UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 2003
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, BLDG. D, PALM DESERT, CALIFORNIA 92211
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (760) 772-9080
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -------
The number of shares of Common Stock, par value $.01 per share, outstanding
on June 13, 2003 was 15,274,749.
1
PENN OCTANE CORPORATION
TABLE OF CONTENTS
ITEM PAGE NO.
---- --------
Part I 1. Financial Statements
Independent Certified Public Accountants' Review Report 3
Consolidated Balance Sheets as of April 30, 2003 (unaudited) 4-5
and July 31, 2002
Unaudited Consolidated Statements of Operations for the three
months and nine months ended April 30, 2003 and 2002 6
Unaudited Consolidated Statements of Cash Flows for the nine
months ended April 30, 2003 and 2002 7
Notes to Unaudited Consolidated Financial Statements 8-20
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21-31
3. Quantitative and Qualitative Disclosures About Market Risk 31
4. Controls and Procedures 31
Part II 1. Legal Proceedings 32
2. Changes in Securities and Use of Proceeds 32
3. Defaults Upon Senior Securities 32
4. Submission of Matters to a Vote of Security Holders 32
5. Other Information 32
6. Exhibits and Reports on Form 8-K 32-33
Signatures 34
Certifications 35-36
2
Independent Certified Public Accountants' Review Report
Board of Directors and Shareholders
Penn Octane Corporation
We have reviewed the accompanying consolidated balance sheet of Penn Octane
Corporation and subsidiaries (Company) as of April 30, 2003, and the related
consolidated statements of operations for the three months and nine months ended
April 30, 2003 and 2002 and the consolidated statements of cash flows for the
nine months ended April 30, 2003 and 2002. These consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
July 31, 2002, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated October 4, 2002, we expressed an unqualified
opinion on those consolidated financial statements. Our report letter
contained a paragraph stating that conditions existed which raised substantial
doubt about the Company's ability to continue as a going concern. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of July 31, 2002, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ BURTON MCCUMBER & CORTEZ, L.L.P.
Brownsville, Texas
June 2, 2003
3
PART I
ITEM 1.
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
April 30,
2003 July 31,
(Unaudited) 2002
------------ -----------
Current Assets
Cash (including restricted cash of $5,657 and $29,701 at April 30, 2003
and July 31, 2002) $ 45,602 $ 160,655
Trade accounts receivable (less allowance for doubtful accounts of
$5,783 at April 30, 2003 and July 31, 2002) 10,797,425 7,653,986
Notes receivable - related parties - 414,356
Inventories 792,130 938,672
Assets held for sale 720,000 -
Mortgage receivable - 1,935,723
Prepaid expenses and other current assets 768,111 254,654
------------ -----------
Total current assets 13,123,268 11,358,046
Property, plant and equipment - net 17,864,391 18,350,785
Lease rights (net of accumulated amortization of $696,087 and $661,740 at
April 30, 2003 and July 31, 2002) 457,952 492,299
Other non-current assets 52,381 154,209
------------ -----------
Total assets $ 31,497,992 $30,355,339
============ ===========
The accompanying notes and accountants' report are an integral part of these
statements.
4
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
April 30,
2003 July 31,
(Unaudited) 2002
------------- -------------
Current Liabilities
Current maturities of long-term debt $ 1,131,729 $ 3,055,708
Short-term debt 1,704,837 3,085,000
Revolving line of credit 2,300,788 150,000
LPG trade accounts payable 8,522,247 8,744,432
Other accounts payable 1,635,063 3,584,848
Accrued liabilities 936,003 860,551
------------- -------------
Total current liabilities 16,230,667 19,480,539
Long-term debt, less current maturities 60,000 612,498
Commitments and contingencies - -
Stockholders' Equity
Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
No shares issued and outstanding at April 30, 2003 and July 31, 2002 - -
Series B - Senior preferred stock-$.01 par value, $10 liquidation value,
5,000,000 shares authorized; No shares issued and outstanding at April
30, 2003 and July 31, 2002 - -
Common stock - $.01 par value, 25,000,000 shares authorized;
15,274,749 and 14,870,977 shares issued and outstanding at April 30,
2003 and July 31, 2002 152,747 148,709
Additional paid-in capital 28,298,301 26,919,674
Notes receivable from officers of the Company, a related party and
another party for exercise of warrants, less reserve of $660,464 and
$754,175 at April 30, 2003 and July 31, 2002 (3,345,597) (3,814,481)
Accumulated deficit (9,898,126) (12,991,600)
------------- -------------
Total stockholders' equity 15,207,325 10,262,302
------------- -------------
Total liabilities and stockholders' equity $ 31,497,992 $ 30,355,339
============= =============
The accompanying notes and accountants' report are an integral part of these
statements.
5
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------------------ --------------------------------
April 30, April 30, April 30, April 30,
2003 2002 2003 2002
---------------- ------------ ----------------- -------------
Revenues $ 45,454,607 $45,482,202 $ 126,517,197 $110,251,749
Cost of goods sold 43,377,776 39,328,681 118,541,576 101,210,101
---------------- ------------ ----------------- -------------
Gross profit 2,076,831 6,153,521 7,975,621 9,041,648
Selling, general and administrative expenses
Legal and professional fees 347,511 331,014 1,399,302 1,275,800
Salaries and payroll related expenses 462,515 434,705 1,432,348 1,103,636
Other 289,257 284,159 755,883 797,451
---------------- ------------ ----------------- -------------
1,099,283 1,049,878 3,587,533 3,176,887
---------------- ------------ ----------------- -------------
Operating income 977,548 5,103,643 4,388,088 5,864,761
Other income (expense)
Interest expense ( 591,535) (438,673) ( 1,385,570) (2,082,663)
Interest income 6,829 14,210 89,272 43,438
Settlement of litigation ( 56,000) - ( 98,316) -
---------------- ------------ ----------------- -------------
Income before taxes 336,842 4,679,180 2,993,474 3,825,536
Income taxes (benefit) - 100,000 ( 100,000) 46,694
---------------- ------------ ----------------- -------------
Net income $ 336,842 $ 4,579,180 $ 3,093,474 $ 3,778,842
================ ============ ================= =============
Net income per common share $ 0.02 $ 0.31 $ 0.21 $ 0.26
================ ============ ================= =============
Net income per common share assuming
dilution $ 0.02 $ 0.30 $ 0.21 $ 0.25
================ ============ ================= =============
Weighted average common shares outstanding 15,131,455 14,857,694 14,954,499 14,766,428
================ ============ ================= =============
The accompanying notes and accountants' report are an integral part of these
statements.
6
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
-------------------------------
April 30, April 30,
2003 2002
---------------- -------------
Cash flows from operating activities:
Net income $ 3,093,474 $ 3,778,842
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization 743,218 608,561
Amortization of lease rights 34,347 34,346
Non-employee stock based costs and other 135,318 318,651
Amortization of loan discount 194,002 905,602
Interest expense associated with exchange of debt 68,000 -
Interest income - officer note ( 67,241) -
Other ( 231,925) ( 7,785)
Changes in current assets and liabilities:
Trade accounts receivable ( 3,143,439) ( 2,290,686)
Inventories 146,542 10,990,734
Prepaid and other current assets ( 648,775) (352,545)
LPG trade accounts payable ( 222,185) 1,121,313
Obligation to deliver LPG - (10,942,817)
Other assets 101,828 127,382
Other accounts payable and accrued liabilities ( 1,645,851) 44,199
---------------- -------------
Net cash (used in) provided by operating activities ( 1,442,687) 4,335,797
Cash flows from investing activities:
Proceeds from the sale of equipment 276,000 -
Capital expenditures ( 300,901) ( 687,429)
---------------- -------------
Net cash used in investing activities ( 24,901) ( 687,429)
Cash flows from financing activities:
Revolving credit facilities 2,150,788 -
Issuance of common stock - 137,813
Issuance of debt 584,712 100,000
Reduction in debt ( 1,382,965) ( 3,226,615)
---------------- -------------
Net cash provided by (used in) financing activities 1,352,535 ( 2,988,802)
---------------- -------------
Net (decrease) increase in cash ( 115,053) 659,566
Cash at beginning of period 160,655 1,322,560
---------------- -------------
Cash at end of period $ 45,602 $ 1,982,126
================ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,132,224 $ 1,223,494
================ =============
Supplemental disclosures of noncash transactions:
Equity - common stock and warrants issued and other $ 1,314,665 $ 974,915
================ =============
Mortgage receivable/ note payable $( 1,935,723) $ -
================ =============
Equipment exchanged for notes receivable $ 720,000 $ -
================ =============
The accompanying notes and accountants' report are an integral part of these
statements.
7
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION
Penn Octane Corporation was incorporated in Delaware in August 1992. The
Company has been principally engaged in the purchase, transportation and
sale of liquefied petroleum gas (LPG). The Company owns and operates a
terminal facility on leased property in Brownsville, Texas (Brownsville
Terminal Facility) and owns a LPG terminal facility in Matamoros,
Tamaulipas, Mexico (Matamoros Terminal Facility) and approximately 23 miles
of pipelines (US - Mexico Pipelines) which connect the Brownsville Terminal
Facility to the Matamoros Terminal Facility. The Company has a long-term
lease agreement for approximately 132 miles of pipeline (Leased Pipeline)
which connects ExxonMobil Corporation'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 which connects Exxon's
Viola valve station in Nueces County, Texas to the inlet of the King Ranch
Gas Plant (ECCPL) as well as existing and other potential propane pipeline
suppliers which have the ability to access the ECCPL. In connection with
the Company's lease agreement for the Leased Pipeline, the Company may
access up to 21,000,000 gallons of storage located in Markham, Texas
(Markham Storage), as well as other potential propane pipeline 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 a subsidiary of Petroleos Mexicanos, the state-owned Mexican oil
company (PEMEX). The LPG purchased from the Company by PMI is generally
destined for consumption 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. Since the
Company began operations, the primary customer for LPG has been PMI. Sales
of LPG to PMI accounted for approximately 81% of the Company's total
revenues for the nine months ended April 30, 2003.
BASIS OF PRESENTATION
-----------------------
The accompanying consolidated financial statements include the Company and
its United States subsidiaries, Penn Octane International, L.L.C.,
PennWilson CNG, Inc. (PennWilson) and Penn CNG Holdings, Inc. and
subsidiaries, its Mexican subsidiaries, Penn Octane de Mexico, S.A. de C.V.
(PennMex) and Termatsal, S.A. de C.V. (Termatsal) and its other inactive
Mexican subsidiaries, (collectively the Company). All significant
intercompany accounts and transactions have been eliminated.
The unaudited consolidated balance sheet as of April 30, 2003, the
unaudited consolidated statements of operations for the three months and
nine months ended April 30, 2003 and 2002 and the unaudited consolidated
statements of cash flows for the nine months ended April 30, 2003 and 2002,
have been prepared by the Company without audit. In the opinion of
management, the unaudited consolidated financial statements include all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the unaudited consolidated financial position of the Company
as of April 30, 2003, the unaudited consolidated results of operations for
the three months and nine months ended April 30, 2003 and 2002 and the
unaudited consolidated statements of cash flows for the nine months ended
April 30, 2003 and 2002.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
omitted. These unaudited consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 2002.
Certain reclassifications have been made to prior period balances to
conform to the current presentation. All reclassifications have been
consistently applied to the periods presented.
8
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - 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 incurs
losses, giving effect to common stock equivalents is not presented as it
would be antidilutive.
The following tables present reconciliations from income (loss) per common
share to income (loss) per common share assuming dilution:
For the three months ended April 30, 2003
-----------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- ----------
Net income (loss) $ 336,842
BASIC EPS
Net income (loss) available to common
stockholders 336,842 15,131,455 $ 0.02
==========
EFFECT OF DILUTIVE SECURITIES
Warrants - 152,312
-------------- -------------
DILUTED EPS
Net income (loss) available to common
stockholders $ 336,842 15,283,767 $ 0.02
============== ============= ==========
For the three months ended April 30, 2002
-----------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- ----------
Net income (loss) $ 4,579,180
BASIC EPS
Net income (loss) available to common
stockholders 4,579,180 14,857,694 $ 0.31
==========
EFFECT OF DILUTIVE SECURITIES
Warrants - 399,144
-------------- -------------
DILUTED EPS
Net income (loss) available to common
stockholders $ 4,579,180 15,256,838 $ 0.30
============== ============= ==========
9
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - INCOME (LOSS) PER COMMON SHARE - CONTINUED
For the nine months ended April 30, 2003
-----------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- ----------
Net income (loss) $ 3,093,474
BASIC EPS
Net income (loss) available to common stockholders 3,093,474 14,954,499 $ 0.21
==========
EFFECT OF DILUTIVE SECURITIES
Warrants - 107,481
-------------- -------------
DILUTED EPS
Net income (loss) available to common stockholders $ 3,093,474 15,061,980 $ 0.21
============== ============= ==========
For the nine months ended April 30, 2002
-----------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- ----------
Net income (loss) $ 3,778,842
BASIC EPS
Net income (loss) available to common
stockholders 3,778,842 14,766,428 $ 0.26
==========
EFFECT OF DILUTIVE SECURITIES
Warrants - 314,533
-------------- -------------
DILUTED EPS
Net income (loss) available to common
stockholders $ 3,778,842 15,080,961 $ 0.25
============== ============= ==========
10
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure", an amendment of FASB Statement
No. 123. This statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. Additionally, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123, "Accounting for Stock-based
Compensation", to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions are
effective for financial statements issued for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods
beginning after December 15, 2002. The Company adopted the interim
disclosure provisions of SFAS No. 148 during the third quarter of fiscal
2003.
The Company accounts for stock option plans in accordance with the
provisions of APB No. 25, "Accounting for Stock Issued to Employees", and
related interpretations which recognizes compensation expense on the grant
date if the current market price of the stock exceeds the exercise price.
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 net income (loss), and net
income (loss) per common share would have been as follows:
Three Months Ended Nine Months Ended
-------------------------- -----------------------------
April 30, April 30, April 30, April 30,
2003 2002 2003 2002
------------ ------------ --------------- ------------
Net income, as reported $ 336,842 $ 4,579,180 $ 3,093,474 $ 3,778,842
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ( 96,743) ( 681,620) ( 1,282,534) (2,134,428)
------------ ------------ --------------- ------------
Net income, pro forma $ 240,099 $ 3,897,560 $ 1,810,940 $ 1,644,414
============ ============ =============== ============
Net income per common share, as reported $ 0.02 $ 0.31 $ 0.21 $ 0.26
============ ============ =============== ============
Net income per common share, pro forma $ 0.02 $ 0.26 $ 0.12 $ 0.11
============ ============ =============== ============
Net income per common share assuming dilution, as
reported $ 0.02 $ 0.30 $ 0.21 $ 0.25
============ ============ =============== ============
Net income per common share assuming dilution,
pro forma $ 0.02 $ 0.26 $ 0.12 $ 0.11
============ ============ =============== ============
The following assumptions were used for grants of warrants to employees in
the nine months ended April 30, 2003, to compute the fair value of the
warrants using the Black-Scholes option-pricing model; dividend yield of
0%; expected volatility of 80%; risk free interest rate of 1.75% and 1.81%;
and expected lives of 5 years.
The following assumptions were used for grants of warrants to employees in
the nine months ended April 30, 2002, to compute the fair value of the
warrants using the Black-Scholes option-pricing model; dividend yield of
0%; expected volatility of 87%; risk free interest rate of 3.59% and 4.72%
and expected lives of 5 years.
11
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - NOTES FROM RELATED PARTIES
During October 2002, the Company agreed to accept certain compressed
natural gas refueling station assets with an appraised fair value of
approximately $800,000 as payment for notes (totaling $652,759 plus accrued
interest) owed to the Company by an officer and director of the Company. In
connection with the transaction, the Company adjusted the fair value of the
assets to $720,000 to reflect additional costs estimated to be incurred in
disposing of the assets. The Company also recorded interest income during
the nine months ended April 30, 2003 on the notes of approximately $67,241,
which had been previously been reserved, representing the difference
between the adjusted fair value of the assets and the book value of the
notes.
On January 31, 2003, a note due from the President in the amount of
$200,000 plus accrued interest as of January 31, 2003 was paid through an
offset against previously accrued bonus and profit sharing amounts due to
the President at January 31, 2003.
NOTE E - DEFERRED REGISTRATION COSTS
The Company is currently contemplating the formation of a registered public
limited partnership (MLP) and the raising of capital through the issuance
of MLP units. In connection with the transaction, the Company has incurred
costs of approximately $415,000 as of April 30, 2003, which are included in
prepaid expenses and other current assets. These costs will continue to be
deferred until such time as the registration is effective. At such time,
the deferred registration costs will be deducted from the proceeds of the
offering. Should the offering be aborted, the deferred registration costs
will be expensed.
12
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
April 30, July 31,
2003 2002
------------ ------------
LPG:
Brownsville Terminal Facility:
Building $ 173,500 $ 173,500
Terminal facilities 3,631,207 3,631,207
Tank Farm 370,855 370,855
Midline pump station 2,443,989 2,449,628
Leasehold improvements 302,657 302,657
Capital construction in progress 96,212 96,212
Equipment 210,350 502,557
------------ ------------
7,228,770 7,526,616
------------ ------------
US - Mexico Pipelines and Matamoros Terminal
Facility:
U.S. Pipelines and Rights of Way 6,611,480 6,441,536
Mexico Pipelines and Rights of Way 1,049,235 1,049,235
Matamoros Terminal Facility 5,107,513 5,074,087
Saltillo Terminal 1,027,267 1,027,267
Land 856,358 856,358
------------ ------------
14,651,853 14,448,483
------------ ------------
Total LPG 21,880,623 21,975,099
------------ ------------
Other:
Automobile - 10,800
Office equipment 85,778 72,728
Software 75,890 -
------------ ------------
161,668 83,528
------------ ------------
22,042,291 22,058,627
Less: accumulated depreciation and amortization (4,177,900) (3,707,842)
------------ ------------
$17,864,391 $18,350,785
============ ============
The Company had previously completed construction of an additional LPG
terminal facility in Saltillo, Mexico (Saltillo Terminal). The Company was
unable to receive all the necessary approvals to operate the facility at
that location. The Company has identified an alternate site in Hipolito,
Mexico, a town located in the proximity of Saltillo to relocate the
Saltillo Terminal. The cost of such relocation is expected to be between
$250,000 and $500,000.
Property, plant and equipment, net of accumulated depreciation, includes
$6,556,407 and $6,759,102 of costs, located in Mexico at April 30, 2003 and
July 31, 2002, respectively.
13
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - INVENTORIES
Inventories consist of the following:
April 30, 2003 July 31, 2002
------------------- -------------------
Gallons Cost Gallons Cost
--------- -------- ---------- --------
LPG:
Leased Pipeline,
Brownsville Terminal Facility,
Matamoros Terminal Facility
and railcars leased by the
Company 1,532,816 $792,130 1,982,646 $772,334
Markham Storage and other - - 427,003 166,338
--------- -------- --------- --------
1,532,816 $792,130 2,409,649 $938,672
========= ======== ========= ========
NOTE H - DEBT OBLIGATIONS
Debt consists of the following:
April 30, July 31,
2003 2002
---------- ----------
Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility. $ 452,254 $ 837,918
Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility. 327,264 554,159
Promissory note issued in connection with the purchase of property. - 1,935,723
New Accepting Noteholders' notes and Additional Note. 1,704,837 3,085,000
Noninterest-bearing note payable, discounted at 7%, for legal services; due in February
002. 137,500 137,500
Other debt. 274,711 202,906
---------- ----------
2,896,566 6,753,206
Current maturities 1,131,729 3,055,708
Short term debt 1,704,837 3,085,000
---------- ----------
$ 60,000 $ 612,498
========== ==========
During June 2002, the Company and certain holders of the Restructured Notes
and the New Notes (New Accepting Noteholders) reached an agreement whereby
the due date for approximately $2,985,000 of principal due on the New
Accepting Noteholders' notes were extended to December 15, 2002 (see
below). The New Accepting Noteholders' notes accrued interest at 16.5% per
annum. Interest was payable on the outstanding balances on specified dates
through December 15, 2002.
During June 2002 the Company issued a note for $100,000 (Additional Note)
to a holder of the Restructured Notes and the New Notes. The $100,000 note
provided for similar terms and conditions as the New Accepting Noteholders'
notes (see below).
14
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - DEBT OBLIGATIONS - CONTINUED
EXTENSION OF NEW ACCEPTING NOTEHOLDERS' NOTES AND ADDITIONAL NOTE
During December 2002, the Company and certain holders of New Accepting
Noteholders' notes and holder of the Additional Note (Extending
Noteholders) reached an agreement whereby the due date for $2,730,000 of
principal due on the Extending Noteholders' notes were extended to December
15, 2003. Under the terms of the agreement, the Extending Noteholders'
notes will continue to bear interest at 16.5% per annum. Interest is
payable quarterly on the outstanding balances beginning on March 15, 2003
(the December 15, 2002 interest was paid on January 1, 2003). In addition,
the Company is required to pay principal in equal monthly installments
beginning March 2003 (approximately $1,152,000 of principal was paid
through the period ended April 30, 2003 of which $1,000,000 was reduced in
connection with the exercise of warrants and purchase of common stock - see
below). The Company may prepay the Extending Noteholders' notes at any
time. The Company is also required to pay a fee of 1.5% on the principal
amount of the Extending Noteholders' notes which are outstanding on
December 15, 2002, March 15, 2003, June 15, 2003 and September 15, 2003.
The Company also agreed to extend the expiration date on the warrants held
by the Extending Noteholders in connection with the issuance of the
Extending Noteholders' notes to December 15, 2006. In connection with the
extension of the warrants, the Company recorded a discount of $316,665
related to the additional value of the modified warrants of which $194,002
has been amortized for the period ended April 30, 2003.
The Company paid the portion of the New Accepting Noteholders' notes which
were not extended, $355,000 plus accrued interest, on December 15, 2002.
During March 2003, warrants to purchase 250,000 shares of common stock of
the Company were exercised by a holder of the Warrants and New Warrants for
which the exercise price totaling $625,000 was paid by reduction of a
portion of the outstanding debt and accrued interest owed to the holder
related to the Restructured Notes. In addition, during March 2003, the
holder acquired 161,392 shares of common stock of the Company at a price of
$2.50 per share. The purchase price was paid through the cancellation of
the remaining outstanding debt and accrued interest owed to the holder
totaling $403,480. In connection with this transaction the Company recorded
additional interest expense of approximately $68,000 representing the
difference between the market value and sales price on the day of the
transaction.
ISSUANCE OF PROMISSORY NOTE
During December 2002, the Company issued a note for $250,000 to a holder of
the Extending Noteholders' notes. The note provides for similar terms and
conditions as the Extending Noteholders' notes.
OTHER
In connection with the note payable for legal services, the Company has not
made all of the required payments. The Company provided a "Stipulation of
Judgment" to the creditor at the time the note for legal services was
issued.
CPSC International, Inc. (CPSC) agreed to be responsible for payments
required by the Mortgage Note in connection with a settlement in March 2001
between CPSC and the Company. During April 2003, CPSC paid the mortgage
receivable by direct payment of the Mortgage Note.
15
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - DEBT OBLIGATIONS - CONTINUED
OTHER - CONTINUED
In accordance with provisions of the settlement, during April 2003, $92,000
of amounts previously paid under the CPSC note were refunded to the
Company. In addition, the Company reduced its CPSC Note by approximately
$32,000. The total amount of the CPSC note reductions of approximately
$124,000 was recorded as a reduction to the costs related to the CPSC
acquisition.
The Company's President is providing a personal guarantee for the punctual
payment and performance under the CPSC Note until collateral pledged in
connection with the note is perfected.
NOTE I - STOCKHOLDERS' EQUITY
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 2003, warrants to purchase 250,000 shares of common stock of
the Company were exercised by a certain holder of the Warrants and New
Warrants, through reductions of debt obligations (see note H).
During March 2003, a holder of the Restructured Notes agreed to acquire
161,392 shares of common stock of the Company at a price of $2.50 per
share. The purchase price was paid through the cancellation of outstanding
debt and accrued interest owed to the holder totaling $403,480 (see note
H).
STOCK WARRANTS
---------------
The Company applies APB 25 for warrants granted to the Company's employees
and to the Company's Board of Directors serving in the capacity as
directors and SFAS 123 for warrants issued to acquire goods and services
from non-employees.
In connection with warrants previously 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 during the call provision period.
BOARD COMPENSATION PLAN (BOARD PLAN)
In connection with the Board Plan, during August 2002 the Board granted
warrants to purchase 20,000 shares of common stock of the Company at
exercise prices of $3.10 per share to outside directors. Based on the
provisions of APB 25, no compensation expense was recorded for these
warrants.
In connection with the Board Plan, during November 2002 the Board granted
warrants to purchase 10,000 shares of common stock of the Company at
exercise prices of $2.27 per share to an outside director. Based on the
provisions of APB 25, no compensation expense was recorded for these
warrants.
16
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - 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. The total settlement costs
recorded by the Company at July 31, 1999, was $456,300. The parties had
agreed to extend the date on 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 July 10, 2002, litigation was filed in the 164th Judicial District Court
of Harris County, Texas by Jorge V. Duran and Ware, Snow, Fogel & Jackson
L.L.P. against the Company alleging breach of contract, common law fraud
and statutory fraud in connection with the settlement agreement between the
parties dated July 26, 2000. Plaintiffs seek actual and punitive damages.
Trial is scheduled for August 2003. The Company believes the claims are
without merit and intends to vigorously defend against the lawsuit.
On March 2, 2000, litigation was filed in the Superior Court of California,
County of San Bernardino by Omnitrans against Penn Octane Corporation, Penn
Wilson, CNG and several other third parties alleging breach of contract,
fraud and other causes of action related to the construction of a refueling
station by a third party. Penn Octane Corporation and Penn Wilson have both
been dismissed from the litigation pursuant to summary judgments. Omnitrans
has filed its appellate brief requesting reversal of the summary judgments
in favor of the Company and Penn Wilson. Based on proceedings to date, the
Company believes that the claims are without merit and intends to
vigorously defend against the lawsuit. The Company intends to file a
response to the appeal and believes the summary judgments will be upheld.
On August 7, 2002, a Mexican company, Intertek Testing Services de Mexico,
S.A. de C.V. (Plaintiff), which contracts with PMI for LPG testing
services, filed suit in the Superior Court of California, County of San
Mateo against the Company alleging breach of contract. In April of 2003 the
case proceeded to a jury trial. The plaintiff Intertek demanded from the
judge and jury approximately $850,000 in damages and interest. The jury
found substantially in favor of the Company and awarded damages to Intertek
of only $228,551 in May of 2003 and said sum was recorded as a judgment on
June 5, 2003. In connection with the judgment, the Company recorded an
additional expense of approximately $56,000 as of April 30, 2003
representing the additional amount of the judgment over amounts previously
accrued.
On October 11, 2002, litigation was filed in the 197th Judicial District
Court of Cameron County, Texas by the Company against Tanner Pipeline
Services, Inc. ("Tanner"); Cause No. 2002-10-4448-C alleging negligence and
aided breaches of fiduciary duties on behalf of CPSC in connection with the
construction of the US Pipelines. The Company is seeking damages. Discovery
is continuing in this matter. Tanner sent notice of its intent to seek its
attorneys fees as a sanction in the event it prevails in the action.
The Company and its subsidiaries are also involved with other proceedings,
lawsuits and claims. The Company believes that the liabilities, if any,
ultimately resulting from such proceedings, lawsuits and claims, including
those discussed above, should not materially affect its consolidated
financial statements.
17
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - COMMITMENTS AND CONTINGENCIES - CONTINUED
CREDIT FACILITY, LETTERS OF CREDIT AND OTHER
As of April 30, 2003, the Company had a $15,000,000 credit facility (see
below) with RZB Finance L.L.C. (RZB) for demand loans and standby letters
of credit (RZB Credit Facility) to finance the Company's purchases of LPG.
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
loan 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 limit or terminate its participation in 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 security interest and
assignment in any and all of the Company's accounts, inventory, real
property, buildings, pipelines, fixtures and interests therein or relating
thereto, including, without limitation, the lease with the Brownsville
Navigation District of Cameron County (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 subsequent 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, El Paso NGL
Marketing Company, L.P. (El Paso) (which expired September 30, 2002), Duke
Energy NGL Services, Inc. (Duke) and/or Koch Hydrocarbon Company (Koch),
letters of credit are issued on a monthly basis based on anticipated
purchases.
In connection with the Company's purchase of LPG, under the RZB Credit
Facility, assets related to product sales (Assets) are required to be in
excess of borrowings and commitments (including restricted cash of $5,657
at April 30, 2003). At April 30, 2003, the Company's borrowings and
commitments were less than the amount of the Assets.
Under the terms of the RZB Credit Facility, the Company is required to
maintain net worth of a minimum of $9,000,000 and is not allowed to make
cash dividends to shareholders without the consent of RZB. The $15,000,000
is effective until August 31, 2003 when it will be automatically reduced to
$12,000,000.
CONSULTING AGREEMENT
Effective November 2002, the Company and an outside consultant (Consultant)
entered into a consulting contract whereby the Company agreed to pay the
Consultant $30,000 a month for a period of six months.
During May 2003, the Consultant was appointed President of the Company. The
Company currently continues to make payments of $30,000 per month and an
employment contract is currently being negotiated.
18
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - COMMITMENTS AND CONTINGENCIES - CONTINUED
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
include cash balances at banks which at times exceed the federal deposit
insurance.
NOTE K - REALIZATION OF ASSETS
The accompanying unaudited consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as
a going concern. The Company has had an accumulated deficit since inception
and has a deficit in working capital. In addition, significantly all of the
Company's assets are pledged or committed to be pledged as collateral on
existing debt in connection with the Extending Noteholders' notes, the RZB
Credit Facility and the notes related to the Settlement. Unless RZB
authorizes an extension, the RZB Credit Facility will be reduced to
$12,000,000 after August 31, 2003. The Extending Noteholders' notes, which
total approximately $1,827,500 at June 2, 2003 are due on December 15, 2003
(see note H).
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 unaudited consolidated balance sheets is dependent upon the
Company's ability to obtain additional financing, repay the Extending
Noteholders' notes and the continued success of the Company's operations.
The unaudited 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 has entered into the Contract with PMI which
increases the minimum monthly sales volume sold to PMI. In addition,
management is taking steps to (i) obtain additional sale contracts
commensurate with supply agreements (ii) increase the number of customers
assuming deregulation of the LPG industry in Mexico, (iii) raise additional
debt and/or equity capital and (iv) increase and extend the RZB Credit
Facility.
At July 31, 2002, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $6,700,000.
NOTE L - CONTRACTS
LPG SALES TO PMI
Effective March 1, 2002, the Company and PMI entered into a contract for
the minimum monthly sale of 17,000,000 gallons of LPG (see supply
agreements below), subject to monthly adjustments based on seasonality
(Contract). The Contract expires on May 31, 2004, except that the Contract
may be terminated by either party on or after May 31, 2003 upon 90 days
written notice, or upon a change of circumstances as defined under the
Contract.
PMI uses the Matamoros Terminal Facility to load LPG purchased from the
Company for distribution by truck in Mexico. The Company continues to use
the Brownsville Terminal Facility in connection with LPG delivered by
railcar to other customers, storage and as an alternative terminal in the
event the Matamoros Terminal Facility cannot be used temporarily.
19
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L - CONTRACTS - CONTINUED
LPG SUPPLY AGREEMENTS
The Company has entered into minimum long-term supply agreements for
quantities of LPG totaling approximately 24,000,000 gallons per month
although the Contract provides for lesser quantities.
In addition to the LPG costs charged by the Suppliers, the Company also
incurs additional costs to deliver LPG to the Company's facilities.
Furthermore, 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, 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 quantities of LPG purchased and/or to finance future price
increases of LPG.
NOTE M - INCOME TAX
During the nine months ended April 30, 2003, the Company recorded an income
tax benefit of $100,000, representing a reduction for alternative minimum
taxes previously accrued. Due to the availability of net operating loss
carryforwards (approximately $6,700,000 at July 31, 2002), the Company did
not incur any additional income tax expense during the nine months ended
April 30, 2003. The Company can receive a credit against any future tax
payments due to the extent of any prior alternative minimum taxes paid
($54,375 at April 30, 2003).
20
ITEM 2. 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 2002) refer to the Company's fiscal year ended July 31.
FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly 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, LPG supply, operations,
demand, competition, capital expenditures, the deregulation of the LPG market in
Mexico, the operations of the US - Mexico Pipelines, the Matamoros Terminal
Facility and the Saltillo Terminal, other upgrades to our facilities, foreign
ownership of LPG operations, short-term obligations and credit arrangements,
outcome of litigation 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 Part I of the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2002 as
well as those discussed elsewhere in this Report. We caution you, however, that
this list of factors may not be complete.
OVERVIEW
The Company has been principally engaged in the purchase, transportation
and sale of LPG for distribution into northeast Mexico. In connection with the
Company's desire to reduce quantities of inventory, the Company may also sell
LPG to U.S. and Canadian customers.
During the nine months ended April 30, 2003, the Company derived 81% 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. 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 of LPG purchased from suppliers and volumes sold to PMI or
others could result in gains during periods of rising LPG prices or losses
during periods of declining LPG prices as a result of holding inventories or
disposing of excess inventories.
LPG SALES
The following table shows the Company's volume sold and delivered in
gallons and average sales price for the three months ended April 30, 2003 and
2002;
2003 2002
------ ------
Volume Sold
LPG (millions of gallons) PMI 51.0 85.1
LPG (million of gallons) Other 14.9 14.3
------ ------
65.9 99.4
====== ======
Average sales price
LPG (per gallon) PMI 0.71 0.48
LPG (per gallon) Other 0.62 0.36
21
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2003 COMPARED WITH THREE MONTHS ENDED APRIL 30,
2002
Revenues. Revenues for the three months ended April 30, 2003 were $45.5
million compared with $45.5 million for the three months ended April 30, 2002, a
decrease of $27,595 or 0.1%. Of this decrease, $24.1 million was attributable
to decreased volumes of LPG sold to PMI during the three months ended April 30,
2003 partially offset by $16.9 million attributable to increases in average
sales prices of LPG sold to PMI during the three months ended April 30, 2003,
$6.7 million attributable to increased average sales prices of LPG sold to
customers other than PMI during the three months ended April 30, 2003 and
$383,985 attributable to increased volumes of LPG sold to customers other than
PMI during the three months ended April 30, 2003.
Cost of goods sold. Cost of goods sold for the three months ended April
30, 2003 was $43.4 million compared with $39.3 million for the three months
ended April 30, 2002, an increase of $4.0 million or 10.3%. Of this increase,
$19.5 million was attributable to increases in the cost of LPG sold to PMI
during the three months ended April 30, 2003, $6.5 million was attributable to
increased costs of LPG sold to customers other than PMI during the three months
ended April 30, 2003 and $394,115 was attributable to increased volume of LPG
sold to customers other than PMI during the three months ended April 30, 2003
partially offset by $21.7 million attributable to decreased volume of LPG sold
to PMI during the three months ended April 30, 2003.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.1 million for the three months ended April 30,
2003, compared with $1.0 million for the three months ended April 30, 2002, an
increase of $49,405 or 4.71%. The increase during the three months ended April
30, 2003 was principally due to legal fees and payroll related costs.
Other income (expense). Other income (expense) was $(640,706) for the
three months ended April 30, 2003, compared with $(424,463) for the three months
ended April 30, 2002. The increase in other expenses was due primarily to
increased amortization of discounts on outstanding debt incurred, interest costs
on outstanding debt and settlements of litigation during the three months ended
April 30, 2003.
Income tax. Due to the availability of net operating loss carryforwards
(approximately $6.7 million at July 31, 2002), the Company did not incur any
additional income tax expense during the three months ended April 30, 2003. The
Company can receive a credit against any future tax payments due to the extent
of any prior alternative minimum taxes paid ($54,375 at April 30, 2003).
NINE MONTHS ENDED APRIL 30, 2003 COMPARED WITH NINE MONTHS ENDED APRIL 30, 2002
Revenues. Revenues for the nine months ended April 30, 2003 were $126.5
million compared with $110.3 million for the nine months ended April 30, 2002,
an increase of $16.3 million or 14.8%. Of this increase, $30.8 million was
attributable to increases in average sales prices of LPG sold to PMI during the
nine months ended April 30, 2003, and $9.1 million attributable to increased
average sales prices of LPG sold to customers other than PMI during the nine
months ended April 30, 2003 partially offset by $4.6 million attributable to
decreased volumes of LPG sold to customers other than PMI during the nine months
ended April 30, 2003 and $19.3 million attributable to decreased volumes of LPG
sold to PMI during the nine months ended April 30, 2003.
22
Cost of goods sold. Cost of goods sold for the nine months ended April 30,
2003 was $118.5 million compared with $101.2 million for the nine months ended
April 30, 2002, an increase of $17.3 million or 17.1%. Of this increase, $32.9
million was attributable to increases in the cost of LPG sold to PMI during the
nine months ended April 30, 2003, $6.3 million attributable to increased costs
of LPG sold to customers other than PMI during the nine months ended April 30,
2003 partially offset by $16.9 million attributable to decreased volume of LPG
sold to PMI during the nine months ended April 30, 2003, and $4.7 million
attributable to decreased volume of LPG sold to customers other than PMI during
the nine months ended April 30, 2003.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $3.6 million for the nine months ended April 30,
2003, compared with $3.2 million for the nine months ended April 30, 2002, an
increase of $410,646 or 12.9%. The increase during the nine months ended April
30, 2003 was principally due to legal fees and payroll related costs.
Other income (expense). Other income (expense) was $(1.4) million for the
nine months ended April 30, 2003, compared with $(2.0) million for the nine
months ended April 30, 2002. The decrease in other expense was due primarily to
decreased and amortization of discounts on outstanding debt during the nine
months ended April 30, 2003.
Income tax. During the nine months ended April 30, 2003, the Company
recorded an income tax benefit of $100,000, representing a reduction for
alternative minimum taxes previously accrued. Due to the availability of net
operating loss carryforwards (approximately $6.7 million at July 31, 2002), the
Company did not incur any additional income tax expense. The Company can
receive a credit against any future tax payments due to the extent of any prior
alternative minimum taxes paid ($54,375 at April 30, 2003).
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception
and has a deficit in working capital. In addition, significantly all of the
Company's assets are pledged or committed to be pledged as collateral on
existing debt in connection with the Extending Noteholders' notes, the RZB
Credit Facility and the notes related to the Settlement. Unless RZB authorizes
an extension, the RZB Credit Facility will be reduced to $12.0 million after
August 31, 2003. The Extending Noteholders' notes total approximately $1.8
million at June 2, 2003 are due on December 15, 2003 (see Private Placements and
Other Transactions below). The Company may need to increase its credit facility
for increases in quantities of LPG purchased and/or to finance future price
increases of LPG. 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, 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 nine months
ended April 30, 2003, and 2002. All information is in thousands.
2003 2002
-------------- ---------------
Net cash (used in) provided by operating activities $( 1,443) $ 4,336
Net cash used in investing activities . . . . . . . ( 25) ( 687)
Net cash provided by (used in) financing activities 1,353 ( 2,989)
-------------- ---------------
Net (decrease) increase in cash . . . . . . . . . . $ (115) $ 660
-------------- ---------------
Less net decrease (increase) in restricted cash . . 24 ( 619)
-------------- ---------------
Net increase (decrease) in non-restricted cash. . . $( 91) $ 41
============== ===============
23
Sales to PMI. Effective March 1, 2002, the Company and PMI entered into a
contract for the minimum monthly sale of 17.0 million gallons of LPG (see LPG
Supply Agreements below), subject to monthly adjustments based on seasonality
(the "Contract"). The Contract expires on May 31, 2004, except that the
Contract may be terminated by either party on or after May 31, 2003 upon 90 days
written notice, or upon a change of circumstances as defined under the Contract.
PMI uses the Matamoros Terminal Facility to load LPG purchased from the
Company for distribution by truck in Mexico. The Company continues to use the
Brownsville Terminal Facility in connection with LPG delivered by railcar to
other customers, storage and as an alternative terminal in the event the
Matamoros Terminal Facility cannot be used temporarily.
Revenues from PMI totaled approximately $102.0 million for the nine months
ended April 30, 2003, representing approximately 81% of total revenue for the
period.
LPG Supply Agreements. The Company has entered into minimum long-term
supply agreements for quantities of LPG totaling approximately 24.0 million
gallons per month although the Contract provides for lesser quantities.
The Company's aggregate costs per gallon to purchase LPG (less any
applicable adjustments) are below the aggregate sales prices per gallon of LPG
sold to its customers.
In addition to the LPG costs charged by the Suppliers, the Company also
incurs additional costs to deliver the LPG to the Company's facilities.
Furthermore, 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, 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 quantities of LPG
purchased and/or to finance future price increases of LPG.
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 beginning January 1, 2002 until its
expiration is $1.0 million. The Company is required to pay a minimum charge for
storage of $300,000 per year (based on reserved storage of 8.4 million gallons).
In connection with the Pipeline Lease, the Company may reserve up to 21.0
million gallons each year thereafter provided that the Company notifies Seadrift
in advance.
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.
The Company at its own expense, installed a mid-line pump station which
included the installation of additional piping, meters, valves, analyzers and
pumps along the Leased Pipeline to increase the capacity of the Leased Pipeline.
The Leased Pipeline's capacity is estimated to be between 300 million and 360
millions gallons per year.
24
Upgrades. 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 cost of this project is expected
to approximate $2.0 million. In addition the Company intends to upgrade its
computer and information systems at a total estimated cost of $350,000.
Mortgage Receivable. CPSC International, Inc. (CPSC) agreed to be
responsible for payment required by the Mortgage Note in connection with a
settlement in March 2001 between CPSC and the Company. During April 2003, CPSC
paid the mortgage receivable by direct payment of the Mortgage Note.
In accordance with provisions of the settlement, during April 2003, $92,000
of amounts previously paid under the CPSC note were refunded to the Company. In
addition, the Company reduced its CPSC Note by approximately $32,000. The total
amount of the CPSC note reductions of approximately $124,000 was recorded as a
reduction to the costs related to the CPSC acquisition.
The Company's President is providing a personal guarantee for the punctual
payment and performance under the CPSC Note (see note H to the unaudited the
consolidated financial statements) until collateral pledged in connection with
the note is perfected.
Mexican Operations. Under current Mexican law, foreign ownership of
Mexican entities involved in the distribution of LPG or the operation of LPG
terminal facilities is 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). PennMex has a
transportation permit and the Mexican Subsidiaries own, lease, or are in the
process of obtaining the land or rights of way used in the construction of the
Mexican portion of the US-Mexico Pipelines, and own the Mexican portion of the
assets comprising the US-Mexico Pipelines, the Matamoros Terminal Facility and
the Saltillo Terminal. The Company's Mexican affiliate, Tergas, S.A. de C.V.
("Tergas"), has been granted the permit to operate the Matamoros Terminal
Facility and the Company relies on Tergas' permit to continue its delivery of
LPG at the Matamoros Terminal Facility. Tergas is owned 90% by Jorge
Bracamontes, an officer and director of the Company, and the remaining balance
is owned by another officer and a consultant of the Company. The Company pays
Tergas its actual cost for distribution services at the Matamoros Terminal
Facility plus a small profit.
The Company had previously completed construction of an additional LPG
terminal facility in Saltillo, Mexico (the "Saltillo Terminal"). The Company
was unable to receive all the necessary approvals to operate the facility at
that location. The Company has identified an alternate site in Hipolito,
Mexico, a town located in the proximity of Saltillo to relocate the Saltillo
Terminal. The cost of such relocation is expected to be between $250,000 and
$500,000.
Once completed, the Company expects the newly constructed terminal facility
to be capable of off-loading LPG from railcars to trucks. The newly constructed
terminal facility will have three truck loading racks and storage to accommodate
approximately 390,000 gallons of LPG.
Once operational, the Company can directly transport LPG via railcar from
the Brownsville Terminal Facility to the Saltillo area. The Company believes
that by having the capability to deliver LPG to the Saltillo area, the Company
will be able to further penetrate the Mexican market for the sale of LPG.
25
Through its operations in Mexico and the operations of the Mexican
Subsidiaries and Tergas, the Company is subject to the tax laws of Mexico which,
among other things, require that the Company comply with transfer pricing rules,
the payment of income, asset and ad valorem taxes, and possibly taxes on
distributions in excess of earnings. In addition, distributions to foreign
corporations, including dividends and interest payments may be subject to
Mexican withholding taxes. Such taxes have not been material to the
consolidated financial statements.
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 are prohibited from participating in the distribution of LPG in
Mexico. Upon 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 or its affiliates expect to sell LPG directly to
independent Mexican distributors as well as PMI upon Deregulation. 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.
During July 2001, the Mexican government announced that it would begin to
accept applications from Mexican companies for permits to allow for the
importation of LPG pursuant to provisions already provided for under existing
Mexican law.
In connection with the above, in August 2001, Tergas received a one-year
permit from the Mexican government to import LPG. During September 2001, the
Mexican government asked Tergas to defer use of the permit and as a result, the
Company did not sell LPG to distributors other than PMI. In March 2002, the
Mexican government again announced its intention to issue permits for free
importation of LPG into Mexico by distributors and others beginning August 2002,
which has been delayed on several occasions and is currently planned for August
2003. Tergas' permit to import LPG expired during August 2002. Tergas intends
to obtain a new permit when the Mexican government begins to accept applications
once more. As a result of the foregoing, it is uncertain as to when, if ever,
Deregulation will actually occur and the effect, if any, it will have on the
Company. However, should Deregulation occur, it is the Company's intention to
sell LPG directly to distributors in Mexico as well as to PMI. Tergas also
received authorization from Mexican Customs authorities regarding the use of the
US-Mexico Pipelines for the importation of LPG.
The point of sale for LPG which flows through the US-Mexico Pipelines for
delivery to the Matamoros Terminal Facility is the United States-Mexico border.
For LPG delivered into Mexico, PMI is the importer of record.
26
Credit Arrangements. As of April 30, 2003, the Company had a $15.0 million
credit facility (see below) with RZB Finance L.L.C. ("RZB") for demand loans and
standby letters of credit (the "RZB Credit Facility") to finance the Company's
purchases of LPG. 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
loan 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 limit or terminate its participation in 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 security interest and assignment in any and all of the Company's
accounts, inventory, 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
subsequent 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, El Paso
(which expired September 30, 2002), Duke and/or Koch, letters of credit are
issued on a monthly basis based on anticipated purchases.
In connection with the Company's purchase of LPG, under the RZB Credit
Facility, assets related to product sales (the "Assets") are required to be in
excess of borrowings and commitments (including restricted cash of approximately
$6,000 at April 30, 2003). At April 30, 2003, the Company's borrowings and
commitments were less than the amount of the Assets.
Under the terms of the RZB Credit Facility, the Company is required to
maintain net worth of a minimum of $9.0 million and is not allowed to make cash
dividends to shareholders without the consent of RZB. The $15.0 million is
effective until August 31, 2003 when it will be automatically reduced to $12.0
million.
Consulting Agreement. Effective November 2002, the Company and an outside
consultant (the "Consultant") entered into a consulting contract whereby the
Company agreed to pay the Consultant $30,000 a month for a period of six months.
During May 2003, the Consultant was appointed President of the Company.
The Company currently continues to make payments of $30,000 per month and an
employment contract is currently being negotiated.
Private Placements and Other Transactions. During June 2002, the Company
and certain holders of the Restructured Notes and the New Notes (the "New
Accepting Noteholders") reached an agreement whereby the due date for
approximately $3.0 million of principal due on the New Accepting Noteholders'
notes were extended to December 15, 2002 (see below). The New Accepting
Noteholders' notes accrued interest at 16.5% per annum. Interest was payable on
the outstanding balances on specified dates through December 15, 2002.
During June 2002 the Company issued a note for $100,000 (the "Additional
Note") to a holder of the Restructured Notes and the New Notes. The $100,000
note provides for similar terms and conditions as the New Accepting Noteholders'
notes (see below).
27
During October 2002, the Company agreed to accept certain the compressed
natural gas refueling station assets with an appraised fair value of
approximately $800,000 as payment for notes (totaling ($652,759 plus accrued
interest) owed to the Company by an officer and director of the Company. In
connection with the transaction, the Company adjusted the fair value of the
assets to $720,000 to reflect additional costs estimated to be incurred in
disposing of the assets. The Company also recorded interest income during the
six months ended April 30, 2003 on the notes of approximately $67,241, which had
been previously been reserved, representing the difference between the adjusted
fair value of the assets and the book value of the notes.
During December 2002, the Company and certain holders of New Accepting
Noteholders' notes and holder of the Additional Note (the "Extending
Noteholders") reached an agreement whereby the due date for approximately $2.7
million of principal due on the Extending Noteholders' notes were extended to
December 15, 2003. Under the terms of the agreement, the Extending Noteholders'
notes will continue to bear interest at 16.5% per annum. Interest is payable
quarterly on the outstanding balances beginning on March 15, 2003 (the December
15, 2002 interest was paid on January 1, 2003). In addition, the Company is
required to pay principal in equal monthly installments beginning March 2003
(approximately $1.2 million of principal was paid through the period ended April
30, 2003 of which $1.0 million was reduced in connection with the exercise of
warrants and purchase of common stock - see below). The Company may prepay the
Extending Noteholders' notes at any time. The Company is also required to pay a
fee of 1.5% on the principal amount of the Extending Noteholders' notes which
are outstanding on December 15, 2002, March 15, 2003, June 15, 2003 and
September 15, 2003. The Company also agreed to extend the expiration date on
the warrants held by the Extending Noteholders in connection with the issuance
of the Extending Noteholders' notes to December 15, 2006. In connection with
the extension of the warrants, the Company recorded a discount of approximately
$317,000 related to the additional value of the modified warrants of which
approximately $194,000 has been amortized for the period ended April 30, 2003.
The Company paid the portion of the New Accepting Noteholders' notes which
were not extended, approximately $355,000 plus accrued interest, on December 15,
2002.
During December 2002, the Company issued a note for $250,000 to a holder of
the Extending Noteholders' notes. The note provides for similar terms and
conditions as the Extending Noteholders' notes.
During January 2003, a note due from the President in the amount of
$200,000 plus accrued interest as of January 31, 2003 was paid through an offset
against previously accrued bonus and profit sharing amounts due to the President
at January 31, 2003.
During March 2003, warrants to purchase 250,000 shares of common stock of
the Company were exercised by a holder of the Warrants and New Warrants for
which the exercise price totaling $625,000 was paid by reduction of the
outstanding debt and accrued interest owed to the holder related to the
Restructured Notes. In addition, during March 2003, the holder acquired 161,392
shares of common stock of the Company at a price of $2.50 per share. The
purchase price was paid through the cancellation of the remaining outstanding
debt and accrued interest owed to the holder totaling approximately $403,000.
In connection with this transaction the Company recorded additional interest
expense of approximately $68,000 representing the difference between the market
value and sales price on the day of the transaction.
In connection with warrants previously 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 during the call provision period.
Litigation. On July 10, 2002, litigation was filed in the 164th Judicial
District Court of Harris County, Texas by Jorge V. Duran and Ware, Snow, Fogel &
Jackson L.L.P. against the Company alleging breach of contract, common law fraud
and statutory fraud in connection with the settlement agreement between the
parties dated July 26, 2000. Plaintiffs seek actual and punitive damages.
Trial is scheduled for August 2003. The Company believes the claims are without
merit and intends to vigorously defend against the lawsuit.
28
On March 2, 2000, litigation was filed in the Superior Court of California,
County of San Bernardino by Omnitrans against Penn Octane Corporation, Penn
Wilson, CNG and several other third parties alleging breach of contract, fraud
and other causes of action related to the construction of a refueling station by
a third party. Penn Octane Corporation and Penn Wilson have both been dismissed
from the litigation pursuant to a summary judgments. Omnitrans has filed its
appellate brief requesting reversal of the summary judgments in favor of the
Company and Penn Wilson. Based on proceedings to date, the Company believes
that the claims are without merit and intends to vigorously defend against the
lawsuit. The Company intends to file a response to the appeal and believes the
summary judgments will be upheld.
On August 7, 2002, a Mexican company, Intertek Testing Services de Mexico,
S.A. de C.V. (the "Plaintiff"), which contracts with PMI for LPG testing
services, filed suit in the Superior Court of California, County of San Mateo
against the Company alleging breach of contract. In April of 2003 the case
proceeded to a jury trial. The plaintiff Intertek demanded from the judge and
jury approximately $850,000 in damages and interest. The jury found
substantially in favor of the Company and awarded damages to Intertek of only
$228,551 in May of 2003 and said sum was recorded as a judgment on June 5, 2003.
In connection with the judgment, the Company recorded an additional expense of
approximately $56,000 as of April 30, 2003 representing the additional amount of
the judgment over amounts previously accrued.
On October 11, 2002, litigation was filed in the 197th Judicial District
Court of Cameron County, Texas by the Company against Tanner Pipeline Services,
Inc. ("Tanner"); Cause No. 2002-10-4448-C alleging negligence and aided breaches
of fiduciary duties on behalf of CPSC in connection with the construction of the
US Pipelines. The Company is seeking damages. Discovery is continuing in this
matter. Tanner sent notice of its intent to seek its attorneys fees as a
sanction in the event it prevails in the action.
The Company and its subsidiaries are also involved with other proceedings,
lawsuits and claims. The Company believes that the liabilities, if any,
ultimately resulting from such proceedings, lawsuits and claims, including those
discussed above, should not materially affect its consolidated financial
statements.
Realization of Assets. The Company has had an accumulated deficit since
inception and has a deficit in working capital. In addition, significantly all
of the Company's assets are pledged or committed to be pledged as collateral on
existing debt in connection with the Extending Noteholders' notes, the RZB
Credit Facility and the notes related to the Settlement. Unless RZB authorizes
an extension, the RZB Credit Facility will be reduced to $12.0 million after
August 31, 2003. The Extending Noteholders' notes, which total approximately
$1.8 million at June 2, 2003, are due on December 15, 2003 (see note G to the
unaudited consolidated financial statements). The Company may need to increase
its credit facility for the purchase of quantities of LPG in excess of current
quantities sold and/or to finance future price increases of LPG, if any.
Further, the Company may find it necessary to liquidate inventories at a loss to
provide working capital or to reduce outstanding balances under its credit
facility.
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
unaudited consolidated balance sheets is dependent upon the Company's ability to
obtain additional financing, repay the Extending Noteholders' notes and the
continued success of the Company's operations. The unaudited 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 has entered into the Contract with PMI which increases
the minimum monthly sales volume sold to PMI. In addition, management is
taking steps to (i) obtain additional sale contracts commensurate with supply
agreements, (ii) increase the number of customers assuming Deregulation, (iii)
raise additional debt and/or equity capital and (iv) increase and extend the
RZB Credit Facility.
At July 31, 2002, the Company had net operating loss carryforward for
federal income tax purposes of approximately $6.7 million.
29
The Company is currently contemplating the formation of a registered public
limited partnership (MLP) and the raising of capital through the issuance of MLP
units. In connection with the transaction, the Company has incurred costs of
approximately $415,000 as of April 30, 2003, which are included in prepaid
expenses and other current assets. These costs will continue to be deferred
until such time as the registration is effective. At such time, the deferred
registration costs will be deducted from the proceeds of the offering. Should
the offering be aborted, the deferred registration costs will be expensed.
The following is a summary of the Company's estimated minimum contractual
obligations and commercial obligations as of April 30, 2003. Where applicable
LPG prices are based on the April 2003 monthly average as published by Oil Price
Information Services.
PAYMENTS DUE BY PERIOD
(AMOUNTS IN MILLIONS)
--------------------------------------------------
Less than 1 - 3 4 - 5 After
Contractual Obligations Total 1 Year Years Years 5 Years
- -------------------------------------- -------- --------- ------ --------- ----------
Long-Term Debt Obligations $ - $ - $ - $ - $ -
Operating Leases 13.1 1.4 2.8 2.6 6.3
LPG Purchase Obligations 545.7 124.2 155.5 155.6 110.4
-------- --------- ------ --------- ----------
Total Contractual Cash Obligations $ 558.8 $ 125.6 $158.3 $ 158.2 $ 116.7
======== ========= ====== ========= ==========
AMOUNT OF COMMITMENT EXPIRATION
PER PERIOD
(AMOUNTS IN MILLIONS)
----------------------------------------------------
Commercial Total Amounts Less than 1 - 3 4 - 5 Over
Commitments Committed 1 Year Years Years 5 Years
- -------------------------------- -------------- ---------- ------ ------ --------
Lines of Credit $ - $ - $ - $ - $ -
Standby Letters of Credit 12.3 12.3 - - -
Guarantees N/A N/A N/A N/A N/A
Standby Repurchase Obligations N/A N/A N/A N/A N/A
Other Commercial Commitments N/A N/A N/A N/A N/A
-------------- ---------- ------ ------ --------
Total Commercial Commitments $ 12.3 $ 12.3 $ - $ - $ -
============== ========== ====== ====== ========
30
STATEMENT BY MANAGEMENT CONCERNING REVIEW OF INTERIM INFORMATION BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS.
The unaudited consolidated financial statements included in this filing on
Form 10-Q have been reviewed by Burton McCumber & Cortez, L.L.P., independent
certified public accountants, in accordance with established professional
standards and procedures for such review. The report of Burton McCumber &
Cortez, L.L.P. commenting on their review, accompanies the unaudited
consolidated financial statements included in Item 1 of Part I.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
To the extent that the Company maintains quantities of LPG inventory in
excess of commitments for quantities of undelivered LPG and/or has commitments
for undelivered LPG in excess of inventory balances, the Company is exposed to
market risk related to the volatility of LPG prices. In the event that
inventory balances exceed commitments for undelivered LPG, during periods of
falling LPG prices, the Company may sell excess inventory to customers to reduce
the risk of these price fluctuations. In the event that commitments for
undelivered LPG exceed inventory balances, the Company may purchase contracts
which protect the Company against future price increases of LPG.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management, including the principal executive officer and
principal financial officer, conducted an evaluation of the Company's disclosure
controls and procedures, as such term is defined under Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as amended, within 90
days of the filing date of this report. Based on their evaluation, the
Company's principal executive officer and principal accounting officer concluded
that the Company's disclosure controls and procedures are effective.
There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph above.
31
PART II
ITEM 1. LEGAL PROCEEDINGS
See note J to the accompanying unaudited consolidated financial
statements and note K to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See note I to the accompanying unaudited consolidated financial
statements and notes I and J to the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 2002, for information
concerning certain sales of Securities.
In connection with the issuances of securities discussed in note I to
the accompanying unaudited consolidated financial statements, the
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 Section 4(2) thereof and
Rule 506 of Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
THE FOLLOWING EXHIBITS ARE INCORPORATED HEREIN BY REFERENCE:
Exhibit No.
------------
10.01 LPG sales agreement entered into as of March 1, 2002 by and
between Penn Octane Corporation ("Seller") and P.M.I. Trading
Limited ("Buyer"). (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 2002 filed on June 13, 2002, SEC File No. 000-24394).
10.02 Settlement agreement, dated as of March 1, 2002 by and between
P.M.I. Trading Limited and Penn Octane Corporation. (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended April 30, 2002 filed on June 13, 2002,
SEC File No. 000-24394).
10.03 Form of Amendment to Promissory Note (the "Note") of Penn Octane
Corporation (the "Company") due June 15, 2002, and related
agreements and instruments dated June 5, 2002, between the
Company and the holders of the Notes. (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended April 30, 2002 filed on June 13, 2002, SEC File No.
000-24394).
32
10.04 Form of Amendment to Promissory Note (the "Note") of Penn Octane
Corporation (the "Company") due December 15, 2002, and related
agreements and instruments dated December 9, 2002, between the
Company and the holders of the Notes. (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended January 31, 2003 filed on March 20, 2003, SEC File
No. 000-24394).
10.05 Employee contract entered into and effective July 29, 2002,
between the Company and Jerome B. Richter. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 2003 filed on March 20, 2003,
SEC File No. 000-24394).
10.06 Equipment Acquisition Agreement effective October 18, 2002 by and
between Penn Octane Corporation and Penn Wilson CNG, Inc., on the
one hand, and B&A Eco-Holdings, Inc. and Ian T. Bothwell, on the
other hand. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended January 31,
2003 filed on March 20, 2003, SEC File No. 000-24394).
10.07 Bill of Sale dated October 18, 2002 between B&A Eco-Holdings,
Inc. and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
January 31, 2003 filed on March 20, 2003, SEC File No.
000-24394).
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
15 Accountant's Acknowledgment
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002.
b. Reports on Form 8-K
None.
33
SIGNATURES
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.
PENN OCTANE CORPORATION
June 16, 2003 By: /s/Ian T. Bothwell
----------------------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
34
CERTIFICATION
I, Jerome B. Richter, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penn Octane
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 16, 2003
/s/ Jerome B. Richter
-------------------------------
Chief Executive Officer
35
CERTIFICATION
I, Ian T. Bothwell, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penn Octane
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 16, 2003
/s/ Ian T. Bothwell
-----------------------------
Chief Financial Officer
36