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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _____________________
Commission file number: 000-24394
PENN OCTANE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1790357
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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 October 30, 1998 was $8,491,992. The last reported sale
price of the Registrant's Common Stock as reported on the Nasdaq SmallCap Market
on October 30, 1998 was $1.44 per share.
The number of shares of Common Stock, par value $.01 per share, outstanding
on October 30, 1998 was 9,952,673.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
ITEM PAGE NO.
---- --------
Part I 1. Business 3
2. Properties 10
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 12
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
7A. Quantitative and Qualitative Disclosures About Market Risks 22
8. Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 58
Part III 10. Directors and Executive Officers of the Registrant 59
11. Executive Compensation 61
12. Security Ownership of Certain Beneficial Owners and Management 63
13. Certain Relationships and Related Transactions 64
Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 64
2
PART I
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, (the "Securities Act"),
and may include the words "believes," "will enable," "will depend," and "intends
to" or similar expressions as well as other statements of expectations, beliefs,
future strategies and comments concerning matters which are not historical
facts. These forward-looking statements are subject to risks and uncertainties
which could cause actual results to differ materially from those expressed or
implied by the statements.
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. Historically, the Company has been principally engaged
in the purchase, transportation and sale of liquefied petroleum gas ("LPG") and,
since 1997, the provision of equipment and services to the compressed natural
gas ("CNG") industry. The Company owns and operates a terminal facility in
Brownsville, Texas (the "Brownsville Terminal Facility") and 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. The Company's CNG capabilities have historically included the
design, packaging, construction, operation and maintenance of CNG fueling
stations. Since early 1998, the Company's CNG activities have been principally
focused on the construction and operation of a CNG vehicle and fueling station
infrastructure in Mexico City, Mexico (the "Mexico City Project").
Due to the current financial condition of the Company and the additional
capital required to pursue CNG operations in Mexico, the Company is currently
reassessing its CNG business strategy including the possible disposition of some
or all of the Company's CNG assets. As of the date of this Report, the Board
has not definitively determined whether to continue or dispose of the Company's
CNG business.
On October 21, 1993, International Energy purchased 100% of the common
stock of Penn Octane Corporation, a Texas corporation (the "Company"), and
merged the Company into International Energy as a division. As a result of the
merger of the Company with and into the Company, the Company assumed the lease
agreement between the Company and 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 LaGloria 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 96%,
95% and 95% of the Company's total revenues for the fiscal years ended July 31,
1996, 1997 and 1998, 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. See note D to the Consolidated Financial
Statements.
In October 1997, the Company formed Penn CNG Holdings, Inc. (Holdings), a
Delaware corporation and a wholly-owned subsidiary, to act as a holding company
for the Company's future Mexico CNG-related operations, including the ownership
and operation of CNG fueling stations, sales of CNG-powered vehicles and other
CNG-related business. 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, for the
Company's future Mexico CNG-related operations. As of the date of this Report,
none of these entities has had any operations.
3
The Company's principal executive offices are located at 900 Veterans
Boulevard, Suite 240, Redwood City, California 94063, and its telephone number
is (415) 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.
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. LPG
is also widely used as a motor fuel.
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. In 1997, domestic sales of LPG in Mexico
averaged approximately 11.7 million gallons per day, an increase of 6.0% over
sales for 1996, of which approximately 2.3 million gallons per day were imported
from the United States. The majority of Mexico's domestic LPG production is
located in the southeastern region of Mexico, while consumption is heaviest in
central, northern and Pacific coast regions.
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, Mexico. 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 from 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.
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 not yet in service.
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.
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 of the Brownsville Lease, 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.
4
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 LaGloria 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 belonging only to the Company and
not to any third party.
The Pipeline Lease currently expires on March 31, 2013, pursuant to an
amendment entered into between the Company and Seadrift on May 21, 1997,
effective on April 1, 1998 (the "Pipeline Lease Amendment"). 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. In addition, the Pipeline Lease Amendment
also provides for variable rental increases based on monthly volumes purchased
and flowing into the Pipeline. As of July 31, 1998, Seadrift had yet to make
certain improvements which the Company believes were the basis of the increase
in rent required under the Pipeline Lease Amendment ("Basic Improvements").
Accordingly, Seadrift has continued to invoice the Company, and the Company has
continued to make lease payments to Seadrift as prescribed under the Pipeline
Lease. The Company further believes that the term of the Pipeline Lease
Amendment shall commence upon the completion of the Basic Improvements and
terminate fifteen years thereafter. The Company believes the extension of the
Pipeline Lease gives the Company increased flexibility in negotiating sales and
supply agreements with its customers and suppliers. The Company has not made all
payments required by the lease agreements. Approximately $45,000 is owed under
the Pipeline Lease for reimbursement for repairs to the pipeline made prior to
the commencement of the lease. The August 1998 through October 1998 monthly
Pipeline Lease payments are outstanding.
Present Pipeline capacity is approximately 265 million gallons per year.
In fiscal year 1998, the Company transported 88.5 million gallons of LPG through
the Pipeline. The Company can increase the Pipeline's capacity through the
installation of additional pumping equipment.
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
either by the customers or by the Company on behalf of the customers. The
Company is currently considering constructing extensions to the Pipeline from
the Brownsville Terminal Facility to the Brownsville Navigation District oil
dock and to the railroad spur located at the Brownsville Terminal Facility,
which would enable the Company to transport LPG by ocean-going vessels and by
railcar to customers in Mexico, the United States or elsewhere. The Company is
also exploring the possibility of constructing a terminal facility in Matamoros,
Mexico and a pipeline to connect such a terminal facility with the Brownsville
Terminal Facility to enable the Company to transport LPG by pipeline directly
into northeast Mexico for subsequent sale and distribution. The Company
currently would be unable to fund any such construction without third-party
equity financing
On July 2, 1998, the Comision Regulador De Energia (the Mexican Energy
Regulatory Commission) unanimously voted to issue Penn Octane de Mexico, S.A. de
C.V. ("PennMex") a permit to transport LPG for the route between El Sabino
(North Rio Bravo) and the City of Matamoros, State of Tamaulipas, Mexico.
Pursuant to an option, the Company has the right to acquire for a nominal sum
ownership of PennMex, a Mexican company which has had minimal operations since
its inception and is owned 90% by Jorge R. Bracamontes, an officer and director
of the Company, to pursue opportunities in Mexico other than CNG. The Company
is currently awaiting the United States Presidential permit, which would allow
the Company to transport LPG from the route between the Brownsville Terminal
Facility and El Sabino. Upon receipt of this permit and adequate third-party
or equity financing, the Company plans to construct a pipeline connecting the
Brownsville Terminal Facility to Matamoros, Mexico.
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.
In November 1997, the Company entered into 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 of 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 96%, 95% and 95% of the Company's total
revenues for the fiscal years ended July 31, 1996, 1997 and 1998, respectively.
The Company and PMI have 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.
Under the PMI sales agreement during the period from October 1, 1997 through
September 30, 1998, actual volume sold was approximately 94 million gallons,
approximately 36% over the committed minimum requirements.
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 Petr leo (the Regulatory Law to Article 27 of the Constitution of Mexico
concerning Petroleum Affairs (the "Regulatory Law")), and Ley Org nica del Petr
leos Mexicanos y Organismos Subsidiarios (the Organic Law of Petr leos Mexicanos
and Subsidiary Entities (the "Organic Law")). Under Mexican law and related
regulations, PEMEX is entrusted with the central planning and the strategic
management of Mexico's petroleum industry, including importation, sales and
transportation of LPG. In carrying out this role, PEMEX controls pricing and
distribution of various petrochemical products, including LPG.
Beginning in 1995, as part of a national privatization program, the
Regulatory Law was amended to permit private entities to transport, store and
distribute natural gas with the approval of the Ministry of Energy. As part of
this national privatization program, the Mexican Government is expected to
completely deregulate the LPG market. Upon the completion of such deregulation,
the Company expects to be able to import LPG into Mexico for sale directly to
independent distributors. 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 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 such
deregulation.
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 November 1997, the Company obtained a $6.0
million credit facility (the "RZB Credit Facility") with RZB Finance, L.L.C.
("RZB Finance") which was increased to $7.0 million in April 1998, 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." Since October 1998, the
Company and Exxon have entered into monthly supply agreements pursuant to which
Exxon agreed to provide minimum volumes of LPG to the Company under terms
similar to the PMI Sales Agreement. The Company believes it has access to an
adequate supply of LPG to satisfy the requirements of PMI under the PMI Sales
Agreement. The LPG purchased from Exxon 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.
The Company is also able to purchase LPG from suppliers other than Exxon
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.
COMPRESSED NATURAL GAS
OVERVIEW. Extracted from underground reservoirs, natural gas is a fossil
fuel composed primarily of methane, hydrocarbons and inert gases. Natural gas
is widely available and in abundant supply. North American supplies are
reported to be sufficient to meet an estimated 150 years of demand at current
usage rates. CNG is measured by volume in cubic feet and sold by mass, energy
units or gasoline liter or gallon equivalents. CNG requires no refining and is
normally distributed to fueling stations via natural gas pipelines that operate
at a pressure of approximately 250 to 1,000 pounds per square inch (psi). For
use in vehicles, the gas is pressurized from 3,000 to 3,600 psi and stored in
the vehicle's gas storage tanks.
6
In the United States, federal and state legislation have tightened
pollution control measures to meet federal air quality standards and encouraged
the use of alternative fuels. Other countries, including Mexico, have also
enacted legislation promoting the use of alternative fuels, such as CNG.
COMPANY CNG PRODUCTS AND SERVICES. In March 1997, the Company entered the
business for the design, construction, installation and maintenance of equipment
for CNG fueling stations after purchasing certain assets from, and hiring
personnel formerly employed by WTI, a company previously engaged in such
operations. See note D to Consolidated Financial Statements. Equipment
comprising a CNG fueling station typically consists of a compressor skid package
(engine, compressor and cooler), dispensing equipment, storage bottles and gas
dryers.
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 the New York City Department of Transportation (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). On October 14, 1998, a complaint was filed by Amwest
under Surety Insurance Company ("Amwest") naming as defendants, among others,
PennWilson and the Company seeking reimbursement for payments made by Amwest
performance and payment bonds in response to claims for services provided by
suppliers, laborers and other materials and work to complete the NYDOT contract.
The Company is currently considering its legal options in relation to Amwest's
complaint and may pursue a counterclaim. In connection with the Orange County
contract, Orange County had filed suit against the Company and the parties
subsequently reached a settlement agreement (see notes G, O and T to the
Company's Consolidated Financial Statements).
The Company has not entered into any CNG contracts subsequent to July 31,
1998.
CNG OPERATIONS. Since 1997, the Company has been engaged in the provision
of equipment and services to the CNG industry. The Company's CNG capabilities
have included the design, packaging, construction, operation and maintenance
of CNG fueling stations.
Due to the current financial condition of the Company and the additional
capital required to pursue CNG operations in Mexico, the Company is currently
reassessing its CNG business strategy including the possible disposition of some
or all of the Company's CNG assets. As of the date of this Report, the Board has
not definitely determined whether to continue or dispose of the Company's CNG
business.
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. 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 provides a transportation cost advantage over the Company's trucking
competitors.
The Company believes that its Pipeline and the location of the Brownsville
Terminal Facility leave it well positioned to successfully compete for LPG
supply contracts with PMI and upon deregulation of the Mexican LPG market with
local distributors in northeast Mexico.
7
CNG. As described above, due to the current financial condition of the
Company and the additional capital required to pursue CNG operations in Mexico,
the Company is currently reassessing its CNG business strategy, including the
possible disposition of some or all of the Company's CNG assets. In making its
determination of whether to continue or dispose of its CNG business, the Company
will carefully consider, in addition to its current financial condition, its
competition in the CNG business as well as the potential success of CNG
operations in Mexico.
Several companies offer products and services that compete directly with
the Company's provision of CNG equipment and services, including the design,
packaging, construction and maintenance of equipment for CNG fueling stations.
If the market for CNG-fueled vehicles develops as anticipated by the Company, it
is likely that new competitors will enter the market. The Company competes for
the provision of equipment and services to the CNG industry principally on the
basis of price and product performance. Many of the Company's competitors have
significantly greater financial, technical and marketing resources and greater
name recognition than the Company. There can be no assurance that the Company
will compete successfully with its existing competitors or with any new
competitors.
In order to meet the emissions standards that have been established by
United States and Mexican federal and state mandates over the past several
years, several alternative fuels in addition to CNG are being used or have been
proposed for use in alternative fuel vehicles. These include electricity, LPG,
methanol, ethanol, hydrogen, reformulated gasoline and liquefied natural gas.
Each of these other fuels has comparative advantages and disadvantages over CNG
and each is expected to occupy part of the market for alternative fuels. In
addition, research is being conducted to develop a gasoline-powered engine that
would compete with alternative fuel vehicles in emissions, the successful
development of which could impact the size of the alternative fuels market.
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 their requirements and their
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.
EMPLOYEES
As of July 31, 1998, the Company had 21 employees, including two in
finance, eight in sales and administration, three in design, and eight 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.
8
ITEM 2. PROPERTIES.
As of July 31, 1998, 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, California CNG Manufacturing Facilities and 17,347 square feet and Leased(2)(4)
Administrative Offices 4,000 square feet
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 $7.0 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. 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 on March 31, 2013.
(4) The Company's lease with respect to the Santa Fe Springs, California facilities expired
December 31, 1997. The Company utilized the facilities under a month to month arrangement under similar
terms and conditions through October 31, 1998. Effective November 1, 1998, the Company entered into a new
lease agreement for approximately 1,500 square feet of Administrative Offices in Santa Fe Springs,
California. The Company no longer maintains CNG manufacturing facilities.
(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 on September 30, 1999.
For information concerning the Company's operating lease commitments, see note O
to the Consolidated Financial Statements.
9
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 to the Company by
IBC-Brownsville. IBC-Brownsville filed an appeal with the Texas Court of Appeals
on January 21, 1997 to appeal the Judgment. 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. The Court has not ruled on the
IBC-Brownsville request for rehearing. A decision is expected by December 31,
1998. As of July 31, 1998, the net amount of the award is approximately $3.4
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 to IBC-Brownsville which is included in the
Consolidated Financial Statements, less attorneys' fees.
On April 18, 1996, the Company reached an agreement (the "IBC Settlement
Agreement") to accept $400,000 to settle a lawsuit it filed in October 1995
against International Bank of Commerce-San Antonio, a bank related to
IBC-Brownsville ("IBC-San Antonio"). As part of the settlement agreement, the
parties, including IBC-Brownsville and IBC-San Antonio, executed mutual releases
from future claims related to the IBC-Brownsville litigation. Additionally,
IBC-San Antonio agreed to indemnify the Company for any such claims made or
asserted.
On June 26, 1996, IBC-Brownsville filed a suit against the Company (Case
No. 96-06-3502) in the 357th Judicial District Court of Cameron County alleging
that the Company, in filing the Judgment against IBC-Brownsville in order to
clear title to its assets, slandered the name of IBC-Brownsville.
IBC-Brownsville contends that the Judgment against it prevented it from selling
certain property. IBC-Brownsville has claimed actual damages of $600,000 and
requested punitive damages of $2,400,000. On September 23, 1996, the court
entered the Judgment on behalf of the Company, and indicated in a preliminary
ruling that the Company was privileged in filing the Judgment to clear title to
its assets.
On July 30, 1996, the Company filed suit in the District Court of Harris
County, Texas against Jorge V. Duran, former Chairman of the Board of the
Company, regarding alleged conversion and fraud by Mr. Duran during his time as
an employee of the Company. The Company has not yet quantified its damages and
is seeking a declaration that the termination of employment of Mr. Duran was
lawful and within the rights of the Company based on Mr. Duran's status as an
at-will employee of the Company. On December 12, 1996, Mr. Duran filed a
counterclaim in the District Court of Harris County, Texas asserting the
following claims: breach of contract against the Company and Mr. Richter;
wrongful discharge against the Company, Mr. Richter, and Mr. Mark Casaday, a
former officer and director of the Company; defamation against the Company, Mr.
Richter, Mr. Mark Casaday, and Mr. Jorge Bracamontes; and interference with
contract against Mr. Jorge Bracamontes. On February 27, 1997, the two actions
were consolidated into Case No. 96-37447, Penn Octane Corporation v. Jorge V.
Duran in the 164th District Court of Harris County, Texas and on September 30,
1998, Mr. Duran filed a Fourth Amended Original Petition. Mr. Duran is seeking
judgment against the Company and Messrs. Richter, Casaday and Bracamontes for
damages in excess of $12.0 million, including prejudgment interest as provided
for by law, and attorneys' fees and such further relief to which he may be
justly entitled. The Company intends to vigorously defend against Mr. Duran's
counterclaim.
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 respondents to cease and desist from committing or causing any current
or future violation of such section and rules.
On February 13, 1998, County Sanitation Districts of Orange County,
California (Orange County) filed a suit (Case No. 790409) in the Superior Court
of the State of California asserting the following claims: specific performance,
possession of personal property and damages and breach of contract against the
Company and PennWilson, CNG, Inc.; fraud/misrepresentation, negligent
misrepresentation and interference with contract against the Company,
PennWilson, CNG, Inc., Penn CNG Holdings, Inc., Michael Jadeski, an employee of
the Company and John Weber and James Antinone, former employees of the Company.
Orange County was seeking judgment against the Company and PennWilson CNG, Inc.
for delivery of the equipment under the contract or the contract value of
$251,494, consequential damages, costs of suit, interest, incidental damages and
other relief. Orange County was also seeking from all defendants general,
special, exemplary and punitive damages and costs of suit and other relief. On
April 23, 1998, the suit was settled whereby the Company agreed to repay Orange
County $202,812 plus interest thereon (10% per annum). As of July 31, 1998 the
Company had made all payments due under the settlement and Orange County
subsequently released the Company from any further obligations.
10
On October 14, 1998, a complaint was filed by Amwest naming as defendants,
among others, PennWilson and the Company seeking reimbursement for payments made
by Amwest from the performance and payment bonds in response to claims for
services provided by suppliers, laborers and other materials and work to
complete the NYDOT contract. The Company is currently considering its legal
options in relation to Amwest's complaint and may pursue a counterclaim.
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 O to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the year ended July 31, 1998 the Company did not hold an annual
meeting of stockholders. The Company intends to hold its next annual meeting
during the year ending July 31, 1999.
11
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 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, 1997:
First Quarter. . . . . . . . . . $2.375 $4.625
Second Quarter . . . . . . . . . 1.750 4.000
Third Quarter. . . . . . . . . . 2.250 4.063
Fourth Quarter . . . . . . . . . 2.125 4.938
FISCAL YEAR ENDED JULY 31, 1998:
First Quarter. . . . . . . . . . $4.750 $7.000
Second Quarter . . . . . . . . . 4.250 6.000
Third Quarter. . . . . . . . . . 3.750 5.750
Fourth Quarter . . . . . . . . . 3.625 5.750
On October 30, 1998, the closing bid price of the common stock as reported
on the Nasdaq SmallCap Market was $1.44 per share. On October 30, 1998, the
Company had 9,952,673 shares of common stock outstanding and approximately 314
holders of record of the common stock.
The Company has not paid and does not intend to pay any 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.
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.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data for each of the years in
the five-year period ended July 31, 1998, 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,
--------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- ---------- --------
Revenues. . . . . . . . . . . . $ 475(1) $14,787 $26,271 $30,367(2) $32,266
Loss from continuing operations (1,234) (2,047) (724) (2,923) (3,744)
Loss per common share . . . . . (.37) (.47) (.14) (.48) (.43)
Total assets. . . . . . . . . . 6,747 6,159 5,190 5,496 6,698
Long-term obligations . . . . . 1,589 95 1,060 1,113 60
(1) The Company's principal operations commenced during the year ended July
31, 1995.
(2) Includes the operations of PennWilson for the period from February 12,
1997 (date of incorporation) through July 31, 1997.
13
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 1998) refer to the Company's fiscal year ended July 31. The
results of operations of PennWilson, which began operations in March 1997 have
been included in the Company's results of operations for fiscal 1997 and 1998
discussed below. To date, there has been no significant activity associated
with the operations of Holdings or Estacion.
OVERVIEW
The Company has been principally engaged in the purchase, transportation
and sale of LPG and, since 1997, the provision of equipment and services to the
CNG industry. Beginning 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
1998, the Company derived approximately 95% of its revenues from sales of LPG,
of which sales to PMI accounted for nearly 100% of total LPG sales.
As part of its business strategy, in March 1997 the Company acquired
certain assets and hired certain former employees from WTI, a company engaged in
the engineering, design and construction of equipment for turnkey CNG fueling
stations. In connection with this acquisition, the Company paid $394,000 and is
committed to pay up to $2.0 million in royalty payments based on future sales,
if any. The acquisition was accounted for as a purchase and is reflected as
such in the Company's consolidated financial statements beginning in fiscal
1997.
The Company's CNG revenues were previously derived from contracts awarded
on a fixed-price, as-completed basis. Currently, the Company is no longer
actively pursuing contracts to construct CNG equipment for sale to third
parties. Due to the current financial condition of the Company and the
additional capital required to pursue CNG operations in Mexico, the Company is
currently reassessing its CNG business strategy including the possible
disposition of some or all of the Company's CNG assets. As of the date of this
Report, the Board has not definitively determined whether to continue or dispose
of the Company's CNG business.
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 costs 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.
14
LPG SALES
The following table shows the Company's volume sold in gallons and average
sales price of LPG for fiscal 1996, 1997 and 1998.
Fiscal Year Ended July 31,
--------------------------
1996 1997 1998
----- ----- -----
Volume Sold
LPG (millions of gallons) 65.4 61.7 88.5
Average sales price
LPG (per gallon). . . . . $0.40 $0.48 $0.35
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1998 COMPARED WITH JULY 31, 1997
Revenues. Revenues for fiscal 1998 were $32.3 million compared with $30.4
million for fiscal 1997, an increase of $1.9 million or 6.3%. Of this increase
(i) $877,257 related to the Company's LPG business; $9.3 million was
attributable to increased volume of LPG sold in fiscal 1998, partially offset by
a decrease in average sales price for LPG in fiscal 1998 resulting in a decrease
in sales of $8.4 million; and (ii) $801,580 was attributable to revenues from
sales of equipment for CNG fueling stations. 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 $30.9 million compared
with $29.7 million for fiscal 1997, an increase of $1.2 million or 4.0%. Of
this increase, $1.4 million was attributable to costs associated with sales of
equipment for CNG fueling stations, partially offset by net reduction of costs
associated with the Company's LPG business of approximately $300,000 ($8.4
million was attributable to a decrease in average purchase price for LPG
purchased in fiscal 1998, 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 $4.5 million in fiscal 1998 compared with $3.4
million in fiscal 1997, an increase of $1.1 million or 32.4%. This increase was
primarily attributable to $589,364 of costs associated with the operations of
the CNG business, litigation and other legal matters ($250,570), payroll related
costs ($274,046) registration costs ($150,000), costs for warrants issued
($160,000), and reserve for interest receivable from the President and a related
party ($223,000) partially offset by reductions of $838,000 of compensation
associated with the issuance of warrants to an employee and a consultant in
fiscal 1997.
Asset Impairment Loss. In accordance with the Statement of Financial
Accounting Standards No. 121 (SFAS 121), the Company recorded an asset
impairment loss related to its CNG long-lived assets of $400,000 for the year
ended July 31, 1998.
Other income and expenses, net. Other income (expense), net was ($269,033)
in fiscal 1998 compared with ($163,290) in fiscal 1997.
Income tax. Due to the net losses for fiscal 1998 and fiscal 1997, there
was no income tax expense in either year. At July 31, 1998, the Company had net
operating loss carryforwards for federal income tax purposes of approximately
$8.8 million. The ability to utilize such net operating loss carryforwards,
which expire in the years 2009 to 2013, may be significantly limited by the
application of the "change of ownership" rules under Section 382 of the Internal
Revenue Code.
15
YEAR ENDED JULY 31, 1997 COMPARED WITH JULY 31, 1996
Revenues. Revenues for fiscal 1997 were $30.4 million compared with $26.3
million for fiscal 1996, an increase of $4.1 million or 15.6%. Of this increase
(i) $4.9 million was attributable to increased average sales price for LPG in
fiscal 1997 partially offset by a decrease in volume of LPG sold in fiscal 1997
resulting in a decrease in sales of $1.5 million, and (ii) $663,000 was
attributable to revenues from sales of equipment for CNG fueling stations. The
decrease in volume of LPG sales in fiscal 1997 resulted from 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 $3.5 million (9.6 million gallons) for the first two months of fiscal
1996.
Cost of sales. Cost of sales for fiscal 1997 was $29.7 million compared
with $25.0 million for fiscal 1996, an increase of $4.7 million or 18.8%. Of
this increase (i) $5.1 million was attributable to an increased average purchase
price for LPG purchased in fiscal 1997 partially offset by the reduction in
volume of LPG sold in fiscal 1997 resulting in a decrease in cost of goods sold
of $897,000, and (ii) $547,000 was attributable to costs associated with sales
of equipment for CNG fueling stations.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $3.4 million in fiscal 1997 compared with $2.2
million in fiscal 1996, an increase of $1.2 million or 54.5%. This increase was
primarily attributable to (i) $838,000 of compensation associated with the
issuance of warrants to an employee and a consultant, and (ii) $372,000 of
consulting and professional fees and travel costs associated with the
commencement of the CNG business, litigation and other legal matters. The
increase in fiscal 1997 was partially offset by reductions in amortization
expense related to prepaid commissions totaling $341,000 which was fully
amortized in fiscal 1996.
Other income and expense, net. Other income (expense), net was ($163,290)
in fiscal 1997 compared with $220,886 in fiscal 1996. Income in fiscal 1996
included an award from litigation of $400,000.
Income tax. Due to the net losses for fiscal 1997 and fiscal 1996, there
was no income tax expense in either year. At July 31, 1997, the Company had net
operating loss carryforwards for federal income tax purposes of approximately
$5.6 million.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited quarterly
financial information for each of the eight most recent quarters in the period
ended July 31, 1998. This information is derived from unaudited consolidated
financial statements of the Company that include, in the opinion of management,
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of results of operations for such periods, when read in
conjunction with the audited Consolidated Financial Statements of the Company
and notes thereto appearing elsewhere in this Annual Report. All information is
in thousands, except per share data.
16
Quarter Ended
--------------------------------------------------------------------------------------------
Oct. 31, Jan. 31, Apr. 30, July 31, Oct. 31, Jan. 31, Apr. 30, July 31,
1996 1997 1997 1997 1997 1998 1998 1998
---------- --------- ---------- ---------- ---------- --------- ---------- ----------
Net revenues
$ 2,546 $ 13,513 $ 8,021 $ 6,287 $ 8,188 $ 10,107 $ 7,868 $ 6,103
Gross Profit
(206) 785 386 (317) 396 1,010 604 (614)
Net income (loss)
(687) 249 (99) (2,386) (124) 259 (43) (3,836)
Earnings (loss) per
common share
$ (.13) $ .05 $ (.02) $ (.37) $ (.01) $ .03 $ (.00) $ (.39)
Earning (loss) per
common share
assuming dilution
$ (.13) $ .04 $ (.02) $ (.37) $ (.01) $ .02 $ (.00) $ (.39)
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.
Historically, the Company has received the majority of its total annual
revenues during the months of October through March. Such pattern is
attributable to the seasonal demand for LPG, which is typically greatest during
the winter months of the second and third quarters of the Company's fiscal year.
The Company's quarterly earnings may vary considerably due to the impact of such
seasonality. Upon expiration of the Company's sales arrangement with PMI July
31, 1996, its primary customer, sales of LPG to PMI were interrupted during July
31, 1996 and September of 1996 pending the negotiation of a new sales contract
that became effective in October 1996.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception in
1992, has used cash in operations and has a deficit in working capital and
stockholders' equity. 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
1996, 1997 and 1998. All information is in thousands.
17
YEAR ENDED JULY 31,
--------------------------------
1996 1997 1998
-------- ---------- ----------
Net cash used in operating activities . . $( 808) $( 1,847) $( 1,065)
Net cash provided by (used in) investing. 347 ( 514) ( 1,337)
activities
Net cash provided by financing activities 769 2,027 2,528
-------- ---------- ----------
Net increase (decrease) in cash . . . . . $ 308 $ ( 334) $ 126
======== ========== ==========
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 October and November 1998, the Company entered into monthly
supply agreements with Exxon pursuant to which Exxon has agreed to supply
minimum volumes of LPG to the Company. 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. 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. The Company anticipates 10% - 15% lower gross margins on its
LPG sales as a result of increased LPG costs beginning October 1998 compared
with the previous agreements.
On October 21, 1997, the Company announced that it was contemplating filing
a registration statement with the SEC for the sale to the public of additional
shares of its common stock. As of July 31, 1998, due to the overall market
conditions and the uncertainty associated with any future sale to the public of
additional shares of the Company's common stock, the Company expensed all
previously deferred costs associated with the contemplated sale of common stock
totaling $385,491.
Pipeline Lease. The Pipeline Lease currently expires on March 31, 2013,
pursuant to an amendment entered into between the Company and Seadrift on May
21, 1997, effective on April 1, 1998 (the "Pipeline Lease Amendment"). 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. In addition, the Pipeline Lease
Amendment also provides for variable rental increases based on monthly volumes
purchased and flowing into the Pipeline. As of July 31, 1998, Seadrift had
yet to make certain improvements which the Company believes were the basis of
the increase in rent required under the Pipeline Lease Amendment ("Basic
Improvements"). Accordingly, Seadrift has continued to invoice the Company, and
the Company has continued to make lease payments to Seadrift as prescribed under
the Pipeline Lease. The Company further believes that the term of the Pipeline
Lease Amendment shall commence upon the completion of the Basic Improvements and
terminate fifteen years thereafter. The Company believes the extension of the
Pipeline Lease gives the Company increased flexibility in negotiating sales
and supply agreements with its customers and suppliers. The Company has not
made all payments required by the lease agreements. Approximately $45,000 is
owed under the Pipeline Lease for reimbursement for repairs to the pipeline made
prior to the commencement of the lease. The August 1998 through October 1998
monthly Pipeline Lease payments are outstanding.
Credit Arrangements. In connection with the PMI Sales Agreement, invoicing
is to occur weekly. From November 1996 to early November 1997, the Company and
PMI made an arrangement under which PMI provided financing on the Company's
behalf under the terms of the Company's supply agreement with Exxon, the
Company's main supplier. As a result of this arrangement, invoicing occurred on
a monthly, rather than a weekly basis.
On October 22, 1997, the Company entered into 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) 1.5% of
the maximum face amount of such letter of credit, or (iii) such higher amount as
may be agreed to between the Company and RZB. Any amounts outstanding under the
RZB Credit Facility shall accrue interest at a rate equal to the rate announced
by the Chase Manhattan Bank as its prime rate plus 2.5%. Pursuant to the RZB
Credit Facility, RZB has sole and absolute discretion to terminate the RZB
Credit Facility and to make any loan or issue any letter of credit thereunder.
RZB also has the right to demand payment of any and all amounts outstanding
under the RZB Credit Facility at any time. In connection with the RZB Credit
Facility, the Company granted a mortgage, security interest and assignment in
any and all of the Company's real property, buildings, pipelines, fixtures and
interests therein or relating thereto, including, without limitation, the lease
with the Brownsville Navigation District of Cameron County for the land on which
the Company's Brownsville Terminal Facility is located, the Pipeline Lease, and
in connection therewith agreed to enter into leasehold deeds of trust, security
agreements, financing statements and assignments of rent, in forms satisfactory
to RZB. Under the RZB Credit Facility, the Company may not permit to exist any
lien, security interest, mortgage, charge or other encumbrance of any nature on
any of its properties or assets, except in favor of RZB, without the consent of
RZB. 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. Upon establishment of the RZB Credit Facility,
beginning November 11, 1997, PMI no longer provides any financing on behalf of
the Company, and the Company began invoicing PMI on a weekly basis.
18
Effective April 22, 1998, the aggregate amount available under the RZB
Credit Facility was increased to $7.0 million. The Company believes that based
on current market prices of LPG and LPG volume requirements under the PMI Sales
Agreement, the RZB Credit Facility is adequate.
In connection with the Company's purchases of LPG from Exxon and/or PG&E
NGL Marketing, L.P., the Company issues letters of credit on a monthly basis
based on anticipated purchases.
As of July 31, 1998, letters of credit established under the RZB Credit
Facility in favor of Exxon for purchases of LPG totaled $5.2 million of which
$883,168 was being used to secure unpaid purchases from Exxon as of July 31,
1998. In addition, as of July 31, 1998, the Company had $991,823 of loans
outstanding under the RZB Credit Facility. In connection with these purchases,
as of July 31, 1998, the Company had unpaid invoices due from PMI totaling $1.09
million and cash balances maintained in the RZB Credit Facility collateral
account of $31,221.
During June 1998, a letter of credit was established under the RZB Credit
Facility in favor of PG&E NGL Marketing, L.P. for purchases of LPG totaling
$360,000. The letter of credit expired during August 1998.
Private Placements and Other Transactions. During August 1997, warrants to
purchase 75,000 shares of the Common Stock of the Company issued in connection
with the private placement were exercised at prices below the original stated
exercise price in exchange for a cash payment of $56,250, which the Company used
for working capital, and cancellation of $75,000 of indebtedness from the
private placement, plus accrued interest thereon.
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.
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 are
unsecured. Proceeds raised from the private placement totaled $1.5 million,
which the Company used for working capital requirements. Interest at 10% per
annum is 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. To date, the Company has not made the required June 30, 1998
quarterly interest and principal payment. The purchasers in the private
placement were granted one demand registration right with respect to the shares
issuable upon exercise of the warrants.
19
Pursuant to the 1997 Stock Award 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.
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, as of April 7, 1998, totaled $1.03 million.
For a detailed listing of Common Stock and warrant transactions during
fiscal 1996, 1997 and 1998, see Notes M and N to the Consolidated Financial
Statements.
Judgment in favor of the Company. Judgment has been rendered in favor of
the Company in connection with its litigation against IBC-Brownsville in the
amount of $3,246,754. As of July 31, 1998, the net amount of the award is
approximately $3.4 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 which is included in the
Consolidated Financial Statements, less attorneys' fees. The Judgment is being
appealed by the defendant. Although no assurance can be made, management
believes that the Company will ultimately prevail on appeal and will receive the
proceeds from such Judgment. A significant portion of the Judgment, upon
realization by the Company, will be used to pay attorneys' fees incurred in
connection with the IBC-Brownsville litigation. In addition, a former officer of
the Company is entitled to 5% of the net proceeds (after expenses and legal
fees). See " Legal Proceedings" and note O to the Consolidated Financial
Statements.
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.
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 and (vi) raise additional debt and/or
equity capital. See note Q to the Consolidated Financial Statements.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
20
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, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended July 31, 1998. 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, 1997 and 1998, and the consolidated results of their
operations and their consolidated cash flows for each of the three years in the
period ended July 31, 1998 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, 1998. 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 achieved profitable operations,
2) outstanding litigation, 3) a deficit in working capital and stockholders'
equity and 4) is delinquent under certain loan and lease agreements.
Management's plans in regard to these matters are described in note Q. 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 123,
"Accounting for Stock Based Compensation" during the year ended July 31, 1996
and SFAS 128, "Earnings per Share", during the year ended July 31, 1998. As
discussed in note S, the Company adopted the provisions of SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information" during the
year ended July 31, 1997.
BURTON McCUMBER & CORTEZ, L.L.P.
Brownsville, Texas
October 9, 1998
21
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31
ASSETS
1997 1998
---------- ----------
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,142 $ 157,513
Trade accounts receivable, less allowance for doubtful accounts of
$53,406 and $418,796 (note G) . . . . . . . . . . . . . . . . . . . . 281,500 1,195,571
Related party receivables (note E) . . . . . . . . . . . . . . . . . . 171,601 82
Costs and estimated earnings in excess of billings on uncompleted
contracts (notes B8 and G) . . . . . . . . . . . . . . . . . . . . . . 196,888 -
Inventories (notes B1 and G) . . . . . . . . . . . . . . . . . . . . . 795,797 377,097
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 83,082 95,775
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,560,010 1,826,038
Property, plant and equipment - net (notes B2 and F). . . . . . . . . . 3,185,148 4,119,437
Lease rights (net of accumulated amortization of $432,765 and $478,560)
(note B2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 721,274 675,479
Other non-current assets (notes B2, E and H). . . . . . . . . . . . . . 29,935 77,026
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,496,367 $6,697,980
========== ==========
The accompanying notes are an integral part of these statements.
22
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
JULY 31
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1998
-------------- ---------------
Current Liabilities
Current maturities of long-term debt (note L) . . . . . . . . . . . . . . $ 1,152,391 $ 1,693,897
Revolving line of credit (note O) . . . . . . . . . . . . . . . . . . . . 140,000 991,823
Construction accounts payable (note K). . . . . . . . . . . . . . . . . . 121,801 -
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 481,348 2,050,575
Billings in excess of costs and estimated earnings
on uncompleted contracts (notes B8 and G) . . . . . . . . . . . . . . . . 7,596 -
Borrowings from IBC-Brownsville (notes I and O). . . . . . . . . . . . . 672,552 672,552
Accrued liabilities 1,055,237 1,555,261
-------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 3,630,925 6,964,108
Long-term debt, less current maturities (note L) . . . . . . . . . . . . . 1,112,833 60,000
Commitments and contingencies (notes D, O and R) . . . . . . . . . . . . . - -
Stockholders' Equity (note M)
Senior preferred stock-$.01 par value, 5,000,000 shares authorized;
0 shares issued and outstanding at July 31, 1997 and 1998 . . . . . . . . - -
Preferred stock-$.01 par value, 5,000,000 shares authorized; 270,000
and 0 convertible shares issued and outstanding at July 31, 1997
and 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700 -
Common stock-$.01 par value, 25,000,000 shares authorized;
8,169,286 and 9,952,673 shares issued and outstanding at July 31,
1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,693 99,527
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 10,515,266 13,318,592
Notes receivable from the president of the Company and a related
party for exercise of warrants, less reserve of $0 and $223,000. . . . . . ( 2,834,865) ( 2,763,006)
Accumulated deficit ( 7,012,185) ( 10,981,241)
-------------- ---------------
Total stockholders' equity 752,609 (326,128)
-------------- ---------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . $ 5,496,367 $ 6,697,980
============== ===============
The accompanying notes are an integral part of these statements.
23
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31
1996 1997 1998
------------ -------------- --------------
Revenues (note B8). . . . . . . . . . . . . . . . . . . . . . $26,270,673 $ 30,367,134 $ 32,266,419
Cost of goods sold 24,978,265 29,718,734 30,869,987
------------ -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 1,292,408 648,400 1,396,432
Selling, general and administrative expenses
Commissions. . . . . . . . . . . . . . . . . . . . . . . . . 341,464 - -
Legal and professional fees. . . . . . . . . . . . . . . . . 789,761 1,075,824 1,348,388
Salaries and payroll related expenses. . . . . . . . . . . . 548,409 707,884 1,092,889
Stock based compensation (note N). . . . . . . . . . . . . . - 837,600 -
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,102 229,506 208,466
Other (note P) . . . . . . . . . . . . . . . . . . . . . . . 414,666 556,955 1,821,712
Asset impairment loss (notes B and F) . . . . . . . . . . . . - - 400,000
------------ -------------- --------------
2,237,402 3,407,769 4,871,455
------------ -------------- --------------
Operating (loss) . . . . . . . . . . . . . . . . . . . . . . ( 944,994) ( 2,759,369) ( 3,475,023)
Other income (expense)
Interest expense . . . . . . . . . . . . . . . . . . . . . . ( 259,608) ( 239,431) ( 502,054)
Interest income. . . . . . . . . . . . . . . . . . . . . . . 4,161 71,893 233,021
Other income . . . . . . . . . . . . . . . . . . . . . . . . 76,333 4,248 -
Award from litigation (note O) . . . . . . . . . . . . . . . 400,000 - -
------------ -------------- --------------
Net (loss) before taxes. . . . . . . . . . . . . . . . . . ( 724,108) ( 2,922,659) ( 3,744,056)
Provision for income taxes (notes B3 and J) . . . . . . . . . - - -
------------ -------------- --------------
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . $( 724,108) $( 2,922,659) $( 3,744,056)
============ ============== ==============
(Loss) per common share and (loss) per common share assuming
dilution (notes B4 and C). . . . . . . . . . . . . . . . . . $ ( 0.14) $ ( 0.48) $ ( 0.43)
============ ============== ==============
Weighted average common shares outstanding. . . . . . . . . . 5,130,191 6,144,724 $ 9,235,299
============ ============== ==============
The accompanying notes are an integral part of these statements.
24
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31
1996 1997 1998
------------------ ------------------ -----------------------
Shares Amount Shares Amount Shares Amount
--------- ------- --------- ------- ----------- ----------
SENIOR PREFERRED STOCK. . . . . . . . . . . . . . . . . - $ - - $ - - $ -
========= ======= ========= ======= =========== ==========
PREFERRED STOCK
Beginning balance. . . . . . . . . . . . . . . . . . . 270,000 $ 2,700 270,000 $ 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 $ 2,700 270,000 $ 2,700 - $ -
========= ======= ========= ======= =========== ==========
COMMON STOCK
Beginning balance. . . . . . . . . . . . . . . . . . . 5,065,000 $50,650 5,205,000 $52,050 8,169,286 81,693
Issuance of 40,000 shares of common stock for
services and settlement of accrued liability. . . . . 40,000 400 - - - -
Issuance of common stock upon exercise of
warrants on February 16, 1996, in exchange for
future legal services . . . . . . . . . . . . . . . . 100,000 1,000 - - - -
Issuance of common stock for services 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
--------- ------- --------- ------- ----------- ----------
Ending balance. . . . . . . . . . . . . . . . . . . . . 5,205,000 $52,050 8,169,286 $81,693 9,952,673 $ 99,527
========= ======= ========= ======= =========== ==========
25
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
FOR THE YEARS ENDED JULY 31
1996 1997 1998
-------------- -------------- ---------------
Amount Amount Amount
-------------- -------------- ---------------
ADDITIONAL PAID-IN CAPITAL
Beginning balance . . . . . . . . . . . . . . . . $ 5,637,965 $ 5,954,565 $ 10,515,266
Issuance of common stock for notes,
cancellation of commission agreements,
services and payment on promissory note . . . . 238,600 13,200 1,142,867
Conversion of preferred stock to common stock - - ( 6,299)
Dividends on preferred stock. . . . . . . . . . . - - 224,000
Amortization of loan discount . . . . . . . . . . - - 75,000
Grant of warrants for services. . . . . . . . . . 78,000 917,785 -
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. . . . . . . . . . . . . . . . . . $ 5,954,565 $ 10,515,266 $ 13,318,592
============== ============== ===============
STOCKHOLDERS' NOTES
Beginning balance . . . . . . . . . . . . . . . . $ - $ - $ ( 2,834,865)
Notes receivable from the President and a
related party for exercise of warrants, less
reserve of $0 and $223,000 . . . . . . . . . . . - ( 2,834,865) 71,859
-------------- -------------- ---------------
Ending balance. . . . . . . . . . . . . . . . . . $ - $( 2,834,865) $ ( 2,763,006)
============== ============== ===============
ACCUMULATED DEFICIT
Beginning balance . . . . . . . . . . . . . . . . $( 3,365,418) $( 4,089,526) $ ( 7,012,185)
Net loss for the year . . . . . . . . . . . . . . ( 724,108) ( 2,922,659) ( 3,744,056)
Dividends on preferred stock. . . . . . . . . . . - - ( 225,000)
-------------- -------------- ---------------
Ending balance. . . . . . . . . . . . . . . . . . $( 4,089,526) $( 7,012,185) $( 10,981,241)
============== ============== ===============
The accompanying notes are an integral part of these statements.
26
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31
1996 1997 1998
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 724,108) $( 2,922,659) $( 3,744,056)
Adjustments to reconcile net loss to net cash used in (provided by)
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 414,412 448,019 249,584
Amortization of lease rights . . . . . . . . . . . . . . . . . . . 115,404 115,404 45,795
Non-employee stock based costs and other . . . . . . . . . . . . . 541,403 108,969 30,000
Issuance of warrants in connection with registration rights
agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 160,542
Loan discount. . . . . . . . . . . . . . . . . . . . . . . . . . . - - 75,000
Stock based compensation cost. . . . . . . . . . . . . . . . . . . - 837,600 -
Gain on sale of option . . . . . . . . . . . . . . . . . . . . . . ( 10,886) - -
Asset impairment loss. . . . . . . . . . . . . . . . . . . . . . . - - 400,000
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . - - 2,579
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 71,859
Changes in current assets and liabilities:
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . ( 29,463) ( 252,037) ( 914,071)
Related party receivable . . . . . . . . . . . . . . . . . . . . . - ( 171,601) 171,519
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . 495 26,233 -
Costs and estimated earnings in excess of billings on uncompleted
contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - ( 196,888) 196,888
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 71,756) ( 74,746) 129,069
Prepaid and other current assets . . . . . . . . . . . . . . . . . 113,322 ( 35,272) ( 42,693)
Construction and accounts payable. . . . . . . . . . . . . . . . . ( 1,201,307) ( 263,082) 1,510,125
Advances from related party. . . . . . . . . . . . . . . . . . . . ( 67,977) - -
Billings in excess of costs and estimated earnings
on uncompleted contracts . . . . . . . . . . . . . . . . . . . . . - 7,596 ( 7,596)
Other assets and liabilities, net. . . . . . . . . . . . . . . . . - - ( 47,091)
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . 112,722 525,716 647,682
-------------- -------------- --------------
Net cash used in operating activities. . . . . . . . . . . . . . ( 807,739) ( 1,846,748) ( 1,064,865)
Cash flows from investing activities:
Acquisition of inventory and fixed assets from WTI . . . . . . . . - ( 394,000) -
NPEG note. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 790,843 - -
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . ( 451,826) ( 120,017) ( 1,358,686)
Sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . - - 21,843
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,846 - -
-------------- -------------- --------------
Net cash provided by (used in) investing activities . . . . . . 346,863 ( 514,017) ( 1,336,843)
Cash flows from financing activities:
Revolving credit facilities. . . . . . . . . . . . . . . . . . . . - 140,000 851,823
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 1,502,033 1,500,000
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . - 516,073 1,131,250
Shareholder notes. . . . . . . . . . . . . . . . . . . . . . . . . 100,000 - -
Reduction in debt. . . . . . . . . . . . . . . . . . . . . . . . . ( 198,252) ( 130,724) ( 954,994)
Decrease in bank overdraft . . . . . . . . . . . . . . . . . . . . ( 133,133) - -
-------------- -------------- --------------
Net cash provided by financing activities. . . . . . . . . . . . 768,615 2,027,382 2,528,079
-------------- -------------- --------------
Net increase (decrease) in cash. . . . . . . . . . . . . . . . 307,739 ( 333,383) 126,371
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . 56,786 364,525 31,142
-------------- -------------- --------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . $ 364,525 $ 31,142 $ 157,513
============== ============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 308,458 $ 165,964 $ 404,883
============== ============== ==============
Supplemental disclosures of noncash transactions:
Common stock and warrants issued (notes L, M and N) . . . . . . . $ 318,000 $ 4,004,756 $ 1,740,242
============== ============== ==============
The accompanying notes are an integral part of these statements.
27
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Penn Octane Corporation was 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. Substantially all
of the LPG sales volume since inception has been to PMI Trading Limited (PMI), a
subsidiary of Petroleos Mexicanos (PEMEX), the Mexican state owned oil company.
The Company commenced operations during the fiscal year ended July 31,
1995 upon construction of its terminal facility in Brownsville, Texas
(Brownsville Terminal Facility). Prior to such time, the Company was in the
"development stage" until the business was established.
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.
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.
28
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 is determined on the first-in, first-out basis.
2. PROPERTY, PLANT AND EQUIPMENT, LEASE RIGHTS AND CONSULTING
SERVICES CONTRACTs
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, consulting services and service contracts are being
amortized as follows:
Lease rights . . . . . . . . . . . . 19 years
Consulting services (note E) . . . . 41 - 48 months
Financial advisory services (note H) 12 months
Legal services (note H). . . . . . . 36 months
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 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, 1996 and 1997. 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 F).
29
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
3. INCOME TAXES
The Company will file a consolidated income tax return for the year
ended July 31, 1998.
The Company accounts for deferred taxes in accordance with Statement
of Financial Accounting Standards No. 109 (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 accumulated depreciation, start up costs,
amortization of professional fees and deferred compensation expense.
4. (LOSS) PER COMMON SHARE
(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 FASB issued Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share", which supersedes Accounting Principles Board
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
Statement of Financial Accounting Standards No. 107 (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.
30
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
8. REVENUES AND COST RECOGNITION
Certain of the Company's work is performed under fixed-price
contracts. Revenues are 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 is used because management considers
expended costs to be the best available measure of progress on these contracts.
Contract costs include 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 are charged
to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes
in job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income. These revisions are recognized in the
period in which the revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of cost and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
9. STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation", which 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 Accounting Principles Board Opinion No. 25 (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.
31
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - (LOSS) PER COMMON SHARE
The following table presents reconciliations from (loss) per common share to
(loss) per common share assuming dilution (see notes M and N for the warrants
and convertible preferred stock excluded because they are anti-dilutive):
For the year ended July 31, 1996
----------------------------------------
(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- -----------
Net (loss) . . . . . . . . . . . . . $( 724,108) - -
Less: Dividends on preferred stock. - - -
BASIC EPS
Net (loss) available to common
stockholders . . . . . . . . . . . ( 724,108) 5,130,191 $ ( 0.14)
===========
EFFECT OF DILUTIVE SECURITIES
Warrants . . . . . . . . . . . . . . - - -
Convertible Preferred Stock. . . . . - - -
DILUTED EPS
Net (loss) available to common
stockholders . . . . . . . . . . . $( 724,108) 5,130,191 $ ( 0.14)
============ ============= ===========
For the year ended July 31, 1997
------------------------------------------
(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
Net (loss) . . . . . . . . . . . . . $( 2,922,659) - -
Less: Dividends on preferred stock. - - -
BASIC EPS
Net (loss) available to common
stockholders . . . . . . . . . . . ( 2,922,659) 6,144,724 $ ( 0.48)
===========
EFFECT OF DILUTIVE SECURITIES
Warrants . . . . . . . . . . . . . . - - -
Convertible Preferred Stock. . . . . - - -
DILUTED EPS
Net (loss) available to common
stockholders . . . . . . . . . . . $( 2,922,659) 6,144,724 $ ( 0.48)
============== ============= ===========
For the year ended July 31, 1998
------------------------------------------
(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
Net (loss) . . . . . . . . . . . . . . . . . $( 3,744,056) - -
Less: Dividends on preferred stock. . . . . ( 225,000) - -
BASIC EPS
Net (loss) available to common stockholders. ( 3,969,056) 9,235,299 $ ( 0.43)
===========
EFFECT OF DILUTIVE SECURITIES
Warrants . . . . . . . . . . . . . . . . . . - - -
Convertible Preferred Stock. . . . . . . . . - - -
DILUTED EPS
Net (loss) available to common stockholders. $( 3,969,056) 9,235,299 $ ( 0.43)
============== ============= ===========
32
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - COMPRESSED NATURAL GAS
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 to occur 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.
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.
The acquisition was accounted for as a purchase. Accordingly, the
results of operations of PennWilson are 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, are not available.
However, WTI's revenues for the period from August 1, 1995 to March 21, 1997
were not material.
33
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - RELATED PARTIES
DIRECTORS, OFFICERS AND SHAREHOLDERS
---------------------------------------
During the year ended July 31, 1996, the Company made advances to, and
received advances from, three of the Company's nine directors. As of July 31,
1996, a director owed the Company a balance of $26,233 for interest on loans
that the Company made to the director's related businesses. All previous loans
and receivables from the director had been settled as of July 31, 1996 and the
interest receivable referred to above was settled as of July 31, 1997.
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 (see note L).
During March 1997, the Company received advances from its President in
the amount of $85,000. This amount was repaid during April 1997.
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 M for other
related party transactions). During the year ended July 31, 1998, the Company
paid that corporation $181,000 for Mexico related expenses incurred by that
corporation on the Company's behalf.
COMMISSION AGREEMENT
---------------------
During the year ended July 31, 1994, the Company entered into a
commission agreement with a consulting firm covering a forty-one month period.
The firm assisted the Company in its efforts to negotiate purchase orders with
its major customer. The former Chairman of the Company is related to a person
in the consulting firm who had a decision-making role.
On March 1, 1995, the consulting firm accepted 200,000 shares of the
Company's common stock in lieu of any future commissions due under the original
agreement signed on February 10, 1994. The stock was valued at $400,000 ($2.00
per share). The consulting firm remained liable for the services to be
performed; therefore, the $400,000 was being amortized over the remaining life
of the original agreement.
On July 31, 1996, the Company determined that no future benefit would
be derived from the consulting services contract, and the remaining balance was
charged to operations.
34
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of July 31:
1997 1998
-------------- --------------
LPG:
Building. . . . . . . . . . . . . $ 173,500 $ 173,500
LPG terminal. . . . . . . . . . . 3,426,440 3,426,440
Automobile and equipment. . . . . 378,039 391,138
Office equipment. . . . . . . . . 22,202 35,738
Capital construction in progress. - 75,389
Leasehold improvements. . . . . . 237,899 291,409
CNG:
Furniture, fixtures and equipment 162,161 203,559
Automobiles . . . . . . . . . . . 40,023 3,500
Capital construction in progress. - 1,041,434
Leasehold improvements. . . . . . 8,575 8,575
-------------- --------------
4,448,839 5,650,682
Less: accumulated depreciation and
amortization. . . . . . . . . . . ( 1,263,691) ( 1,531,245)
-------------- --------------
$ 3,185,148 $ 4,119,437
============== ==============
During May 1997, the Company amended (the Amendment) the Pipeline
Lease with Seadrift to extend the term of the Pipeline Lease through March 31,
2013. The Amendment became effective on April 1, 1998. As a result of the
Amendment, the Company changed the useful life of its LPG terminal assets,
leasehold improvements and lease rights through the extension of the amended
lease period (see note O). The effect of the change in estimate for the year
ended July 31, 1998 was to decrease the Company's net loss by $284,068 and
decrease the Company's loss per common share by $.03. At July 31, 1998, the
Company determined that CNG related assets constructed by the Company and spare
parts inventories (CNG capital construction in progress) 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.
Depreciation and amortization expense of property, plant and equipment
totaled $414,412, $448,019 and $249,584 for the years ended July 31, 1996, 1997
and 1998, respectively.
35
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - INVENTORIES AND COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
Inventories consist of the following as of July 31:
1997 1998
--------- --------
LPG
Pipeline. . . . . . . . . $ 406,371 $276,938
LPG terminal. . . . . . . 86,180 100,159
CNG
Raw material and supplies 199,519 -
Work in progress. . . . . 103,727 -
--------- --------
$ 795,797 $377,097
========= ========
Costs and estimated earnings on uncompleted contracts consist of the following
as of July 31:
1997 1998
---------- -----
Uncompleted contracts consist of:
Costs incurred on uncompleted contracts. .. . . . . . . . . . . . . . . $ 488,560 $ -
Estimated earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . 101,294 -
---------- -----
589,854 -
Less: billings to date. . . . . . . . . . . . . . . . . . . . . . . . . 400,562 -
---------- -----
189,292 $ -
========== =====
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts . . . . . . . . . . . . . . . . . . $ 196,888 $ -
Billings in excess of costs and estimated
earnings on uncompleted contracts . . . . . . . . . . . . . . . . . . ( 7,596) -
---------- -----
$ 189,292 $ -
========== =====
36
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - OTHER ASSETS
On August 25, 1995, the Company entered into a one year contract with
an investment advisory firm for future financial advisory services in exchange
for 20,000 shares of common stock. In February 1996, an attorney exercised his
100,000 warrants to purchase 100,000 shares of common stock for $1.25 per share
in exchange for legal services for a three year period.
On July 31, 1996, the Company determined that the attorney would not
be required to render future services. The Company has retained another
attorney; therefore, the remaining balance was charged to operations. Other
assets consist of the following at July 31:
1997 1998
------- -------
Prepaid compensation cost $18,000 $ -
Other . . . . . . . . . . 11,935 77,026
------- -------
29,935 $77,026
======= =======
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, 1997 and 1998 (see note O).
37
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES
At July 31, 1998, 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
- ----------- -------------
2009 $ 930,000
2010 2,370,000
2012 2,279,000
2013 3,247,000
-------------
$ 8,826,000
=============
Deferred tax assets and liabilities were as follows as of July 31:
1997 1998
----------------------- -----------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
263 and other inventory costs
Depreciation. . . . . . . . . . . $ - $ - $ - $ 29,000
Capitalized start-up costs. . . . 15,000 - - 21,000
Warranty reserves . . . . . . . . 3,000 - 1,000 -
Bad debt reserve. . . . . . . . . 1,000 - 5,000 -
Amortization of professional fees 19,000 - 142,000 -
Deferred compensation expense . . 58,000 - 8,000 -
Net operating loss carryforward . 318,000 - 469,000 -
1,818,000 - 3,001,000 -
---------- ----------- ---------- -----------
2,232,000 - 3,626,000 50,000
Less: valuation allowance
2,232,000 - 3,626,000 50,000
---------- ----------- ---------- -----------
- - $ - -
========== =========== ========== ===========
Management believes that the valuation allowance reflected above is
warranted 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.
38
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - CONSTRUCTION PAYABLES
As of July 31, 1995, two companies: Lauren Constructors, Inc.
(Lauren) and Thomas G. Janik & Associates, Inc. (Janik), had filed Mechanic's
and Materialmen's Liens against the Company's Brownsville Terminal Facility.
The Company was in litigation with Lauren and Janik but the parties reached a
settlement agreement on June 21, 1995. Under the terms of the settlement
agreement, the parties agreed to stay the pending legal proceedings provided the
Company adhered to an agreed-upon payment schedule. The minimum monthly payment
due according to the payment schedule was $34,445, which included interest at
12% per annum. In addition, the agreement provided for additional payments
related to the monthly volume of gallons of LPG sold by the Company through its
Brownsville Terminal Facility. At July 31, 1996, the principal amount owed
Lauren and Janik was $360,145 and $77,689, respectively. Under terms of the
settlement agreement, the Company was to have paid the remaining balance on
August 15, 1996. The Company did not make the required payment but because the
Company had complied with all other terms and conditions of the settlement
agreement and had made combined principal and interest payments of $984,480 to
Lauren and Janik, the parties agreed to extend the settlement agreement to April
14, 1997, under substantially similar terms and conditions. In exchange for
this extension, the Company made an immediate lump sum payment of approximately
$50,000 and executed a promissory note for the remaining balance due. In
addition, the Company provided Lauren and Janik a first lien position on the
improvements at the Brownsville terminal and a mortgagee's title policy for the
full amount of the principal and accrued interest remaining due.
During April 1997, Janik agreed to exercise warrants to purchase
25,000 shares of common stock of the Company at an exercise price below the
stated exercise price of $2.50 per share, and the Company agreed to accept in
lieu of cash payment on the exercise of the warrants, full cancellation of the
remaining approximately $46,000 principal amount of indebtedness and interest
thereon due Janik. In connection with the remaining obligation owed to Lauren
of approximately $212,000, which was due in April 1997, the Company and Lauren
reached an agreement whereby the Company paid Lauren $100,000 in April 1997, and
the remaining balance was paid in four equal monthly installments during the
period from May 15, 1997 through August 15, 1997.
39
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - LONG-TERM DEBT
Long-term debt consists of the following as of July 31:
1997 1998
---------- ----------
Contract for Bill of Sale; due in semi-annual payments of $22,469, including interest
at 11.8%; due in October 1998; collateralized by a building. . . . . . . . . . . . . . $ 113,191 $ 91,197
Subordinated note with warrants to purchase 50,000 shares of common stock at
$2.50 per share expiring February 28, 2001; principal due August 31, 1997, or upon
receipt of proceeds from secondary equity offering in the minimum amount of
$5,000,000; interest at 10% due annually on the anniversary date of the note;
collateralized by all tanks, pumps, equipment and other terminal property, and
proceeds from a judgment or settlement of litigation (Paid in September 1997). . . . . 400,000 -
Subordinated note with warrants to purchase 50,000 shares of common stock at
$2.50 per share expiring April 11, 2001; principal due October 11, 1997, or upon
receipt of proceeds from secondary equity offering in the minimum amount of
$5,000,000; interest at 10% due annually on the anniversary date of the note;
collateralized by all tanks, pumps, equipment and other terminal property and
proceeds from the judgment or settlement of litigation (Paid in October 1997). . . . . 500,000 -
Unsecured note with warrants to purchase 75,000 shares of common stock at $3.00
per share expiring October 10, 1997; principal due November 7, 1997, or upon
receipt of proceeds from offering of securities prior to payment date in excess of
$250,000; Company shall utilize one half of proceeds from such sale to satisfy this
note; interest at 10% due annually on the anniversary date of the note (Paid in
August 1997).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 -
Unsecured note with principal due in equal annual installments of $20,000
beginning June 5, 1998, plus interest at the prime rate (8.5% at July 31, 1998); due
June 5, 2002 (see note D). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Unsecured promissory note due May 29, 1998 (paid in June 1998).. . . . . . . . . . . . 33,000 -
Secured Promissory Note with warrants to purchase 500,000 shares of common
stock at $2.50 per share expiring June 15, 2002; principal due June 15, 1999, or
upon receipt of proceeds from secondary debt or equity offering in the minimum
amount of $5,000,000; interest at 10.5% due semi-annually on December 15 and
June 15; collateralized by certain specified assets of the Company (see note M). . . . 1,000,000 -
$1,500,000 in 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;
principal due June 30, 1998, or upon earlier receipt of proceeds from any public
offering of debt or equity of the Company resulting in net proceeds to the Company
in excess of $5,000,000; interest at 10.0% on the principal amount of the promissory
notes 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 M). . . . . . . - 1,500,000
Note issued in connection with settlement of vendor obligation. Principal due in
monthly installments.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 62,700
Capitalized lease obligations payable in monthly installments totaling $3,138; due
on various dates through January 1999. . . . . . . . . . . . . . . . . . . . . . . . . 44,033 -
---------- ----------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,265,224 1,753,897
Current maturities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,152,391 1,693,897
---------- ----------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,112,833 $ 60,000
========== ==========
40
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - LONG-TERM DEBT - CONTINUED
Scheduled maturities are as follows:
Year ending July 31,
- --------------------
1999 $1,693,897
2000 20,000
2001 20,000
2002 20,000
----------
$1,753,897
==========
NOTE M - STOCKHOLDERS' EQUITY
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 for possible future issuance in
connection with acquisitions and general corporate purposes, including public or
private offerings of shares for cash and stock dividends. The Board of
Directors has made no determination with respect to the issuance of any shares
of the new preferred stock and has no present commitment, arrangement or plan
which would require the issuance of such additional shares of new preferred
stock in connection with any equity offering, merger, acquisition or otherwise.
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.
COMMON STOCK
-------------
On August 25, 1995, the Company issued 20,000 shares of common stock
to an investment advisory firm as compensation for financial advisory services
to be provided for a period of one year. As additional compensation, the firm
was to receive a "cash success" fee and common stock warrants based on capital
raised.
On February 16, 1996, the Company allowed the holder of $1.25 per
share warrants to purchase 100,000 shares of common stock of the Company to
convert the warrants into common stock in exchange for a contract to provide
legal fees for three years.
On February 26, 1996, the Company granted warrants to a director to
purchase 330,000 shares of common stock for $2.50 per share through February 8,
2000, in exchange for advisory services during that period.
On February 26, 1996, the Company granted warrants to purchase 200,000
shares of common stock of the Company to the new Chairman of the Board to
purchase 200,000 shares of common stock for $2.50 per share through February 29,
2000.
41
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCKHOLDERS' EQUITY - CONTINUED
On July 16, 1996, the Company issued 20,000 shares of common stock as
settlement for consulting services previously accrued during the year ended July
31, 1995.
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 payment due March 26, 1998 has not been received. The promissory
note has been recorded as a reduction of stockholders' equity. At July 31,
1998, interest receivable from the related party has been reserved.
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, Janik agreed to exercise warrants to purchase
25,000 shares of common stock of the Company (note K).
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 payment due on April 11, 1998 has 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. At 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.
42
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCKHOLDERS' EQUITY - CONTINUED
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 (see note L).
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.
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 are unsecured. Proceeds raised from the private placement totaled $1.5
million, which the Company used for working capital requirements. Interest at
10% per annum is 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. To date the Company has not made the required June 30,
1998 quarterly interest and principal payment. The purchasers in the private
placement were granted one demand registration right with respect to the shares
issuable upon exercise of the warrants.
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.
43
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - 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 $0, $837,600 and $0 for
each of the years ended July 31, 1996, 1997 and 1998, respectively.
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 year ended July 31, 1997:
Net loss as reported. . . . . . . $(2,922,659)
Net loss proforma . . . . . . . . (3,054,615)
Loss per common share as reported (0.48)
Loss per common share proforma. . (0.50)
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.
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, 1996, 1997 and 1998, totaled $36,000, $92,185, and $30,000,
respectively. Warrants granted to non-employees simultaneously with the
issuance of debt are accounted for based on the guidance provided by Accounting
Principles Board Opinion No. 14 (APB 14), "Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants".
A summary of the status of the Company's warrants as of July 31, 1996,
1997 and 1998, and changes during the years ending on those dates is presented
below:
1996 1997 1998
--------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Warrants Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------- ---------- --------------- ----------- --------------- ---------- ---------------
Outstanding at beginning of year. . 4,150,000 $ 1.66 4,680,000 $ 1.84 2,215,000 $ 2.61
Granted . . . . . . . . . . . . . . 630,000 2.90 1,325,000 2.66 300,000 5.42
Exercised . . . . . . . . . . . . . (100,000) 1.25 (3,492,856) 1.55 (505,000) 2.57
Expired . . . . . . . . . . . . . . - (297,144) 2.56 (580,000) 2.76
---------- ----------- ----------
Outstanding at end of year. . . . . 4,680,000 $ 1.84 2,215,000 $ 2.61 1,430,000 $ 3.15
========== =========== ==========
Warrants exercisable at end of year 4,680,000 2,015,000 1,430,000
44
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - STOCK WARRANTS - CONTINUED
The following table depicts the weighted-average exercise price and
weighted average fair value of warrants granted during the years ended July 31,
1996, 1997 and 1998 by the relationship of the exercise price of the warrants
granted to the market price on the grant date:
1996 1997 1998
---------------------------- ---------------------------- ----------------------------
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 - -
Less than market price . . 2.51 2.90 1.64 2.50 2.07 5.42
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, 1996,
1997 and 1998, respectively: dividend yield of 0% for all three years, expected
volatility of 87%, 88% and 85%, risk-free interest rate of 7% for all three
years and expected lives of 4, 3 and 3 years.
The following table summarizes information about the warrants
outstanding at July 31, 1998:
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, 1998 Life Price July 31, 1998 Price
- ------------------------- ------------- ------------ --------- ------------- ---------
2.50 to $3.00. . . . . . 1,180,000 2.34 years $ 2.54 1,180,000 $ 2.54
2.21
6.00 . . . . . . . . . . 250,000 6.00 250,000 6.00
------------- -------------
2.32
2.50 to $6.00. . . . . . 1,430,000 3.15 1,430,000 $ 3.15
============= =============
Under the Company's 1997 Stock Award Plan, the Company has reserved
for issuance 150,000 shares of Common Stock, of which 129,686 shares were
unissued as of July 31, 1998, 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.
45
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - COMMITMENTS AND CONTINGENCIES
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. The Court has not ruled on the
IBC-Brownsville request for rehearing. A decision is expected by December 31,
1998. As of July 31, 1998, the net amount of the award is approximately $3.4
million, which is comprised of (i) the original Judgement, including attorney's
fees, (ii) post-award interest, (iii) cancellation of the note and accrued
interest payable to IBC-Brownsville which is included in the Consolidated
Financial Statements less attorneys' fees.
On April 18, 1996, the Company reached an agreement (the "IBC
Settlement Agreement") to accept $400,000 to settle a lawsuit it filed in
October 1995 against International Bank of Commerce-San Antonio, a bank related
to IBC-Brownsville ("IBC-San Antonio"). As part of the settlement agreement, the
parties, including IBC-Brownsville and IBC-San Antonio, executed mutual releases
from future claims related to the IBC-Brownsville litigation. Additionally,
IBC-San Antonio agreed to indemnify the Company for any such claims made or
asserted.
On June 26, 1996, IBC-Brownsville filed a suit against the Company
(Case No. 96-06-3502) in the 357th Judicial District Court of Cameron County
alleging that the Company, in filing the Judgment against IBC-Brownsville in
order to clear title to its assets, slandered the name of IBC-Brownsville.
IBC-Brownsville contends that the Judgment against it prevented it from selling
certain property. IBC-Brownsville has claimed actual damages of $600,000 and
requested punitive damages of $2,400,000. On September 23, 1996, the court
entered the Judgment on behalf of the Company indicated in a preliminary ruling
that the Company was privileged in filing the Judgment to clear title to its
assets.
On July 30, 1996, the Company filed suit in the District Court of
Harris County, Texas against Jorge V. Duran, former Chairman of the Board of the
Company, regarding alleged conversion and fraud by Mr. Duran during his time as
an employee of the Company. The Company has not yet quantified its damages and
is seeking a declaration that the termination of employment of Mr. Duran was
lawful and within the rights of the Company based on Mr. Duran's status as an
at-will employee of the Company. On December 12, 1996, Mr. Duran filed a
counterclaim in the District Court of Harris County, Texas asserting the
following claims: breach of contract against the Company and Mr. Richter;
wrongful discharge against the Company, Mr. Richter, and Mr. Mark Casaday, a
former officer and director of the Company; defamation against the Company, Mr.
Richter, Mr. Mark Casaday, and Mr. Jorge Bracamontes; and interference with
contract against Mr. Jorge Bracamontes. On February 27, 1997, the two actions
were consolidated into Case No. 96-37447, Penn Octane Corporation v. Jorge V.
Duran in the 164th District Court of Harris County, Texas and on September 30,
1998, Mr. Duran filed a Fourth Amended Original Petition. Mr. Duran is seeking
judgment against the Company and Messrs. Richter, Casaday and Bracamontes for
damages in excess of $12.0 million, including prejudgment interest as provided
for by law, and attorneys' fees and such further relief to which he may be
justly entitled. The Company intends to vigorously defend against Mr. Duran's
counterclaim.
46
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - COMMITMENTS AND CONTINGENCIES - CONTINUED
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 respondents to cease and desist from committing or causing
any current or future violation of such section and rules.
On February 13, 1998, County Sanitation Districts of Orange County,
California (Orange County) filed a suit (Case No. 790409) in the Superior Court
of the State of California asserting the following claims: Specific performance,
possession of personal property and damages and breach of contract against the
Company and PennWilson, CNG, Inc.; fraud/misrepresentation, negligent
misrepresentation and interference with contract against the Company,
PennWilson, CNG, Inc., Penn CNG Holdings, Inc., Michael Jadeski, an employee of
the Company and John Weber and James Antione, former employees of the Company.
Orange County was seeking judgment against the Company and PennWilson CNG, Inc.
for delivery of the equipment under the contract or the contract value of
$251,494, consequential damages, costs of suit, interest, incidental damages and
other relief. Orange County was also seeking from all defendants general,
special, exemplary and punitive damages and costs of suit and other relief. On
April 23, 1998, the suit was settled whereby the Company agreed to repay Orange
County $202,812 plus interest thereon (10% per annum). As of July 31, 1998 the
Company had made all payments due under the settlement and Orange County
subsequently released the Company from any further obligations.
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
In December 1995, the Company obtained a revolving line of credit for
$140,000. The credit line was renewed in December 1996 for the period through
September 30, 1997. Interest is calculated on this credit line at the prime
rate plus 3%. During October 1997, the outstanding balance under the revolving
line of credit was repaid.
In connection with the Term Sale Agreement, in September 1996 the
Company obtained a $625,000 letter of credit in favor of its main propane
supplier. As part of the terms and conditions of this letter of credit, which
was due to expire September 30, 1997, the Company executed a $625,000 demand
promissory note to the issuing bank. The note was initially collateralized by a
$500,000 deposit, accrued interest at the prime rate (8.25% as of October 31,
1996) plus 3%, and was guaranteed by the Company's president.
On November 5, 1996, the Company's main propane supplier presented for
payment a $495,315 invoice, which was paid through the initial $500,000
collateral deposit. After such payment, the balance available under the letter
of credit remained $625,000 and the remaining balance of the collateral deposit
totaled $4,685. In March 1997, the letter of credit, collateral and guaranty
were released.
47
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - COMMITMENTS AND CONTINGENCIES - Continued
During June 1997, PennWilson entered into a performance and payment
bond (the Bonds) in connection with a contract to design, construct and install
CNG equipment totaling approximately $1,487,000. The Bonds remained outstanding
until the equipment was delivered to the customer, as prescribed under the
contract, in December 1997. As of April 30, 1998, PennWilson had failed to make
certain payments to vendors and as such several of PennWilson's vendors have
made clams against the Bonds (see note T).
In connection with the PMI Sales Agreement, invoicing occurs weekly.
From November 1996 to early November 1997, the Company and PMI made an
arrangement under which PMI provided financing on the Company's behalf under the
terms of the Company's supply agreement with Exxon, the Company's main supplier.
As a result of this arrangement, invoicing occurred on a monthly, rather than a
weekly basis.
On October 22, 1997, the Company entered into a $6,000,000 credit
facility with RZB Finance L.L.C. (RZB) for demand loans and standby letters of
credit (RZB Credit Facility) to finance the Company's purchase of LPG and
propylene (PPL). 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) 1.5% of the maximum face amount of such letter of credit, or
(iii) such higher amount as may be agreed 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
entered into leasehold deeds of trust, security agreements, financing statements
and assignments of rent. Under the RZB Credit Facility, the Company may not
permit to exist any lien, security interest, mortgage, charge or other
encumbrance of any nature on any of its properties or assets, except in favor of
RZB, without the consent of RZB. The Company's President, Chairman and Chief
Executive Officer has personally guaranteed all of the Company's payment
obligations with respect to the RZB Credit Facility. Upon establishment of the
RZB Credit Facility, beginning November 11, 1997, PMI no longer provides any
financing on behalf of the Company, and the Company began invoicing PMI on a
weekly basis.
Effective April 22, 1998, the aggregate amount available under the RZB
Credit Facility was increased to $7,000,000.
In connection with the Company's purchases of LPG from Exxon and/or
PG&E NGL Marketing, L.P., the Company issues letters of credit on a monthly
basis based on anticipated purchases.
As of July 31, 1998, letters of credit established under the RZB
Credit Facility in favor of Exxon for purchases of LPG totaled $5,200,000 of
which $883,168 was being used to secure unpaid purchases from Exxon as of July
31, 1998. In addition, as of July 31, 1998, the Company had approximately
$991,823 of loans outstanding under the RZB Credit Facility. In connection with
these purchases, as of July 31, 1998, the Company had unpaid invoices due from
PMI totaling $1,086,423 and cash balances maintained in the RZB Credit Facility
collateral account of $31,221. Interest cost on the RZB Credit Facility totaled
$97,986 for the year ended July 31, 1998.
48
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - COMMITMENTS AND CONTINGENCIES - Continued
During June 1998, a letter of credit was established under the RZB
Credit Facility in favor of PG&E NGL Marketing, L.P. for purchases of LPG
totaling $360,000. The letter of credit expired in August 1998.
OPERATING LEASE COMMITMENTS
The Company has lease commitments for its pipeline, land, office space
and office equipment. The Pipeline Lease requires 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 for 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 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 after the first
twelve months 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 March 31, 2013, pursuant to an
amendment entered into between the Company and Seadrift on May 21, 1997,
effective on April 1, 1998 (the Pipeline Lease Amendment). 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. In addition, the Pipeline Lease Amendment
also provides for variable rental increases based on monthly volumes purchased
and flowing into the Pipeline. As of July 31, 1998, Seadrift had yet to make
certain improvements which the Company believes were the basis of the increase
in rent required under the Pipeline Lease Amendment ("Basic Improvements").
Accordingly, Seadrift has continued to invoice the Company, and the Company has
continued to make lease payments to Seadrift as prescribed under the Pipeline
Lease. The Company further believes that the term of the Pipeline Lease
Amendment shall commence upon the completion of the Basic Improvements and
terminate fifteen years thereafter. The Company believes the extension of the
Pipeline Lease gives the Company increased flexibility in negotiating sales and
supply agreements with its customers and suppliers. The Company has not made all
payments required by the lease agreements. Approximately $45,000 is owed under
the Pipeline Lease for reimbursement for repairs to the pipeline made prior to
the commencement of the lease. The August 1998 through October 1998 monthly
Pipeline Lease payments are outstanding. The Company has accrued additional
rents in excess of the amounts invoiced by Seadrift based on the rents provided
for in the Pipeline Lease Amendment.
The operating lease for the land expires in October 2003. In May
1997, the Company amended its lease with the Brownsville Navigation 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 additional space will allow the Company to develop additional storage, add
railroad access to its storage facility and facilitate port activities.
49
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - COMMITMENTS AND CONTINGENCIES - Continued
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 of the Brownsville Lease, 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.
In May 1997, the Company renewed the lease for its executive offices
located in Redwood City, California. The monthly rental is $4,910 through June
1999.
Rent expense was $773,847, $781,750 and $954,924 for the years ended
July 31, 1996, 1997 and 1998, respectively. In addition, rent expense associated
with operating leases for leased equipment and furniture was $3,188, $14,017 and
$38,178 for the years ended July 31, 1996, 1997 and 1998. As of July 31, 1998,
the minimum lease payments are as follows:
Year ending July 31,
- --------------------
1999. . . . . . . . $ 1,154,110
2000. . . . . . . . 1,105,002
2001. . . . . . . . 1,050,619
2002. . . . . . . . 1,049,784
2003. . . . . . . . 1,049,784
Thereafter. . . . . 9,440,580
------------
$ 14,849,879
============
The Company has not made all payments required by the lease
agreements. Approximately $45,000 is owed under the Pipeline Lease for
reimbursement for repairs to the pipeline made prior to the commencement of the
lease. The August 1998 through October 1998 monthly Pipeline Lease payments are
outstanding. The Company has included the amounts owed in the accompanying
consolidated balance sheet as trade accounts payable.
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, 1998,
he waived his right to receipt of the stock options 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 M).
50
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - COMMITMENTS AND CONTINGENCIES - Continued
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 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 (see note M).
Aggregate compensation under employment agreements totaled $327,692,
$174,524 and $391,078 for the years ended July 31, 1996, 1997 and 1998,
respectively, which included agreements with former executives. Minimum
salaries under the remaining agreements are as follows:
Year ending July 31, Salaries
- -------------------- ---------
1999 . . . . . . . . $ 420,000
2000 . . . . . . . . 329,000
2001 . . . . . . . . 150,000
NOTE P - FOURTH QUARTER ADJUSTMENTS - UNAUDITED
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 incurred losses since
inception, has used cash in operations, has a deficit in working capital and
stockholders' equity and is delinquent under certain loan and lease agreements.
In addition, the Company is involved in litigation, the outcome of which cannot
be determined at the present time. As discussed in Note A, the Company has
historically depended heavily on sales to one major customer.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts as shown in the
accompanying consolidated balance sheet is dependent upon the collection of the
Judgement, 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 1) collect the Judgement,
2) increase sales to its current customers, 3) increase its customer base, 4)
extend the terms and capacity of the Pipeline Lease and the Brownsville Terminal
Facility, 5) expand its product lines and 6) raise additional debt and/or equity
capital.
51
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - REALIZATION OF ASSETS - Continued
At July 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8,826,000 (see note J). 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 (Agreement) with its
major customer, PMI, to provide a minimum monthly volume of LPG to PMI
through September 30, 1999. Sales to PMI for the years ended July 31, 1996,
1997 and 1998 totaled $25,336,151, $28,836,820, and $30,511,480 respectively,
representing 96%, 95% and 95% of total revenues for each year. The Company
currently is purchasing LPG on a month-to-month basis from a major supplier to
meet the minimum monthly volumes required in the Agreement. The supplier's
price is below the sales price provided for in the Agreement.
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 Orange
County contract, Orange County had filed suit against the Company and the
parties subsequently reached a settlement agreement (see notes G and O).
The Company has not entered into any CNG contracts subsequent to July
31, 1998.
NOTE S - SEGMENT INFORMATION
The FASB issued Statement of Financial Accounting Standards No. 131
(SFAS No. 131), "Disclosure about Segments of an Enterprise and Related
Information", effective for years beginning after December 15, 1997, with
earlier application encouraged. The Company adopted SFAS 131 in 1997.
The Company has the following reportable segments: LPG and CNG. The
LPG segment is a distributor of fuel and the CNG segment designed, constructed
and installed fueling stations since its inception through early 1998.
Subsequently, the CNG segment focused primarily on the construction and
operation of a CNG vehicle and fueling station infrastructure in Mexico City,
Mexico.
52
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - SEGMENT INFORMATION - Continued
The accounting policies used to develop segment information correspond
to those described in the summary of significant accounting policies. Segment
profit (loss) is based on profit (loss) from operations before income tax. The
reportable segments are distinct business units operating in similar industries.
They are separately managed, with separate marketing and distribution systems.
The following information about the segments is for the years ended July 31,
1997 and 1998.
YEAR ENDED JULY 31, 1997:
LPG CNG Totals
------------ ------------ ------------
Revenues from external customers. . . . . . . $29,703,650 $ 663,484 $30,367,134
Interest expense. . . . . . . . . . . . . . . 236,236 3,195 239,431
Interest Income . . . . . . . . . . . . . . . 71,427 466 71,893
Depreciation and amortization . . . . . . . . 434,960 13,059 448,019
Segment profit (loss) . . . . . . . . . . . . (2,886,067) (36,592) (2,922,659)
Segment assets. . . . . . . . . . . . . . . . 4,550,915 945,452 5,496,367
Segment liabilities . . . . . . . . . . . . . (3,762,714) (981,044) (4,743,758)
Expenditure for segment assets. . . . . . . . 27,257 92,760 120,017
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments . . . . . . . . . . $30,367,134
Other revenues . . . . . . . . . . . . . . . . . . . . . . -
Elimination of intersegment revenues . . . . . . . . . . . -
------------
Total consolidated revenues. . . . . . . . . . . . . . . $30,367,134
============
Profit (Loss)
Total profit (loss) for reportable segments. . . . . . . . $(2,922,659)
Other profit (loss). . . . . . . . . . . . . . . . . . . . -
Elimination of intersegment profits. . . . . . . . . . . . -
Unallocated amounts
Corporate headquarters expense . . . . . . . . . . . . . -
Other expenses . . . . . . . . . . . . . . . . . . . . . -
------------
Consolidated (loss) before income tax. . . . . . . . . $(2,922,659)
============
Assets
Total assets for reportable segments
Other assets . . . . . . . . . . . . . . . . . . . . . . . $ 5,496,367
Corporate headquarters . . . . . . . . . . . . . . . . . . -
Other unallocated amounts. . . . . . . . . . . . . . . . . -
Total consolidated assets. . . . . . . . . . . . . . . . -
------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,496,367
============
Geographic Information. . . . . . . . . . . . Revenues Assets
- --------------------------------------------- ------------ ------------
United States . . . . . . . . . . . . . . . . $30,337,208 $ 5,496,367
Canada. . . . . . . . . . . . . . . . . . . . 29,926 -
------------ ------------
. . . . . . . . . . . . . . . . . . . . . . . $30,367,134 $ 5,496,367
============ ============
53
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - SEGMENT INFORMATION - Continued
YEAR ENDED JULY 31, 1998:
LPG CNG Totals
------------ -------------- --------------
Revenues from external customers. . . . . . . $30,801,355 $ 1,465,064 $ 32,266,419
Interest expense. . . . . . . . . . . . . . . 458,657 43,397 502,054
Interest Income . . . . . . . . . . . . . . . 233,017 4 233,021
Depreciation and amortization . . . . . . . . 234,730 14,854 249,584
Segment profit (loss) . . . . . . . . . . . . (2,072,255) ( 1,671,801) ( 3,744,056)
Segment assets. . . . . . . . . . . . . . . . 5,323,547 1,374,433 6,697,980
Segment liabilities . . . . . . . . . . . . . (6,243,282) ( 780,826) ( 7,024,108)
Expenditure for segment assets. . . . . . . . 155,534 1,203,152 1,358,686
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments . . . . . . . . . . $ 32,266,419
Other revenues . . . . . . . . . . . . . . . . . . . . . . -
Elimination of intersegment revenues . . . . . . . . . . . -
--------------
Total consolidated revenues. . . . . . . . . . . . . . . $ 32,266,419
==============
Profit (Loss)
Total profit (loss) for reportable segments. . . . . . . . $( 3,744,056)
Other profit (loss). . . . . . . . . . . . . . . . . . . . -
Elimination of intersegment profits. . . . . . . . . . . . -
Unallocated amounts
Corporate headquarters expense . . . . . . . . . . . . . -
Other expenses . . . . . . . . . . . . . . . . . . . . . -
--------------
Consolidated (loss) before income tax. . . . . . . . . $( 3,744,056)
==============
Assets
Total assets for reportable segments . . . . . . . . . . . $ 6,697,980
Other assets . . . . . . . . . . . . . . . . . . . . . . . -
Corporate headquarters . . . . . . . . . . . . . . . . . . -
Other unallocated amounts. . . . . . . . . . . . . . . . . -
--------------
Total consolidated assets. . . . . . . . . . . . . . . . $ 6,697,980
==============
Geographic Information Revenues Assets
- --------------------------------------------- ------------ --------------
United States . . . . . . . . . . . . . . . . $32,209,457 $ 6,697,980
Canada. . . . . . . . . . . . . . . . . . . . 56,962 -
------------ --------------
. . . . . . . . . . . . . . . . . . . . . . . $32,266,419 $ 6,697,980
============ ==============
54
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE T - SUBSEQUENT EVENTS - UNAUDITED
LITIGATION
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 by Amwest from the performance
and payment bonds in response to claims for services provided by Suppliers,
laborers and other materials and work to complete the NYDOT contract. The
Company is currently considering its legal options and intends to file and
answer to Amwest's complaint.
55
Schedule II - Valuation and Qualifying Accounts
ADDITIONS
- --------------------------------------------------------------------------------------------
Balance at Charged to
Beginning of Costs and Charged to Balance at End
Description Period Expenses Other Accounts Deductions of Period
- ----------------- ------------- ----------- --------------- ----------- ---------------
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
Year ended
- -----------------
July 31, 1996
- -----------------
Allowance for
Doubtful Accounts $ - $ - $ - $ - $ -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
56
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. . 62 Chairman, President, Chief Executive Officer and
Director
Ian T. Bothwell. . . 38 Vice President, Treasurer, Assistant Secretary, Chief
Financial Officer and Director
Jorge R. Bracamontes 34 Executive Vice President, Secretary and Director
Jerry L. Lockett . . 57 Vice President
Kenneth G. Oberman . 38 Director
Stewart J. Paperin . 50 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, positions he held until he resigned
therefrom on August 1, 1996. Effective October 29, 1996, Mr. Richter was elected
Chairman of the Board, President and Chief Executive Officer of the Company.
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.
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. 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.
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, strategic planning, as well as
management of Union Carbide's wholly-owned pipeline subsidiaries.
KENNETH G. OBERMAN has been a director of the Company since its
organization in August 1992. Since 1996, Mr. Oberman has been Senior Director
of Fujitsu Computer Products of America, a San Jose, California-based computer
peripherals company. From 1994 through 1995, Mr. Oberman held the position of
business unit manager for Conner Peripherals, a computer peripherals company, in
San Jose, California. During the period from 1992 through 1994, Mr. Oberman
served as Vice President of International Economic Development Corporation in
Moscow, Russia, a consulting company to the Ministry of Sports of the Government
of Russia involved in the sale of sporting goods and sports apparel.
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.
57
Mr. Oberman is Mr. Richter's son-in-law. 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, with the exception of those persons indicated below, all
directors, officers and 10% stockholders complied with such filing requirements.
According to the Company's records, the following filings appear not
to have been timely made. A Form 4 for Mr. Bothwell relating to his receipt of
warrants to purchase 200,000 shares of Common Stock was not filed on a timely
basis in October 1997. A Form 4 for Mr. Bothwell relating to his acquisition of
warrants to acquire 100,000 shares of Common Stock in a private transaction was
not filed on a timely basis in April 1998. A Form 4 correcting this situation
was filed in November 1997. Form 4s and a Form 5 for Mr. Bracamontes were not
filed on a timely basis with respect to three transactions during the fiscal
year ended July 31, 1997. A Form 3 for Mr. Lockett was not filed on a timely
basis in November 1997. A Form 5 correcting this situation was filed in
September 10, 1998.
58
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
Other than reimbursement for out-of-pocket expenses incurred to attend
Board and committee meetings, directors do not receive any compensation for
their services as such.
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 of those persons who, at July 31, 1998, 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
1998. 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.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------------------------------
ALL OTHER
NAME AND OTHER ANNUAL COMPENSA-
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION TION
- ---------------------------- ---- -------- ----------- ------------- -----------
Jerome B. Richter,(4)
President, Chairman of the. 1998 $299,578 $ - $ - $ -
Board and Chief . . . . . . 1997 138,603 - - -
Executive Officer . . . . . 1996 132,923 - - -
Ian T. Bothwell,
Vice President, Treasurer,. 1998 120,000 - - -
Assistant Secretary and . . 1997 90,077 418,800(1) - -
Chief Financial Officer . . 1996 - - - -
Jorge R. Bracamontes,. . . . 1998 - - - 120,000
Executive Vice President. . 1997 - - - 526,921(2)
and Secretary . . . . . . . 1996 - - - -
Jerry L. Lockett,(3) . . . . 1998 91,500 - - -
Vice President. . . . . . . 1997 - - - -
1996 - - - -
(1) As a bonus for the year ended July 31, 1997, on September 10, 1997 the
Board of Directors 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 Board of
Directors 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 additional consulting fee
for the year ended July 31, 1997, on September 10, 1997, the Board of Directors
lowered the exercise price of the these warrants granted to Mr. Bracamontes from
$3.625 to $2.50.
(3) In connection with Mr. Lockett's employment agreement, on each of the
employment anniversaries, Mr. Lockett will be entitled to receive warrants to
purchase 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.
59
AGGREGATED WARRANT EXERCISES IN FISCAL 1998 AND WARRANT VALUES ON JULY 31, 1998
The following table provides certain information with respect to
warrants exercised by the Named Executive Officers during fiscal 1998 by the
persons named below. The table also presents information as to the number of
warrants outstanding as of July 31, 1998.
Number Of
Securities Value Of
Number of Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Value Warrants Warrants
Upon Realized At July 31, 1998 At July 31, 1998
Exercise of Upon Exercisable/ Exercisable/
Name Warrants Exercise Unexercisable Unexercisable
- -------------------- ----------- --------- ---------------- ------------------
Jerome B. Richter. . 0 $ 0 0/0 $ 0/0
Jorge R. Bracamontes 0 $ 0 200,000/0 $ 300,000/0(1)
Ian T. Bothwell. . . 0 $ 0 300,000/0 $ 400,000/0(1)
(1) Based on a closing price of $4.00 per share of Common Stock on July 31, 1998.
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. To date, Mr. Richter
has waived his rights to receive the options 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.
60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of October 30,
1998, 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.
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
---------------------- ----------------
Jerome B. Richter . . . . . . . . . . . . . . . . . . . 3,902,000(2) 39.21%
Western Wood Equipment Corporation (Hong Kong)
20/F Tung Way Commercial Building Wanchai, Hong Kong. 758,163(3) 7.25%
Ian T. Bothwell . . . . . . . . . . . . . . . . . . . . 318,600(4) 3.11%
Jorge R. Bracamontes. . . . . . . . . . . . . . . . . . 215,500(5) 2.12%
Kenneth G. Oberman. . . . . . . . . . . . . . . . . . . 86,500 (6)
Stewart J. Paperin. . . . . . . . . . . . . . . . . . . 16,500 (6)
Jerry L. Lockett. . . . . . . . . . . . . . . . . . . . 6,100 (6)
As a group, the current officers and directors of the Company are
beneficial owners of 4,045,200 shares of Common Stock or 40.64% of the voting
power of the Company excluding warrants held by members of such group and
4,545,200 shares of Common Stock or 43.48% of the voting power of the Company
including warrants so held.
- ----------------------------------------
(1) The number of shares of Common Stock issued and outstanding on October
30, 1998 was 9,952,673 and all calculations and percentages are based on such
number. The beneficial ownership indicated in the table includes shares of
Common Stock subject to common stock purchase warrants held by the respective
persons as of October 30, 1998, 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 2,000 shares of Common Stock owned by Mrs. Richter.
(3) Includes 500,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(4) Includes 300,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(5) Includes 200,000 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.
(6) Percent of class is less than 1%.
61
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 the year ended July 31, 1998, the Company paid PennMex
$181,000 for Mexico related expenses incurred by Penn Mex on the Company's
behalf.
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, 1997 and 1998
Consolidated Statements of Operations for the years ended July 31,
1996, 1997 and 1998
Consolidated Statement of Stockholders' Equity for the years ended
July 31, 1996, 1997 and 1998.
Consolidated Statements of Cash Flows for the years ended July 31,
1996, 1997 and 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
b. Exhibits.
The following Exhibits are incorporated herein by reference:
62
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).
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).
10.10 Promissory 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).
10.11 Promissory 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).
63
10.12 Promissory 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).
10.13 LPG 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).
10.14 Promissory Note dated October 29, 1996 between James Mulholland and
Registrant. (Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended October 31, 1996 filed on December 16,
1996, SEC File No. 000-24394).
10.15 Promissory 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).
10.16 Agreement 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).
10.17 Promissory 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).
10.18 Agreement 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).
10.19 Agreement 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).
10.20 Agreement 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).
10.21 Interim 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).
10.22 Purchase 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).
10.23 Amendment 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).
64
10.24 Promissory 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).
10.25 Real 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).
10.26 Promissory Note and Pledge and Security Agreement dated April 11, 1997 between
Jerome B. Richter and the Registrant. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended April 30, 1997
filed on June 16, 1997, SEC File No. 000-24394).
10.27 Lease 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).
10.28 Lease 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).
10.29 Lease 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).
10.30 Promissory 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).
10.31 Lease 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).
10.32 Lease Amendment dated May 29, 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).
10.33 Irrevocable 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)
10.34 Commercial 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)
10.35 Commercial 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)
10.36 Promissory 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)
65
10.37 Amendment 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)
10.38 Warrant 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)
10.39 Security Agreement, Common Stock Warrant and Promissory Note dated June 15,
1997 between Western Wood Equipment Corporation and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.40 Performance 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)
10.41 Labor 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)
10.42 Subcontract Agreement dated between A.E. Schmidt and PennWilson CNG June
25, 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)
10.43 Propylene 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)
10.44 Release 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)
10.45 LPG 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)
10.46 Continuing 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)
10.47 Promissory 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)
10.48 General 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)
10.49 Guaranty 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)
66
10.50 Purchase Agreement dated October 21, 1997 among Castle Energy Corporation,
Clint Norton, Southwest Concept, Inc., James F. Meara, Jr., Donaldson Luftkin
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)
10.51 Registration Rights Agreement dated October 21, 1997 among Castle Energy
Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara, Jr., Donaldson
Luftkin 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)
10.52 Promissory Note dated October 21, 1997 between Castle Energy Corporation and
the Company. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File
No. 000-24394)
10.53 Common 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)
10.54 Promissory 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)
10.55 Common 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)
10.56 Promissory 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)
10.57 Common 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)
10.58 Promissory 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)
10.59 Common 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)
10.60 Promissory Note dated October 21, 1997 between Donaldson Luftkin 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)
10.61 Common Stock Purchase Warrant dated October 21, 1997 issued to Donaldson
Luftkin 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)
67
10.62 Promissory 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)
10.63 Common 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)
10.64 Agreement 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)
10.65 LPG 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)
10.66 Purchase 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)
10.67 Amendment 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)
10.68 Lease 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)
10.69 Employment 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)
10.70 Employment 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)
The following material contracts are filed as part of this report:
10.71 LPG Mix Purchase Contract dated September 28, 1998 between P.M.I. Trading
Limited and the Company.
21.1 Subsidiaries of the registrant. (Filed herewith.)
27.1 Financial Data Schedule. (Filed herewith.)
68
b. Reports on Form 8-K.
The following Reports on Form 8-K are incorporated herein by reference:
None.
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 12, 1998
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 12, 1998
- -----------------------
Chairman, President and Chief
Executive Officer
/s/ Jorge R. Bracamontes Jorge R. Bracamontes November 12, 1998
- ------------------------
Executive Vice President,
Secretary and Director
/s/ Ian T. Bothwell Ian T. Bothwell November 12, 1998
- ------------------------
Vice President, Treasurer,
Assistant Secretary, Chief
Financial Officer, Principal
Accounting Officer and Director
/s/ Kenneth G. Oberman Kenneth G. Oberman November 12, 1998
- ------------------------
Director
/s/ Stewart J. Paperin Stewart J. Paperin November 12, 1998
- ------------------------
Director