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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 1999
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 of (I.R.S.Employer
Incorporation or Organization) Identification No.)
900 VETERANS BOULEVARD, SUITE 240, REDWOOD CITY, CALIFORNIA 94063
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (650) 368-1501
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 30, 1999 was $33,985,239. The last reported sale
price of the Registrant's Common Stock as reported on the Nasdaq SmallCap Market
on September 30, 1999 was $3.94 per share.
The number of shares of Common Stock, par value $.01 per share, outstanding
on September 30, 1999 was 12,720,497.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
ITEM PAGE NO.
---- ------
Part I 1. Business 3
2. Properties 12
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 14
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
7A. Quantitative and Qualitative Disclosures About Market Risks 28
8. Financial Statements and Supplementary Data 29
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 66
Part III 10. Directors and Executive Officers of the Registrant 67
11. Executive Compensation 68
12. Security Ownership of Certain Beneficial Owners and Management 74
13. Certain Relationships and Related Transactions 75
Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 76
2
PART I
The statements contained in this Annual Report that are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933. These forward-looking statements may be identified by the use of
forward-looking terms such as "believes," "expects," "may," "will", "should" or
anticipates" or by discussions of strategy that involve risks and uncertainties.
From time to time, we have made or may make forward-looking statements, orally
or in writing. These forward-looking statements include statements regarding
anticipated future revenues, sales, operations, demand, competition, capital
expenditures, the deregulation of the LPG market in Mexico, the completion and
operations of the US - Mexico Pipeline, the Mexican Terminal Facilities and the
Saltillo Terminal Facilities, foreign ownership of LPG operations, credit
arrangements and other statements regarding matters that are not historical
facts, and involve predictions which are based upon a number of future
conditions that ultimately may prove to be inaccurate. Actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Factors that may cause or
contribute to such differences include those discussed under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as those discussed elsewhere in this Annual Report. We
caution you, however, that this list of factors may not be complete.
ITEM 1. BUSINESS.
INTRODUCTION
Penn Octane Corporation (the "Company"), formerly known as International
Energy Development Corporation ("International Energy"), was incorporated in
Delaware in August 1992. The Company has been principally engaged in the
purchase, transportation and sale of liquefied petroleum gas ("LPG"). From 1997
until March 1999, the Company was also involved in the provision of equipment
and services to the compressed natural gas ("CNG") industry. The Company's CNG
capabilities included the design, packaging, construction, operation and
maintenance of CNG fueling stations. In May 1999, the Company discontinued
operation of its CNG business and most of the Company's CNG assets were sold.
The Company owns and operates a terminal facility in Brownsville, Texas (the
"Brownsville Terminal Facility") and has a long-term lease agreement for
approximately 132 miles of pipeline from certain gas plants in Texas to the
Brownsville Terminal Facility (the "Pipeline"). The Company sells its LPG
primarily to P.M.I. Trading Limited ("PMI"), which is the exclusive importer of
LPG into Mexico and a subsidiary of Petroleos Mexicanos, the state-owned Mexican
oil company ("PEMEX"), for distribution in the northeast region of Mexico.
On October 21, 1993, International Energy purchased 100% of the common
stock of Penn Octane Corporation, a Texas corporation, and merged it into
International Energy as a division. As a result of the merger, the Company
assumed the lease agreement with Seadrift Pipeline Corporation ("Seadrift")
relating to the Pipeline which connects Exxon Company, U.S.A.'s ("Exxon") King
Ranch Gas Plant in Kleberg County, Texas and Duke Energy's La Gloria Gas Plant
in Jim Wells County, Texas, to the Company's Brownsville Terminal Facility. In
January 1995, the Board of Directors approved the change of the Company's name
to Penn Octane Corporation.
The Company commenced commercial operations for the purchase, transport and
sale of LPG in July 1994 upon completion of construction of the Brownsville
Terminal Facility. The primary market for the Company's LPG is the northeast
region of Mexico, which includes the states of Coahuila, Nuevo Leon and
Tamaulipas. The Company believes it has a competitive advantage in the supply
of LPG for the northeast region of Mexico as a result of the geographic
proximity of its Brownsville Terminal Facility to consumers of LPG in such major
Mexican cities as Matamoros, Reynosa and Monterrey. Since 1994, the Company's
primary customer for LPG has been PMI. Sales of LPG to PMI accounted for 97%,
99% and 99% of the Company's total revenues for the fiscal years ended July 31,
1997, 1998 and 1999, respectively.
In March 1997, the Company, through its wholly-owned subsidiary PennWilson
CNG, Inc., a Delaware corporation ("PennWilson"), acquired certain assets,
including inventory, equipment and intangibles, from Wilson Technologies
Incorporated ("WTI"), a company formerly engaged in the design, construction,
installation and maintenance of turnkey CNG fueling stations, hired certain of
WTI's former employees and commenced operations for the provision of equipment
and services used in the CNG industry. In May 1999, the Company discontinued
operation of its CNG business and most of the Company's CNG assets were sold.
See note D to the Consolidated Financial Statements.
3
The Company's principal executive offices are located at 900 Veterans
Boulevard, Suite 240, Redwood City, California 94063, and its telephone number
is (650) 368-1501. The offices of PennWilson are located at 12631 Imperial
Highway, Bldg. A, Suite 120, Santa Fe Springs, California 90670, and its
telephone number is (562) 929-1984. Effective November 1, 1999, the Company
will move its executive offices to Palm Desert, California.
LIQUEFIED PETROLEUM GAS
OVERVIEW. Since July 1994, the primary business of the Company has been
the purchase, transportation and sale of LPG. LPG is a mixture of propane and
butane principally used for residential and commercial heating and cooking.
Propane is also widely used as a motor fuel.
The primary market for the Company's LPG is the northeast region of Mexico,
which includes the states of Coahuila, Nuevo Leon and Tamaulipas. Mexico is the
largest market for LPG in the world. LPG is the most widely used domestic fuel
in Mexico and is the primary energy source for Mexican households using such
domestic fuels. Domestic consumption of LPG in Mexico increased from an average
of 362 million gallons per month in 1998 to an average of 382 million gallons
per month from January 1, 1999 to September 30, 1999, an estimated annual
increase of 5.5%. The future of LPG in Mexico continues to favor the Company
for the following reasons: i) as Mexico's domestic consumption of LPG
increases, Mexico's domestic production of LPG is expected to decline, ii)
limited sources of competitive LPG supply for importation into Mexico, iii) the
Mexican government's current plans to deregulate the LPG industry, iv) the
expanding use of propane as an automotive fuel, and v) the location of
Mexico's major domestic LPG production which is in the southeastern region of
Mexico combined with the lack of pipeline infrastructure within Mexico from
those production centers, resulting in higher distribution costs to transport
the LPG to areas where consumption is heaviest including the central, northern
and Pacific coast regions of Mexico.
The Company has been able to successfully compete with other LPG suppliers
in the provision of LPG to customers in northeast Mexico primarily as a result
of the Pipeline and the geographic proximity of its Brownsville Terminal
Facility to consumers of LPG in such major cities as Matamoros, Reynosa and
Monterrey. Prior to the commencement of operations by the Company at its
Brownsville Terminal Facility in 1994, LPG exports to northeast Mexico from the
United States had been transported by truck and rail primarily through Eagle
Pass, Texas which is approximately 240 miles northwest of Brownsville. The
Company's Brownsville Terminal Facility provides significantly reduced trucking
distances than Ciudad Madero and Piedras Negras, the principal LPG supply
centers (other than Brownsville) used by PMI, to points of distribution in
northeast Mexico. The Company's Brownsville Terminal Facility is approximately
331 miles closer to Matamoros than either Ciudad Madero or Piedras Negras, and
approximately 57 miles closer to Monterrey than Piedras Negras. Upon the
completion of the Company's LPG expansion program (see "LPG Expansion Program"
below), the Company believes that it will further enhance its strategic position
for the supply of LPG in Mexico.
THE BROWNSVILLE TERMINAL FACILITY. The Company's Brownsville Terminal
Facility occupies approximately 31 acres of land located adjacent to the
Brownsville Ship Channel, a major deep-water port serving northeastern Mexico,
including the city of Monterrey, and southeastern Texas. Total rated storage
capacity of the Brownsville Terminal Facility is approximately 675,000 gallons
of LPG. The Brownsville Terminal Facility includes eleven storage and mixing
tanks, four mixed product truck loading racks, one specification product propane
loading rack and two racks capable of receiving LPG delivered by truck. The
truck loading racks are linked to a computer-controlled loading and remote
accounting system. The Brownsville Terminal Facility also contains a railroad
spur, which the Company expects to have operational during the first six months
of fiscal 2000, primarily to supply LPG to the Saltillo, Mexico region by way of
railroad (see "LPG Expansion Program" below).
The Company leases the land on which the Brownsville Terminal Facility is
located from the Brownsville Navigation District (the "District") under a lease
agreement (the "Brownsville Lease") that expires on October 15, 2003. The
Brownsville Lease contains a pipeline easement to the Brownsville Navigation
District oil dock.
4
The Company anticipates renewing the Brownsville Lease prior to its
expiration for the same term as the Pipeline Lease Amendment (as defined below).
The Brownsville Lease provides, among other things, that if the Company complies
with all the conditions and covenants therein, the leasehold improvements made
to the Brownsville Terminal Facilities by the Company may be removed from the
premises or otherwise disposed of by the Company at the termination of the
Brownsville Lease. In the event of a breach by the Company of any of the
conditions or covenants of the Brownsville Lease, all improvements owned by the
Company and placed on the premises shall be considered part of the real estate
and shall become the property of the District.
THE PIPELINE. The Company has a lease agreement (the "Pipeline Lease")
with Seadrift, a subsidiary of Union Carbide Corporation ("Union Carbide"), for
approximately 132 miles of pipeline which connects Exxon's King Ranch Gas Plant
in Kleberg County, Texas and Duke Energy Corporation's La Gloria Gas Plant in
Jim Wells County, Texas, to the Company's Brownsville Terminal Facility. As
provided for in the Pipeline Lease, the Company has the right to use the
Pipeline solely for the transportation of LPG and refined products belonging
only to the Company and not to any third party.
The Pipeline Lease currently expires on December 31, 2013, pursuant to an
amendment (the "Pipeline Lease Amendment") entered into between the Company and
Seadrift on May 21, 1997, which became effective on January 1, 1999 (the
"Effective Date"). The Pipeline Lease Amendment provides, among other things,
for additional storage access and inter-connection with another pipeline
controlled by Seadrift, thereby providing greater access to and from the
Pipeline. Pursuant to the Pipeline Lease Amendment, the Company's fixed annual
fee associated with the use of the Pipeline was increased by $350,000, less
certain adjustments during the first two years from the Effective Date and the
Company is required to pay for a minimum volume of storage of $300,000 per year,
beginning the second year from the Effective Date. In addition, the Pipeline
Lease Amendment provides for variable rental increases based on monthly volumes
purchased and flowing into the Pipeline and storage utilized. The Company
believes that the Pipeline Lease Amendment provides the Company increased
flexibility in negotiating sales and supply agreements with its customers and
suppliers. The Company has made all payments required under the Pipeline Lease
Amendment.
Present Pipeline capacity is approximately 265 million gallons per year.
In fiscal year 1999, the Company sold 117.0 million gallons of LPG which flowed
through the Pipeline. The Company can increase the Pipeline's capacity through
the installation of additional pumping equipment. (See "LPG Expansion Program"
below.)
In connection with the Company's LPG expansion program (see "LPG Expansion
Program" below), the Company intends to obtain additional lease extensions for
the Pipeline, which would enable the Company to maintain its LPG business beyond
the term of the Pipeline Lease Amendment.
DISTRIBUTION. Historically, all of the LPG from the Pipeline has been
delivered to the Company's customers at the Brownsville Terminal Facility and
then transported by truck to the U.S. Rio Grande Valley and northeast Mexico by
the customers. The Company is currently completing an expansion program (see
"LPG Expansion Program" below), to construct extensions to the Pipeline from the
Brownsville Terminal Facility to the railroad spur located at the Brownsville
Terminal Facility. This would enable the Company to supply LPG by railcar to
customers in Mexico, the United States or elsewhere. Through the Lease
Agreements (see "LPG Expansion Program" below) the Company is also constructing
a terminal facility in Matamoros, Mexico and a pipeline to connect such a
terminal facility with the Brownsville Terminal Facility. This will enable the
Company to transport LPG by pipeline directly into northeast Mexico for
subsequent sale and distribution by truck from the Matamoros terminal facility.
The Company is also constructing a terminal facility in Saltillo, Mexico which
will enable the Company to deliver LPG from the Brownsville Terminal Facility by
railcar to the Saltillo terminal facility for subsequent distribution by truck.
The Company owns 14 trailers, which are approved for the transport of
petrochemicals over U.S. roadways. These trailers have been used to transport
LPG on behalf of PMI from the Brownsville Terminal Facility to points of
distribution in northeast Mexico.
Since November 1997, the Company has been in a lease arrangement with Auto
Tanques Nieto ("Nieto") to lease the Company's trailers to be used in connection
with transporting LPG from the Brownsville Terminal Facility to points of
distribution in Mexico. Nieto is one of Mexico's largest transportation
companies and provides transportation services to PMI for the LPG purchased from
the Company.
5
LPG SALES AGREEMENT. Since July 1994, the Company has been a supplier of
LPG to PMI, which, under current Mexican law, has exclusive responsibility for
importing LPG into Mexico. PMI is the Company's largest customer, with sales of
LPG to PMI accounting for 97%, 99% and 99% of the Company's total revenues for
the fiscal years ended July 31, 1997, 1998 and 1999, respectively. The Company
and PMI entered into a sales agreement (the "PMI Sales Agreement") for the
period from October 1, 1998 through September 30, 1999, under which PMI has
committed to purchase from the Company a minimum volume of LPG each month, mixed
to PMI's specifications, subject to seasonal variability, with a total committed
minimum annual volume of 69.0 million gallons, similar to minimum volume
requirements under the previous sales agreement with PMI effective during the
period from October 1, 1997 through September 30, 1998. During June 1999, the
PMI Sales Agreement was amended (the "PMI Sales Agreement Amendment") to extend
the expiration date to March 31, 2000 and to provide the Company with additional
margins for any volume exceeding 7.0 million gallons per month during the summer
period (April - September) and 9.0 million gallons per month during the winter
period (October - March). Under the PMI Sales Agreement Amendment, PMI is
obligated to purchase a minimum volume of 45.0 million gallons during October
1999 through March 2000. Under the PMI Sales Agreements during the periods from
October 1, 1997 through September 30, 1998, and October 1, 1998 through
September 30, 1999, actual volume sold was 94.0 million gallons and 124.0
million gallons, respectively, an increase over the committed minimum
requirements under the PMI Sales Agreements of 36% and 80%, respectively.
Historically, the Company and PMI have renewed the PMI Sales Agreement
prior to expiration. The Company intends to negotiate a renewal of the current
PMI Sales Agreement prior to the expiration of that agreement.
LPG EXPANSION PROGRAM. On July 26, 1999, the Company was granted a permit
by the United States Department of State authorizing the Company to construct,
maintain and operate two pipelines (the "US Pipeline") crossing the
international boundary line between the United States and Mexico (from the
Brownsville Terminal Facilities near the Port of Brownsville, Texas and El
Sabino, Mexico) for the transport of LPG and refined products (motor gasoline
and diesel fuel) [the "Refined Products"].
Previously, on July 2, 1998, Penn Octane de Mexico, S.A. de C.V.
("PennMex"), an affiliated company (see "Foreign Ownership of LPG Operations"),
received a permit from the Comision Reguladora de Energia (the "Mexican Energy
commission") to build and operate one pipeline to transport LPG (the "Mexican
Pipeline") [collectively, the US Pipeline and the Mexican Pipeline are referred
to as the "US-Mexico Pipeline"] from El Sabino (at the point north of the Rio
Bravo) and to a terminal facility in the City of Matamoros, State of Tamaulipas,
Mexico (the "Mexican Terminal Facilities").
As a result of the above, the Company will be able to transport LPG
directly from the US into Mexico through the US-Mexico Pipeline and to the
Mexican Terminal Facilities (the "Expansion"). Management believes that as a
result of the Expansion, the Company will have additional strengths due to its
ability to: i) penetrate further into Mexico, ii) provide greater volumes of LPG
as a result of reduced cross border trucking delays and greater access to
Mexican distribution resources, and iii) the potential to achieve greater
margins on its LPG sales.
In addition to the Expansion, Tergas has begun construction of an
additional LPG terminal facility in Saltillo, Mexico (the "Saltillo Terminal
Facilities") for an estimated cost of $500,000. The Saltillo Terminal
Facilities, when complete, will allow for the distribution of LPG by railcars,
which will directly link the Company's Brownsville Terminal Facility and the
Saltillo Terminal Facilities. The Saltillo Terminal Facilities will contain
storage to accommodate approximately 100,000 gallons of LPG. As a result of the
Saltillo Terminal Facilities, the Company believes that it will be able to
further penetrate the Mexican market for the sale of LPG. Initially, the Company
believes that the Saltillo Terminal Facilities, when complete, will generate
additional sales of 5.0 million gallons monthly, independent of the Expansion.
On May 31, 1999, Tergas, S.A. de C.V. ("Tergas") an affiliated Company (see
"Foreign Ownership of LPG Operations"), was formed for the purpose of operating
LPG terminal facilities in Mexico, including the Mexican Terminal Facilities and
the planned Saltillo Terminal Facilities. The Company anticipates that Tergas
will be issued the permit to operate the Mexican Terminal Facilities.
6
In connection with the Expansion and the Saltillo Terminal Facilities, the
Company is also in the process of completing upgrades at the Brownsville
Terminal facility (the "Terminal Upgrades") and in January 2000 is planning to
begin certain enhancements to the Pipeline (the "Pipeline Enhancements"). Among
other things, the Terminal Upgrades will include the installation of additional
piping to connect the Pipeline to the loading dock at the railroad spur located
at the Brownsville Terminal Facility and construction of railcar loading
facilities to enable the Company to receive or deliver LPG for distribution of
LPG by railcar into Mexico and to the Saltillo Terminal Facilities. The Company
expects the Terminal Upgrades to be completed by December 1999 at a total cost
of approximately $200,000. Upon the completion of the Terminal Upgrades and the
Saltillo Terminal Facilities, the Company will be able to distribute LPG to
Mexico by railcars, which will directly link the Company's Brownsville Terminal
Facility and the Saltillo Terminal Facilities.
The Pipeline Enhancements will include the installation of additional
piping, meters, valves, analyzers and pumps along the Pipeline to increase the
capacity of the Pipeline and make the Pipeline bi-directional. The Pipeline
Enhancements will increase the capacity of the Pipeline to 360 million gallons
per year, and will provide the Company with access to a greater number of LPG
suppliers and additional storage facilities. The Company expects to begin the
Pipeline Enhancements in January 2000 and expects to be completed three months
thereafter at a cost of approximately $1.5 million.
In connection with the Expansion, the Company and CPSC International, Inc.
("CPSC") entered into two separate Lease / Installation Purchase Agreements, as
amended ("the Lease Agreements"), whereby CPSC will construct and operate the
US-Mexico Pipeline (including an additional pipeline to accommodate Refined
Products) and the Mexican Terminal Facilities and lease these assets to the
Company. Under the terms of the Lease Agreements, the Company will pay monthly
rentals of approximately $157,000, beginning the date that the US-Mexico
Pipeline and Mexican Terminal Facilities are physically capable to transport and
receive LPG in accordance with technical specifications required (the
"Substantial Completion Date"). In addition the Company has agreed to provide a
lien on certain assets, leases and contracts, which are currently pledged to RZB
Finance, L.L.C. ("RZB") and provide CPSC with a letter of credit of
approximately $1.0 million. The Company is currently in negotiations with RZB
and CPSC concerning RZB's subordination of RZB's lien on certain assets, leases
and contracts. The Company also has the option to purchase the US-Mexico
Pipelines and the Mexican Terminal Facilities at the end of the 10th year
anniversary and 15th year anniversary for $5.0 million and $100,000,
respectively. Under the terms of the Lease Agreements, CPSC is required to pay
all costs associated with the construction and maintenance of the US-Mexico
Pipeline and Mexican Terminal Facilities.
On September 16, 1999, the Lease Agreements were amended whereby CPSC
agreed to accept 500,000 shares of common stock of the Company owned by the
President of the Company (the "Collateral") in place of the letter of credit
originally required under the Lease Agreements. The Collateral shall be
replaced by a letter of credit or cash collateral over a ten month period
beginning monthly after the Substantial Completion Date. In addition, the
Company has agreed to guaranty the value of the Collateral based on the fair
market value of the Collateral for up to $1.0 million.
For financial reporting purposes, the Lease Agreements are capital leases.
Therefore the assets and related liabilities will be recorded in the Company's
balance sheet on the Substantial Completion Date (see note N to the Consolidated
Financial Statements).
On September 16, 1999, the Company and CPSC entered into a purchase and
option agreement whereby the Company will purchase a 30% interest (the
"Purchased Interests") in the US-Mexico Pipeline and Mexican Terminal Facilities
for $3.0 million. In connection with the Purchased Interests, the Company will
not assume any costs associated with CPSC's obligations under the Lease
Agreements until the Substantial Completion Date is reached, and the Company
will receive a minimum of $54,000 per month from the Company's payments under
the Lease Agreements (approximately 34% of the Company's monthly lease
obligations under the Lease Agreements). The Company is required to pay for the
Purchased Interests on January 3, 2000, or 10 days subsequent to the Substantial
Completion Date, whichever is later (the "Closing Date"). To secure the payment
of the $3.0 million for the Purchased Interests, the Company has agreed to
assign its interest in the net cash proceeds to be received from the
IBC-Brownsville award judgment (the "Judgment") of approximately $3.0 million
(see Item 3, "Legal Proceedings"). In the event that the net cash received from
the Judgment is less than $3.0 million, the Company will be required to pay the
difference. In addition, if the Judgment is not paid by the Closing Date, CPSC
may require the Company to make immediate payment in exchange for the return of
the Judgment assignment.
7
Included in the agreement for the Purchased Interests, the Company has two
option agreements (the "Options") whereby the Company has the right to acquire
an additional 20% and an additional 50% interest in the Lease Agreements for
$2.0 million and $7.0 million, respectively, within 90 days from the Closing
Date. In the event the Company exercises the additional 20% option, then the
Purchase Interests will total 50% and the Company will receive a minimum of
$90,000 per month from the Company's payments under the Lease Agreements
(approximately 57% of the Company's monthly lease obligations under the Lease
Agreements). The Company paid $50,000 to obtain the Options.
The actual costs to complete the US-Mexico Pipeline and Mexican Terminal
Facilities are the sole responsibility of CPSC ("the Costs"). In addition, the
Company has spent approximately $512,000 as of July 31, 1999 related to the
Costs, which are included in capital construction in progress in the
consolidated balance sheet.
PennMex and/or Tergas are currently the owners of the land which is being
utilized for the Mexican Pipeline and Mexican Terminal Facilities, own the
leases associated with the Saltillo Terminal Facilities, have been granted the
permit for the Mexican Pipeline and have been granted and/or are expected to be
granted permits to operate the Mexican Terminal Facilities and the Saltillo
Terminal Facilities. In addition, the Company has advanced funds to PennMex
and/or Tergas in connection with the purchase of assets associated with the
Mexican Pipeline, Mexican Terminal Facilities and the Saltillo Terminal
Facilities (see note O to the Consolidated Financial Statements).
FOREIGN OWNERSHIP OF LPG OPERATIONS. Both PennMex and Tergas are Mexican
companies, which are owned 90% and 95%, respectively, by Jorge R. Bracamontes,
an officer and director of the Company ("Bracamontes") and the balance by other
Mexican citizens ("Minority Shareholders"). Under current Mexican law (see
"Deregulation of the LPG Market in Mexico" below), foreign ownership of Mexican
entities involved in the distribution of LPG and the operation of LPG terminal
facilities are prohibited. However, foreign ownership is permitted in the
transportation and storage of LPG. In October 1999, the Company received a
verbal opinion from the Foreign Investment Section of the Department of Commerce
and Industrial Development ("SECOFI"), that the Company's planned strategy of
selling LPG to PMI at the US border and then transporting the LPG through the
Mexican portion of the US - Mexico Pipeline to the Mexican Terminal Facilities
would comply with the LPG regulations. The Company intends to request a ruling
(the "Ruling") from SECOFI confirming the verbal opinion. There is no certainty
that the Company will obtain the Ruling, and if obtained, that the Ruling will
not be affected by future changes in Mexican laws.
The Company, Bracamontes and the Minority Shareholders have entered into
agreements whereby the Company may acquire up to 75% of the outstanding shares
of PennMex for a nominal amount, subject to among other things, the receipt of
the Ruling. The Company intends to contract with Tergas for services to be
performed by Tergas at the Mexican Terminal Facilities and the Saltillo Terminal
Facilities.
The operations of PennMex and/or Tergas are subject to the tax laws of
Mexico, which among other things, require that Mexican subsidiaries of foreign
entitles comply with transfer pricing rules, the payment of income and/or asset
taxes, and possibly taxes on distributions in excess of earnings. In addition,
distributions to foreign corporations may be subject to withholding taxes,
including dividends and interest payments.
DEREGULATION OF THE LPG MARKET IN MEXICO. The Mexican petroleum industry
is governed by the Ley Reglarmentaria del Articulo 27 Constitutional en el Ramo
del Petroleo (the Regulatory Law to Article 27 of the Constitution of Mexico
concerning Petroleum Affairs (the "Regulatory Law")), and Ley Orgonica del
Petroleos Mexicanos y Organismos Subsidiarios (the Organic Law of Petroleos
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 LPG activities related to transportation and storage. Upon the completion of
Deregulation, Mexican entities will be able to import LPG into Mexico. However,
foreign entities will be prohibited from participating in the distribution of
LPG in Mexico. Accordingly, the Company expects to sell LPG directly to
independent Mexican distributors as well as PMI. Upon Deregulation, it is
anticipated that the independent Mexican distributors will be required to obtain
authorization from the Mexican government for the importation of LPG prior to
entering into contracts with the Company.
8
Pursuant to the PMI Sales Agreement upon Deregulation by the Mexican
government of the LPG market, the Company will have the right to renegotiate the
PMI Sales Agreement. Depending on the outcome of any such renegotiation, the
Company expects to either (i) enter into contracts directly with independent
Mexican LPG distributors located in the northeast region of Mexico, or (ii)
modify the terms of the PMI Sales Agreement to account for the effects of
Deregulation.
Currently the Company sells LPG to PMI at its Brownsville Terminal
Facility. Upon the completion of the US - Mexico Pipeline and Mexican Terminal
Facilities, the Company will sell LPG to PMI at the U.S. border and transport
the LPG to the Mexican Terminal Facilities through the US-Mexico Pipeline. Upon
Deregulation, the Company intends to sell to independent Mexican LPG
distributors as well as to PMI.
LPG SUPPLY. Historically, the Company has purchased LPG from Exxon, mixed
to PMI's specifications, at variable posted prices below those provided for in
the PMI Sales Agreement thereby providing the Company with a fixed margin over
the cost of LPG. From June 1995 to July 1996, and from November 1, 1996 to
early November 1997, PMI purchased LPG from Exxon on the Company's behalf under
the terms of the Company's supply agreement with Exxon. PMI invoiced the
Company for the LPG at the price paid to Exxon and title to the LPG passed to
the Company as the LPG entered the Pipeline. In October 1997, the Company
obtained a $6.0 million credit facility (the "RZB Credit Facility") with RZB
which was increased to $10.0 million during October 1999, and which can be
terminated at any time by RZB. As a result of the RZB Credit Facility, PMI no
longer provides any financing on behalf of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Credit Arrangements." During October 1998,
the Company entered into a monthly supply agreement with Exxon pursuant to which
Exxon agreed to supply minimum volumes of LPG to the Company. Effective
November 1, 1998, the Company entered into a supply agreement with Exxon to
purchase minimum monthly volumes of LPG through September 1999.
Effective October 1, 1999 (the "Exxon Closing Date"), the Company and Exxon
entered into a ten year LPG supply contract (the "Exxon Supply Contract"),
whereby Exxon has agreed to supply and the Company has agreed to take, the
supply of propane and butane available at Exxon's King Ranch Gas Plant (the
"Plant") which is estimated to be between 10.1 million gallons per month and
13.9 million gallons per month blended in accordance with the specifications
outlined under the PMI Sales Agreement (the "Plant Commitment"), with a minimum
of 10.1 million gallons per month guaranteed by Exxon to be provided to the
Company.
In addition, under the terms of the Exxon Supply Contract, Exxon will make
operational its Corpus Christi Pipeline (the "CCPL") which when completed, will
allow the Company to acquire an additional supply of propane from other propane
suppliers located near Corpus Christi, Texas (the "Additional Propane Supply),
and bring the Additional Propane Supply to the Plant (the "CCPL Supply") for
blending to the proper specifications outlined under the PMI Sales Agreement and
then delivered into the Pipeline. In connection with the CCPL Supply, the
Company has agreed to supply a minimum of 7.7 million gallons into the CCPL
during the first quarter from the date that the CCPL is operational,
approximately 92 million gallons the following year and 122 million gallons each
year thereafter and continuing for four years.
The Exxon Supply Contract currently requires that the Company purchase a
minimum supply of LPG, which is significantly higher than committed sales
volumes under the PMI Sales Agreement. In addition, the Company is required to
pay additional fees associated with the Additional Propane Supply, which will
increase its LPG costs by a minimum of $.01 per gallon without considering the
actual cost of the Additional Supply charged to the Company.
In September 1999, the Company and PG&E NGL Marketing, L.P. ("PG&E")
entered into a three year supply agreement (the "PG&E Supply Agreement")
whereby PG&E has agreed to supply and the Company has agreed to take, a monthly
average of 2.5 million gallons (the "PG&E Supply") of propane. In addition,
PG&E is in the process of obtaining up to 3.8 million gallons per month of
additional propane commitments, which if successful by December 31, 1999, will
be an adjustment to the PG&E Supply. Under the PG&E Supply Agreement, the
Company is not obligated to purchase the PG&E Supply until the CCPL is
operational, anticipated to be during October 1999.
Under the terms of the PG&E Supply Agreement, the PG&E Supply will be
delivered to the CCPL, as described above, and blended to the proper
specifications as outlined under the PMI Sales Agreement. In addition, by
utilizing the PG&E Supply, the Company would satisfy the CCPL Supply
requirements under the Exxon Supply Contract.
In connection with the Plant Commitment and the PG&E Supply, the Company
anticipates lower gross margins on its sales of LPG under the PMI Sales
Agreement of approximately 10% - 40% as a result of increased LPG costs compared
with the previous agreements to purchase LPG. The Company may incur significant
additional costs associated with storage, disposal and/or changes in LPG prices
resulting from the excess of the Plant Commitment and PG&E Supply over actual
sales volumes.
9
The Company believes that the terms of the Exxon Supply Contract and the
PG&E Supply Contract are commensurate with the anticipated future demand for LPG
in Mexico and that any additional costs associated with the Additional Supply as
well as the increase in the costs for LPG over previous agreements will be
offset by increased sales margins on LPG sold to the Company's customers. The
Company further believes that any additional costs incurred in connection with
the Plant Commitment and PG&E Supply, if any, will be short-term in nature.
The ability of the Company to increase sales of LPG into Mexico in the
future is largely dependent on the Company's ability to negotiate future
contracts with PMI and/or with local Mexican distributors once Deregulation in
Mexico is implemented. In addition, there can be no assurance that the Company
will be able to obtain terms as favorable as the PMI Sales Agreement. In the
event that the Company is unable to meet its intended LPG sales objectives, then
the Company may incur significant losses as a result of not being able to meet
its minimum purchase requirements under the Exxon Supply Contract and the PG&E
Supply Contract and/or the costs of LPG may be in excess of prices received on
sales of LPG.
Furthermore, until the US-Mexico Pipeline and Mexican Terminal Facilities
and Saltillo Terminal Facilities are completed, the Company will be required to
deliver the minimum monthly volumes from its Brownsville Terminal Facility.
Historically, sales of LPG from the Brownsville Terminal Facilities have not
exceeded 11.1 million gallons per month. In addition, breakdowns along the
planned distribution route for the LPG once purchased from PG&E and/or Exxon
and/or other suppliers, may limit the ability of the Company to accept the Plant
Commitment, CCPL Supply and/or the PG&E Supply.
Under the terms of the Exxon Supply Contract and the PG&E Supply Contract,
the Company must provide letters of credit in amounts equal to the cost of the
product purchased. The amount of product to be purchased under the Exxon Supply
Contract and the PG&E Supply Contract are significantly higher than historical
amounts. 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 and the Company may require additional sources of
financing to meet the letter of credit requirements under the Exxon Supply
Contract and the PG&E Supply Agreement. Furthermore, upon the implementation of
Deregulation the Company anticipates entering into contracts with Mexican
customers which require payments in pesos. In addition, the Mexican customers
may be limited in their ability to provide adequate financing.
The LPG purchased from Exxon and/or PG&E is delivered to the Company at the
opening of the Pipeline in Kleberg County, Texas, and then transported through
the Pipeline to the Brownsville Terminal Facility.
As a result of the Exxon Supply Contract and the PG&E Supply Contract, the
Company believes that it has an adequate supply of LPG to satisfy the
requirements of PMI under the PMI Sales Agreement and to meet its future sales
obligations, if any, upon the expiration of the PMI Sales Agreement. Due to the
strategic location of the Company's pipelines and terminal facilities, the
Company believes that it will be able to achieve higher margins on the sale of
LPG in the future.
The Company is also able to purchase LPG from suppliers other than Exxon
and/or PG&E for distribution through the Pipeline. In determining whether any
other suppliers will be utilized, the Company will consider the applicable
prices charged as well as any additional fees that may be required to be paid
under the Pipeline Lease Amendment.
COMPETITION
LPG. The Company competes with several major oil and gas and trucking
companies for the export of LPG from Texas to northeastern Mexico. In many
cases, these companies own or control their LPG supply and have significantly
greater financial and human resources than the Company.
The Company competes in the supply of LPG on the basis of price. As such,
LPG providers who own or control their LPG supply may have a competitive
advantage over the Company. However, in connection with the Exxon Supply
Contract and the PG&E Supply Agreement, the Company believes that it has control
over a significant amount of LPG supply.
10
Pipelines generally provide a relatively low-cost alternative for the
transportation of petroleum product; however, at certain times of the year,
trucking companies may reduce their rates to levels lower than those charged by
the Company. The Company believes that such reductions are limited in both
duration and volumes and that on an annualized basis the Pipeline and when
completed, the US-Mexico Pipeline, will provide a transportation cost advantage
over the Company's competitors who utilize truck transportation.
The Company believes that its Pipeline and the location of the Brownsville
Terminal Facility and the successful implementation of the Expansion and the
Saltillo Terminal Facilities, leave it well positioned to successfully compete
for LPG supply contracts with PMI and upon deregulation of the Mexican LPG
market with local distributors in northeast Mexico.
ENVIRONMENTAL AND OTHER REGULATIONS
The operations of the Company are subject to certain federal, state and
local laws and regulations relating to the protection of the environment, and
future regulations may impose additional requirements. Although the Company
believes that its operations are in compliance with applicable environmental
laws and regulations, because the requirements imposed by environmental laws and
regulations are frequently changed, the Company is unable to predict with
certainty the ultimate cost of compliance with such requirements and its effect
on the Company's operations and business prospects.
The Company's Brownsville Terminal Facility operations are subject to
regulation by the Texas Railroad Commission. The Company believes it is in
compliance with all applicable regulations of the Texas Railroad Commission.
In connection with the construction and operation of the US-Mexico Pipeline
and the Mexican Terminal Facilities, the Company is not responsible for ensuring
that it is in compliance with applicable US and/or Mexican laws. CPSC has
assumed all the responsibility for constructing and operating the US-Mexico
Pipeline and Mexican Terminal Facilities in accordance with applicable laws and
regulations. The Company believes and CPSC has represented that the current
designs for the construction and operation of the US-Mexico Pipeline and Mexican
Terminal Facilities will be in compliance with all applicable US and/or Mexican
laws. However, there can be no assurance that these laws will not change in the
future, or if such a change were to occur, that the ultimate cost of compliance
with such requirements and its effect on the Company's operations and business
prospects would not be significant.
EMPLOYEES
As of July 31, 1999, the Company had 16 employees, including two in
finance, seven in sales and administration, and seven in production. In
addition, the Company occasionally retains subcontractors and consultants in
connection with its operations.
The Company has not experienced any work stoppages and considers relations
with its employees to be satisfactory.
11
ITEM 2. PROPERTIES.
As of July 31, 1999, the Company owned or leased the following facilities:
APPROXIMATE LEASED OR
LOCATION TYPE OF FACILITY SIZE OWNED
Brownsville, Texas Pipeline and Storage Facility, On-site 31 acres Leased(1)(2)
Administrative Offices
Brownsville, Texas Brownsville Terminal Facility Building 19,200 square feet Owned(1)(2)
Extending from Kleberg Seadrift Pipeline 132 miles Leased(2)(3)
County, Texas to Cameron
County, Texas
Santa Fe Springs, Administrative Offices 1,500 square feet Leased(2)(4)
California
Redwood City, California Penn Octane Corporation Headquarters 1,559 square feet Leased(2)(5)
________________
(1) The Company's lease with respect to the Brownsville Terminal Facility
expires on October 15, 2003.
(2) Pursuant to a $10.0 million credit facility, the Company has granted a
mortgage security interest and assignment in any and all of the Company's
real property, buildings, pipelines, fixtures, and interests therein,
including, without limitation, the lease agreement with the Navigation
District of Cameron County, Texas, and the Pipeline Lease (the "Liens"). In
connection with the Lease Agreements, the Company is negotiating the
assignment of a portion and/or all of the Liens. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources - Credit Arrangements."
(3) The Company's lease with Seadrift expires December 31, 2013.
(4) The Company's lease with respect to the Santa Fe Springs, California
facilities expires October 31, 1999, at which time the Company will
continue to rent the facility on a month to month basis.
(5) The Company's lease with respect to its headquarters offices is in the name
of Jerome B. Richter, the Company's Chairman, President and Chief Executive
Officer. The lease expires October 31, 1999. Beginning November 1999, the
Company will relocate its headquarters offices to Palm Desert, California.
The lease expires October 31, 2002. The monthly lease payments are
approximately $3,000 a month.
For information concerning the Company's operating lease commitments, see note N
to the Consolidated Financial Statements.
12
ITEM 3. LEGAL PROCEEDINGS.
On August 24, 1994, the Company filed an Original Petition and Application
for Injunctive Relief against the International Bank of Commerce-Brownsville
("IBC-Brownsville"), a Texas state banking association, seeking (i) either
enforcement of a credit facility between the Company and IBC-Brownsville or a
release of the Company's property granted as collateral thereunder consisting of
significantly all of the Company's business and assets; (ii) declaratory relief
with respect to the credit facility; and (iii) an award for damages and
attorneys' fees. After completion of an arbitration proceeding, on February 28,
1996, the 197th District Court in and for Cameron County, Texas entered judgment
(the "Judgment") confirming the arbitral award for $3.2 million to the Company
by IBC-Brownsville.
In connection with the lawsuit, IBC-Brownsville filed an appeal with the
Texas Court of Appeals on January 21, 1997. The Company responded on February
14, 1997. On September 18, 1997, the appeal was heard by the Texas Court of
Appeals and on June 18, 1998, the Texas Court of Appeals issued its opinion in
the case, ruling essentially in favor of the Company. IBC-Brownsville sought a
rehearing of the case on August 3, 1998. On December 30, 1998, the Court denied
the IBC-Brownsville request for rehearing. On February 16, 1999,
IBC-Brownsville filed a petition for review with the Supreme Court of Texas. On
May 10, 1999, the Company responded to the Supreme Court of Texas', request for
response of the Petitioner's petition for review. On May 27, 1999,
IBC-Brownsville filed a reply with the Supreme Court of Texas to the Company's
response of the Petitioner's petition for review. On June 10, 1999, the Supreme
Court of Texas denied the Petitioner's petition for review. During July 1999,
the Petitioner filed an appeal with the Supreme Court of Texas to rehear the
Petitioner's petition for review. On August 26, 1999, the Supreme Court of
Texas upheld its decision to deny the Petitioner's petition for review. As of
July 31, 1999, the net amount of the Judgment is approximately $3.9 million
which is comprised of (i) the original judgment, including attorneys' fees, (ii)
post-award interest, and (iii) cancellation of the note and accrued interest
payable to IBC-Brownsville, less attorneys' fees. There is no certainty that
IBC-Brownsville will not continue to seek other legal remedies against the
Judgment.
For the year ended July 31, 1999, the Company recognized a gain of
approximately $987,000, which represents the amount of the Judgment which was
recorded as a liability on the Company's balance sheet at December 31, 1998 (see
note S to the Consolidated Financial Statements). The remaining net amount of
the Judgment to be realized by the Company is approximately $3.9 million less
attorney's fees. The Company will recognize the remaining amount of the
Judgment when it realizes the proceeds associated with the Judgment.
On March 16, 1999, the Company settled in mediation a lawsuit with its
former chairman of the board, Jorge V. Duran. In connection therewith and
without admitting or denying liability the Company agreed to pay Mr. Duran
approximately $456,300 in cash and common stock of the Company of which $100,000
is to be paid by the Company's insurance carrier. Litigation costs totaled
$221,391. The Company has agreed to register the stock in the future.
On October 14, 1998, a complaint was filed by Amwest Surety Insurance
Company ("Amwest") naming as defendants, among others, PennWilson and the
Company seeking reimbursement for payments made to date by Amwest of
approximately $160,000 on claims made against the performance and payment bonds
in connection with services provided by suppliers, laborers and other materials
and work to complete the NYDOT contract (Vendors). These amounts were
previously recorded in the Company's balance sheet at the time of the complaint.
In addition, Amwest was seeking pre-judgment for any amounts ultimately paid by
Amwest relating to claims presented to Amwest against the performance and
payment bonds, but have not yet been authorized or paid to date by Amwest. In
May 1999, the Company and PennWilson reached a settlement agreement with Amwest
whereby Amwest will be reimbursed by PennWilson $160,000 for the payments, made
to the Vendors, with the Company acting as guarantor. Upon satisfactory
payment, Amwest will dismiss its pending claims related to the payment bond. On
October 12, 1999, a Demand for Arbitration of $780,767 was filed by A.E. Schmidt
Environmental against Amwest, PennWilson and the Company on the performance bond
pursuant to the NYDOT contract. The Company is currently considering its legal
options and intends to vigorously defend against the claims made against the
performance bond but not yet paid by Amwest.
13
The Company and its subsidiaries are also involved with other proceedings,
lawsuits and claims. The Company is of the opinion that the liabilities, if
any, ultimately resulting from such proceedings, lawsuits and claims should not
materially affect its consolidated financial position.
For further information concerning the aforementioned legal proceedings,
see note N of the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the year ended July 31, 1999, the Company did not hold an annual
meeting of its stockholders. The Company intends to hold its next annual
meeting during the fiscal year ending July 31, 2000.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock began trading in the over-the-counter ("OTC")
market on the Nasdaq SmallCap Market under the symbol "POCC" in December 1995.
The following table sets forth the reported high ask and low bid quotations
of the common stock for the periods indicated. Such quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions and may
not necessarily represent actual transactions.
LOW HIGH
------ ------
FISCAL YEAR ENDED JULY 31, 1998:
First Quarter. . . . . . . . . . $4.750 $7.000
Second Quarter . . . . . . . . . 4.250 6.063
Third Quarter. . . . . . . . . . 3.625 5.875
Fourth Quarter . . . . . . . . . 2.875 5.875
FISCAL YEAR ENDED JULY 31, 1999:
First Quarter. . . . . . . . . . $0.875 $3.875
Second Quarter . . . . . . . . . 0.500 2.000
Third Quarter. . . . . . . . . . 1.313 2.500
Fourth Quarter . . . . . . . . . 1.313 2.531
On September 30, 1999, the closing bid price of the common stock as
reported on the Nasdaq SmallCap Market was $3.94 per share. On September 30,
1999, the Company had 12,720,497 shares of common stock outstanding and
approximately 324 holders of record of the common stock.
The Company has not paid and does not intend to pay any common stock
dividends to stockholders in the foreseeable future and intends to retain any
future earnings for capital expenditures and otherwise to fund the Company's
operations.
RECENT SALES OF UNREGISTERED SECURITIES
- -------------------------------------------
On July 15, 1999, the Company issued 50,000 shares of common stock of the
Company and warrants to purchase 25,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 15, 2002 for an amount
of $100,000.
On July 16, 1999, the Company issued 100,000 shares of common stock of the
Company and warrants to purchase 50,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 16, 2002 for an amount
of $200,000.
On July 21, 1999, the Company issued 40,000 shares of common stock of the
Company and warrants to purchase 20,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 21, 2002 for an amount
of $90,000.
On July 29, 1999 and July 30, 1999, the Company issued 37,500, and 362,500
shares of common stock of the Company and warrants to purchase 18,750 and
181,250 shares of common stock each with an exercise price of $3.00 per warrant
and an expiration date of July 29,2003 and July 30, 2003 for an amount of
$600,000 and full cancellation of notes payable of $200,000.
In connection with the stock issuance on July 29, 1999 and July 30, 1999,
the Company paid a cash fee of $72,000 and issued a warrant to purchase 40,000
shares of common stock of the Company with a exercise price of $3.00 per warrant
and an expiration date of July 30, 2003 representing the fees associated with
the transactions.
15
During August 1999, warrants to purchase a total of 425,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $681,233. The proceeds of such exercises were used for working
capital purposes.
PREFERRED STOCK
- ----------------
On September 18, 1993, in a private placement, the Company issued 150,000
shares of its $.01 par value, 11% convertible, cumulative non-voting preferred
stock at a purchase price of $10.00 per share. On June 10, 1994 the Company
declared a 2-for-1 stock split. The preferred stock was convertible into voting
shares of common stock of the Company at a conversion ratio of one share of
preferred stock for 3.333 shares of common stock. On September 10, 1997, the
Board of Directors of the Company approved the issuance of an additional 100,000
shares of common stock as an inducement for the preferred stockholders to
convert the shares of preferred stock and release all rights with respect to the
preferred stock. In January 1998, all 270,000 shares of the preferred stock were
converted into an aggregate of 999,910 shares of common stock of the Company.
The issuance of the additional 100,000 common shares was recorded as a preferred
stock dividend in the amount of $225,000 at January 30, 1998.
On March 3, 1999, the Company completed an exchange of $900,000 of
promissory notes for 90,000 shares of a newly created class of its Series B
Senior Preferred Stock, the Series B Convertible Redeemable Preferred Stock (the
Convertible Stock), at a purchase price of $10.00 per share and 50,000 shares of
its common stock. The Convertible Stock was non-voting and dividends were
payable at a rate of 10% annually, payable in cash or in kind, semi-annually.
The Convertible Stock could be converted in whole or in part at any time at a
conversion ratio of one share of Convertible Stock for 5.0 shares of common
stock of the Company. In connection with the Company's notice to repurchase
90,000 shares of the Convertible Stock for $900,000 plus dividends of $45,370 on
September 3, 1999, the holder of the Convertible Stock elected to convert all of
the Convertible Stock into 450,000 shares of common stock of the Company. The
Company paid the $45,370 of dividends in cash.
The Company has granted one demand registration right with respect to the
common stock referred to in the preceding paragraph. The Company and the holder
of the common stock have agreed to share the costs of the registration.
STOCK AWARD PLAN
- ------------------
Under the Company's 1997 Stock Award Plan, the Company has reserved for
issuance 150,000 shares of Common Stock, of which 124,686 shares were unissued
as of September 30, 1999, to compensate consultants who have rendered
significant services to the Company. The Plan is administered by the
Compensation Committee of the Board of Directors of the Company which has
complete authority to select participants, determine the awards of Common Stock
to be granted and the times such awards will be granted, interpret and construe
the 1997 Stock Award Plan for purposes of its administration and make
determinations relating to the 1997 Stock Award Plan, subject to its provisions,
which are in the best interests of the Company and its stockholders. Only
consultants who have rendered significant advisory services to the Company are
eligible to be participants under the Plan. Other eligibility criteria may be
established by the Compensation Committee as administrator of the Plan.
In October 1997, the Company issued 20,314 shares of Common Stock to a
Mexican consultant in payment for services rendered to the Company valued at
$113,000.
In April 1999, the Company issued 5,000 shares of Common Stock to a
consultant in payment for services rendered to the Company valued at $8,750.
16
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data for each of the years in
the five-year period ended July 31, 1999 have been derived from the Consolidated
Financial Statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and related notes included elsewhere herein. All information is in
thousands, except per share data.
Year Ended July 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- ---------- ---------- ----------
Revenues $14,787 $26,271 $29,699(1) $30,801(1) $35,338(1)
Income (loss) from continuing operations (2,047) (724) (2,886) (2,072) 1,125
Net income (loss) (2,047) (724) (2,923) (3,744) 545
Net income (loss) per common share (.47) (.14) (.48) (.43) .05
Total assets 6,159 5,190 5,496 6,698 8,909
Long-term obligations 95 1,060 1,113 60 259
- ---------------------
(1) The operations of PennWilson for the period from February 12, 1997 (date
of incorporation) through May 25, 1999, the date operations were discontinued,
are presented in the Consolidated Financial Statements as discontinued
operations.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
liquidity and capital resources should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto
appearing elsewhere herein. References to specific years preceded by "fiscal"
(e.g. fiscal 1999) refer to the Company's fiscal year ended July 31. The
results of operations related to the Company's CNG segment, primarily consisting
of PennWilson, which began operations in March 1997 and was discontinued during
fiscal 1999, have been presented separately in the Consolidated Financial
Statements of the Company as discontinued operations.
OVERVIEW
The Company has been principally engaged in the purchase, transportation
and sale of LPG and, from 1997 to March 1999, the provision of equipment and
services to the CNG industry. Beginning in July 1994, the Company has bought
and sold LPG for distribution into northeast Mexico and the U.S. Rio Grande
Valley.
Historically, the Company has derived substantially all of its revenues
from sales to PMI, its primary customer, of LPG purchased from Exxon. In fiscal
1999, the Company derived approximately 99% of its revenues from sales of LPG.
The Company provides products and services through a combination of
fixed-margin and fixed-price contracts. Under the Company's agreements with its
customers and suppliers, the buying and selling prices of LPG are based on
variable posted prices that provide the Company with a fixed margin. Costs
included in cost of goods sold other than the purchase price of LPG may affect
actual profits from sales, including costs relating to transportation, storage,
leases, maintenance and financing. The Company generally attempts to purchase
in volumes commensurate with projected sales. However, mismatches in volumes and
prices of LPG purchased from Exxon and resold to PMI could result in
unanticipated costs.
LPG SALES
The following table shows the Company's volume sold in gallons and average
sales price for fiscal 1997, 1998 and 1999.
Fiscal Year Ended July 31,
------------------------------
1997 1998 1999
----- ----- ------
Volume Sold
LPG (millions of gallons) 61.7 88.5 117.0
Average sales price
LPG (per gallon) $0.48 $0.35 $ 0.30
18
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1999 COMPARED WITH JULY 31, 1998
Revenues. Revenues for fiscal 1999 were $35.4 million compared with $30.8
million for fiscal 1998, an increase of $4.5 million or 14.7%. Of this increase
$8.6 million was attributable to increased volume of LPG sold in fiscal 1999
partially offset by a decrease in average sales price of LPG sold in fiscal 1999
resulting in a decrease in sales of $3.9 million.
Cost of sales. Cost of sales for fiscal 1999 was $32.0 million compared
with $28.9 million for fiscal 1998, an increase of $3.2 million or 10.9%. Of
this increase $7.3 million was attributable to an increased volume of LPG
purchased in fiscal 1999 partially offset by the reduction in average sales
price of LPG purchased in fiscal 1999 resulting in a decrease in cost of goods
sold of $4.1 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.1 million in fiscal 1999 compared with $3.5
million in fiscal 1998, a decrease of $1.5 million or 41.4%. This decrease was
primarily attributable to (i) $970,364 of legal and professional fees and (ii)
$481,361 of costs associated with the issuance of warrants and registration
costs.
Other income and expense, net. Other income (expense), net was ($95,015)
in fiscal 1999 compared with $(448,641) in fiscal 1998. The decrease in other
expense, net was due primarily to the award from litigation of $987,114,
partially offset by costs associated from the settlement of litigation of
($577,691).
Income tax. Due to the availability of net operating loss carryforwards
($8.0 million and $8.8 million at July 31, 1999 and 1998), there was no income
tax expense in either year. The ability to use such net operating loss
carryforwards, which expire in the years 2009 to 2018, may be significantly
limited by the application of the "change in ownership" rules under Section 382
of the Internal Revenue Code.
YEAR ENDED JULY 31, 1998 COMPARED WITH JULY 31, 1997
Revenues. Revenues for fiscal 1998 were $30.8 million compared with $29.7
million for fiscal 1997, an increase of $1.1 million or 3.7%. This increase was
attributable to increased volume of LPG sold in fiscal 1998 of $9.3 million,
partially offset by a decrease in average sales price for LPG in fiscal 1998
resulting in a decrease in sales of $8.4 million. The increase in volume of LPG
sales in fiscal 1998 was partially due to the lack of sales to PMI during the
first two months of fiscal 1997 due to the expiration of the Company's Sales
Agreement with PMI on July 31, 1996. Sales of LPG to PMI totaled $3.7 million
(8.8 million gallons) for the first two months of fiscal 1998.
Cost of sales. Cost of sales for fiscal 1998 was $28.9 million compared
with $29.2 million for fiscal 1997, a decrease of $284,969 or 1%. This decrease
was attributable to a decrease in average purchase price for LPG purchased in
fiscal 1998 of $8.4 million, offset by the increase in volume of LPG sold in
fiscal 1998, resulting in an increase in cost of goods sold of $8.1 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $3.5 million in fiscal 1998 compared with $3.3
million in fiscal 1997, an increase of $285,030 or 8.8%. This increase was
primarily attributable to litigation and other legal matters ($250,570), payroll
related costs ($274,046), registration costs ($150,000), costs for warrants
issued ($160,000), and other expenses ($288,013) partially offset by reductions
of $838,000 of compensation associated with the issuance of warrants to an
employee and a consultant in fiscal 1997.
Other income and expenses, net. Other income (expense), net was ($448,641)
in fiscal 1998 compared with ($160,562) in fiscal 1997. The increase was
primarily due to interest costs associated with the credit facility obtained by
the Company in October 1997.
Income tax. Due to the net losses for fiscal 1998 and fiscal 1997, there
was no income tax expense in either year.
19
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception in
1992, and until the year ended July 31, 1999, has used cash in operations and
has had a deficit in working capital. In addition, the Company is involved in
litigation, the outcome of which cannot be determined at the present time. The
Company depends heavily on sales to one major customer. The Company's sources
of liquidity and capital resources historically have been provided by sales of
LPG and CNG-related equipment, proceeds from the issuance of short-term and
long-term debt, revolving credit facilities and credit arrangements, sale or
issuance of preferred and common stock of the Company and proceeds from the
exercise of warrants to purchase shares of the Company's common stock.
The following summary table reflects comparative cash flows for fiscal
1997, 1998 and 1999. All information is in thousands.
YEAR ENDED JULY 31,
--------------------------
1997 1998 1999
-------- -------- ------
Net cash provided by (used in) operating activities $(1,847) $(1,065) $ 562
Net cash used in investing activities . . . . . . . (514) (1,337) (383)
Net cash provided by financing activities . . . . . 2,027 2,528 696
-------- -------- ------
Net increase (decrease) in cash . . . . . . . . . . $ (334) $ 126 $ 875
======== ======== ======
PMI Sales Agreement. The PMI Sales Agreement is effective for the period
from October 1, 1998 through September 30, 1999 and provides for the purchase by
PMI of minimum monthly volumes of LPG aggregating a minimum annual volume of
69.0 million gallons, similar to minimum volume requirements under the previous
sales agreement with PMI effective during the period from October 1, 1997 to
September 30, 1998. During June 1999, the PMI Sales Agreement was amended (the
"PMI Sales Agreement Amendment") to extend the expiration date until March 31,
2000 and to provide the Company with additional margins for any volume exceeding
7.0 million gallons per month during the summer period (April - September) and
9.0 million gallons per month during the winter period (October - March). Under
the PMI Sales Agreement Amendment, PMI is obligated to purchase a minimum volume
of 45.0 million gallons during October 1999 through March 2000.
LPG Supply Agreement. During October 1998, the Company entered into a
monthly supply agreement with Exxon pursuant to which Exxon agreed to supply
minimum volumes of LPG to the Company. Effective November 1, 1998, the Company
entered into a supply agreement with Exxon to purchase minimum monthly volumes
of LPG through September 1999. The Company believes it has access to an
adequate supply of LPG from Exxon and other suppliers to satisfy the
requirements of PMI under the PMI Sales Agreement.
Effective October 1, 1999 (the "Exxon Closing Date"), the Company and Exxon
entered into a ten year LPG supply contract (the "Exxon Supply Contract"),
whereby Exxon has agreed to supply and the Company has agreed to take, the
supply of propane and butane available at Exxon's King Ranch Gas Plant (the
"Plant") which is estimated to be between 10.1 million gallons per month and
13.9 million gallons per month blended in accordance with the specifications
outlined under the PMI Sales Agreement (the "Plant Commitment"), with a minimum
of 10.1 million gallons per month guaranteed by Exxon to be provided to the
Company.
In addition, under the terms of the Exxon Supply Contract, Exxon will make
operational its Corpus Christi Pipeline (the "CCPL") which when completed, will
allow the Company to acquire an additional supply of propane from other propane
suppliers located near Corpus Christi, Texas (the "Additional Propane Supply),
and bring the Additional Propane Supply to the Plant (the "CCPL Supply") for
blending to the proper specifications outlined under the PMI Sales Agreement and
then delivered into the Pipeline. In connection with the CCPL Supply, the
Company has agreed to supply a minimum of 7.7 million gallons into the CCPL
during the first quarter from the date that the CCPL is operational,
approximately 92 million gallons the following year and 122 million gallons each
year thereafter and continuing for four years.
20
The Exxon Supply Contract currently requires that the Company purchase a
minimum supply of LPG, which is significantly higher than committed sales
volumes under the PMI Sales Agreement. In addition, the Company is required to
pay additional fees associated with the Additional Propane Supply, which will
increase its LPG costs by a minimum of $.01 per gallon without considering the
actual cost of the Additional Supply charged to the Company.
In September 1999, the Company and PG&E NGL Marketing, L.P. ("PG&E")
entered into a three year supply agreement (the "PG&E Supply Agreement") whereby
PG&E has agreed to supply and the Company has agreed to take, a monthly average
of 2.5 million gallons (the "PG&E Supply") of propane. In addition, PG&E is in
the process of obtaining up to 3.8 million gallons per month of additional
propane commitments, which if successful by December 31, 1999, would be an
adjustment to the PG&E Supply. Under the PG&E Supply Agreement, the Company is
not obligated to purchase the PG&E Supply until the CCPL is operational,
anticipated to be during October 1999.
Under the terms of the PG&E Supply Agreement, the PG&E Supply will be
delivered to the CCPL, as described above, and blended to the proper
specifications as outlined under the PMI Sales Agreement. In addition, by
utilizing the PG&E Supply, the Company would satisfy the CCPL Supply
requirements under the Exxon Supply Contract.
In connection with the Plant Commitment and the PG&E Supply, the Company
anticipates lower gross margins on its sales of LPG under the PMI Sales
Agreement of approximately 10% - 40% as a result of increased LPG costs compared
with the previous agreements to purchase LPG. The Company may incur significant
additional costs associated with storage, disposal and/or changes in LPG prices
resulting from the excess of the Plant Commitment and PG&E supply over actual
sales volumes.
The Company believes that the terms of the Exxon Supply Contract and the
PG&E Supply Contract are commensurate with the anticipated future demand for LPG
in Mexico and that any additional costs associated with the Additional Supply as
well as the increase in the costs for LPG over previous agreements will be
offset by increased sales margins on LPG sold to the Company's customers. The
Company further believes that any additional costs incurred in connection with
the Plant Commitment and PG&E Supply, if any, will be short-term in nature.
The ability of the Company to increase sales of LPG into Mexico in the
future is largely dependent on the Company's ability to negotiate future
contracts with PMI and/or with local Mexican distributors once Deregulation in
Mexico is implemented. In addition, there can be no assurance that the Company
will be able to obtain terms as favorable as the PMI Sales Agreement. In the
event that the Company is unable to meet its intended LPG sales objectives, then
the Company may incur significant losses as a result of not being able to meet
its minimum purchase requirements under the Exxon Supply Contract and the PG&E
Supply Contract and/or the costs of LPG may be in excess of prices received on
sales of LPG.
Furthermore, until the US-Mexico Pipeline and Mexican Terminal Facilities
and Saltillo Terminal Facilities are completed, the Company will be required to
deliver the minimum monthly volumes from its Brownsville Terminal Facility.
Historically, sales of LPG from the Brownsville Terminal Facilities have not
exceeded 11.1 million gallons per month. In addition, breakdowns along the
planned distribution route for the LPG once purchased from PG&E and/or Exxon
and/or other suppliers, may limit the ability of the Company to accept the Plant
Commitment, CCPL Supply and/or the PG&E Supply.
Under the terms of the Exxon Supply Contract and the PG&E Supply Contract,
the Company must provide letters of credit in amounts equal to the cost of the
product purchased. The amount of product to be purchased under the Exxon Supply
Contract and the PG&E Supply Contract are significantly higher than historical
amounts. 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 and the Company may require additional sources of
financing to meet the letter of credit requirements under the Exxon Supply
Contract and the PG&E Supply Agreement. Furthermore upon the implementation of
Deregulation the Company anticipates entering into contracts with Mexican
customers which require payments in pesos. In addition the Mexican customers
may be limited in their ability to provide adequate financing.
As a result of the Exxon Supply Contract and the PG&E Supply Contract, the
Company believes that its has an adequate supply of LPG to satisfy the
requirements of PMI under the PMI Sales Agreement and to meet its future sales
obligations, if any, upon the expiration of the PMI Sales Agreement. Due to
strategic location of the Company's pipelines and terminal facilities, the
Company believes that it will be able to achieve higher margins on the sale of
LPG in the future.
21
In determining whether any supplier will be utilized, the Company will
consider the applicable prices charged as well as any additional fees that may
be required to be paid under the Pipeline Lease. Beginning in October 1999, the
Company's gross margins on its LPG sales were reduced by 10% - 40% as a result
of increased LPG costs compared with the previous agreements.
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 Pipeline. Pursuant to the Pipeline Lease Amendment, the Company's
fixed annual fee associated with the use of the Pipeline was increased by
$350,000, less certain adjustments during the first two years from the Effective
Date and the Company is required to pay for a minimum volume of storage of
$300,000 per year beginning the second year from the Effective Date. In
addition, the Pipeline Lease Amendment provides for variable rental increases
based on monthly volumes purchased and flowing into the Pipeline and storage
utilized. The Company believes that the Pipeline Lease Amendment provides the
Company increased flexibility in negotiating sales and supply agreements with
its customers and suppliers. The Company has made all payments required under
the Pipeline Lease Amendment.
Present Pipeline capacity is approximately 265 million gallons per year.
In fiscal year 1999, the Company sold 117.0 million gallons of LPG which flowed
through the Pipeline. The Company can increase the Pipeline's capacity through
the installation of additional pumping equipment. (See "LPG Expansion
Program" below.)
LPG EXPANSION PROGRAM. On July 26, 1999, the Company was granted a permit
by the United States Department of State authorizing the Company to construct,
maintain and operate two pipelines (the "US Pipeline") crossing the
international boundary line between the United States and Mexico (from the
Brownsville Terminal Facilities near the Port of Brownsville, Texas and El
Sabino, Mexico) for the transport of LPG and refined products (motor gasoline
and diesel fuel) [the "Refined Products"].
Previously, on July 2, 1998, Penn Octane de Mexico, S.A. de C.V.
("PennMex"), an affiliated company, received a permit from the Comision
Reguladora de Energia (the "Mexican Energy commission") to build and operate one
pipeline to transport LPG (the "Mexican Pipeline") [collectively, the US
Pipeline and the Mexican Pipeline are referred to as the "US-Mexico Pipeline"]
between El Sabino (at the point North of the Rio Bravo) and to a terminal
facility in the City of Matamoros, State of Tamaulipas, Mexico (the "Mexican
Terminal Facilities").
As a result of the above, the Company will be able to transport LPG
directly from the US into Mexico through the US-Mexico Pipeline and to the
Mexican Terminal Facilities (the "Expansion"). Management believes that as a
result of the Expansion, the Company will have additional strengths due to its
ability to penetrate further into Mexico, provide greater volumes of LPG as a
result of reduced cross border trucking delays and greater access to Mexican
distribution resources and the potential to achieve greater margins on its LPG
sales.
In addition to the Expansion, Tergas has begun construction of an
additional LPG terminal facility in Saltillo, Mexico (the "Saltillo Terminal
Facilities") for an estimated cost of $500,000. The Saltillo Terminal
Facilities, when complete, will allow for the distribution of LPG by railcars,
which will directly link the Company's Brownsville Terminal Facility and
the Saltillo Terminal Facilities. The Saltillo Terminal Facilities will contain
storage to accommodate approximately 100,000 gallons of LPG. As a result of the
Saltillo Terminal Facilities, the Company believes that it will be able to
further penetrate the Mexican market for the sale of LPG. Initially, the
Company believes that the Saltillo Terminal Facilities, when complete, will
generate additional sales of 5.0 million gallons monthly, independent of the
Expansion.
On May 31, 1999, Tergas, S.A. de C.V. ("Tergas") an affiliated Company, was
formed for the purpose of operating LPG terminal facilities in Mexico, including
the Mexican Terminal Facilities and the planned Saltillo Terminal Facilities.
The Company anticipates Tergas will be issued the permit to operate the Mexican
Terminal Facilities.
In connection with the Expansion and the Saltillo Terminal Facilities, the
Company is also in the process of completing upgrades at the Brownsville
Terminal facility (the "Terminal Upgrades") and in January 2000 is planning to
begin certain enhancements to the Pipeline (the "Pipeline Enhancements"). Among
other things, the Terminal Upgrades will include the installation of additional
piping to connect the Pipeline to the loading dock at the railroad spur located
at the Brownsville Terminal Facility and construction of railcar loading
facilities to enable the Company to receive or deliver LPG for distribution of
LPG by railcar into Mexico and to the Saltillo Terminal Facilities. The Company
expects the Terminal Upgrades to be completed by December 1999 at a total cost
of approximately $200,000. Upon the completion of the Terminal Upgrades and the
Saltillo Terminal Facilities, the Company will be able to distribute LPG to
Mexico by railcars, which will directly link the Company's Brownsville Terminal
Facility and the Saltillo Terminal Facilities.
22
The Pipeline Enhancements will include the installation of additional
piping, meters, valves, analyzers and pumps along the Pipeline to increase the
capacity of the Pipeline make the Pipeline bi-directional. The Pipeline
Enhancements will increase the capacity of the Pipeline to 360 million gallons
per year, and will provide the Company with access to a greater number of LPG
suppliers and additional storage facilities. The Company expects to begin the
Pipeline Enhancements in January 2000 and to be completed three months
thereafter at a cost of approximately $1.5 million.
In connection with the Expansion, the Company and CPSC International, Inc.
("CPSC") entered into two separate Lease / Installation Purchase Agreements, as
amended, ("the Lease Agreements"), whereby CPSC will construct the US-Mexico
Pipeline (including an additional pipeline to accommodate Refined Products) and
the Mexican Terminal Facilities and lease these assets to the Company. Under
the terms of the Lease Agreements, the Company will pay monthly rentals of
approximately $157,000, beginning the date that the US-Mexico Pipeline and
Mexican Terminal Facilities are physically capable to transport and receive LPG
in accordance with technical specifications required (the "Substantial
Completion Date"). In addition the Company has agreed to provide a lien on
certain assets, leases and contracts which are currently pledged to RZB, and
provide CPSC with a letter of credit of approximately $1.0 million. The Company
is currently in negotiations with RZB and CPSC concerning RZB's subordination of
RZB's lien on certain assets, leases and contracts. The Company also has the
option to purchase the US-Mexico Pipeline and Mexican Terminal Facilities at the
end of the 10th year anniversary and 15th year anniversary for $5.0 million and
$100,000, respectively. Under the terms of the Lease Agreements, CPSC is
required to pay all costs associated with the construction and maintenance of
the US - Mexico Pipeline and Mexican Terminal Facilities.
On September 16, 1999, the Lease Agreements were amended whereby CPSC
agreed to accept 500,000 shares of common stock of the Company owned by the
President of the Company (the "Collateral") in place of the letter of credit
originally required under the Lease Agreements. The Collateral shall be
replaced by a letter of credit or cash collateral over a ten month period
beginning monthly after the Substantial Completion Date. In addition, the
Company has agreed to guaranty the value of the Collateral based on the fair
market value of the Collateral for up to $1.0 million.
For financial accounting purposes, the Lease Agreements are capital leases.
Therefore, the assets and related liabilities will be recorded in the Company's
balance sheet on the Substantial Completion Date.
On September 16, 1999, the Company and CPSC entered into a purchase and
option agreement whereby the Company will purchase a 30% interest (the
"Purchased Interests") in the US-Mexico Pipeline and Mexican Terminal Facilities
for $3.0 million. In connection with the Purchased Interests, the Company will
not assume any costs associated with CPSC's obligations under the Lease
Agreements until the Substantial Completion Date is reached, and the Company
will receive a minimum of $54,000 per month from the Company's payments under
the Lease Agreements (approximately 34% of the Company's monthly lease
obligations under the Lease Agreements). The Company is required to pay for
the Purchased Interests on January 3, 2000, or 10 days subsequent to the
Substantial Completion Date, whichever is later (the "Closing Date"). To secure
the payment of the $3.0 million for the Purchased Interests, the Company has
agreed to assign its interest in the net cash proceeds to be received from the
IBC-Brownsville award judgment (the "Judgment") of approximately $3.0 million
(see Item 3, "Legal Proceedings"). In the event that the net cash received from
the Judgment is less than $3.0 million, the Company will be required to pay the
difference. In addition, if the Judgment is not paid by the Closing Date, CPSC
may require the Company to make immediate payment in exchange for the return of
the Judgment assignment.
Included in the agreement for the Purchased Interests, the Company has two
option agreements (the "Options") whereby the Company has the right to acquire
an additional 20% and an additional 50% interest in the Lease Agreements for
$2.0 million and $7.0 million, respectively, within 90 days from the Closing
Date. In the event the Company exercises the additional 20% option, then the
Purchase Interests will total 50% and the Company will receive a minimum from
the Purchased Interests of $90,000 per month from the Company's payments under
the Lease Agreements (approximately 57% of the Company's monthly lease
obligations under the Lease Agreements). The Company paid $50,000 to obtain the
Options.
The actual costs to complete the US-Mexico Pipeline and Mexican Terminal
Facilities are the sole responsibility of CPSC (the "Costs"). In addition, the
Company has spent approximately $512,000 as of July 31, 1999 related to the
Costs, which are included in capital construction in progress in the
consolidated balance sheet.
Foreign Ownership of LPG Operations. Both PennMex and Tergas are Mexican
companies, which are owned 90% and 95%, respectively, by Jorge R. Bracamontes,
an officer and director of the Company ("Bracamontes") and the balance by other
Mexican citizens ("Minority Shareholders"). Under current Mexican law (see
"Deregulation of the LPG Market in Mexico" below), foreign ownership of Mexican
entities involved in the distribution of LPG and the operation of LPG terminal
23
facilities are prohibited. However, foreign ownership is permitted in the
transportation and storage of LPG. In October 1999, the Company received a
verbal opinion from the Foreign Investment Section of the Department of Commerce
and Industrial Development ("SECOFI"), that the Company's planned strategy of
selling LPG to PMI at the US border and then transporting the LPG through the
Mexican portion of the US - Mexico Pipeline to the Mexican Terminal Facilities
would comply with the LPG regulations. The Company intends to request a ruling
(the "Ruling") from SECOFI confirming the verbal opinion. There is no certainty
that the Company will obtain the Ruling, and if obtained, that the Ruling will
not be affected by future changes in Mexican laws.
The Company, Bracamontes and the Minority Shareholders have entered into
agreements whereby the Company may acquire up to 75% of the outstanding shares
of PennMex for a nominal amount, subject to among other things, receipt of the
Ruling. The Company intends to contract with Tergas for services to be performed
by Tergas at the Mexican Terminal Facilities and the Saltillo Terminal
Facilities.
The operations of PennMex and/or Tergas are subject to the tax laws of
Mexico, which among other things, require that Mexican subsidiaries of foreign
entitles comply with transfer pricing rules, the payment of income and/or asset
taxes, and possibly taxes on distributions in excess of earnings. In addition,
distributions to foreign corporations may be subject to withholding taxes,
including dividends and interest payments.
Deregulation of the LPG Market in Mexico. The Mexican petroleum industry
is governed by the Ley Reglarmentaria del Art culo 27 Constitutional en el Ramo
del Petroleo (the Regulatory Law to Article 27 of the Constitution of Mexico
concerning Petroleum Affairs (the "Regulatory Law")), and Ley Organica del
Petroleos Mexicanos y Organismos Subsidiarios (the Organic Law of Petroleos
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 LPG activities related to transportation and storage. Upon the completion of
Deregulation, Mexican entities will be able to import LPG into Mexico. However,
foreign entities will be prohibited from participating in the distribution of
LPG in Mexico. Accordingly, the Company expects to sell LPG directly to
independent Mexican distributors as well as PMI. Upon Deregulation, it is
anticipated that the independent Mexican distributors will be required to obtain
authorization from the Mexican government for the importation of LPG prior to
entering into contracts with the Company.
Pursuant to the PMI Sales Agreement upon Deregulation by the Mexican
government of the LPG market, the Company will have the right to renegotiate the
PMI Sales Agreement. Depending on the outcome of any such renegotiation, the
Company expects to either (i) enter into contracts directly with independent
Mexican LPG distributors located in the northeast region of Mexico, or (ii)
modify the terms of the PMI Sales Agreement to account for the effects of
Deregulation.
Currently the Company sells LPG to PMI at its Brownsville Terminal
Facility. Upon the completion of the US - Mexico Pipeline and Mexican Terminal
Facilities, the Company will sell LPG to PMI at the U.S. border and transport
the LPG to the Mexican Terminal Facilities through the US-Mexico Pipeline. Upon
Deregulation, the Company intends to sell to independent Mexican LPG
distributors as well as PMI.
Credit Arrangements. As of October 21, 1999, the Company has a $10.0
million credit facility with RZB Finance L.L.C. (RZB) for demand loans and
standby letters of credit (RZB Credit Facility) to finance the Company's
purchase of LPG. Under the RZB Credit Facility, the Company pays a fee with
respect to each letter of credit thereunder in an amount equal to the greater of
(i) $500, (ii) 2.5% of the maximum face amount of such letter of credit, or
(iii) such higher amount as may be agreed to between the Company and RZB. Any
amounts outstanding under the RZB Credit Facility shall accrue interest at a
rate equal to the rate announced by the Chase Manhattan Bank as its prime rate
plus 2.5%. Pursuant to the RZB Credit Facility, RZB has sole and absolute
discretion to terminate the RZB Credit Facility and to make any loan or issue
any letter of credit thereunder. RZB also has the right to demand payment of
any and all amounts outstanding under the RZB Credit Facility at any time. In
connection with the RZB Credit Facility, the Company granted a mortgage,
security interest and assignment in any and all of the Company's real property,
buildings, pipelines, fixtures and interests therein or relating thereto,
including, without limitation, the lease with the Brownsville Navigation
District of Cameron County for the land on which the Company's Brownsville
Terminal Facility is located, the Pipeline Lease, and in connection therewith
agreed to enter into leasehold deeds of trust, security agreements, financing
statements and assignments of rent, in forms satisfactory to RZB. Under the RZB
24
Credit Facility, the Company may not permit to exist any lien, security
interest, mortgage, charge or other encumbrance of any nature on any of its
properties or assets, except in favor of RZB, without the consent of RZB. The
Company's President, Chairman and Chief Executive Officer has personally
guaranteed all of the Company's payment obligations with respect to the RZB
Credit Facility.
In connection with the Company's purchases of LPG from Exxon and/or PG&E
NGL Marketing, LP (PG&E), the Company issues letters of credit on a monthly
basis based on anticipated purchases.
As of July 31, 1999, letters of credit established under the RZB Credit
Facility in favor of Exxon for purchases of LPG totaled $6.0 million of which
$2.9 million was being used to secure unpaid purchases from Exxon. In
connection with these purchases, the Company had unpaid invoices due from PMI
totaling $2.5 million and cash balances maintained in the RZB Credit Facility
collateral account of $847,042 as of July 31, 1999.
Private Placements and Other Transactions. On October 21, 1997, the
Company completed a private placement pursuant to which it issued promissory
notes in the aggregate principal amount of $1.5 million and warrants to purchase
250,000 shares of common stock exercisable until October 21, 2000 at an exercise
price of $6.00 per share. The notes were unsecured. Proceeds raised from the
private placement totaled $1.5 million, which the Company used for working
capital requirements. Interest at 10% per annum was due quarterly on March 31,
June 30, September 30 and December 31. Payment of the principal and accrued
interest on the promissory notes was due on June 30, 1998. On December 1, 1998,
the Company completed a rollover and assignment agreement effectively extending
the due date of the promissory notes until June 30, 1999 (the "Rollover
Agreement"). In connection with the Rollover Agreement, the Company agreed to
assign its rights to any net cash collected from the Judgment towards any unpaid
principal and interest owing on the promissory notes. The Company also agreed
to use any net proceeds received by the Company from any public offering of debt
or equity of the Company in excess of $2.3 million, towards the repayment of any
balances owing under the promissory notes. The promissory note holders also
received additional warrants to purchase 337,500 shares of common stock,
exercisable until November 30, 2001, at an exercise price of $1.75 per share.
The purchasers in the private placement were granted one demand registration
right with respect to the shares issuable upon exercise of the warrants.
On March 3, 1999, the Company completed an exchange of $900,000 of
promissory notes for 90,000 shares of a newly created class of its Series B
Senior Preferred Stock, the Series B Convertible Redeemable Preferred Stock (the
Convertible Stock), at a purchase price of $10.00 per share and 50,000 shares of
its common stock. The Convertible Stock was non-voting and dividends were
payable at a rate of 10% annually, payable in cash or in kind, semi-annually.
The Convertible Stock could be converted in whole or in part at any time at a
conversion ratio of one share of Convertible Stock for 5.0 shares of common
stock of the Company. In connection with the Company's notice to repurchase
90,000 shares of the Convertible Stock for $900,000 plus dividends of $45,370 on
September 3, 1999, the holder of the Convertible Stock elected to convert all of
the Convertible Stock into 450,000 shares of common stock of the Company. The
Company paid the $45,370 of dividends in cash.
The Company has granted one demand registration right with respect to the
common stock referred to in the preceding paragraph. The Company and the holder
of the common stock have agreed to share the costs of the registration.
During July 1999, the Company paid the remaining $600,000 of promissory
notes outstanding through a cash payment of $300,000 and the issuance of 166,667
shares of common stock of the Company as payment for and full cancellation of
$300,000 of promissory notes.
On November 13, 1998, the Company issued 250,000 shares of common stock of
the Company and warrants to purchase 125,000 shares of common stock with an
exercise price of $1.25 per warrant and an expiration date of November 13, 2000
for an amount of $250,000. Net proceeds from the sale were used for working
capital purposes.
On December 14, 1998, the Company issued 500,000 shares of common stock of
the Company and warrants to purchase 300,000 shares of common stock with an
exercise price of $1.75 per warrant and an expiration date of December 13, 2003
for an amount of $500,000. Net proceeds from the sale were used for working
capital purposes.
During December 1998, the Company issued 53,884 shares of common stock of
the Company to Zimmerman Holdings Inc. (ZHI), as payment for and full
cancellation of a note payable of $100,000 and related interest and other
obligations totaling $18,000. In connection therewith, the Company has no
further obligation to pay any future royalties in connection with Company's
purchase of certain CNG assets from Wilson Technologies Inc., a wholly owned
subsidiary of ZHI.
25
During December 1998, the Company issued 15,000 shares of common stock of
the Company and warrants to purchase 10,000 shares of common stock with an
exercise price of $3.25 per warrant and an expiration date of December
31, 2000 in exchange for cancellation of all outstanding obligations totaling
$22,500 and other obligations as outlined in an agreement between the parties.
On March 18, 1999, the Company issued 120,000 shares of common stock of the
Company and warrants to purchase 60,000 shares of common stock with an exercise
price of $2.25 per warrant and an expiration date of March 18, 2002 for an
amount of $150,000. Net proceeds from the sale were used for working capital
purposes.
On March 19, 1999, the Company issued 60,606 shares of common stock of the
Company and warrants to purchase 30,303 shares of common stock with an exercise
price of $2.59 per warrant and an expiration date of March 19, 2002 for an
amount of $100,000. Net proceeds from the sale were used for working capital
purposes.
On March 19, 1999, the Company issued 146,667 shares of common stock of the
Company and warrants to purchase 73,333 shares of common stock with an exercise
price of $2.42 per warrant and an expiration date of March 19, 2002 for an
amount of $220,000. Net proceeds from the sale were used for working capital
purposes.
In connection with the stock issuances in March 1999, the Company issued a
total of 35,000 shares of common stock of the Company, representing the fees
associated with the transactions.
Pursuant to the 1997 Stock Award Plan, in April 1999, the Company issued
5,000 shares of Common Stock to a consultant in payment for services rendered to
the Company valued at $8,750.
On July 15, 1999, the Company issued 50,000 shares of common stock of the
Company and warrants to purchase 25,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 15, 2002 for an amount
of $100,000. Net proceeds from the sale were used for working capital purposes.
On July 16, 1999, the Company issued 100,000 shares of common stock of the
Company and warrants to purchase 50,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 16, 2002 for an amount
of $200,000. Net proceeds from the sale were used for working capital purposes.
On July 21, 1999, the Company issued 40,000 shares of common stock of the
Company and warrants to purchase 20,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 21, 2002 for an amount
of $90,000. Net proceeds from the sale were used for working capital purposes.
On July 29, 1999 and July 30, 1999, the Company issued 37,500, and 362,500
shares of common stock of the Company and warrants to purchase 18,750 and
181,250 shares of common stock each with an exercise price of $3.00 per warrant
and an expiration date of July 29,2003 and July 30, 2003 for an amount of
$600,000 and full cancellation of notes payable of $200,000. Net proceeds from
the sale were used for working capital purposes and to pay down $300,000 of debt
obligations.
In connection with the stock issuance on July 29, 1999 and July 30, 1999,
the Company paid a cash fee of $72,000 and issued a warrant to purchase 40,000
shares of common stock of the Company with a exercise price of $3.00 per warrant
and an expiration date of July 30, 2003 representing the fees associated with
the transactions.
As of July 31, 1999, $769,701 is owed by the Company in connection with
various settlement agreements with legal firms and suppliers (the "Creditors")
in connection with prior services performed for the Company. Under the terms
of the settlements, the Company has agreed to make specified monthly payments.
In connection with the settlements, the Company has agreed in the future to
provide a "Stipulation of Judgment" to the Creditors in the event that the
Company defaults under the settlement agreements.
During August 1999, warrants to purchase a total of 425,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $681,233. The proceeds of such exercises were used for working
capital purposes.
In connection with previous warrants issued by the Company, certain of
these warrants contain a call provision whereby the Company has the right to
purchase the warrants for a nominal price if the holder of the warrants does not
elect to exercise the warrants within the call provision.
26
In connection with the issuance of shares and warrants by the Company (the
Shares), the Company has on numerous instances granted registration rights to
the holders of the Shares, including those shares which result from the
exercise of warrants (the "Registrable Securities"). The obligations of the
Company with respect to the Registrable Securities include one-time demand
registration rights and/or piggy-back registration rights (the "Registration").
The Company is required to file an effective registration by either September
19, 1999, December 1, 1999 or January 31, 2000. In connection with the
Registration of the Registrable Securities, the Company is required to provide
notice to the holder of the Registrable Securities, who may or may not elect to
be included in the Registration. The Company is obligated to register the
Registrable Securities even though the Registrable Securities may be tradable
under Rule 144. The Company did not file a registration statement for the shares
agreed to be registered by September 19, 1999. The Company has also received
notice of a demand for registration for certain of the Shares. The Registration
Rights Agreements do not contain provisions for damages, if the Registration is
not completed except for those Shares required to be registered on December 1,
1999, whereby for each month after December 1999 and if the Company fails to
have an effective registration statement, the Company will be required to pay a
penalty of $80,000 to be paid in cash and/or common stock of the Company based
on the then current trading price of the common stock of the Company.
Judgment in favor of the Company. Judgment has been rendered in favor of
the Company in connection with its litigation against IBC-Brownsville. On
August 26, 1999, IBC-Brownsville was denied a rehearing of an earlier decision
on June 10, 1999 in which the Supreme Count of Texas denied IBC's-Brownsville
petition for review. As of July 31, 1999, the net amount of the award is
approximately $3.9 million, which is comprised of the sum of (i) the original
award, including attorney's fees, (ii) post-award interest, and (iii)
cancellation of the note and accrued interest payable, less attorneys' fees.
Although no assurance can be made that IBC-Brownsville will not continue to seek
other legal remedies against the Judgment, management believes that the Company
will ultimately prevail, and will receive the proceeds from such Judgment. In
addition, a former officer of the Company is entitled to 5% of the net proceeds
(after expenses and legal fees).
Settlement of Litigation. On March 16, 1999, the Company settled in
mediation a lawsuit with its former chairman of the board, Jorge V. Duran. In
connection therewith and without admitting or denying liability the Company
agreed to pay Mr. Duran approximately $456,000 in cash and common stock of the
Company of which $100,000 is to be paid by the Company's insurance carrier. The
Company has agreed to register the stock in the future.
Realization of Assets. Recoverability of a major portion of the recorded
asset amounts on the Company's balance sheet is dependent upon the collection of
the Judgment, the Company's ability to obtain additional financing and to raise
additional equity capital, and the success of the Company's future operations
and expansion program, which includes the acquisition of the interests in
PennMex and the consummation of an operating agreement with Tergas.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to (i) collect the Judgment, (ii)
increase sales to its current customers, (iii) increase its customer base, (iv)
extend the terms and capacity of the Pipeline Lease and the Brownsville Terminal
Facility, (v) expand its product lines, (vi) increase its source of LPG supply
and at more favorable terms, (vii) obtain additional letters of credit financing
and (viii) raise additional debt and/or equity capital. See note Q to the
Consolidated Financial Statements.
At July 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8.0 million. The ability to
utilize such net operating loss carryforwards may be significantly limited by
the application of the "change of ownership" rules under Section 382 of the
Internal Revenue Code.
Year 2000 Date Conversion. Management has determined that the consequences
of its Year 2000 issues will not have a material effect on the Company's
business, results of operations, or financial condition.
FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share. SFAS
128 supersedes APB Opinion No. 15 (Opinion No. 15), Earnings per Share, and
requires the calculation and dual presentation of basic and diluted earnings per
share (EPS), replacing the measures of primary and fully-diluted EPS as reported
under Opinion No. 15. SFAS 128 became effective for financial statements issued
for periods ending after December 15, 1997; earlier application was not
permitted. Accordingly, EPS for the periods presented in the accompanying
consolidated statements of operations are calculated under the guidance of SFAS
128.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income and Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosure about Segments of an Enterprise and Related Information. Both are
effective for periods beginning after December 15, 1997, with earlier
application encouraged for SFAS 131. The Company adopted SFAS 131 in fiscal
1997.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Certified Public Accountants
-------------------------------------------------------
To the Board of Directors
Penn Octane Corporation
We have audited the accompanying consolidated balance sheets of Penn Octane
Corporation and its subsidiaries (Company) as of July 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended July 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of July 31, 1998 and 1999, and the consolidated results of their
operations and their consolidated cash flows for each of the three years in the
period ended July 31, 1999 in conformity with generally accepted accounting
principles.
We have also audited Schedule II of the Company for each of the three years in
the period ended July 31, 1999. In our opinion, this schedule presents fairly
in all material respects, the information required to be set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note Q, conditions
exist which raise substantial doubt about the Company's ability to continue as a
going concern including 1) the Company has not sustained profitable operations,
2) outstanding litigation, 3) a deficit in working capital, and 4) consummation
of agreements related to the LPG expansion program referred to in note O.
Management's plans in regard to these matters are described in note O. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
As discussed in note B, the Company adopted the provisions of SFAS 128,
"Earnings per Share", during the year ended July 31, 1998.
/S/ BURTON McCUMBER & CORTEZ, L.L.P.
Brownsville, Texas
October 8, 1999
29
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31
ASSETS
1998 1999
---------- ----------
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,513 $1,032,265
Trade accounts receivable, less allowance for doubtful accounts of . . 1,195,653 2,505,915
$418,796 and $521,067 (note D)
Notes receivable (note E). . . . . . . . . . . . . . . . . . . . . . . - 77,605
Inventories (notes B1 and H) . . . . . . . . . . . . . . . . . . . . . 377,097 615,156
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 90,851 42,517
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,821,114 4,273,458
Property, plant and equipment - net (notes B2 and G). . . . . . . . . . 2,908,251 3,171,650
Lease rights (net of accumulated amortization of $478,560 and $524,355) 675,479 629,684
(note B2)
CNG assets held for sale (notes D and E). . . . . . . . . . . . . . . . 1,293,136 -
Notes receivable (note E) . . . . . . . . . . . . . . . . . . . . . . . - 822,196
Other non-current assets. . . . . . . . . . . . . . . . . . . . . . . . - 11,720
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,697,980 $8,908,708
========== ==========
The accompanying notes are an integral part of these statements.
30
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
JULY 31
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1999
--------------- ---------------
Current Liabilities
Current maturities of long-term debt (note K) . . . . . . . . . . . . . . . $ 1,693,897 $ 365,859
Revolving line of credit (note N) . . . . . . . . . . . . . . . . . . . . . 991,823 -
LPG trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 931,362 2,850,197
Other accounts payable and accrued liabilities . . . . . . . . . . . . 2,674,474 1,382,603
Borrowings from IBC-Brownsville (notes I and S). . . . . . . . . . . . . . 672,552 -
--------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 6,964,108 4,598,659
Long-term debt, less current maturities (note K) . . . . . . . . . . . . . . 60,000 258,617
Commitments and contingencies (notes D, K and N) . . . . . . . . . . . . . . - -
Stockholders' Equity (note L)
Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized; . . - -
No shares issued and outstanding at July 31, 1998 and 1999
Series B - Senior preferred stock-$.01 par value, $10 liquidation value,. . - 900
5,000,000 shares authorized; 0 and 90,000 shares issued and outstanding at
July 31, 1998 and 1999
Common stock-$.01 par value, 25,000,000 shares authorized;. . . . . . . . . 99,527 118,456
9,952,673 and 11,845,497 shares issued and outstanding at July 31,
1998 and 1999
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 13,318,592 17,133,222
Notes receivable from the president of the Company and a related party. . . ( 2,763,006) ( 2,765,350)
for exercise of warrants, less reserve of $223,000 and $451,141 at July 31,
1998 and 1999, respectively
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 10,981,241) ( 10,435,796)
--------------- ---------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . (326,128) 4,051,432
--------------- ---------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . $ 6,697,980 $ 8,908,708
=============== ===============
The accompanying notes are an integral part of these statements.
31
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31
1997 1998 1999
-------------------- ---------------- ----------------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,699,403 $ 30,801,355 $ 35,337,935
Cost of goods sold . . . . . . . . . . . . . . . . . . . . 29,172,138 28,887,169 32,044,194
-------------------- ---------------- ----------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . 527,265 1,914,186 3,293,741
Selling, general and administrative expenses
Legal and professional fees . . . . . . . . . . . . . . . 1,070,351 1,320,922 350,558
Salaries and payroll related expenses . . . . . . . . . . 614,551 888,597 904,076
Stock based compensation (note M) . . . . . . . . . . . . 837,600 - -
Travel. . . . . . . . . . . . . . . . . . . . . . . . . . 218,926 178,747 151,362
Other (note P). . . . . . . . . . . . . . . . . . . . . . 511,342 1,149,534 668,173
-------------------- ---------------- ----------------
3,252,770 3,537,800 2,074,169
-------------------- ---------------- ----------------
Operating income (loss) . . . . . . . . . . . . . . . . . ( 2,725,505) ( 1,623,614) 1,219,572
Other income (expense)
Interest expense. . . . . . . . . . . . . . . . . . . . . ( 236,236) ( 458,657) ( 521,418)
Interest income . . . . . . . . . . . . . . . . . . . . . 71,426 10,016 16,981
Other income. . . . . . . . . . . . . . . . . . . . . . . 4,248 - -
Settlement of litigation (note N) . . . . . . . . . - - ( 577,691)
Award from litigation (notes N and S) . . . . . . . . . . - - 987,114
-------------------- ---------------- ----------------
Income (loss) from continuing operations before taxes . ( 2,886,067) ( 2,072,255) 1,124,558
Provision for income taxes (notes B3 and J). . . . . . . . - - -
-------------------- ---------------- ----------------
Income (loss) from continuing operations. . . . . ( 2,886,067) ( 2,072,255) 1,124,558
Discontinued operations, net of taxes (notes B2, B8 and D)
Loss from operations of CNG segment . . . . . . ( 36,592) ( 1,671,801) ( 290,625)
Loss on disposal of CNG segment. . . . . . . . - - ( 288,488)
-------------------- ---------------- ----------------
Total loss from discontinued operations . . . . ( 36,592) ( 1,671,801) ( 579,113)
-------------------- ---------------- ----------------
Net income (loss) (notes B3 and J). . . . . . . . . . . $ ( 2,922,659) $ ( 3,744,056) $ 545,445
==================== ================ ================
Income (loss) from continuing operations . . . . . . . . . $ ( 0.47) $ ( 0.25) $ 0.11
==================== ================ ================
per common share (notes B4 and C)
Net income (loss) per common share (notes B4 and C). . . . $ ( 0.48) $ ( 0.43) $ 0.05
==================== ================ ================
Income (loss) from continuing operations per common share. $ ( 0.47) $ ( 0.25) $ 0.10
==================== ================ ================
assuming dilution (notes B4 and C)
Net income (loss) per common share assuming dilution . . . $ ( 0.48) $ ( 0.43) $ 0.05
==================== ================ ================
(notes B4 and C)
Weighted average common shares outstanding . . . . . . . . 6,144,724 9,235,299 10,659,100
==================== ================ ================
The accompanying notes are an integral part of these statements.
32
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31
1997 1998 1999
------------------ -------------------- ------------------
Shares Amount Shares Amount Shares Amount
--------- ------- ---------- -------- --------- -------
PREFERRED STOCK
Beginning balance 270,000 $ 2,700 270,000 $ 2,700 - -
Conversion of 270,000 shares of Preferred Stock
to 899,910 shares of Common Stock on January 30,
1998 - - (270,000) (2,700) - -
--------- ------- ---------- -------- --------- -------
Ending balance 270,000 $ 2,700 - $ - - $ -
========= ======= ========== ======== ========= =======
SENIOR PREFERRED STOCK
Beginning balance - - - - - -
Issuance of 90,000 shares of Senior Preferred
Stock during March 1999 in exchange for cancellation
of $900,000 of promissory notes - - - - 90,000 900
--------- ------- ---------- -------- --------- -------
Ending balance - - - $ - 90,000 $ 900
========= ======= ========== ======== ========= =======
COMMON STOCK
Beginning balance 5,205,000 $52,050 8,169,286 $81,693 9,952,673 $99,527
Issuance of common stock for service in January
1997 10,000 100 - - - -
Issuance of common stock in connection with
Exchange Agreements between the Company and
certain warrant holders to purchase shares of common
stock in the Company 164,286 1,643 - - - -
Issuance of common stock upon exercise of
warrants on April 1, 1997, in connection with
retirement of $250,000 debt obligations 250,000 2,500 - - - -
Issuance of common stock upon exercise of
warrants in April 1997, in exchange for settlement of
46,759 of outstanding contractor payables 25,000 250 - - - -
Issuance of common stock upon exercise of
warrants during April 1997, in exchange for promissory
note 2,200,000 22,000 - - - -
Issuance of common stock upon exercise of
warrants during March 1997, in exchange for
promissory note 15,000 150 - - - -
Issuance of common stock upon exercise of
warrants during April 1997 300,000 3,000 - - - -
Issuance of common stock upon exercise of
warrants during August 1997, in connection with
retirement of $75,000 debt obligation - - 75,000 750 - -
Issuance of common stock upon exercise of
warrants during August 1997 - - 430,000 4,300 - -
Issuance of common stock in September 1997 in
exchange for settlement of $113,000 of outstanding
consulting fees - - 20,314 203 - -
Conversion of 270,000 shares of preferred stock
to 899,910 shares of common stock on January
30, 1998 - - 899,910 8,999 - -
Dividend of 100,000 shares of common stock
paid upon conversion of 270,000 shares of
preferred stock to 899,910 shares of common
stock on January 30, 1998 - - 100,000 1,000 - -
Issuance of common stock in April 1998 in
connection with retirement of $1,032,652 debt
obligations - - 258,163 2,582 - -
The accompanying notes are an integral part of these statements.
33
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
FOR THE YEARS ENDED JULY 31
1997 1998 1999
----------------- ------------------ --------------------
Shares Amount Shares Amount Shares Amount
--------- ------- --------- ------- ---------- --------
COMMON STOCK - CONTINUED
Sale of common stock in November 1998 - - - - 250,000 2,500
Issuance of common stock in December 1998 in
exchange for settlement of $22,500 of
outstanding obligations - - - - 15,000 150
Issuance of common stock in December 1998 in
exchange for settlement of $118,607 of debt
obligations - - - - 53,884 539
Sale of common stock in December 1998 - - - - 500,000 5,000
Sale of common stock in March 1999, including
related fees of 35,000 shares of common stock - - - - 362,273 3,623
Issuance of common stock in connection with
conversion of debt into Senior Preferred Stock of
the Company - - - - 50,000 500
Issuance of common stock in exchange for
consulting services - - - - 5,000 50
Sale of common stock in July 1999 - - - - 490,000 4,900
Issuance of common stock in July 1999 in
exchange for cancellation of $300,000 of debt
obligations - - - - 166,667 1,667
--------- ------- --------- ------- ---------- --------
Ending balance 8,169,286 $81,693 9,952,673 $99,527 11,845,497 $118,456
========= ======= ========= ======= ========== ========
The accompanying notes are an integral part of these statements.
34
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
FOR THE YEARS ENDED JULY 31
1997 1998 1999
------------ -------------- -------------
Amount Amount Amount
------------ -------------- -------------
ADDITIONAL PAID-IN CAPITAL
Beginning balance $ 5,954,565 $ 10,515,266 $ 13,318,592
Sale of common stock - - 2,288,477
Issuance of common stock for notes,
cancellation of commission agreements,
services and payment on promissory note 13,200 1,142,867 140,418
Conversion of preferred stock to common
stock - (6,299) -
Exchange of debt for senior preferred
stock and common stock - - 997,933
Dividends on preferred stock - 224,000 -
Amortization of loan discount - 75,000 172,802
Grant of stock for services - - 8,700
Common stock to be distributed in
connection with the settlement of a lawsuit - - 206,300
Grant of warrants for services 917,785 - -
Grant of warrants in connection with
registration rights agreement - 160,542 -
Exercise of warrants in connection with
retirement of debt 494,009 136,516 -
Exercise of warrants 3,135,707 1,070,700 -
------------ -------------- -------------
Ending balance $10,515,266 $ 13,318,592 $ 17,133,222
============ ============== =============
STOCKHOLDERS' NOTES
Beginning balance $ - $( 2,834,865) $ (2,763,006)
Notes receivable from the President and a
related party for exercise of warrants, less
reserve of $0, $223,000, and $451,141 (2,834,865) 71,859 (2,344)
------------ -------------- -------------
Ending balance $(2,834,865) $ (2,763,006) $ (2,765,350)
============ ============== =============
ACCUMULATED DEFICIT
Beginning balance $(4,089,526) $ (7,012,185) $(10,981,241)
Net income (loss) for the year (2,922,659) (3,744,056) 545,445
Dividends on preferred stock - (225,000) -
------------ -------------- -------------
Ending balance $(7,012,185) $ (10,981,241) $(10,435,796)
============ ============== =============
The accompanying notes are an integral part of these statements.
35
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31
1997 1998 1999
-------------- -------------------- ---------------------
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) $( 2,922,659) $ ( 3,744,056) $ 545,445
Adjustments to reconcile net (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 448,019 249,584 230,078
Amortization of lease rights 115,404 45,795 45,795
Non-employee stock based costs and other 108,969 30,000 -
Issuance of warrants in connection with
registration rights agreement - 160,542 -
Loan discount - 75,000 134,741
Award from litigation - - ( 987,114)
Stock based compensation cost 837,600 - -
Settlement of litigation - - 206,300
Asset impairment loss - 400,000 -
Loss on sale of assets - 2,579 288,488
Other - 71,859 3,256
Changes in current assets and liabilities:
Trade accounts receivable ( 252,037) ( 914,071) ( 1,310,262)
Related party receivable ( 171,601) 171,519 -
Interest receivable 26,233 - -
Costs and estimated earnings in excess of billings
on uncompleted contracts ( 196,888) 196,888 -
Inventories ( 74,746) 129,069 ( 238,059)
Prepaid and other current assets ( 35,272) ( 42,693) 48,334
LPG trade accounts payable - 931,362 1,918,835
Billings in excess of costs and estimated earnings
on uncompleted contracts 7,596 ( 7,596) -
Other assets and liabilities, net - ( 47,091) ( 11,270)
Other accounts payable and accrued liabilities 262,634 1,226,445 ( 312,754)
-------------- -------------------- ---------------------
Net cash provided by (used in) operating activities ( 1,846,748) ( 1,064,865) 561,813
Cash flows from investing activities:
Acquisition of inventory and fixed assets from WTI ( 394,000) - -
Capital expenditures ( 120,017) ( 1,358,686) ( 432,988)
Sale of assets - 21,843 -
Payments on note receivable - - 49,548
-------------- -------------------- ---------------------
Net cash used in investing activities ( 514,017) ( 1,336,843) ( 383,440)
Cash flows from financing activities:
Revolving credit facilities 140,000 851,823 ( 991,823)
Issuance of debt 1,502,033 1,500,000 -
Issuance of common stock 516,073 1,131,250 2,105,500
Reduction in debt ( 130,724) ( 954,994) ( 417,298)
-------------- -------------------- ---------------------
Net cash provided by financing activities 2,027,382 2,528,079 696,379
-------------- -------------------- ---------------------
Net increase (decrease) in cash ( 333,383) 126,371 874,752
Cash at beginning of period 364,525 31,142 157,513
-------------- -------------------- ---------------------
Cash at end of period $ 31,142 $ 157,513 $ 1,032,265
============== ==================== =====================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 165,964 $ 404,883 $ 338,659
============== ==================== =====================
Supplemental disclosures of noncash transactions:
Preferred stock, common stock and warrants issued
(notes L, M and N) $ 4,004,756 $ 1,740,242 $ 1,556,507
============== ==================== =====================
The accompanying notes are an integral part of these statements.
36
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Penn Octane Corporation, formerly International Energy Development Corporation
(IEDC) and The Russian Fund, a Delaware corporation, was incorporated on August
27, 1992. On October 21, 1993, IEDC acquired Penn Octane Corporation, a Texas
corporation, whose primary asset was a liquid petroleum gas (LPG) pipeline lease
agreement (Pipeline Lease) with Seadrift Pipeline Corporation (Seadrift), a
subsidiary of Union Carbide Corporation (Union Carbide). On January 6, 1995,
the Board of Directors approved the change of IEDC's name to Penn Octane
Corporation. The Company is engaged primarily in the business of purchasing,
transporting and selling LPG and has provided services and equipment to the
compressed natural gas (CNG) industry. The Company owns and operates a terminal
facility in Brownsville, Texas (Brownsville Terminal Facility). The Company has
a long-term lease agreement for approximately 132 miles of pipeline from certain
gas plants in Texas to the Brownsville Terminal Facility. The Company sells LPG
primarily to P.M.I. Trading Limited (PMI). PMI is the exclusive importer of LPG
into Mexico. PMI is also a subsidiary of Petroleos Mexicanos, the state-owned
Mexican oil company (PEMEX). PMI distributes LPG in the northeastern region of
Mexico.
The Company commenced operations during the fiscal year ended July 31, 1995 upon
construction of the Brownsville Terminal Facility. Prior to such time, the
Company was in the "development stage" until the business was established.
Since the Company began operations, the primary customer for LPG has been PMI.
Sales of LPG to PMI accounted for 97%, 99% and 99% of the Company's total
revenues for the fiscal years ended July 31, 1997, 1998 and 1999, respectively.
In February 1997, the Company formed Wilson Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary, for the purpose of engaging in the
business of designing, constructing, installing and servicing equipment for CNG
fueling stations and related products for use in the CNG industry throughout the
world. The subsidiary's name was changed to PennWilson CNG, Inc. (PennWilson)
in August 1997.
In October 1997, the Company formed Penn CNG Holdings, Inc. (Holdings), a
Delaware corporation and a wholly-owned subsidiary. In February 1998, the
Company formed PennWill, S.A. de C.V., Camiones Ecologicos, S.A. de C.V., Grupo
Ecologico Industrial, S.A. de C.V., Estacion Ambiental, S.A. de C.V., Estacion
Ambiental II, S.A. de C.V., and Serinc, S.A. de C.V. (collectively Estacion),
all Mexican corporations. To date there has not been significant operations for
any of these entities.
During May 1999, the Company sold certain CNG related assets to a corporation
controlled by a director and officer of the Company (see note E). As a result
of the sale, the Company is no longer in the CNG business and has reflected the
historical results of the CNG segment as discontinued operations. All prior
periods have been restated.
BY-LAWS
- -------
At the 1997 Annual Meeting of Stockholders of Penn Octane Corporation on May 29,
1997, the stockholders approved an amendment and restatement of Penn Octane
Corporation's by-laws to, among other things, allow the Board of Directors of
Penn Octane Corporation to amend the by-laws and to take certain other actions
and to effect certain other matters without the further approval of the
stockholders.
BASIS OF PRESENTATION
- -----------------------
The accompanying financial statements include the Company and its subsidiaries,
PennWilson and Holdings (Company). All significant intercompany accounts and
transactions are eliminated.
37
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. INVENTORIES
Inventories are stated at the lower of cost or market. For valuing propane and
butane gas, the Company changed costing methods from the weighted average method
to the first-in, first-out method for the year ended July 31, 1997. The Company
determined that the first-in, first-out method was preferable for matching costs
with revenues. The effect of this change in accounting method was immaterial to
the consolidated financial statements. For valuing CNG-related inventory, cost
was determined on the first-in, first-out basis.
2. PROPERTY, PLANT AND EQUIPMENT AND LEASE RIGHTS
Property, plant and equipment are recorded at cost. Assets are depreciated
and amortized using the straight-line method over their estimated useful lives
as follows:
LPG terminal, building and leasehold
improvements 19 years
Automobiles 3-5 years
Furniture, fixtures and equipment 3-5 years
Trailers 8 years
The lease rights are being amortized as follows:
Lease rights 19 years
Maintenance and repair costs are charged to expense as incurred, and renewals
and improvements that extend the useful life of the assets are added to the
property, plant and equipment accounts.
The provisions of Statement of Financial Accounting Standards No. 121 (SFAS
121) "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of", require the Company to review long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an impairment has occurred, the amount of
the impairment is charged to operations. No impairments were recognized for the
years ended July 31, 1997 and 1999. For the year ended July 31, 1998, the
Company recorded a $400,000 charge to operations for the impairment of
long-lived assets relating to the CNG business (see note D).
3. INCOME TAXES
The Company will file a consolidated income tax return for the year ended
July 31, 1999.
The Company accounts for deferred taxes in accordance with SFAS 109, "Accounting
for Income Taxes". Under the liability method specified by SFAS 109, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities
for financial statement and tax return purposes are the allowance for doubtful
accounts receivable, amortization of professional fees and deferred compensation
expense.
38
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
4. INCOME (LOSS) PER COMMON SHARE
Income (loss) per share of common stock is computed on the weighted average
number of shares outstanding. During periods in which the Company incurred
losses, giving effect to common stock equivalents is not presented as it would
be antidilutive.
The Financial Accounting Standards Board (FASB) issued SFAS 128, "Earnings Per
Share", which supersedes Accounting Principles Board Opinion (APB) Opinion No.
15 (APB 15), "Earnings Per Share". The statement became effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Early adoption was not permitted.
5. CASH EQUIVALENTS
For purposes of the cash flow statement, the Company considers cash in banks and
securities purchased with a maturity of three months or less to be cash
equivalents.
6. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107 "Disclosures about Fair Value of Financial Instruments", requires the
disclosure of fair value information about financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to estimate the
value. SFAS 107 excludes certain financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts are not intended to
represent the underlying value of the Company. The carrying amounts of cash and
cash equivalents, current receivables and payables and long-term liabilities
approximate fair value because of the short-term nature of these instruments.
8. REVENUES AND COST RECOGNITION
Certain of the Company's work was performed under fixed-price contracts.
Revenues were recognized on the percentage-of-completion method, measured by the
percentage of total costs incurred to date to estimated total costs for each
contract. This method was used because management considered expended costs to
be the best available measure of progress on these contracts.
Contract costs included all direct materials and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools
and repair costs. General and administrative costs were charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts were made in
the period in which such losses were determined.
39
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
9. STOCK-BASED COMPENSATION
SFAS 123, "Accounting for Stock-Based Compensation", establishes financial
accounting and reporting standards for stock-based employee compensation plans
and for transactions in which an entity issues its equity instruments to acquire
goods and services from non-employees.
The Company has elected under the guidance provided by SFAS 123 to continue to
account for employee stock-based compensation using the intrinsic value method
prescribed in APB 25, "Accounting for Stock Issued to Employees" and related
Interpretations.
10. RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform to
the current presentation.
NOTE C - INCOME (LOSS) PER COMMON SHARE
The following table presents reconciliations from income (loss) per common share
to income (loss) per common share assuming dilution (see notes L and M for the
convertible preferred stock and the warrants):
For the year ended July 31, 1997
------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
Income (loss) from continuing operations $ (2,886,067) - -
--------------
Loss from discontinued operations (36,592) - -
Net income (loss) (2,922,659) - -
--------------
Less: Dividends on preferred stock - - -
BASIC EPS
Income (loss) from continuing operations
available to common stockholders (2,886,067) 6,144,724 $ (0.47)
===========
Loss from discontinued operations (36,592) 6,144,724 $ (0.01)
===========
Net income (loss) available to common stockholders (2,922,659) 6,144,724 $ (0.48)
===========
EFFECT OF DILUTIVE SECURITIES
Warrants - - -
Convertible Preferred Stock - - -
DILUTED EPS
Income (loss) from continuing operations
available to common stockholders N/A N/A $ N/A
===========
Loss from discontinued operations N/A N/A $ N/A
===========
Net income (loss) available to common
stockholders $ N/A N/A $ N/A
============== ============= ===========
40
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INCOME (LOSS) PER COMMON SHARE - Continued
For the year ended July 31, 1998
-------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
Income (loss) from continuing operations $ (2,072,255) - -
--------------
Loss from discontinued operations (1,671,801) - -
Net income (loss) (3,744,056) - -
--------------
Less: Dividends on preferred stock (225,000) - -
BASIC EPS
Income (loss) from continuing operations
available to common stockholders (2,297,255) 9,235,299 $ (0.25)
===========
Loss from discontinued operations (1,671,801) 9,235,299 $ (0.18)
===========
Net income (loss) available to common
stockholders (3,969,056) 9,235,299 $ (0.43)
===========
EFFECT OF DILUTIVE SECURITIES
Warrants - - -
Convertible Preferred Stock - - -
DILUTED EPS
Income (loss) from continuing operations
available to common stockholders N/A N/A $ N/A
===========
Loss from discontinued operations N/A N/A $ N/A
===========
Net income (loss) available to common
stockholders $ N/A N/A $ N/A
============== ============= ===========
41
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INCOME (LOSS) PER COMMON SHARE - Continued
For the year ended July 31, 1999
------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
Income (loss) from continuing operations $ 1,124,558 - -
--------------
Loss from discontinued operations (579,113) - -
Net income (loss) 545,445 - -
--------------
Less: Dividends on preferred stock - - -
BASIC EPS
Income (loss) from continuing operations
available to common stockholders 1,124,558 10,659,100 $ 0.11
===========
Loss from discontinued operations (579,113) 10,659,100 $ (0.06)
===========
Net income (loss) available to common
stockholders 545,445 10,659,100 $ 0.05
===========
EFFECT OF DILUTIVE SECURITIES
Warrants - 89,437 -
Convertible Preferred Stock - 185,440 -
DILUTED EPS
Income (loss) from continuing operations
available to common stockholders 1,124,558 10,933,977 $ 0.10
===========
Loss from discontinued operations (579,113) 10,933,977 $ (0.05)
===========
Net income (loss) available to common
stockholders $ 545,445 10,933,977 $ 0.05
============== ============= ===========
NOTE D - DISCONTINUED OPERATIONS
ACQUISITION OF ASSETS FROM WILSON TECHNOLOGIES INCORPORATED
- -----------------------------------------------------------------
In connection with the Company's plans to enter the CNG fueling business, on
March 7, 1997, PennWilson and Wilson Technologies Incorporated (Wilson), a
leading supplier of CNG fueling stations engaged in the business of selling,
designing, constructing, installing and servicing CNG fueling stations and
related products for use in the CNG industry throughout the world, entered into
an Interim Operating Agreement (the Arrangement). Under the terms of the
Arrangement, effective as of February 17, 1997, PennWilson was granted the right
to use the Wilson name, technology and employees, subject to certain
restrictions, as well as rights to perform contracts which Wilson had not begun
to perform, in exchange for monthly payments of $84,000, and royalty payments
not to exceed $3,000,000 cumulatively, less certain adjustments, if any, based
on 5% of net revenues. The Arrangement provided that PennWilson was entitled to
all revenues earned by PennWilson and by certain businesses of Wilson commencing
as of February 17, 1997. In addition, Zimmerman Holdings Inc. (ZHI), the parent
of Wilson, agreed to reimburse the Company for 50% of the net operating cash
deficit of PennWilson, if any. In carrying out the business, PennWilson was also
entitled to use the Wilson premises as well as available inventory of Wilson at
cost plus 10% or any other amount mutually agreed upon by PennWilson and Wilson.
The Arrangement was to have terminated on the earlier of 90 days from the date
of the Arrangement or the closing of the Acquisition described below. If the
Acquisition was not completed within 90 days, the Arrangement could be extended
by PennWilson for up to three years.
42
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - DISCONTINUED OPERATIONS - Continued
Simultaneously with the Arrangement, the Company, PennWilson, Wilson and
ZHI entered into a purchase agreement (the Acquisition), whereby PennWilson
would acquire certain assets, including trademarks and licenses, and certain
ongoing businesses of Wilson, in exchange for the assumption of certain
liabilities, a $3,000,000 contingent royalty note, a promissory note based upon
certain operating expenses and a $220,000 convertible debenture issued by the
Company. The Acquisition was subject to several conditions, including obtaining
satisfactory restructuring of all of Wilson's obligations to creditors including
the consent of such creditors to the proposed Acquisition.
Effective as of March 21, 1997, the Arrangement was amended (the Amendment) so
that PennWilson agreed to acquire $394,000 of Wilson's inventory and/or other
assets to be paid for through the application of $294,000 previously paid under
the Arrangement, plus other adjustments. In addition, PennWilson issued a
promissory note in the amount of $100,000 to Wilson which is payable in equal
annual installments of $20,000 plus interest at the prime rate (8.5% at July 31,
1998) beginning June 5, 1998. To date the Company has not made the required June
5, 1998 installment. Furthermore, the cumulative royalty to be paid to Wilson
was reduced from $3,000,000 to $2,000,000, less certain adjustments. Also under
the Amendment, effective June 1, 1997, the Company ceased making the monthly
payment and assumed direct responsibility for expenses relating to the operation
of Wilson's facilities, including the lease of the premises and the hiring of
certain employees formerly employed by Wilson. Pursuant to the Amendment and
except as provided for therein, the Arrangement and Acquisition were terminated
effective as of March 21, 1997.
During December 1998, the Company issued 53,884 shares of common stock of the
Company to ZHI as payment for and full cancellation of the $100,000 note payable
and related interest and other obligations totaling $18,000. In connection
therewith, the Company no longer has any further obligation to pay any future
royalties in connection with the Arrangement and the Amendment.
The acquisition was accounted for as a purchase. Accordingly, the results of
operations of PennWilson were included in the consolidated financial statements
from the effective date of the acquisition.
Proforma operating results for the years ended July 31, 1996 and 1997, as if the
acquisition had been completed on August 1, 1995, were not available.
However, WTI's revenues for the period from August 1, 1995 to March 21, 1997
were not material.
RESULTS OF OPERATIONS
- -----------------------
During the year ended July 31, 1998, the Company recorded additional revenues of
$821,994 related to change-orders for additional work performed by the Company
in connection with the construction of equipment for a CNG fueling station for
the New York City Department of Transportation (NYDOT). The change-orders have
been submitted to the customer for approval. During March 1998, the Company was
requested to furnish additional documentation with respect to the submitted
change-orders which was subsequently provided on May 15, 1998. On April 30,
1998, the Company received notification from the general contractor, A.E.
Schmidt Environmental ("AES"), that the Company was in default under the
agreement between AES and the Company relating to the NYDOT CNG fueling station.
The Company has responded to AES indicating that AES is in default with the
terms of the agreement and that the Company is awaiting satisfactory resolution
of these matters prior to completion of the remaining work outlined under the
agreement. The Company is currently exploring legal remedies available (see
note N). As of July 31, 1998, the Company revised its estimate related to the
work preformed in connection with the change-orders. As a result of this
revision the Company reduced revenues associated with the change-orders by
$500,000 and recorded an allowance for doubtful accounts of $321,994. In
connection with this contract, the Company does not anticipate a material amount
of additional costs associated with either completion of the contract or
subsequent warranties provided for in the contract.
43
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - DISCONTINUED OPERATIONS - Continued
At July 31, 1998, the Company determined that CNG related assets constructed by
the Company and spare parts inventories (CNG assets held for sale) should be
written down to their net realizable value due to the uncertainty in the
Company's strategy regarding the CNG business. The amount of the charge to
operations was $400,000.
In connection with the sale of assets related to the CNG business during May
1999 (see note E), the Company has effectively disposed of its CNG segment and
has discontinued operations of that segment. In accordance with APB 30, the
results of operations related to the CNG segment have been recorded as
discontinued operations for all periods presented in the Company's financial
statements and the assets of the CNG segment to be sold have been presented
separately for all periods presented. As a result of the sale, the Company
recorded a loss associated with the discounted notes (see note E).
NOTE E - SALE OF CNG ASSETS
During May 1999, the Company sold its remaining CNG assets and business to a
company (Buyer) controlled by a director and officer of the Company. Under the
terms of the sale, the Company received promissory notes aggregating $1,200,000
to be paid over a period of 61 months. The notes are collateralized by the CNG
assets, the common stock of the Buyer owned by the director and officer and
warrants to purchase 200,000 shares of common stock of the Company which had
previously been issued to the director and officer by the Company. The director
and officer has personally guaranteed a portion of the balance of the notes.
The notes contain a provision for prepayment at a discount and bear interest at
rates specified therein. The Company discounted the notes for the prepayment
discount, resulting in a discount of 260,000 and a discounted balance of the
notes of $940,000 at the date of issuance, which the Company believes is less
than the fair value of the collateral. The effective interest rate of the
notes after giving affect to the discount is 8.6%. At July 31, 1999, the Buyer
has made all required payments provided for in the notes. Because the Buyer can
pay the notes at any time, the Company has determined that it will account for
interest income using the cost recovery method to account for collections on the
notes. Under this method, the amounts recorded as notes receivable will not
exceed the discounted cash payoff amounts.
The Stock Pledge and Security Agreement (Agreement) executed in connection with
the sale provides that the Buyer may sell the collateral at fair market value at
any time during the term of the notes without the Company's consent provided
that all proceeds collected from the sale will be applied to the note balances.
In addition, the Company has agreed to subordinate its secured interest in the
collateral after the Buyer has paid $300,000 plus interest at 10% as provided
for in the Agreement.
NOTE F - RELATED PARTIES
DIRECTORS, OFFICERS AND SHAREHOLDERS
- ---------------------------------------
In March 1996 and April 1996, the Company received loans from two shareholders
aggregating $1,000,000. The notes bear interest at 10% and had accrued interest
at July 31, 1996 and 1997 of $35,833 and $32,662, respectively. During the year
ended July 31, 1997, the Company paid interest totaling $98,794 and reduced the
principal balance outstanding by $100,000. During September and October 1997,
the Company repaid the amount owing on the loans.
During March 1997, the Company received advances from its President in the
amount of $85,000. This amount was repaid during April 1997.
44
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - RELATED PARTIES - Continued
During April 1997, the Company's President exercised warrants to purchase
2,200,000 shares of common stock of the Company at an exercise price of $1.25
per share. The consideration for the exercise of the warrants included $22,000
in cash and a $2,728,000 promissory note. The note accrues interest at the rate
of 8.25% per annum and is payable annually on April 11 until maturity on April
11, 2000. The payments due on April 11, 1998 and 1999 have not been received.
The promissory note is collateralized by 1,000,000 shares of common stock of the
Company owned by the President and has been recorded as a reduction of
stockholders' equity. In connection with the Company's lease agreements (the
Lease Agreements) with CPSC (see note O), the President agreed to provide
500,000 shares of his common stock of the Company as collateral. During
September 1999, in consideration for providing the collateral, the Board of
Directors of the Company agreed to offset the interest due on the President's
$2,728,000 promissory note.
At July 31, 1998, interest receivable from the President was offset by the
remaining amount due to the President as of July 31, 1998 under his employment
agreement. The remaining balance of the interest receivable at July 31, 1998 and
the interest for the year ended July 31, 1999 has been reserved.
During the year ended July 31, 1998 and 1999, the Company paid PennMex $181,000
and $125,000, respectively, for Mexico related expenses incurred by that
corporation on the Company's behalf. Such amounts were expensed (see note O).
During May 1999, the Company and PennWilson completed the sale of assets related
to the CNG business to a company controlled by a director and officer of the
Company (see note E).
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of July 31:
1998 1999
------------ ------------
LPG: $ 173,500 $ 173,500
Building 3,426,440 3,426,440
LPG terminal 391,137 388,839
Automobile and equipment 35,738 35,738
Office equipment 75,389 572,774
Capital construction in progress (see note O) 291,409 291,409
------------ ------------
Leasehold improvements 4,393,613 4,888,700
Less: accumulated depreciation and (1,485,362) (1,717,050)
------------ ------------
Amortization $ 2,908,251 $ 3,171,650
============ ============
Depreciation and amortization expense of property, plant and equipment totaled
$448,019, $249,584 and $234,232 for the years ended July 31, 1997, 1998 and
1999, respectively. These amounts include CNG related depreciation of $13,059,
$14,854 and $10,105, respectively, which is included in discontinued operations
in the consolidated statements of operations.
45
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - INVENTORIES
Inventories consist of the following as of July 31:
1998 1999
-------- ----------
$276,938 $ 434,987
LPG: 100,159 180,169
Pipeline
LPG terminal
$377,097 $ 615,156
======== ==========
NOTE I - BORROWINGS FROM IBC-BROWNSVILLE
The Company had short-term borrowings of $672,552 from International Bank
of Commerce-Brownsville as of July 31, 1998 (see note S).
NOTE J - INCOME TAXES
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities at July 31, 1998 and 1999, were as
follows:
1998 1999
----------------------- ------------------------
Assets Liabilities Assets Liabilities
---------- ------------ ---------- ------------
$ - $ 29,000 $ - $ -
(S) 263 and other inventory costs - 21,000 - 40,000
Depreciation 1,000 - - -
Capitalized start-up costs 5,000 - 5,000 -
Warranty reserves 142,000 - 177,000 -
Bad debt reserve 8,000 - - -
Amortization of professional fees 469,000 - 421,000 -
Deferred compensation expense 3,001,000 - 2,721,000 -
---------- ------------ ---------- ------------
Net operating loss carryforward 3,626,000 50,000 3,324,000 40,000
3,626,000 50,000 3,324,000 40,000
---------- ------------ ---------- ------------
Less: valuation allowance $ - $ - $ - $ -
========== ============ ========== ============
There is no current or deferred tax expense for the years ended July 31, 1997,
1998 and 1999. The Company was in a loss position for 1997 and 1998 and
utilized net operating loss carryforwards in 1999.
Management believes that the valuation allowance reflected above is appropriate
because of the uncertainty that sufficient taxable income will be generated in
future taxable years by the Company to absorb the entire amount of such net
operating losses.
46
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES - Continued
At July 31, 1999, the approximate amount of net operating loss
carryforwards and expiration dates for U.S. income tax purposes were as follows:
Year ending Tax Loss
July 31 Carryforward
- ----------- -------------
$ 26,000
2009 2,372,000
2010 2,279,000
2012 3,326,000
-------------
2018 $ 8,003,000
=============
Future changes in ownership, as defined by section 382 of the Internal Revenue
Code, could limit the amount of net operating loss carryforwards used in any one
year.
47
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - LONG-TERM DEBT
Long-term debt consists of the following as of July 31:
1998 1999
---------- --------
Contract for Bill of Sale which was extended in April 1999; due in monthly
payments of $3,000, including interest at 10%; due in February 2001; collateralized
by a building. $ 91,197 $ 50,347
Unsecured note with principal due in equal annual installments of $20,000
beginning June 5, 1998, plus interest at the prime rate; due June 5, 2002
(see note L). 100,000 -
Noninterest bearing note payable, discounted at 7%, for legal services, due in
Monthly installments of $10,000 - $20,000 through January 2001 with a final
payment of $110,000 in February 2001. - 387,129
Note payable for legal services in connection with the Duran litigation; payable in
monthly installments of $11,092, including interest at 6.9% (see note N). - 127,000
Other long-term debt. 62,700 60,000
Promissory notes, with warrants to purchase up to 250,000 shares of common stock
At an exercise price of $6.00 per share expiring October 21, 2000 and warrants to
purchase up to 337,500 shares of common stock at an exercise price of $1.75 per
share expiring November 30, 2001; principal due June 30, 1999, or from proceeds
received by the Company from any public offering of debt or equity of the Company
in excess of $2,250,000. Promissory notes are collateralized by an assignment of net
proceeds received by the Company in connection with the Judgment (note N);
interest at 10.0% is due quarterly on March 31, June 30, September 30 and
December 31. The effective interest rate after consideration of the discount, is
18.0% per annum. Purchasers of the promissory notes were granted one demand
registration right with respect to the shares issuable upon exercise of the warrants
(see note L). 1,500,000 -
1,753,897 624,476
Current maturities. 1,693,897 365,859
---------- --------
$ 60,000 $258,617
========== ========
In connection with the notes to attorneys, the Company has agreed in the future
to provide a "Stipulation of Judgment" to the creditors in the event that the
Company defaults under the settlement agreements.
Scheduled maturities are as follows:
Year ending July 31,
--------------------
2000 $365,859
2001 258,617
--------
$624,476
========
48
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY
SERIES A - PREFERRED STOCK: CONVERSION
- ------------------------------------------
On September 18, 1993, in a private placement, the Company issued 150,000 shares
of its $.01 par value, 11% convertible, cumulative non-voting preferred stock at
a purchase price of $10.00 per share (the Series A Preferred Stock). On June
10, 1994, the Company declared a 2-for-1 stock split. The Series A Preferred
Stock was convertible into voting shares of common stock of the Company at a
conversion ratio of one share of Series A Preferred Stock for 3.333 shares of
common stock. On September 10, 1997, the Board of Directors of the Company
approved the issuance of an additional 100,000 shares of common stock as an
inducement for the holders of the Series A Preferred Stock to convert the shares
of Series A Preferred Stock and release all rights with respect to the Series A
Preferred Stock. In January 1998, all 270,000 shares of the Series A Preferred
Stock were converted into an aggregate of 999,910 shares of common stock of the
Company. The issuance of the additional 100,000 common shares was recorded as a
preferred stock dividend in the amount of $225,000 during the year ended July
31, 1998.
SERIES B - SENIOR PREFERRED STOCK
- --------------------------------------
At the 1997 Annual Meeting of Stockholders of the Company held on May 29,
1997, the stockholders authorized the amendment of the Company's Restated
Certificate of Incorporation to authorize 5,000,000 shares, $.01 par value per
share, of a new class of senior preferred stock (Series B Senior Preferred
Stock) for possible future issuance in connection with acquisitions and general
corporate purposes, including public or private offerings of shares for cash and
stock dividends.
On October 21, 1997, the Company completed a private placement pursuant to
which it issued promissory notes in the aggregate principal amount of $1.5
million and warrants to purchase 250,000 shares of common stock exercisable
until October 21, 2000 at an exercise price of $6.00 per share. The notes were
unsecured. Proceeds raised from the private placement totaled $1.5 million,
which the Company used for working capital requirements. Interest at 10% per
annum was due quarterly on March 31, June 30, September 30 and December 31.
Payment of the principal and accrued interest on the promissory notes was due on
June 30, 1998. On December 1, 1998, the Company completed a rollover and
assignment agreement effectively extending the due date of the promissory notes
until June 30, 1999 (the "Rollover Agreement"). In connection with the Rollover
Agreement, the Company agreed to assign its rights to any net cash collected
from the Judgment towards any unpaid principal and interest owing on the
promissory notes. The Company also agreed to use any net proceeds received by
the Company from any public offering of debt or equity of the Company in excess
of $2.3 million, towards the repayment of any balances owing under the
promissory notes. The promissory note holders also received additional warrants
to purchase 337,500 shares of common stock, exercisable until November 30, 2001,
at an exercise price of $1.75 per share. The purchasers in the private
placement were granted one demand registration right with respect to the shares
issuable upon exercise of the warrants.
On March 3, 1999, the Company completed an exchange of $900,000 of
promissory notes for 90,000 shares of a newly created class of its Series B
Senior Preferred Stock, the Series B Convertible Redeemable Preferred Stock (the
Convertible Stock), at a purchase price of $10.00 per share and 50,000 shares of
its common stock. The Convertible Stock was non-voting and dividends were
payable at a rate of 10% annually, payable in cash or in kind, semi-annually.
The Convertible Stock could be converted in whole or in part at any time at a
conversion ratio of one share of Convertible Stock for 5.0 shares of common
stock of the Company. In connection with the Company's notice to repurchase
90,000 shares of the Convertible Stock for $900,000 plus dividends of $45,370 on
September 3, 1999, the holder of the Convertible Stock elected to convert all of
the Convertible Stock into 450,000 shares of common stock of the Company. The
Company paid the $45,370 of dividends in cash.
49
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY - Continued
The Company has granted one demand registration right with respect to the
common stock referred to the preceding paragraph. The Company and the holder of
the common stock have agreed to share the costs of the registration.
During July 1999, the Company paid the remaining $600,000 of promissory
notes outstanding through a cash payment of $300,000 and the issuance of 166,667
shares of common stock of the Company as payment for and full cancellation of
$300,000 of promissory notes.
COMMON STOCK
-------------
In November 1996, the Company issued warrants to purchase 100,000 shares of
common stock of the Company to a third party to obtain the rights to construct,
own and operate a Dina dealership in Mexico. Grupo Dina, S.A. de C.V. (Dina) is
one of the largest bus and truck manufacturers in Mexico.
In January 1997, the Company issued 10,000 shares of common stock to an
advertising firm for services provided.
During February 1997, the Company and certain prior officers of the Company
(the Officers) agreed to an exchange offer whereby the Officers, on a weighted
average basis, received 164,286 shares of the Company's common stock in exchange
for outstanding warrants to purchase 702,856 shares of common stock of the
Company. The warrants were canceled.
During March 1997, the Company reduced from $5.00 per share to $2.50 per
share the exercise price of warrants to purchase 100,000 shares of common stock
of the Company held or controlled by a director of the Company.
During March 1997, the Company approved the issuance of warrants to
purchase 200,000 shares of common stock of the Company to a director and officer
of the Company, at an exercise price of $3.625 per share, exercisable on or
before March 24, 2000. As a bonus for the year ended July 31, 1997, on
September 10, 1997, the Company reduced the exercise price of the warrants to
$2.50 per share.
During March 1997, the Company approved the issuance of warrants to
purchase 200,000 shares of common stock of the Company to a director and officer
of the Company upon his one-year anniversary of employment with the Company.
The exercise price of the warrants was to be based on the closing stock price
the day prior to the issuance of the warrants and are exercisable three years
from the date of issuance. On September 10, 1997, the Company agreed to waive
the one-year requirement and immediately granted the warrants as a bonus for the
year ended July 31, 1997 at an exercise price of $2.50 per share exercisable on
or before September 9, 2000.
During March 1997, a related party exercised warrants to purchase 15,000
shares of common stock of the Company at an exercise price of $2.50 per share.
The consideration for the exercise of the warrants included $150 in cash and a
$37,350 promissory note. The note accrues interest at the rate of 8.25% per
annum to be paid annually on March 26 until the note is due in full on March 26,
2000. The payments due on March 26, 1998 and 1999 have not been received. The
promissory note has been recorded as a reduction of stockholders' equity. At
July 31, 1998 and 1999, interest receivable from the related party has been
reserved.
50
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY - Continued
In April 1997, warrants were exercised for 250,000 shares of common stock of the
Company in exchange for the cancellation of $250,000 in outstanding notes plus
accrued interest thereon, and a cash payment received by the Company of
$188,438.
During April 1997, warrants to purchase 25,000 shares of common stock of
the Company were exercised.
During April 1997, additional warrants to purchase 300,000 shares of common
stock of the Company at an exercise price of $1.25 per share were exercised by a
director of the Company and other third parties.
During June 1997, in connection with the Secured Promissory Note, the
Company approved the issuance of warrants to purchase 500,000 shares of common
stock of the Company.
In August 1997, warrants to purchase 75,000 shares of common stock of the
Company were exercised in exchange for cancellation of a $75,000 note payable,
plus accrued interest thereon, and a cash payment to the Company of $56,250.
During August 1997, warrants to purchase a total of 430,000 shares of
Common Stock were exercised, resulting in cash proceeds to the Company of $1.1
million. The proceeds of such exercises were used for working capital and
repayment of Company debt.
On August 29, 1997, in connection with the exercise of warrants to purchase
100,000 shares of Common Stock of the Company by an unrelated third party, the
Company entered into a Registration Rights Agreement requiring that the Company
either register the Common Stock issued upon exercise on or before February 1,
1998 or issue additional warrants to acquire up to 60,000 shares of common
stock. In accordance with the Registration Rights Agreement, the Company issued
warrants to purchase 60,000 shares of Common Stock to the unrelated third party
at an exercise price of $2.50 per share, exercisable within one year from the
date of issuance.
Effective April 7, 1998, the Company issued 258,163 shares of Common Stock
in satisfaction of all principal and interest owing on the Secured Promissory
Note, which totaled $1,032,652 as of April 7, 1998.
On November 13, 1998, the Company issued 250,000 shares of common stock of
the Company and warrants to purchase 125,000 shares of common stock with an
exercise price of $1.25 per warrant and an expiration date of November 13, 2000
for an amount of $250,000. Net proceeds from the sale were used for working
capital purposes.
On December 14, 1998, the Company issued 500,000 shares of common stock of
the Company and warrants to purchase 300,000 shares of common stock with an
exercise price of $1.75 per warrant and an expiration date of December 13, 2003
for an amount of $500,000. Net proceeds from the sale were used for working
capital purposes.
During December 1998, the Company issued 53,884 shares of common stock of
the Company to Zimmerman Holdings Inc. (ZHI) as payment for and full
cancellation of a note payable of $100,000 and related interest and other
obligations totaling $18,000. In connection therewith, the Company has no
further obligation to pay any future royalties in connection with the Company's
purchase of certain CNG assets from Wilson Technologies Inc., a wholly owned
subsidiary of ZHI.
51
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY - Continued
During December 1998, the Company issued 15,000 shares of common stock of the
Company and warrants to purchase 10,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of December 31, 2000 in
exchange for cancellation of all outstanding obligations totaling approximately
$22,500 and other obligations as outlined in an agreement between the parties.
On March 18, 1999, the Company issued 120,000 shares of common stock of the
Company and warrants to purchase 60,000 shares of common stock with an exercise
price of $2.25 per warrant and an expiration date of March 18, 2002 for an
amount of $150,000. Net proceeds from the sale were used for working capital
purposes.
On March 19, 1999, the Company issued 60,606 shares of common stock of the
Company and warrants to purchase 30,303 shares of common stock with an exercise
price of $2.59 per warrant and an expiration date of March 19, 2002 for an
amount of $100,000. Net proceeds from the sale were used for working capital
purposes.
On March 19, 1999, the Company issued 146,667 shares of common stock of the
Company and warrants to purchase 73,333 shares of common stock with an exercise
price of $2.42 per warrant and an expiration date of March 19, 2002 for an
amount of $220,000. Net proceeds from the sale were used for working capital
purposes.
In connection with the stock issuances in March 1999, the Company issued a total
of 35,000 shares of common stock of the Company, representing the fees
associated with the transactions.
On July 15, 1999, the Company issued 50,000 shares of common stock of the
Company and warrants to purchase 25,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 15, 2002 for an amount
of $100,000. Net proceeds from the sale were used for working capital purposes.
On July 16, 1999, the Company issued 100,000 shares of common stock of the
Company and warrants to purchase 50,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 16, 2002 for an amount
of $200,000. Net proceeds from the sale were used for working capital purposes.
On July 21, 1999, the Company issued 40,000 shares of common stock of the
Company and warrants to purchase 20,000 shares of common stock with an exercise
price of $3.25 per warrant and an expiration date of July 21, 2002 for an amount
of $90,000. Net proceeds from the sale were used for working capital purposes.
On July 29, 1999 and July 30, 1999, the Company issued 37,500, and 362,500
shares of common stock of the Company and warrants to purchase 18,750 and
181,250 shares of common stock each with an exercise price of $3.00 per warrant
and an expiration dates of July 29, 2003 and July 30, 2003 for a cash payment
of $600,000 and the full cancellation of notes payable of $200,000. Net
proceeds from the sale were used for working capital purposes and to pay down
$300,000 of debt obligations (See Preferred Stock above).
In connection with the stock issuances on July 29, 1999 and July 30, 1999, the
Company paid a cash fee of $72,000 and issued a warrant to purchase 40,000
shares of common stock of the Company with an exercise price of $3.00 per
warrant and an expiration date of July 30, 2003 representing the fees associated
with the transactions. The cash fee was netted against the proceeds from the
sale of the common stock.
During July 1999, the Company issued 66,667 shares of common stock of the
Company as payment for and full cancellation of a note payable of $100,000 (See
Preferred Stock above).
52
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY - Continued
During August 1999, warrants to purchase a total of 425,000 shares of common
stock of the Company were exercised, resulting in cash proceeds to the Company
of $681,233. The proceeds of such exercises were used for working capital
purposes.
In connection with previous warrants issued by the Company, certain of these
warrants contain a call provision whereby the Company has the right to purchase
the warrants for a nominal price if the holder of the warrants does not elect to
exercise the warrants within the prescribed period.
REGISTRATION RIGHTS
- --------------------
In connection with the issuance of shares and warrants by the Company (the
Shares), the Company has on numerous instances granted registration rights to
the holders of the Shares, including those shares which result from the exercise
of warrants (the "Registrable Securities"). The obligations of the Company with
respect to the Registrable Securities include one-time demand registration
rights and/or piggy-back registration rights (the "Registration"). The Company
is required to file an effective registration by either September 19, 1999,
December 1, 1999 or January 31, 2000. In connection with the Registration of
the Registrable Securities, the Company is required to provide notice to the
holder of the Registrable Securities, who may or may not elect to be included in
the Registration. The Company is obligated to register the Registrable
Securities even though the Registrable Securities may be tradable under Rule
144. The Company did not file a registration statement for the shares agreed
to be registered by September 19, 1999. The Company has also received notice
of a demand for registration for certain of the Shares. The Registration Rights
Agreements do not contain provisions for damages, if the Registration is not
completed except for those Shares required to be registered on December 1, 1999,
whereby for each month after December 1999 and if the Company fails to have an
effective registration statement, the Company will be required to pay a penalty
of $80,000 to be paid in cash and/or common stock of the Company based on the
then current trading price of the common stock of the Company.
The total amount of shares and warrants subject to registration at September 30,
1999, are as follows:
Unexercised
Shares Warrants
--------- -----------
Demand Registration Rights 1,400,000 -
Piggy-Back Registration Rights 1,358,940 1,046,136
--------- -----------
Total Registrable Securities 2,758,940 1,046,136
========= ===========
Registration Rights Subject To
Penalty* 400,000 200,000
* Also entitled to piggy-back registration rights
53
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS' EQUITY - Continued
STOCK AWARD PLAN
- ------------------
Under the Company's 1997 Stock Award Plan, the Company has reserved for issuance
150,000 shares of Common Stock, of which 124,686 shares were unissued as of July
31, 1999, to compensate consultants who have rendered significant services to
the Company. The Plan is administered by the Compensation Committee of the
Board of Directors of the Company which has complete authority to select
participants, determine the awards of Common Stock to be granted and the times
such awards will be granted, interpret and construe the 1997 Stock Award Plan
for purposes of its administration and make determinations relating to the 1997
Stock Award Plan, subject to its provisions, which are in the best interests of
the Company and its stockholders. Only consultants who have rendered
significant advisory services to the Company are eligible to be participants
under the Plan. Other eligibility criteria may be established by the
Compensation Committee as administrator of the Plan.
In October 1997, the Company issued 20,314 shares of Common Stock to a Mexican
consultant in payment for services rendered to the Company valued at $113,000
pursuant to the plan.
In April 1999, the Company issued 5,000 shares of Common Stock to a consultant
in payment for services rendered to the Company valued at $8,750 pursuant to the
plan.
NOTE M - STOCK WARRANTS
The Company applies APB 25 for warrants granted to the Company's employees. The
compensation cost recorded in the consolidated statements of operations for
warrants granted to employees totaled $837,600 and $0 for the years ended July
31, 1997 and 1999, respectively. No warrants granted to Employees during the
year ended July 31, 1998.
As bonuses to four of its executive officers for the year ended July 31, 1999,
the Company granted each executive warrants to purchase 30,000 shares of common
stock at an exercise price of $2.50 per share through July 30, 2004. The
exercise price per share of the warrants was greater than the quoted market
price per share at the measurement date. Based on the provisions of APB 25, no
compensation expense was recorded for the bonuses.
Had compensation cost related to the warrants granted to employees been
determined based on the fair value at the grant dates, consistent with the
methodology of SFAS 123, the Company's pro forma net loss and loss per share
would have been as follows for the years ended July 31, 1997 and 1999:
54
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCK WARRANTS - CONTINUED
1997 1999
---------------- ----------
Income (loss) from continuing operations as reported $ (2,886,067) $1,124,558
Income (loss) from continuing operations proforma (3,018,023) 896,958
Net income (loss) as reported (2,922,659) 545,445
Net income (loss) proforma (3,054,615) 317,845
Income (loss) from continuing operations per common share as reported (.47) .11
Income (loss) from continuing operations per common share proforma (.49) .08
Net income (loss) per common share as reported (.48) .05
Net income (loss) per common share proforma (.50) .03
Income (loss) from continuing operations per common
share assuming dilution as reported (.47) .10
Income (loss) from continuing operations per common
share assuming dilution proforma (.49) .08
Net income (loss) per common share assuming dilution as
reported (.48) .05
Net income (loss) per common share assuming dilution
proforma (.50) .03
The following assumptions were used for two grants of warrants to employees in
the year ended July 31, 1997 to compute the fair value of the warrants using the
Black-Scholes option-pricing model: dividend yield of 0% for both grants;
expected volatility of 95% and 90%; risk-free interest rate of 7% for both
grants; and expected lives of 3 years for both grants.
The following assumptions were used for two grants of warrants to employees in
the year ended July 31, 1999 to compute the fair value of the warrants using the
Black Scholes option-pricing model; dividend yield of 0% for both grants;
expected volatility of 92% and 94%; risk free interest rate of 7% for both
grants; and expected lives of 3 and 5 years.
For warrants granted to non-employees, the Company applies the methodology of
SFAS 123 to determine the fair market value of the warrants issued. Costs
associated with warrants granted to non-employees for the years ended July 31,
1997, 1998 and 1999, totaled $92,185, $30,000 and $0, respectively. Warrants
granted to non-employees simultaneously with the issuance of debt are accounted
for based on the guidance provided by APB 14, "Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants".
55
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCK WARRANTS - CONTINUED
A summary of the status of the Company's warrants as of July 31, 1997, 1998 and
1999, and changes during the years ending on those dates is presented below:
1997 1998 1999
---------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
---------------
Average Average Average
Warrants Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------ ----------- --------------- ---------- --------------- ---------- ---------------
Outstanding at beginning of
year 4,680,000 $ 1.84 2,215,000 $ 2.61 1,430,000 $ 3.15
Granted 1,325,000 2.66 300,000 5.42 1,451,136 2.27
Exercised (3,492,856) 1.55 (505,000) 2.57 - -
Expired (297,144) 2.56 (580,000) 2.76 (290,000) 2.67
----------- ---------- ----------
Outstanding at end of year 2,215,000 2.61 1,430,000 3.15 2,591,136 2.71
=========== ========== ==========
Warrants exercisable at end of
year 2,015,000 1,430,000 2,591,136
The following table depicts the weighted-average exercise price and weighted
average fair value of warrants granted during the years ended July 31, 1997,
1998 and 1999 by the relationship of the exercise price of the warrants granted
to the market price on the grant date:
1997 1998 1999
---------------------------- ---------------------------- ----------------------------
For warrants granted For warrants granted For warrants granted
Weighted Weighted Weighted Weighted Weighted Weighted
Exercise price compared to average average average average average average
market price on grant date Fair value exercise price Fair value exercise price fair value Exercise price
- -------------------------- ----------- --------------- ----------- --------------- ----------- ---------------
Equals market price $ - $ - $ - $ - $ - $ -
Exceeds market price 0.30 3.00 - - 1.03 2.27
Less than market price 1.64 2.50 2.07 5.42 1.98 2.50
The fair value of each warrant grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the years ending July 31, 1997, 1998 and 1999,
respectively: dividend yield of 0% for all three years, expected volatility of
88%, 85% and 92%, risk-free interest rate of 7% for all three years and expected
lives of 3, 3 and 3.5 years.
The following table summarizes information about the warrants outstanding at
July 31, 1999:
Warrants Outstanding Warrants Exercisable
-------------- ------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at Contractual Exercise at Exercise
Range of Exercise Prices July 31, 1999 Life Price July 31, 1999 Price
- ------------------------- ------------- ----------- --------- ------------- ---------
1.25 to $2.50 1,915,833 3.31 years $ 2.16 1,915,833 $ 2.16
2.59 to $3.25 375,303 3.59 3.04 375,303 3.04
5.00 to $6.00 300,000 1.39 5.83 300,000 5.83
------------- -------------
2.50 to $6.00 2,591,136 2.61 $ 2.71 2,591,136 $ 2.71
============= =============
56
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES
LITIGATION
On March 16, 1999, the Company settled in mediation a lawsuit with its former
chairman of the board, Jorge V. Duran. In connection therewith and without
admitting or denying liability, the Company agreed to pay Mr. Duran
approximately $456,300 in cash and common stock of the Company of which $100,000
is to be paid by the Company's insurance carrier. Litigation costs totaled
$221,391. The Company has agreed to register the stock in the future.
In October 1996, the Company and Mr. Richter, without admitting or denying the
findings contained therein (other than as to jurisdiction), consented to the
issuance of an order by the Securities and Exchange Commission (the "SEC") in
which the SEC (i) made findings that the Company and Mr. Richter had violated
portions of Section 13 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), relating to the filing of periodic reports and the maintenance
of books and records, and certain related rules under the Exchange Act, and (ii)
ordered respondent to cease and desist from committing or causing any current or
future violation of such section and rules.
On October 14, 1998, a complaint was filed by Amwest Surety Insurance Company
("Amwest") naming as defendants, among others, PennWilson and the Company
seeking reimbursement for payments made to date by Amwest of approximately
$160,000 on claims made against the performance and payment bonds in connection
with services provided by suppliers, laborers and other materials and work to
complete the NYDOT contract (Vendors). These amounts were previously recorded
in the Company's balance sheet at the time of the complaint. In addition,
Amwest was seeking pre-judgment for any amounts ultimately paid by Amwest
relating to claims presented to Amwest against the performance and payment
bonds, but have not yet been authorized or paid to date by Amwest. In May 1999,
the Company and PennWilson reached a settlement agreement with Amwest whereby
Amwest will be reimbursed $160,000 by PennWilson for the payments made to the
Vendors, with the Company acting as guarantor. Upon satisfactory payment,
Amwest will dismiss its pending claims related to the payment bond. On October
12, 1999, a Demand for Arbitration of $780,767 was filed by A.E. Schmidt
Environmental against Amwest, PennWilson and the Company on the performance bond
pursuant to the NYDOT contract. The Company is currently considering its legal
options and intends to vigorously defend against the claims made against the
performance bond but not yet paid by Amwest.
The Company and its subsidiaries are also involved with other proceedings,
lawsuits and claims. The Company is of the opinion that the liabilities, if
any, ultimately resulting from such proceedings, lawsuits and claims should not
materially affect its consolidated financial position.
CREDIT FACILITY, LETTERS OF CREDIT AND OTHER
As of July 31, 1999, the Company has a $6.0 million credit facility with RZB
Finance L.L.C. (RZB) for demand loans and standby letters of credit (RZB Credit
Facility) to finance the Company's purchase of LPG. Under the RZB Credit
Facility, the Company pays a fee with respect to each letter of credit
thereunder in an amount equal to the greater of (i) $500, (ii) 2.5% of the
maximum face amount of such letter of credit, or (iii) such higher amount as may
be agreed to between the Company and RZB. Any amounts outstanding under the RZB
Credit Facility shall accrue interest at a rate equal to the rate announced by
the Chase Manhattan Bank as its prime rate plus 2.5%. Pursuant to the RZB
Credit Facility, RZB has sole and absolute discretion to terminate the RZB
Credit Facility and to make any loan or issue any letter of credit thereunder.
RZB also has the right to demand payment of any and all amounts outstanding
under the RZB Credit Facility at any time. In connection with the RZB Credit
Facility, the Company granted a mortgage, security interest and assignment in
any and all of the Company's real property, buildings, pipelines, fixtures and
interests therein or relating thereto, including, without limitation, the lease
with the Brownsville Navigation District of Cameron County for the land on which
the Company's Brownsville Terminal Facility is located, the Pipeline Lease, and
in connection therewith agreed to enter into leasehold deeds of trust, security
agreements, financing statements and assignments of rent, in forms satisfactory
to RZB. Under the RZB Credit Facility, the Company may not permit to exist any
lien, security interest, mortgage, charge or other encumbrance of 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.
57
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - CONTINUED
In connection with the Company's purchases of LPG from Exxon and/or PG&E NGL
Marketing, L.P.(PG&E), the Company issues letters of credit on a monthly basis
based on anticipated purchases.
As of July 31, 1999, letters of credit established under the RZB Credit Facility
in favor of Exxon for purchases of LPG totaled $5,994,997 of which $2,850,197
was being used to secure unpaid purchases from Exxon. In connection with these
purchases, the Company had unpaid invoices due from PMI totaling $2,459,427 and
cash balances maintained in the RZB Credit Facility collateral account of
$847,042 as of July 31, 1999.
Interest costs on the RZB Credit Facility totaled $97,986 and $217,179 for the
years ended July 31, 1998 and 1999.
OPERATING LEASE COMMITMENTS
The Company has lease commitments for its pipeline, land, office space and
office equipment. The Pipeline Lease originally required fixed monthly payments
of $45,834 ($550,000 annually) and monthly service payments of $8,000 through
March 2004. The service payments are subject to an annual adjustment based on a
labor cost index and an electric power cost index. As provided in the Pipeline
Lease, the Company has the right to use the Pipeline solely for the
transportation of LPG belonging only to the Company and not to any third party.
The lessor has the right to terminate the lease agreement under certain limited
circumstances, which management currently believes are remote, as provided for
in the lease agreement at specific times in the future by giving twelve months
written notice. The Company can also terminate the lease at any time by giving
thirty days notice only if its sales agreement with its main customer is
terminated. The Company can also terminate the lease at any time after the
fifth anniversary date of the lease by giving twelve months notice. Upon
termination by the lessor, the lessor has the obligation to reimburse the
Company the lesser of 1) net book value of its liquid propane gas terminal at
the time of such termination or 2) $2,000,000.
The Pipeline Lease currently expires on December 31, 2013, pursuant to an
amendment (the "Pipeline Lease Agreement") 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, which the Company believes will provide greater access
to and from the Pipeline. Pursuant to the Pipeline Lease Amendment, the
Company's fixed annual fee associated with the use of the Pipeline was increased
by $350,000 less certain adjustments during the first two years from the
Effective Date and the Company is required to pay for a minimum volume of
storage of $300,000 per year beginning the second year from the Effective Date.
In addition, the Pipeline Lease Amendment also provides for variable rental
increases based on monthly volumes purchased and flowing into the Pipeline and
storage utilized. The Company has made all payments required under the Pipeline
Lease Agreement.
The operating lease for the land expires in October 2003. In May 1997, the
Company amended its lease ("Brownsville Lease") with the Brownsville Navigation
District ("District") to include rental of additional space adjacent to the
existing terminal location. Effective April 15, 1997, the lease amount was
increased to $74,784 annually.
The Company anticipates renewing the Brownsville Lease prior to its
expiration for the same term as the Pipeline Lease Amendment. The Brownsville
Lease provides, among other things, that if the Company complies with all the
conditions and covenants, the leasehold improvements made to the Brownsville
Terminal Facilities by the Company may be removed from the premises or otherwise
disposed of by the Company at the termination of the Brownsville Lease. In the
event of a breach by the Company of any of the conditions or covenants, all
improvements owned by the Company and placed on the premises shall be considered
part of the real estate and shall become the property of the District.
58
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - CONTINUED
OPERATING LEASE COMMITMENTS - CONTINUED
The Company leases its executive offices, which are located in Redwood
City, California. The monthly rental is $4,910 through October 1999.
Beginning November 1, 1999, the Company will relocate its executive offices to
Palm Desert, California. The lease on the Palm Desert facility expires October
31, 2002. The monthly lease payments are approximately $3,000.
Rent expense was $781,750, $954,924 and $1,123,821 for the years ended July
31, 1997, 1998 and 1999, respectively. In addition, rent expense associated
with operating leases for leased equipment and furniture was $14,017, $38,178
and $28,332 for the years ended July 31, 1997, 1998 and 1999. As of July 31,
1999, the minimum lease payments under noncancelable operating leases are as
follows:
Year ending July 31, $ 1,125,288
- --------------------
2000 1,090,819
2001 1,089,984
2002 1,067,034
2003 1,000,180
2004 8,450,000
-----------
Thereafter $13,823,305
===========
CAPITALIZED LEASE COMMITMENT
The following table is a schedule by years (assuming the Substantial Completion
Date is January 1, 2000) of the estimated future minimum lease payments under
the Lease Agreements for the US - Mexico Pipeline and Mexican Terminal Facility
together with the present value of the net minimum lease payments net of the 30%
interest purchased subsequent to July 31, 1999 (see note O):
Year ending July 31,
- -------------------------------------------------------------------
2000 $ 785,000
2001 1,884,000
2002 1,884,000
2003 1,884,000
2004 1,884,000
Later years 19,939,000
-----------------
Total minimum lease payments 28,260,000
Less: Amount representing estimated executory costs for operations ( 3,600,000)
-----------------
24,660,000
Less: Amounts related to the purchased interest - see note O ( 7,243,567)
-----------------
Net minimum lease payments 17,416,433
Less: Amount representing interest ( 9,016,130)
-----------------
Present value of net minimum lease payments $ 8,400,303
=================
59
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - CONTINUED
EMPLOYMENT CONTRACTS
The Company has a six year employment agreement with the President for the
period through January 31, 2001. Under that agreement, he is entitled to
receive $300,000 in annual compensation equal to a monthly salary of $25,000
until earnings exceed a gross profit of $500,000 per month, whereupon he is
entitled to an increase in his salary to $40,000 per month for the first year of
the agreement increasing to $50,000 per month during the second year of the
agreement. He is also entitled to (i) an annual bonus of 5% of all pre-tax
profits of the Company, (ii) options for the purchase of 200,000 shares of
Common Stock that can be exercised under certain circumstances at an option
price of $7.50 per share (giving effect to a 2-for-1 stock split on June 10,
1994), and (iii) a term life insurance policy commensurate with the term of
employment agreement, equal to six times his annual salary and three times his
annual bonus. The employment agreement also entitles him to a right of first
refusal to participate in joint venture opportunities in which the Company may
invest, contains a covenant not to compete until one year from the termination
of the agreement and restrictions on use of confidential information. Through
July 31, 1997, he waived his right to his full salary. Through July 31, 1999,
he waived his right to receipt of the stock options, bonus on pre-tax profits
and the purchase by the Company of a term life insurance policy. In the future,
he may elect not to waive such rights. At July 31, 1998, $77,000 of salary due
to the President has been offset against the interest receivable from the
President (see note F).
In November 1997, the Company entered into an employment agreement with an
employee of the Company. Under the terms of the agreement, the employee is
entitled to receive $120,000 in annual compensation, plus $1,000 monthly for an
automobile allowance. The Agreement is for two years and may be terminated by
the Company or the employee. The agreement provides for the issuance of
warrants for the purchase of 50,000 shares of Common Stock of the Company with
an exercise price of $5.00 per share to expire November 16, 2001. The agreement
also provides for the issuance of an additional 50,000 upon the second
anniversary of the agreement.
Aggregate compensation under employment agreements totaled $174,524, $391,078
and $432,000 for the years ended July 31, 1997, 1998 and 1999, respectively,
which included agreements with former executives. Minimum salaries under the
remaining agreements are as follows:
Year ending July 31, Salaries
----------------------- --------
2000 $336,000
2001 150,000
NOTE O - LPG EXPANSION PROGRAM (EXPANSION)
On July 26, 1999, the Company was granted a permit by the United States
Department of State authorizing the Company to construct, maintain and operate
two pipelines (the "US Pipeline") crossing the international boundary line
between the United States and Mexico (from the Brownsville Terminal Facilities
near the Port of Brownsville, Texas and El Sabino, Mexico) for the transport of
LPG and refined products (motor gasoline and diesel fuel) [the "Refined
Products"].
Previously, on July 2, 1998, Penn Octane de Mexico, S.A. de C.V. ("PennMex"),
see below, received a permit from the Comision Reguladora de Energia (the
"Mexican Energy commission") to build and operate one pipeline to transport LPG
(the "Mexican Pipeline") [collectively, the US Pipelines and the Mexican
Pipeline are referred to as the "US-Mexico Pipeline"] between El Sabino (at the
point North of the Rio Bravo) and to a terminal facility in the City of
Matamoros, State of Tamaulipas, Mexico (the "Mexican Terminal Facilities").
60
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - LPG EXPANSION PROGRAM (EXPANSION) - CONTINUED
In addition to the Expansion, the Company has begun construction of an
additional LPG terminal facility in Saltillo, Mexico (the "Saltillo Terminal
Facilities") at an estimated cost of $500,000. The Saltillo Terminal
Facilities, when complete, will allow for the distribution of LPG by railcars,
which will directly link the Company's Brownsville Terminal Facility and the
Saltillo Terminal Facilities. The Saltillo Terminal Facilities will contain
storage to accommodate approximately 100,000 gallons of LPG.
On May 31, 1999, Tergas, S.A. de C.V. ("Tergas"), see below, was formed for the
purpose of operating LPG terminal facilities in Mexico, including the Mexican
Terminal Facilities and the planned Saltillo Terminal Facilities and future LPG
terminal facilities in Mexico. The Company anticipates Tergas will be issued the
permit to operate the Mexican Terminal Facilities.
In connection with the Expansion, the Company and CPSC International, Inc.
("CPSC") entered into two separate Lease / Installation Purchase Agreements, as
amended, ("the Lease Agreements"), whereby CPSC will construct and operate the
US-Mexico Pipeline (including an additional pipeline to accommodate refined
products) and the Mexican Terminal Facilities and lease these assets to the
Company. Under the terms of the Lease Agreements, the Company will pay monthly
rentals of approximately $157,000, beginning the date that the US-Mexico
Pipeline and Mexican Terminal Facilities are physically capable to transport and
receive LPG in accordance with technical specifications required (the
"Substantial Completion Date"). In addition, the Company has agreed to provide
a lien on certain assets, leases and contracts which are currently pledged to
RZB, and provide CPSC with a letter of credit of approximately $1,000,000. The
Company is currently in negotiations with RZB and CPSC concerning RZB's
subordination of RZB's lien on certain assets, leases and contracts. The
Company also has the option to purchase the US-Mexico Pipeline and the Mexican
Terminal Facilities at the end of the 10th year anniversary and 15th year
anniversary for $5,000,000 and $100,000, respectively. Under the terms of the
Lease Agreements, CPSC is required to pay all costs associated with the
construction design and maintenance of the US-Mexico Pipeline and Mexican
Terminal Facilities.
On September 16, 1999, the Lease Agreements were amended whereby CPSC agreed to
accept 500,000 shares of common stock of the Company owned by the President of
the Company (the "Collateral") in place of the letter of credit originally
required under the Lease Agreements. The Collateral shall be replaced by a
letter of credit or cash collateral over a ten month period beginning monthly
after the Substantial Completion Date. In addition, the Company has agreed to
guaranty the value of the Collateral based on the fair market value of the
Collateral for up to $1,000,000.
For financial accounting purposes, the Lease Agreements are capital leases.
Therefore, the assets and related liabilities will be recorded in the Company's
balance sheet on the Substantial Completion Date.
On September 16, 1999, the Company and CPSC entered into an option agreement
whereby the Company will purchase a 30% interest (the "Purchased Interests") in
the US-Mexico Pipeline and the Mexican Terminal Facilities for $3,000,000. In
connection with the Purchased Interests, the Company will not assume any costs
associated with CPSC's obligations under the Lease Agreements until the
Substantial Completion Date is reached, and the Company will receive a minimum
of $54,000 per month from the Company's payments under the Lease Agreements
(approximately 34% of the Company's monthly lease obligations under the Lease
Agreements). The Company is required to pay for the Purchased Interests on
January 3, 2000, or 10 days subsequent to the Substantial Completion Date,
whichever is later (the "Closing Date"). To secure the payment of the
$3,000,000 for the Purchased Interests, the Company has agreed to assign its
interest in the net cash proceeds to be received from the IBC-Brownsville award
judgment (the "Judgment"). In the event that the net cash received from the
Judgment is less than $3,000,000, the Company will be required to pay the
difference. In addition, if the Judgment is not paid by the Closing Date, CPSC
may require the Company to make immediate payment in exchange for the return of
the Judgment assignment.
61
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - LPG EXPANSION PROGRAM (EXPANSION) - CONTINUED
Included in the agreement for the Purchased Interests, the Company has two
option agreements (the "Options") whereby the Company has the right to acquire
an additional 20% and an additional 50% interest in the Lease Agreements for
$2,000,000 and $7,000,000, respectively, within 90 days from the Closing Date.
The Company paid $50,000 to obtain the Options.
The actual costs to complete the US-Mexico Pipelines and Mexican Terminal
Facilities are the sole responsibility of CPSC ("the Costs"). In addition, the
Company has spent approximately $512,000 as of July 31, 1999 related to the
Costs, which are included in capital construction in progress in the
consolidated balance sheet.
PennMex and/or Tergas are currently the owners of the land which is being
utilized for the Mexican Pipeline and Mexican Terminal Facilities, own the
leases associated with the Saltillo Terminal Facilities, have been granted the
permit for the Mexican Pipeline and have been granted and/or are expected to be
granted permits to operate the Mexican Terminal Facilities and the Saltillo
Terminal Facilities. In addition, the Company has advanced funds to PennMex
and/or Tergas in connection with the purchase of assets associated with the
Mexican Pipeline, Mexican Terminal Facilities and the Saltillo Terminal
Facilities.
Both PennMex and Tergas are Mexican companies which are owned 90% and 95%,
respectively, by Jorge R. Bracamontes, an officer and director of the Company
and the balance by other citizens of Mexico.
Under current Mexican law, foreign ownership of Mexican entities involved in the
distribution of LPG and the operation of LPG terminal facilities are prohibited.
However, transportation and storage of LPG by foreigners is permitted (see note
T).
NOTE P - FOURTH QUARTER ADJUSTMENTS - UNAUDITED
The net loss for the quarter ended July 31, 1999, was primarily attributable to
increases in the following expenses (i) settlement of litigation of $501,416,
(ii) the discount of the note receivable in connection with the sale of the CNG
assets of $260,000, and (iii) an increase in the allowance for uncollectable
receivables of $111,431.
The net loss for the quarter ended July 31, 1998, was primarily attributable to
increases in the following expenses: (1) warrants issued in connection with the
registration rights agreement of $160,542, (2) the write-off of deferred
registration costs of $385,491, (3) professional fees of $425,769, (4) an
allowance for uncollectable receivables of $38,880, (5) salary related costs of
$77,000, (6) approximately $1.0 million of losses associated with the
construction of CNG equipment for sale to third parties, (7) a $400,000 asset
impairment loss associated with the Company's CNG assets and (8) a reserve for
the interest receivable from the President and a related party of $223,000.
The net loss for the quarter ended July 31,1997 was primarily attributable to
increases in the following selling, general and administrative expenses: (1)
stock based compensation of $838,000, (2) PennWilson expenses of $125,000, (3)
professional fees of $388,000, and (4) travel expenses of $125,000.
NOTE Q - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. The Company has had an accumulated deficit since
inception, has used cash in operations, and has had a deficit in working
capital. In addition, the Company is involved in litigation, the outcome of
which cannot be determined at the present time. Although the Company has entered
into the Lease Agreements, the acquisition of the interests in PennMex and the
operating agreement with Tergas have yet to be consummated. As discussed in note
A, the Company has historically depended heavily on sales to one major customer.
62
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - REALIZATION OF ASSETS - CONTINUED
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts as shown in the accompanying
consolidated balance sheet is dependent upon the collection of the Judgment, the
Company's ability to obtain additional financing and to raise additional equity
capital, and the success of the Company's future operations. The financial
statements do not include any adjustments related to the recoverability and
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be unable to continue in
existence.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to (i) collect the Judgment, (ii)
increase sales to its current customers, (iii) increase its customer base, (iv)
extend the terms and capacity of the Pipeline Lease and the Brownsville Terminal
Facility, (v) expand its product lines, (vi) increase its source of LPG supply
and at more favorable terms, (vii) obtain additional letters of credit financing
and (viii) raise additional debt and/or equity capital.
At July 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8,000,000. The ability to utilize
such net operating loss carryforwards may be significantly limited by the
application of the "change of ownership" rules under Section 382 of the Internal
Revenue Code.
NOTE R - CONTRACTS
LPG BUSINESS
The Company has entered into a sales agreement, as amended, (Agreement)
with PMI, its major customer, to provide a minimum monthly volume of LPG to PMI
through March 31, 2000. Sales to PMI for the years ended July 31, 1997, 1998
and 1999 totaled $28,836,820, $30,511,480, and $35,204,102 respectively,
representing 97%, 99% and 99% of total revenues for each year. The Company is
currently purchasing LPG from major suppliers to meet the minimum monthly
volumes required in the Agreement. The suppliers' prices are below the sales
price provided for in the Agreement (see note T).
CNG BUSINESS
Prior to July 31, 1998, the Company was awarded two contracts for the design,
construction and installation of equipment for CNG fueling stations for A.E.
Schmidt Environmental in connection with CNG fueling stations being constructed
for NYDOT (total contract amount of approximately $1.5 million) and the County
Sanitation Districts of Orange County, California (Orange County) (total
contract amount of approximately $251,000). In connection with the NYDOT and
Orange County contracts, Amwest and Orange County had filed suit against the
Company and the parties have subsequently reached settlement agreements (see
notes D, E and N).
The Company has not entered into any other CNG contracts.
CONSULTING COMMISSION AGREEMENT
The Company has entered into an incentive arrangement with several
consultants (the "Arrangement") whereby the Company will pay a commission based
on $.001 plus 5% of every $.01 of gross margin in excess of $.0425 earned by the
Company in connection with the LPG sales of the Company, so long as the volume
is in excess of 7.5 million gallons per month. The Arrangement became effective
July 1, 1999 and is renewable annually. The amounts owed by the Company to the
Consultants for the period from July 1, 1999 through July 31, 1999, were not
material.
63
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - AWARD FROM LITIGATION
On August 24, 1994, the Company filed an Original Petition and Application for
Injunctive Relief against the International Bank of Commerce-Brownsville
("IBC-Brownsville"), a Texas state banking association, seeking (i) either
enforcement of a credit facility between the Company and IBC-Brownsville or a
release of the Company's property granted as collateral thereunder consisting of
significantly all of the Company's business and assets; (ii) declaratory relief
with respect to the credit facility; and (iii) an award for damages and
attorneys' fees. After completion of an arbitration proceeding, on February 28,
1996, the 197th District Court in and for Cameron County, Texas entered judgment
(the "Judgment") confirming the arbitral award for $3,246,754 to the Company by
IBC-Brownsville.
In connection with the lawsuit, IBC-Brownsville filed an appeal with the Texas
Court of Appeals on January 21, 1997. The Company responded on February 14,
1997. On September 18, 1997, the appeal was heard by the Texas Court of Appeals
and on June 18, 1998, the Texas Court of Appeals issued its opinion in the case,
ruling essentially in favor of the Company. IBC-Brownsville sought a rehearing
of the case on August 3, 1998. On December 30, 1998, the Court denied the
IBC-Brownsville request for rehearing. On February 16, 1999, IBC-Brownsville
filed a petition for review with the Supreme Court of Texas. On May 10, 1999
the Company responded to the Supreme Court of Texas' request for response of the
Petitioner's petition for review. On May 27, 1999, IBC-Brownsville filed a
reply with the Supreme Court of Texas to the Company's response of the
Petitioner's petition for review. On June 10, 1999, the Supreme Court of Texas
denied the Petitioner's petition for review. During July 1999, the Petitioner
filed an appeal with the Supreme Court of Texas to rehear the Petitioner's
petition for review. On August 26, 1999, the Supreme Court of Texas upheld its
decision to deny the Petitioner's petition for review. As of July 31, 1999, the
net amount of the Judgment is approximately $3,900,000, which is comprised of
(i) the original judgment, including attorneys' fees, (ii) post-award interest,
and (iii) cancellation of the note and accrued interest payable to
IBC-Brownsville, less attorneys' fees. There is no certainty that
IBC-Brownsville will not continue to seek other legal remedies against the
Judgment.
For the year ended July 31, 1999, the Company has recognized a gain of
approximately $987,000, which represents the amount of the Judgment which was
recorded as a liability on the Company's balance sheet at December 31, 1998 (see
note I). The remaining net amount of the Judgment to be realized by the Company
is approximately $3,900,000, less attorneys fees. In addition, a former officer
of the Company is entitled to 5% of the net proceeds from the Judgment (after
expenses and legal fees). The Company will recognize the remaining amount of
the Judgment when it realizes the proceeds associated with the Judgment.
NOTE T - SUBSEQUENT EVENTS - UNAUDITED
Effective October 1, 1999 (the "Closing Date"), the Company and Exxon entered
into a ten year LPG supply contract (the "Exxon Supply Contract"), whereby Exxon
has agreed to supply and the Company has agreed to take, the supply of propane
and butane available at Exxon's King Ranch Gas Plant (the "Plant") which is
estimated to be between 10,100,000 gallons per month and 13,900,000 gallons per
month blended in accordance with the specifications as outlined under the PMI
Sales Agreement (the "Plant Commitment"), with a minimum of 10,100,000 gallons
per month guaranteed by Exxon to be provided to the Company.
In addition, under the terms of the Exxon Supply Contract, Exxon will make
operational its Corpus Christi Pipeline (the "CCPL") which when completed, will
allow the Company to acquire an additional supply of propane from other propane
suppliers located near Corpus Christi, Texas (the "Additional Propane Supply),
and bring the Additional Propane Supply to the Plant (the "CCPL Supply") for
blending to the proper specifications outlined under the PMI Sales Agreement and
then delivered into the Pipeline. In connection with the CCPL Supply, the
Company has agreed to supply a minimum of 7,700,000 gallons into the CCPL during
the first quarter from the date that the CCPL is operational, approximately
92,000,000 gallons the following year and 122,000,000 gallons each year
thereafter and continuing for four years.
64
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE T - SUBSEQUENT EVENTS - UNAUDITED - CONTINUED
The Exxon Supply Contract currently requires that the Company purchase a minimum
supply of LPG, which is significantly higher than committed sales volumes under
the PMI Sales Agreement. In addition, the Company is required to pay additional
fees associated with the Additional Propane Supply, which will increase its LPG
costs by a minimum of $.01 per gallon without considering the actual cost of the
Additional Propane Supply charged to the Company.
In September 1999, the Company and PG&E NGL Marketing, L.P. ("PG&E") entered
into a three year supply agreement (the "PG&E Supply Agreement") whereby PG&E
has agreed to supply and the Company has agreed to take, a monthly average of
2,500,000 gallons (the "PG&E Supply") of propane. In addition, PG&E is in the
process of obtaining up to 3,800,000 gallons per month of additional propane
commitments, which if successful by December 31, 1999, would be an adjustment to
the PG&E Supply. Under the PG&E Supply Agreement, the Company is not obligated
to purchase the PG&E Supply until the CCPL is operational, anticipated to be
during October 1999.
Under the terms of the PG&E Supply Agreement, the PG&E Supply will be delivered
to the CCPL, as described above, and blended to the proper specifications as
outlined under the PMI sales Agreement. In addition, by utilizing the PG&E
Supply, the Company would satisfy the CCPL Supply requirements under the Exxon
Supply Contract.
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 and PG&E Supply over actual sales volumes. Furthermore, the
Company's existing letter of credit facility may not be adequate and the Company
may require additional sources of financing to meet the letter of credit
requirements under the Exxon Supply Agreement and the PG&E Supply Agreement.
During the Board of Directors (the Board) meeting held on September 3, 1999, the
Board approved the implementation of a plan to compensate each outside director
serving on the Board (the Plan). Under the Plan, all outside directors upon
election to the Board will be entitled to receive warrants to purchase 20,000
shares of common stock of the Company and be granted warrants to purchase 10,000
shares of common stock of the Company for each year of service as a director.
Such warrants will expire five years after the warrants become vested. The
exercise price of the warrants issued under the Plan will be based on the
average trading price of the Company's common stock on the effective date of the
granting of the warrants, and the warrants will vest monthly over a one year
period.
In connection with the Plan, the Board granted warrants to purchase 40,000
shares of common stock at an exercise price of $2.50 for those outside directors
previously elected and serving on the Board at September 3, 1999. In addition,
the Board granted those directors warrants to purchase 20,000 shares of common
stock, at an exercise of $2.50 per share with the vesting period to commence on
August 1, 1999.
In October 1999, the Company received a verbal opinion from the Foreign
Investment Section of the Department of Commerce and Industrial Development
("SECOFI") that the operation of the leases in Mexico (see note O) would be
considered as a transportation rather than a distribution activity, and
therefore, could be performed by a foreign entity or through a foreign-owed
Mexican entity. The Company intends to request a ruling from SECOFI confirming
the verbal opinion. On November 8, 1999, the Company and Jorge Bracamontes and
the other shareholders entered into a purchase agreement to acquire up to 75% of
the common stock of PennMex for a nominal amount. The purchase agreement is
subject to among other things, the receipt of the aforementioned ruling. The
Company intends to contract with Tergas for services to be performed by Tergas
at the Mexican Terminal Facilities and the Saltillo Terminal Facilities.
The operations of PennMex and/or Tergas are subject to the tax laws of Mexico,
which among other things, require that Mexican subsidiaries of foreign entitles
comply with transfer pricing rules, the payment of income and/or asset taxes,
and possibly taxes on distributions in excess of earnings. In addition,
distributions to foreign corporations may be subject to withholding taxes,
including dividends and interest payments.
On October 21, 1999, the RZB Credit Facility was increased from $6,000,000 to
$10,000,000. All other terms and conditions of the RZB Credit Facility remain
unchanged.
65
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to
Beginning of Costs and Charged to Balance at End
Description Period Expenses(1) Other Accounts Deductions of Period
- ---------------- ------------- ------------ --------------- ----------- ---------------
Year ended July
- ----------------
31, 1999
- ----------------
Allowance for
Doubtful
Accounts $ 418,796 $ 116,432 $ - $ 14,161 $ 521,067
Year ended
- ----------------
July 31, 1998
- ----------------
Allowance for
doubtful
accounts $ 53,406 $ 373,130 $ - $ 7,740 $ 418,796
Year ended July
- ----------------
31, 1997
- ----------------
Allowance for
doubtful
accounts $ - $ 53,406 $ - $ - $ 53,406
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND OFFICERS OF THE COMPANY
The executive officers and directors of the Company are as follows:
Name of Director Age Positions and Offices Held
- ---------------------------------- --- -----------------------------------------------------
Jerome B. Richter 63 Chairman, President, Chief Executive Officer and
Director
Jorge R. Bracamontes 35 Executive Vice President, Secretary and Director
Ian T. Bothwell 39 Vice President, Treasurer, Assistant Secretary, Chief
Financial Officer and Director
Jerry L. Lockett 58 Vice President
Kenneth G. Oberman 39 Director
Stewart J. Paperin 51 Director
All directors were elected at the 1997 Annual Meeting of Stockholders of
the Company held on May 29, 1997 and hold office until the next annual meeting
of shareholders and until their successors are duly elected and qualified.
Executive officers of the Company are elected annually by the Board of Directors
and serve until their successors are duly elected and qualified.
JEROME B. RICHTER founded the Company and served as its Chairman of the
Board and Chief Executive Officer from the date of its organization in August
1992 to December 1994, when he resigned from such positions and became Secretary
and Treasurer of the Company. He resigned on August 1, 1996. Effective October
29, 1996, Mr. Richter was elected Chairman of the Board, President and Chief
Executive Officer of the Company.
JORGE R. BRACAMONTES was elected a director of the Company in February
1996. Effective October 29, 1996, he was elected Executive Vice President and
Secretary of the Company. Mr. Bracamontes also serves as President and Chief
Executive Officer of PennMex and Tergas (see note O to the Consolidated
Financial Statements). Prior to joining the Company, Mr. Bracamontes was
General Counsel for Environmental Matters at Pemex, for the period from May 1994
to March 1996. During the period from November 1992 to May 1994, Mr.
Bracamontes was legal representative for Pemex in New York.
IAN T. BOTHWELL was elected Vice President, Treasurer, Assistant Secretary
and Chief Financial Officer of the Company on October 29, 1996 and a director of
the Company on March 25, 1997. Since July 1993, Mr. Bothwell has been a
principal of Bothwell & Asociados, S.A. de C.V., a Mexican management consulting
and financial advisory company that was founded by Mr. Bothwell in 1993 and
specializes in financing infrastructure projects in Mexico. During the period
from February 1993 through November 1993, Mr. Bothwell was a senior manager with
Ruiz, Urquiza y Cia., S.C., the affiliate in Mexico of Arthur Andersen L.L.P.,
an accounting firm. Mr. Bothwell also serves as CEO of B & A Eco-Holdings,
Inc., the company formed to purchase the Company's CNG assets (see note E to the
Consolidated Financial Statements).
JERRY L. LOCKETT joined the Company as a Vice President on November 17,
1998. Prior to joining the Company, Mr. Lockett held a variety of positions
during a thirty-one year career with Union Carbide Corporation in sales
management, hydrocarbon supply and trading, and strategic planning. He also
served in a management position with Union Carbide's wholly-owned pipeline
subsidiaries.
67
KENNETH G. OBERMAN has been a Director of the Company since its
organization in August 1992. Since 1998, Mr. Oberman has served as Vice
President. From 1996 to 1998, Mr. Oberman was Senior Director of Fujitsu
Computer Products of America, a computer peripherals company based in San Jose,
California. From 1994 through 1995, Mr. Oberman held the position of Business
Unit Manager for Conner Peripherals, a computer peripherals company based in San
Jose, California. During the period from 1992 through 1994, Mr. Oberman served
as Vice President of International Economic Development Corporation, a
consulting company to the Ministry of Sports of the Government of Russia
involved in the sale of sporting goods and sports apparel based in Moscow,
Russia.
STEWART J. PAPERIN was elected a director of the Company in February 1996.
Mr. Paperin has been Managing Director of Lionrock Partners Ltd., a management
consulting and investment firm, and Managing Director of Capital Resources East,
a management consulting firm, since 1993. From 1990 to 1993, Mr. Paperin served
as President of Brooke Group International, an international trading company and
a subsidiary of Brooke Group Ltd.
Mr. Oberman is Mr. Richter's step-son. There are no other family
relationships among the Company's officers and directors.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
In October, 1996 the Company and Mr. Richter, Chairman and President,
without admitting or denying the findings contained therein (other than as to
jurisdiction), consented to the issuance of an order by the SEC in which the SEC
(i) made findings that the Company and Richter had violated portions of Section
13 of the Exchange Act relating to the filing of periodic reports and the
maintenance of books and records, and certain related rules under said Act, and
(ii) ordered respondents to cease and desist from committing or causing any
current or future violation of such sections and rules.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act, requires the Company's directors and
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file initial reports of ownership and reports of
changes in ownership with the SEC. Such persons are required by the SEC to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of Forms 3, 4 and 5 received by it, the
Company believes that all directors, officers and 10% stockholders complied with
such filing requirements.
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
During the Board of Directors (the Board) meeting held on September 3, 1999, the
Board approved the implementation of a plan to compensate each outside director
serving on the Board (the Plan). Under the Plan, all outside directors upon
election to the Board will be entitled to receive warrants to purchase 20,000
shares of common stock of the Company and be granted warrants to purchase 10,000
shares of common stock of the Company for each year of service as a director.
Such warrants will expire five years after the warrants become vested. The
exercise price of the warrants issued under the Plan will be based on the
average trading price of the Company's common stock on the effective date of the
granting of the warrants, and the warrants will vest monthly over a one year
period.
In connection with the Plan, the Board granted warrants to purchase 40,000
shares of common stock at an exercise price of $2.50 for those outside directors
previously elected and serving on the Board at September 3, 1999. In addition,
the Board granted those directors warrants to purchase 20,000 shares of common
stock, at an exercise price of $2.50 per share with the vesting period to
commence on August 1, 1999.
68
EXECUTIVE COMPENSATION
The following table sets forth annual and all other compensation for services
rendered in all capacities to the Company and its subsidiaries during each of
the fiscal years indicated for those persons who, at July 31, 1999, were (i) the
Company's Chief Executive Officer and a former executive officer who acted in a
similar capacity, and (ii) the other three most highly compensated executive
officers (collectively, the "Named Executive Officers"). No other executive
officer received compensation in excess of $100,000 during fiscal 1997, 1998 and
1999. This information includes the dollar values of base salaries, bonus
awards, the number of warrants granted and certain other compensation, if any,
whether paid or deferred. The Company does not grant stock appreciation rights
and has no stock option or other long-term compensation plans for employees.
69
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------- ---------------------------------
AWARDS PAYOUTS
------------------------ ---------------------
SECURITIES
RESTRICTED UNDER-
AWARD(S) LYING ALL OTHER
NAME AND OTHER ANNUAL STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS SATION
- ----------------------------- ---- -------- ----------- ------------- ------------ ---------- -------- -----------
Jerome B. Richter,(4) (5) 1999 $300,000 $ - $ - $ - - $ - $
President, Chairman of the 1998 299,578 - - - - - -
Board and Chief 1997 138,603 - - - - - -
Executive Officer
Ian T. Bothwell, ,(5) 1999 134,000 - - - - - -
Vice President, Treasurer, 1998 120,000 418,800(1) - - - - -
Assistant Secretary and 1997 90,077 - - - - - -
Chief Financial Officer
Jorge R. Bracamontes, 1999 - - - - - - 155,000(6)
Executive Vice President 1998 - - - - - - 120,000
and Secretary 1997 - - - - - - 526,921(2)
Jerry L. Lockett, (3) (5) 1999 132,000 - - - - - -
Vice President 1998 91,500 - - - - - -
1997 - - - - - - -
(1) As a bonus for the year ended July 31, 1997, on September 10, 1997 the
Company granted to Mr. Bothwell warrants to purchase 200,000 shares of
Common Stock for $2.50 per share to expire on September 9, 2000.
(2) Mr. Bracamontes received consulting fees totaling $108,121 for services
performed on behalf of the Company in Mexico. On March 25, 1997, the
Company granted to Mr. Bracamontes warrants to purchase 200,000 shares of
Common Stock for $3.625 per share to expire on March 24, 2000. As an
additional consulting fee for the year ended July 31, 1997, on September
10, 1997, the Company lowered the exercise price of these warrants granted
to Mr. Bracamontes from $3.625 to $2.50.
(3) In connection with Mr. Lockett's employment agreement, Mr. Lockett received
warrants to purchase 50,000 shares of Common Stock for 5.00 per share to
expire on November 16, 2001 and on November 16, 1999, Mr. Lockett will be
entitled to receive warrants to purchase an additional 50,000 shares of
common stock of the Company.
(4) During the year ended July 31, 1998, $77,000 of compensation was offset
against the interest due on Mr. Richter's note receivable.
(5) As a bonus for the year ended July 31, 1999, the Company granted warrants
to purchase 30,000 shares of common stock at an exercise price of $2.50 per
share and an expiration date of July 30, 2004.
(6) Mr. Bracamontes received consulting fees totaling $155,000 for services
performed on behalf of the Company in Mexico. As a bonus for the year ended
July 31, 1999, the Company granted Mr. Bracamontes warrants to purchase
30,000 shares of common stock for $2.50 per share to expire on July 30,
2004.
70
AGGREGATED WARRANT EXERCISES IN FISCAL 1999 AND WARRANT VALUES ON JULY 31, 1999
The following table provides certain information with respect to warrants
exercised by the Named Executive Officers during fiscal 1999. The table also
presents information as to the number of warrants outstanding as of July 31,
1999.
Number Of
Securities Value Of
Number of Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Value Warrants Warrants
Upon Realized At July 31, 1999 At July 31, 1999
Exercise of Upon Exercisable/ Exercisable/
Name Warrants Exercise Unexercisable Unexercisable
- -------------------- ----------- --------- ---------------- ------------------
Jerome B. Richter 0 $ 0 30,000/0 $ (1)
Jorge R. Bracamontes 0 $ 0 230,000/0 $ (1)
Ian T. Bothwell 0 $ 0 230,000/0 $ (1)
Jerry L. Lockett 0 $ 0 80,000/0 $ (1)
(1) Based on a closing price of $2.375 per share of Common Stock on July 31,
1999.
As bonuses to four of its executive officers for the year ended July 31, 1999,
the Company granted each executive warrants to purchase 30,000 shares of common
stock at $2.50 per share through July 30, 2004.
EMPLOYMENT AGREEMENTS
The Company has entered into a six year employment agreement with Mr.
Richter, the President of the Company, through January 31, 2001. Under Mr.
Richter's agreement, he is entitled to receive $300,000 in annual compensation
equal to a monthly salary of $25,000 until earnings exceed a gross profit of
$500,000 per month, whereupon Mr. Richter is entitled to an increase in his
salary to $40,000 per month for the first year of the agreement increasing to
$50,000 per month during the second year of the agreement. Mr. Richter is also
entitled to (i) an annual bonus of 5% of all pre-tax profits of the Company;
(ii) 200,000 stock options for the purchase of 200,000 shares of Common Stock
that can be exercised under certain circumstances at an option price of $7.50
(giving effect to a 2-for-1 stock split on June 10, 1994), and (iii) a term life
insurance policy commensurate with the term of the employment agreement, equal
to six times Mr. Richter's annual salary and three times his annual bonus. Mr.
Richter's employment agreement also entitles him to a right of first refusal to
participate in joint venture opportunities in which the Company may invest,
contains a covenant not to compete until one year from the termination of the
agreement and restrictions on use of confidential information. Through July 31,
1997, Mr. Richter waived his rights to his full salary. Through July 31, 1999,
Mr. Richter has waived his rights to receive the options, bonus on pre-tax
profits and the purchase by the Company of a term life insurance policy. In the
future, Mr. Richter may elect not to waive such rights.
In November 1997, the Company entered into an employment agreement with
Jerry Lockett. Under the terms of the agreement, Mr. Lockett is entitled to
receive $120,000 in annual compensation, plus $1,000 monthly as an automobile
allowance. The Agreement is for two years and may be terminated by the Company
or Mr. Lockett. The agreement also calls for the issuance of warrants for the
purchase of 50,000 shares of common stock of the Company on each of the
anniversary dates of the agreement.
71
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's compensation to executive management is administered by the
Compensation Committee ("Committee") of the Board of Directors. The Committee
is comprised of one outside Director and reports to the Board of Directors on
all compensation matters concerning the Company's executive officers (the
"Executive Officers"). The Executive Officers of the Company are identified in
the Company's July 31, 1999 Form 10-K. In determining annual compensation,
including bonus, and other incentive compensation to be paid to the Executive
Officers, the Committee considers several factors including overall performance
of the Executive Officer (measured in terms of financial performance of the
Company, opportunities provided to the Company, responsibilities, quality of
work and/or tenure with the Company), and considers other factors including
retention and motivation of the Executive Officers and the overall financial
condition of the Company. The Committee provides compensation to the Executive
Officer in the form of cash, equity instruments and forgiveness of interest
incurred on indebtedness to the Company.
The overall compensation provided to the Executive Officers consisting of
base salary and the issuance of equity instruments is intended to be competitive
with the compensation provided to other executives at other companies after
adjusting for factors described above including the Company's financial
condition during the term of employment of the Executive Officer.
BASE SALARY: The base salary is approved based on the Executive
Officer's position, level of responsibility and tenure with the Company.
CHIEF EXECUTIVE OFFICER'S COMPENSATION: During fiscal year 1999, Mr.
Richter was paid in accordance with the terms of his employment agreement which
was entered into in July 13, 1993. During September 1999, Mr. Richter also
received compensation in the form of forgiveness of unpaid interest relating to
his indebtedness to the Company. The Committee determined that Mr. Richter's
compensation under the employment agreement is fair to the Company, especially
considering the position of Mr. Richter with the Company and the financing Mr.
Richter has provided to the Company in the form of personal guarantees on
several of the Company's obligations.
COMPENSATION COMMITTEE
STEWART PAPERIN
72
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the Company's
cumulative, five-year total stockholder return with the Russell 2000 Index and
the NASDAQ Index. The graph assumes that $100 was invested on August 1, 1994 in
each of the Company's common stock, the Russell 2000 Index and the NASDAQ Index,
and that all dividends were reinvested. The graph is not, nor is it intended it
to be, indicative of future performance of the Company's common stock.
The Company is not aware of a published industry or line of business index
with which to compare the Company's performance. Nor is the Company aware of
any other companies with a line of business and market capitalization similar to
that of the Company with which to construct a peer group index. Therefore, the
Company has elected to compare its performance with the NASDAQ Index and Russell
2000 Index, an index of companies with small capitalization.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
YEAR ENDED JULY 31,
1994 1995 1996 1997 1998 1999
----- ----- ----- ----- ----- -----
Penn Octane Corporation $ 100 $ 117 $ 278 $ 278 $ 234 $ 139
Russell 2000 $ 100 $ 123 $ 129 $ 170 $ 172 $ 182
NASDAQ $ 100 $ 139 $ 150 $ 221 $ 259 $ 365
73
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock by (i) each stockholder known by the
Company to beneficially own more than five percent of the Company's Common
Stock, (ii) each director and (iii) each Named Executive Officer of the Company
as of September 30, 1999
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ----------------------------------------- ----------------------- -----------------
Jerome B. Richter 3,966,000 (2) 31.10%
CEC, Inc. 1,459,334(3) 11.13%
KFP Grand Ltd. 1,100,000 8.65%
Western Wood Equipment Corporation (Hong
Kong)
20/F Tung Way Commercial Building
Wanchai, Hong Kong 758,163(4) 5.73%
Ian T. Bothwell 248,600(5) 1.92%
Jorge R. Bracamontes 245,500(6) 1.90%
Jerry L. Lockett 106,225(7) (10)
Kenneth G. Oberman 81,500(8) (10)
Stewart J. Paperin 21,500(9) (10)
As a group, the current officers and directors of the Company are
beneficial owners of 4,089,325 shares of Common Stock or 32.15% of the voting
power of the Company excluding warrants held by members of such group and
4,669,325 shares of Common Stock or 35.11% of the voting power of the Company
including warrants so held.
(1) The number of shares of Common Stock issued and outstanding on September
30, 1999 was 12,720,497 and all calculations and percentages are based on
such number. The beneficial ownership indicated in the table includes
shares of Common Stock subject to common stock purchase warrants held by
the respective persons as of September 30, 1999, that are exercisable on
the date hereof or within 60 days thereafter. Unless otherwise indicated,
each person has sole voting and sole investment power with respect to the
shares shown as beneficially owned.
(2) Includes 36,000 shares of Common Stock owned by Mrs. Richter and 30,000
shares of Common Stock issuable upon exercise of Common Stock purchase
warrants.
(3) Includes 391,667 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(4) Includes 500,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(5) Includes 230,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(6) Includes 230,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants owned by Mr. Bracamontes and 15,000 shares of
Common Stock owned by Mrs. Bracamontes.
(7) Includes 80,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(8) Includes 5,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(9) Includes 5,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(10) Percent of class is less than 1%.
74
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In September 1997, additional warrants to purchase 130,000 shares of Common
Stock were exercised by a director of the Company at an exercise price of $2.50
per share resulting in a cash payment received by the Company of $325,000.
In October 1997, the Company made payment of $500,000 plus accrued interest
to TRAKO International Limited, a company affiliated with John H. Robinson, a
former director, in full satisfaction of amounts owing under a promissory note
dated March 1, 1996. In August 1997, the Company made payment of $400,000 plus
accrued interest to John H. Robinson, in full satisfaction of amounts owing
under a promissory note dated March 1, 1996.
In October 1997, in connection with the RZB Credit Facility, Mr. Richter
entered into a Guaranty & Agreement pursuant to which Mr. Richter personally
guaranteed all of the Company's payment obligations with respect to the RZB
Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Credit Arrangements."
The lease for the Company's executive offices located at 900 Veterans
Boulevard in Redwood City, California is between Mr. Richter, as an individual,
and Nine-C Corporation, as landlord. The Company currently makes monthly
payments directly to Nine-C Corporation in satisfaction of obligations under
such lease.
During April 1997, the Company's President exercised warrants to purchase
2,200,000 shares of common stock of the Company at an exercise price of $1.25
per share. The consideration for the exercise of the warrants included $22,000
in cash and a $2,728,000 promissory note. The note accrues interest at the rate
of 8.25% per annum and is payable annually on April 11 until maturity on April
11, 2000. The payments due on April 11, 1998 and 1999 have not been received.
The promissory note is collateralized by 1,000,000 shares of common stock of the
Company owned by the President and has been recorded as a reduction of
stockholders' equity. In connection with the Company's lease agreements (the
Lease Agreements) with CPSC (see note O), the President agreed to provide
500,000 shares of common stock of the Company owned by the President (the
Collateral) to replace the requirement of the Company to provide a letter of
credit to CPSC as specified under the Lease Agreement. During September 1999,
in consideration for providing the Collateral, the Board of Directors of the
Company agreed to offset the interest due on the President's $2,728,000
promissory note.
On July 31, 1998, interest receivable from the President has been offset by
the remaining amount due to the President as of July 31, 1998 under his
employment agreement. The remaining balance of the interest receivable has been
reserved.
On July 31, 1999, interest receivable from the President has been
reserved.
As of July 31, 1997, the Company had a receivable from a corporation owned
by an officer of the Company in the amount of $171,601 of which approximately
$130,000 was repaid in September 1997 (see note F for other related party
transactions). During the year ended July 31, 1998 and 1999, the Company paid
that corporation $181,000 and $125,000 for Mexico related expenses incurred by
that corporation on the Company's behalf. In addition, the Company has also
incurred costs associated with the LPG Expansion Program on behalf of that
corporation (see note O).
During May 1999, the Company and PennWilson completed the sale of assets
related to the CNG business to a company controlled by a director and officer of
the Company for $1,200,000 (see note E). The selling price of the assets was
based on the book values of the assets which, as of the date of closing,
approximated the fair value of the assets sold.
75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. Financial Statements and Financial Statement Schedules.
The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
Penn Octane Corporation
Independent Auditor's Report
Consolidated Balance Sheet as of July 31, 1998 and 1999
Consolidated Statements of Operations for the years ended
July 31, 1997, 1998 and 1999
Consolidated Statement of Stockholders' Equity for the years
ended July 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended
July 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
b. Reports on Form 8-K.
The following Reports on Form 8-K are incorporated herein by reference:
Company's Current Report on Form 8-K filed on February 9, 1999
regarding the Company's realization of the IBC-Brownsville award.
Company's Current Report on Form 8-K filed on March 4, 1999
regarding the Company's exchange of $.9 million of indebtedness
for Senior Preferred Stock of the Company.
Company's Current Report on Form 8-K filed on June 1, 1999
regarding the Company's sale of the CNG assets.
c. Exhibits.
The following Exhibits are incorporated herein by reference:
Exhibit No.
- ------------
3.1 Restated Certificate of Incorporation, as amended. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File No.
000-24394).
3.2 Amended and Restated By-Laws of the Company. (Incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
76
10.1 Employment Agreement dated July 12, 1993 between the Registrant and Jerome
B. Richter. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended October 31, 1993 filed on March
7, 1994, SEC File No. 000-24394).
10.2 Security Agreement dated July 1, 1994 between International Bank of
Commerce and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended October 31,
1993 filed on March 7, 1994, SEC File No. 000-24394).
10.3 Security Agreement dated December 6, 1995 between Bay Area Bank and
Registrant. (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the annual period ended July 31, 1996 filed on November 13,
1996, SEC File No. 000-24394).
10.4 Purchase Agreement dated February 22, 1996 between Eagle Oil Company and
Registrant. (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the annual period ended July 31, 1996 filed on November 13,
1996, SEC File No. 000-24394).
10.5 Judgment from litigation with International Bank of Commerce - Brownsville
dated February 28, 1996. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the annual period ended July 31, 1996 filed on
November 13, 1996, SEC File No. 000-24394).
10.6 Loan Agreement, Promissory Note, Security Agreement, and Common Stock
Purchase Warrant Agreement dated March 1, 1996 between John H. Robinson and
Registrant. (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the annual period ended July 31, 1996 filed on November 13,
1996, SEC File No. 000-24394).
10.7 Loan Agreement, Promissory Note, Security Agreement, and Common Stock
Purchase Warrant Agreement dated as of April 30, 1996 between TRAKO
International Company LTD and Registrant. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the annual period ended July 31,
1996 filed on November 13, 1996, SEC File No. 000-24394).
10.8 Extension of June 16, 1996 Payout Agreement between Penn Octane Corporation
and Lauren Constructors, Inc., and Tom Janik and Associates, Inc.
dated October 10, 1996 (Including June 16, 1995 Payout Agreement).
(Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the annual period ended July 31, 1996 filed on November 13, 1996, SEC
File No. 000-24394).
10.9 LPG Purchase Agreement dated October 1, 1996 between Exxon Company U.S.A.
and Registrant. (Incorporated by reference to the Company's Annual Report
on Form 10-KSB for the annual period ended July 31, 1996 filed on November
13, 1996, SEC File No. 000-24394).
10.10Promissory Note, Letter of Credit and Security Agreement dated October 3,
1996 between Bay Area Bank and Registrant. (Incorporated by reference to
the Company's Annual Report on Form 10-KSB for the annual period ended July
31, 1996 filed on November 13, 1996, SEC File No. 000-24394).
10.11Promissory Note dated October 7, 1996 between Jerry Williams and
Registrant. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended October 31, 1996 filed on
December 16, 1996, SEC File No. 000-24394).
10.12Promissory Note dated October 9, 1996 between Richard Serbin and
Registrant. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended October 31, 1996 filed on
December 16, 1996, SEC File No. 000-24394).
10.13LPG Sales Agreement dated October 10, 1996 between P.M.I. Trading Ltd. and
Registrant. (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the annual period ended July 31, 1996 filed on November 13,
1996, SEC File No. 000-24394).
10.14Promissory Note dated October 29, 1996 between James Mulholland and
Registrant. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended October 31, 1996 filed on
December 16, 1996, SEC File No. 000-24394).
77
10.15Promissory Note between Frederick Kassner and Registrant dated October 29,
1996. (Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended October 31, 1996 filed on December
16, 1996, SEC File No. 000-24394).
10.16Agreement between Roberto Keoseyan and the Registrant dated November 12,
1996. (Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended January 31, 1997 filed on March 17,
1997, SEC File No. 000-24394).
10.17Promissory Note between Bay Area Bank and the Registrant dated December
20, 1996. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended January 31, 1997 filed on March
17, 1997, SEC File No. 000-24394).
10.18Agreement for Exchange of Warrants for Common Stock dated February 5, 1997
between the Registrant and Mark D. Casaday. (Incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended January 31, 1997 filed on March 17, 1997, SEC File No. 000-24394).
10.19Agreement for Exchange of Warrants for Common Stock dated February 5, 1997
between the Registrant Thomas P. Muse. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarterly period ended
January 31, 1997 filed on March 17, 1997, SEC File No. 000-24394).96, SEC
File No. 000-24394).
10.20Agreement for Exchange of Warrants for Common Stock dated February 19,
1997 between the Registrant and Thomas A. Serleth. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended January 31, 1997 filed on March 17, 1997, SEC File
No. 000-24394).
10.21Interim Operating Agreement between Wilson Acquisition Corporation and
Wilson Technologies Incorporated dated March 7, 1997. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended January 31, 1997 filed on March 17, 1997, SEC File
No. 000-24394).
10.22Purchase Agreement dated March 7, 1997 between the Registrant, Wilson
Acquisition Corporation, Wilson Technologies Incorporated and Zimmerman
Holdings Inc. (Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarterly period ended January 31, 1997 filed on
March 17, 1997, SEC File No. 000-24394).
10.23Amendment of the Interim Operating Agreement dated March 21, 1997 between
the Registrant, Wilson Acquisition Corporation, Wilson Technologies
Incorporated and Zimmerman Holdings Inc. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarterly period ended
April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.24Promissory Note and Pledge and Security Agreement dated March 26, 1997
between M.I. Garcia Cuesta and the Registrant. (Incorporated by reference
to the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.25Real Estate Lien Note, Deed of Trust and Security Agreement dated April 9,
1997 between Lauren Constructors, Inc. and the Registrant. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File No.
000-24394).
10.26Promissory Note and Pledge and Security Agreement dated April 11, 1997
between Jerome B. Richter and the Registrant. (Incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
78
10.27Lease dated October 20, 1993 between Brownsville Navigation District of
Cameron County, Texas and Registrant with respect to the Company's land
lease rights, including related amendment to the Lease dated as of February
11, 1994 and Purchase Agreement. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB filed for the quarterly period
ended April 30, 1994 on February 25, 1994, SEC File No. 000-24394).
10.28Lease Amendment dated May 7, 1997 between Registrant and Brownsville
Navigation District of Cameron County, Texas. (Incorporated by reference to
the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.29Lease dated May 22, 1997 between Nine-C Corporation and J.B. Richter,
Capital resources and J.B. Richter and J.B. Richter, an individual, as
amended with respect to the Company's executive offices. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File No.
000-24394).
10.30Promissory Note dated May 28, 1997 between Bay Area Bank and the
Registrant. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended April 30, 1997 filed on June 16,
1997, SEC File No. 000-24394).
10.31Lease dated September 1, 1993 between Seadrift Pipeline Corporation and
Registrant with respect to the Company's pipeline rights. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended October 31, 1993 filed on March 7, 1994, SEC File
No. 000-24394).
10.32Lease Amendment dated May 21, 1997 between Seadrift Pipeline Corporation
and the Registrant. (Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended April 30, 1997 filed
on June 16, 1997, SEC File No. 000-24394).
10.33Irrevocable Standby Letter of Credit No. 310 dated April 2, 1997 between
Bay Area Bank and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.34Commercial Guaranty dated April 2, 1997 between Bay Area Bank and Jerome
B. Richter. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC
File No. 000-24394)
10.35Commercial Pledge and Security Agreement dated April 2, 1997 between Bay
Area Bank and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.36Promissory Note dated April 2, 1997 between Bay Area Bank and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.37Amendment to Irrevocable Standby Letter of Credit No. 310 dated September
15, 1997. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.38Warrant Purchase Agreement, Promissory Note and Common Stock Warrant dated
June 15, 1997 between Western Wood Equipment Corporation and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.39Security Agreement, Common Stock Warrant and Promissory Note dated June
15, 1997 between Western Wood Equipment Corporation and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
79
10.40Performance Bond dated June 25, 1997 between PennWilson CNG and Amwest
Surety Insurance Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.41Labor and Material Payment Bond dated June 11, 1997 between PennWilson CNG
and Amwest Surety Insurance Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed
on November 13, 1997, SEC File No. 000-24394)
10.42Subcontract Agreement dated June 25, 1997 between A.E. Schmidt
Environmental and PennWilson CNG. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed
on November 13, 1997, SEC File No. 000-24394)
10.43Propylene Purchase Agreement dated July 31, 1997 between Union Carbide and
the Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC
File No. 000-24394)
10.44Release of Lien dated August 1997 by Lauren Constructors, Inc.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.45LPG Purchase Agreement dated August 28, 1997 between PMI Trading Company
Ltd and the Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1997 filed on November 13,
1997, SEC File No. 000-24394)
10.46Continuing Agreement for Private Letters of Credit dated October 14, 1997
between RZB Finance LLC and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed
on November 13, 1997, SEC File No. 000-24394)
10.47Promissory Note dated October 14, 1997 between RZB Finance LLC and the
Company. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.48General Security Agreement dated October 14, 1997 between RZB Finance LLC
and the Company. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.49Guaranty and Agreement dated October 14, 1997 between RZB Finance LLC and
Jerome Richter. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.50Purchase Agreement dated October 21, 1997 among Castle Energy Corporation,
Clint Norton, Southwest Concept, Inc., James F. Meara, Jr., Donaldson
Lufkin Jenrette Securities Corporation Custodian SEP FBO James F. Meara
IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.51Registration Rights Agreement dated October 21, 1997 among Castle Energy
Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara, Jr.,
Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO James F.
Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.52Promissory Note dated October 21, 1997 between Castle Energy Corporation
and the Company. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
80
10.53Common Stock Purchase Warrant dated October 21, 1997 issued to Castle
Energy Corporation by the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed
on November 13, 1997, SEC File No. 000-24394)
10.54Promissory Note dated October 21, 1997 between Clint Norton and the
Company. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.55Common Stock Purchase Warrant dated October 21, 1997 issued to Clint
Norton by the Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1997 filed on November 13,
1997, SEC File No. 000-24394)
10.56Promissory Note dated October 21, 1997 between Southwest Concept, Inc. and
the Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC
File No. 000-24394)
10.57Common Stock Purchase Warrant dated October 21, 1997 issued to Southwest
Concept, Inc. by the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.58Promissory Noted dated October 21, 1997 between James F. Meara, Jr. and
the Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC
File No. 000-24394)
10.59Common Stock Purchase Warrant dated October 21, 1997 issued to James F.
Meara, Jr. by the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.60Promissory Note dated October 21, 1997 between Donaldson Lufkin Jenrette
Securities Corporation Custodian SEP FBO James F. Meara IRA and the
Company. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.61Common Stock Purchase Warrant dated October 21, 1997 issued to Donaldson
Lufkin Jenrette Securities Corporation Custodian SEP FBO James F. Meara IRA
and the Company. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.62Promissory Note dated October 21, 1997 between Lincoln Trust Company FBO
Perry D. Snavely IRA and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed
on November 13, 1997, SEC File No. 000-24394)
10.63Common Stock Purchase Warrant dated October 21, 1997 issued to Lincoln
Trust Company FBO Perry D. Snavely IRA by the Company. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.64Agreement dated November 7, 1997 between Ernesto Rubio del Cueto and the
Company. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.65LPG Sales Agreement dated November 12, 1997 between Exxon and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 filed on November 13, 1997, SEC File No.
000-24394)
10.66Purchase order dated November 7, 1996 between County Sanitation Districts
of Orange County and Wilson Technologies, Inc. (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the three months ended
October 31, 1997 filed on December 15, 1997, SEC File No. 000-24394)
81
10.67Amendment letter dated April 22, 1998 between RZB Finance LLC and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended April 30, 1998 filed on June 15, 1998,
SEC File No. 000-24394)
10.68Lease dated May 8, 1998 between Nine-C Corporation and J.B. Richter,
Capital Resources and J.B. Richter and J.B. Richter, an individual, with
respect to the Company's executive offices. Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the three months ended
April 30, 1998 filed on June 15, 1998, SEC File No. 000-24394)
10.69Employment Agreement dated October 20, 1997 between the Company and
Vicente Soriano. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the three months ended April 30, 1998 filed on June
15, 1998, SEC File No. 000-24394)
10.70Employment Agreement dated November 17, 1997 between the Company and Jerry
L. Lockett. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended April 30, 1998 filed on June 15, 1998,
SEC File No. 000-24394)
10.71LPG Mix Purchase Contract dated September 28, 1998 between P.M.I. Trading
Limited and the Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended July 31, 1998 filed on November 13,
1998, SEC File No. 000-24394).
10.72LPG Sales Agreement dated November 16, 1998 between Exxon and the Company.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended October 31, 1998 filed on December 18, 1998,
SEC File No. 000-24394).
10.73Rollover and Assignment Agreement dated December 1, 1998 among Castle
Energy Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara,
Jr., Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO
James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1998 filed on December
18, 1998, SEC File No. 000-24394).
10.74Registration Rights Agreement dated December 1, 1998 among Castle Energy
Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara, Jr.,
Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO James F.
Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended October 31, 1998 filed on December 18, 1998,
SEC File No. 000-24394).
10.75Collateral Agreement dated December 1, 1998 among Castle Energy
Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara, Jr.,
Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO James F.
Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended October 31, 1998 filed on December 18, 1998,
SEC File No. 000-24394).
10.76Assignment of Judgment Agreement dated December 1, 1998 among Castle
Energy Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara,
Jr., Donaldson Lufkin Jenrette Securities Corporation Custodian SEP FBO
James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1998 filed on December
18, 1998, SEC File No. 000-24394).
10.77Amended Promissory Note dated December 1, 1998 between Castle Energy
Corporation and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31,
1998 filed on December 18, 1998, SEC File No. 000-24394).
10.78Common Stock Purchase Warrant dated December 1, 1998 issued to Castle
Energy Corporation by the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
82
10.79Amended Promissory Note dated December 1, 1998 between Clint Norton and
the Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended October 31, 1998 filed on
December 18, 1998, SEC File No. 000-24394).
10.80Common Stock Purchase Warrant dated December 1, 1998 issued to Clint
Norton by the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31,
1998 filed on December 18, 1998, SEC File No. 000-24394).
10.81Amended Promissory Note dated December 1, 1998 between Southwest Concept,
Inc. and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998 filed
on December 18, 1998, SEC File No. 000-24394).
10.82Common Stock Purchase Warrant dated December 1, 1998 issued to Southwest
Concept, Inc. by the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31,
1998 filed on December 18, 1998, SEC File No. 000-24394).
10.83Amended Promissory Note dated December 1, 1998 between James F. Meara, Jr.
and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998 filed
on December 18, 1998, SEC File No. 000-24394).
10.84Common Stock Purchase Warrant dated December 1, 1998 issued to James F.
Meara, Jr. by the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31,
1998 filed on December 18, 1998, SEC File No. 000-24394).
10.85Amended Promissory Note dated December 1, 1998 between Donaldson Luftkin
Jenrette Securities Corporation Custodian SEP FBO James F. Meara IRA and
the Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended October 31, 1998 filed on
December 18, 1998, SEC File No. 000-24394).
10.86Common Stock Purchase Warrant dated December 1, 1998 issued to Donaldson
Lufkin Jenrette Securities Corporation Custodian SEP FBO James F. Meara IRA
and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998 filed
on December 18, 1998, SEC File No. 000-24394).
10.87Amended Promissory Note dated December 1, 1998 between Lincoln Trust
Company FBO Perry D. Snavely IRA and the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended October 31, 1998 filed on December 18, 1998, SEC File No.
000-24394).
10.88Common Stock Purchase Warrant dated December 1, 1998 issued to Lincoln
Trust Company FBO Perry D. Snavely IRA by the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended October 31, 1998 filed on December 18, 1998, SEC File No.
000-24394).
10.89Purchase Agreement dated November 13, 1998 between Van Moer Santerre &
Company and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 31,
1998 filed on December 18, 1998, SEC File No. 000-24394).
10.90Registration Rights Agreement dated November 13, 1998 between Van Moer
Santerre & Company and the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.91Common Stock Purchase Warrant dated November 13, 1998 issued to Van Moer
Santerre & Company by the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
October 31, 1998 filed on December 18, 1998, SEC File No. 000-24394).
10.92Purchase Agreement dated December 14, 1998 between KFP Grand LTD. and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1998 filed on December
18, 1998, SEC File No. 000-24394).
83
10.93Registration Rights Agreement dated December 14, 1998 between KFP Grand
LTD. and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998 filed
on December 18, 1998, SEC File No. 000-24394).
10.94Common Stock Purchase Warrant dated December 14, 1998 issued to KFP Grand
LTD. by the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998 filed
on December 18, 1998, SEC File No. 000-24394).
10.95Second Amendment of the Interim Operating Agreement dated December 15,
1998 among Wilson Technologies Inc., Zimmerman Holdings, Inc. and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1998 filed on December
18, 1998, SEC File No. 000-24394).
10.96Purchase Agreement dated March 18, 1999 between Van Moer Santerre &
Company and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 30, 1999
filed on June 14, 1999, SEC File No. 000-24394).
10.97Registration Rights Agreement dated March 18, 1999 between Van Moer
Santerre & Company and the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 1999 filed on June 14, 1999, SEC File No. 000-24394).
10.98Common Stock Purchase Warrant dated March 18, 1999 issued to Van Moer
Santerre & Company by the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 1999 filed on June 14, 1999, SEC File No. 000-24394).
10.99Purchase Agreement dated March 19, 1999 between Steve Payne and the
Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 30, 1999 filed on June 14,
1999, SEC File No. 000-24394).
10.100 Registration Rights Agreement dated March 19, 1999 between Steve Payne
and the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 1999 filed on
June 14, 1999, SEC File No. 000-24394).
10.101 Common Stock Purchase Warrant dated March 19, 1999 issued to Steve Payne
by the Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 1999 filed on
June 14, 1999, SEC File No. 000-24394).
10.102 Purchase Agreement dated March 19,1999 between Igor Kent and the Company.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended April 30, 1999 filed on June 14, 1999, SEC
File No. 000-24394).
10.103 Registration Rights Agreement dated March 19, 1999 between Igor Kent and
the Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1999 filed on June
14, 1999, SEC File No. 000-24394).
10.104 Common Stock Purchase Warrant dated March 19, 1999 issued to Igor Kent by
the Company. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1999 filed on June
14, 1999, SEC File No. 000-24394).
The following Exhibits are filed as part of this report:
3.3 The Company's Certificate of the Designation, Powers, Preferences and
Rights of the Series B. Class A Senior Cumulative Preferred Stock, filed
with the State of Delaware.
10.105 Purchase Agreement dated July 15, 1999 between Steve Payne and the
Company.
10.106 Registration Rights Agreement dated July 15, 1999 between Steve Payne and
the Company.
10.107 Common Stock Purchase Warrant dated July 15, 1999 issued to Steve Payne
by the Company.
84
10.108 Purchase Agreement dated July 16, 1999 between The Apogee Fund L.P. and
the Company.
10.109 Registration Rights Agreement dated July 16, 1999 between The Apogee Fund
L.P. and the Company.
10.110 Common Stock Purchase Warrant dated July 16, 1999 issued to The Apogee
Fund L.P. by the Company.
10.111 Purchase Agreement dated July 21, 1999 between Igor Kent and the Company.
10.112 Registration Rights Agreement dated July 21, 1999 between Igor Kent and
the Company.
10.113 Common Stock Purchase Warrant dated July 21, 1999 issued to Igor Kent by
the Company.
10.114 Purchase Agreement dated July 29, 1999 between Southwest Concept Inc. and
the Company.
10.115 Registration Rights Agreement dated July 29, 1999 between Southwest
Concept Inc. and the Company.
10.116 Common Stock Purchase Warrant dated July 29, 1999 issued to Southwest
Concept Inc. by the Company.
10.117 Purchase Agreement dated July 29, 1999 between Clint Norton and the
Company.
10.118 Registration Rights Agreement dated July 29, 1999 between Clint Norton
and the Company.
10.119 Common Stock Purchase Warrant dated July 29, 1999 issued to Clint Norton
by the Company.
10.120 Purchase Agreement dated July 30, 1999 between Europa International, Inc.
and the Company.
10.121 Registration Rights Agreement dated July 30, 1999 between Europa
International, Inc. and the Company.
10.122 Common Stock Purchase Warrant dated July 30, 1999 issued to Europa
International, Inc. by the Company.
10.123 Purchase Agreement dated July 30, 1999 between Valor Capital Management
L.P and the Company.
10.124 Registration Rights Agreement dated July 30, 1999 between Valor Capital
Management L.P and the Company.
10.125 Common Stock Purchase Warrant dated July 30, 1999 issued to Valor Capital
Management L.P by the Company.
10.126 Purchase Agreement dated July 30, 1999 between Lincoln Trust Company FBO
Perry D. Snavely IRA and the Company.
10.127 Registration Rights Agreement dated July 30, 1999 between Lincoln Trust
Company FBO Perry D. Snavely IRA and the Company.
10.128 Common Stock Purchase Warrant dated July 30, 1999 issued to Lincoln Trust
Company FBO Perry D. Snavely IRA by the Company.
10.129 Common Stock Purchase Warrant dated July 30, 1999 issued to Sterling 2000
Investments by the Company.
85
10.130 Lease/Installment Purchase Agreement dated November 24, 1998 by and
between CPSC International and the Company.
10.131 Amendment No. 1, to the Lease/Installment Purchase Agreement dated
November 24, 1999, dated January 7, 1999 by and between CPSC International
and the Company.
10.132 Amendment, to Lease/Installment Purchase Agreement dated February 16,
1999 dated January 25, 1999 by and between CPSC International and the
Company.
10.133 Lease/Installment Purchase Agreement dated February 16, 1999 by and
between CPSC International and the Company.
10.134 Amendment No. 2, to Lease/Installment Purchase Agreement dated November
24, 1998 and to Lease/Installment Purchase Agreement dated January 7, 1999
dated September 16, 1999 by and between CPSC International and the Company.
10.135 Agreement dated September 16, 1999 by and between CPSC International and
the Company.
10.136 Purchase, Sale and Service Agreement for Propane/Butane Mix entered into
effective as of October 1, 1999 by and between Exxon Company, U.S.A. and
the Company.
10.137 Sales/Purchase Agreement of Propane Stream dated October 1, 1999 between
PG&E NGL Marketing, L.P. and the Company.
10.138 Permit issued on July 26, 1999 by the United States Department of State
authorizing the Company to construct two pipelines crossing the
international boundary line between the United States and Mexico for the
transport of liquefied petroleum gas (LPG) and refined product (motor
gasoline and diesel fuel).
10.139 Amendment to the LPG Purchase Agreement dated June 18, 1999 between PMI
Trading Company Ltd. And the Company.
21.1 Subsidiaries of the Registrant (filed herewith)
27.1 Financial Data Schedule. (Filed herewith.)
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENN OCTANE CORPORATION
By:/s/Ian T. Bothwell
--------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
November 9, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------- ------------------------------- ----------------
/s/Jerome B. Richter Jerome B. Richter November 9, 1999
- ----------------------- Chairman, President and Chief
Executive Officer
/s/Jorge R. Bracamontes Jorge R. Bracamontes November 9, 1999
- ----------------------- Executive Vice President,
Secretary and Director
Secretary and Director
/s/Ian T. Bothwell Ian T. Bothwell November 9, 1999
- ----------------------- Vice President, Treasurer,
Assistant Secretary, Chief
Financial Officer, Principal
Accounting Officer and Director
/s/Jerry L. Lockett Jerry L. Lockett November 9, 1999
- ----------------------- Vice President and Director
/s/Kenneth G. Oberman Kenneth G. Oberman November 9, 1999
- ----------------------- Director
/s/Stewart J. Paperin Stewart J. Paperin November 9, 1999
- ----------------------- Director
87