U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File No. 0-24394
Penn Octane Corporation
(Exact name of registrant as specified in charter)
Delaware 52-1790357
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
900 Veterans Blvd., Suite 510, Redwood City, CA 94063
(Address of principal executive offices) (Zip Code)
(415) 368-1501
(Registrant's telephone number, including area code)
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____
As of April 30, 1996, 5,185,000 shares of the Registrant's common stock were
outstanding.
______________________________________________________________________________
Penn Octane Corporation
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheet as of April 30, 1996 3
Statements of Operations for the three and nine months ended
April 30, 1996 and 1995 4
Statements of Cash Flows for the three and nine months ended
April 30, 1996 and 1995 5
Notes to Financial Statements 6-8
Item 2. Management's Discussion and Analysis or Plan
of Operation 9-11
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12-13
Penn Octane Corporation
PART I - ITEM 1
BALANCE SHEET
(Unaudited)
ASSETS April 30, 1996
Cash $ 418,875
Trade accounts receivable 219,768
Amount due from settlement of lawsuit 400,000
Interest receivable 26,346
Inventories 562,404
Prepaid expenses 16,878
Other current assets 190,592
Total current assets 1,834,863
Property, plant and equipment
(net of accumulated depreciation of
$718,764) 3,501,095
Lease rights (net of accumulated amortization
of $288,510) 865,530
Other noncurrent assets 407,043
Total assets 6,608,531
LIABILITIES & STOCKHOLDERS' EQUITY
Short-term borrowing 672,552
Current maturities of long-term debt 115,086
Construction accounts payable 822,460
Suppliers payable 403,483
Trade accounts payable 535,844
Advances from related parties 5,606
Accrued liabilities 520,628
Total current liabilities 3,075,659
Long-term debt 1,060,044
Stockholders' equity
Preferred stock-$.01 par value, 5,000,000 shares authorized;
270,000 convertible shares issued and outstanding at
April 30, 1996
2,70
0
Common stock-$.01 par value, 25,000,000 shares authorized;
5,185,000 shares issued and outstanding at April 30, 1996 51,850
Additional paid-in capital
5,836
,766
Accumulated deficit ( 3,418,
488)
Total stockholders' equity
2,472
,828
Total liabilities and stockholders' equity $ 6,608,
531
See Notes to Financial Statements
Penn Octane Corporation
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30, April 30 April 30,
1996 1995 1996 1995
Revenues $7,831,986 $5,222,291 $20,105,493 $11,294,465
Cost of goods sold 7,456,119 4,420,63 19,049,025 9,515,251
Gross profit 375,867 801,661 1,056,468 1,779,214
Selling, general and
administrative expenses 595,936 887,178 1,317,010 2,885,524
Operating loss (220,069) (85,517) (260,542) (1,106,310)
Other income (expense)
Interest income (Net) (66,159) (288,694) (184,021) (774,093)
Gain on sale of option 10,886 - 10,886 1,222,212
Award from Litigation 400,000 - 400,000 -
Net profit (loss)
before taxes 124,658 (374,211) (33,677) (658,191)
Provision for income
taxes 11,542 15,400 19,392 29,100
Net profit (loss) $113,116 $(389,611) $(53,069) $(687,291)
Profit (loss) per
common share $ .02 $(0.08) $(.01) $(0.16)
Weighted average common
shares outstanding 5,141,333 4,654,494 5,110,547 4,182,721
See Notes to Financial Statements
Penn Octane Corporation
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30, April 30, April 30,
1996 1995 1996 1995
INCREASE (DECREASE) IN CASH
Cash flows from
operating activities:
Net loss $113, 116 $(389,611) $(53,069) $(687,291)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
Amortization 194,838 152,615 536,658 400,406
Gain on investment 0 0 0 (1,222,212)
Other 0 (699) 0 (45)
Changes in current assets
and liabilities:
Trade accounts receivable (123,577) 140,157 (219,768) (1,548,887)
Interest receivable 109 0 382 0
Note receivable (400,000) 0 (300,000) 0
NPEG note 589,114 (54,263) 779,957 245,737
Inventories (94,448) (11,205) (189,109)
(267,180)
Prepaids and other
current assets (110,905) 8,586 (58,338)
62,686
Construction and accounts
payable (276,314) (142,708) (332,684) (304,360)
Advances from and to
related party (net) (15,011) (4,439) (62,371)
(109,380)
Accrued liabilities 46,745 52,260 (2,561)
43,935
Net cash provided by
(used in) operating
activities (76,333) (249,307) 99,097 (3,386,591)
Cash flows from investing
activities:
Capital expenditures (373,263) (53,457) (444,096) (81,524)
Advances to affiliated
companies - - - 600,000
Other - (8,752) 7,259
(13,436)
Net cash provided by
(used in)investing
activities (373,263) (62,209) (436,837) 505,040
Cash flows from financing
activities:
Short-term borrowing - 93,319 (160,000)
1,317,360
Long-term debt borrowing 996,804 (2,186) 992,962 (6,340)
Issuance of common stock - 15,000 -
1,416,316
Increase (decrease) in
bank overdraft (136,075) 205,383 (133,133) 154,215
Net cash provided by
financing activities 860,729 311,516 699,829 2,881,551
Net increase (decrease)
in cash 411,133 - 362,089 -
Cash at beginning
of period 7,742 - 56,786 -
Cash at end of period $418,875 - $418,875 $ -
See Notes to Financial Statements
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The balance sheet as of April 30, 1996, the statements
of operations, and statements of cash flows for the
three and nine months ended April 30, 1996 and 1995
have been prepared by Penn Octane Corporation (the "Company")
without audit. In the opinion of management, the
financial statements include all adjustments
(which include only normal recurring adjustments)
necessary to present fairly the financial position
as of April 30, 1996 and the results of operations
and cash flows for the three and nine month
Certain information and footnote disclosures normally
included in financial statements prepared in accordance
with generally accepted accounting principles have
been omitted. These financial statements should be
read in conjunction with the financial statements and
notes thereto included in the Company's Form 10-KSB
for the year ended July 31, 1995, and Forms 10-QSB
for the quarters ended October 31, 1995 and January 31, 1996.
2. Earnings (Loss) per Common Share
Earnings (loss) per share of common stock is
computed based on the weighted average number
of shares outstanding. Warrants and shares
issuable upon conversion of preferred stock
have not been included in the calculation as
their effect would be anti-dilutive.
3. Commitments and Contingencies
On August 24, 1994 the Company filed an Original
Petition and Application for Injunctive Relief
against the International Bank of Commerce-Brownsville,
a Texas state banking association ("IBC-Brownsville")
seeking: (1) either enforcement of a credit facility
between the Company and IBC-Brownsville or a release
of the Company's collateral consisting of significantly
all of the Company's business and assets; (2) declaratory
relief with respect to the credit facility; and (3)
an award for damages and attorney
In response to the Company's request for injunctive
relief, IBC-Brownsville filed a motion on
August 29, 1994 to compel arbitration and to
stay the proceedings. On September 12, 1994,
a State District Court in Cameron County, Texas
signed an order compelling the Company and
IBC-Brownsville to resolve all of the Company's
claims against IBC-Brownsville in arbitration.
The arbitration was conducted through the
American Arbitration Association, Commercial
Arbitration No. B 70 148 0133 94 A. The arbitration
August 2, 1995. On October 10, 1995, the Company
received notification of the following Award of Arbitrators:
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
IBC-Brownsville shall pay to the Company the sum
of (a) $3,246,754 and (b) attorneys' fees of
$568,000 on the Company's claims for Breach of
Contract plus post-award interest at an interest
rate of 9.75% compounded annually; and
The Company shall pay to IBC-Brownsville the sum of
(a) $804,016 and (b) attorneys' fees of $200,000
on IBC-Brownsville's counterclaim against the
Company for Breach of Contract plus post-award
interest at an interest rate of 9.75% compounded
annually. All other relief sought by
IBC-Brownsville in its counterclaims was denied.
On February 28, 1996, after denying
IBC-Brownsville's motion to vacate the
arbitration award, the following judgment was ordered:
International Energy Development Corporation
n/k/a Penn Octane Corporation shall have a
judgment against International Bank of
Commerce-Brownsville in the sum of
$2,810,737, plus post-award interest at
a rate of 9.75% compounded annually to
begin running 10 days after the date this
award was signed by the requisite number of
arbitrators (September 21, 1995) to the entry
of this Judgment and thereafter at the statutory
rate (10%).
Upon the entry of this Judgment International
Bank of Commerce-Brownsville shall release all
collateral transferred to it by International
Energy Development Corporation n/k/a Penn Octane Corporation.
The Court further orders that International
Energy Development Corporation n/k/a
Penn Octane Corporation shall have and
recover from International Bank of
Commerce-Brownsville attorneys' fees
in the sum of $100,000 for services
rendered in pursuing the entry of Judgment
in this case, together with interest at the
statutory rate from date of entry of this
Judgment until paid and conditionally
$7,500 for any appeal to the Court of
Appeals and $5,000 for any appeal to the
Texas Supreme Court and $2,500 in the event
Writ is granted by the Supreme Court.
On June 3, 1996, IBC-Brownsville filed an
appeal but the Company continues to
believe that the judgment is final,
binding, collectible and will resolve
the litigation with IBC-Brownsville.
The financial statements do not include
any adjustments reflecting the gain contingency
(the Award), net of attorneys' fees, or the offset.
Short-term borrowing of $672,552 reflects
the principal amount of the offset. The Award
will be accounted for when it is actually
realized and the offset will be accounted for at
such time as IBC-Brownsville has exhausted all appeals.
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. Option to Acquire National Power Exchange Group, Inc.
On April 5, 1996, the Company received payment of
$600,000 and settled and discharged the
Settlement Agreement and Mutual General Release
("Settlement Agreement") with National Power
Exchange Group, Inc. (NPEG). The Company had
previously made a provision to reduce the amount
due under the Settlement Agreement. The net amount
due recorded as a result of the settlement agreement
was $589,114 at January 31, 1996.
Penn Octane Corporation
PART I - ITEM 2
Management's Discussion and Analysis or Plan of Operation
Result of Operations
Revenue for the three months ended April 30,
1996 was $7,831,986 as compared to $5,222,291
for the three months ended April 30, 1995, an
increase of 50%. The increase for the quarter
ended April 30, 1996, was due to (1) the
increased number of trucks the Company's
primary customer had available for product
pickup at the Company's terminal, (2) the
Company's sale of propane to customers in the
U.S. Rio Grande valley and (3) colder weather
this year.
For the nine months ended April 30, 1996 as
compared to the same period in 1995, revenue
grew to $20,105,493 from $11,294,465, an
increase of 78%. This growth was due to
(1) the increased number of trucks available,
(2) the colder weather and (3) the primary
customer's recognition of the cost and
quality advantages of LPG delivered by
the Company. Finally, a portion of the
growth was due to propane sales of
$428,078 for the quarter to U.S. customers
in the Rio Grande Valley.
Cost of goods sold for the three months
ended April 30, 1996 was $7,456,119 as
compared to $4,420,630 in the same quarter
during the prior year, an increase of 69%.
For the nine month period ended April 30,
1996, cost of goods sold increased 100%,
from $9,515,251 in 1995 to $19,049,025 in
1996. In addition to the increase in cost
of goods sold due to increased sales volumes,
during the prior year's comparable periods,
cost of goods sold included only the cost of
purchased LPG. All other costs associated
the cost of purchased LPG, the company has
included all expenses of pipeline and terminal
operations in cost of goods sold.
Gross profit for the three months ended April 30,
1996 was $375,867 as compared to $801,661 for
the three months ended April 30, 1995. For
the nine months ended April 30, 1996, as
compared to the same period in 1995, gross
profit declined to $1,056,468 from $1,779,214.
The decline was due primarily to the Company's
inclusion of all expenses of pipeline and terminal
operations in cost of goods sold this fiscal year
as described above.
Selling, general and administrative (SG&A)
expenses for the three months ended April
30, 1996, were $725,936 as compared to
$887,178 for the same quarter in the prior
year, a decrease of 18%. This decrease was
due primarily to the removal of all expenses
of pipeline and terminal operations from SG&A
and their inclusion in cost of goods sold.
For the nine months ended April 30, 1996,
SG&A expenses were $1,447,010 as compared
to $2,885,524, a decline of 50%. Prior year
expenses were significantly higher due to the
inclusion of all expenses of pipeline and terminal operations
in cost of goods this fiscal year s described above.
Selling,general and administrative (SG&A) expenses for the
three months ended April 30, 1996 were
$725,936 as compared to $887,178 for the same quarter in
the prior year, a decrease of 18%.This decrease was
due primarily to the removal of all expenses of pipeline
and terminal operations from (SG&A) and their
inclusion in cost of goods sold. For the nine
months ended April 30, 1996, (SG&A) expenses were
$1,447,010 as compared to $2,885,524, a decline of
50%. Prior year expenses were significantly higher
due to the inclusion ofall expenses of pipeline and
terminal operations in (SG&A), the Company's startup
of operations, the dispute with the bank, the
resulting travel expenses and legal fees associated
with the lawsuits brought by and against the Company
and the cost of obtaining factoring for the
Company's receivables.
Penn Octane Corporation
Result of Operations - Continued
Interest expense was $66,159 and $288,694 for
the three months ended April 30, 1996, and
April 30, 1995, respectively. For the nine
months ended April 30, 1996 and 1995,
interest expense was $184,021 and
$774,093, respectively. The decrease
was due primarily to the elimination of
the need to factor the Company's receivables
due to the restructured sales arrangement
the Company negotiated with its primary customer.
On October 30, 1994, the Company signed an
agreement to sell its option to purchase
National Power Exchange Group (NPEG) for
a promissory note of $2,000,000 to be
received over various periods no later
than January 1, 1996. A gain of $1,222,212
was recorded during the quarter ended
October 31, 1994, which reflected the
settlement agreement discounted by the
Company's incremental borrowing rate less
the funds advanced to NPEG during the
fiscal year ended July 31, 1994. NPEG
made a payment of $300,000 during the quarter
ended January 31, 1995 and a payment of $200,000
during the quarter ended October 31, 1995.
. In July 1995, due to uncertainties related
to the timing of the financing of NPEG's power
project, the Company made a provision to reduce
the amount due under the settlement agreement.
At October 31, 1995, the net amount due was $589,114.
On April 5, 1996, NPEG made a final payment of
$600,000. In accordance with the settlement
agreement with two of the contractors, most of
these funds were used to reduce construction
amounts payable.
In December 1995, the Company began selling
propane to distributors in the U.S. Rio Grande
Valley. These sales are made on either a
prepaid basis or under letters of credit
posted for the Company's benefit and have
been at higher gross margins than sales
to the Company's primary customer. In
order to expand in this U.S. market, on
February 15, 1996, the Company executed
a Letter of Intent regarding the possible
acquisition of one of these distributors.
The Letter of Intent does not constitute
a binding obligation on either party. Each
party has the right to commence due dilligence
and subject thereto, the parties will
then enter into negotiations regarding
a definitive agreement. Should the
definitive agreement not be executed
by July 15, 1996, either party may
terminate the Letter of Intent.
On February 22, 1996, the Company entered
into a contract to purchase fourteen LPG
trailers for cash totaling $295,000.
These trailers are approved for the
transport of LPG over U.S. roadways
and are used to transport LPG from the
Company's terminal to both Mexican and
U.S. distributors.
Penn Octane Corporation
Liquidity and Capital Resources
As of April 30, 1996, the Company had cash
balances of $418,875. The Company's primary
uses of cash during the three months ended
April 30, 1996, were the payment of
operating expenses, purchase of the LPG
trailers and payments to contractors.
In December 1995, the Company secured
a bank credit facility secured by its
receivables. A portion of this facility
is used for a standby letter of credit
posted with a propane supplier to enable
the Company to purchase propane for sale
to U.S. customers. The balance of the credit
facility is used for working capital. On
March 1, 1996, the Company entered into
adn agreement with a related party to borrow
$500,000 in the form of subordinate debt with
warrants to purchase 50,000 shares of the
common stock of the Company at $5.00 per
share. This debt is secured by a lien
against the Company's terminal assets,
excluding inventory. This loan is interest
only with principal due in full on September
1, 1997, (under certain conditions, principal
repayment may occur sooner than September 1, 1997).
On April 30, 1996, the Company borrowed an
additional $500,000 under substantially similar terms
and conditions.Management believes the remaing
proceeds are sufficient to fund
proposed acquisition of the propane
distributor should a definitive purchase
agreement be reached.
On April 18, 1996, the Company reached agreement
to accept $400,000 to settle a lawsuit it filed
as plaintiff in October 1995. The proceeds were
received on May 28, 1996, and were used to pay
outstanding legal fees of $315,000.
Due to the new sales arrangement with and
increasing sales order volumes from its primary
customer, the addition of several new customers,
the elimination of its need to factor, the new
bank credit facility, receipt of the proceeds
from the subordinate loan and the settlement of
the lawsuit described above, the Company believes
it will have cash flow adequate to meet its obligations.
Company operations have increased significantly
since the new sales arrangement with its primary
customer commenced in June 1995. Selling, general
and administrative expenses, and financing costs
have been significantly reduced and, as discussed
in Note 3 to the Financial Statements, the Company
has obtained a judgment against the bank in the
amount of $2,810,738 plus interest accrued from
October 2, 1995 plus an additional $100,000 awarded
for legal fees. At April 30, 1996, the judgment
including accrued interest and legal fees approximates
$3,02,000 less contingent fees.
While the Company has yet to collect on the
judgment, the judgment ordered IBC-Brownsville
to offset the monies owed by the Company and
release all collateral transferred to it by
the Company. This offset consists of the
entire amount of short-term borrowing included
in the Company's balance sheet plus accrued
interest. The Company continues to pursue
its legal remedies to force IBC-Brownsville
to fully comply with the judgment.
Management continues to implement plans
to expand sales to its primary customer
and to increase its customer base.
Penn Octane Corporation
Part II Other Information
Item 1. Legal Proceedings
See Note 3 to the Financial Statements.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
The following Exhibits and Form 8-K are incorporated herein by reference:
a. Exhibits
1.1 Restated Certificate of Incorporation of the Registrant
dated as of February 1, 1995.
1.2 Lease dated as of May 10, 1993 between
Nine-C Corporation and J.B. Richter,
Capital Resources and J.B. Richter, an
individual as amended with respect to the
Company's executive offices.
1.3 Employment Agreement between the Registrant
and Jerome B. Richter dated as of July 12, 1993.
1.4 Lease dated as of September 13, 1993 between
Seadrift Pipeline Corporation and Registrant
with respect to the Registrant's pipeline rights.
1.5 Lease dated as of October 20, 1993 between
Brownsville Navigation District of Cameron
County, Texas and Registrant with respect to
the Registrant's land lease rights, including
related amendment to the Lease dated as of
February 11, 1994 and Purchase Agreement.
Penn Octane Corporation
Item 6. Exhibits and Reports on Form 8-K - Continued
1.6 Employment Agreement between the Registrant
and Mark D. Casaday dated as of October 22, 1993.
1.7 Security Agreement between International
Bank of Commerce and Registrant dated as of July 1, 1994.
1.8 Employment Agreement between the Registrant
and Jorge V. Duran dated as of August 29, 1994,
including related amendment to the Agreement
dated as of November 13, 1994.
1.9 Factoring and Security Agreement between
Allstate Financial Corporation and Registrant
dated as of October 24, 1994 including related
amendment to the Agreement dated as of December 2, 1994.
2.0 Propane Sale Agreement between Exxon
Company, U.S.A. and Penn Octane Corporation
dated as of December 28, 1994.
b. Reports on Form 8-K
On March 6, 1996, the Registrant filed a Form
8-K Current Report regarding the naming of a
new chairman and the addition of five new
directors, incorporated by reference.
Penn Octane Corporation
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Penn Octane Corporation
June 12, 1996 By: /s/ Thomas A. Serleth
Thomas A. Serleth
Executive Vice President and
Chief Financial Officer
