per year, beginning January 1, 2000. In
addition, the Pipeline Lease Amendment provides for variable rental increases
based on monthly volumes purchased and flowing into the Leased Pipeline and
storage utilized. The Company believes that the Pipeline Lease Amendment
provides the Company increased flexibility in negotiating sales and supply
agreements with its customers and suppliers. The Company has made all payments
required under the Pipeline Lease Amendment.
Present Pipeline capacity is approximately 250 million gallons per year.
In fiscal year 2000, the Company sold approximately 140 million gallons of LPG
which flowed through the Leased Pipeline. The Company can increase the Leased
Pipeline's capacity through the installation of additional pumping equipment
(see "Upgrades" below).
The Company intends to obtain additional lease extensions for the Leased
Pipeline, which would enable the Company to maintain its LPG business beyond the
term of the Pipeline Lease Amendment.
THE ECCPL PIPELINE. In connection with the Company's supply agreement with
Exxon, the Company was granted access to Exxon's twelve-inch pipeline which
connects from Exxon's Viola valve station in Nueces County, Texas (near Corpus
Christi, Texas) to the inlet of the King Ranch Gas Plant (the "ECCPL Pipeline").
Under the terms of the agreement, Exxon has agreed to make available space in
the ECCPL for up to 420,000 gallons per day for the Company's use.
THE TANK FARM. The Company recently purchased four storage tanks capable
of storing approximately 12.6 million gallons of Refined Products. The Company
leases the land on which the Tank Farm is located from the District under a
lease agreement (the "Brownsville Lease") that expires in January 2005. The
Company intends to construct additional piping to the Tank Farm which would
connect the Brownsville Terminal Facility, the Tank Farm and the water dock
facilities at the Brownsville Ship Channel.
UPGRADES. The Company has already contracted and intends to further
contract in the near future for the design, construction and installation of
several projects which, when completed, will increase its current pipeline and
storage capacity, enhance its existing pipeline and terminal facilities or
expand its ability to accept or deliver LPG supply (the "Upgrades").
The Company is currently completing a mid-line pump station which will
include the installation of additional piping, meters, valves, analyzers and
pumps along the Leased Pipeline to increase the capacity of the Leased Pipeline
and make the Leased Pipeline bi-directional. The mid-line pump station will
increase the capacity of the Leased Pipeline to approximately 360 million
gallons per year. The total estimated cost to complete the project is
approximately $2.0 million of which approximately $1.1 million has been incurred
through July 31, 2000.
The Company also intends to contract for the design, installation and
construction of pipelines which will connect the Brownsville Terminal Facility
to the District's water dock facilities at the Brownsville Ship Channel and
install additional storage capacity. The estimated cost of this project is
expected to approximate $2.0 million. The Company has employed a firm to
provide the design and engineering for this project.
7
DISTRIBUTION. Until March 2000, all of the LPG from the Leased Pipeline
has been delivered to the Company's customers at the Brownsville Terminal
Facility and then transported by truck to the United States Rio Grande Valley
and northeast Mexico by the customers. In April 2000, the Company began
operating the Matamoros Terminal Facility, whereby a portion of the Company's
LPG supply is further routed from the Brownsville Terminal Facility through the
US - Mexico Pipelines to the Matamoros Terminal Facility and received by the
Company's customer for further distribution by truck in northeast Mexico.
The Company also intends to begin delivering LPG from the Brownsville
Terminal Facility to the Saltillo Terminal Facility by railcar, which will then
be received by the Company's customer for further distribution by truck in
northeast Mexico. Termatsal has contracted with Arrendadora Nacional de Carros
de Ferrocarril, S.A. de C.V. for the rental of up to 50 railcars to be used
primarily to transport LPG from the Brownsville Terminal Facility to the
Saltillo Terminal Facility for the period from August 1999 to August 2001.
The Company owns 14 trailers, which are approved for the transport of
petrochemicals over United States roadways. These trailers are currently being
used to transport LPG on behalf of PMI from the Brownsville Terminal Facility to
points of distribution in northeast Mexico.
Since November 1997, the Company has had a lease arrangement with Auto
Tanques Nieto ("Nieto") to lease the Company's trailers to be used in connection
with transporting LPG from the Brownsville Terminal Facility to points of
distribution in Mexico. Nieto is one of Mexico's largest transportation
companies and provides transportation services to PMI for the LPG purchased from
the Company.
LPG SALES AGREEMENT. Since operations commenced, the Company has been a
supplier of LPG to PEMEX/PMI, which, under current Mexican law, has exclusive
responsibility for importing LPG into Mexico. PMI is currently the Company's
only customer (other than United States customers which the Company may sell
excess quantities of LPG), with sales of LPG to PMI accounting for substantially
all of the Company's total LPG sales revenues (other than sales related to
disposal of excess quantities of LPG) for the fiscal years ended July 31, 1998,
1999 and 2000. The Company entered into a new sales agreement with PMI for the
period from April 1, 2000 through March 31, 2001 (the "New Agreement"), for the
annual sale of a minimum of 151.2 million gallons of LPG, mixed to PMI
specifications, subject to seasonal variability, to be delivered to PMI at the
Company's terminal facilities in Matamoros, Tamaulipas, Mexico and Saltillo,
Coahuila, Mexico.
On October 11, 2000, the New Agreement was amended to increase the minimum
amount of LPG to be purchased during the period from November 2000 through March
2001 by 7.5 million gallons resulting in a new annual minimum commitment of
158.7 million gallons.
The New Agreement, as amended, represents an increase of 130% over annual
minimum contract volumes under the previous sales agreement with PMI for the
period from April 1, 1999 through March 31, 2000. Actual sales volumes to PMI
during the period from April 1, 1999 through March 31, 2000 exceeded the minimum
contractual volumes by 95%. Under the terms of the New Agreement, sale prices
are indexed to variable posted prices. The New Agreement also provides for
higher fixed margins above the variable posted prices over the previous sales
agreements with PMI depending on the final delivery point of the LPG. Sales to
PMI for the year ended July 31, 2000 totaled $76.0 million representing
approximately 77.2% of total revenues for the period.
The New Agreement also provides for trucking of LPG from the Company's
Brownsville Terminal Facility to the Matamoros Terminal Facility (or designated
locations within the area) and from the Brownsville Terminal Facility or the
Matamoros Terminal Facility to the Saltillo Terminal Facility (or designated
locations within the area) in the event that (i) the Company is unable to
transport LPG through the US - Mexico Pipelines, (ii) the Saltillo Terminal
Facility or railcars to deliver LPG to the Saltillo Terminal Facility are not
utilized or (iii) until the Matamoros Terminal Facility or the Saltillo Terminal
Facility are fully operational. Under the terms of the New Agreement, in the
event that the US-Mexico Pipelines or railcars are not used, the sales prices
received shall be reduced by the corresponding trucking charges. During April
2000, the Company began shipping LPG through the US - Mexico Pipelines. During
October 2000, approximately 78% of the LPG sold to PMI was delivered through
the US-Mexico Pipelines to the Matamoros Terminal Facility. As of July 31,
2000, the Saltillo Terminal Facility had not commenced operations.
Historically, the Company and PMI have renewed the existing sales agreement
prior to its expiration. The Company intends to negotiate a renewal of the New
Agreement prior to its expiration.
8
FOREIGN OWNERSHIP OF LPG OPERATIONS. PennMex, Tergas and Termatsal are
Mexican companies, which are owned 90%, 90% and 98%, respectively, by Jorge R.
Bracamontes, an officer and director of the Company ("Bracamontes") and the
balance by other Mexican citizens ("Minority Shareholders"). Under current
Mexican law (see "Deregulation of the LPG Market in Mexico" below), foreign
ownership of Mexican entities involved in the distribution of LPG or the
operation of LPG terminal facilities are prohibited. Foreign ownership is
permitted in the transportation and storage of LPG. Mexican law also provides
that a single entity is not permitted to participate in more than one of the
defined LPG activities (transportation, storage or distribution).
During November 2000, the Company, Bracamontes and the Minority
Shareholders entered into agreements whereby the Company may acquire up to 100%
of the outstanding shares of PennMex and Termatsal for a nominal amount subject
to, among other things, the Settlement. Because the Company participates in one
of the defined LPG activities (see above), the Company intends to contract with
Tergas for services to be performed by Tergas at the Matamoros Terminal Facility
and the Saltillo Terminal Facility.
In connection with the construction of the Mexico Pipelines and the
Matamoros Terminal Facility, CPSC provided all payments and delivery of
equipment through Termatsal (see below).
PennMex, Tergas or Termatsal (i) have entered into leases associated with
the Saltillo Terminal Facility, (ii) have been granted the permit for the
Mexican Pipeline, (iii) have been granted permits to operate the Matamoros
Terminal Facility and the Saltillo Terminal Facility, (iv) own, lease or intend
to obtain the land or right of ways used in the construction of the Mexican
Pipeline, Matamoros Terminal Facility and Saltillo Terminal Facility and (v) own
the assets comprising the Mexican Pipeline, Matamoros Terminal Facility and
Saltillo Terminal Facility, all of which were funded by the Company or CPSC (see
notes G and P to the consolidated financial statements). The portion of funds
which were advanced by the Company (totaling $3.7 million at July 31, 2000) to
PennMex or Termatsal are included in property, plant and equipment.
Furthermore, the Company intends to fund PennMex or Termatsal for any additional
costs required in connection with the Mexican Pipeline, Matamoros Terminal
Facility and the Saltillo Terminal Facility.
During the years ended July 31, 1998, 1999 and 2000, the Company paid
PennMex, Tergas or Termatsal $181,000, $125,000 and $293,000, respectively, for
Mexico related expenses incurred by those corporations on the Company's behalf.
Such amounts have been expensed.
The operations of PennMex, Tergas and Termatsal are subject to the tax laws
of Mexico, which among other things, require that Mexican subsidiaries of
foreign entities comply with transfer pricing rules, the payment of income
and/or asset taxes, and possibly taxes on distributions in excess of earnings.
In addition, distributions to foreign corporations may be subject to withholding
taxes, including dividends and interest payments.
DEREGULATION OF THE LPG INDUSTRY IN MEXICO. The Mexican petroleum industry
is governed by the Ley Reglarmentaria del Art culo 27 Constitutional en el Ramo
del Petr leo (the Regulatory Law to Article 27 of the Constitution of Mexico
concerning Petroleum Affairs (the "Regulatory Law")), and Ley Org nica del Petr
leos Mexicanos y Organismos Subsidiarios (the Organic Law of Petr leos Mexicanos
and Subsidiary Entities (the "Organic Law")). Under Mexican law and related
regulations, PEMEX is entrusted with the central planning and the strategic
management of Mexico's petroleum industry, including importation, sales and
transportation of LPG. In carrying out this role, PEMEX controls pricing and
distribution of various petrochemical products, including LPG.
Beginning in 1995, as part of a national privatization program, the
Regulatory Law was amended to permit private entities to transport, store and
distribute natural gas with the approval of the Ministry of Energy. As part of
this national privatization program, the Mexican Government is expected to
deregulate the LPG market ("Deregulation"). In June 1999, the Regulatory Law
for LPG was changed to permit foreign entities to participate without limitation
in the defined LPG activities related to transportation and storage. However,
foreign entities will be prohibited from participating in the distribution of
LPG in Mexico. Upon the completion of Deregulation, Mexican entities will be
able to import LPG into Mexico. Under Mexican law a single entity is not
permitted to participate in more than one of the defined LPG activities
(transportation, storage and distribution). The Company expects to sell LPG
directly to independent Mexican distributors as well as PMI. The Company
anticipates that the independent Mexican distributors will be required to obtain
authorization from the Mexican government for the importation of LPG upon
Deregulation, prior to entering into contracts with the Company.
9
Pursuant to the New Agreement, upon Deregulation by the Mexican government
of the LPG market, the Company will have the right to renegotiate the New
Agreement. Depending on the outcome of any such renegotiations, the Company
expects to either (i) enter into contracts directly with independent Mexican LPG
distributors located in the northeast region of Mexico, or (ii) modify the terms
of the New Agreement to account for the effects of Deregulation.
Currently the Company sells LPG to PMI at its Brownsville Terminal Facility
or at the United States-Mexico border for LPG product destined for the Matamoros
Terminal Facility or the Saltillo Terminal Facility. Upon Deregulation, the
Company intends to sell to independent Mexican LPG distributors as well as to
PMI at its Brownsville Terminal Facility or at the United States-Mexico border.
LPG SUPPLY. Historically, the Company has purchased LPG from its
suppliers, mixed to PMI's specifications, at variable posted prices below those
provided for in its sales agreements with PMI thereby providing the Company with
a fixed margin over the cost of LPG. From June 1995 to July 1996, and from
November 1, 1996 to early November 1997, PMI purchased LPG from Exxon on the
Company's behalf under the terms of the Company's supply agreement with Exxon.
PMI invoiced the Company for the LPG at the price paid to Exxon and title to the
LPG passed to the Company as the LPG entered the Leased Pipeline. In October
1997, as a result of the Company obtaining a credit facility, PMI no longer
provided any financing on behalf of the Company (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Credit Arrangements"). During October 1998, the Company
entered into a monthly supply agreement with Exxon pursuant to which Exxon
agreed to supply minimum volumes of LPG to the Company. Effective November 1,
1998, the Company entered into a supply agreement with Exxon to purchase minimum
monthly volumes of LPG through September 1999.
Effective October 1, 1999, the Company and Exxon entered into a ten year
LPG supply contract, as amended (the "Exxon Supply Contract"), whereby Exxon has
agreed to supply and the Company has agreed to take, 100% of Exxon's owned or
controlled volume of propane and butane available at Exxon's King Ranch Gas
Plant (the "Plant") up to 13.9 million gallons per month blended in accordance
with the specifications as outlined under the New Agreement (the "Plant
Commitment"). The purchase price is indexed to variable posted prices.
In addition, under the terms of the Exxon Supply Contract, Exxon made
operational its Corpus Christi Pipeline (the "ECCPL") during September 2000.
The ability to utilize the ECCPL allows the Company to acquire an additional
supply of propane from other propane suppliers located near Corpus Christi,
Texas (the "Additional Propane Supply"), and bring the Additional Propane Supply
to the Plant (the "ECCPL Supply") for blending to the proper specifications
outlined under the New Agreement and then delivered into the Leased Pipeline.
In connection with the ECCPL Supply, the Company has agreed to supply a minimum
of 7.7 million gallons into the ECCPL during the first quarter from the date
that the ECCPL is operational, approximately 92.0 million gallons the following
year and 122.0 million gallons each year thereafter and continuing for four
years. The Company is required to pay additional costs associated with the use
of the ECCPL.
In September 1999, the Company and PG&E NGL Marketing, L.P. ("PG&E")
entered into a three year supply agreement (the "PG&E Supply Agreement") whereby
PG&E has agreed to supply and the Company has agreed to take, a monthly average
of 2.5 million gallons of propane (the "PG&E Supply") beginning in October 1999.
The purchase price is indexed to variable posted prices.
Under the terms of the PG&E Supply Agreement, the PG&E Supply will be
delivered to either the Leased Pipeline or, in the future, to the ECCPL (after
PG&E completes construction of an interconnection, expected to be completed by
December 2000), and blended to the proper specifications as outlined under the
New Agreement.
In March 2000, the Company and Koch Hydrocarbon Company ("Koch") entered
into a three year supply agreement (the "Koch Supply Contract") whereby Koch has
agreed to supply and the Company has agreed to take, a monthly average of 8.2
million gallons (the "Koch Supply") of propane beginning April 1, 2000, subject
to the actual amounts of propane purchased by Koch from the refinery owned by
its affiliate, Koch Petroleum Group, L.P. The purchase price is indexed to
variable posted prices. Furthermore, the Company is required to pay additional
charges associated with the construction of a new pipeline interconnection to be
paid through additional adjustments to the purchase price (totaling
approximately $1.0 million) which allows deliveries of the Koch Supply into the
ECCPL.
In connection with the delivery of the Koch Supply, the Company did not
accept the Koch Supply because the ECCPL was not operational until September
2000. Accordingly, the Company arranged for the sale of the Koch Supply to
third parties (the "Unaccepted Koch Supply Sales"). The Company incurred
additional costs in connection with the disposal of the Unaccepted Koch Supply
Sales.
Under the terms of the Koch Supply Contract, the Koch Supply will be
delivered into the ECCPL and blended to the proper specifications as outlined
under the New Agreement.
10
During March 2000, the Company and Duke Energy NGL Services, Inc. ("Duke")
entered into a three year supply agreement (the "Duke Supply Contract") whereby
Duke has agreed to supply and the Company has agreed to take, a monthly average
of 1.9 million gallons (the "Duke Supply") of propane or propane/butane mix,
beginning April 1, 2000. The purchase price is indexed to variable posted
prices.
Pursuant to the terms of the Duke Supply Contract, the Company paid a
minimal amount for modifications related to the interconnections necessary to
allow the Duke Supply to be delivered into the Leased Pipeline facilities.
The delivery of the PG&E Supply or the Koch Supply will satisfy a portion
or all of the ECCPL Supply requirements under the Exxon Supply Contract.
The Company is currently purchasing LPG from the above-mentioned suppliers
(the "Suppliers") to meet the minimum monthly volumes required in the New
Agreement. The Company's costs to purchase LPG (less any applicable
adjustments) are below the sales prices provided for in the New Agreement.
The agreements with the Suppliers currently require that the Company
purchase a minimum supply of LPG, which is significantly higher than committed
sales volumes under the New Agreement.
The Company may incur significant additional costs associated with the
storage, disposal and/or changes in LPG prices resulting from the excess of the
Plant Commitment, PG&E Supply, Koch Supply or Duke Supply over actual sales
volumes. Under the terms of the Supply Contracts, the Company must provide
letters of credit in amounts equal to the cost of the product to be purchased.
The cost of the product purchased is tied directly to overall market conditions.
As a result, the Company's existing letter of credit facility may not be
adequate to meet the letter of credit requirements under the agreements with the
Suppliers or other suppliers due to increases in costs of LPG or LPG volumes
purchased by PMI. Upon the implementation of Deregulation, the Company
anticipates entering into contracts with Mexican distributors which require
payments in pesos. In addition, the Mexican distributors may be limited in
their ability to obtain adequate financing.
The ability of the Company to increase sales of LPG into Mexico in the
future is largely dependent on the Company's ability to negotiate future
contracts with PMI and/or with local Mexican distributors once Deregulation in
Mexico is implemented. In addition, there can be no assurance that the Company
will be able to obtain terms equal to or more favorable than those in the New
Agreement. In the event that the Company is unable to meet its intended LPG
sales objectives, then the Company may incur significant losses.
Furthermore, the Company currently utilizes the Brownsville Terminal
Facility and may be required to deliver a portion or all of the minimum monthly
volumes from the Brownsville Terminal Facility in the future. Historically,
sales of LPG from the Brownsville Terminal Facility have not exceeded 12.7
million gallons per month. In addition, breakdowns along the planned
distribution route for the LPG once purchased from the Suppliers, may limit the
ability of the Company to accept or deliver the Plant Commitment, the PG&E
Supply, the Koch Supply, and the Duke Supply.
As a result of the Supply Contracts, the Company has an adequate supply of
LPG to satisfy the requirements of PMI under the New Agreement. Due to the
strategic location of the Company's pipelines and terminal facilities, the
Company believes that it will be able to enter into future sales agreements to
utilize the excess volumes committed to under the contracts with the Suppliers.
11
COMPETITION
LPG. The Company competes with several major oil and gas and trucking
companies for the export of LPG from the United States to northeastern Mexico.
In many cases, these companies own or control their LPG supply and have
significantly greater financial and human resources than the Company.
The Company competes in the supply of LPG on the basis of service, price
and volume. As such, LPG providers who own or control their LPG supply may have
a competitive advantage over their competitors. As a result of the Supply
Contracts, the Company believes that it has committed to purchase a significant
amount of the LPG supply available in south Texas which could be delivered
competitively to northeast Mexico.
Pipelines generally provide a relatively low-cost alternative for the
transportation of petroleum product; however, at certain times of the year,
trucking companies may reduce their rates to levels lower than those charged by
the Company. The Company believes that such reductions are limited in both
duration and volumes and that on an annualized basis the ECCPL, the Leased
Pipeline and the US - Mexico Pipelines provide a transportation cost advantage
over the Company's competitors who utilize truck transportation to deliver LPG.
The Company believes that it's ECCLP, Leased Pipeline, the US-Mexico
Pipelines and the geographic location of the Brownsville Terminal Facility, the
Matamoros Terminal Facility and the Saltillo Terminal Facility, leave it well
positioned to successfully compete for LPG supply contracts with PMI and upon
Deregulation of the Mexican LPG market with local distributors in northeast
Mexico.
ENVIRONMENTAL AND OTHER REGULATIONS
The operations of the Company are subject to certain federal, state and
local laws and regulations relating to the protection of the environment, and
future regulations may impose additional requirements. Although the Company
believes that its operations are in compliance with applicable environmental
laws and regulations, because the requirements imposed by environmental laws and
regulations are frequently changed, the Company is unable to predict with
certainty the ultimate cost of compliance with such requirements and its effect
on the Company's operations and business prospects.
Certain of the Company's United States operations are subject to regulation
by the Texas Railroad Commission. The Company believes it is in compliance with
all applicable regulations of the Texas Railroad Commission. However, there can
be no assurance that these laws will not change in the future, or if such a
change were to occur, that the ultimate cost of compliance with such
requirements and its effect on the Company's operations and business prospects
would not be significant.
EMPLOYEES
As of July 31, 2000, the Company has 16 employees, including two in
finance, seven in sales and administration, and seven in production. In
addition, the Company's Mexican affiliates have employees which provide services
in Mexico to the Company and the Company occasionally retains subcontractors and
consultants in connection with its operations.
The Company has not experienced any work stoppages and considers relations
with its employees to be satisfactory.
12
ITEM 2. PROPERTIES.
As of July 31, 2000, the Company owned, leased or has access to the
following facilities:
APPROXIMATE LEASE, OWN
LOCATION TYPE OF FACILITY SIZE OR ACCESS(2)
- ------------------------- ----------------------------------------- ------------------ -------------
Brownsville, Texas Pipeline interconnection and railcar 31 acres Leased(1)
and truck loading facilities, LPG
storage facilities, on-site
administrative offices
Brownsville, Texas Brownsville Terminal Facility 19,200 square feet Owned(1)
building
Extending from Kleberg Seadrift Pipeline 132 miles Leased(3)
County, Texas to Cameron
County, Texas
Salt Storage-Markham, Seadrift Pipeline 500,000 bbls of Access(3)
Texas to King Ranch Plant storage; 155 mile
pipeline
Extending from Nueces ECCPL Pipeline 46 miles Access(8)
County, Texas to King
Ranch Plant
Saltillo, Mexico Railcar and truck loading facilities, 53,820 square feet Owned(9)
LPG storage facilities, on-site
administration offices
Extending from US-Mexico Pipelines 25 miles 50% own;
Brownsville, Texas to option for
Matamoros, Mexico remaining 50%
Matamoros, Mexico Pipeline interconnection, LPG truck 35 acres 50% own;
loading facilities, LPG storage option for
facilities, on-site administration office remaining 50%
Brownsville, Texas Pipeline interconnection, Refined 12 acres Leased(6)
Products storage tanks 300,000 bbls of Owned
Storage
Houston, Texas Administrative Offices 968 square feet Leased(7)
Santa Fe Springs, Administrative Offices 1,500 square feet Leased(4)
California
Palm Desert, California Penn Octane Corporation Headquarters 3,400 square feet Leased(5)
_____________
13
(1) The Company's lease with respect to the Brownsville Terminal Facility
expires on October 15, 2003.
(2) Pursuant to a $20.0 million credit facility, the Company has granted a
mortgage security interest and assignment in any and all of the Company's
real property, buildings, pipelines, fixtures, and interests therein,
including, without limitation, the Brownsville Lease and the Pipeline Lease
(the "Liens"). In connection with the Lease Agreements with CPSC, the
Company is required to assign a portion of or all of the Liens (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources - Credit Arrangements").
(3) The Company's lease with Seadrift expires December 31, 2013.
(4) The Company's lease with respect to the Santa Fe Springs, California
facilities is on a month to month basis.
(5) The Company's lease with respect to its headquarters offices expires
October 31, 2002. The monthly lease payments approximate $3,000 a month.
(6) The Company's lease with respect to the Tank Farm expires in January 2005.
(7) The Company's lease for the Houston, Texas facility expired in September
2000. Beginning in October 2000, the Company relocated its Houston, Texas
facility to another location in Houston, Texas. The lease expires in March
2002. The monthly lease payments approximate $1,300.
(8) The Company's use of the ECCPL is pursuant to the Exxon Supply Contract,
which expires on September 30, 2009.
(9) These assets are located on land leased by Tergas. The lease agreement
expires on January 31, 2003, with an option to renew annually thereafter.
For information concerning the Company's operating lease commitments, see note M
to the consolidated financial statements.
14
ITEM 3. LEGAL PROCEEDINGS.
On August 24, 1994, the Company filed an Original Petition and Application
for Injunctive Relief against the International Bank of Commerce-Brownsville
("IBC-Brownsville"), a Texas state banking association, seeking (i) either
enforcement of a credit facility between the Company and IBC-Brownsville or a
release of the Company's property granted as collateral thereunder consisting of
significantly all of the Company's business and assets; (ii) declaratory relief
with respect to the credit facility; and (iii) an award for damages and
attorneys' fees. After completion of an arbitration proceeding, on February 28,
1996, the 197th District Court in and for Cameron County, Texas entered judgment
(the "Judgment") confirming the arbitral award for $3.2 million to the Company
by IBC-Brownsville.
In connection with the lawsuit, IBC-Brownsville filed an appeal with the
Texas Court of Appeals on January 21, 1997. The Company responded on February
14, 1997. On September 18, 1997, the appeal was heard by the Texas Court of
Appeals and on June 18, 1998, the Texas Court of Appeals issued its opinion in
the case, ruling essentially in favor of the Company. IBC-Brownsville sought a
rehearing of the case on August 3, 1998. On December 30, 1998, the Court denied
the IBC-Brownsville request for rehearing. On February 16, 1999,
IBC-Brownsville (the "Petitioner") filed a petition for review with the Supreme
Court of Texas. On May 10, 1999, the Company responded to the Supreme Court of
Texas' request for response of the Petitioner's petition for review. On May 27,
1999, the Petitioner filed a reply with the Supreme Court of Texas to the
Company's response of the Petitioner's petition for review. On June 10, 1999,
the Supreme Court of Texas denied the Petitioner's petition for review. During
July 1999, the Petitioner filed an appeal with the Supreme Court of Texas to
rehear the Petitioner's petition for review. On August 26, 1999, the Supreme
Court of Texas upheld its decision to deny the Petitioner's petition for review.
During November 1999, the Petitioner filed a petition for writ of certiorari
with the United States Supreme Court. On January 24, 2000, the United States
Supreme Court denied the Petitioner's request for review and the Judgment became
final and binding. During March 2000, the Company received a cash payment from
IBC-Brownsville of $4.3 million of which approximately $1.3 million was paid for
legal fees and for other expenses associated with the Judgment.
On March 16, 1999, the Company settled a lawsuit in mediation with its
former chairman of the board, Jorge V. Duran. In connection therewith and
without admitting or denying liability, the Company agreed to pay Mr. Duran
$250,000, of which $100,000 is to be paid by the Company's insurance carrier, in
cash and issue him 100,000 shares of common stock of the Company. The total
settlement costs recorded by the Company at July 31, 1999 totaled $456,300. The
parties had agreed to extend the date which the payments were required in
connection with the settlement including the issuance of the common stock. On
July 26, 2000, the parties executed final settlement agreements whereby the
Company paid the required cash payment of $150,000. During September 2000, the
Company issued the required stock.
On October 12, 1999, a Demand for Arbitration (the "Arbitration") of
$780,767 (subsequently amended to $972,515) was filed by A.E. Schmidt
Environmental ("Schmidt") against Amwest Surety Insurance Company ("Amwest"),
PennWilson and Penn Octane Corporation on a performance bond pursuant to a CNG
contract. The Company filed a response with the court opposing the petition by
Schmidt to compel Penn Octane Corporation to participate in the Arbitration
pursuant to an alter ego theory. During April 2000, the court denied Schmidt's
petition to compel Penn Octane Corporation to participate in the Arbitration.
The Arbitration is currently scheduled for March 2001. PennWilson has
countersued Schmidt in connection with overruns under the CNG contract.
PennWilson is currently considering all of its other legal options and intends
to vigorously defend against the claims made against PennWilson as well as the
performance bond issued by Amwest. Penn Octane Corporation is not currently a
party to the dispute.
On January 28, 2000, a complaint was filed by WIN Capital Corporation
("WIN") in the Supreme Court of the State of New York, County of New York,
against the Company for breach of contract seeking specific performance and
declaratory relief in connection with an investment banking agreement. During
August 2000, the complaint was settled whereby the Company agreed to issue WIN
12,500 shares of common stock of the Company. The Company also agreed to
register the shares issued to WIN. The value of the stock, totaling
approximately $82,000 at the time of settlement, has been recorded in the
Company's Consolidated Financial Statements at July 31, 2000.
15
On February 24, 2000, litigation was filed in the 357th Judicial District
Court of Cameron County, Texas, against Cowboy Pipeline Service Company, Inc.
("Cowboy"), CPSC International, Inc. ("CPSC") and the Company (collectively
referred to as the "Defendants") alleging that the Defendants had illegally
trespassed in connection with the construction of the US Pipelines and seeking a
temporary restraining order against the Defendants from future use of the US
Pipelines. On March 20, 2000, the Company acquired the portion of the property
which surrounds the area where the US Pipelines were constructed for cash of
$1.9 million which was paid during April 2000, and debt in the amount of $1.9
million. As a result, the litigation was dismissed. The debt bears interest at
10% per annum, payable monthly in minimum installments of $15,000 with a balloon
payment due during April 2003. The liability of $1.9 million is included in
capital lease obligations (see note J to the consolidated financial
statements).
On March 14, 2000, CPSC filed for protection under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court (the "Court"),
Southern District of Texas, Corpus Christi Division.
On April 27, 2000, the Company filed a complaint in the 107th Judicial
District Court of Cameron County, Texas, against Cowboy and the sole shareholder
of Cowboy ("Owner") alleging (i) fraud, (ii) aiding and abetting a breach of
fiduciary duty, (iii) negligent misrepresentation, and (iv) conspiracy to
defraud in connection with the construction of the US-Mexico Pipelines and
Matamoros Terminal Facility and the underlying agreements thereto. The Company
also alleges that Cowboy was negligent in performing its duties. The Company
was seeking actual and exemplary damages and other relief. On June 9, 2000,
Cowboy removed the case to the Court.
On May 8, 2000, CPSC filed an adversary proceeding against the Company in
the Court seeking (i) prevention of the Company against the use of the US-Mexico
Pipelines and escrow of all income related to use of the US-Mexico Pipelines,
(ii) sequestering all proceeds related to the sale from any collateral
originally pledged to CPSC, (iii) the avoidance of the Addendum agreement
between the Company and CPSC, and (iv) damages arising from the Company's breach
of the Lease Agreements and the September 1999 Agreements.
During May 2000, the Company filed a motion with the Court seeking to
appoint a Chapter 11 Trustee and the Company also filed a complaint with the
Court seeking a declaratory judgment stating that the US-Mexico Pipelines be
held in trust for the benefit of the Company and that the US-Mexico Pipelines
are no longer the assets of the bankruptcy estate. The motion and the complaint
are still pending.
On June 2, 2000, additional litigation was filed in the 138th Judicial
District Court of Cameron County, Texas, against Cowboy and the Company alleging
that Cowboy and the Company had illegally trespassed in connection with the
construction of the US Pipelines and seeking declaratory relief, including
damages, exemplary damages and injunctive relief preventing Cowboy and the
Company from utilizing the US Pipelines. On June 9, 2000, CPSC intervened and
removed the case to the Court. Subsequent to July 31, 2000, the litigation was
settled through a court ordered mediation by the Company agreeing to acquire
land for which substantially all of the costs will be offset against the balance
of the promissory note due to CPSC (see below). The settlement is subject to
completion of the settlement documents.
On June 19, 2000, the Company, CPSC, Cowboy and the Owner reached a
settlement (the "Settlement") whereby the Company has agreed to purchase the
remaining 50% interest in the assets associated with Lease Agreements for a
promissory note, transfer of the property owned by the Company purchased on
March 20, 2000 referred to above and warrants to acquire common stock of the
Company together with a release of all claims and proceedings between them. In
addition, CPSC will assume the Company's debt issued in connection with the
acquisition of the property. On July 19, 2000, the Settlement expired without
the parties completing final documents as provided for in the Settlement
Agreement. The parties are close to a renewed negotiated settlement of all
disputes between them and have signed a number of term sheets that contain
virtually all of the substantive provisions necessary to a global resolution.
The accompanying consolidated financial statements have been adjusted to reflect
the Settlement. The Settlement is subject to final documentation and approval
of the Court. If the Settlement is not finalized, the Company will continue to
pursue its legal remedies.
As a result of the aforementioned, the Company may incur additional costs
to complete the US - Mexico Pipelines and Matamoros Terminal Facility, the
amount of which cannot presently be determined.
16
In addition, there is no certainty that the Company will (i) acquire the
remaining 50% interest in the US - Mexico Pipelines and Matamoros Terminal
Facility, (ii) continue to utilize the US - Mexico Pipelines and Matamoros
Terminal Facility or (iii) realize its recorded investment in the Lease
Agreements or in the US - Mexico Pipelines and Matamoros Terminal Facility (see
note G to the consolidated financial statements).
The Company and its subsidiaries are also involved with other proceedings,
lawsuits and claims. The Company is of the opinion that the liabilities, if
any, ultimately resulting from such proceedings, lawsuits and claims should not
materially affect its consolidated financial position.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock began trading in the over-the-counter ("OTC")
market on the Nasdaq SmallCap Market under the symbol "POCC" in December 1995.
The following table sets forth the reported high ask and low bid quotations
of the common stock for the periods indicated. Such quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions and may
not necessarily represent actual transactions.
LOW HIGH
------- --------
FISCAL YEAR ENDED JULY 31, 1999:
First Quarter . . . . . . . . . . . . . $ 0.875 $3.875
Second Quarter . . . . . . . . . . . . . 0.500 2.000
Third Quarter . . . . . . . . . . . . . . 1.313 2.500
Fourth Quarter . . . . . . . . . . . . . 1.313 2.531
FISCAL YEAR ENDED JULY 31, 2000:
First Quarter . . . . . . . . . . . . . $ 2.375 $4.281
Second Quarter . . . . . . . . . . . . . . 3.375 7.875
Third Quarter . . . . . . . . . . . . . 6.500 10.938
Fourth Quarter . . . . . . . . . . . . . 6.375 8.875
On October 13, 2000, the closing bid price of the common stock as reported
on the Nasdaq SmallCap Market was $5.25 per share. On October 13, 2000, the
Company had 13,686,795 shares of common stock outstanding and approximately
1,600 holders of record of the common stock.
The Company has not paid and does not intend to pay any common stock
dividends to stockholders in the foreseeable future and intends to retain any
future earnings for capital expenditures and otherwise to fund the Company's
operations.
RECENT SALES OF UNREGISTERED SECURITIES
During May 2000 and June 2000, warrants to purchase a total of 48,750
shares of common stock of the Company were exercised, resulting in cash proceeds
to the Company of $120,000. The proceeds of such exercises were used for
working capital purposes.
During June 2000 and September 2000, the Company issued 8,497 shares and
3,480 shares, respectively, of common stock of the Company in exchange for
penalties payable under a registration rights agreement.
During August 2000 and September 2000, the Company issued 12,500 shares and
100,000 shares, respectively, of common stock of the Company in connection with
settlement of litigation. The Company agreed to register the shares issued in
the future.
During September 2000, a director and officer of the Company exercised
warrants to purchase 200,000 shares of common stock of the Company at an
exercise price of $2.50 per share. The consideration for the exercise of the
warrants included $2,000 in cash and a $498,000 promissory note. The principal
amount of the note plus accrued interest at an annual rate of 10.5% is due on
April 30, 2001. The director and officer of the Company is personally liable
with full recourse to the Company and has provided 121,617 shares of common
stock of the Company as collateral. The promissory note will be recorded as a
reduction of stockholders' equity during the quarter ending October 31, 2000.
Interest on the promissory note will be recorded when the cash is received.
During October 2000, warrants to purchase a total of 7,500 shares of common
stock of the Company were exercised, resulting in cash proceeds to the Company
of $11,250.
19
During November 2000, warrants to purchase a total of 10,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $32,500.
The above transactions were issued without registration under the
Securities Act of 1933, as amended, in reliance upon the exemptions from the
registration provisions thereof, contained in Regulation D promulgated
thereunder.
20
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data for each of the years in
the five-year period ended July 31, 2000 have been derived from the consolidated
financial statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company and related notes included elsewhere herein. All information is in
thousands, except per share data.
Year Ended July 31,
---------------------------------------------------------
1996 1997 1998 1999 2000
-------- ------------ ------------ ---------- -------
Revenues $26,271 $ 29,699(1) $ 30,801(1) $35,338(1) $98,515
Income (loss) from continuing operations (724) (2,886) (2,072) 1,125 1,461
Net income (loss) (724) (2,923) (3,744) 545 1,461
Net income (loss) from continuing (.14) (.48) (.25) .11 .11
operations per common share
Net income (loss) per common share (.14) (.48) (.43) .05 .11
Total assets 5,190 5,496 6,698 8,909 31,537
Long-term obligations(1) 1,060 1,113 60 259 1,465
- --------------------
(1)The operations of PennWilson for the period from February 12, 1997 (date of
incorporation) through May 25, 1999, the date operations were discontinued, are
presented in the consolidated financial statements as discontinued operations.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
liquidity and capital resources should be read in conjunction with the
consolidated financial statements of the Company and related notes thereto
appearing elsewhere herein. References to specific years preceded by "fiscal"
(e.g. fiscal 2000) refer to the Company's fiscal year ended July 31. The
results of operations related to the Company's CNG segment, primarily consisting
of PennWilson, which began operations in March 1997 and was discontinued during
fiscal 1999, have been presented separately in the consolidated financial
statements of the Company as discontinued operations.
OVERVIEW
The Company has been principally engaged in the purchase, transportation
and sale of LPG and, from 1997 to March 1999, the provision of equipment and
services to the CNG industry. Since operations commenced, the Company has
bought and sold LPG for distribution into northeast Mexico and the United States
Rio Grande Valley.
In fiscal 2000, the Company has derived 77.2% of its revenues from sales of
LPG to PMI, its primary customer.
The Company provides products and services through a combination of
fixed-margin and fixed-price contracts. Under the Company's agreements with its
customers and suppliers, the buying and selling prices of LPG are based on
similarly indexed variable posted prices that provide the Company with a fixed
margin. Costs included in cost of goods sold, other than the purchase price of
LPG, may affect actual profits from sales, including costs relating to
transportation, storage, leases and maintenance. Mismatches in volumes and
prices of LPG purchased from suppliers and resold to PMI could result in
unanticipated costs.
LPG SALES
The following table shows the Company's volume sold in gallons and average
sales price for fiscal 1998, 1999 and 2000.
Fiscal Year Ended
July 31,
---------------------
1998 1999 2000
----- ------ ------
Volume Sold
LPG (millions of gallons) - PMI 88.5 117.0 140.2
LPG (million of gallons) - Other - - 47.2
----- ------ ------
88.5 117.0 187.4
Average sales price
LPG (per gallon) - PMI $0.35 $ 0.30 $ 0.54
LPG (per gallon) - Other - - 0.47
22
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 2000 COMPARED WITH JULY 31, 1999
Revenues. Revenues for fiscal 2000 were $98.5 million compared with $35.3
million for fiscal 1999, an increase of $63.2 million or 178.8%. Of this
increase, $12.6 million was attributable to increased volumes of LPG sold to PMI
in fiscal 2000, $28.2 million was attributable to increased average sales prices
of LPG sold to PMI in fiscal 2000 and $22.4 million was attributable to sales of
LPG to customers other then PMI in connection with the Company's desire to
reduce outstanding inventory balances during fiscal 2000.
Cost of sales. Cost of sales for fiscal 2000 was $94.9 million compared
with $32.0 million for fiscal 1999, an increase of $62.9 million or 196.2%. Of
this increase, $11.4 million was attributable to increased volumes of LPG
purchased for sales to PMI in fiscal 2000, $27.4 million was attributable to
increased average sales prices of LPG purchased for sales to PMI in fiscal 2000,
$23.0 million was attributable to sales of LPG to customers other then PMI in
connection with the Company's desire to reduce outstanding inventory balances
during fiscal 2000 and $1.1 million was attributable to increased operating
costs associated with LPG during fiscal 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $3.2 million for fiscal 2000 compared with $2.1
million for fiscal 1999, an increase of $1.1 million or 52.0%. This increase
was primarily attributable to additional professional fees and payroll related
expenses incurred during fiscal 2000.
Other income and expense, net. Other income (expense), net was $1.1
million for fiscal 2000 compared with $(0.1) million for fiscal 1999, an
increase of $1.2 million. The increase in other income, net was due primarily
to a gain on the award from litigation of $2.0 million and reduced costs from
the settlement of litigation of $0.5 million, partially offset by increased
interest costs and amortization of discounts associated with the issuance of
debt of $(1.3) million, which was recorded during fiscal 2000.
Income tax. During fiscal 2000, the Company recorded a provision for
income taxes of $0.1 million, representing the alternative minimum tax due. Due
to the availability of net operating loss carryforwards ($5.6 million at July
31, 2000), the Company did not incur any additional income tax expense during
fiscal 2000. Due to the availability of net operating loss carryforwards at
July 31, 1999 of $8.0 million, there was no income tax expense recorded during
the fiscal 1999. The ability to use such net operating loss carryforwards, which
expire in the years 2010 to 2018, may be significantly limited by the
application of the "change in ownership" rules under Section 382 of the Internal
Revenue Code. The Company can receive a credit against any future tax payments
due to the extent of prior alternative minimum taxes paid.
YEAR ENDED JULY 31, 1999 COMPARED WITH JULY 31, 1998
Revenues. Revenues for fiscal 1999 were $35.4 million compared with $30.8
million for fiscal 1998, an increase of $4.5 million or 14.7%. Of this
increase, $8.6 million was attributable to increased volume of LPG sold in
fiscal 1999 partially offset by a decrease in average sales price of LPG sold in
fiscal 1999 resulting in a decrease in sales of $3.9 million.
Cost of sales. Cost of sales for fiscal 1999 was $32.0 million compared
with $28.9 million for fiscal 1998, an increase of $3.2 million or 10.9%. Of
this increase, $7.3 million was attributable to an increased volume of LPG
purchased in fiscal 1999 partially offset by the reduction in average sales
price of LPG purchased in fiscal 1999 resulting in a decrease in cost of goods
sold of $4.1 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.1 million in fiscal 1999 compared with $3.5
million in fiscal 1998, a decrease of $1.5 million or 41.4%. This decrease was
primarily attributable to (i) $1.0 million of legal and professional fees and
(ii) $0.5 million of costs associated with the issuance of warrants and
registration costs.
Other income and expense, net. Other income (expense), net was $(0.1)
million in fiscal 1999 compared with $(0.5) million in fiscal 1998. The
decrease in other expense, net was due primarily to the award from litigation of
$1.0 million, partially offset by costs associated from the settlement of
litigation of $(0.6) million.
Income tax. Due to the availability of net operating loss carryforwards
there was no income tax expense in either year.
23
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception in
1992, has used cash in operations and has had a deficit in working capital. In
addition, the Company is involved in litigation, the outcome of which cannot be
determined at the present time. Although the Company has entered into the
Settlement, there exists significant uncertainties related to the US - Mexico
Pipelines and Matamoros Terminal Facility (see note M to the consolidated
financial statements). The Company depends heavily on sales to one major
customer. The Company's sources of liquidity and capital resources historically
have been provided by sales of LPG and CNG-related equipment, proceeds from the
issuance of short-term and long-term debt, revolving credit facilities and
credit arrangements, sale or issuance of preferred and common stock of the
Company and proceeds from the exercise of warrants to purchase shares of the
Company's common stock.
The following summary table reflects comparative cash flows for fiscal
1998, 1999 and 2000. All information is in thousands.
YEAR ENDED JULY 31,
------------------------------------------
1998 1999 2000
---------- --------------- -------------
Net cash provided by (used in) operating activities $( 1,065) $ 562 $( 2,933)
Net cash used in investing activities . . . . . . . ( 1,337) ( 383) ( 10,771)
Net cash provided by financing activities . . . . . 2,528 696 12,697
---------- --------------- -------------
Net increase (decrease) in cash . . . . . . . . . . $ 126 $ 875 $( 1,007)
========== =============== =============
New Agreement. The Company entered into a new sales agreement with PMI for
the period from April 1, 2000 through March 31, 2001 (the "New Agreement"), for
the annual sale of a minimum of 151.2 million gallons of LPG, mixed to PMI
specifications, subject to seasonal variability, to be delivered to PMI at the
Company's terminal facilities in Matamoros, Tamaulipas, Mexico and Saltillo,
Coahuila, Mexico.
On October 11, 2000, the New Agreement was amended to increase the minimum
amount of LPG to be purchased during the period from November 2000 through March
2001 by 7.5 million gallons resulting in a new annual minimum commitment of
158.7 million gallons.
The New Agreement, as amended, represents an increase of 130% over annual
minimum contract volumes under the previous sales agreement with PMI for the
period April 1, 1999 through March 31, 2000. Actual sales volumes to PMI during
the period April 1, 1999 through March 31, 2000 exceeded the minimum contractual
volumes by 95%. Under the terms of the New Agreement, sale prices are indexed
to variable posted prices. The New Agreement also provides for higher fixed
margins above the variable posted prices over the previous sales agreements with
PMI depending on the final delivery point of the LPG. Sales to PMI totaled
$76,008,360 for the year ended July 31, 2000, representing approximately 77.2%
of total revenues for the period.
The New Agreement also provides for trucking of LPG from the Company's
Brownsville Terminal Facility to the Matamoros Terminal Facility (or designated
locations within the area) and from the Brownsville Terminal Facility or the
Matamoros Terminal Facility to the Saltillo Terminal Facility (or designated
locations within the area) in the event that (i) the Company is unable to
transport LPG through the US - Mexico Pipelines, (ii) the Saltillo Terminal
Facility or railcars to deliver LPG to the Saltillo Terminal Facility are not
utilized or (iii) until the Matamoros Terminal Facility or the Saltillo Terminal
Facility are fully operational. Under the terms of the New Agreement, in the
event that the US-Mexico Pipelines or railcars are not used, the sales price
received shall be reduced by the corresponding trucking charges. During April
2000, the Company began shipping LPG through the US - Mexico Pipelines. During
October 2000, approximately 78% of the LPG sold to PMI was delivered through
the US-Mexico Pipelines to the Matamoros Terminal Facility. As of July 31,
2000, the Saltillo Terminal Facility had not commenced operations.
24
As part of volume requirements under the New Agreement, the Company has
committed to sell PMI 3.2 million gallons of propane at a sales price of
approximately $0.60 per gallon, to be delivered during December 2000 and
February 2001.
Historically, the Company and PMI have renewed the existing sales agreement
prior to its expiration. The Company intends to negotiate a renewal of the New
Agreement prior to its expiration.
LPG Supply Agreements. During October 1998, the Company entered into a
monthly supply agreement with Exxon Mobil Corporation ("Exxon") pursuant to
which Exxon agreed to supply minimum volumes of LPG to the Company. Effective
November 1, 1998, the Company entered into a supply agreement with Exxon to
purchase minimum monthly volumes of LPG through September 1999.
Effective October 1, 1999, the Company and Exxon entered into a ten year
LPG supply contract, as amended (the "Exxon Supply Contract"), whereby Exxon has
agreed to supply and the Company has agreed to take, 100% of Exxon's owned or
controlled volume of propane and butane available at Exxon's King Ranch Gas
Plant (the "Plant") up to 13.9 million gallons per month blended in accordance
with the specifications as outlined under the New Agreement (the "Plant
Commitment"). The purchase price is indexed to variable posted prices.
In addition, under the terms of the Exxon Supply Contract, Exxon made
operational its Corpus Christi Pipeline (the "ECCPL") during September 2000.
The ability to utilize the ECCPL allows the Company to acquire an additional
supply of propane from other propane suppliers located near Corpus Christi,
Texas (the "Additional Propane Supply"), and bring the Additional Propane Supply
to the Plant (the "ECCPL Supply") for blending to the proper specifications
outlined under the New Agreement and then delivered into the Leased Pipeline.
In connection with the ECCPL Supply, the Company has agreed to supply a minimum
of 7.7 million gallons into the ECCPL during the first quarter from the date
that the ECCPL is operational, approximately 92.0 million gallons the following
year and 122.0 million gallons each year thereafter and continuing for four
years. The Company is required to pay additional costs associated with the use
of the ECCPL.
In September 1999, the Company and PG&E NGL Marketing, L.P. ("PG&E")
entered into a three year supply agreement (the "PG&E Supply Agreement") whereby
PG&E has agreed to supply and the Company has agreed to take, a monthly average
of 2.5 million gallons of propane (the "PG&E Supply") beginning in October 1999.
The purchase price is indexed to variable posted prices.
Under the terms of the PG&E Supply Agreement, the PG&E Supply will be
delivered to either the Leased Pipeline or, in the future, the ECCPL (after PG&E
completes construction of an interconnection, expected to be completed by
December 2000), and blended to the proper specifications as outlined under the
New Agreement.
In March 2000, the Company and Koch Hydrocarbon Company ("Koch") entered
into a three year supply agreement (the "Koch Supply Contract") whereby Koch has
agreed to supply and the Company has agreed to take, a monthly average of 8.2
million gallons (the "Koch Supply") of propane beginning April 1, 2000, subject
to the actual amounts of propane purchased by Koch from the refinery owned by
its affiliate, Koch Petroleum Group, L.P. The purchase price is indexed to
variable posted prices. Furthermore, the Company is required to pay additional
charges associated with the construction of a new pipeline interconnection to be
paid through additional adjustments to the purchase price (totaling
approximately $1.0 million) which allows deliveries of the Koch Supply into the
ECCPL.
In connection with the delivery of the Koch Supply, the Company did not
accept the Koch Supply because the ECCPL was not operational until September
2000. Accordingly, the Company arranged for the sale of the Koch Supply to
third parties (the "Unaccepted Koch Supply Sales"). The Company incurred
additional costs in connection with the disposal of the Unaccepted Koch Supply
Sales.
Under the terms of the Koch Supply Contract, the Koch Supply will be
delivered into the ECCPL and blended to the proper specifications as outlined
under the New Agreement.
During March 2000, the Company and Duke Energy NGL Services, Inc. ("Duke")
entered into a three year supply agreement (the "Duke Supply Contract") whereby
Duke has agreed to supply and the Company has agreed to take, a monthly average
of 1.9 million gallons (the "Duke Supply") of propane or propane/butane mix,
beginning April 1, 2000. The purchase price is indexed to variable posted
prices.
25
Pursuant to the terms of the Duke Supply Contract, the Company paid a
minimal amount for modifications related to the interconnections necessary to
allow the Duke Supply to be delivered into the Pipeline facilities.
The delivery of the PG&E Supply or the Koch Supply will satisfy a portion
or all of the ECCPL Supply requirements under the Exxon Supply Contract.
The Company is currently purchasing LPG from the above-mentioned suppliers
(the "Suppliers") to meet the minimum monthly volumes required in the New
Agreement. The Company's costs to purchase LPG (less any applicable
adjustments) are below the sales prices provided for in the New Agreement.
The agreements with the Suppliers currently require that the Company
purchase a minimum supply of LPG, which is significantly higher than committed
sales volumes under the New Agreement.
The Company may incur significant additional costs associated with the
storage, disposal and/or changes in LPG prices resulting from the excess of the
Plant Commitment, PG&E Supply, Koch Supply or Duke Supply over actual sales
volumes. Under the terms of the Supply Contracts, the Company must provide
letters of credit in amounts equal to the cost of the product to be purchased.
In addition, the cost of the product purchased is tied directly to overall
market conditions. As a result, the Company's existing letter of credit
facility may not be adequate to meet the letter of credit requirements under the
agreements with the Suppliers or other suppliers due to increases in costs of
LPG or LPG volumes purchased by PMI. Upon the implementation of Deregulation,
the Company anticipates entering into contracts with Mexican distributors which
require payments in pesos. In addition, the Mexican distributors may be limited
in their ability to obtain adequate financing.
The ability of the Company to increase sales of LPG into Mexico in the
future is largely dependent on the Company's ability to negotiate future
contracts with PMI and/or with local Mexican distributors once Deregulation in
Mexico is implemented. In addition, there can be no assurance that the Company
will be able to obtain terms equal to or more favorable to the terms as those in
the New Agreement. In the event that the Company is unable to meet its intended
LPG sales objectives, then the Company may incur significant losses.
Furthermore, the Company currently utilizes the Brownsville Terminal
Facility and may be required to deliver a portion or all of the minimum monthly
volumes from the Brownsville Terminal Facility in the future. Historically,
sales of LPG from the Brownsville Terminal Facility have not exceeded 12.7
million gallons per month. In addition, breakdowns along the planned
distribution route for the LPG once purchased from the Suppliers, may limit the
ability of the Company to accept or deliver the Plant Commitment, the ECCPL
Supply, the PG&E Supply, the Koch Supply, and the Duke Supply.
As a result of the Exxon Supply Contract, the PG&E Supply Agreement, the
Koch Supply Contract and the Duke Supply Contract, the Company has an adequate
supply of LPG to satisfy the requirements of PMI under the New Agreement. Due
to strategic location of the Company's pipelines and terminal facilities, the
Company believes that it will be able to enter into future sales agreements to
utilize the excess volumes committed to under the contracts with the Suppliers.
Pipeline Lease. The Pipeline Lease currently expires on December 31,
2013, pursuant to an amendment (the "Pipeline Lease Amendment") entered into
between the Company and Seadrift on May 21, 1997, which became effective on
January 1, 1999 (the "Effective Date"). The Pipeline Lease Amendment provides,
among other things, for additional storage access and inter-connection with
another pipeline controlled by Seadrift, thereby providing greater access to and
from the Leased Pipeline. Pursuant to the Pipeline Lease Amendment, the
Company's fixed annual rent for the use of the Leased Pipeline was increased by
$350,000, less certain adjustments during the first two years from the Effective
Date, and the Company is required to pay a minimum charge for storage of
$300,000 per year, beginning January 1, 2000. In addition, the Pipeline Lease
Amendment provides for variable rental increases based on monthly volumes
purchased and flowing into the Leased Pipeline and storage utilized. The
Company believes that the Pipeline Lease Amendment provides the Company
increased flexibility in negotiating sales and supply agreements with its
customers and suppliers. The Company has made all payments required under the
Pipeline Lease Amendment.
26
Present Pipeline capacity is approximately 250 million gallons per year.
In fiscal year 2000, the Company sold approximately 140 million gallons of LPG,
substantially all of which flowed through the Leased Pipeline. The Company can
increase the Leased Pipeline's capacity through the installation of additional
pumping equipment (see "Upgrades" below).
Upgrades. The Company has already contracted and intends to further
contract in the near future for design, construction and installation of several
projects which, when completed, will increase its current pipeline and storage
capacity, enhance its existing pipeline and terminal facilities or expand its
ability to accept or deliver LPG supply (the "Upgrades").
The Company is currently completing a mid-line pump station which will
include the installation of additional piping, meters, valves, analyzers and
pumps along the Leased Pipeline to increase the capacity of the Leased Pipeline
and make the Leased Pipeline bi-directional. The mid-line pump station will
increase the capacity of the Leased Pipeline to approximately 360 million
gallons per year. The total estimated cost to complete the project is
approximately $2.0 million of which approximately $1.1 million has been incurred
through July 31, 2000.
The Company also intends to contract for the design, installation and
construction of pipelines which will connect the Brownsville Terminal Facility
to the water dock facilities at the Brownsville Ship Channel and install
additional storage capacity. The estimated cost of this project is expected to
approximate $2.0 million. The Company has employed a firm to provide the design
and engineering for this project.
Lease Agreements. In connection with the construction of the US-Mexico
Pipelines and the Matamoros Terminal Facility, the Company and CPSC
International, Inc. ("CPSC") entered into two separate Lease / Installation
Purchase Agreements, as amended, ("the Lease Agreements"), whereby CPSC was
required to construct and operate the US - Mexico Pipelines (including an
additional pipeline to accommodate Refined Products) and the Matamoros Terminal
Facility and lease these assets to the Company. Under the terms of the Lease
Agreements, the Company was required to pay monthly rentals of approximately
$157,000, beginning the date that the US - Mexico Pipelines and Matamoros
Terminal Facility are physically capable to transport and receive LPG in
accordance with technical specifications required (the "Substantial Completion
Date"). In addition, the Company agreed to provide a lien on certain assets,
leases and contracts which are currently pledged to RZB (Liens), which Liens
would require the consent of RZB, and provide CPSC with a letter of credit of
approximately $1.0 million. The Company also had the option to purchase the US
- - Mexico Pipelines and Matamoros Terminal Facility at the end of the 10th year
anniversary and 15th year anniversary for $5.0 million and $100,000,
respectively. Under the terms of the Lease Agreements, CPSC is required to pay
all costs associated with the construction and maintenance of the US - Mexico
Pipeline and Matamoros Terminal Facility.
During September 1999, December 1999 and February 2000, the Company and
CPSC amended the Lease Agreements whereby the Company agreed to acquire up to
100% interest in the Lease Agreements which, as of July 31, 2000 the Company had
acquired a 50% interest pursuant to the December 1999 amendment. During
February 2000, the Company determined that CPSC did not comply with certain
obligations under the Lease Agreements. In March 2000, CPSC filed for
protection under Chapter 11 of the United States Bankruptcy Code. Since that
date, the Company has also determined that CPSC did not comply with other
obligations provided for under the Lease Agreements. The parties are close to a
renewed negotiated settlement of all disputes between them and have signed a
number of term sheets that contain virtually all of the substantive provisions
necessary to a global resolution, which would provide for 100% ownership of the
US - Mexico Pipelines and Matamoros Terminal Facility by the Company or its
affiliates (the "Settlement") and eliminate the requirement for the Liens.
Until the Settlement is completed, the Company will continue to record the
remaining 50% portion of the US - Mexico Pipelines and Matamoros Terminal
Facility as a capital lease (see notes G, J and M to the consolidated financial
statements).
FOREIGN OWNERSHIP OF LPG OPERATIONS. PennMex, Tergas and Termatsal are
Mexican companies, which are owned 90%, 90% and 98%, respectively, by Jorge R.
Bracamontes, an officer and director of the Company ("Bracamontes") and the
balance by other Mexican citizens ("Minority Shareholders"). Under current
Mexican law (see "Deregulation of the LPG Market in Mexico" below), foreign
ownership of Mexican entities involved in the distribution of LPG or operation
of LPG terminal facilities are prohibited. Foreign ownership is permitted in
the transportation and storage of LPG. Mexican law also provides that a single
entity is not permitted to participate in more than one of the defined LPG
activities (transportation, storage or distribution).
27
During November 2000, the Company, Bracamontes and the Minority
Shareholders entered into agreements whereby the Company may acquire up to 100%
of the outstanding shares of PennMex and Termatsal for a nominal amount subject
to, among other things, the Settlement. Because the Company participates in one
of the defined LPG activities (see above), the Company intends to contract with
Tergas for services to be performed by Tergas at the Matamoros Terminal Facility
and the Saltillo Terminal Facility.
In connection with the construction of the Mexican Pipeline and the
Matamoros Terminal Facility, CPSC provided all payments and delivery of
equipment through Termatsal (see below).
PennMex, Tergas or Termatsal (i) have entered into leases associated with
the Saltillo Terminal Facility, (ii) have been granted the permit for the
Mexican Pipeline, (iii) have been granted permits to operate the Matamoros
Terminal Facility and the Saltillo Terminal Facility, (iv) own, lease or intend
to obtain the land or right of ways used in the construction of the Mexican
Pipeline, Matamoros Terminal Facility and Saltillo Terminal Facility and (v) own
the assets comprising the Mexican Pipeline, Matamoros Terminal Facility and
Saltillo Terminal Facility, all of which were funded by the Company or CPSC (see
notes G and P to the consolidated financial statements). The portion of funds
which were advanced by the Company (totaling $3.7 million at July 31, 2000) to
PennMex or Termatsal are included in property, plant and equipment.
Furthermore, the Company intends to fund PennMex or Termatsal for any additional
costs required in connection with the Mexican Pipeline, Matamoros Terminal
Facility and the Saltillo Terminal Facility.
During the years ended July 31, 1998, 1999 and 2000, the Company paid
PennMex, Tergas or Termatsal $181,000, $125,000 and $293,000, respectively, for
Mexico related expenses incurred by those corporations on the Company's behalf.
Such amounts have been expensed.
The operations of PennMex, Tergas and Termatsal are subject to the tax laws
of Mexico, which among other things, require that Mexican subsidiaries of
foreign entities comply with transfer pricing rules, the payment of income
and/or asset taxes, and possibly taxes on distributions in excess of earnings.
In addition, distributions to foreign corporations may be subject to withholding
taxes, including dividends and interest payments.
DEREGULATION OF THE LPG INDUSTRY IN MEXICO. The Mexican petroleum industry
is governed by the Ley Reglarmentaria del Art culo 27 Constitutional en el Ramo
del Petr leo (the Regulatory Law to Article 27 of the Constitution of Mexico
concerning Petroleum Affairs (the "Regulatory Law")), and Ley Org nica del Petr
leos Mexicanos y Organismos Subsidiarios (the Organic Law of Petr leos Mexicanos
and Subsidiary Entities (the "Organic Law")). Under Mexican law and related
regulations, PEMEX is entrusted with the central planning and the strategic
management of Mexico's petroleum industry, including importation, sales and
transportation of LPG. In carrying out this role, PEMEX controls pricing and
distribution of various petrochemical products, including LPG.
Beginning in 1995, as part of a national privatization program, the
Regulatory Law was amended to permit private entities to transport, store and
distribute natural gas with the approval of the Ministry of Energy. As part of
this national privatization program, the Mexican Government is expected to
deregulate the LPG market ("Deregulation"). In June 1999, the Regulatory Law
for LPG was changed to permit foreign entities to participate without limitation
in the defined LPG activities related to transportation and storage. However,
foreign entities will be prohibited from participating in the distribution of
LPG in Mexico. Upon the completion of Deregulation, Mexican entities will be
able to import LPG into Mexico. Under Mexican law a single entity is not
permitted to participate in more than one of the defined LPG activities
(transportation, storage and distribution). The Company expects to sell LPG
directly to independent Mexican distributors as well as PMI. The Company
anticipates that the independent Mexican distributors will be required to obtain
authorization from the Mexican government for the importation of LPG upon
Deregulation prior to entering into contracts with the Company.
Pursuant to the New Agreement upon Deregulation by the Mexican government
of the LPG market, the Company will have the right to renegotiate the New
Agreement. Depending on the outcome of any such renegotiations, the Company
expects to either (i) enter into contracts directly with independent Mexican LPG
distributors located in the northeast region of Mexico, or (ii) modify the terms
of the New Agreement to account for the effects of Deregulation.
Currently the Company sells LPG to PMI at its Brownsville Terminal Facility
or at the United States-Mexico border for LPG product destined for the Matamoros
Terminal Facility or the Saltillo Terminal Facility. Upon Deregulation, the
Company intends to sell to independent Mexican LPG distributors as well as to
PMI at its Brownsville Terminal Facility or at the United States-Mexico border.
28
Credit Arrangements. As of July 31, 2000, the Company has a $20.0 million
credit facility with RZB Finance L.L.C. (RZB) for demand loans and standby
letters of credit (RZB Credit Facility) to finance the Company's purchase of
LPG. In connection with the RZB Credit Facility, RZB entered into a
participation agreement with Bayerische Hypo-und Vereinsbank Aktiengeselischaft,
New York Branch ("HVB"), whereby RZB and HVB will each participate up to $10.0
million toward the total credit facility. Under the RZB Credit Facility, the
Company pays a fee with respect to each letter of credit thereunder in an amount
equal to the greater of (i) $500, (ii) 2.5% of the maximum face amount of such
letter of credit, or (iii) such higher amount as may be agreed to between the
Company and RZB. Any amounts outstanding under the RZB Credit Facility shall
accrue interest at a rate equal to the rate announced by the Chase Manhattan
Bank as its prime rate plus 2.5%. Pursuant to the RZB Credit Facility, RZB has
sole and absolute discretion to terminate the RZB Credit Facility and to make
any loan or issue any letter of credit thereunder. RZB also has the right to
demand payment of any and all amounts outstanding under the RZB Credit Facility
at any time. In connection with the RZB Credit Facility, the Company granted a
mortgage, security interest and assignment in any and all of the Company's real
property, buildings, pipelines, fixtures and interests therein or relating
thereto, including, without limitation, the lease with the District for the land
on which the Company's Brownsville Terminal Facility is located, the Pipeline
Lease, and in connection therewith agreed to enter into leasehold deeds of
trust, security agreements, financing statements and assignments of rent, in
forms satisfactory to RZB. Under the RZB Credit Facility, the Company may not
permit to exist any lien, security interest, mortgage, charge or other
encumbrance of any nature on any of its properties or assets, except in favor of
RZB, without the consent of RZB.
The Company's President, Chairman and Chief Executive Officer has
personally guaranteed all of the Company's payment obligations with respect to
the RZB Credit Facility.
In connection with the Company's purchases of LPG from Exxon Mobil
Corporation ("Exxon"), PG&E NGL Marketing, L.P. ("PG&E"), Duke Energy NGL
Services, Inc. ("Duke") and/or Koch Hydrocarbon Company ("Koch"), the Company
issues letters of credit on a monthly basis based on anticipated purchases.
As of July 31, 2000, letters of credit established under the RZB Credit
Facility in favor of Exxon, PG&E, Duke and Koch for purchases of LPG totaled
$10.4 million of which $5.2 million was being used to secure unpaid purchases.
In addition, as of July 31, 2000, the Company had borrowed $3.5 million from its
revolving line of credit under the RZB Credit Facility for purchases of LPG. In
connection with these purchases, at July 31, 2000, the Company had unpaid
invoices due from PMI totaling $3.5 million, cash balances maintained in the RZB
Credit Facility collateral account of $32,372 and inventory held in storage of
$6.0 million (see note H to the consolidated financial statements).
Private Placements and Other Transactions. In connection with the
Company's notice to repurchase 90,000 shares of the Convertible Stock for
$900,000 plus dividends of $45,370 on September 3, 1999, the holder of the
Convertible Stock elected to convert all of the Convertible Stock into 450,000
shares of common stock of the Company. The Company paid the $45,370 of
dividends in cash.
The Company has granted one demand registration right with respect to the
common stock referred to in the preceding paragraph. The Company and the holder
of the common stock have agreed to share the costs of the registration.
During August 1999, warrants to purchase a total of 425,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $681,233. The proceeds of such exercises were used for working
capital purposes.
During October 1999, warrants to purchase a total of 163,636 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $390,951. The proceeds of such exercises were used for working
capital purposes.
From December 10, 1999 through January 18, 2000, and on February 2, 2000,
the Company completed a series of related transactions in connection with the
private placement of $4.9 million and $710,000, respectively, of subordinated
notes (the "Notes") due the earlier of December 15, 2000 or upon the receipt of
proceeds by the Company from any future debt or equity financing in excess of
$2.3 million. Interest at 9% is due on June 15, 2000, and December 15, 2000 (or
the maturity date, if earlier). In connection with the Notes, the Company
granted the holders of the Notes, warrants (the "Warrants") to purchase a total
of 706,763 shares of common stock of the Company at an exercise price of $4.00
per share, exercisable through December 15, 2002. The Company was also
required to register the shares issuable in connection with exercise of the
Warrants on July 15, 2000, subject to certain conditions (see note K to the
consolidated financial statements).
Net proceeds from the Notes were used for the purchase of the 50% interest
in the US - Mexico Pipelines and Matamoros Terminal Facility (see notes G and J
to the consolidated financial statements) and for working capital purposes.
29
Under the terms of the Notes, the Company has agreed to pledge the
Company's owned interest (50%) in the US - Mexico Pipelines and the Matamoros
Terminal Facility. RZB has consented to subordinate its senior interest in
these assets in connection with the Notes.
In connection with the issuance of $3.9 million and $710,000 of Notes from
December 10, 1999 through January 18, 2000 and February 2, 2000, respectively,
the Company paid placement fees equal to a cash payment of $270,830 and $49,700
and warrants to purchase a total of 96,725 shares and 17,750 shares,
respectively, of common stock of the Company at an exercise price of $4.00 per
share, exercisable for three years. The Company also granted piggy back
registration rights to the holders of the warrants issued for the placement
fees.
During January and February 2000, the Company issued 17,000 shares of
common stock of the Company in exchange for services performed.
During February 2000, warrants to purchase a total of 95,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $308,750. The proceeds of such exercises were used for working
capital purposes.
During March 2000, a director and officer of the Company exercised warrants
to purchase 200,000 shares of common stock of the Company at an exercise price
of $2.50 per share. The consideration for the exercise of the warrants included
$2,000 in cash and a $498,000 promissory note. The principal amount of the note
plus accrued interest at an annual rate of 10.0% is due on April 30, 2001. The
director and officer of the Company is personally liable with full recourse to
the Company and has provided 200,000 shares of common stock of the Company as
collateral. The promissory note has been recorded as a reduction of
stockholders' equity. Interest on the promissory note will be recorded when the
cash is received.
On April 19, 2000, the Company issued 181,818 shares of common stock of the
Company for an amount of $1.0 million. Net proceeds from the sale were used for
working capital purposes. In connection with the sale the Company has
registered the shares.
During May 2000 and June 2000, warrants to purchase a total of 48,750
shares of common stock of the Company were exercised, resulting in cash proceeds
to the Company of $120,000. The proceeds of such exercises were used for
working capital purposes.
During June 2000 and September 2000, the Company issued 8,497 shares and
3,480 shares, respectively, of common stock of the Company in exchange for
penalties payable under a registration rights agreement.
During August 2000 and September 2000, the Company issued 12,500 shares and
100,000 shares, respectively, of common stock of the Company in connection with
the settlement of litigation. The company agreed to register the shares issued
in the future.
In August 2000 the Company issued 6,500 shares of Common Stock to a
consultant in payment for services rendered to the Company valued at $41,438.
During September 2000, a director and officer of the Company exercised
warrants to purchase 200,000 shares of common stock of the Company at an
exercise price of $2.50 per share. The consideration for the exercise of the
warrants included $2,000 in cash and a $498,000 promissory note. The principal
amount of the note plus accrued interest at an annual rate of 10.5% is due on
April 30, 2001. The director and officer of the Company is personally liable
with full recourse to the Company and has provided 121,617 shares of common
stock of the Company as collateral. The promissory note will be recorded as a
reduction of stockholders' equity during the quarter ending October 31, 2000.
Interest on the promissory note will be recorded when the cash is received.
During October 2000, warrants to purchase a total of 7,500 shares of common
stock of the Company were exercised, resulting in cash proceeds to the Company
of $11,250.
30
During November 2000, warrants to purchase a total of 10,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $32,500.
In November 2000 the Company issued 4,716 shares of common stock to a
consultant in payment for services rendered to the Company valued at $23,583.
In connection with previous warrants issued by the Company, certain of
these warrants contain a call provision whereby the Company has the right to
purchase the warrants for a nominal price if the holder of the warrants does not
elect to exercise the warrants within the call provision.
In connection with the issuance of shares and warrants by the Company (the
"Shares"), the Company has on numerous instances granted registration rights to
the holders of the Shares, including those shares which result from the exercise
of warrants (the "Registrable Securities"). The Company was obligated to
register the Registrable Securities even though the Registrable Securities have
been tradable under Rule 144. The registration rights agreements generally did
not contain provisions for damages if the Registration was not completed, except
for certain Shares required to be registered on December 1, 1999, whereby the
Company was required to pay a penalty of $80,000 to be paid in cash and/or
common stock of the Company based on the then current trading price of the
common stock of the Company. In connection with the requirements, the Company
issued 11,977 shares of its common stock. On July 14, 2000, the Company filed a
registration statement which included the Shares. The registration statement
was subsequently declared effective on October 6, 2000.
Judgment in favor of the Company. During March 2000, the Company received
the cash portion of the Judgment from IBC-Brownsville of $4.3 million of which
approximately $1.3 million was paid for legal fees and for other expenses
associated with the Judgment.
Settlement of Litigation. On March 16, 1999, the Company settled a lawsuit
in mediation with its former chairman of the board, Jorge V. Duran. In
connection therewith and without admitting or denying liability the Company
agreed to pay Mr. Duran $250,000, of which $100,000 is to be paid by the
Company's insurance carrier, in cash and issue him 100,000 shares of common
stock of the Company. The Company agreed to register the stock in the future.
The parties had agreed to extend the date which the payments required in
connection with the settlement, including the issuance of the common stock. On
July 26, 2000, the parties executed final settlement agreements whereby the
Company paid the required cash payment of $150,000. During September 2000, the
Company issued the required stock.
On January 28, 2000, a complaint was filed by WIN Capital Corporation
("WIN") in the Supreme Court of the State of New York, County of New York,
against the Company for breach of contract seeking specific performance and
declaratory relief in connection with an investment banking agreement. During
August 2000, the complaint was settled whereby the Company agreed to issue WIN
12,500 shares of common stock of the Company. The Company also agreed to
register the shares issued to WIN. The value of the stock, totaling
approximately $82,000 at the time of settlement, has been recorded in the
Company's consolidated financial statements at July 31, 2000.
On February 24, 2000, litigation was filed in the 357th Judicial District
Court of Cameron County, Texas, against Cowboy Pipeline Service Company, Inc.
("Cowboy"), CPSC International, Inc. ("CPSC") and the Company (collectively
referred to as the "Defendants") alleging that the Defendants had illegally
trespassed in connection with the construction of the US Pipelines and seeking a
temporary restraining order against the Defendants from future use of the US
Pipelines. On March 20, 2000, the Company acquired the portion of the property
which surrounds the area where the US Pipelines were constructed for cash of
$1.9 million, which was paid during April 2000, and debt in the amount of $1.9
million. As a result, the litigation was dismissed. The debt bears interest at
10% per annum, payable monthly in minimum installments of $15,000 with a balloon
payment due during April 2003. The liability of $1.9 million is included in
capital lease obligations (see note J to the consolidated financial
statements).
On June 2, 2000, additional litigation was filed in the 138th Judicial
District Court of Cameron County, Texas, against Cowboy and the Company alleging
that Cowboy and the Company had illegally trespassed in connection with the
construction of the US Pipelines and seeking declaratory relief, including
damages, exemplary damages and injunctive relief preventing Cowboy and the
Company from utilizing the US Pipelines. On June 9, 2000, CPSC intervened and
removed the case to the Court. Subsequent to July 31, 2000, the litigation was
settled through a court ordered mediation by the Company agreeing to acquire
land for which substantially all of the costs will be offset against the balance
of the promissory note due to CPSC (see below). The settlement is subject to
completion of the settlement documents.
31
On June 19, 2000, the Company, CPSC, Cowboy and the Owner reached a
settlement (the "Settlement") whereby the Company has agreed to purchase the
remaining 50% interest in the assets associated with Lease Agreements for a
promissory note, transfer of the property owned by the Company purchased on
March 20, 2000 referred to above and warrants to acquire common stock of the
Company together with a release of all claims and proceedings between them. In
addition, CPSC will assume the Company's debt issued in connection with the
acquisition of the property. On July 19, 2000, the Settlement expired without
the parties completing final documents as provided for in the Settlement
Agreement. The parties are close to a renewed negotiated settlement of all
disputes between them and have signed a number of term sheets that contain
virtually all of the substantive provisions necessary to a global resolution.
The accompanying consolidated financial statements have been adjusted to reflect
the Settlement. The Settlement is subject to final documentation and approval
of the Court. If the Settlement is not finalized, the Company will continue to
pursue its legal remedies.
As a result of the aforementioned, the Company may incur additional costs
to complete the US - Mexico Pipelines and Matamoros Terminal Facility, the
amount of which cannot presently be determined.
In addition, there is no certainty that the Company will (i) acquire the
remaining 50% interest in the US - Mexico Pipelines and Matamoros Terminal
Facility, (ii) continue to utilize the US - Mexico Pipelines and Matamoros
Terminal Facility or (iii) realize its recorded investment in the Lease
Agreements or in the US - Mexico Pipelines and Matamoros Terminal Facility (see
note G to the consolidated financial statements).
Other Litigation. The Company and its subsidiaries are also involved with
other proceedings, lawsuits and claims. The Company is of the opinion that the
liabilities, if any, ultimately resulting from such proceedings, lawsuits and
claims should not materially affect its consolidated financial position (see
note M to the consolidated financial statements).
Realization of Assets. Recoverability of a major portion of the recorded
asset amounts as shown in the Company's consolidated balance sheet is dependent
upon (i) the Company's ability to obtain additional financing and raise
additional equity capital, (ii) the completion of the transactions related to
the US - Mexico Pipelines, the Matamoros Terminal Facility and the Saltillo
Terminal Facility and (iii) the success of the Company's future operations.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to (i) increase sales to its current
customers, (ii) increase its customer base upon Deregulation, (iii) extend the
terms and capacity of the Pipeline Lease and the Brownsville Terminal Facility,
(iv) expand its product lines, (v) obtain additional letters of credit
financing, (vi) raise additional debt and/or equity capital and (vii) resolve
the uncertainties related to the US - Mexico Pipelines, Matamoros Terminal
Facility and the Saltillo Terminal Facility (see note R to the consolidated
financial statements).
At July 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $5.6 million. The ability to
utilize such net operating loss carryforwards may be significantly limited by
the application of the "change of ownership" rules under Section 382 of the
Internal Revenue Code.
FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share. SFAS
128 supersedes APB Opinion No. 15 (Opinion No. 15), Earnings per Share, and
requires the calculation and dual presentation of basic and diluted earnings per
share (EPS), replacing the measures of primary and fully-diluted EPS as reported
under Opinion No. 15. SFAS 128 became effective for financial statements issued
for periods ending after December 15, 1997; earlier application was not
permitted. Accordingly, EPS for the periods presented in the accompanying
consolidated statements of operations are calculated under the guidance of SFAS
128.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income and Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosure about Segments of an Enterprise and Related Information. Both are
effective for periods beginning after December 15, 1997, with earlier
application encouraged for SFAS 131. The Company adopted SFAS 131 in fiscal
1997.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
To the extent that the Company maintains quantities of LPG inventory, the
Company is exposed to market risk related to the volatility of LPG prices.
During periods of falling LPG prices, the Company may sell excess inventory to
customers to reduce the risk of these price fluctuations.
As part of the volume requirements under the New Agreement, the Company has
committed to sell PMI 3.2 million gallons of propane at a sales price of
approximately $0.60 per gallon, to be delivered during December 2000 and
February 2001.
If the cost of the 3.2 million gallons of propane increases by 25% from the
cost of propane at July 31, 2000 during the period from December 31, 2000
through February 2001, the Company would realize a loss of approximately
$270,000 upon the sale of the propane based on this commitment.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors
Penn Octane Corporation
We have audited the accompanying consolidated balance sheets of Penn Octane
Corporation and its subsidiaries (Company) as of July 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended July 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of July 31, 1999 and 2000, and the consolidated results of their
operations and their consolidated cash flows for each of the three years in the
period ended July 31, 2000 in conformity with generally accepted accounting
principles.
We have also audited Schedule II of the Company for each of the three years in
the period ended July 31, 2000. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note R, conditions
exist which raise substantial doubt about the Company's ability to continue as a
going concern including 1) the Company has not sustained profitable operations,
2) a deficit in working capital, and 3) uncertainties related to the US-Mexico
Pipelines, the Matamoros Terminal Facility and the Saltillo Terminal Facility
referred to in notes M and P. Management's plans regarding to these matters are
described in note R. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
As discussed in note B, the Company adopted the provisions of SFAS 128,
"Earnings per Share", during the year ended July 31, 1998.
BURTON McCUMBER & CORTEZ, L.L.P.
Brownsville, Texas
September 29, 2000
34
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31
ASSETS
1999 2000
---------- -----------
Current Assets
Cash $1,032,265 $ 25,491
Trade accounts receivable, less allowance for doubtful accounts of 2,505,915 3,816,685
$521,067 and $562,950 (note D)
Notes receivable (note E) 77,605 770,016
Inventories (notes B1 and H) 615,156 7,323,209
Prepaid expenses and other current assets 42,517 338,187
Property held for sale (note M) - 1,908,000
---------- -----------
Total current assets 4,273,458 14,181,588
Property, plant and equipment - net (notes B2 and G) 3,171,650 16,756,816
Lease rights (net of accumulated amortization of $524,355 and $570,150) 629,684 583,889
(note B2)
Notes receivable (note E) 822,196 -
Other non-current assets 11,720 14,870
---------- -----------
Total assets $8,908,708 $31,537,163
========== ===========
The accompanying notes are an integral part of these statements.
35
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
JULY 31
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 2000
------------- ------------
Current Liabilities
Current maturities of long-term debt (note J) $ 365,859 $ 3,859,266
Short-term debt (note J) - 4,980,872
Revolving line of credit (note M) - 3,538,394
LPG trade accounts payable 2,850,197 5,226,958
Other accounts payable and accrued liabilities 1,382,603 2,833,434
------------- ------------
Total current liabilities 4,598,659 20,438,924
Long-term debt, less current maturities (note J) 258,617 1,464,984
Commitments and contingencies (notes D, K and M) - -
Stockholders' Equity (note K)
Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized; - -
No shares issued and outstanding at July 31, 1999 and 2000
Series B - Senior preferred stock-$.01 par value, $10 liquidation value, 900 -
5,000,000 shares authorized; 90,000 and 0 shares issued and outstanding at
July 31, 1999 and 2000
Common stock - $.01 par value, 25,000,000 shares authorized; 118,456 134,352
11,845,497 and 13,435,198 shares issued and outstanding at July 31,
1999 and 2000
Additional paid-in capital 17,133,222 21,782,638
Notes receivable from officers of the Company and a related party for (2,765,350) (3,263,350)
exercise of warrants, less reserve of $451,141 and $496,077 at July 31,
1999 and 2000, respectively
Accumulated deficit (10,435,796) (9,020,385)
------------- ------------
Total stockholders' equity 4,051,432 9,633,255
------------- ------------
Total liabilities and stockholders' equity $ 8,908,708 $31,537,163
============= ============
The accompanying notes are an integral part of these statements.
36
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31
1998 1999 2000
-------------- ------------ ------------
Revenues $ 30,801,355 $35,337,935 $98,514,963
Cost of goods sold 28,887,169 32,044,194 94,936,405
-------------- ------------ ------------
Gross profit 1,914,186 3,293,741 3,578,558
Selling, general and administrative expenses
Legal and professional fees 1,320,922 350,558 826,310
Salaries and payroll related expenses 888,597 904,076 1,219,581
Travel 178,747 151,362 176,225
Other (note P) 1,149,534 668,173 930,530
-------------- ------------ ------------
3,537,800 2,074,169 3,152,646
-------------- ------------ ------------
Operating income (loss) (1,623,614) 1,219,572 425,912
Other income (expense)
Interest expense (458,657) (521,418) (1,857,057)
Interest income 10,016 16,981 34,080
Settlement of litigation (note M) - (577,691) (81,250)
Award from litigation (note T) - 987,114 3,036,638
-------------- ------------ ------------
Income (loss) from continuing operations before taxes (2,072,255) 1,124,558 1,558,323
Provision for income taxes (notes B3 and I) - - 97,542
-------------- ------------ ------------
Income (loss) from continuing operations ( 2,072,255) 1,124,558 1,460,781
Discontinued operations, net of taxes (notes B2 and D)
Loss from operations of CNG segment (1,671,801) ( 290,625) -
Loss on disposal of CNG segment - (288,488) -
-------------- ------------ ------------
Total loss from discontinued operations (1,671,801) (579,113) -
-------------- ------------ ------------
Net income (loss) $ (3,744,056) $ 545,445 $ 1,460,781
============== ============ ============
Income (loss) from continuing operations
per common share (notes B4 and C) $ (0.25) $ 0.11 $ 0.11
============== ============ ============
Net income (loss) per common share (notes B4 and C) $ (0.43) $ 0.05 $ 0.11
============== ============ ============
Income (loss) from continuing operations per common share
assuming dilution (notes B4 and C) $ (0.25) $ 0.10 $ 0.10
============== ============ ============
Net income (loss) per common share assuming dilution
(notes B4 and C) $ (0.43) $ 0.05 $ 0.10
============== ============ ============
Weighted average common shares outstanding 9,235,299 10,659,100 12,970,052
============== ============ ============
The accompanying notes are an integral part of these statements.
37
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31
1998 1999 2000
--------------------- ------------------- ---------------------
Shares Amount Shares Amount Shares Amount
--------- ---------- ---------- ------- ---------- ---------
PREFERRED STOCK
Beginning balance 270,000 $ 2,700 - $ - - $ -
Conversion of 270,000 shares of Preferred Stock
to 899,910 shares of Common Stock on January
30, 1998 (270,000) (2,700) - - - -
--------- ---------- ---------- ------- ---------- ---------
Ending balance - $ - - $ - - $ -
========= ========== ========== ======= ========== =========
SENIOR PREFERRED STOCK
Beginning balance - $ - - $ - 90,000 $ 900
Issuance of 90,000 shares of Senior Preferred
Stock during March 1999 in exchange for
cancellation of $900,000 of promissory notes - - 90,000 900 - -
Conversion of 90,000 shares of preferred stock to
450,000 shares of common stock on September
3, 1999 - - - - (90,000) (900)
--------- ---------- ---------- ------- ---------- ---------
Ending balance - $ - 90,000 $ 900 - $ -
========= ========== ========== ======= ========== =========
COMMON STOCK
Beginning balance 8,169,286 $ 81,693 9,952,673 $99,527 11,845,497 $118,456
Issuance of common stock upon exercise of
warrants during August 1997, in connection with
retirement of $75,000 debt obligation 75,000 750 - - - -
Issuance of common stock upon exercise of
warrants during August 1997 430,000 4,300 - - - -
Issuance of common stock in September 1997 in
exchange for settlement of $113,000 of
outstanding consulting fees 20,314 203 - - - -
Conversion of 270,000 shares of preferred stock
to 899,910 shares of common stock on January
30, 1998 899,910 8,999 - - - -
Dividend of 100,000 shares of common stock
paid upon conversion of 270,000 shares of
preferred stock to 899,910 shares of common
stock on January 30, 1998 100,000 1,000 - - - -
Issuance of common stock in April 1998 in
connection with retirement of $1,032,652 debt
obligations 258,163 2,582 - - - -
Sale of common stock in November 1998 - - 250,000 2,500 - -
Issuance of common stock in December 1998 in
exchange for settlement of $22,500 of
outstanding obligations - - 15,000 150 - -
Issuance of common stock in December 1998 in
exchange for settlement of $118,607 of debt
obligations - - 53,884 539 - -
Sale of common stock in December 1998 - - 500,000 5,000 - -
Sale of common stock in March 1999, including
related fees of 35,000 shares of common stock - - 362,273 3,623 - -
Issuance of common stock in connection with
conversion of debt to Senior Preferred Stock of
the Company - - 50,000 500 - -
The accompanying notes are an integral part of these statements.
38
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
FOR THE YEARS ENDED JULY 31
1998 1999 2000
------------------ -------------------- --------------------
Shares Amount Shares Amount Shares Amount
--------- ------- ---------- -------- ---------- --------
COMMON STOCK - CONTINUED
Issuance of common stock in exchange for
consulting services - - 5,000 50 - -
Sale of common stock in July 1999 - - 490,000 4,900 - -
Issuance of common stock in July 1999 in
exchange for cancellation of $300,000 of debt
obligations - - 166,667 1,667 - -
Issuance of common stock upon exercise of
warrants during August 1999 - - - - 425,000 4,250
Issuance of common stock in September 1999 in
connection with conversion of Senior Preferred
Stock - - - - 450,000 4,500
Issuance of common stock upon exercise of
warrants during October 1999 - - - - 163,636 1,636
Issuance of common stock in connection with
bonus during January 2000 - - - - 10,000 100
Issuance of common stock upon exercise of
warrants during February 2000 - - - - 95,000 950
Issuance of common stock for services in
February 2000 - - - - 7,000 70
Issuance of common stock upon exercise of
warrants in March 2000 in exchange for
promissory note - - - - 200,000 2,000
Sale of common stock in April 2000 - - - - 181,818 1,818
Issuance of common stock upon exercise of
warrants during May 2000 - - - - 48,750 488
Issuance of common stock in connection with
registration rights penalty - - - - 8,497 84
--------- ------- ---------- -------- ---------- --------
Ending balance 9,952,673 $99,527 11,845,497 $118,456 13,435,198 $134,352
========= ======= ========== ======== ========== ========
The accompanying notes are an integral part of these statements.
39
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
FOR THE YEARS ENDED JULY 31
1998 1999 2000
------------- ------------- ----------------
Amount Amount Amount
------------- ------------- ----------------
ADDITIONAL PAID-IN CAPITAL
Beginning balance $ 10,515,266 $ 13,318,592 $ 17,133,222
Sale of common stock - 2,288,477 998,182
Issuance of common stock for notes,
cancellation of commission agreements
services and payment on promissory note 1,142,867 140,418 -
Conversion of preferred stock to common stock (6,299) - (3,600)
Exchange of debt for senior preferred stock and
common stock - 997,933 -
Dividends on preferred stock 224,000 - -
Loan discount 75,000 172,802 1,305,031
Grant of stock for services - 8,700 -
Common stock to be distributed in connection
with the settlement of a lawsuit - 206,300 81,250
Grant of warrants for services - - 381,080
Grant of warrants in connection with registration
rights agreement 160,542 - (85)
Exercise of warrants in connection with
retirement of debt 136,516 - -
Exercise of warrants 1,070,700 - 1,991,627
Cost of registering securities - - (104,069)
------------- ------------- ----------------
Ending balance $ 13,318,592 $ 17,133,222 $ 21,782,638
============= ============= ================
STOCKHOLDERS' NOTES
Beginning balance $ (2,834,865) $ (2,763,006) $ (2,765,350)
Note receivable from an officer of the Company
for exercise of warrants - - ( 498,000)
Other 71,859 (2,344) -
------------- ------------- ----------------
Ending balance $ (2,763,006) $ (2,765,350) $ (3,263,350)
============= ============= ================
ACCUMULATED DEFICIT
Beginning balance $ (7,012,185) $(10,981,241) $ (10,435,796)
Net income (loss) for the year (3,744,056) 545,445 1,460,781
Dividends on preferred stock (225,000) - (45,370)
------------- ------------- ----------------
Ending balance $(10,981,241) $(10,435,796) $ (9,020,385)
============= ============= ================
The accompanying notes are an integral part of these statements.
40
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31
Increase (decrease) in cash 1998 1999 2000
------------ ------------ -------------
Cash flows from operating activities:
Net income (loss) $(3,744,056) $ 545,445 $ 1,460,781
Adjustments to reconcile net (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization 249,584 230,078 388,445
Amortization of lease rights 45,795 45,795 45,795
Non-employee stock based costs and other 30,000 - 58,333
Issuance of warrants in connection with registration rights
agreement 160,542 - -
Loan discount 75,000 134,741 1,107,876
Award from litigation - (987,114) -
Settlement of litigation - 206,300 81,250
Asset impairment loss 400,000 - -
Loss on sale of assets 2,579 288,488 -
Other 71,859 3,256 123,137
Changes in current assets and liabilities:
Trade accounts receivable (914,071) (1,310,262) (1,352,652)
Related party receivable 171,519 - -
Costs and estimated earnings in excess of billings on uncompleted
contracts 196,888 - -
Inventories 129,069 (238,059) (6,708,053)
Prepaid and other current assets (42,693) 48,334 (54,003)
Property held for sale - - (1,908,000)
LPG trade accounts payable 931,362 1,918,835 2,376,761
Other assets and liabilities, net (54,687) (11,270) (3,150)
Other accounts payable and accrued liabilities 1,226,445 (312,754) 1,450,788
------------ ------------ -------------
Net cash provided by (used in) operating activities (1,064,865) 561,813 (2,932,692)
Cash flows from investing activities:
Capital expenditures (1,358,686) (432,988) (7,811,111)
Sale of assets 21,843 - -
Purchase of lease interests - - (3,000,000)
Payments on note receivable - 49,548 40,000
------------ ------------ -------------
Net cash used in investing activities (1,336,843) (383,440) (10,771,111)
Cash flows from financing activities:
Revolving credit facilities 851,823 (991,823) 3,538,394
Issuance of debt 1,500,000 - 7,279,212
Issuance of common stock 1,131,250 2,105,500 2,398,882
Reduction in debt (954,994) (417,298) (474,089)
Preferred stock dividends - - (45,370)
------------ ------------ -------------
Net cash provided by financing activities 2,528,079 696,379 12,697,029
------------ ------------ -------------
Net increase (decrease) in cash 126,371 874,752 (1,006,774)
Cash at beginning of period 31,142 157,513 1,032,265
------------ ------------ -------------
Cash at end of period $ 157,513 $ 1,032,265 $ 25,491
============ ============ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 404,883 $ 338,659 $ 772,296
============ ============ =============
Taxes $ - $ - $ 80,042
============ ============ =============
Supplemental disclosures of noncash transactions:
Preferred stock, common stock and warrants issued
(notes K, L and M) $ 1,740,242 $ 1,556,507 $ 960,500
============ ============ =============
Capitalized lease $ - $ - $ 3,162,500
============ ============ =============
The accompanying notes are an integral part of these statements.
41
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Penn Octane Corporation, formerly known as International Energy Development
Corporation ("International Energy"), was incorporated in Delaware in
August 1992. The Company has been principally engaged in the purchase,
transportation and sale of liquefied petroleum gas (LPG). From 1997 until
March 1999, the Company was also involved in the provision of equipment and
services to the compressed natural gas (CNG) industry. The Company owns and
operates a terminal facility in Brownsville, Texas (the Brownsville
Terminal Facility) and owns a 50% interest and leases the remaining 50%
interest in a LPG terminal facility in Matamoros, Tamaulipas, Mexico (the
Matamoros Terminal Facility) and pipelines (the US - Mexico Pipelines)
which connect the Brownsville Terminal Facility to the Matamoros Terminal
Facility. The lease of the remaining 50% interest has been capitalized for
financial statement reporting purposes. The Company has a long-term lease
agreement for approximately 132 miles of pipeline (the Leased Pipeline)
which connects Exxon Company, U.S.A.'s (Exxon) King Ranch Gas Plant in
Kleberg County, Texas and Duke Energy's La Gloria Gas Plant in Jim Wells
County, Texas, to the Company's Brownsville Terminal Facility. In addition,
the Company has access to a twelve-inch pipeline (the ECCPL), which
connects from Exxon's Viola valve station in Nueces County, Texas to the
inlet of the King Ranch Gas Plant. In connection with the Company's lease
agreement for the Leased Pipeline, the Company has access to 21,000,000
gallons of storage located in Markham, Texas as well as potential propane
pipeline exchange suppliers via approximately 155 miles of pipeline located
between Markham, Texas and the Exxon King Ranch Gas Plant. The Company
sells LPG primarily to P.M.I. Trading Limited (PMI). PMI is the exclusive
importer of LPG into Mexico. PMI is also a subsidiary of Petroleos
Mexicanos, the state-owned Mexican oil company (PEMEX). PMI distributes the
LPG purchased from the Company in the northeastern region of Mexico.
The Company commenced operations during the fiscal year ended July 31,
1995, upon construction of the Brownsville Terminal Facility. Prior to such
time, the Company was in the "development stage" until the business was
established. Since the Company began operations, the primary customer for
LPG has been PMI. Sales of LPG to PMI accounted for approximately 99%, 100%
and 77% of the Company's total revenues for the fiscal years ended July 31,
1998, 1999 and 2000, respectively.
In February 1997, the Company formed Wilson Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary, for the purpose of
engaging in the business of designing, constructing, installing and
servicing equipment for CNG fueling stations and related products for use
in the CNG industry throughout the world. The subsidiary's name was changed
to PennWilson CNG, Inc. (PennWilson) in August 1997.
In October 1997, the Company formed Penn CNG Holdings, Inc. (Holdings), a
Delaware corporation and a wholly-owned subsidiary. In February 1998, the
Company formed PennWill, S.A. de C.V., Camiones Ecologicos, S.A. de C.V.,
Grupo Ecologico Industrial, S.A. de C.V., Estacion Ambiental, S.A. de C.V.,
Estacion Ambiental II, S.A. de C.V., and Serinc, S.A. de C.V. (collectively
Estacion), all Mexican corporations which are subsidiaries of Holdings. To
date there has not been significant operations for any of these entities.
During May 1999, the Company sold certain CNG related assets to a
corporation controlled by a director and officer of the Company (see note
E). As a result of the sale, the Company is no longer in the CNG business
and has reflected the historical results of the CNG segment as discontinued
operations. All prior periods have been restated.
42
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION - Continued
BASIS OF PRESENTATION
-----------------------
The accompanying consolidated financial statements include the Company and
its subsidiaries, PennWilson and Holdings and its subsidiaries (Company).
All significant intercompany accounts and transactions are eliminated.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows.
1. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method.
2. PROPERTY, PLANT AND EQUIPMENT AND LEASE RIGHTS
Property, plant and equipment are recorded at cost. Assets are depreciated
and amortized using the straight-line method over their estimated useful
lives as follows:
LPG terminals, building and leasehold improvements 19 years
Automobiles 3-5 years
Furniture, fixtures and equipment 3-5 years
Trailers 8 years
Pipelines 30 years
The lease rights are being amortized as follows:
Lease rights 19 years
Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements that extend the useful life of the assets are
added to the property, plant and equipment accounts.
The provisions of Statement of Financial Accounting Standards (SFAS) No.
121 (SFAS 121) "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of", require the Company to review
long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If it is determined that an
impairment has occurred, the amount of the impairment is charged to
operations. No impairments were recognized for the years ended July 31,
1999 and 2000. For the year ended July 31, 1998, the Company recorded a
$400,000 charge to operations for the impairment of long-lived assets
relating to the CNG business (see note D).
43
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
3. INCOME TAXES
The Company will file a consolidated income tax return for the year ended
July 31, 2000.
The Company accounts for deferred taxes in accordance with SFAS 109,
"Accounting for Income Taxes". Under the liability method specified
therein, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of
changes in deferred tax assets and liabilities. The principal types of
differences between assets and liabilities for financial statement and tax
return purposes are the allowance for doubtful accounts receivable,
amortization of deferred interest costs, accumulated depreciation and
deferred compensation expense.
4. INCOME (LOSS) PER COMMON SHARE
Income (loss) per share of common stock is computed on the weighted average
number of shares outstanding. During periods in which the Company incurred
losses, giving effect to common stock equivalents is not presented as it
would be antidilutive.
The Financial Accounting Standards Board (FASB) issued SFAS 128, "Earnings
Per Share", which supersedes Accounting Principles Board Opinion (APB)
Opinion No. 15 (APB 15), "Earnings Per Share". The statement became
effective for financial statements issued for periods ending after December
15, 1997, including interim periods. Early adoption was not permitted.
5. CASH EQUIVALENTS
For purposes of the cash flow statement, the Company considers cash in
banks and securities purchased with a maturity of three months or less to
be cash equivalents.
6. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments", requires
the disclosure of fair value information about financial instruments,
whether or not recognized on the balance sheet, for which it is practicable
to estimate the value. SFAS 107 excludes certain financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
are not intended to represent the underlying value of the Company. The
carrying amounts of cash and cash equivalents, current receivables and
payables and long-term liabilities approximate fair value because of the
short-term nature of these instruments.
44
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. STOCK-BASED COMPENSATION
SFAS 123, "Accounting for Stock-Based Compensation", establishes financial
accounting and reporting standards for stock-based employee compensation
plans and for transactions in which an entity issues its equity instruments
to acquire goods and services from non-employees.
Under the guidance provided by SFAS 123, the Company has elected to
continue to account for employee stock-based compensation using the
intrinsic value method prescribed in APB 25, "Accounting for Stock Issued
to Employees", and related Interpretations.
9. RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform
to the current presentation.
NOTE C - INCOME (LOSS) PER COMMON SHARE
The following tables present reconciliations from income (loss) per common
share to income (loss) per common share assuming dilution (see notes K and
L for the convertible preferred stock and the warrants):
For the year ended July 31, 1998
------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
Income (loss) from continuing operations $( 2,072,255) - -
Income (loss) from discontinued operations ( 1,671,801) - -
--------------
Net income (loss) ( 3,744,056) - -
Less: Dividends on preferred stock ( 225,000) - -
BASIC EPS
Income (loss) from continuing operations ( 2,297,255) 9,235,299 $ ( 0.25)
===========
available to common stockholders
Income (loss) from discontinued operations ( 1,671,801) 9,235,299 $ ( 0.18)
-------------- ===========
Net income (loss) available to common ( 3,969,056) 9,235,299 $ ( 0.43)
===========
stockholders
EFFECT OF DILUTIVE SECURITIES
Warrants - - -
Convertible Preferred Stock - - -
DILUTED EPS
Income (loss) from continuing operations N/A N/A $ N/A
===========
available to common stockholders
Income (loss) from discontinued operations N/A N/A $ N/A
===========
Net income (loss) available to common $ N/A N/A $ N/A
============== ============= ===========
stockholders
45
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INCOME (LOSS) PER COMMON SHARE - Continued
For the year ended July 31, 1999
------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
Income (loss) from continuing operations $ 1,124,558 - -
Income (loss) from discontinued operations ( 579,113) - -
--------------
Net income (loss) 545,445 - -
Less: Dividends on preferred stock - - -
BASIC EPS
Income (loss) from continuing operations 1,124,558 10,659,100 $ 0.11
===========
available to common stockholders
Income (loss) from discontinued operations ( 579,113) 10,659,100 $( 0.06 )
-------------- ===========
Net income (loss) available to common 545,445 10,659,100 $ 0.05
===========
stockholders
EFFECT OF DILUTIVE SECURITIES
Warrants - 89,437 -
Convertible Preferred Stock - 185,440 -
DILUTED EPS
Income (loss) from continuing operations 1,124,558 10,933,977 $ 0.10
===========
available to common stockholders
Income (loss) from discontinued operations ( 579,113) 10,933,977 $ ( 0.05)
-------------- ===========
Net income (loss) available to common $ 545,445 10,933,977 $ 0.05
============== ============= ===========
stockholders
46
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INCOME (LOSS) PER COMMON SHARE - Continued
For the year ended July 31, 2000
-----------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- ----------
Income (loss) from continuing operations $ 1,460,781 - -
Income (loss) from discontinued operations - - -
--------------
Net income (loss) 1,460,781 - -
Less: Dividends on preferred stock (45,370) - -
BASIC EPS
Income (loss) from continuing operations 1,415,411 12,970,052 $ 0.11
==========
available to common stockholders
Income (loss) from discontinued operations - 12,970,052 $ -
-------------- ==========
Net income (loss) available to common 1,415,411 12,970,052 $ 0.11
==========
stockholders
EFFECT OF DILUTIVE SECURITIES
Warrants - 1,371,515 -
Convertible Preferred Stock - 41,803 -
DILUTED EPS
Income (loss) from continuing operations 1,415,411 14,383,370 $ 0.10
==========
available to common stockholders
Income (loss) from discontinued operations - 14,383,370 $ -
-------------- ==========
Net income (loss) available to common $ 1,415,411 14,383,370 $ 0.10
============== ============= ==========
stockholders
NOTE D - DISCONTINUED OPERATIONS
At July 31, 1998, the Company determined that CNG related assets
constructed by the Company and spare parts inventories (CNG assets held for
sale) should be written down to their net realizable value due to the
uncertainty in the Company's strategy regarding the CNG business. The
amount of the charge to operations was $400,000.
In connection with the sale of assets related to the CNG business during
May 1999 (see note E), the Company has effectively disposed of its CNG
segment and has discontinued operations of that segment. In accordance with
APB 30, the results of operations related to the CNG segment have been
recorded as discontinued operations for all periods presented in the
Company's consolidated financial statements. As a result of the sale, the
Company recorded a loss associated with the discounted notes (see note E).
47
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - SALE OF CNG ASSETS
During May 1999, the Company sold its remaining CNG assets and business to
a company controlled by a director and officer of the Company (referred to
collectively as the Buyer). Under the terms of the sale, the Company
received promissory notes aggregating $1,200,000 to be paid over a period
of 61 months. The notes were collateralized by the CNG assets, the common
stock of the Buyer and warrants to purchase 200,000 shares of common stock
of the Company which had previously been issued to the Buyer by the
Company. The director and officer had personally guaranteed a portion of
the balance of the notes.
The notes contained a provision for prepayment at a discount and bore
interest at rates specified therein. The Company discounted the notes for
the prepayment discount, resulting in a discount of $260,000 and a
discounted balance of the notes of $940,000 at the date of issuance, which
the Company believes was less than the fair value of the collateral. The
effective interest rate of the notes after giving affect to the discount is
8.6%. Because the Buyer could pay the notes at any time, the Company
determined that it would account for interest income using the cost
recovery method based on collections of the notes.
The Stock Pledge and Security Agreement (Agreement) executed in connection
with the sale provides that the Buyer may sell the collateral at fair
market value at any time during the term of the notes without the Company's
consent provided that all proceeds collected from the sale will be applied
to the note balances. In addition, the Company agreed to subordinate its
secured interest in the collateral after the Buyer has paid $300,000 plus
interest at 10.0% as provided for in the Agreement.
One of the notes was paid on September 10, 2000 (see note F). The remaining
note has a balance of $214,355 and is collateralized by the CNG assets and
60,809 shares of the Company's common stock owned by the Buyer.
NOTE F - RELATED PARTIES
DIRECTORS, OFFICERS AND SHAREHOLDERS
---------------------------------------
During April 1997, the Company's President exercised warrants to purchase
2,200,000 shares of common stock of the Company, at an exercise price of
$1.25 per share. The consideration for the exercise of the warrants
included $22,000 in cash and a $2,728,000 promissory note. The note accrued
interest at the rate of 8.25% per annum and was payable annually on April
11 until its maturity on April 11, 2000. In connection with the Company's
lease agreements (the Lease Agreements) with CPSC (see note N), the
President agreed to provide 500,000 shares of his common stock of the
Company as collateral. During September 1999, in consideration for
providing the collateral, the Board of Directors of the Company agreed to
offset the future interest due on the President's $2,728,000 promissory
note. Certain of the payments due on April 11, 1998, 1999 and 2000,
including the principal payment, were not received. On April 11, 2000, the
Company's President issued a new promissory note totaling $3,196,693,
representing the total unpaid principal and unpaid accrued interest at the
expiration of the original promissory note. During April 2000, in
consideration for the President providing a guaranty in connection with the
RZB Credit Facility (see note M), the Board of Directors agreed to waive
any interest requirements on the promissory notes so long as the President
continues to provide a personal guaranty in connection with the RZB credit
facility and the Company's letter of credit requirements due under the
Lease Agreements. The principal amount of the note plus accrued interest at
an annual rate of 10.0% except as adjusted for above, is due on April 30,
2001. The Company's President is personally liable with full recourse to
the Company and has provided 1,000,000 shares of common stock of the
Company as collateral. The promissory note has been recorded as a reduction
of stockholders' equity.
48
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - RELATED PARTIES - Continued
At July 31, 1998, interest receivable from the President was offset by the
remaining amount due to the President as of July 31, 1998 under his
employment agreement. The remaining balance of the interest receivable at
July 31, 1998, and the interest for the years ended July 31, 1999 and 2000
has been reserved.
During the year ended July 31, 1998, 1999 and 2000, the Company advanced
funds to Mexican affiliates in connection with the purchase of property,
plant and equipment and for Mexico related expenses incurred on the
Company's behalf (see note P).
During May 1999, the Company and PennWilson completed the sale of assets
related to the CNG business to the Buyer (see note E). On September 10,
2000, the Board of Directors approved the repayment by the Buyer of the
$900,000 promissory note to the Company (the Buyer was entitled to
discounts for early payment of approximately $344,000 as prescribed under
the promissory note) through the exchange of 78,373 shares of common stock
of the Company owned by Buyer, which were previously pledged to the Company
in connection with the promissory note. The exchanged shares had a fair
market value of approximately $556,000 at the time of the transaction and
the promissory note had a net book value of $640,000 at that time.
Therefore, the Company recorded a loss of approximately $84,000 as a result
of the discount taken by the Buyer. Such amount is included in the
consolidated statement of operations at July 31, 2000.
On March 26, 2000, an affiliate of a director and officer of the Company
issued the Company a new promissory note totaling $46,603, representing the
total unpaid principal and interest due under a prior promissory note due
to the Company which expired on March 26, 2000. The principal amount of the
note plus accrued interest at an annual rate of 10.0% is due on April 30,
2001. The promissory note is collateralized by 15,000 shares of common
stock of the Company owned by the affiliate of a director and officer of
the Company and has been recorded as a reduction of stockholders' equity.
During March 2000, a director and officer of the Company exercised warrants
to purchase 200,000 shares of common stock of the Company, at an exercise
price of $2.50 per share. The consideration for the exercise of the
warrants included $2,000 in cash and a $498,000 promissory note. The
principal amount of the note plus accrued interest at an annual rate of 10%
is due on April 30, 2001. The director and officer of the Company is
personally liable with full recourse to the Company and has provided
200,000 shares of common stock of the Company as collateral. The promissory
note has been recorded as a reduction of stockholders' equity. Interest on
the promissory note will be recorded when the cash is received.
During September 2000, a director and officer of the Company exercised
warrants to purchase 200,000 shares of common stock of the Company, at an
exercise price of $2.50 per share. The consideration for the exercise of
the warrants included $2,000 in cash and a $498,000 promissory note. The
principal amount of the note plus accrued interest at an annual rate of
10.5% is due on April 30, 2001. The director and officer of the Company is
personally liable with full recourse to the Company and has provided 60,809
shares of common stock of the Company as collateral (see note E). The
promissory note will be recorded as a reduction of stockholders' equity
during the three months ended October 31, 2000. Interest on the promissory
note will be recorded when the cash is received.
49
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of July 31:
1999 2000
-------------- --------------
LPG:
Brownsville Terminal Facility:
Building $ 173,500 $ 173,500
Terminal facilities 3,426,440 3,426,440
Tank Farm - 370,845
Leasehold improvements 291,409 291,409
Capital construction in progress - 1,295,825
Equipment 378,039 393,462
-------------- --------------
4,269,388 5,951,481
-------------- --------------
US - Mexico Pipelines and Matamoros Terminal Facility:
Purchase of 50% interest in the Lease Agreements - 3,000,000
Capitalized leases 512,000 6,400,000
Other costs paid by the Company 60,774 2,674,716
-------------- --------------
572,774 12,074,716
-------------- --------------
Saltillo Terminal Facility - 785,699
-------------- --------------
Other:
Automobile
Office equipment 10,800 10,800
35,738 39,615
-------------- --------------
46,538 50,415
-------------- --------------
4,888,700 18,862,311
Less: accumulated depreciation and amortization,
including amounts related to the capital lease of
$157,489 in 2000
( 1,717,050) ( 2,105,495)
-------------- --------------
$ 3,171,650 $ 16,756,816
============== ==============
Depreciation and amortization expense of property, plant and equipment
totaled $249,584, $230,078 and $388,445 for the years ended July 31, 1998,
1999 and 2000, respectively. These amounts include CNG related depreciation
of $14,854, $10,105 and $0, respectively, which is included in discontinued
operations in the consolidated statements of operations.
50
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - INVENTORIES
Inventories consist of the following as of July 31:
1999 2000
------------------------ ----------------------
Gallons Cost Gallons Cost
--------- ------------- ---------- ----------
LPG:
Leased Pipeline and US-Mexico
Pipelines 1,175,958 $ 434,987 1,361,850 $ 736,485
Storage:
Brownsville Terminal Facility,
Matamoros Terminal Facility
and railcars leased by the
Company 487,076 180,169 1,037,290 560,964
Markham - - 11,176,125 6,025,760
--------- ------------- ---------- ----------
1,663,034 $ 615,156 13,575,265 $7,323,209
========= ============= ========== ==========
NOTE I - INCOME TAXES
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities at July 31, 1999 and 2000, were as
follows:
1999 2000
------------------------ ------------------------
Assets Liabilities Assets Liabilities
---------- ------------ ---------- ------------
Depreciation
Warranty reserves $ - $ 40,000 $ - $ 135,000
Bad debt reserve 5,000 - - -
Receivable 177,000 - 191,000 -
Deferred compensation expense - - 31,000 -
Deferred interest cost 421,000 - 311,000 -
Deferred other cost - - 400,000 -
Net operating loss carryforward - - 19,000 -
2,721,000 - 1,915,000 -
---------- ------------ ---------- ------------
3,324,000 40,000 2,867,000 135,000
Less: valuation allowance
3,324,000 40,000 2,867,000 135,000
---------- ------------ ---------- ------------
$ - $ - $ - $ -
========== ============ ========== ============
There is no current or deferred tax expense for the years ended July 31,
1998 and 1999. Alternative minimum tax totaled $97,542 for the year ended
July 31, 2000. The Company was in a loss position for 1998 and utilized net
operating loss carryforwards in 1999 and 2000.
Management believes that the valuation allowance reflected above is
appropriate because of the uncertainty that sufficient taxable income will
be generated in future taxable years by the Company to absorb the entire
amount of such net operating losses.
51
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - INCOME TAXES - Continued
At July 31, 2000, the approximate amount of net operating loss
carryforwards and expiration dates for U.S. income tax purposes were as
follows:
Year ending Tax Loss
July 31 Carryforward
------------ -------------
2010 $ 27,000
2012 2,279,000
2018 3,326,000
-------------
$ 5,632,000
=============
Future changes in ownership, as defined by section 382 of the Internal
Revenue Code, could limit the amount of net operating loss carryforwards used in
any one year.
NOTE J - DEBT OBLIGATIONS
SHORT-TERM DEBT - ISSUANCE OF NOTES
----------------------------------------
From December 10, 1999 through January 18, 2000, and on February 2, 2000,
the Company completed a series of related transactions in connection with
the private placement of $4,944,000 and $710,000, respectively, of
subordinated notes (the Notes) due the earlier of December 15, 2000 or upon
the receipt of proceeds by the Company from any future debt or equity
financing in excess of $2,250,000. Interest at 9% is due on June 15, 2000,
and December 15, 2000 (or the maturity date, if earlier). In connection
with the Notes, the Company granted the holders of the Notes warrants (the
Warrants) to purchase a total of 706,763 shares of common stock of the
Company at an exercise price of $4.00 per share, exercisable through
December 15, 2002. The Company was also required to register the shares
issuable in connection with exercise of the Warrants on or before July 15,
2000, subject to certain conditions (see note K).
Net proceeds from the Notes were used for the purchase of the 50% interest
in the US - Mexico Pipelines and Matamoros Terminal Facility (see notes G
and N) and for working capital purposes.
Under the terms of the Notes, the Company has agreed to pledge the
Company's owned interest (50%) in the US - Mexico Pipelines and the
Matamoros Terminal Facility. RZB has consented to subordinate its senior
interest in these assets in connection with the Notes.
In connection with the issuance of $3,869,000 and $710,000 of Notes from
December 10, 1999 through January 18, 2000 and February 2, 2000,
respectively, the Company paid placement fees equal to a cash payment of
$270,830 and $49,700 and warrants to purchase a total of 96,725 shares and
17,750 shares, respectively, of common stock of the Company at an exercise
price of $4.00 per share, exercisable for three years. The Company also
granted piggy back registration rights to the holders of the warrants
issued for the placement fees.
Upon the issuance of the Notes, the Company recorded a discount of
$1,675,598 related to the fair value of the Warrants issued and other
costs, to be amortized over the life of the Notes.
52
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - DEBT OBLIGATIONS - CONTINUED
LONG-TERM DEBT
---------------
The Company began utilizing the US- Mexico Pipelines and the Matamoros
Terminal Facility during April 2000. The amounts related to the Settlement
discussed in note M have been recorded in the accompanying consolidated
financial statements as property, plant and equipment and capital lease
obligations.
Long-term debt consists of the following as of July 31:
1999 2000
-------- ----------
Capitalized lease obligations in connection with the US - Mexico Pipelines and the $ - $5,070,500
Matamoros Terminal Facility (see notes G and N).
Contract for Bill of Sale which was extended in April 1999; due in monthly 50,347 14,347
payments of $3,000, including interest at 10%; due in February 2001; collateralized
by a building.
Noninterest-bearing note payable, discounted at 7%, for legal services; due in 387,129 202,750
monthly installments of $20,000 through January 2001 with a final payment of
110,000 in February 2001.
Note payable for legal services in connection with litigation; payable in monthly 127,000 -
installments of $11,092, including interest at 6.9%.
Other long-term debt. 60,000 36,653
-------- ----------
624,476 5,324,250
Current maturities. 365,859 3,859,266
-------- ----------
$258,617 $1,464,984
======== ==========
In connection with the notes payable for legal services, the Company agreed
to provide a "Stipulation of Judgment" to the creditors in the event that
the Company defaults under the settlement agreements.
Scheduled maturities are as follows:
Year ending July 31,
--------------------
2001 $ 897,516
2002 567,468
----------
$1,464,984
==========
53
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - STOCKHOLDERS' EQUITY
SERIES A - PREFERRED STOCK: CONVERSION
-------------------------------------------
On September 18, 1993, in a private placement, the Company issued 150,000
shares of its $.01 par value, 11% convertible, cumulative non-voting
preferred stock at a purchase price of $10.00 per share (the Series A
Preferred Stock). On June 10, 1994, the Company declared a 2-for-1 stock
split. The Series A Preferred Stock was convertible into voting shares of
common stock of the Company at a conversion ratio of one share of Series A
Preferred Stock for 3.333 shares of common stock. On September 10, 1997,
the Board of Directors of the Company approved the issuance of an
additional 100,000 shares of common stock as an inducement for the holders
of the Series A Preferred Stock to convert the shares of Series A Preferred
Stock and release all rights with respect to the Series A Preferred Stock.
In January 1998, all 270,000 shares of the Series A Preferred Stock were
converted into an aggregate of 999,910 shares of common stock of the
Company. The issuance of the additional 100,000 common shares was recorded
as a preferred stock dividend in the amount of $225,000 during the year
ended July 31, 1998.
SERIES B - SENIOR PREFERRED STOCK
--------------------------------------
At the 1997 Annual Meeting of Stockholders of the Company held on May 29,
1997, the stockholders authorized the amendment of the Company's Restated
Certificate of Incorporation to authorize 5,000,000 shares, $.01 par value
per share, of a new class of senior preferred stock (Series B Senior
Preferred Stock) for possible future issuance in connection with
acquisitions and general corporate purposes, including public or private
offerings of shares for cash and stock dividends.
On March 3, 1999, the Company completed an exchange of $900,000 of
promissory notes issued in December 1998 for 90,000 shares of a newly
created class of its Series B Senior Preferred Stock, the Series B
Convertible Redeemable Preferred Stock (the Convertible Stock), at a
purchase price of $10.00 per share and 50,000 shares of its common stock.
The Convertible Stock was non-voting and dividends were payable at a rate
of 10% annually, payable semi-annually, in cash or in kind. The Convertible
Stock could be converted in whole or in part at any time at a conversion
ratio of one share of Convertible Stock for five shares of common stock of
the Company. In connection with the Company's notice to repurchase 90,000
shares of the Convertible Stock for $900,000 plus dividends of $45,370 on
September 3, 1999, the holder of the Convertible Stock elected to convert
all of the Convertible Stock into 450,000 shares of common stock of the
Company. The Company paid the $45,370 of dividends in cash.
COMMON STOCK
-------------
The Company routinely issues shares of its common stock for cash, as a
result of the exercise of warrants, in payment of notes and other
obligations and to settle lawsuits.
During March 2000, a director and officer of the Company exercised warrants
to purchase 200,000 shares of common stock of the Company at an exercise
price of $2.50 per share. The consideration for the exercise of the
warrants included $2,000 in cash and a $498,000 promissory note (see note
F).
During June 2000 and September 2000, the Company issued 8,497 shares and
3,480 shares, respectively, of common stock of the Company in exchange for
penalties payable pursuant to registration rights discussed below.
During August 2000 and September 2000, the Company issued 12,500 shares and
100,000, respectively, shares of common stock of the Company in connection
with the settlement of litigation. The company agreed to register the
shares issued in the future.
54
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - STOCKHOLDERS' EQUITY - Continued
COMMON STOCK - Continued
-------------
During September 2000, a director and officer of the Company exercised
warrants to purchase 200,000 shares of common stock of the Company, at an
exercise price of $2.50 per share. The consideration for the exercise of
the warrants included $2,000 in cash and a $498,000 promissory note (see
note F).
In connection with previous warrants issued by the Company, certain of
these warrants contain a call provision whereby the Company has the right
to purchase the warrants for a nominal price if the holder of the warrants
does not elect to exercise the warrants within the call provision.
REGISTRATION RIGHTS
--------------------
In connection with the issuance of shares and warrants by the Company (the
Shares), the Company has on numerous instances granted registration rights
to the holders of the Shares, including those shares which result from the
exercise of warrants (the "Registrable Securities"). The Company was
obligated to register the Registrable Securities even though the
Registrable Securities may have been tradable under Rule 144. The
registration rights agreements generally did not contain provisions for
damages if the Registration was not completed, except for certain Shares
required to be registered on December 1, 1999, whereby the Company was
required to pay a penalty of $80,000 to be paid in cash and/or common stock
of the Company based on the then current trading price of the common stock
of the Company. In connection with the requirement, the Company issued
11,977 shares of its common stock. On July 14, 2000, the Company filed a
registration statement which included the Shares. The registration
statement was subsequently declared effective on October 6, 2000.
55
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - STOCKHOLDERS' EQUITY - Continued
STOCK AWARD PLAN
------------------
Under the Company's 1997 Stock Award Plan (Plan), the Company has reserved
for issuance 150,000 shares of Common Stock, of which 124,686 shares were
unissued as of July 31, 2000, to compensate consultants who have rendered
significant services to the Company. The Plan is administered by the
Compensation Committee of the Board of Directors of the Company which has
complete authority to select participants, determine the awards of Common
Stock to be granted and the times such awards will be granted, interpret
and construe the Plan for purposes of its administration and make
determinations relating to the Plan, subject to its provisions, which are
in the best interests of the Company and its stockholders. Only consultants
who have rendered significant advisory services to the Company are eligible
to be participants under the Plan. Other eligibility criteria may be
established by the Compensation Committee as administrator of the Plan.
In October 1997, the Company issued 20,314 shares of Common Stock to a
Mexican consultant in payment for services rendered to the Company valued
at $113,000.
In April 1999, the Company issued 5,000 shares of Common Stock to a
consultant in payment for services rendered to the Company valued at
$8,750.
In August 2000, the Company issued 6,500 shares of Common Stock to a
consultant in payment for services rendered to the Company valued at
$41,438.
NOTE L - STOCK WARRANTS
The Company applies APB 25 for warrants granted to the Company's employees
and to the Company's Board of Directors and SFAS 123 for warrants issued to
acquire goods and services from non-employees. No warrants were granted to
employees or directors during the year ended July 31, 1998.
BOARD COMPENSATION PLAN
-------------------------
During the Board of Directors (the Board) meeting held on September 3,
1999, the Board approved the implementation of a plan to compensate each
outside director serving on the Board (the Plan). Under the Plan, all
outside directors upon election to the Board will be entitled to receive
warrants to purchase 20,000 shares of common stock of the Company and will
be granted warrants to purchase 10,000 shares of common stock of the
Company for each year of service as a director. Such warrants will expire
five years after the warrants become vested. The exercise price of the
warrants issued under the Plan will be based on the average trading price
of the Company's common stock on the effective date the warrants are
granted, and the warrants will vest monthly over a one year period.
In connection with the Plan, the Board granted warrants to purchase 40,000
shares of common stock at an exercise price of $2.50 per share for those
outside directors previously elected and serving on the Board at September
3, 1999. In addition, the Board granted those directors warrants to
purchase 20,000 shares of common stock, at an exercise of $2.50 per share,
with the vesting period to commence on August 1, 1999.
In connection with the Plan, the Board granted warrants to purchase 10,000
shares of common stock at an exercise price of $6.90 per share for those
outside directors previously elected and serving on the Board at August 1,
2000. In addition, the Board granted to newly elected directors warrants to
purchase 60,000 shares of common stock, at an exercise of $6.90 per share,
with the vesting period to commence on August 7, 2000.
56
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCK WARRANTS - Continued
BOARD COMPENSATION PLAN - Continued
-------------------------
The exercise prices per share of the warrants issued under the Plan were
equal to or greater than the quoted market prices per share at the
measurement dates. Based on the provisions of APB 25, no compensation
expense was recorded for these warrants.
INCENTIVE PLAN
---------------
During December 1999, the Board authorized the implementation of a
management incentive program whereby officers and directors of the Company
received warrants to purchase 1,400,000 shares of common stock of the
Company and warrants to purchase 100,000 shares of common stock of the
Company were received by consultants (the Incentive Warrants). The
Incentive Warrants have an exercise price equal to $4.60 per share and will
vest ratably on a monthly basis over three years or immediately upon a
change in control of the Company. The exercise price per share of the
warrants was equal to or greater than the quoted market price per share at
the measurement date. Based on the provisions of APB 25, no compensation
expense was recorded for the Incentive Warrants issued to officers and
directors. The warrants issued to the consultants were accounted for under
the provisions of SFAS 123 and are being amortized over the vesting period.
OTHER
-----
As bonuses to four of its executive officers for the year ended July 31,
1999, the Company granted each executive warrants to purchase 30,000 shares
of common stock at an exercise price of $2.50 per share exercisable through
July 31, 2004. The exercise price per share of the warrants was equal to or
greater than the quoted market price per share at the measurement date.
Based on the provisions of APB 25, no compensation expense was recorded for
these bonus warrants.
As bonuses to four of its executive officers for the year ended July 31,
2000, the Company granted each executive warrants to purchase 10,000 shares
of common stock at an exercise price of $6.94 per share exercisable through
July 31, 2005. The exercise price per share of the warrants was equal to or
greater than the quoted market price per share at the measurement date.
Based on the provisions of APB 25, no compensation expense was recorded for
these bonus warrants.
In connection with a consulting agreement between the Company and a
director of the Company, during August 2000, the director received warrants
to purchase 70,000 shares of common stock at an exercise price of $6.38 per
share exercisable through August 6, 2005. The warrants will vest ratably on
a quarterly basis over four years. The warrants will be accounted for under
the provisions of SFAS 123 and are being amortized over the vesting period.
57
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCK WARRANTS - Continued
Had compensation cost related to the warrants granted to employees been
determined based on the fair value at the grant dates, consistent with the
provisions of SFAS 123, the Company's pro forma income (loss) from
continuing operations, net income (loss), income (loss) from continuing
operations per common share and net income (loss) per common share would
have been as follows for the years ended July 31, 1999 and 2000:
1999 2000
---------- ------------
Income (loss) from continuing operations as reported $1,124,558 $ 1,460,781
Income (loss) from continuing operations proforma 896,958 ( 245,886)
Net income (loss) as reported 545,445 1,460,781
Net income (loss) proforma 317,845 ( 245,886)
Income (loss) from continuing operations per common .11 .11
share as reported
Income (loss) from continuing operations per common .08 (.02)
share proforma
Net income (loss) per common share as reported .05 .11
Net income (loss) per common share proforma .03 (.02)
Income (loss) from continuing operations per common .10 .10
Share assuming dilution as reported
Income (loss) from continuing operations per common .08 (.02)
Share assuming dilution proforma
Net income (loss) per common share assuming dilution as .05 .10
Reported
Net income (loss) per common share assuming dilution .03 (.02)
Proforma
The following assumptions were used for two grants of warrants to employees
in the year ended July 31, 1999, to compute the fair value of the warrants
using the Black-Scholes option-pricing model; dividend yield of 0% for both
grants; expected volatility of 92% and 94%; risk free interest rate of 7%
for both grants; and expected lives of 3 and 5 years.
The following assumptions were used for grants of warrants to employees in
the year ended July 31, 2000 to compute the fair value of the warrants
using the Black-Scholes option-pricing model; dividend yield of 0%;
expected volatility of 92% and 93%; risk free interest rate of 6.02%; and
expected lives of 3 and 5 years.
For warrants granted to non-employees, the Company applies the provisions
of SFAS 123 to determine the fair value of the warrants issued. Costs
associated with warrants granted to non-employees for the years ended July
31, 1998, 1999 and 2000, totaled $30,000, $0 and $58,333, respectively.
Warrants granted to non-employees simultaneously with the issuance of debt
are accounted for based on the guidance provided by APB 14, "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants".
58
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCK WARRANTS - Continued
A summary of the status of the Company's warrants as of July 31, 1998, 1999
and 2000, and changes during the years ending on those dates is presented
below:
1998 1999 2000
--------------------------- --------------------------- -----------------------------------
Weighted Weighted Weighted
Average Average Average
Warrants Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------ ---------- --------------- ---------- --------------- ------------------ ---------------
Outstanding at beginning of 2,215,000 $ 2.61 1,430,000 $ 3.15 2,591,136 $ 2.71
year
Granted 300,000 5.42 1,451,136 2.27 2,478,738 4.36
Exercised (505,000) 2.57 - - ( 914,886) 2.16
Expired (580,000) 2.76 (290,000) 2.67 - -
---------- ---------- ------------------
Outstanding at end of year 1,430,000 3.15 2,591,136 2.71 4,154,988 3.82
========== ========== ==================
Warrants exercisable at end of 1,430,000 2,591,136 2,946,653
year
The following table depicts the weighted-average exercise price and
weighted average fair value of warrants granted during the years ended July
31, 1998, 1999 and 2000, by the relationship of the exercise price of the
warrants granted to the market price on the grant date:
1998 1999 2000
---------------------------- ---------------------------- ----------------------------
For warrants granted For warrants granted For warrants granted
Weighted Weighted Weighted Weighted Weighted Weighted
Exercise price compared to average average average average average average
market price on grant date Fair value exercise price Fair value exercise price fair value Exercise price
- -------------------------- ----------- --------------- ----------- --------------- ----------- ---------------
Equals market price $ - $ - $ - $ - $ - $ -
Exceeds market price - - 1.03 2.27 2.96 4.21
Less than market price 2.07 5.42 1.98 2.50 1.85 2.50
The fair value of each warrant grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the years ended July 31,
1998, 1999 and 2000, respectively: dividend yield of 0% for all three
years, expected volatility of 85%, 92% and 92%, risk-free interest rate of
7%, 7% and 6.02% for all three years and expected lives of 3, 3.5 and 3 to
5 years.
The following table summarizes information about the warrants outstanding
at July 31, 2000:
Warrants Outstanding Warrants Exercisable
--------------------- ------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at Contractual Exercise at Exercise
Range of Exercise Prices July 31, 2000 Life Price July 31, 2000 Price
- --------------------------- ------------- ----------- --------- ------------- ---------
1.75 to $2.50 1,225,000 2.80 years $ 2.29 1,225,000 $ 2.29
3.00 to $3.25 218,750 3.98 3.01 218,750 3.01
3.69 to $4.60 2,371,238 4.34 4.37 1,162,903 4.14
5.00 to $6.94 340,000 1.89 5.96 340,000 5.96
------------- -------------
$1.75 to $6.94 4,154,988 3.67 $ 3.82 2,946,653 $ 3.50
============= =============
59
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES
LITIGATION
On March 16, 1999, the Company settled a lawsuit in mediation with its
former chairman of the board, Jorge V. Duran. In connection therewith and
without admitting or denying liability, the Company agreed to pay Mr. Duran
$250,000, of which $100,000 is to be paid by the Company's insurance
carrier, in cash and issue him 100,000 shares of common stock of the
Company. The total settlement costs recorded by the Company at July 31,
1999 was $456,300. The parties had agreed to extend the date which the
payments were required in connection with the settlement including the
issuance of the common stock. On July 26, 2000, the parties executed final
settlement agreements whereby the Company paid the required cash payment of
$150,000. During September 2000, the Company issued the required stock.
On October 12, 1999, a Demand for Arbitration (the "Arbitration") of
$780,767 (subsequently amended to $972,515) was filed by A.E. Schmidt
Environmental ("Schmidt") against Amwest Surety Insurance Company
("Amwest"), PennWilson and Penn Octane Corporation on a performance bond
pursuant to a CNG contract. The Company filed a response with the court
opposing the petition by Schmidt to compel Penn Octane Corporation to
participate in the Arbitration pursuant to an alter ego theory. During
April 2000, the court denied Schmidt's petition to compel Penn Octane
Corporation to participate in the Arbitration. The Arbitration is currently
scheduled for March 2001. PennWilson has countersued Schmidt in connection
with overruns under the CNG contract. PennWilson is currently considering
all of its other legal options and intends to vigorously defend against the
claims made against PennWilson as well as the performance bond issued by
Amwest. Penn Octane Corporation is not currently a party to the dispute.
On January 28, 2000, a complaint was filed by WIN Capital Corporation (WIN)
in the Supreme Court of the State of New York, County of New York, against
the Company for breach of contract seeking specific performance and
declaratory relief in connection with an investment banking agreement.
During August 2000, the complaint was settled whereby the Company agreed to
issue WIN 12,500 shares of common stock of the Company. The Company also
agreed to register the shares issued to WIN. The value of the stock,
totaling approximately $82,000 at the time of settlement, has been recorded
in the Company's consolidated financial statements at July 31, 2000.
On February 24, 2000, litigation was filed in the 357th Judicial District
Court of Cameron County, Texas, against Cowboy Pipeline Service Company,
Inc. (Cowboy), CPSC International, Inc. (CPSC) and the Company
(collectively referred to as the "Defendants") alleging that the Defendants
had illegally trespassed in connection with the construction of the US
Pipelines (see note N) and seeking a temporary restraining order against
the Defendants from future use of the US Pipelines. On March 20, 2000, the
Company acquired the portion of the property which surrounds the area where
the US Pipelines were constructed for cash of $1,908,000, which was paid
during April 2000, and debt in the amount of $1,908,000. As a result, the
litigation was dismissed. The debt bears interest at 10% per annum, payable
monthly in minimum installments of $15,000 with a balloon payment due
during April 2003. The liability of $1,908,000 is included in capital lease
obligations (see note J).
On March 14, 2000, CPSC filed for protection under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court (Court),
Southern District of Texas, Corpus Christi Division.
60
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES - CONTINUED
On April 27, 2000, the Company filed a complaint in the 107th Judicial
District Court of Cameron County, Texas, against Cowboy and the sole
shareholder of Cowboy (Owner) alleging (i) fraud, (ii) aiding and abetting
a breach of fiduciary duty, (iii) negligent misrepresentation, and (iv)
conspiracy to defraud in connection with the construction of the US-Mexico
Pipelines and Matamoros Terminal Facility and the underlying agreements
thereto. The Company also alleges that Cowboy was negligent in performing
its duties. The Company was seeking actual and exemplary damages and other
relief. On June 9, 2000, Cowboy removed the case to the Court.
On May 8, 2000, CPSC filed an adversary proceeding against the Company in
the Court seeking (i) prevention of the Company against the use of the
US-Mexico Pipelines and escrow of all income related to use of the
US-Mexico Pipelines, (ii) sequestering all proceeds related to the sale
from any collateral originally pledged to CPSC, (iii) the avoidance of the
Addendum agreement between the Company and CPSC, and (iv) damages arising
from the Company's breach of the Lease Agreement and the September 1999
Agreements.
During May 2000, the Company filed a motion with the Court seeking to
appoint a Chapter 11 Trustee and the Company also filed a complaint with
the Court seeking a declaratory judgment stating that the US Pipelines be
held in trust for the benefit of the Company and that the US-Mexico
Pipelines are no longer the assets of the bankruptcy estate. The motion and
the complaint are still pending.
On June 2, 2000, additional litigation was filed in the 138th Judicial
District Court of Cameron County, Texas, against Cowboy and the Company
alleging that Cowboy and the Company had illegally trespassed in connection
with the construction of the US Pipelines and seeking declaratory relief,
including damages, exemplary damages and injunctive relief preventing
Cowboy and the Company from utilizing the US Pipelines. On June 9, 2000,
CPSC intervened and removed the case to the Court. Subsequent to July 31,
2000, the litigation was settled through a court ordered mediation by the
Company agreeing to acquire land for which substantially all of the costs
will be offset against the balance of the promissory note due to CPSC
(see below). The settlement is subject to completion of the settlement
documents.
On June 19, 2000, the Company, CPSC, Cowboy and the Owner reached a
settlement (the Settlement) whereby the Company has agreed to purchase the
remaining 50% interest in the assets associated with Lease Agreements for
cash, two promissory notes, transfer of the property owned by the Company
purchased on March 20, 2000 referred to above and warrants to acquire
common stock of the Company together with a release of all claims and
proceedings between them. The promissory notes total $900,000 and
$1,462,500 and both bear interest at 9%. The principal and interest
payments are payable monthly with the notes expiring in three years. In
addition, CPSC will assume the Company's debt issued in connection with the
acquisition of the property. On July 19, 2000, the Settlement expired
without the parties completing final documentation as provided for in the
Settlement. The parties are close to a renewed negotiated settlement of
All disputes between them and have signed a number of term sheets that
contain virtually all of the substantive provisions necessary to a global
resolution. The accompanying consolidated financial statements have been
adjusted to reflect the Settlement. The Settlement is subject to final
documentation and approval of the Court. If the Settlement is not
finalized, the Company will continue to pursue its legal remedies.
As a result of the aforementioned, the Company may incur additional costs
to complete the US - Mexico Pipelines and Matamoros Terminal Facility,
which amount cannot presently be determined.
In addition, there is no certainty that the Company will (i) acquire the
remaining 50% interest in the US - Mexico Pipelines and Matamoros Terminal
Facility, (ii) continue to utilize the US - Mexico Pipelines and Matamoros
Terminal Facility or (iii) realize its recorded investment in the Lease
Agreements or in the US - Mexico Pipelines and Matamoros Terminal Facility
(see note G).
61
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company and its subsidiaries are also involved with other proceedings,
lawsuits and claims. The Company is of the opinion that the liabilities, if
any, ultimately resulting from such proceedings, lawsuits and claims should
not materially affect its consolidated financial position.
CREDIT FACILITY, LETTERS OF CREDIT AND OTHER
As of July 31, 2000, the Company has a $20,000,000 credit facility with RZB
Finance L.L.C. (RZB) for demand loans and standby letters of credit (RZB
Credit Facility) to finance the Company's purchase of LPG. In connection
with the RZB Credit Facility, RZB entered into a participation agreement
with Bayerische Hypo-und Vereinsbank Aktiengeselischaft, New York Branch
(HVB), whereby RZB and HVB will each participate up to $10,000,000 toward
the total credit facility. Under the RZB Credit Facility, the Company pays
a fee with respect to each letter of credit thereunder in an amount equal
to the greater of (i) $500, (ii) 2.5% of the maximum face amount of such
letter of credit, or (iii) such higher amount as may be agreed to between
the Company and RZB. Any amounts outstanding under the RZB Credit Facility
shall accrue interest at a rate equal to the rate announced by the Chase
Manhattan Bank as its prime rate plus 2.5%. Pursuant to the RZB Credit
Facility, RZB has sole and absolute discretion to terminate the RZB Credit
Facility and to make any loan or issue any letter of credit thereunder. RZB
also has the right to demand payment of any and all amounts outstanding
under the RZB Credit Facility at any time. In connection with the RZB
Credit Facility, the Company granted a mortgage, security interest and
assignment in any and all of the Company's real property, buildings,
pipelines, fixtures and interests therein or relating thereto, including,
without limitation, the lease with the Brownsville Navigation District of
Cameron County for the land on which the Company's Brownsville Terminal
Facility is located, the Pipeline Lease, and in connection therewith agreed
to enter into leasehold deeds of trust, security agreements, financing
statements and assignments of rent, in forms satisfactory to RZB. Under the
RZB Credit Facility, the Company may not permit to exist any lien, security
interest, mortgage, charge or other encumbrance of any nature on any of its
properties or assets, except in favor of RZB, without the consent of RZB
(see notes J and N).
The Company's President, Chairman and Chief Executive Officer has
personally guaranteed all of the Company's payment obligations with respect
to the RZB Credit Facility.
In connection with the Company's purchases of LPG from Exxon Mobil
Corporation (Exxon), PG&E NGL Marketing, L.P. (PG&E), Duke Energy NGL
Services, Inc. (Duke) and/or Koch Hydrocarbon Company (Koch), the Company
issues letters of credit on a monthly basis based on anticipated purchases.
As of July 31, 2000, letters of credit established under the RZB Credit
Facility in favor of Exxon, PG&E, Duke and Koch for purchases of LPG
totaled $10,358,293 of which $5,226,958 was being used to secure unpaid
purchases. In addition, as of July 31, 2000, the Company had borrowed
$3,538,394 from its revolving line of credit under the RZB Credit Facility
for purchases of LPG. In connection with these purchases, at July 31, 2000,
the Company had unpaid invoices due from PMI totaling $3,468,308, cash
balances maintained in the RZB Credit Facility collateral account of
$32,372 and inventory held in storage of $6,025,760 (see note H).
Interest costs associated with the RZB Credit Facility totaled $97,986,
$217,179, and $513,392 for the years ended July 31, 1998, 1999 and 2000.
62
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES - CONTINUED
OPERATING LEASE COMMITMENTS
The Company has lease commitments for its pipeline, land, office space and
office equipment. The Pipeline Lease originally required fixed monthly
payments of $45,834 ($550,000 annually) and monthly service payments of
$8,000 through March 2004. The service payments are subject to an annual
adjustment based on a labor cost index and an electric power cost index. As
provided in the Pipeline Lease, the Company has the right to use the
Pipeline solely for the transportation of LPG belonging only to the Company
and not to any third party. The lessor has the right to terminate the lease
agreement under certain limited circumstances, which management currently
believes are remote, as provided for in the lease agreement at specific
times in the future by giving twelve months written notice. The Company can
also terminate the lease at any time by giving thirty days notice only if
its sales agreement with its main customer is terminated. The Company can
also terminate the lease at any time after the fifth anniversary date of
the lease by giving twelve months notice. Upon termination by the lessor,
the lessor has the obligation to reimburse the Company the lesser of 1) net
book value of its liquid propane gas terminal at the time of such
termination or 2) $2,000,000.
The Pipeline Lease currently expires on December 31, 2013, pursuant to an
amendment (the Pipeline Lease Amendment) entered into between the Company
and Seadrift on May 21, 1997, which became effective on January 1, 1999
(the Effective Date). The Pipeline Lease Amendment provides, among other
things, for additional storage access and inter-connection with another
pipeline controlled by Seadrift thereby providing greater access to and
from the Leased Pipeline. Pursuant to the Pipeline Lease Amendment, the
Company's fixed annual rent for the use of the Leased Pipeline was
increased by $350,000, less certain adjustments during the first two years
from the Effective Date, and the Company is required to pay for a minimum
volume of storage of $300,000 per year beginning January 1, 2000. In
addition, the Pipeline Lease Amendment provides for variable rental
increases based on monthly volumes purchased and flowing into the Leased
Pipeline and storage utilized. The Company has made all payments required
under the Pipeline Lease Amendment.
The operating lease for the land expires in October 2003. In May 1997, the
Company amended its lease (Brownsville Lease) with the Brownsville
Navigation District (District) to include rental of additional space
adjacent to the existing terminal location. Effective April 15, 1997, the
lease amount was increased to approximately $75,000 annually.
The Company anticipates renewing the Brownsville Lease prior to its
expiration for the same term as the Pipeline Lease Amendment. The
Brownsville Lease provides, among other things, that if the Company
complies with all the conditions and covenants therein, the leasehold
improvements made to the Brownsville Terminal Facility by the Company may
be removed from the premises or otherwise disposed of by the Company at the
termination of the Brownsville Lease. In the event of a breach by the
Company of any of the conditions or covenants, all improvements owned by
the Company and placed on the premises shall be considered part of the real
estate and shall become the property of the District.
The Company leases the land on which its Tank Farm is located. The lease
amount is approximately $27,000 annually and expires on January 18, 2005.
The Company leases its executive offices in Palm Desert, California. The
monthly rental is approximately $3,000 through October 2002.
63
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES - CONTINUED
OPERATING LEASE COMMITMENTS
Rent expense was $954,924, $1,123,821 and $2,166,732 for the years ended
July 31, 1998, 1999 and 2000, respectively. In addition, rent expense
associated with operating leases for leased equipment and furniture was
$38,178, $28,332 and $36,807 for the years ended July 31, 1998, 1999 and
2000. As of July 31, 2000, the minimum lease payments under noncancellable
operating leases are as follows:
Year ending July 31,
--------------------
2001 $1,422,662
2002 1,422,662
2003 1,399,712
2004 1,335,974
2005 1,287,414
Thereafter 9,800,000
----------
16,668,424
==========
EMPLOYMENT CONTRACTS
The Company has a six year employment agreement with its President for the
period through January 31, 2001. Under that agreement, he is entitled to
receive $300,000 in annual compensation equal to a monthly salary of
$25,000 until earnings exceed a gross profit of $500,000 per month,
whereupon he is entitled to an increase in his salary to $40,000 per month
for the first year of the agreement increasing to $50,000 per month during
the second year of the agreement. He is also entitled to (i) an annual
bonus of 5% of all pre-tax profits of the Company, (ii) options for the
purchase of 200,000 shares of Common Stock that can be exercised under
certain circumstances at an option price of $7.50 per share (giving effect
to a 2-for-1 stock split on June 10, 1994), and (iii) a term life insurance
policy commensurate with the term of employment agreement, equal to six
times his annual salary and three times his annual bonus. The employment
agreement also entitles him to a right of first refusal to participate in
joint venture opportunities in which the Company may invest, contains a
covenant not to compete for a period of one year from his termination of
the agreement and restrictions on use of confidential information. Through
July 31, 1997, he waived his right to his full salary. Through July 31,
2000, he waived his right to receipt of the stock options, bonus on pre-tax
profits and the purchase by the Company of a term life insurance policy. He
may elect not to waive such rights through January 31, 2001. At July 31,
1998, $77,000 of salary due to the President has been offset against the
interest receivable from the President (see note F).
Aggregate compensation under employment agreements totaled $391,078,
$432,000 and $432,000 for the years ended July 31, 1998, 1999 and 2000,
respectively, which included agreements with former executives. Minimum
salary under the remaining agreement is $150,000 through January 31, 2001.
64
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - CAPITAL LEASE
On July 26, 1999, the Company was granted a permit by the United States
Department of State authorizing the Company to construct, maintain and
operate two pipelines (US Pipelines) crossing the international boundary
line between the United States and Mexico (from the Brownsville Terminal
Facility near the Port of Brownsville, Texas and El Sabino, Mexico) for the
transport of LPG and refined products (motor gasoline and diesel fuel)
[Refined Products].
On July 2, 1998, Penn Octane de Mexico, S.A. de C.V. (PennMex), an
affiliated company (see note P), received a permit from the Comision
Reguladora de Energia (Mexican Energy Commission) to build and operate one
pipeline to transport LPG (Mexican Pipeline) [collectively, the US
Pipelines and the Mexican Pipeline are referred to as the US - Mexico
Pipelines] from El Sabino (at the point North of the Rio Bravo) to a
terminal facility in the City of Matamoros, State of Tamaulipas, Mexico
(Matamoros Terminal Facility).
In connection with the construction of the US-Mexico Pipelines and the
Matamoros Terminal Facility, the Company and CPSC International, Inc.
(CPSC) entered into two separate Lease / Installation Purchase Agreements,
as amended, (Lease Agreements), whereby CPSC was required to construct and
operate the US - Mexico Pipelines (including an additional pipeline to
accommodate Refined Products) and the Matamoros Terminal Facility and lease
these assets to the Company. Under the terms of the Lease Agreements, the
Company was required to pay monthly rental payments of approximately
$157,000, beginning the date that the US - Mexico Pipelines and Matamoros
Terminal Facility were physically capable to transport and receive LPG in
accordance with technical specifications required (Substantial Completion
Date). In addition, the Company agreed to provide a lien on certain assets,
leases and contracts which are currently pledged to RZB (Liens), which
Liens would require consent of RZB, and provide CPSC with a letter of
credit of approximately $1,000,000. The Company also had the option to
purchase the US - Mexico Pipelines and the Matamoros Terminal Facility at
the end of the 10th year anniversary and 15th year anniversary for
$5,000,000 and $100,000, respectively. Under the terms of the Lease
Agreements, CPSC is required to pay all costs associated with the design,
construction and maintenance of the US - Mexico Pipelines and Matamoros
Terminal Facility.
During September 1999, December 1999 and February 2000, the Company and
CPSC amended the Lease Agreements whereby the Company agreed to acquire up
to a 100% interest in the Lease Agreements which, as of July 31, 2000, the
Company had acquired a 50% interest pursuant to the December 1999
amendment. During February 2000, the Company determined that CPSC did not
comply with certain obligations under the Lease Agreements. In March 2000,
CPSC filed for protection under Chapter 11 of the United States Bankruptcy
Code. Since that date, the Company has also determined that CPSC did not
comply with other obligations provided for under the Lease Agreements. The
Settlement would provide for 100% ownership of the US-Mexico Pipelines and
Matamoros Terminal Facility by the Company or its affiliates (Settlement)
and eliminate the requirement for the Liens. Until the Settlement is
completed, the Company will continue to record the remaining 50% portion of
the US-Mexico Pipelines and Matamoros Terminal Facility as a capital lease
(see notes G, J, M and P).
With the completion of the US-Mexico Pipelines and Matamoros Terminal
Facility, the Company has established a pipeline infrastructure that allows
it to transport LPG from the United States to Mexico.
The Company or its Mexican affiliates own, lease, or intend to obtain the
land or rights of way used in the construction of the U.S.-Mexico
Pipelines, and own the assets comprising the US-Mexico Pipelines and
Matamoros Terminal Facility. The Company's Mexican affiliate Tergas, S.A.
de C.V. (Tergas) has been granted the permit to operate the Matamoros
Terminal Facility.
65
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - UPGRADES
The Company recently purchased four storage tanks capable of storing
approximately 12,600,000 gallons of Refined Products (Tank Farm). The
Company intends to construct additional piping to the Tank Farm which would
connect the Brownsville Terminal Facility, the Tank Farm and the water dock
facilities at the Brownsville Ship Channel.
The Company is currently completing a mid-line pump station which will
include the installation of additional piping, meters, valves, analyzers
and pumps along the Leased Pipeline to increase the capacity of the Leased
Pipeline and make the Leased Pipeline bi-directional. The mid-line pump
station will increase the capacity of the Leased Pipeline to approximately
360,000,000 gallons per year. The total estimated cost to complete the
project is approximately $2,000,000 of which approximately $1,100,000 has
been incurred through July 31, 2000.
The Company also intends to contract for the design, installation and
construction of pipelines which will connect the Brownsville Terminal
Facility to the water dock facilities at the Brownsville Ship Channel and
install additional storage capacity. The estimated cost of this project is
expected to be approximately $2,000,000. The Company has employed a firm to
provide the design and engineering for this project.
NOTE P - MEXICAN OPERATIONS
Termatsal, S.A. de C.V. (Termatsal) has completed construction of an
additional LPG terminal facility in Saltillo, Mexico (Saltillo Terminal
Facility) for an estimated cost of $800,000. The Saltillo Terminal Facility
is capable of off loading LPG from railcars to trucks. The Saltillo
Terminal Facility contains storage to accommodate approximately 90,000
gallons of LPG with additional storage planned for 180,000 gallons. The
Saltillo Terminal Facility has three railcar off loading racks and three
truck loading racks. As a result of the Saltillo Terminal Facility, the
Company can directly transport LPG via railcar from the Brownsville
Terminal Facility to the Saltillo Terminal Facility. The Saltillo Terminal
Facility will begin operations upon final approval from local government
authorities, expected to be by December 2000.
Tergas leases the land on which the Saltillo Terminal Facility is located
and has been granted the permit to operate the Saltillo Terminal Facility.
Termatsal owns the assets comprising the Saltillo Terminal Facility. The
land lease amount is $69,000 annually and expires in January 2003. Under
the terms of the land lease agreement, any leasehold improvements at the
termination of the lease may be removed.
In connection with the planned operations of the Saltillo Terminal
Facility, Termatsal has leased approximately 50 railcars to transport LPG
between the Brownsville Terminal Facility and the Saltillo Terminal
Facility. The lease amount is $297,000 annually and expires in August 2001.
PennMex, Tergas and Termatsal are Mexican companies, which are owned 90%,
90% and 98%, respectively, by Jorge R. Bracamontes, an officer and director
of the Company (Bracamontes) and the balance by other Mexican citizens
(Minority Shareholders). Under current Mexican law, foreign ownership of
Mexican entities involved in the distribution of LPG or the operation of
LPG terminal facilities are prohibited. Foreign ownership is permitted in
the transportation and storage of LPG. Mexican law also provides that a
single entity is not permitted to participate in more than one of the
defined LPG activities (transportation, storage or distribution). The
Company intends to acquire PennMex and Termatsal (see note U).
66
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - MEXICAN OPERATIONS - Continued
In connection with the construction of the Mexican Pipeline and the
Matamoros Terminal Facility, CPSC provided all payments and delivery of
equipment through Termatsal discussed below.
PennMex, Tergas or Termatsal (i) have entered into leases associated with
the Saltillo Terminal Facility, (ii) have been granted the permit for the
Mexican Pipeline, (iii) have been granted permits to operate the Matamoros
Terminal Facility and the Saltillo Terminal Facility, (iv) own, lease or
intend to obtain the land or right of ways used in the construction of the
Mexican Pipeline, Matamoros Terminal Facility and Saltillo Terminal
Facility and (v) own the assets comprising the Mexican Pipeline, Matamoros
Terminal Facility and Saltillo Terminal Facility, all of which were funded
by the Company or CPSC (see note G). The portion of funds which were
advanced by the Company (totaling $3,700,000 at July 31, 2000) to PennMex
or Termatsal are included in property, plant and equipment. Furthermore,
the Company intends to fund PennMex or Termatsal for any additional costs
required in connection with the Mexican Pipeline, Matamoros Terminal
Facility and the Saltillo Terminal Facility.
During the years ended July 31, 1998, 1999 and 2000, the Company paid
PennMex, Tergas or Termatsal $181,000, $125,000 and $293,000, respectively,
for Mexico related expenses incurred by those corporations on the Company's
behalf. Such amounts have been expensed.
The operations of PennMex, Tergas and Termatsal are subject to the tax laws
of Mexico which, among other things, require that Mexican subsidiaries of
foreign entities comply with transfer pricing rules, the payment of income
and/or asset taxes, and possibly taxes on distributions in excess of
earnings. In addition, distributions to foreign corporations may be subject
to withholding taxes, including dividends and interest payments.
NOTE Q - FOURTH QUARTER ADJUSTMENTS - UNAUDITED
The net loss for the quarter ended July 31, 1999, was primarily
attributable to increases in the following expenses: (i) settlement of
litigation of $501,416, (ii) the discount of the note receivable in
connection with the sale of the CNG assets of $260,000, and (iii) an
increase in the allowance for uncollectable receivables of $111,431.
The net loss for the quarter ended July 31, 1998, was primarily
attributable to increases in the following expenses: (1) warrants issued in
connection with the registration rights agreement of $160,542, (2) the
write-off of deferred registration costs of $385,491, (3) professional fees
of $425,769, (4) an allowance for uncollectable receivables of $38,880, (5)
salary related costs of $77,000, (6) approximately $1,000,000 of losses
associated with the construction of CNG equipment for sale to third
parties, (7) a $400,000 asset impairment loss associated with the Company's
CNG assets and (8) a reserve for the interest receivable from the President
and a related party of $223,000.
67
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. The Company has had an
accumulated deficit since inception, has used cash in operations, and has
had a deficit in working capital. In addition, the Company entered into
supply agreements for quantities of LPG substantially in excess of minimum
quantities under the New Agreement (see note S). Although the Company has
entered into the Settlement (see note M), significant uncertanties exist
related to the US - Mexico Pipelines and Matamoros Terminal Facility. As
discussed in note A, the Company has historically depended heavily on sales
to one major customer.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts as shown in the
accompanying consolidated balance sheet is dependent upon the Company's
ability to obtain additional financing and to raise additional equity
capital, the completion of the transactions related to the US-Mexico
Pipelines, Matamoros Terminal Facility and the Saltillo Terminal Facility
and the success of the Company's future operations. The consolidated
financial statements do not include any adjustments related to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to (i) increase sales to its
current customers, (ii) increase its customer base upon deregulation of the
LPG industry in Mexico, (iii) extend the terms and capacity of the Pipeline
Lease and the Brownsville Terminal Facility, (iv) expand its product lines,
(v) obtain additional letters of credit financing, (vi) raise additional
debt and/or equity capital and (vii) resolve the uncertainties related to
the US-Mexico Pipelines, the Matamoros Facility and the Saltillo Terminal
Facility.
At July 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $5,600,000. The ability to
utilize such net operating loss carryforwards may be significantly limited
by the application of the "change of ownership" rules under Section 382 of
the Internal Revenue Code.
68
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - CONTRACTS
LPG BUSINESS - SALES AGREEMENT
The Company entered into a sales agreement, as amended (Agreement), with
PMI, its major customer, to provide minimum monthly volume of LPG to PMI
through March 31, 2000. The Company entered into a new sales agreement with
PMI for the period from April 1, 2000 through March 31, 2001 (New
Agreement), for the annual sale of a minimum of 151,200,000 gallons of LPG,
mixed to PMI specifications, subject to seasonal variability, to be
delivered to PMI at the Company's terminal facilities in Matamoros,
Tamaulipas, Mexico and Saltillo, Coahuila, Mexico (see note U).
The New Agreement, as amended, represents an increase of 130% over annual
minimum contract volumes under the previous sales agreement with PMI for
the period April 1, 1999 through March 31, 2000. Actual sales volumes to
PMI during the period April 1, 1999 through March 31, 2000 exceeded the
minimum contractual volumes by 95%. Under the terms of the New Agreement,
sales prices are indexed to variable posted prices. The New Agreement also
provides for higher fixed margins above the variable posted prices over the
previous sales agreements with PMI depending on the final delivery point of
the LPG. Sales to PMI for the year ended July 31, 2000 totaled $76,008,360,
representing approximately 77.2% of total revenues for the period.
The New Agreement also provides for trucking of LPG from the Company's
Brownsville Terminal Facility to the Matamoros Terminal Facility (or
designated locations within the area) and from the Brownsville Terminal
Facility or the Matamoros Terminal Facility to the Saltillo Terminal
Facility (or designated locations within the area) in the event that (i)
the Company is unable to transport LPG through the US-Mexico Pipelines,
(ii) the Saltillo Terminal Facility or railcars to deliver LPG to the
Saltillo Terminal Facility are not utilized or (iii) until the Matamoros
Terminal Facility or the Saltillo Terminal Facility are fully operational.
Under the terms of the New Agreement, in the event that the US-Mexico
Pipelines or railcars are not used, the sales prices received shall be
reduced by the corresponding trucking charges. During April 2000, the
Company began shipping LPG through the US-Mexico Pipelines. During October
2000, approximately 78% of the LPG sold to PMI was delivered through the
US-Mexico Pipelines to the Matamoros Terminal Facility. As of July 31,
2000, the Saltillo Terminal Facility had not commenced operations.
As part of volume requirements under the New Agreement, the Company has
committed to sell to PMI 3,150,000 gallons of propane at a sales price of
approximately $0.60 per gallon, to be delivered during December 2000 and
February 2001.
LPG SUPPLY AGREEMENTS
Effective October 1, 1999, the Company and Exxon entered into a ten year
LPG supply contract, as amended (Exxon Supply Contract), whereby Exxon has
agreed to supply and the Company has agreed to take, 100% of Exxon's owned
or controlled volume of propane and butane available at Exxon's King Ranch
Gas Plant (Plant) up to 13,900,000 gallons per month blended in accordance
with the specifications as outlined under the New Agreement (Plant
Commitment). The purchase price is indexed to variable posted prices.
69
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - CONTRACTS - Continued
LPG SUPPLY AGREEMENTS - Continued
In addition, under the terms of the Exxon Supply Contract, Exxon made
operational its Corpus Christi Pipeline (ECCPL) during September 2000. The
ability to utilize the ECCPL allows the Company to acquire an additional
supply of propane from other propane suppliers located near Corpus Christi,
Texas (Additional Propane Supply), and bring the Additional Propane Supply
to the Plant (ECCPL Supply) for blending to the proper specifications
outlined under the New Agreement and then delivered into the Leased
Pipeline. In connection with the ECCPL Supply, the Company has agreed to
supply a minimum of 7,700,000 gallons into the ECCPL during the first
quarter from the date that the ECCPL is operational, approximately
92,000,000 gallons the following year and 122,000,000 gallons each year
thereafter and continuing for four years. The Company is required to pay
additional costs associated with the use of the ECCPL.
In September 1999, the Company and PG&E NGL Marketing, L.P. (PG&E) entered
into a three year supply agreement (PG&E Supply Agreement) whereby PG&E has
agreed to supply and the Company has agreed to take, a monthly average of
2,500,000 gallons of propane (PG&E Supply) beginning in October 1999. The
purchase price is indexed to variable posted prices.
Under the terms of the PG&E Supply Agreement, the PG&E Supply will be
delivered to either the Leased Pipeline or, in the future, to the ECCPL
(after PG&E completes construction of an interconnection, expected to be
completed by December 2000), and blended to the proper specifications as
outlined under the New Agreement.
In March 2000, the Company and Koch Hydrocarbon Company (Koch) entered into
a three year supply agreement (Koch Supply Contract) whereby Koch has
agreed to supply and the Company is required to take, a monthly average of
8,200,000 gallons (Koch Supply) of propane beginning April 1, 2000, subject
to the actual amounts of propane purchased by Koch from the refinery owned
by its affiliate, Koch Petroleum Group, L.P. The purchase price is indexed
to variable posted prices. Furthermore, the Company has agreed to pay
additional charges associated with the construction of a new pipeline
interconnection to be paid through additional adjustments to the purchase
price (totaling approximately $1,000,000) which allows deliveries of the
Koch Supply into the ECCPL.
In connection with the delivery of the Koch Supply, the Company did not
accept the Koch Supply because the ECCPL was not operational until
September 2000. Accordingly, the Company arranged for the sale of the Koch
Supply to third parties (Unaccepted Koch Supply Sales). The Company
incurred additional costs in connection with the disposal of the Unaccepted
Koch Supply Sales.
Under the terms of the Koch Supply Contract, the Koch Supply will be
delivered into the ECCPL and blended to the proper specifications as
outlined under the New Agreement.
During March 2000, the Company and Duke Energy NGL Services, Inc. (Duke)
entered into a three year supply agreement (Duke Supply Contract) whereby
Duke has agreed to supply and the Company has agreed to take, a monthly
average of 1,900,000 gallons (Duke Supply) of propane or propane/butane
mix, beginning April 1, 2000. The purchase price is indexed to variable
posted prices.
70
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - CONTRACTS - Continued
LPG SUPPLY AGREEMENTS - Continued
Pursuant to the terms of the Duke Supply Contract, the Company paid a
minimal amount for modifications related to the interconnections necessary
to allow the Duke Supply to be delivered into the Leased Pipeline
facilities.
The delivery of the PG&E Supply or the Koch Supply will satisfy a portion
or all of the ECCPL Supply requirements under the Exxon Supply Contract.
The Company is currently purchasing LPG from the above-mentioned suppliers
(Suppliers) to meet the minimum monthly volumes required in the New
Agreement. The Company's costs to purchase LPG (less any applicable
adjustments) are below the sales prices provided for in the New Agreement.
The agreements with the Suppliers currently require that the Company
purchase a minimum supply of LPG, which is significantly higher than
committed sales volumes under the New Agreement.
The Company may incur significant additional costs associated with the
storage, disposal and/or changes in LPG prices resulting from the excess of
the Plant Commitment, PG&E Supply, Koch Supply or Duke Supply over actual
sales volumes. Under the terms of the Supply Contracts, the Company must
provide letters of credit in amounts equal to the cost of the product to be
purchased. In addition, the cost of the product purchased is tied directly
to overall market conditions. As a result, the Company's existing letter of
credit facility may not be adequate to meet the letter of credit
requirements under the Exxon Supply Contract, the PG&E Supply Agreement,
the Koch Supply Contract or the Duke Supply Contract due to increases in
costs of LPG or LPG volumes purchased by PMI. Upon the implementation of
Deregulation, the Company anticipates entering into contracts with Mexican
distributors which require payments in pesos. In addition, the Mexican
distributors may be limited in their ability to obtain adequate financing.
The ability of the Company to increase sales of LPG into Mexico in the
future is largely dependent on the Company's ability to negotiate future
contracts with PMI and/or with local Mexican distributors once deregulation
in Mexico is implemented. In addition, there can be no assurance that the
Company will be able to obtain terms equal to or more favorable than those
in the New Agreement. In the event that the Company is unable to meet its
intended LPG sales objectives, then the Company may incur significant
losses.
Furthermore, the Company currently utilizes the Brownsville Terminal
Facility and may be required to deliver a portion or all of the minimum
monthly volumes from the Brownsville Terminal Facility in the future.
Historically, sales of LPG from the Brownsville Terminal Facility have not
exceeded 12,700,000 gallons per month. In addition, breakdowns along the
planned distribution route for the LPG once purchased from the Suppliers,
may limit the ability of the Company to accept or deliver the Plant
Commitment, the PG&E Supply, the Koch Supply, and the Duke Supply.
71
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE T - AWARD FROM LITIGATION
On August 24, 1994, the Company filed an Original Petition and Application
for Injunctive Relief against the International Bank of
Commerce-Brownsville (IBC-Brownsville), a Texas state banking association,
seeking (i) either enforcement of a credit facility between the Company and
IBC-Brownsville or a release of the Company's property granted as
collateral thereunder consisting of significantly all of the Company's
business and assets; (ii) declaratory relief with respect to the credit
facility; and (iii) an award for damages and attorneys' fees. After
completion of an arbitration proceeding, on February 28, 1996, the 197th
District Court in and for Cameron County, Texas entered judgment (Judgment)
confirming the arbitral award for $3,246,754 to the Company by
IBC-Brownsville.
In connection with the lawsuit, IBC-Brownsville filed an appeal with the
Texas Court of Appeals on January 21, 1997. The Company responded on
February 14, 1997. On September 18, 1997, the appeal was heard by the Texas
Court of Appeals and on June 18, 1998, the Texas Court of Appeals issued
its opinion in the case, ruling essentially in favor of the Company.
IBC-Brownsville sought a rehearing of the case on August 3, 1998. On
December 30, 1998, the Court denied the IBC-Brownsville request for
rehearing. On February 16, 1999, IBC-Brownsville (Petitioner) filed a
petition for review with the Supreme Court of Texas. On May 10, 1999, the
Company responded to the Supreme Court of Texas' request for response of
the Petitioner's petition for review. On May 27, 1999, the Petitioner filed
a reply with the Supreme Court of Texas to the Company's response of the
Petitioner's petition for review. On June 10, 1999, the Supreme Court of
Texas denied the Petitioner's petition for review. During July 1999, the
Petitioner filed an appeal with the Supreme Court of Texas to rehear the
Petitioner's petition for review. On August 26, 1999, the Supreme Court of
Texas upheld its decision to deny the Petitioner's petition for review.
During November 1999, the Petitioner filed a petition for writ of
certiorari with the United States Supreme Court. On January 24, 2000, the
United States Supreme Court denied the Petitioner's request for review and
the Judgment became final and binding. During March 2000, the Company
received a cash payment from IBC-Brownsville of $4,254,347 of which
approximately $1,300,000 was paid for legal fees and for other expenses
associated with the Judgment.
For the year ended July 31, 1999, the Company has recognized a gain of
approximately $987,000, which represents the amount of the Judgment which
was recorded as a liability on the Company's balance sheet at December 31,
1998 (non-cash). The cash portion of the Judgment received by the Company,
net of all contingent expenses, has been recorded as a gain during the year
ended July 31, 2000.
NOTE U - SUBSEQUENT EVENTS - UNAUDITED
On October 11, 2000, the New Agreement was amended to increase the minimum
amount of LPG to be purchased during the period from November 2000 through
March 2001 by 7,500,000 gallons resulting in a new annual minimum
commitment of 158,700,000 gallons.
During October 2000, warrants to purchase a total of 7,500 shares of common
stock of the Company were exercised, resulting in cash proceeds to the
Company of $11,250.
During November 2000, warrants to purchase a total of 10,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to
the Company of $32,500.
In November 2000, the Company issued 4,716 shares of common stock of the
Company to a consultant in payment for services rendered to the Company
valued at $23,583.
72
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE U - SUBSEQUENT EVENTS - UNAUDITED - Continued
As a bonus to a director and officer of the Company, during November 2000,
the Company granted warrants to purchase 200,000 shares of common stock of
the Company at an exercise price of $7.00 per share exercisable for five
years. The exercise price per share of the warrants was equal to or greater
than the quoted market price per share at the measurement date. Based on
the provisions of APB 25, no compensation expense will be recorded for
these bonus warrants.
During November 2000, the Company, Bracamontes and the Minority
Shareholders entered into agreements whereby the Company may acquire up to
100% of the outstanding shares of PennMex and Termatsal for a nominal
amount subject to, among other things, the Settlement. Because the Company
participates in one of the defined LPG activities, the Company intends to
contract with Tergas for services to be performed by Tergas at the
Matamoros Terminal Facility and the Saltillo Terminal Facility.
73
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to
Beginning of Costs and Charged to Balance at End
Description Period Expenses(1) Other Accounts Deductions of Period
- ---------------- ------------- ------------ --------------- ----------- ---------------
Year ended July
- ----------------
31, 2000
- --------
Allowance for
doubtful
accounts $ 521,067 $ 41,883 $ - $ - $ 562,950
Year ended July
- ----------------
31, 1999
- --------
Allowance for
Doubtful
Accounts $ 418,796 $ 116,432 $ - $ 14,161 $ 521,06
Year ended
- ----------
July 31, 1998
- -------------
Allowance for
doubtful
accounts $ 53,406 $ 373,130 $ - $ 7,740 $ 418,796
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
- ------------
1 Costs and expenses related to PennWilson CNG have been reflected in
discontinued operations.
74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as follows:
Name of Director Age Positions and Offices Held
-------------------- --- ------------------------------------------------
Jerome B. Richter 64 Chairman, President, Chief Executive Officer
and Director
Jorge R. Bracamontes 36 Executive Vice President, Secretary and Director
Ian T. Bothwell 40 Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer and Director
Jerry L. Lockett 59 Vice President
Kenneth G. Oberman 40 Director
Stewart J. Paperin 52 Director
Harvey L. Benenson 52 Director
Charles Handly 64 Director
All directors, except for directors Benenson and Handly, were elected
at the 2000 Annual Meeting of Stockholders of the Company held on April 28,
2000. All directors hold office until the next annual meeting of
shareholders and until their successors are duly elected and qualified.
JEROME B. RICHTER founded the Company and served as its Chairman of
the Board and Chief Executive Officer from the date of its organization in
August 1992 to December 1994, when he resigned from such positions and
became Secretary and Treasurer of the Company. He resigned on August 1,
1996. Effective October 29, 1996, Mr. Richter was elected Chairman of the
Board, President and Chief Executive Officer of the Company.
JORGE R. BRACAMONTES was elected a director of the Company in February
1996. Effective October 29, 1996, he was elected Executive Vice President
and Secretary of the Company. Mr. Bracamontes also serves as President and
Chief Executive Officer of PennMex, Tergas and Termatsal (see note P to the
consolidated financial statements). Prior to joining the Company, Mr.
Bracamontes was General Counsel for Environmental Matters at PEMEX for the
period from May 1994 to March 1996. During the period from November 1992 to
May 1994, Mr. Bracamontes was legal representative for PEMEX in New York.
IAN T. BOTHWELL was elected Vice President, Treasurer, Assistant
Secretary and Chief Financial Officer of the Company on October 29, 1996
and a director of the Company on March 25, 1997. Since July 1993, Mr.
Bothwell has been a principal of Bothwell & Asociados, S.A. de C.V., a
Mexican management consulting and financial advisory company that was
founded by Mr. Bothwell in 1993 and specializes in financing infrastructure
projects in Mexico. During the period from February 1993 through November
1993, Mr. Bothwell was a senior manager with Ruiz, Urquiza y Cia., S.C.,
the affiliate in Mexico of Arthur Andersen L.L.P., an accounting firm. Mr.
Bothwell also serves as CEO of B & A Eco-Holdings, Inc., the company formed
to purchase the Company's CNG assets (see note E to the consolidated
financial statements).
JERRY L. LOCKETT joined the Company as a Vice President on November
17, 1998. Prior to joining the Company, Mr. Lockett held a variety of
positions during a thirty-one year career with Union Carbide Corporation in
sales management, hydrocarbon supply and trading, and strategic planning.
He also served in a management position with Union Carbide's wholly-owned
pipeline subsidiaries.
75
KENNETH G. OBERMAN had been a Director of the Company since its
organization in August 1992 until his resignation on August 7, 2000. Since
1998, Mr. Oberman has served as Vice President and from 1996 to 1998, Mr.
Oberman was Senior Director of Fujitsu Computer Products of America, a
computer peripherals company based in San Jose, California. From 1994
through 1995, Mr. Oberman held the position of Business Unit Manager for
Conner Peripherals, a computer peripherals company based in San Jose,
California. During the period from 1992 through 1994, Mr. Oberman served as
Vice President of International Economic Development Corporation, a
consulting company to the Ministry of Sports of the Government of Russia
involved in the sale of sporting goods and sports apparel based in Moscow,
Russia.
STEWART J. PAPERIN was elected a director of the Company in February
1996. Since July 1996, Mr. Paperin has served as Executive Vice President
of the Soros Foundations Open Society Institute, which encompasses the
charitable operations of forty foundations in Central and Eastern Europe,
the United States, Africa, and Latin America. From January 1994 to July
1996, Mr. Paperin was President of Capital Resources East Ltd., a
diversified consulting and investment firm in New York. He served as
president of Brooke Group International, a United States based leveraged
buy-out firm operating in the former Soviet Union, a corporation controlled
by Brooke Group. From 1989 to 1990. he served as chief financial officer of
the Western Union Corporation. He is a member of the Boards of Directors of
Penn Octane Corporation, Global TeleSystems Group, Inc. and Golden Telecom
Inc.
HARVEY L. BENENSON was elected a director of the Company in August
2000. Mr. Benenson has been Managing Director, Chairman and CEO of Lyons,
Benenson & Company Inc., a management consulting firm, since 1988, and
Chairman of the Benenson Strategy Group, a strategic research, polling and
consulting firm affiliated with Lyons, Benenson & Company Inc., since July
2000. Earlier, Mr. Benenson was a partner in the management consulting firm
of Cresap, McCormick and Paget from 1974 to 1983, and Ayers, Whitmore &
Company from 1983 to 1988.
CHARLES HANDLY was elected a director of the Company in August 2000.
Since August 2000, Mr. Handly has provided consulting services to the
Company. Mr. Handly retired from Exxon Corporation on February 1, 2000
after 38 years of service. From 1997 until January 2000, Mr. Handly was
Business Development Coordinator for gas liquids in Exxon's Natural Gas
Department. From 1987 until 1997 Mr. Handly was supply coordinator for two
Exxon refineries and 57 gas plants in Exxon's Supply Department.
Mr. Oberman is Mr. Richter's step-son. There are no other family
relationships among the Company's officers and directors.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
In October 1996, the Company and Mr. Richter, Chairman and President,
without admitting or denying the findings contained therein (other than as
to jurisdiction), consented to the issuance of an order by the SEC in which
the SEC (i) made findings that the Company and Mr. Richter had violated
portions of Section 13 of the Exchange Act relating to the filing of
periodic reports and the maintenance of books and records, and certain
related rules under said Act, and (ii) ordered respondents to cease and
desist from committing or causing any current or future violation of such
sections and rules.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act, requires the Company's directors
and officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file initial reports of ownership and
reports of changes in ownership with the SEC. Such persons are required by
the SEC to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its review of the copies of Forms 3, 4 and 5 received
by it, the Company believes that all directors, officers and 10%
stockholders complied with such filing requirements.
76
ITEM 11. EXECUTIVE COMPENSATION.
During December 1999, the Board authorized the implementation of a
management incentive program whereby officers and directors of the Company
received warrants to purchase 1,400,000 shares of common stock of the
Company and warrants to purchase 100,000 shares of common stock of the
Company were received by consultants (the Incentive Warrants). The
Incentive Warrants have an exercise price equal to $4.60 per share and will
vest ratably on a monthly basis over three years or immediately upon a
change in control of the Company. The exercise price per share of the
warrants was equal to or greater than the quoted market price per share at
the measurement date. Based on the provisions of APB 25, no compensation
expense was recorded for the Incentive Warrants issued to officers and
directors. The warrants issued to the consultants were accounted for under
the provisions of SFAS 123 and are being amortized over the vesting period.
As bonuses to four of its executive officers for the year ended July 31,
1999, the Company granted each executive warrants to purchase 30,000 shares
of common stock at an exercise price of $2.50 per share exercisable through
July 31, 2004. The exercise price per share of the warrants was equal to or
greater than the quoted market price per share at the measurement date.
Based on the provisions of APB 25, no compensation expense was recorded for
these bonus warrants.
As bonuses to four of its executive officers for the year ended July 31,
2000, the Company granted each executive warrants to purchase 10,000 shares
of common stock at an exercise price of $6.94 per share exercisable through
July 31, 2005. The exercise price per share of the warrants was equal to or
greater than the quoted market price per share at the measurement date.
Based on the provisions of APB 25, no compensation expense was recorded for
these bonus warrants.
The following table sets forth annual and all other compensation for
services rendered in all capacities to the Company and its subsidiaries
during each of the fiscal years indicated for those persons who, at July
31, 2000, were (i) the Company's Chief Executive Officer, and (ii) the
other three most highly compensated executive officers (collectively, the
"Named Executive Officers"). No other executive officer received
compensation in excess of $100,000 during fiscal 1998, 1999 and 2000. This
information includes the dollar values of base salaries, bonus awards, the
number of warrants granted and certain other compensation, if any, whether
paid or deferred. The Company does not grant stock appreciation rights or
other long-term compensation plans for employees.
77
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------- ----------------------------------
AWARDS PAYOUTS
------------------------ --------
SECURITIES
OTHER UNDER-
ANNUAL RESTRICTED LYING ALL OTHER
NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS(3) SATION AWARD(S) SARS PAYOUTS SATION
- ----------------------------- ---- -------- ------------- -------- ------------ ---------- -------- ----------------
Jerome B. Richter,(1) 2000 $300,000 $ 2,393,700 $ - $ - - $ - $ -
President, Chairman of the 1999 300,000 53,400 - - - - -
Board and Chief 1998 299,578 - - - - - -
Executive Officer
Ian T. Bothwell, 2000 159,508 535,700(4) - - - - -
Vice President, Treasurer, 1999 134,000 53,400 - - - - -
Assistant Secretary and 1998 120,000 - - - - - -
Chief Financial Officer
Jorge R. Bracamontes, 2000 - - - - - - 1,662,700(2)(3)
Executive Vice President 1999 - - - - - - 208,400(2)(3)
And Secretary 1998 - - - - - - 120,000(2)(3)
Jerry L. Lockett, 2000 132,000 1,106,200(5) - - - - -
Vice President 1999 132,000 67,400 - - - - -
1998 91,500 - - - - - -
(1) During the year ended July 31, 1998, $77,000 of compensation was offset
against the interest due on Mr. Richter's note receivable.
(2) Mr. Bracamontes received consulting fees totaling $120,000, $155,000 and
$205,000 for services performed on behalf of the Company in Mexico for the
years ended July 31, 1998, 1999 and 2000.
(3) The fair market value of non-cash bonuses issued in the form of stock
warrants are determined by using the Black-Scholes Option Pricing Model
(see note L to the consolidated financial statements).
(4) Includes cash bonus of $14,000.
(5) Includes cash bonus of $11,000.
78
Options/SAR Grants in Last Fiscal Year
Individual Grants Potential Realizable Value At
- ----------------------------------------------------------------------- Assumed Annual Rates Of Stock
Percent Of Price Appreciation For Option
Number Of Total Term
Securities Options/ Exercise
Underlying SARs Granted Of ----------------------------
Option/SARs To Employees Base Price Expiration
Name Granted (#) In Fiscal Year ($/Sh) Date 0% ($) 5% ($) 10% ($)
- ----------------------- ----------- --------------- ------ -------- ------ -------- --------
Jerome B. Richter 10,000 0.84% 6.94 7/31/05 0 19,167 23,383
Jerome B. Richter (a) 500,000 42.02% 4.60 12/31/04 0 635,448 775,230
Jorge R. Bracamontes 10,000 0.84% 6.94 7/31/05 0 19,167 23,383
Jorge R. Bracamontes(a) 300,000 25.21% 4.60 12/31/04 0 381,269 465,138
Ian T. Bothwell 10,000 0.84% 6.94 7/31/05 0 19,167 23,383
Ian T. Bothwell (a) 100,000 8.40% 4.60 12/31/04 0 127,090 155,046
Jerry L. Lockett 10,000 0.84% 6.94 7/31/05 0 19,167 23,383
Jerry L. Lockett 50,000 4.20% 3.69 11/17/02 0 29,082 39,252
Jerry L. Lockett (a) 200,000 16.81% 4.60 12/31/04 0 254,179 310,092
a) The warrants were granted on December 31, 1999, and vest ratably on a
monthly basis over a three year period.
79
AGGREGATED WARRANT EXERCISES IN FISCAL 2000 AND WARRANT VALUES ON JULY 31,
2000
The following table provides certain information with respect to warrants
exercised by the Named Executive Officers during fiscal 2000. The table
also presents information as to the number of warrants outstanding as of
July 31, 2000.
Number Of
Securities Value Of
Number of Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Value Warrants Warrants
Upon Realized At July 31, 2000 At July 31, 2000
Exercise of Upon Exercisable/ Exercisable/
Name Warrants Exercise($) Unexercisable Unexercisable(1)($)
- ---- ----------- ------------ ---------------- -------------------
Jerome B. Richter 0 0 137,222/402,778 394,688/1,042,188
Jorge R. Bracamontes 200,000 1,450,000(2) 98,333/241,667 294,063/625,313
Ian T. Bothwell 0 0 259,444/80,556 1,130,938/208,438
Jerry L. Lockett 0 0 178,889/161,111 528,000/416,875
(1) Based on a closing price of $7.19 per share of Common Stock on July 31, 2000.
(2) Based on a closing price of $7.25 per share of Common Stock on March 25, 2000.
EMPLOYMENT AGREEMENTS
The Company has entered into a six year employment agreement with Mr.
Richter, the President of the Company, through January 31, 2001. Under Mr.
Richter's agreement, he is entitled to receive $300,000 in annual
compensation equal to a monthly salary of $25,000 until earnings exceed a
gross profit of $500,000 per month, whereupon Mr. Richter is entitled to an
increase in his salary to $40,000 per month for the first year of the
agreement increasing to $50,000 per month during the second year of the
agreement. Mr. Richter is also entitled to (i) an annual bonus of 5% of all
pre-tax profits of the Company; (ii) 200,000 stock options for the purchase
of 200,000 shares of Common Stock that can be exercised under certain
circumstances at an option price of $7.50 (giving effect to a 2-for-1 stock
split on June 10, 1994), and (iii) a term life insurance policy
commensurate with the term of the employment agreement, equal to six times
Mr. Richter's annual salary and three times his annual bonus. Mr. Richter's
employment agreement also entitles him to a right of first refusal to
participate in joint venture opportunities in which the Company may invest,
contains a covenant not to compete for a period of one year from his
termination of the agreement and restrictions on use of confidential
information. Through July 31, 1997, Mr. Richter waived his rights to his
full salary. Through July 31, 2000, Mr. Richter has waived his rights to
receive the options, bonus on pre-tax profits and the purchase by the
Company of a term life insurance policy. Mr. Richter may elect not to waive
such rights through January 31, 2001.
In November 1997, the Company entered into an employment agreement
with Jerry Lockett. Under the terms of the agreement, Mr. Lockett was
entitled to receive $120,000 in annual compensation, plus $1,000 monthly as
an automobile allowance. The Agreement was for two years. The agreement
provided for the issuance of warrants for the purchase of 50,000 shares of
common stock of the Company on each of the anniversary dates of the
agreement.
80
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's compensation to executive management was administered by the
Compensation Committee ("Committee") of the Board of Directors. As of July 31,
2000, the Committee is comprised of one outside Director who reports to the
Board of Directors on all compensation matters concerning the Company's
executive officers (the "Executive Officers"). The Executive Officers of the
Company are identified in the Company's July 31, 2000, Form 10-K. In
determining annual compensation, including bonus, and other incentive
compensation to be paid to the Executive Officers, the Committee considers
several factors including overall performance of the Executive Officer (measured
in terms of financial performance of the Company, opportunities provided to the
Company, responsibilities, quality of work and/or tenure with the Company), and
considers other factors including retention and motivation of the Executive
Officers and the overall financial condition of the Company. The Committee
provides compensation to the Executive Officer in the form of cash, equity
instruments and forgiveness of interest incurred on indebtedness to the Company.
The overall compensation provided to the Executive Officers consisting of
base salary and the issuance of equity instruments is intended to be competitive
with the compensation provided to other executives at other companies after
adjusting for factors described above, including the Company's financial
condition during the term of employment of the Executive Officer.
BASE SALARY: The base salary is approved based on the Executive
Officer's position, level of responsibility and tenure with the Company.
CHIEF EXECUTIVE OFFICER'S COMPENSATION: During fiscal year 2000, Mr.
Richter was paid in accordance with the terms of his employment agreement which
was entered into in July 13, 1993, except as discussed in note M to the
consolidated financial statements. During September 1999, the Board elected to
not accrue any future interest payable by Mr. Richter on his note to the Company
so long as Mr. Richter continued to provide guarantees to certain of the
Company's creditors. The Committee determined that Mr. Richter's compensation
under the employment agreement is fair to the Company, especially considering
the position of Mr. Richter with the Company.
COMPENSATION COMMITTEE
STEWART PAPERIN
81
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the Company's
cumulative, five-year total stockholder return with the Russell 2000 Index and
the NASDAQ Index. The graph assumes that $100 was invested on August 1, 1995 in
each of the Company's common stock, the Russell 2000 Index and the NASDAQ Index,
and that all dividends were reinvested. The graph is not, nor is it intended to
be, indicative of future performance of the Company's common stock.
The Company is not aware of a published industry or line of business index
with which to compare the Company's performance. Nor is the Company aware of any
other companies with a line of business and market capitalization similar to
that of the Company with which to construct a peer group index. Therefore, the
Company has elected to compare its performance with the NASDAQ Index and Russell
2000 Index, an index of companies with small capitalization.
[GRAPHIC OMMITTED]
1995 1996 1997 1998 1999 2000
----------------------- ----- ----- ----- ----- ----- -----
Penn Octane Corporation $ 100 $ 238 $ 238 $ 200 $ 119 $ 360
----------------------- ----- ----- ----- ----- ----- -----
Russell 2000 Index $ 100 $ 105 $ 138 $ 140 $ 148 $ 167
----------------------- ----- ----- ----- ----- ----- -----
NASDAQ Index $ 100 $ 108 $ 159 $ 187 $ 264 $ 376
----------------------- ----- ----- ----- ----- ----- -----
82
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock by (i) each stockholder known by the
Company to beneficially own more than five percent of the Company's Common
Stock, (ii) each director and (iii) each Named Executive Officer of the Company
as of October 13, 2000() The number of shares of Common Stock issued and
outstanding on October 13, 2000 was 13,686,795 (including 78,383 shares of
treasury stock) and all calculations and percentages are based on such number.
The beneficial ownership indicated in the table includes shares of Common Stock
subject to common stock purchase warrants held by the respective persons as of
October 13, 2000, that are exercisable on the date hereof or within 60 days
thereafter. Unless otherwise indicated, each person has sole voting and sole
investment power with respect to the shares shown as beneficially owned. (1)
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ---------------------------------------------- ----------------------- -----------------
Jerome B. Richter 4,144,491(1) 29.85%
CEC, Inc. 1,521,834(3) 10.76%
The Apogee Fund 1,100,000 8.04%
Western Wood Equipment Corporation (Hong Kong)
20/F Tung Way Commercial Building
Wanchai, Hong Kong 758,163(4) 5.34%
Jorge R. Bracamontes 349,995(6) 2.53%
Jerry L. Lockett 229,421(7) 1.65%
Ian T. Bothwell 193,215(5) 1.40%
Stewart J. Paperin 115,252(9) (12)
Kenneth G. Oberman 97,000(8) (12)
Charlie Handly 35,667(10) (12)
Harvey L. Benenson 23,489(11) (12)
As a group, the current officers and directors of the Company are
beneficial owners of 4,426,542 shares of Common Stock or 32.34% of the voting
power of the Company excluding warrants held by members of such group and
5,188,530 shares of Common Stock or 35.91% of the voting power of the Company
including warrants so held.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ------------------
(1) The number of shares of Common Stock issued and outstanding on October 13,
2000 was 13,686,795 (including 78,383 shares of treasury stock) and all
calculations and percentages are based on such number. The beneficial
ownership indicated in the table includes shares of Common Stock subject to
common stock purchase warrants held by the respective persons as of October
13, 2000, that are exercisable on the date hereof or within 60 days
thereafter. Unless otherwise indicated, each person has sole voting and
sole investment power with respect to the shares shown as beneficially
owned.
(2) Includes 36,000 shares of Common stock owned by Mrs. Richter and 197,991
shares of Common Stock issuable upon exercise of Common Stock purchase
warrants.
(3) Includes 454,167 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(4) Includes 500,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(5) Includes 71,598 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(6) Includes 134,795 shares of Common Stock issuable upon exercise of common
stock purchase warrants owned by Mr. Bracamontes and 15,000 shares of
Common Stock owned by Mrs. Bracamontes.
(7) Includes 203,196 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(8) Includes 30,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(9) Includes 65,252 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(10) Includes 35,667 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(11) Includes 23,489 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(12) Percent of class is less than 1%.
83
During April 1997, Jerry Richter, the Company's President, exercised warrants to
purchase 2,200,000 shares of common stock of the Company, at an exercise price
of $1.25 per share. The consideration for the exercise of the warrants included
$22,000 in cash and a $2,728,000 promissory note. The note accrued interest at
the rate of 8.25% per annum and was payable annually on April 11 until its
maturity on April 11, 2000. In connection with the Company's lease agreements
(the Lease Agreements) with CPSC (see note N), Mr. Richter agreed to provide
500,000 shares of his common stock of the Company as collateral. During
September 1999, in consideration for providing the collateral, the Board of
Directors of the Company agreed to offset the future interest due on Mr.
Richter's $2,728,000 promissory note. Certain of the payments due on April 11,
1998, 1999 and 2000, including the principal payment, were not received. On
April 11, 2000, Mr. Richter issued a new promissory note totaling $3,196,693,
representing the total unpaid principal and unpaid accrued interest at the
expiration of the original promissory note. During April 2000, in consideration
for Mr. Richter providing a guaranty in connection with the RZB Credit Facility,
the Board of Directors agreed to waive any interest requirements on the
promissory notes so long as Mr. Richter continues to provide a personal guaranty
in connection with the RZB credit facility and the Company's letter of credit
requirements due under the Lease Agreements. The principal amount of the note
plus accrued interest at an annual rate of 10.0%, except as adjusted for above,
is due on April 30, 2001. Mr. Richter is personally liable with full recourse
to the Company and has provided 1,000,000 shares of common stock of the Company
as collateral. The promissory note has been recorded as a reduction of
stockholders' equity.
During the year ended July 31, 2000, the Company paid PennMex, Termatsal or
Tergas, Mexican companies which are owned 90%, 90% and 98%, respectively, by
Jorge R. Bracamontes, an officer and director of the Company, $388,640 for
Mexico related expenses incurred on the Company's behalf. Such amounts were
expensed. In addition, the Company advanced $3,700,000 to these companies in
connection with the purchase of property, plant and equipment associated with
the construction of the Mexican Pipeline, Matamoros Terminal Facility and
Saltillo Terminal Facility.
During May 1999, the Company and PennWilson completed the sale of assets related
to the CNG business to a company controlled by Ian Bothwell (Buyer), a director
and officer of the Company (see note E). On September 10, 2000, the Board of
Directors approved the repayment by Mr. Bothwell of the Buyer's $900,000
promissory note to the Company (the Buyer was entitled to discounts for early
payment of approximately $344,000 as prescribed under the promissory note)
through the exchange of 78,373 shares of common stock of the Company owned by
Mr. Bothwell, which were previously pledged to the Company in connection with
the promissory note. The promissory note had a net book value of $640,000 at
July 31, 2000 and, therefore, the Company recorded a loss of approximately
$84,000 as a result of the discount. Such amount is included in the
consolidated statement of operations at July 31, 2000. The exchanged shares had
a fair market value of approximately $556,000 at the time of the transaction.
On March 26, 2000, M.I. Garcia Cuesta, the wife of Jorge Bracamontes, a director
and officer of the Company, issued the Company a new promissory note totaling
$46,603, representing the total unpaid principal and interest due under a prior
promissory note due to the Company which expired on March 26, 2000. The note
accrues interest at 10.0%, payable annually. The principal amount of the note
plus all unpaid interest is due on April 30, 2001. The promissory note is
collateralized by 15,000 shares of common stock of the Company owned by Mrs.
Garcia Cuesta and has been recorded as a reduction of stockholders' equity.
During March 2000, Jorge Bracamontes, a director and officer of the Company,
exercised warrants to purchase 200,000 shares of common stock of the Company, at
an exercise price of $2.50 per share. The consideration for the exercise of the
warrants included $2,000 in cash and a $498,000 promissory note. The principal
amount of the note plus accrued interest at an annual rate of 10.0% is due on
April 30, 2001. Mr. Bracamontes is personally liable with full recourse to the
Company and has provided 200,000 shares of common stock of the Company as
collateral. The promissory note has been recorded as a reduction of
stockholders' equity. Interest on the promissory note will be recorded when
the cash is received.
84
In August 2000, Charlie Handly, a director of the Company, agreed to provide
consulting services to the Company for a one-year period. Mr. Handly is
entitled to a minimum of $6,000 per month and has received warrants to purchase
70,000 shares of common stock at an exercise price of $6.375, exercisable for
five years. The warrants will vest ratably on a quarterly basis over four
years.
During September 2000, Ian Bothwell, a director and officer of the Company,
exercised warrants to purchase 200,000 shares of common stock of the Company, at
an exercise price of $2.50 per share. The consideration for the exercise of the
warrants included $2,000 in cash and a $498,000 promissory note. The principal
amount of the note plus accrued interest at an annual rate of 10.5% is due on
April 30, 2001. Mr. Bothwell is personally liable with full recourse to the
Company and has provided 60,809 shares of common stock of the Company as
collateral. The promissory note will be recorded as a reduction of
stockholders' equity during the three months ended October 31, 2000. Interest
on the promissory note will be recorded when the cash is received.
During the year ended July 31, 2000, the Company granted warrants to purchase
common stock of the Company to various officers and directors (see note L to the
consolidated financial statements and Item 11).
85
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. Financial Statements and Financial Statement Schedules.
The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
Penn Octane Corporation
Independent Auditor's Report
Consolidated Balance Sheet as of July 31, 1999 and 2000
Consolidated Statements of Operations for the years ended
July 31, 1998, 1999 and 2000
Consolidated Statement of Stockholders' Equity for the years
ended July 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended
July 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
b. Reports on Form 8-K.
None.
c. Exhibits.
The following Exhibits are incorporated herein by reference:
Exhibit No.
------------
3.1 Restated Certificate of Incorporation, as amended. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File
No. 000-24394).
3.2 Amended and Restated By-Laws of the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File
No. 000-24394).
3.3 The Company's Certificate of the Designation, Powers, Preferences and
Rights of the Series B. Class A Senior Cumulative Preferred Stock,
filed with the State of Delaware.
10.1 Employment Agreement dated July 12, 1993 between the Registrant and
Jerome B. Richter. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended October
31, 1993 filed on March 7, 1994, SEC File No. 000-24394).
10.2 Security Agreement dated July 1, 1994 between International Bank of
Commerce and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended October
31, 1993 filed on March 7, 1994, SEC File No. 000-24394).
86
10.3 Security Agreement dated December 6, 1995 between Bay Area Bank and
Registrant. (Incorporated by reference to the Company's Annual Report
on Form 10-KSB for the annual period ended July 31, 1996 filed on
November 13, 1996, SEC File No. 000-24394).
10.4 Purchase Agreement dated February 22, 1996 between Eagle Oil Company
and Registrant. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the annual period ended July 31, 1996 filed
on November 13, 1996, SEC File No. 000-24394).
10.5 Judgment from litigation with International Bank of Commerce -
Brownsville dated February 28, 1996. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the annual period ended
July 31, 1996 filed on November 13, 1996, SEC File No. 000-24394).
10.6 Loan Agreement, Promissory Note, Security Agreement, and Common Stock
Purchase Warrant Agreement dated March 1, 1996 between John H.
Robinson and Registrant. (Incorporated by reference to the Company's
Annual Report on Form 10-KSB for the annual period ended July 31, 1996
filed on November 13, 1996, SEC File No. 000-24394).
10.7 Loan Agreement, Promissory Note, Security Agreement, and Common Stock
Purchase Warrant Agreement dated as of April 30, 1996 between TRAKO
International Company LTD and Registrant. (Incorporated by reference
to the Company's Annual Report on Form 10-KSB for the annual period
ended July 31, 1996 filed on November 13, 1996, SEC File No.
000-24394).
10.8 Extension of June 16, 1996 Payout Agreement between Penn Octane
Corporation and Lauren Constructors, Inc., and Tom Janik and
Associates, Inc. dated October 10, 1996 (Including June 16, 1995
Payout Agreement). (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the annual period ended July 31, 1996 filed
on November 13, 1996, SEC File No. 000-24394).
10.9 LPG Purchase Agreement dated October 1, 1996 between Exxon Company
U.S.A. and Registrant. (Incorporated by reference to the Company's
Annual Report on Form 10-KSB for the annual period ended July 31, 1996
filed on November 13, 1996, SEC File No. 000-24394).
10.10Promissory Note, Letter of Credit and Security Agreement dated
October 3, 1996 between Bay Area Bank and Registrant. (Incorporated by
reference to the Company's Annual Report on Form 10-KSB for the annual
period ended July 31, 1996 filed on November 13, 1996, SEC File No.
000-24394).
10.11Promissory Note dated October 7, 1996 between Jerry Williams and
Registrant. (Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended October 31, 1996
filed on December 16, 1996, SEC File No. 000-24394).
10.12Promissory Note dated October 9, 1996 between Richard Serbin and
Registrant. (Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended October 31, 1996
filed on December 16, 1996, SEC File No. 000-24394).
10.13LPG Sales Agreement dated October 10, 1996 between P.M.I. Trading
Ltd. and Registrant. (Incorporated by reference to the Company's
Annual Report on Form 10-KSB for the annual period ended July 31, 1996
filed on November 13, 1996, SEC File No. 000-24394).
10.14Promissory Note dated October 29, 1996 between James Mulholland and
Registrant. (Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended October 31, 1996
filed on December 16, 1996, SEC File No. 000-24394).
10.15Promissory Note between Frederick Kassner and Registrant dated
October 29, 1996. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended October
31, 1996 filed on December 16, 1996, SEC File No. 000-24394).
10.16Agreement between Roberto Keoseyan and the Registrant dated November
12, 1996. (Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarterly period ended January 31, 1997 filed
on March 17, 1997, SEC File No. 000-24394).
87
10.17Promissory Note between Bay Area Bank and the Registrant dated
December 20, 1996. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended January
31, 1997 filed on March 17, 1997, SEC File No. 000-24394).
10.18Agreement for Exchange of Warrants for Common Stock dated February 5,
1997 between the Registrant and Mark D. Casaday. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended January 31, 1997 filed on March 17, 1997, SEC
File No. 000-24394).
10.19Agreement for Exchange of Warrants for Common Stock dated February 5,
1997 between the Registrant Thomas P. Muse. (Incorporated by reference
to the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended January 31, 1997 filed on March 17, 1997, SEC File No.
000-24394).96, SEC File No. 000-24394).
10.20Agreement for Exchange of Warrants for Common Stock dated February
19, 1997 between the Registrant and Thomas A. Serleth. (Incorporated
by reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended January 31, 1997 filed on March 17, 1997, SEC
File No. 000-24394).
10.21Interim Operating Agreement between Wilson Acquisition Corporation
and Wilson Technologies Incorporated dated March 7, 1997.
(Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended January 31, 1997 filed on March
17, 1997, SEC File No. 000-24394).
10.22Purchase Agreement dated March 7, 1997 between the Registrant, Wilson
Acquisition Corporation, Wilson Technologies Incorporated and
Zimmerman Holdings Inc. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended January
31, 1997 filed on March 17, 1997, SEC File No. 000-24394).
10.23Amendment of the Interim Operating Agreement dated March 21, 1997
between the Registrant, Wilson Acquisition Corporation, Wilson
Technologies Incorporated and Zimmerman Holdings Inc. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File
No. 000-24394).
10.24Promissory Note and Pledge and Security Agreement dated March 26,
1997 between M.I. Garcia Cuesta and the Registrant. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File
No. 000-24394).
10.25Real Estate Lien Note, Deed of Trust and Security Agreement dated
April 9, 1997 between Lauren Constructors, Inc. and the Registrant.
(Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended April 30, 1997 filed on June 16,
1997, SEC File No. 000-24394).
10.26Promissory Note and Pledge and Security Agreement dated April 11,
1997 between Jerome B. Richter and the Registrant. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File
No. 000-24394).
10.27Lease dated October 20, 1993 between Brownsville Navigation District
of Cameron County, Texas and Registrant with respect to the Company's
land lease rights, including related amendment to the Lease dated as
of February 11, 1994 and Purchase Agreement. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB filed for
the quarterly period ended April 30, 1994 on February 25, 1994, SEC
File No. 000-24394).
10.28Lease Amendment dated May 7, 1997 between Registrant and Brownsville
Navigation District of Cameron County, Texas. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File
No. 000-24394).
88
10.29Lease dated May 22, 1997 between Nine-C Corporation and J.B. Richter,
Capital resources and J.B. Richter and J.B. Richter, an individual, as
amended with respect to the Company's executive offices. (Incorporated
by reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File
No. 000-24394).
10.30Promissory Note dated May 28, 1997 between Bay Area Bank and the
Registrant. (Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended April 30, 1997
filed on June 16, 1997, SEC File No. 000-24394).
10.31Lease dated September 1, 1993 between Seadrift Pipeline Corporation
and Registrant with respect to the Company's pipeline rights.
(Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended October 31, 1993 filed on March
7, 1994, SEC File No. 000-24394).
10.32Lease Amendment dated May 21, 1997 between Seadrift Pipeline
Corporation and the Registrant. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarterly period
ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.33Irrevocable Standby Letter of Credit No. 310 dated April 2, 1997
between Bay Area Bank and the Company. (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended July 31,
1997 filed on November 13, 1997, SEC File No. 000-24394)
10.34Commercial Guaranty dated April 2, 1997 between Bay Area Bank and
Jerome B. Richter. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1997 filed on November
13, 1997, SEC File No. 000-24394)
10.35Commercial Pledge and Security Agreement dated April 2, 1997 between
Bay Area Bank and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997
filed on November 13, 1997, SEC File No. 000-24394)
10.36Promissory Note dated April 2, 1997 between Bay Area Bank and the
Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.37Amendment to Irrevocable Standby Letter of Credit No. 310 dated
September 15, 1997. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1997 filed on November
13, 1997, SEC File No. 000-24394)
10.38Warrant Purchase Agreement, Promissory Note and Common Stock Warrant
dated June 15, 1997 between Western Wood Equipment Corporation and the
Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.39Security Agreement, Common Stock Warrant and Promissory Note dated
June 15, 1997 between Western Wood Equipment Corporation and the
Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.40Performance Bond dated June 25, 1997 between PennWilson CNG and
Amwest Surety Insurance Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997
filed on November 13, 1997, SEC File No. 000-24394)
10.41Labor and Material Payment Bond dated June 11, 1997 between
PennWilson CNG and Amwest Surety Insurance Company. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.42Subcontract Agreement dated June 25, 1997 between A.E. Schmidt
Environmental and PennWilson CNG. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997
filed on November 13, 1997, SEC File No. 000-24394)
89
10.43Propylene Purchase Agreement dated July 31, 1997 between Union
Carbide and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.44Release of Lien dated August 1997 by Lauren Constructors, Inc.
(Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.45LPG Purchase Agreement dated August 28, 1997 between PMI Trading
Company Ltd and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997
filed on November 13, 1997, SEC File No. 000-24394)
10.46Continuing Agreement for Private Letters of Credit dated October 14,
1997 between RZB Finance LLC and the Company. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.47Promissory Note dated October 14, 1997 between RZB Finance LLC and
the Company. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended July 31, 1997 filed on November 13,
1997, SEC File No. 000-24394)
10.48General Security Agreement dated October 14, 1997 between RZB Finance
LLC and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.49Guaranty and Agreement dated October 14, 1997 between RZB Finance LLC
and Jerome Richter. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1997 filed on November
13, 1997, SEC File No. 000-24394)
10.50Purchase Agreement dated October 21, 1997 among Castle Energy
Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara,
Jr., Donaldson Lufkin Jenrette Securities Corporation Custodian SEP
FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA
and the Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1997 filed on November
13, 1997, SEC File No. 000-24394)
10.51Registration Rights Agreement dated October 21, 1997 among Castle
Energy Corporation, Clint Norton, Southwest Concept, Inc., James F.
Meara, Jr., Donaldson Lufkin Jenrette Securities Corporation Custodian
SEP FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely
IRA and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.52Promissory Note dated October 21, 1997 between Castle Energy
Corporation and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997
filed on November 13, 1997, SEC File No. 000-24394)
10.53Common Stock Purchase Warrant dated October 21, 1997 issued to Castle
Energy Corporation by the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997
filed on November 13, 1997, SEC File No. 000-24394)
10.54Promissory Note dated October 21, 1997 between Clint Norton and the
Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.55Common Stock Purchase Warrant dated October 21, 1997 issued to Clint
Norton by the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.56Promissory Note dated October 21, 1997 between Southwest Concept,
Inc. and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
90
10.57Common Stock Purchase Warrant dated October 21, 1997 issued to
Southwest Concept, Inc. by the Company. (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended July 31,
1997 filed on November 13, 1997, SEC File No. 000-24394)
10.58Promissory Noted dated October 21, 1997 between James F. Meara, Jr.
and the Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1997 filed on November
13, 1997, SEC File No. 000-24394)
10.59Common Stock Purchase Warrant dated October 21, 1997 issued to James
F. Meara, Jr. by the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997
filed on November 13, 1997, SEC File No. 000-24394)
10.60Promissory Note dated October 21, 1997 between Donaldson Lufkin
Jenrette Securities Corporation Custodian SEP FBO James F. Meara IRA
and the Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1997 filed on November
13, 1997, SEC File No. 000-24394)
10.61Common Stock Purchase Warrant dated October 21, 1997 issued to
Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO
James F. Meara IRA and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997
filed on November 13, 1997, SEC File No. 000-24394)
10.62Promissory Note dated October 21, 1997 between Lincoln Trust Company
FBO Perry D. Snavely IRA and the Company. (Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended July
31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.63Common Stock Purchase Warrant dated October 21, 1997 issued to
Lincoln Trust Company FBO Perry D. Snavely IRA by the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.64Agreement dated November 7, 1997 between Ernesto Rubio del Cueto and
the Company. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended July 31, 1997 filed on November 13,
1997, SEC File No. 000-24394)
10.65LPG Sales Agreement dated November 12, 1997 between Exxon and the
Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.66Purchase order dated November 7, 1996 between County Sanitation
District of Orange County and Wilson Technologies, Inc. (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q for the
three months ended October 31, 1997 filed on December 15, 1997, SEC
File No. 000-24394)
10.67Amendment letter dated April 22, 1998 between RZB Finance LLC and the
Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the three months ended April 30, 1998 filed on June
15, 1998, SEC File No. 000-24394)
10.68Lease dated May 8, 1998 between Nine-C Corporation and J.B. Richter,
Capital Resources and J.B. Richter and J.B. Richter, an individual,
with respect to the Company's executive offices. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the three
months ended April 30, 1998 filed on June 15, 1998, SEC File No.
000-24394)
10.69Employment Agreement dated October 20, 1997 between the Company and
Vicente Soriano. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the three months ended April 30, 1998 filed on
June 15, 1998, SEC File No. 000-24394)
10.70Employment Agreement dated November 17, 1997 between the Company and
Jerry L. Lockett. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the three months ended April 30,
1998 filed on June 15, 1998, SEC File No. 000-24394)
91
10.71LPG Mix Purchase Contract dated September 28, 1998 between P.M.I.
Trading Limited and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1998
filed on November 13, 1998, SEC File No. 000-24394).
10.72LPG Sales Agreement dated November 16, 1998 between Exxon and the
Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended October 31, 1998 filed on
December 18, 1998, SEC File No. 000-24394).
10.73Rollover and Assignment Agreement dated December 1, 1998 among Castle
Energy Corporation, Clint Norton, Southwest Concept, Inc., James F.
Meara, Jr., Donaldson Lufkin Jenrette Securities Corporation Custodian
SEP FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely
IRA and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.74Registration Rights Agreement dated December 1, 1998 among Castle
Energy Corporation, Clint Norton, Southwest Concept, Inc., James F.
Meara, Jr., Donaldson Lufkin Jenrette Securities Corporation Custodian
SEP FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely
IRA and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.75Collateral Agreement dated December 1, 1998 among Castle Energy
Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara,
Jr., Donaldson Lufkin Jenrette Securities Corporation Custodian SEP
FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA
and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998
filed on December 18, 1998, SEC File No. 000-24394).
10.76Assignment of Judgment Agreement dated December 1, 1998 among Castle
Energy Corporation, Clint Norton, Southwest Concept, Inc., James F.
Meara, Jr., Donaldson Lufkin Jenrette Securities Corporation Custodian
SEP FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely
IRA and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.77Amended Promissory Note dated December 1, 1998 between Castle Energy
Corporation and the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.78Common Stock Purchase Warrant dated December 1, 1998 issued to Castle
Energy Corporation by the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.79Amended Promissory Note dated December 1, 1998 between Clint Norton
and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998
filed on December 18, 1998, SEC File No. 000-24394).
10.80Common Stock Purchase Warrant dated December 1, 1998 issued to Clint
Norton by the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.81Amended Promissory Note dated December 1, 1998 between Southwest
Concept, Inc. and the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.82Common Stock Purchase Warrant dated December 1, 1998 issued to
Southwest Concept, Inc. by the Company. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended October 31, 1998 filed on December 18, 1998, SEC File No.
000-24394).
92
10.83Amended Promissory Note dated December 1, 1998 between James F.
Meara, Jr. and the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.84Common Stock Purchase Warrant dated December 1, 1998 issued to James
F. Meara, Jr. by the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.85Amended Promissory Note dated December 1, 1998 between Donaldson
Lufkin Jenrette Securities Corporation Custodian SEP FBO James F.
Meara IRA and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.86Common Stock Purchase Warrant dated December 1, 1998 issued to
Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO
James F. Meara IRA and the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.87Amended Promissory Note dated December 1, 1998 between Lincoln Trust
Company FBO Perry D. Snavely IRA and the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended October 31, 1998 filed on December 18, 1998,
SEC File No. 000-24394).
10.88Common Stock Purchase Warrant dated December 1, 1998 issued to
Lincoln Trust Company FBO Perry D. Snavely IRA by the Company.
(Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended October 31, 1998 filed on December
18, 1998, SEC File No. 000-24394).
10.89Purchase Agreement dated November 13, 1998 between Van Moer Santerre
& Company and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.90Registration Rights Agreement dated November 13, 1998 between Van
Moer Santerre & Company and the Company. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended October 31, 1998 filed on December 18, 1998, SEC File No.
000-24394).
93
10.91Common Stock Purchase Warrant dated November 13, 1998 issued to Van
Moer Santerre & Company by the Company. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended October 31, 1998 filed on December 18, 1998, SEC File No.
000-24394).
10.92Purchase Agreement dated December 14, 1998 between KFP Grand LTD. and
the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998
filed on December 18, 1998, SEC File No. 000-24394).
10.93Registration Rights Agreement dated December 14, 1998 between KFP
Grand LTD. and the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.94Common Stock Purchase Warrant dated December 14, 1998 issued to KFP
Grand LTD. by the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.95Second Amendment of the Interim Operating Agreement dated December
15, 1998 among Wilson Technologies Inc., Zimmerman Holdings, Inc. and
the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998
filed on December 18, 1998, SEC File No. 000-24394).
10.96Purchase Agreement dated March 18, 1999 between Van Moer Santerre &
Company and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 30,
1999 filed on June 14, 1999, SEC File No. 000-24394).
10.97Registration Rights Agreement dated March 18, 1999 between Van Moer
Santerre & Company and the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 1999 filed on June 14, 1999, SEC File No. 000-24394).
10.98Common Stock Purchase Warrant dated March 18, 1999 issued to Van Moer
Santerre & Company by the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 1999 filed on June 14, 1999, SEC File No. 000-24394).
10.99Purchase Agreement dated March 19, 1999 between Steve Payne and the
Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1999 filed on
June 14, 1999, SEC File No. 000-24394).
10.100 Registration Rights Agreement dated March 19, 1999 between Steve
Payne and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 30,
1999 filed on June 14, 1999, SEC File No. 000-24394).
10.101 Common Stock Purchase Warrant dated March 19, 1999 issued to Steve
Payne by the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 30,
1999 filed on June 14, 1999, SEC File No. 000-24394).
10.102 Purchase Agreement dated March 19, 1999 between Igor Kent and the
Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1999 filed on
June 14, 1999, SEC File No. 000-24394).
10.103 Registration Rights Agreement dated March 19, 1999 between Igor Kent
and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 1999
filed on June 14, 1999, SEC File No. 000-24394).
10.104 Common Stock Purchase Warrant dated March 19, 1999 issued to Igor
Kent by the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 30,
1999 filed on June 14, 1999, SEC File No. 000-24394).
94
10.105 Purchase Agreement dated July 15, 1999 between Steve Payne and the
Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1999 filed on November 9, 1999,
SEC File No. 000-24394).
10.106 Registration Rights Agreement dated July 15, 1999 between Steve
Payne and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1999 filed on
November 9, 1999, SEC File No. 000-24394).
10.107 Common Stock Purchase Warrant dated July 15, 1999 issued to Steve
Payne by the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1999 filed on
November 9, 1999, SEC File No. 000-24394).
10.108 Purchase Agreement dated July 16, 1999 between The Apogee Fund L.P.
and the Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1999 filed on November
9, 1999, SEC File No. 000-24394).
10.109 Registration Rights Agreement dated July 16, 1999 between The Apogee
Fund L.P. and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1999 filed on
November 9, 1999, SEC File No. 000-24394).
10.110 Common Stock Purchase Warrant dated July 16, 1999 issued to The
Apogee Fund L.P. by the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1999
filed on November 9, 1999, SEC File No. 000-24394).
10.111 Purchase Agreement dated July 21, 1999 between Igor Kent and the
Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1999 filed on November 9, 1999,
SEC File No. 000-24394).
10.112 Registration Rights Agreement dated July 21, 1999 between Igor Kent
and the Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1999 filed on November
9, 1999, SEC File No. 000-24394).
10.113 Common Stock Purchase Warrant dated July 21, 1999 issued to Igor
Kent by the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1999 filed on
November 9, 1999, SEC File No. 000-24394).
10.114 Purchase Agreement dated July 29, 1999 between Southwest Concept
Inc. and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1999 filed on
November 9, 1999, SEC File No. 000-24394).
10.115 Registration Rights Agreement dated July 29, 1999 between Southwest
Concept Inc. and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1999
filed on November 9, 1999, SEC File No. 000-24394).
10.116 Common Stock Purchase Warrant dated July 29, 1999 issued to
Southwest Concept Inc. by the Company. (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended July 31,
1999 filed on November 9, 1999, SEC File No. 000-24394).
10.117 Purchase Agreement dated July 29, 1999 between Clint Norton and the
Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1999 filed on November 9, 1999,
SEC File No. 000-24394).
10.118 Registration Rights Agreement dated July 29, 1999 between Clint
Norton and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1999 filed on
November 9, 1999, SEC File No. 000-24394).
10.119 Common Stock Purchase Warrant dated July 29, 1999 issued to Clint
Norton by the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1999 filed on
November 9, 1999, SEC File No. 000-24394).
95
10.120 Purchase Agreement dated July 30, 1999 between Europa International,
Inc. and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1999 filed on
November 9, 1999, SEC File No. 000-24394).
10.121 Registration Rights Agreement dated July 30, 1999 between Europa
International, Inc. and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1999
filed on November 9, 1999, SEC File No. 000-24394).
10.122 Common Stock Purchase Warrant dated July 30, 1999 issued to Europa
International, Inc. by the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1999
filed on November 9, 1999, SEC File No. 000-24394).
10.123 Purchase Agreement dated July 30, 1999 between Valor Capital
Management L.P and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1999
filed on November 9, 1999, SEC File No. 000-24394).
10.124 Registration Rights Agreement dated July 30, 1999 between Valor
Capital Management L.P and the Company. (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended July 31,
1999 filed on November 9, 1999, SEC File No. 000-24394).
10.125 Common Stock Purchase Warrant dated July 30, 1999 issued to Valor
Capital Management L.P. by the Company. (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended July 31,
1999 filed on November 9, 1999, SEC File No. 000-24394).
10.126 Purchase Agreement dated July 30, 1999 between Lincoln Trust Company
FBO Perry D. Snavely IRA and the Company. (Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended July
31, 1999 filed on November 9, 1999, SEC File No. 000-24394).
10.127 Registration Rights Agreement dated July 30, 1999 between Lincoln
Trust Company FBO Perry D. Snavely IRA and the Company. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended July 31, 1999 filed on November 9, 1999, SEC File No.
000-24394).
10.128 Common Stock Purchase Warrant dated July 30, 1999 issued to Lincoln
Trust Company FBO Perry D. Snavely IRA by the Company. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended July 31, 1999 filed on November 9, 1999, SEC File No.
000-24394).
10.129 Common Stock Purchase Warrant dated July 30, 1999 issued to Sterling
2000 Investments by the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1999
filed on November 9, 1999, SEC File No. 000-24394).
10.130 Lease/Installment Purchase Agreement dated November 24, 1998 by and
between CPSC International and the Company. (Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended July
31, 1999 filed on November 9, 1999, SEC File No. 000-24394).
10.131 Amendment No. 1, to the Lease/Installment Purchase Agreement dated
November 24, 1999, dated January 7, 1999 by and between CPSC
International and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1999
filed on November 9, 1999, SEC File No. 000-24394).
10.132 Amendment, to Lease/Installment Purchase Agreement dated February
16, 1999 dated January 25, 1999 by and between CPSC International and
the Company. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended July 31, 1999 filed on November 9,
1999, SEC File No. 000-24394).
10.133 Lease/Installment Purchase Agreement dated February 16, 1999 by and
between CPSC International and the Company. (Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended July
31, 1999 filed on November 9, 1999, SEC File No. 000-24394).
96
10.134 Amendment No. 2, to Lease/Installment Purchase Agreement dated
November 24, 1998 and to Lease/Installment Purchase Agreement dated
January 7, 1999 dated September 16, 1999 by and between CPSC
International and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1999
filed on November 9, 1999, SEC File No. 000-24394).
10.135 Agreement dated September 16, 1999 by and between CPSC International
and the Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1999 filed on November
9, 1999, SEC File No. 000-24394).
10.136 Purchase, Sale and Service Agreement for Propane/Butane Mix entered
into effective as of October 1, 1999 by and between Exxon Company,
U.S.A. and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1999 filed on
November 9, 1999, SEC File No. 000-24394).
10.137 Sales/Purchase Agreement of Propane Stream dated October 1, 1999
between PG&E NGL Marketing, L.P. and the Company. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended July 31, 1999 filed on November 9, 1999, SEC File No.
000-24394).
10.138 Permit issued on July 26, 1999 by the United States Department of
State authorizing the Company to construct two pipelines crossing the
international boundary line between the United States and Mexico for
the transport of liquefied petroleum gas (LPG) and refined product
(motor gasoline and diesel fuel). (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1999
filed on November 9, 1999, SEC File No. 000-24394).
10.139 Amendment to the LPG Purchase Agreement dated June 18, 1999 between
P.M.I. Trading Ltd. and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1999
filed on November 9, 1999, SEC File No. 000-24394).
10.140 Transfer of Shares Agreement dated November 4, 1999 between Jorge
Bracamontes and the Company. (Incorporated by reference to the
Company's Quarterly report on Form 10-Q for the quarterly period ended
October 31, 1999, filed on December 14, 1999, SEC File No. 000-24394).
10.141 Transfer of Shares Agreement dated November 4, 1999 between Juan
Jose Navarro Plascencia and the Company. (Incorporated by reference to
the Company's Quarterly report on Form 10-Q for the quarterly period
ended October 31, 1999, filed on December 14, 1999, SEC File No.
000-24394).
10.142 Addendum dated December 15, 1999 between CPSC International, Inc.
and the Company. (Incorporated by reference to the Company's Quarterly
report on Form 10-Q for the quarterly period ended January 31, 2000,
filed on March 21, 2000, SEC File No. 000-24394).
10.143 LPG Mix Purchase Contract (DTIR-010-00) dated March 31, 2000 between
P.M.I. Trading Limited and the Company. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended April 30, 2000 filed on June 19, 2000, SEC File No. 000-24394).
10.144 LPG Mix Purchase Contract (DTIR-011-00) dated March 31, 2000 between
P.M.I. Trading Limited and the Company. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended April 30, 2000 filed on June 19, 2000, SEC File No. 000-24394).
10.145 Product Sales Agreement dated February 23, 2000 between Koch
Hydrocarbon Company and the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 2000 filed on June 19, 2000, SEC File No. 000-24394).
10.146 First Amendment Line Letter dated May 2000 between RZB Finance LLC
and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 2000
filed on June 19, 2000, SEC File No. 000-24394).
The following Exhibits are filed as part of this report:
10.147 Promissory Note and Pledge and Security Agreement dated April 11,
2000 between Jerome B. Richter and the Registrant.
97
10.148 Promissory Note and Pledge and Security Agreement dated March 25,
2000 between Jorge Bracamontes A. and the Registrant.
10.149 Promissory Note and Pledge and Security Agreement dated March 26,
2000 between M.I. Garcia Cuesta and the Registrant.
10.150 Promissory Note and Pledge and Security Agreement dated September
10, 2000 between Ian T. Bothwell and the Registrant.
10.151 Promissory Share Transfer Agreement to purchase shares of Termatsal,
S.A. de C.V. dated November 13, 2000 between Jorge Bracamontes and the
Company (Translation from Spanish).
10.152 Promissory Share Transfer Agreement to purchase shares of Termatsal,
S.A. de C.V. dated November 13, 2000 between Pedro Prado and the
Company (Translation from Spanish).
10.153 Promissory Share Transfer Agreement to purchase shares of Termatsal,
S.A. de C.V. dated November 13, 2000 between Pedro Prado and Penn
Octane International, L.L.C. (Translation from Spanish).
10.154 Promissory Share Transfer Agreement to purchase shares of Penn
Octane de Mexico, S.A. de C.V. dated November 13, 2000 between Jorge
Bracamontes and the Company (Translation from Spanish).
10.155 Promissory Share Transfer Agreement to purchase shares of Penn
Octane de Mexico, S.A. de C.V. dated November 13, 2000 between Juan
Jose Navarro Plascencia and the Company (Translation from Spanish).
10.156 Promissory Share Transfer Agreement to purchase shares of Penn
Octane de Mexico, S.A. de C.V. dated November 13, 2000 between Juan
Jose Navarro Plascencia and Penn Octane International, L.L.C.
(Translation from Spanish).
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule.
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENN OCTANE CORPORATION
By: /s/ Ian T. Bothwell
----------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
November 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------- -------------------------------- -----------------
/s/Jerome B. Richter Jerome B. Richter November 14, 2000
- -----------------------
Chairman, President and Chief
Executive Officer
/s/Jorge R. Bracamontes Jorge R. Bracamontes November 14, 2000
- -----------------------
Executive Vice President,
Secretary and Director
/s/Ian T. Bothwell Ian T. Bothwell November 14, 2000
- -----------------------
Vice President, Treasurer,
Assistant Secretary, Chief
Financial Officer, Principal
Accounting Officer and Director
/s/Jerry L. Lockett Jerry L. Lockett November 14, 2000
- -----------------------
Vice President and Director
/s/Stewart J. Paperin Stewart J. Paperin November 14, 2000
- -----------------------
Director
/s/Harvey L. Benenson Harvey L. Benenson November 14, 2000
- -----------------------
Director
/s/Charlie Handly Charlie Handly November 14, 2000
- -----------------------
Director
99