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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant X
Filed by a Party other than the Registrant
Check the appropriate box:
Preliminary Proxy Statement Confidential, For Use of the
Commission Only (as permitted by
Rule 14A-6(e)(2))
X Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
PENN OCTANE CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
X No fee required
Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
Fee paid previously with preliminary materials:
Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement no.:
(3) Filing Party:
(4) Date Filed:
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PENN OCTANE CORPORATION
900 VETERANS BOULEVARD
REDWOOD CITY, CALIFORNIA 94063
May 9, 1997
To Our Stockholders:
You are cordially invited to attend the 1997 Annual Meeting of
Stockholders of Penn Octane Corporation (the "Company") to be held at our
offices at 900 Veterans Boulevard, Redwood City, California 94063, at 10:00 a.m.
on May 29, 1997.
The matters to be acted upon at the meeting include (i) the election
of the Board of Directors, (ii) the amendment of the Company's Restated
Certificate of Incorporation to authorize an aggregate of 5,000,000 shares of a
new class of senior preferred stock, (iii) the amendment of the Company's
By-Laws to allow the Board of Directors to amend the By-Laws and take certain
other action without first obtaining the consent of a majority of stockholders,
and to make certain other changes, (iv) the approval and ratification by
stockholders of certain transactions approved by the Board of Directors, and (v)
the ratification of Burton McCumber & Prichard, L.L.P. as the Company's auditors
for the fiscal year ending July 31, 1997, all as described in detail in the
Notice of Annual Meeting of Stockholders, Proxy Statement and proxy card that
are enclosed with this letter.
It is important that you use this opportunity to participate in the
Company's affairs by voting on the business to come before this meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE PREPAID
ENVELOPE PRIOR TO THE MEETING. Returning the proxy card will not deprive you of
your right to attend the meeting and to vote your shares in person.
We look forward to seeing you at the meeting.
Sincerely,
/s/ Jerome B. Richter
Jerome B. Richter
Chairman of the Board of Directors
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PENN OCTANE CORPORATION
900 VETERANS BOULEVARD
REDWOOD CITY, CALIFORNIA 94063
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of Penn Octane Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Penn
Octane Corporation (the "Company") will be held at the Company's offices at 900
Veterans Boulevard, Redwood City, California 94063, on May 29, 1997, at 10:00
a.m. for the following purposes:
1. To elect seven directors to the Board of Directors of the
Company.
2. To approve an amendment to the Company's Restated Certificate
of Incorporation to authorize 5,000,000 shares of a new class
of senior preferred stock of the Company.
3. To approve an amendment to the Company's By-Laws to allow the
Board of Directors to amend the By-Laws and to take certain
other action without first obtaining the consent of a
majority of stockholders, and to make certain other changes.
4. To approve and ratify certain transactions approved by the
Board of Directors.
5. To ratify the appointment of Burton McCumber & Prichard,
L.L.P. as the independent auditors for the Company for the
fiscal year ending July 31, 1997.
6. To transact such other business as may properly come before
the meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only stockholders of record at the close of
business on April 18, 1997 are entitled to notice of and to vote at the meeting
or any adjournment thereof.
By Order of the Board of Directors
/s/ Jorge R. Bracamontes
Redwood City, California Jorge R. Bracamontes
May 9, 1997 Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE PREPAID
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE ANNUAL MEETING. YOU MAY
REVOKE THE PROXY AT ANY TIME PRIOR TO ITS EXERCISE. IF YOU ATTEND THE MEETING,
YOU MAY VOTE IN PERSON.
<PAGE>
PENN OCTANE CORPORATION
900 VETERANS BOULEVARD
REDWOOD CITY, CALIFORNIA 94063
----------------
PROXY STATEMENT
----------------
ANNUAL MEETING OF STOCKHOLDERS
MAY 29, 1997
----------------
This Proxy Statement and the accompanying form of proxy were first
mailed to stockholders on or about May 9, 1997.
INFORMATION REGARDING VOTING, PROXIES AND THE MEETING
DATE, TIME AND PLACE OF MEETING
The accompanying proxy is solicited on behalf of the Board of Directors
of Penn Octane Corporation, a Delaware corporation (the "Company"), for use at
the 1997 Annual Meeting of Stockholders of the Company to be held at the
Company's offices at 900 Veterans Boulevard, Redwood City, California 94063, on
May 29, 1997, at 10:00 a.m. (the "Meeting").
RECORD DATE; OUTSTANDING SHARES; QUORUM
Only holders of record of the Company's Common Stock, $0.01 par value
(the "Common Stock"), at the close of business on April 18, 1997 (the "Record
Date") will be entitled to notice of and to vote at the Meeting. At the close
of business on the Record Date, the Company had approximately 8,319,286 shares
of Common Stock outstanding and entitled to vote, held by approximately 340
stockholders of record. A majority of the shares of the issued and outstanding
Common Stock entitled to vote at such Meeting, present in person or by proxy at
the Meeting, will constitute a quorum for the transaction of business. Proxies
marked to abstain from voting on a proposal or to withhold authority to vote on
a matter and broker non-votes (as defined below) will be included in
determining the presence of a quorum.
VOTING RIGHTS; VOTING OF PROXIES
Holders of the Company's Common Stock are entitled to one vote for
each share held as of the Record Date. Cumulative voting for directors is not
permitted.
If a stockholder abstains on any matter, the stockholder's shares will
not be voted, which will have the same legal effect as a vote "against" the
matter. If a stockholder returns a duly executed proxy card and no choice is
specified, the stockholder's shares will be voted in favor of each nominee for
election as a director and for Proposals No. 2, No. 3, No. 4 and No. 5 on the
proxy card and at the discretion of the proxyholder with respect to any other
matter as may properly be brought before the Meeting or an adjournment thereof.
In the event that a broker, bank, custodian, nominee or other record
holder of the Common Stock indicates on a proxy that it does not have
discretionary authority to vote certain shares on a particular matter (a "broker
non-vote"), such shares will not be counted as shares entitled to vote with
respect to that matter, and therefore will have no effect on the outcome of the
vote with respect to Proposals No. 1 and No. 5, but will have the effect of a
vote against Proposals No. 2, 3 and 4. Broker non-votes will, however, be
counted toward the establishment of a quorum.
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With regard to Proposal No. 1 below, directors will be elected by a
plurality of the votes cast by the shares present in person or represented by
proxy and entitled to vote at the Meeting, assuming a quorum is present. With
regard to Proposals No. 2, No. 3 and No. 4 below, the affirmative vote of the
holders of a majority of the issued and outstanding shares of the Common Stock
of the Company is required for approval. With regard to Proposal No. 5, the
affirmative vote of a majority of the issued and outstanding shares of Common
Stock of the Company, present in person or by proxy and entitled to vote at the
Meeting, is required for approval, assuming a quorum is present.
One stockholder, Jerome B. Richter, Chairman of the Board, President
and Chief Executive Officer of the Company, who holds 46.90% of the issued and
outstanding shares of Common Stock of the Company, has indicated his intention
to vote his shares in favor of each of the nominees set forth in
Proposal No. 1 and FOR each of Proposals No. 2, No. 3, No. 4 and No. 5.
SOLICITATION AND VOTING OF PROXIES
The proxy card accompanying this Proxy Statement is solicited on behalf
of the Board of Directors of the Company for use at the Meeting. Stockholders
are requested to complete, date and sign the accompanying proxy card and
promptly return it in the accompanying postage prepaid envelope or otherwise
mail or deliver it to the Company c/o American Securities Transfer, 938 Quail
Street, Suite 101, Lakewood, Colorado 80215. All proxy cards that are properly
executed and returned, and that are not revoked prior to their use, will be
voted at the Meeting in accordance with the instructions indicated therein or,
if no direction is indicated, in favor of the election to the Company's Board of
Directors of each of the nominees listed in Proposal No. 1 below and in
favor of Proposals No. 2, No. 3, No. 4 and No. 5. To the best knowledge of the
Company's Board of Directors, no other matters are to be brought before the
Meeting. As to any business that may properly come before the Meeting, however,
it is intended that proxy cards in the form enclosed will be voted in respect
of the election of directors and each other proposal in accordance with the
judgment of the persons holding such proxies.
The expenses of soliciting proxies to be voted at the Meeting will be
paid by the Company. Following the original mailing of the proxies and other
soliciting materials, the Company, its officers and employees and/or its agents
may also solicit proxies by mail, telephone, telegraph, telecopy or in person.
The Company will request that the brokers, custodians, nominees and other
record holders forward copies of the Proxy Statement, proxy card and any other
soliciting materials to persons for whom they hold shares of Common Stock and
request authority for the exercise thereof. In such cases, the Company, upon
the request of the record holders, will reimburse such holders for their
reasonable expenses incurred in forwarding such proxies.
REVOCATION OF PROXIES
Any person signing a proxy card in the form accompanying this Proxy
Statement has the power to revoke it prior to the Meeting or at the Meeting
prior to the vote. A Company stockholder who has given a proxy may revoke it at
any time before it is exercised at the Meeting by (i) delivering to the
Secretary of the Company (by any means, including facsimile) a written notice,
bearing a date later than the proxy, stating that the proxy is revoked; (ii)
signing and delivering a subsequent proxy relating to the same shares of Common
Stock and
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bearing a later date prior to the vote at the Meeting; or (iii) attending the
Meeting and voting in person (although attendance at the Meeting will not, by
itself, revoke a proxy). Please note, however, that if a stockholder's shares
of Common Stock are held of record by a broker, bank or other nominee and that
stockholder wishes to vote at the Meeting, the stockholder must bring to the
Meeting a valid proxy from the broker, bank or other nominee authorizing the
stockholder to vote on behalf of the record holder.
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
The Board of Directors of the Company is presently composed of seven
members, with each director serving until the next annual meeting of
stockholders and until their successor is duly elected and qualified or until
such director's earlier resignation or removal.
At the Meeting, the following seven persons will be nominated for
election to the Board of Directors: Jerome B. Richter, Ian T. Bothwell, Jorge
R. Bracamontes, John P. Holmes, Kenneth G. Oberman, Stewart J. Paperin and John
H. Robinson. All of such nominees are currently directors of the Company.
Shares represented by the accompanying proxy will be voted for the election of
each of these nominees unless the proxy is marked in such a manner as to
withhold authority so to vote. If any nominee for any reason is unable to serve
or for good cause will not serve, the proxy may be voted for such substitute
nominee as the proxy holder may determine. The Company is not aware of any
nominee who will be unable to or for good cause will not serve as a director.
Directors will be elected by a plurality of the votes of the issued and
outstanding shares of Common Stock of the Company present in person or
represented by proxy and entitled to vote at the Meeting, assuming a quorum is
present.
DIRECTORS/NOMINEES
The names of the Company's directors, including the nominees, and
certain information about them are set forth below:
Director
Name of Director Age Principal Occupation Since
- ---------------- --- -------------------- -----
Jerome B. Richter 61 Chairman of the Board, President 1992
and Chief Executive Officer of the
Company
Ian T. Bothwell 37 Vice President, Treasurer, Assistant 1997
Secretary and Chief Financial
Officer of the Company
Jorge R. Bracamontes 32 Executive Vice President and 1996
Secretary of the Company
John P. Holmes 58 President and Chief Executive 1996
Officer of John P. Holmes and Co.,
a private investment company
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Director
Name of Director Age Principal Occupation Since
- ---------------- --- -------------------- -----
Kenneth G. Oberman 34 Vice President of Fujitsu Computer 1992
Products of America, Mobile/
Desktop Business Unit, a computer
peripherals company
Stewart J. Paperin 48 Managing Director of Lionrock 1996
Partners Ltd., a management
consulting and investment firm,
and Managing Director of Capital
Resources East, a management
consulting firm
John H. Robinson 73 Vice Chairman of Commonwealth 1996
Associates, an investment banking
firm
Each of the nominees, if elected, will serve until the next Annual
Meeting of Stockholders and until his successor has been elected and qualified
or until his earlier resignation or removal.
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 the positions of Chairman
of the Board and Chief Executive Officer and became Secretary and Treasurer of
the Company, positions he held until his resignation 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 as 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 Mexican infrastructure projects. During the
period February 1992 through November 1993, Mr. Bothwell was a senior manager
with Ruiz, Urquiza y Cia., S.C., the Mexican affiliate of Arthur Andersen
L.L.P., an accounting firm. From 1987 through 1992, Mr. Bothwell was Controller
and Director of Financial Analysis for Brooke Management Inc., a management
company which is an affiliate of Brooke Group Ltd., a financial services and
investment company.
JORGE R. BRACAMONTES was elected as 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 Penn Octane S.A. de C.V., a Mexican
company and affiliate of the Company. Prior to joining the Company, Mr.
Bracamontes was General Counsel for Environmental Matters at Petroleos
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Mexicanos, the Mexican national oil company ("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, New York. From May
1990 to November 1992, Mr. Bracamontes served as in-house counsel for PEMEX in
Houston, Texas.
JOHN P. HOLMES was elected as a director of the Company in February
1996. Since 1991, Mr. Holmes has served as President and Chief Executive
Officer of John P. Holmes and Co., a private investment company. Mr. Holmes is
also a member of the Board of Directors of Village Green Books, an operator of
retail bookstores.
KENNETH G. OBERMAN has been a director of the Company since its
organization in August 1992. Since 1997, Mr. Oberman has been a Vice President
of Fujitsu Computer Products of America, a San Jose, California-based computer
peripherals company. From 1996 to 1997, he was Senior Director of Fujitsu
Computer Products of America. 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
involved in the sale of sporting goods and sports apparel. From 1989 through
1992, Mr. Oberman was employed by Conner Peripherals, where he was a sales and
world accounts manager.
STEWART J. PAPERIN was elected as 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., a
financial services and investment company.
JOHN H. ROBINSON was elected as a director of the Company in February
1996. Since 1993, Mr. Robinson has served as Vice Chairman of Commonwealth
Associates, an investment banking firm. Prior to 1993 Mr. Robinson served as
Chairman of the Harper Group, an international transportation and information
management company. Mr. Robinson is also a member of the Board of Directors of
Lukens Medical Corp., a specialized medical products company.
Mr. Oberman is Mr. Richter's son. There are no other family
relationships among the Company's officers and directors.
BOARD OF DIRECTORS' MEETINGS AND COMMITTEES
The Board of Directors met two times during the fiscal year ended July
31, 1996 (sometimes referred to herein as "fiscal 1996"). During fiscal 1996,
each incumbent director attended at least 75% of the total number of meetings of
the Board of Directors. There were no committees of the Board of Directors in
fiscal 1996.
In March 1997, the Company established an audit committee (the "Audit
Committee") consisting of Messrs. Stewart J. Paperin, John H. Robinson and John
P. Holmes. The Audit Committee is composed entirely of outside directors who
are independent of the management of the Company and are free from any
relationships that in the opinion of the Board of Directors
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would interfere with their exercise of independent judgment. The Audit
Committee recommends the engagement or termination of independent auditors and
reviews the scope of their services and reviews the Company's consolidated
financial statements and the related audit. The Audit Committee is also charged
with reviewing the internal audit function, including the scope and extent of
internal audits and credit reviews and is responsible for investigations of any
matter brought to its attention within its purview. The Audit Committee also
reviews all reports of examination and management's responses and annually
reviews transactions involving the Company and any director, executive officer
or other affiliate.
In March 1997, the Company established a compensation committee (the
"Compensation Committee") consisting of Messrs. Jerome B. Richter, Stewart J.
Paperin and John P. Holmes. The Compensation Committee makes recommendations
concerning the election and reelection of officers, and approves all salary
levels and incentive awards for all senior management officers, subject to
ratification by the Board in the case of the Chairman of the Board, President
and Chief Executive Officer of the Company.
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.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF
THE NOMINEES.
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PROPOSAL NO. 2 - AMENDMENT OF RESTATED CERTIFICATE OF
INCORPORATION OF THE COMPANY AUTHORIZING 5,000,000 SHARES
OF A NEW CLASS OF SENIOR PREFERRED STOCK
REASONS FOR THE PROPOSAL
The Company currently has authorized 5,000,000 shares of preferred stock (the
"Existing Preferred Stock") which may not be issued in series and all of the
terms of which, including the dividend rate and conversion rate, are set forth
in the Restated Certificate of Incorporation of the Company and may not be
changed except by formal amendment of the Restated Certificate of
Incorporation. As of the date of this Proxy Statement, 270,000 shares of
Existing Preferred Stock were issued and outstanding. However, because of the
difficulty of altering the terms of the Existing Preferred Stock to meet the
needs of the Company in the current market, the Board has determined not to
issue any additional shares of Existing Preferred Stock.
In these circumstances, the Board believes it is in the best interest of the
Company and its shareholders to amend Article FOURTH of the Restated
Certificate of Incorporation of the Company to authorize 5,000,000 shares,
$0.01 par value per share, of a new class of "blank check" senior preferred
stock (the "New Preferred Stock"). The text of the proposed amendment to the
Restated Certificate of Incorporation of the Company is set forth in the
Certificate of Amendment (the "Charter Amendment") which is attached as Exhibit
A to this Proxy Statement.
The Board believes it advisable to authorize such shares of New Preferred Stock
to have them available, among other things, for issuance in connection with
acquisitions and general corporate purposes, including public or private
offerings of shares for cash and stock dividends. The Board has made no
determination with respect to the issuance of any shares of 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 an
equity offering, merger, acquisition or otherwise.
The term "blank check" preferred stock refers to stock for which the board of
directors of a corporation may fix or change the terms, including: (i) the
division of such shares into series; (ii) the dividend or distribution rate;
(iii) the dates of payment of dividends or distributions and the dates from
which they are cumulative; (iv) liquidation price; (v) redemption rights and
price; (vi) sinking fund requirements; (vii) conversion rights; and (viii)
restrictions on the issuance of additional shares of any class or series. As a
result, the Board of Directors of the Company will, in the event of the approval
of this proposal by the stockholders, be entitled to authorize the creation and
issuance of up to 5,000,000 shares of New Preferred Stock in one or more series
with such terms, limitations and restrictions as may be determined in the
Board's sole discretion, with no further authorization by the Company's
stockholders (except as may be required by applicable laws, regulatory
authorities or the rules of any stock exchange on which the Company's securities
are then listed).
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The holders of shares of New Preferred Stock will have only such voting rights
as are granted by law and authorized by the Board of Directors with respect to
any series thereof. The Board of the Company will have the right to establish
the relative rights of the New Preferred Stock in respect of dividends and
other distributions and in the event of the voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company as
compared with such rights applicable to the Common Stock, the Existing
Preferred Stock and any other series of New Preferred Stock.
EFFECT OF AUTHORIZATION
It is not possible to state the effect of the authorization of the New
Preferred Stock upon the rights of holders of Common Stock or the Existing
Preferred Stock until the Board determines the terms relating to one or more
series of New Preferred Stock. However, such effects might include (i) the
reduction of amounts otherwise available for payment of dividends on Common
Stock or the Existing Preferred Stock, to the extent dividends are payable on
any issued shares of New Preferred Stock, (ii) restrictions on dividends on
Common Stock or the Existing Preferred Stock if dividends on New Preferred
Stock are in arrears, (iii) dilution of the voting power of the Common Stock
and the Existing Preferred Stock and dilution of net income and net tangible
book value per share of Common Stock as a result of any such issuance, depending
on the number of shares issued and the purpose, terms and conditions of the
issuance, and (iv) the holders of Common Stock and the Existing Preferred Stock
not being entitled to share in the Company's assets upon liquidation until
satisfaction of any liquidation preference granted to shares of New Preferred
Stock.
Although the Company has no present commitment, arrangement or plan for the
issuance of the New Preferred Stock, the authorized but unissued shares of such
New Preferred Stock could be used to make a takeover or change in control in
the Company more difficult. Under certain circumstances, rights granted upon
issuance of shares of the New Preferred Stock could be used to create voting
impediments or to discourage third parties seeking to effect a takeover or
otherwise gain control of the Company.
If the Charter Amendment is adopted by the Company's stockholders, the Charter
Amendment will become effective on the date it is filed with the Secretary of
State of the State of Delaware, the Company's state of incorporation.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS; VOTE REQUIRED
The Company's Board of Directors has unanimously determined that the Charter
Amendment is in the best interest of the Company and its stockholders and
recommends that stockholders approve the Charter Amendment. Authorization of the
Charter Amendment will require the affirmative vote of the holders of a majority
of the issued and outstanding shares of Common
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Stock of the Company. Abstentions and broker non-votes will each have the effect
of a vote against the proposed Charter Amendment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT OF THE
COMPANY'S RESTATED CERTIFICATE OF INCORPORATION.
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PROPOSAL NO. 3 - AMENDMENT AND RESTATEMENT OF
THE COMPANY'S BY-LAWS
The Board of Directors has approved a resolution, subject to
stockholder approval, to amend and restate the Company's By-Laws, among other
things, to allow the Board of Directors of the Company to amend the By-Laws of
the Company and to take certain other actions and to effect certain other
matters by an affirmative vote of a majority of the Board of Directors.
Presently, amendments to the Company's By-Laws and certain other actions
require the vote of a majority of stockholders.
REASONS FOR THE PROPOSAL
The Board believes it is in the best interests of the Company to amend
and restate the Company's By-Laws to, among other things, allow the Board of
Directors of the Company to amend the By-Laws of the Company and to take
certain other actions and to effect certain other matters by an affirmative
vote of a majority of the Board of Directors. The text of the proposed Amended
and Restated By-Laws (the "New By-Laws") is attached as Exhibit B to this Proxy
Statement. The text of the existing Amended and Restated By-Laws of the Company
(the "Existing By-Laws") is attached as Exhibit C.
SUMMARY OF CHANGES
Presently, Section 8 of Article II of the Existing By-Laws requires
the affirmative vote of the holders of not less than half of the then issued
and outstanding shares of the Common Stock in order for the Company to take any
of the following actions:
(a) the amendment, alteration, modification or repeal of the Restated
Certificate of Incorporation or By-Laws of the Company;
(b) the issuance, sale, grant, repurchase or redemption by the Company
of any shares of the capital stock of the Company or other securities
either convertible to capital stock of the Company or carrying the
right to acquire capital stock of the Company;
(c) the merger or consolidation of the Company with any person or
entity;
(d) the transfer or pledge, mortgage or grant of a security interest
or other adverse right or encumbrance of or in all or substantially
all of the assets of the Company;
(e) the recapitalization of the Company;
(f) the removal of a director of the Company whether with or without
cause;
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(g) incurring of any indebtedness for borrowed money or guaranteeing
the obligations of others, except for trade payables incurred by the
Company in the ordinary course of business, accrued employee expenses,
accrued taxes, reasonable reserves for losses and other contingencies
and except for additional indebtedness in an amount not to exceed
$100,000 in any single fiscal year;
(h) the declaration, payment or making of any dividend or distribution
with respect to either shares of the capital stock of the Company or
other securities either convertible to capital stock of the Company or
carrying the right to acquire capital stock of the Company, other than
as provided in a stockholders agreement between the Company and all of
its stockholders; and
(i) any other matter requiring the approval or authorization of
stockholders under Delaware law.
The Board believes that the restrictions contained in Section 8 of
Article II of the Existing By-Laws, as set forth above, are inconsistent with
the system of governance envisioned by the Delaware General Corporation Law,
will result in significant delay and expense in the accomplishment of essential
corporate activities and are detrimental to the efficient operation of the
Company, and that it is in the best interest of the Company and its stockholders
that the New By-Laws, which do not contain such restrictions (other than those
restrictions required by applicable law and regulations), be approved by the
stockholders.
Presently, Section 2 of Article III of the Existing By-Laws provides
that the number of directors which shall constitute the Board of Directors
shall not be less than one nor more than ten and sets the initial size of the
Board of Directors at five until changed, within such limits, by resolution of
the Board or by the stockholders. Section 1 of Article III of the New By-Laws
provides for the Board of Directors to be of such number as shall, from time to
time, be determined by resolution of the Board of Directors, except to the
extent that the number of directors is fixed by the stockholders of the Company,
in which event, such number shall not be changed except by further vote of the
stockholders. The Board of Directors believes that such an amendment will
provide the Company with the flexibility to expand the Board to such size as it
deems appropriate or necessary from time to time.
Presently, Section 14 of Article III of the Existing By-Laws provides
for the designation of one or more committees of the Board with such powers of
the Board of Directors as shall be conferred in the designating resolution of
the Board. Section 4 of Article III of the New By-Laws will restrict any
committee of the Board of Directors with respect to its power to amend the
Company's Restated Certificate of Incorporation, to adopt an agreement of merger
or consolidation, to recommend to the stockholders a sale, lease or exchange of
all or substantially all of the Company's property or a dissolution of the
Company or a revocation of a dissolution, or to amend the New By-Laws of the
Company and, unless expressly provided in a resolution
11
<PAGE>
of the Board as a whole, the power or authority to declare a dividend,
authorize issuance of stock or adopt a certificate of ownership and merger. The
Board of Directors believes such restrictions on the power of committees of the
Board of Directors with respect to the above-listed actions to be in the best
interest of the Company by requiring such actions to be taken with the full
knowledge and approval of the whole Board.
Presently, Section 11 of Article III of the Existing By-Laws provides
that in the event of the removal of a director by the stockholders of the
Company, the vacancy created must be filled by the affirmative vote of a
majority in interest of the stockholders entitled to vote. Section 2 of Article
III of the New By-Laws provides that any such vacancy created may, but need not
be, filled by the vote of the stockholders; and, if not so filled by the
stockholders, the remaining directors may fill such vacancy by a majority vote.
Presently, Section 2 of Article VI of the Existing By-Laws allows for
the closing of the stock transfer books of the Company in order to determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders, or stockholders entitled to receive dividends, for a period not
to exceed 60 days. The New By-Laws will not provide for the closing of the
stock transfer books of the Company. The Board believes that the setting of a
record date by resolution of the Board of Directors renders any closing of the
stock transfer books unnecessary for purposes of making such determinations.
EFFECT OF AMENDMENT
The Board believes that the adoption of the New By-Laws will provide
the Company with more modern By-Laws which offer the flexibility to respond
more effectively to the demands of the marketplace. Certain actions restricted
by the Existing By-Laws require the vote of a majority of outstanding shares
according to Delaware law or other applicable regulation and therefore will
not be affected by the New By-Laws.
The Board of Directors proposes that the stockholders approve the New
By-Laws in their entirety in the form of Exhibit B to this Proxy Statement. If
the New By-Laws are adopted by the Company's stockholders, they will become
effective immediately.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS; VOTE REQUIRED
The Company's Board of Directors has unanimously approved the
amendment and restatement of the Company's By-Laws and has determined that the
approval of the New ByLaws is in the best interest of the Company and its
stockholders. It is intended that proxies not marked to the contrary will be
voted in favor of the approval of the New By-Laws. Authorization of the
amendment and restatement of the Company's Existing By-Laws will require the
affirmative vote of the holders of a majority of the issued and outstanding
shares of Common Stock of the Company. Abstentions and broker non-votes will
each have the effect of a vote against the New By-Laws.
12
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NEW BY-LAWS.
13
<PAGE>
PROPOSAL NO. 4 - SHAREHOLDER APPROVAL AND RATIFICATION OF CERTAIN TRANSACTIONS
Since the adoption of the Existing By-laws in February 1995, the Board
of Directors of the Company has approved certain private transactions which are
described below involving the issuance of shares of Common Stock and warrants to
purchase shares of Common Stock or the incurrence of indebtedness by the Company
in amounts in excess of $100,000 (collectively, the "Transactions"), all of
which have been or will be disclosed in accordance with the Company's reporting
obligations under the Exchange Act.
DESCRIPTION OF TRANSACTIONS
Effective March 1, 1995, the Company agreed to issue 200,000 shares of
Common Stock at $2.00 per share to the Company's sales agent in lieu of any
future commissions due under an agreement with such agent that was entered into
during the year ended July 31, 1994 and which terminated on July 31, 1996.
On April 12, 1995 and April 19, 1995, the Company issued 150,000 and
100,000 shares of Common Stock, respectively, at $2.00 per share to Samani Inc.
and Regent Park Development in exchange for subscription agreements that were
paid in full during May 1995.
On July 5, 1995, the Company issued 165,000 shares of Common Stock at
$2.00 per share to Turbotrade International in exchange for promissory notes
that were paid in full as of August 23, 1995.
On August 25, 1995, the Company entered into a one year contract with
Encap Investments LC, an investment advisory firm, for future financial
advisory services in exchange for 20,000 shares of Common Stock.
In 1995, the Company issued warrants to purchase 15,000 shares of
Common Stock at $2.50 per share to M.I. Garcia Cuesta, the wife of Jorge R.
Bracamontes, in exchange for certain legal services performed by Mr. Bracamontes
on behalf of the Company. Mr. Bracamontes became an officer and director of the
Company in July 1996 and the warrants were exercised on March 26, 1997.
On February 26, 1996, the Board of Directors issued to John P. Holmes,
a director of the Company, 330,000 warrants to purchase 330,000 shares of Common
Stock for $2.50 per share exercisable through February 8, 2000, in exchange for
advisory services to be provided during that period.
On February 26, 1996, the Board of Directors issued to Thomas P. Muse,
former Chairman of the Board of the Company, 200,000 warrants to purchase
200,000 shares of Common Stock for $2.50 per share exercisable through February
29, 2000. The warrants were cancelled as part of the exchange described below.
14
<PAGE>
On March 1, 1996, the Company entered into a loan agreement with John
H. Robinson, a director of the Company, to borrow $500,000 in the form of
subordinated indebtedness and, in connection therewith, issued warrants to
purchase 50,000 shares of Common Stock at $5.00 per share exercisable through
February 28, 2001. This loan, which is secured by a lien against substantially
all of the Company's terminal assets located at the Port of Brownsville, Texas,
requires payment of interest at the rate of 10% per annum at maturity, with
principal due in full on September 1, 1997, subject to certain pre-payment
provisions. In connection with such transactions, Mr. Robinson became a director
of the Company. On April 12, 1996, the Company borrowed an additional $500,000
from TRAKO International Company Limited, an organization affiliated with Mr.
Robinson, under substantially similar terms, including the issuance to TRAKO of
warrants to purchase 50,000 shares of Common Stock at $5.00 per share
exercisable through April 11, 2001.
On October 21, 1996, Thomas P. Muse resigned as a director and as
Chairman of the Board of the Company. In connection with his resignation, the
Company agreed to extend the exercise period of 42,856 warrants to purchase
42,856 shares of Common Stock of the Company at an exercise price of $2.50 per
share, held by Mr. Muse for an additional three years. These warrants were
cancelled as part of the exchange described below.
In October 1996, Mark D. Casaday resigned as a director and President
of the Company. In connection with his resignation, the Company agreed to extend
the exercise period of 200,000 warrants to purchase 200,000 shares of Common
Stock of the Company at an exercise price of $2.50 per share, held by Mr.
Casaday for an additional three years. These warrants were cancelled as part of
the exchange described below.
On October 30, 1996, the Company borrowed $325,000 from four investors
in exchange for promissory notes of like principal amount and 325,000 warrants
to purchase shares of Common Stock of the Company exercisable at $3.00 per share
exercisable through October 30, 1997. On March 25, 1997, the Board of Directors
of the Company approved the exercise of such warrants by the investors and the
issuance of 325,000 shares of Common Stock to such investors in exchange for
cancellation of $325,000 of indebtedness plus interest accrued thereon and an
aggregate cash payment of approximately $242,000 to the Company. As of the date
hereof, 275,000 warrants to purchase shares of Common Stock of the Company have
been exercised, $275,000 of such indebtedness (plus interest) has been cancelled
and the Company has received approximately $205,000 in cash payments.
In connection with the Company's plans to enter the compressed natural
gas ("CNG") refueling business, on March 7, 1997, Wilson Acquisition Corporation
("WAC"), a newly formed wholly-owned subsidiary of the Company, and Wilson
Technologies Incorporated ("Wilson"), a leading supplier of CNG refueling
stations which is engaged in the business of selling, designing, manufacturing,
installing and servicing CNG refueling stations and related products for use in
the CNG industry throughout the world, entered into an Interim Operating
Agreement ("Arrangement"). Under the terms of the Arrangement, effective as of
February 17, 1997, WAC will be granted the right to use the Wilson name,
technology and employees, subject to certain restrictions, as well as rights to
perform contracts which Wilson has currently not begun to perform, in exchange
for monthly payments of $84,000, and royalty
15
<PAGE>
payments of 5% on gross revenues. WAC will be entitled to all revenues earned by
WAC and by certain businesses of Wilson commencing as of February 17, 1997. In
addition, Zimmerman Holdings Inc. ("ZHI"), the parent of Wilson, has agreed to
reimburse the Company for 50% of the net operating cash deficit of WAC, if any.
WAC will also be entitled to use the Wilson premises as well as available
inventory of Wilson in carrying out the business at a price of cost plus 10%.
The Arrangement will terminate 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 is not completed within 90 days, the Arrangement may be extended by
WAC for up to three years.
Simultaneously with Arrangement, the Company, WAC, Wilson and ZHI
entered into a purchase agreement (the "Acquisition"), pursuant to which WAC
will acquire certain of the assets of Wilson and all of the outstanding capital
stock of ZH Canada Inc. ("ZH Canada") and Wilson Technologies de Mexico S.A. de
C.V. ("Wilson Mexico"), each an affiliate of Wilson (the "Acquisition"). In
connection with the Acquisition, (i) WAC will issue a Royalty Note, to be
guaranteed by the Company, under which WAC is obligated to pay a 5% royalty to
Wilson on revenues generated from WAC's provision of services and products in
the compressed natural gas industry, up to $3 million, payable in cash or in
restricted stock of the Company at a value equal to 80% of the market price per
share of the common stock on NASDAQ on the last day of the quarter for which the
royalty payment is due, subject to certain conditions more fully set forth on
the Royalty Note, (ii) the Company will issue a one year 8.25% $220,000
Convertible Debenture to ZHI, convertible at the option of ZHI, into restricted
shares of Company common stock at a conversion price equal to 80% of the average
NASDAQ market price for the common stock over the immediately preceding twenty
trading days, and (iii) the Company will agree to guarantee a 8.25% SG&A Note
the amount of which will be determined upon closing and will become due thirty
days thereafter to Wilson. The Acquisition is subject to several conditions,
including obtaining satisfactory restructuring of all of Wilson's creditor
obligations involving the consent of such creditors to the proposed Acquisition.
Each of the Royalty Note and the Convertible Debenture contains registrations
rights.
In November 1996, the Company acquired the right to a Dina dealership
(the "Dealership") which was conditionally granted to Mr. Roberto Keoseyan by
Grupo Dina, S.A. de C.V., one of the largest bus and truck manufacturers in
Mexico. In connection with the acquisition, the Company agreed to make certain
monthly payments to Mr. Keoseyan and has agreed to issue Mr. Keoseyan 100,000
warrants to purchase 100,000 shares of Common Stock of the Company once the
Dealership
has been officially granted to the Company.
On March 25, 1997, the Company ratified the execution and delivery of
Exchange Agreements between the Company and Thomas P. Muse, Mark D. Casaday and
Thomas A. Serleth, former officers and directors of the Company, providing for
the exchange (i) by Muse of 242,856 warrants to purchase Common Stock for 55,195
shares of Common Stock, (ii) by Casaday of 200,000 warrants to purchase Common
Stock for 50,000 shares of Common Stock; and (iii) by Serleth of 260,000
warrants to purchase Common Stock for 59,091 shares of Common Stock.
On March 25, 1997, the Company agreed to adjust the exercise price of
50,000 warrants to purchase Common Stock held by Mr. Robinson and 50,000
warrants to purchase Common
16
<PAGE>
Stock held by TRAKO International Company Limited to $2.50 from $5.00 per share.
In all other respects, the terms of the warrants remains the same.
On March 25, 1997, the Company approved the issuance to Mr. Jorge R.
Bracamontes of 200,000 warrants to purchase shares of Common Stock of the
Company at an exercise price of $3.625 per share of Common Stock, to be
effective through the close of business on March 24, 2000.
On March 25, 1997, the Company approved the issuance to Thomas G. Janik
Associates, Inc. ("Janik") of 25,000 shares of Common Stock of the Company in
exchange for the cancellation of $42,000 principal amount of indebtedness due
Janik plus interest thereon.
All of the securities issued in the foregoing transactions were issued
in private transactions under circumstances which did not involve any public
offering and were appropriately legended to reflect such fact.
REASONS FOR THE PROPOSAL
Because the Existing By-Laws may require shareholder approval or
authorization with respect to certain of the Transactions, the Board of
Directors has determined that it is in the best interests of the Company to seek
approval and ratification by the stockholders of the Transactions. None of the
Transactions would require shareholder approval under the proposed New By-Laws.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS; VOTE REQUIRED
The Company's Board of Directors unanimously determined that approval
and ratification by the stockholders of the Transactions is in the best
interest of the Company and its stockholders and recommends that stockholders
approve and ratify the Transactions. It is intended that proxies not marked to
the contrary will be voted in favor of the approval and ratification of the
Transactions. Abstentions and broker non-votes will have the effect of a vote
against approval and ratification of the Transactions. Approval and ratification
of the Transactions will require the affirmative vote of the holders of a
majority of the issued and outstanding shares of Common Stock of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL AND RATIFICATION OF
THE TRANSACTIONS
17
<PAGE>
PROPOSAL NO. 5 - RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS
The Company has appointed Burton McCumber & Prichard, L.L.P. as its
independent auditors to perform the audit of the Company's financial statements
for the fiscal year ending July 31, 1997, and the stockholders are being asked
to ratify such appointment. Representatives of Burton McCumber & Prichard,
L.L.P. will be present at the Meeting, will have the opportunity to make a
statement at the Meeting if they desire to do so and will be available to
respond to appropriate questions.
Ratification of the appointment of Burton McCumber & Prichard, L.L.P.
as the Company's independent auditors for fiscal year 1997 will require the
affirmative vote of the holders of a majority of the shares of Common Stock of
the Company present in person or represented by proxy and entitled to vote at
the Meeting, assuming a quorum is present.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF BURTON MCCUMBER & PRICHARD, L.L.P. AS THE COMPANY'S INDEPENDENT
AUDITORS FOR FISCAL YEAR 1997.
18
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information, as of April 18,
1997, 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 nominee for director,
(iii) each person serving as an executive officer of the Company at the end of
fiscal 1996, and (iv) all directors and executive officers as a group. The
number of shares of Common Stock issued and outstanding on April 18, 1997 was
8,319,286 and all calculations and percentages are based on such number (other
than percentages of ownership of Messrs. Bracamontes, Holmes and Robinson which
include such number plus warrants held by such persons). The beneficial
ownership indicated in the table includes shares of Common Stock subject to
warrants held by the respective persons as of the date of this Proxy Statement
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.
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- ----------------------- ----------------
Jerome B. Richter 3,902,000(1) 46.90%
Chairman of the Board, President,
Chief Executive Officer and Director
Penn Octane Corporation
900 Veterans Boulevard
Redwood City, CA
Kenneth G. Oberman 89,000 1.07%
Director
3562 Amber Drive
San Jose, CA
Stewart J. Paperin 16,500 *
Director
Lionrock Partners, Ltd.
14 East 60th Street
New York, NY
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<PAGE>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- -------------------- ----------------
Mark D. Casaday 50,000(2) *
Former President and Director
6819 Fawncliff Drive
Houston, TX
Thomas P. Muse 140,909(3) 1.69%
Former Chairman
Muse, Stancil & Co.
100 McKinney Place
3131 McKinney Avenue
Dallas, TX
Thomas A. Serleth 81,791(4) *
Former Executive Vice President
and Director
55 Olive Avenue
Larkspur, CA
Ian T. Bothwell 0 *
Vice President, Treasurer, Assistant
Secretary, Chief Financial Officer and
Director
Penn Octane Corporation
5847 San Felipe, Suite 3420
Houston, TX
20
<PAGE>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ------------------- ----------------------- ----------------
Jorge R. Bracamontes 225,000(5) 2.64%
Executive-Vice President, Secretary
and Director
Penn Octane de Mexico S.A. de C.V.
Diagonal San Antonio 838
Coli del Valle
Mexico, D.F.
John P. Holmes 430,000(6) 4.97%
Director
47 Ram Island Road
Shelter Island Heights,
N.Y.
John H. Robinson 112,500(7) 1.34%
Director
Commonwealth Associates
733 Third Avenue
New York, NY
As a group, the current officers and directors of the Company are beneficial
owners of 4,145,000 shares or 49.82% of the voting securities of the Company
excluding warrants held by members of such group and 4,775,000 shares or 53.36%
of the voting securities of the Company including warrants so held.
- --------
* Less than 1%.
(1) Includes 2,200,000 shares of Common Stock issued upon exercise of common
stock purchase warrants on April 11, 1997. Includes 2,000 shares of
Common Stock owned by Mrs. Richter.
(2) Mr. Casaday resigned as an officer and director of the Company in October,
1996. At that time he owned 130,000 shares of Common Stock and 200,000
shares of Common Stock were issuable to him upon the exercise of common
stock purchase warrants. Subsequent to October 31, 1996, Mr. Casaday sold
130,000 shares of Common Stock and exchanged 200,000 warrants for 50,000
additional shares of Common Stock in a private transaction with the
Company.
(3) Mr. Muse resigned as an officer and director of the Company in October,
1996. At that time he owned 85,714 shares of Common Stock and 242,856
shares of Common Stock were issuable to him upon exercise of common stock
purchase warrants. Subsequent to October 31, 1997, Mr. Muse exchanged
242,856 warrants for 55,195 additional shares of Common Stock in a private
transaction with the Company.
(4) Mr. Serleth resigned as an officer and director of the Company in October,
1996. At that time he owned 22,700 shares of Common Stock and 260,000
shares of Common Stock were issuable to him upon exercise of common stock
purchase warrants. Subsequent to October 31, 1996, Mr. Serleth exchanged
260,000 warrants for 59,091 additional shares of Common Stock in a private
transaction with the Company.
(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) Includes 330,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
(7) Includes 100,000 shares of Common Stock issuable upon exercise of common
stock purchase warrants.
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<PAGE>
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, 1996, were
(i) the Company's Chief Executive Officer, and (ii) the other three most highly
compensated executive officers (collectively, with the Chief Executive Officer,
the "Named Executive Officers"). No other executive officer received
compensation in excess of $100,000 during fiscal 1996. This information includes
the dollar values of base salaries and certain other compensation, if any,
whether paid or deferred. The Company does not grant stock appreciation rights
and has no restricted stock, stock option or other long-term compensation plans.
No bonuses were paid during or with respect to the fiscal years indicated.
SUMMARY COMPENSATION TABLE
Annual Compensation
---------------------------------
Name And Other Annual
Principal Position Year Salary Compensation
------------------ ---- ------ ------------
Jerome B. Richter, 1996 $132,923 None
Secretary Treasurer & 1995 (1)
Chief Executive Officer 1994 (1)
for portion of fiscal 1995 and
all of fiscal 1996
Mark D. Casaday, 1996 $111,692 None
Former President and Director 1995 $78,312
1994 (1)
Thomas A. Serleth, 1996 $101,308 None
Former Executive Vice 1995 $78,487
President and Chief 1994 $28,000
Financial Officer for a
portion of fiscal 1995
Thomas P. Muse 1996 $56,571 (2)
Former Chairman 1995 (3)
of the Board 1994 (3)
(1) No compensation was paid for services rendered by the Named Executive
Officer in such fiscal year.
(2) On February 16, 1996, the Board of Directors granted 200,000 warrants
to Mr. Muse to purchase 200,000 shares of common stock for $2.50 per
share through February 29, 2000.
(3) Not an officer of the Company during such year.
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<PAGE>
AGGREGATED WARRANT EXERCISES IN FISCAL 1996 AND WARRANT VALUES ON
JULY 31, 1996*
Number Of
Securities Value Of
Underlying Unexercised
Unexercised In-The-Money
Warrants Warrants
At July 31, 1996 At July 31, 1996
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
---- ------------- -------------
Jerome B. Richter 2,300,000/0 $8,050,000/0 (1)
Mark D. Casaday 200,000/0 $ 0/0 (2)
Thomas A. Serleth 260,000/0 $ 0/0 (2)
Thomas P. Muse 42,856/0 $ 0/0 (2)
* No warrants were exercised by the Named Executive Officers in fiscal 1996.
(1) Based on an exercise price of $1.25 per share of Common Stock and a
closing price of $4.75 per share of Common Stock on July 31, 1996.
(2) Based on an exercise price of $5.00 per share of Common Stock and a
closing price of $4.75 per share of Common Stock on July 31, 1996.
EMPLOYMENT AGREEMENTS
The Company signed three and six year employment agreements with
Mr. Casaday and Mr. Richter, respectively. Mr. Casaday's employment agreement
expired October 31, 1996 (at which time Mr. Casaday resigned from the Company).
Mr. Richter's employment agreement expires January 31, 2001. Under Mr. Richter's
agreement, dated July 12, 1993, Mr. Richter is entitled to receive $300,000 in
annual compensation equal to a monthly salary of $25,000. Mr. Richter is also
entitled under the employment agreement to (i) an annual bonus of 5% of all
pre-tax profits of the Corporation, (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, 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. To date, Mr.
Richter has waived his entitlement to his full salary, receipt of the stock
options, bonus and the purchase by the Company of a term life insurance policy.
Mr. Richter may, in the future, elect not to waive such entitlements.
23
<PAGE>
LEGAL PROCEEDINGS
In connection with a law suit by the Company against International Bank
of Commerce-Brownsville, a Texas state banking association ("IBC"), concerning
the breach by IBC of a credit facility dated July 1, 1994 between the Company
and IBC, IBC filed an appeal with the Texas Court of Appeals on June 3, 1996 of
the judgment entered on February 26, 1996 against IBC in the sum of $2,810,737,
plus post-award interest at a rate of 9.75% compounded annually plus additional
amounts for attorneys' fees and a release of all collateral transferred to IBC
by the Company. The Company filed a response to IBC's appeal on February 14,
1997.
On June 26, 1996, IBC filed suit against the Company, Case No.
96-06-3502 in the 357th Judicial District Court of Cameron County, Texas
alleging that the Company, in filing the judgment against IBC in order to clear
title to its assets, slandered the name of IBC. IBC has claimed actual damages
of $600,000 and requested punitive damages of $2,300,000. On September 23, 1997,
the court which 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. The Company believes IBC's case to be frivolous.
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 "Commission") in which the Commission (i) made findings that the Company
and Mr. Richter had violated portions of Section 13 of the Exchange Act,
relating to the filing of periodic reports and the maintenance of books and
records, and certain related rules under 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 July 30, 1996, the Company filed suit in the District Court of
Harris County, Texas against the former Chairman of the Board of the Company,
Jorge V. Duran, 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 against the Company in the District Court of Harris County,
Texas alleging wrongful termination and seeking compensation in an unspecified
amount. On February 27, 1997, the two actions were consolidated into one.
24
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended July 31, 1995, the Company made advances to, and
received advances from Jerome B. Richter, Chairman of the Company, and several
companies which were wholly-owned by him. The total owed to the Company
aggregated to $144,000 during the year. These advances accrued interest at a
rate of 8% per annum. As of July 31, 1995, the Company owed $19,762 to
Mr. Richter. As of April 11, 1997, the Company owed no amounts to Mr. Richter.
On February 26, 1996, the Board of Directors granted to John P. Holmes,
a director, 330,000 warrants to purchase 330,000 shares of Common Stock at an
exercise price of $2.50 per share through February 8, 2000, in exchange for
advisory services during that period.
On February 26, 1996, the Board of Directors granted to Thomas P.
Muse, former Chairman of the Board, 200,000 warrants to purchase 200,000 shares
of Common Stock at an exercise price of $2.50 per share through February 29,
2000.
On March 1, 1996, the Company entered into a loan agreement with John
Robinson, a director of the Company, to borrow $500,000 in the form of
subordinated indebtedness and, in connection therewith, issued warrants to
purchase 50,000 shares of Common Stock at $5.00 per share exercisable through
February 28, 2001. This loan, which is secured by a lien against substantially
all of the Company's terminal assets, located at the Port of Brownsville, Texas,
requires payment of interest at the rate of 10% per annum at maturity, with
principal due in full on September 1, 1997, subject to certain pre-payment
provisions. In connection with such transactions, Mr. Robinson became a
director of the Company. On April 12, 1996, the Company borrowed an additional
$500,000 from TRAKO International Company Limited, an organization affiliated
with Mr. Robinson, under substantially similar terms including the issuance to
TRAKO of warrants to purchase 50,000 shares of Common Stock at $5.00 per share
exercisable through April 11, 2001.
During the year ended July 31, 1996, the Company entered into certain
commission arrangements with Consultores di Chemica, a consulting firm that
assisted the Company in connection with its negotiation of purchase orders with
PEMEX, its major customer. Jorge Duran, who was Chairman of the Board of the
Company, is related to a person with a decision making role with Consultores di
Chemica. The Company has no further obligations with respect to such
arrangements.
On October 21, 1996, Thomas P. Muse resigned as a Director and as
Chairman of the Board of the Company. In connection with his resignation, the
Company agreed to extend the expiration date of 242,856 warrants held by Mr.
Muse for an additional three year period. The Company and Mr. Muse also agreed
that if the Common Stock traded at $6.00 or more per share for twenty
consecutive trading days, the warrants would be exercised by Mr. Muse. This
agreement is no longer in effect. Mr. Muse exchanged these 242,856 warrants with
the Company for 55,195 shares of Common Stock in March 1997. See "Security
Ownership of Certain Beneficial Owners and Management" for additional
information concerning Mr. Muse's ownership of Common Stock.
On October 24, 1996, Thomas A. Serleth resigned as a Director and
Executive Vice President of the Company. In connection with his resignation, the
Company entered into a two month consulting agreement with Mr. Serleth which
expired on December 31, 1996 and pursuant to which the Company paid Mr. Serleth
a fee of $10,000 per month and agreed that Mr. Serleth would be entitled to a
payment of 5% of the net proceeds (after expenses and legal fees) received by
the Company arising out of the lawsuit with IBC. See "Security Ownership of
Certain Beneficial Owners and Management" for additional information concerning
Mr. Serleth's ownership of Common Stock. See "Legal Proceedings" for information
concerning the IBC lawsuit.
In October 1996, Mr. Casaday resigned as a Director and President of
the Company. In connection with his resignation, the Company agreed to extend
the expiration date of 200,000 warrants held by Mr. Casaday for an additional
three year period. The Company and Mr. Casaday also agreed that if the Common
Stock were to trade at $6.00 or more per share for 20 consecutive trading days,
the warrants would be exercised by Mr. Casaday. The Company agreed to guarantee
a floor of $3.00 per share on 130,000 shares which became eligible for sale by
Mr. Casaday 90 days after his resignation from the Company. Subsequently, Mr.
Muse exchanged those 200,000 warrants for 50,000 shares of Common Stock in a
private transaction with the Company. In addition, the Company agreed to sell
the Company car that Mr. Casaday was using to Mr. Casaday for $1.00. See
"Certain Ownership of Certain Beneficial Owners and Management" for additional
information concerning Mr. Casaday's ownership of Common Stock.
On March 25, 1997, the Company agreed to allow Mr. Richter to exercise
2,200,000 warrants at an exercise price of $1.25 through payment of $22,000 and
issuance of a promissory note due April 11, 2000 to the Company in the principal
amount of $2,728,000 at the rate of 8.25% per annum and secured by 1,000,000
shares of Common Stock to be placed with a collateral agent.
On March 25, 1997, the Company agreed to adjust the exercise price of
50,000 warrants held by Mr. Robinson and 50,000 warrants held by TRAKO
International Company Limited to $2.50 from $5.00. In all other respects, the
terms of the warrants remain the same.
The parties to the lease governing the Company's executive offices
located at 900 Veterans Boulevard in Redwood City, California are Mr. Richter,
in his individual capacity as tenant, and Nine-C Corporation, as landlord. The
Company currently makes monthly payments directly to Nine-C Corporation in
satisfaction of obligations under such lease.
25
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COMPLIANCE UNDER SECTION 16(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
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
26
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reports of changes in ownership with the Commission. Such persons are required
by the Commission 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 3 for Mr. Thomas P. Muse and a Form 4 relating to
his ownership of 85,714 shares of Common Stock of the Company were not filed on
a timely basis during fiscal 1996. A Form 3 for Mr. Thomas Serleth relating to
his election to the Board in 1994 and two reports on Form 4 relating to his
receipt of 200,000 warrants and 60,000 warrants, respectively, were not timely
filed during fiscal 1996. A Form 3 for Mr. Mark Casaday and a Form 4 reporting
his receipt of 200,000 warrants were not timely filed during fiscal 1996. Mr.
Casaday filed a Form 4 in February 1997 reporting his disposition of 50,000
shares of Common Stock. A Form 3 for Mr. Jerome B. Richter was not filed on a
timely basis during fiscal 1996. A Form 5 correcting this matter was filed in
September, 1996. A Form 3 for Mr. Ian T. Bothwell was not filed on a timely
basis in 1996. A Form 3 correcting this matter for Mr. Bothwell was filed on
April 10, 1997. A Form 3 for Mr. Jorge R. Bracamontes was not filed on a timely
basis in 1996. A Form 4 correcting this matter was filed on April 10, 1997. A
Form 3 for Mr. Kenneth Oberman was not filed on a timely basis during fiscal
1996. A Form 4 correcting this matter was filed on April 10, 1997. A Form 3 for
Mr. John P. Holmes was not filed on a timely basis during fiscal 1996. A Form 4
correcting this matter was filed on April 10, 1997. A Form 3 for Mr. John H.
Robinson and a Form 4 reflecting the grant of 50,000 warrants were not filed on
a timely basis during fiscal 1996. A Form 3 for Mr. Stewart J. Paperin was not
filed on a timely basis during fiscal 1996. A Form 3 correcting this matter was
filed on July 15, 1996.
REPORTS ON FORMS 10-KSB AND FORM 10-QSB
The Company's Annual Report on Form 10-KSB for the fiscal year ended
July 31, 1996 (the "10-KSB") and the Company's Quarterly Report on Form 10-QSB
(the "10-QSB") for the six months ended January 31, 1997, in each case including
consolidated financial statements, are being furnished along with this proxy
statement to stockholders of record on the Record Date. The consolidated
financial statements of the Company contained in the 10-KSB and 10-QSB are
incorporated herein by reference.
OTHER BUSINESS
The Board of Directors does not presently intend to bring any other
business before the Meeting and, to the best knowledge of the Board of
Directors, no matters are to be brought before the Meeting except as specified
in the Notice. As to any business that may properly come before the Meeting, it
is intended that proxies, in the form enclosed, will be voted in accordance
with the judgment of the persons voting such proxies.
STOCKHOLDER PROPOSALS
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The Company anticipates that the 1998 Annual Meeting of Stockholders
will be held in May, 1998. Accordingly, proposals of stockholders intended to
be presented at the Company's 1998 Annual Meeting of Stockholders must be
received by the Secretary of the Company at the Company's principal executive
offices no later than January 1, 1998 in order to be included in the Company's
Proxy Statement and form of proxy relating to that meeting. All such proposals
must comply with applicable Commission regulations.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE,
SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE
PREPAID ENVELOPE.
By Order of the Board of Directors
/s/ Jorge R. Bracamontes
Jorge R. Bracamontes
Secretary
May 9, 1997
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EXHIBIT A
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
PENN OCTANE CORPORATION
PENN OCTANE CORPORATION, a corporation duly organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
does hereby certify as follows:
1. The name of the corporation is Penn Octane Corporation (hereinafter
called the "Corporation").
2. The Corporation's Restated Certificate of Incorporation is hereby
amended to delete in its entirety the present Article FOURTH and to replace it
with the following:
"FOURTH: (a) Capital Stock. The total number of shares of capital stock which
the Corporation shall have authority to issue is 35,000,000 shares of which
25,000,000 shall be Common Stock, having a par value of $.01 per share,
5,000,000 shares shall be Senior Preferred Stock, having a par value of $.01 per
share, and 5,000,000 shares shall be Preferred Stock, having a par value of
$.01 per share. The capital stock of the Corporation may be issued for such
consideration and for such corporate purposes as the directors of the
Corporation may from time to time determine by resolution.
(b) Senior Preferred Stock. The relative rights, privileges, and
restrictions relating to the Senior Preferred Stock are set forth below:
(1) Shares of Senior Preferred Stock may be issued in
one or more series at such time or times and for such consideration as
the Board of Directors may determine. Each such series shall be given
a distinguishing designation. All shares of any one series shall have
preferences, limitations and relative rights identical with those of
other shares of the same series and, except to the extent otherwise
provided in the description of such series, with those of other shares
of Senior Preferred Stock.
(2) Authority is hereby expressly granted to the
Board of Directors to fix from time to time by resolution or
resolutions providing for the establishment and/or issuance of any
series of Senior Preferred Stock, the designation of such series and
the preferences, limitations and relative rights of the shares of such
series, including the following:
(A) The distinctive designation and number
of shares comprising such series, which number may (except where
otherwise provided by the Board of Directors in creating such series)
be increased or decreased (but not
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below the number of shares then outstanding) from time to time by
action of the Board of Directors;
(B) The voting rights, if any, which shares
of that series shall have, which may be special, conditional, limited
or otherwise;
(C) The rate of dividends, if any, on the
shares of that series, whether dividends shall be non-cumulative to
the extent earned, partially cumulative or cumulative (and, if
cumulative, from which date or dates), whether dividends shall be
payable in cash, property or rights, or in shares of the corporation's
capital stock, and the relative rights of priority, if any, of payment
of dividends on shares of that series over shares of any other series,
shares of Preferred Stock or shares of Common Stock;
(D) Whether the shares of that series shall
be redeemable and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be
redeemable, the event or events upon or after which they shall be
redeemable, whether they shall be redeemable at the option of the
corporation, the shareholder or another person, the amount per share
payable in case of redemption (which amount may vary under different
conditions and at different redemption dates), whether such amount
shall be a designated amount or an amount determined in accordance
with a designated formula or by reference to extrinsic data or events
and whether such amount shall be paid in cash, indebtedness,
securities or other property or rights, including securities of any
other corporation;
(E) Whether that series shall have a
sinking fund for the redemption or purchase of shares of that series
and, if so, the terms of and amounts payable into such sinking fund;
(F) The rights to which the holders of the
shares of that series shall be entitled in the event of voluntary or
involuntary dissolution or liquidation of the Corporation, and the
relative rights of priority, if any, of payment of shares of that
series over shares of any other series, shares of Preferred Stock or
shares of Common Stock in any such event;
(G) Whether the shares of that series shall
be convertible into or exchangeable for cash, shares of stock of any
other class or any other series, indebtedness, or other property or
rights, including securities of another corporation, and, if so, the
terms and conditions of such conversion or exchange, including the
rate or rates of conversion or exchange, and whether such rates shall
be a designated amount or an amount determined in accordance with a
designated formula or by reference to extrinsic data or events, the
date or dates upon or after which they shall be convertible or
exchangeable, the duration for which they shall be convertible or
exchangeable, the event or events upon or after which they shall be
convertible or exchangeable, and whether they shall be convertible or
exchangeable at the option of the Corporation, the shareholder or
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another person, and the method (if any) of adjusting the rate of
conversion or exchange in the event of a stock split, stock dividend,
combination of shares, or similar event;
(H) Whether the issuance of any additional
shares of such series, or of any shares of any other series, shall be
subject to restrictions as to issuance, or as to the powers,
preferences or rights of any such other series; and
(I) Any other preferences, privileges and
powers and relative, participating, optional or other special rights
and qualifications, limitations or restrictions of such series, as the
Board of Directors may deem advisable and as shall not be inconsistent
with the provisions of this Article FOURTH and to the full extent now
or hereafter permitted by the laws of the State of Delaware.
(c) Preferred Stock. The relative rights, preferences, privileges, and
restrictions relating to the Preferred Stock are set forth below:
(1) Conversion. The Preferred Stock shall be subject
to the following provisions regarding conversions:
(A) Holder's Rights to Convert. Each share
of Preferred Stock shall be convertible, without the payment of any
additional consideration by the holder thereof and at the option of
the holder thereof at the office of the Corporation or any transfer
agent for the Corporation, into 3.333 fully paid and nonassessable
shares of Common Stock.
(B) Terms of Conversion Period. Each share
of Preferred Stock shall be convertible at the option of the holder of
such stock for a period of five-years beginning on September 18, 1993
and concluding on September 18, 1998.
(C) Mechanics of Right to Convert. Before
any holder of Preferred Stock shall be entitled to convert the same
into shares of Common Stock, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation
or of its transfer agent, and shall give written notice to the
Corporation at such office that he elects to convert the same and
shall state therein his name or the name or names of his nominees in
which he wishes the certificate or certificates for the shares of
Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such
holder of Preferred Stock, or to his nominee or nominees, a
certificate or certificates for the number of shares of Common Stock
to which he shall be entitled as aforesaid. Such conversion shall be
deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of the Preferred Stock to be
converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon conversion shall be
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treated for all purposes as the record holder of such shares of Common
Stock on such date.
(D) Common Stock Reserved. The Corporation
shall reserve and keep available out of its authorized but unissued
Common Stock such number of shares of Common Stock as shall from time
to time be sufficient to effect conversion of the Preferred Stock.
(E) Adjustment of Conversion Ratio. The
1-to-3.333 conversion ratio specified above shall be subject to an
equitable adjustment upon the occurrence of a stock split or stock
dividend, reclassification or other similar event relating to the
Common Stock.
(2) Voting Rights. The holders of the Preferred
Stock shall hold no voting rights, except as may be provided by law.
(3) Dividend Rights. The holders of the Preferred
Stock shall be entitled to receive, when and as declared by the board
of directors, yearly dividends from the surplus of net profits of the
Corporation at the rate of eleven percent per annum, beginning on the
date the particular shares of Class I Preferred Stock are issued by
the Corporation and payable twice annually on the 30th day of June and
the 31st day of December in each year, with proper adjustment for any
dividend period that is less than a full half-year. Such dividends
shall be payable before any dividends shall be paid upon, or set apart
for, the Common Stock of the Corporation, and shall be cumulative from
the date of issuance so that if such dividends shall not have been
paid upon or set apart for the Preferred Stock, the deficiency (but
without interest) shall be fully paid or set apart for payment, before
any dividends shall be paid upon, or set apart for, the Common Stock.
(d) Common Stock. The relative rights, preferences, privileges and
restrictions relating to the Common Stock are set forth below.
(1) Dividend Rights. Out of any assets of the
Corporation available for dividends remaining after full satisfaction
of any preference with respect to dividends on the Senior Preferred
Stock and the Preferred Stock then outstanding, and after full
satisfaction of any obligations then or theretofore matured in respect
of any sinking fund provided for the Senior Preferred Stock or any
series thereof and for the Preferred Stock then outstanding, then,
subject to the restrictions set forth in this Article FOURTH and in
any resolution of the Board of Directors of this Corporation
establishing a particular series of shares, dividends may be paid upon
the Common Stock.
(2) Liquidation Rights. In the event of any
liquidation, dissolution or winding up of this Corporation, after
there shall have been paid or set aside in cash for the holders of the
Senior Preferred Stock and the Preferred Stock the full preferential
amounts to which they are entitled under the provisions of this
Article FOURTH or any resolution of the Board of Directors
establishing
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a particular series of shares, the holders of the Common Stock shall
be entitled to receive pro rata all of the remaining assets of this
Corporation available for distribution to its shareholders.
(3) Voting Rights. The holders of the Common Stock
shall be entitled to vote for the election of directors and for all
other purposes and shall be entitled to one vote for each share held."
3. The amendment was duly adopted in accordance with the applicable
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Penn Octane Corporation has caused this
Certificate to be signed by an authorized officer, this ___ day of _________,
1997.
By ___________________________________
Name: Jerome B. Richter
Title: Chairman, President and
Chief Executive Officer
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EXHIBIT B
PROPOSED BY-LAWS
OF
PENN OCTANE CORPORATION
(a Delaware corporation)
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the corporation
shall be maintained at 1209 Orange Street, Wilmington, Delaware. The
Corporation Trust Company shall be the registered agent of this corporation in
charge thereof.
Section 2. Other Offices. The corporation may have other offices,
either within or without the State of Delaware, at such place or places as the
Board of Directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meetings. Annual meetings of stockholders for the
election of directors and for such other business as may be stated in the
notice of the meeting shall be held at such place, either within or without the
State of Delaware, and at such time and date, as the Board of Directors shall
determine and set forth in the notice of the meeting.
Section 2. Other Meetings. Meetings of stockholders for any purpose
other than the election of directors may be held at such time and place, within
or without the State of Delaware, as shall be determined by the Board of
Directors and stated in the notice of the meeting.
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Section 3. Voting. Unless otherwise provided in the Certificate of
Incorporation or applicable By-law, each stockholder entitled to vote in
accordance with the terms of the Restated Certificate of Incorporation and in
accordance with the provisions of these By-Laws shall be entitled to one vote,
in person or by proxy, for each share of stock entitled to vote held by such
stockholder, but no proxy shall be voted after three years from its date unless
such proxy provides for a longer period. Upon the demand of any stockholder, the
vote for directors and the vote upon any question before the meeting shall be
by ballot. All elections for directors shall be decided by a plurality of the
votes of the shares present in person or by proxy at the meeting and entitled
to vote on the election of directors; all other questions shall be decided by
the affirmative vote of the majority of shares present in person or by proxy
and entitled to vote except as otherwise provided in these By-Laws or by the
Certificate of Incorporation or by the laws of the State of Delaware.
A complete list of the stockholders entitled to vote in the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be opened to the examination of any
stockholder for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof and may be
inspected by any stockholder who is present.
Section 4. Quorum. Except as otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the presence, in person or by
proxy, of stockholders holding a majority of the stock of the corporation
entitled to vote shall constitute a quorum at all meetings of the stockholders.
In case a quorum shall not be present at any meeting, a majority in interest of
the stockholders entitled to vote thereat, present in person or by proxy, shall
have
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the power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of stock entitled to
vote shall be present. At such adjourned meeting at which the requisite amount
of stock entitled to vote shall be represented, any business may be transacted
which might have been transacted at the meeting as originally noticed; but only
those stockholders entitled to vote at the meeting as originally noticed shall
be entitled to vote at any adjournment or adjournments thereof. If any
adjournment is for more than thirty days or if after the adjournment a new
record date is fixed for the adjourned meeting, notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote thereat.
Section 5. Special Meetings. Special meetings of the stockholders for
any purpose or purposes may be called by the President of the Corporation and
shall be called by the President or Secretary at the request in writing of a
majority of the Board of Directors, or at the request in writing of the
registered holder or holders of 10% or more of the capital stock outstanding
and entitled to vote. Any such request shall state the purpose or purposes of
the proposed meeting.
Section 6. Notice of Meetings. Written notice, stating the place, date
and time of the meeting, and the general nature of the business to be
considered, shall be given to each stockholder entitled to vote thereat at his
address as it appears on the records of the corporation, not less than ten nor
more than sixty days before the date of the meeting.
Section 7. Action Without Meeting. Unless otherwise provided by the
Certificate of Incorporation, any action required to or which may be taken at
any annual or special meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if a
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consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of
the taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
ARTICLE III
DIRECTORS
Section 1. Number and Term. The number of directors shall be such
number as shall, from time to time, be determined by resolution of the Board of
Directors or by the affirmative vote of a majority in interest of the
stockholders, at the annual meeting or at a special meeting called for that
purpose. The directors shall be elected at the annual meeting of the
stockholders and each director shall be elected to serve until such director's
successor shall be elected and qualified. Directors need not be stockholders. If
the numbers of directors is determined by the stockholders, such number shall
not be changed except by further vote of the stockholders.
Section 2. Removal. Except as otherwise required by law, any director
or directors may be removed either for or without cause at any time by the
affirmative vote of the holders of a majority of all the shares of stock
outstanding and entitled to vote, and the vacancies thus created may but need
not be filled by the affirmative vote of a majority in interest of the
stockholders entitled to vote, but if not so filled, such vacancies shall be
filled as provided in Section 2 of Article V hereof.
Section 3. Powers. The business and affairs of the corporation shall
be managed by or under the direction of the Board of Directors, which shall
exercise all of the powers of the
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corporation except such as are by law or by the Certificate of Incorporation of
the corporation or by these By-Laws or otherwise conferred upon or reserved to
the stockholders.
Section 4. Committees. The Board of Directors may, by resolution or
resolutions passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of such committee or committees. The member or members thereof present
at any meeting and not disqualified from voting, whether or not such member or
members constitute a quorum, may unanimously appoint another member of the Board
of Directors to act at the meeting in the place of any such absent or
disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, or in these By-Laws, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except as provided by law with respect to the
issuance of certain shares of stock of the Corporation), adopting an agreement
of merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the By-Laws of the corporation; and,
unless the resolution, these By-Laws or the Certificate of Incorporation
expressly so provides, no such committee shall have the power or authority to
declare a dividend, authorize the issuance of stock or adopt a certificate of
ownership and merger.
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Section 5. Meetings. The newly elected directors shall hold their
first meeting for the purpose of organization and the transaction of business,
if a quorum be present, immediately after the annual meeting of the
stockholders; or the time and place of such meeting may be fixed by consent in
writing of all the directors.
Regular meetings of the directors may be held without notice at such
places and times as shall be determined from time to time by resolution of the
directors.
Special meetings of the Board may be called by the President and shall
be called by the Secretary on the written request of any two directors on at
least two days' notice to each director and shall be held at such place or
places as may be determined by the directors, or as shall be stated in the
notice of the meeting.
Section 6. Quorum. A majority of the directors at the time in office
shall constitute a quorum for the transaction of business and, except as
otherwise required by law, the Certificate of Incorporation or these By-Laws,
the act of a majority of the Board of Directors present at a meeting shall
constitute the act of the Board of Directors. If at any meeting of the Board of
Directors there shall be less than a quorum present, a majority of those
present may adjourn the meeting from time to time until a quorum is obtained,
and no further notice thereof need be given other than by announcement at the
meeting which shall be so adjourned.
Section 7. Compensation. Directors shall not receive any stated salary
for their services as directors or as members of committees, but by resolution
of the Board of Directors a fixed fee and expenses of attendance may be allowed
for attendance at each meeting. Nothing herein contained shall be construed to
preclude any director from serving the corporation in any other capacity as an
officer, agent or otherwise, and receiving compensation therefor.
Section 8. Action Without Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a
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meeting, if a written consent thereto is signed by all members of the Board of
Directors, or of such committee as the case may be, and such written consent is
filed with the minutes of proceedings of the Board of Directors or committee.
Section 9. Participation by Conference Telephone. Members of the Board
of Directors of the corporation, or any committee designated by such Board, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a
meeting shall constitute presence in person at such meeting.
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the corporation shall be a
President, a Treasurer and a Secretary, each of whom shall be elected by the
Board of Directors and shall hold office at the pleasure of the Board until
their successor is elected and qualified. In addition, the Board of Directors
may elect a Chairman, one or more Vice Presidents and such Assistant
Secretaries and Assistant Treasurers as they may deem proper. None of the
officers of the corporation need be directors. The officers shall be elected at
the first meeting of the Board of Directors after each annual meeting. More
than two offices may be held by the same person.
Section 2. Other Officers and Agents. The Board of Directors may
appoint such other officers and agents as it may deem advisable, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Directors.
Section 3. Chairman. The Chairman of the Board of Directors, if one be
elected, shall preside at all meetings of the Board of Directors and he shall
have and perform such other duties as from time to time may be assigned to him
by the Board of Directors.
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Section 4. President. The President shall be the chief executive
officer of the corporation and shall have the general powers and duties of
supervision and management usually vested in the office of president of a
corporation. The President shall preside at all meetings of the stockholders if
present thereat and, in the absence or non-election of the Chairman of the Board
of Directors, at all meetings of the Board of Directors, and shall have general
supervision, direction and control of the business of the corporation. Except as
the Board of Directors shall authorize the execution thereof in some other
manner, he shall execute bonds, mortgages and other contracts on behalf of the
corporation, and shall cause the seal to be affixed to any instrument requiring
it and when so affixed the seal shall be attested by the signature of the
Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer.
Section 5. Vice President. Each Vice President shall have such powers
and shall perform such duties as shall be assigned to him by the directors.
Section 6. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the corporation. The Treasurer
shall deposit all moneys and other valuables in the name and to the credit of
the corporation in such depositories as may be designated by the Board of
Directors.
The Treasurer shall disburse the funds of the corporation as may be
ordered by the Board of Directors, or the President, taking proper vouchers for
such disbursements. The Treasurer shall render to the President and Board of
Directors at the regular meetings of the Board of Directors, or whenever they
may request it, an account of all transactions as Treasurer and of the financial
condition of the corporation. If required by the Board of Directors, the
Treasurer shall give the corporation a bond for the faithful discharge of duties
in such amount and with such surety as the Board of Directors shall prescribe.
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Section 7. Secretary. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors, and all other notices
required by law or by these By-Laws, and in case of absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the President, or by the directors, or stockholders, upon whose requisition
the meeting is called as provided in these By-Laws. The Secretary shall record
all the proceedings of the meetings of the corporation and of the directors in a
book to be kept for that purpose, and shall perform such other duties as may be
assigned by the directors or the President. The Secretary shall have the custody
of the seal of the corporation and shall affix the same to all instruments
requiring it, when authorized by the directors or the President, and attest the
same.
Section 8. Assistant Treasurers and Assistant Secretaries. Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the directors.
ARTICLE V
MISCELLANEOUS
Section 1. Resignations. Any director, member of a committee or
corporate officer may, provided the same would not result in a breach of any
contract to which said person is a party, resign at any time. Such resignation
shall be made in writing, and shall take effect at the time specified therein,
and if no time be specified, at the time of its receipt by the President or
Secretary. The acceptance of a resignation shall not be necessary to make it
effective.
Section 2. Vacancies. If the office of any director, member of a
committee or corporate officer becomes vacant, by reason of death, disability
or otherwise, the remaining directors in office, though less than a quorum, by
a majority vote may appoint any qualified person to fill
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such vacancy, who shall hold office for the unexpired term and until their
successor shall be duly chosen.
Section 3. Certificates of Stock. Certificates of stock, signed by the
Chairman of the Board of Directors, or the President or any Vice President, and
the Treasurer or an Assistant Treasurer, or Secretary or an Assistant
Secretary, shall be issued to each stockholder certifying the number of shares
owned by him in the corporation, unless otherwise required by the Board of
Directors. When such certificates are countersigned (1) by a transfer agent
other than the corporation or its employee, or (2) by a registrar other than
the corporation or its employee, the signatures of such officers of the
corporation may be facsimiles.
Section 4. Lost Certificates. A new certificate of stock may be issued
in the place of any certificate theretofore issued by the corporation, alleged
to have been lost or destroyed, and the directors may, in their discretion,
require the owner of the lost or destroyed certificate, or his legal
representatives, to give the corporation a bond, in such sum as they may
direct, not exceeding double the value of the stock represented by such
certificate, to indemnify the corporation against any claim that may be made
against it on account of the alleged loss of any such certificate, or the
issuance of any such new certificate.
Section 5. Transfer of Shares. The shares of stock of the corporation
shall be transferable only upon its books by the holders thereof or by their
duly authorized attorneys or legal representatives, and upon such transfer the
old certificates shall be surrendered to the corporation by the delivery
thereof to the person in charge of the stock transfer books and ledgers, or to
such other person as the directors may designate, by whom they shall be
canceled, and new certificates shall thereupon be issued. A record shall be made
of each transfer and whenever a transfer shall be made for collateral security,
and not absolutely, it shall be so expressed in the entry of the transfer.
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Section 6. Stockholders Record Date. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 7. Dividends. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the capital
stock of the corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the corporation available
for dividends, such sum or sums as the directors from time to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
directors shall deem conducive to the interests of the corporation.
Section 8. Seal. The corporate seal shall be circular in form and
shall contain the name of the corporation, the year of its creation and the
words "CORPORATE SEAL DELAWARE". Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or otherwise reproduced.
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Section 9. Fiscal Year. The fiscal year of the corporation shall be
determined by resolution of the Board of Directors. In the absence of such
determination, the fiscal year shall be the calendar year.
Section 10. Checks. All checks, drafts or other orders for the payment
of money, notes or other evidences of indebtedness issued in the name of the
corporation shall be signed by such officer or officers, agent or agents of the
corporation, and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
Section 11. Notice and Waiver of Notice. Whenever any notice is
required by these By-Laws to be given, personal notice is not meant unless
expressly so stated, and any notice so required shall be deemed to be
sufficient if given by depositing the same in the United States mail, postage
prepaid, addressed to the person entitled thereto at his address as it appears
on the records of the corporation, and such notice shall be deemed to have been
given on the day of such mailing. Stockholders not entitled to vote shall not
be entitled to receive notice of any meetings except as otherwise provided by
statute.
Whenever any notice whatever is required to be given under the
provisions of any law, or under the provisions of the Certificate of
Incorporation of the corporation or these By-Laws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto.
ARTICLE VI
INDEMNIFICATION
To the full extent permitted by law, the corporation shall indemnify
any person or such person's heirs, distributees, next of kin, successors,
appointees, executors, administrators, legal representatives and assigns who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
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administrative or investigative by reason of the fact that such person is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
domestic or foreign, against expenses, attorneys' fees, court costs, judgments,
fines, amounts paid in settlement and other losses actually and reasonably
incurred by such person in connection with such action, suit or proceeding.
ARTICLE VII
AMENDMENTS
These By-Laws may be altered or repealed and new By-Laws may be
adopted at any annual or special meeting of the stockholders by the affirmative
vote of a majority of the stock issued and outstanding and entitled to vote
thereat, or by the affirmative vote of a majority of the Board of Directors, at
any regular or special meeting of the Board of Directors.
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EXHIBIT C
AMENDED AND RESTATED
BYLAWS
OF
PENN OCTANE CORPORATION
(FORMERLY INTERNATIONAL ENERGY DEVELOPMENT CORPORATION)
(ADOPTED FEBRUARY 1995)
ARTICLE I
Offices
Section 1. Registered Office. The registered office of PENN OCTANE
CORPORATION (hereinafter called the "Corporation") shall be at Corporation
Trust Center, 1209 Orange Street, Wilmington, Delaware.
Section 2. Other Offices. The Corporation also may have offices at
such other place or places, within or without the State of Delaware as the
Board of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
Meetings of Stockholders
Section 1. Place of Meeting. All meetings of the stockholders of the
Corporation shall be held at such place, within or without the State of
Delaware, as may from time to time be fixed in the respective notices or
waivers of notices thereof.
Section 2. Annual Meeting. The annual meeting of the stockholders for
the election of directors and for the transaction of such other business as may
come before the meeting shall be held at such time and place as shall be
determined by the President or the Board of Directors
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and stated in the notice or the meeting. Written notice of the annual meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten (10) nor more
than sixty (60) days before the date of the meeting.
Section 3. Special Meetings. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be
called by the President or Secretary at the request in writing of a majority of
the Board of Directors, or at the request in writing of stockholders owning ten
percent (10%) or more in amount of the entire capital stock of the Corporation
issued and outstanding and entitled to vote. Such request shall state the
purpose or purposes of the proposed meeting. Written notice of a special
meeting stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called shall be given not less than ten (10)
nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting. Business transacted at any
special meeting of stockholders shall be limited to the purposes stated in the
notice.
Section 4. Notice Not Required. Notice of any meeting of stockholders
shall not be required to be given to any stockholder who shall attend such
meeting in person or by proxy, and if any stockholder shall, in person or by
attorney thereunto authorized, in writing or by telegraph, cable or telex,
waive notice of any meeting, whether before or after such meeting shall be
held, notice thereof need not be given to him. Notice of any adjourned meeting
of the stockholders shall not be required to be given, except when expressly
required by law.
Section 5. Quorum. At each meeting of the stockholders, the holders of
a majority of each class of the issued and outstanding stock of the Corporation
entitled to vote at such meeting, present either in person or by proxy, shall
constitute a quorum for the transaction of business of the Corporation. In the
absence of a quorum, a majority present in person or by
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proxy and entitled to vote, or, in the absence of all of the holders of each
class of issued and outstanding stock of the Corporation entitled to vote, any
officer entitled to preside or act as secretary at such meeting, shall have the
power to adjourn the meeting, from time to time, until the requisite number of
stockholders of each class shall be present or represented. At any such
adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally
noticed.
Section 6. Voting. At each meeting of the stockholders, every
stockholder of record of the Corporation entitled to vote at such meeting shall
be entitled to one vote within his class or classes in person or by proxy
(executed in writing by the stockholder or by his duly authorized attorney in
fact) for each share in such class or classes of stock of the Corporation
registered in his name on the books of the Corporation on the date fixed
pursuant to Section 2 of Article VI of these Bylaws as the record date for the
determination of the stockholders entitled to vote at such meeting. Shares of
its own capital stock belonging to the Corporation shall not be voted upon
directly or indirectly. At all meetings of the stockholders, all matters
(except special cases where other provision is made in the Corporation's
Certificate of Incorporation, these Bylaws, any agreement between or among the
Corporation's stockholders or by statute) to be decided by each respective
class of stockholders shall be decided by the holders of a majority of the
stock of each class, respectively, present in person or by proxy and entitled
to vote thereat, a quorum being present. Unless demanded by a stockholder
present in person or by proxy at any meeting and entitled to vote thereat, the
vote on any question need not be by ballot.
Section 7. Action by Consent. Whenever any action is required or
permitted to be taken by vote of stockholders of any class at a meeting thereof
by any provision of the statutes or of the Certificate of Incorporation or
these Bylaws or any agreement between or among the
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Corporation's stockholders, the meeting and votes of stockholders of any class
may be dispensed with if the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize to take such
action shall consent in writing to such corporate action being taken. Such
written consent may be given by any person holding a power of attorney for any
stockholder.
Section 8. Minimum Shareholder Vote. In addition to any affirmative
vote required by law or by any other provision of these Bylaws, the approval or
authorization of any of the following actions shall require the affirmative
vote of the holders of not less than half of the then issued and outstanding
shares of the Corporation's common stock:
(a) the amendment, alteration, modification or repeal of
the Articles of Incorporation or Bylaws of the
Corporation;
(b) the issuance, sale, grant, repurchase or redemption
by the Corporation of any shares of the capital
stock of the Corporation or other securities either
convertible to capital stock of the Corporation or
carrying the right to acquire capital stock of the
Corporation;
(c) the merger or consolidation of the Corporation with
any person or entity;
(d) the transfer or pledge, mortgage or grant of a
security interest or other adverse right or
encumbrance of or in all or substantially all of the
assets of the Corporation;
(e) the recapitalization of the Corporation;
(f) the removal of a director of the Corporation whether
with or without cause;
(g) incurring of any indebtedness for borrowed money or
guaranteeing the obligations of others, except for
trade payables incurred by the
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Corporation in the ordinary course of business,
accrued employee expenses, accrued taxes, reasonable
reserves for losses and other contingencies and
except for additional indebtedness in an amount not
to exceed $100,000 in any single fiscal year;
(h) the declaration, payment or making of any dividend
or distribution with respect to either shares of the
capital stock of the Corporation or other securities
either convertible to capital stock of the
Corporation or carrying the right to acquire capital
stock of the Corporation, other than as provided in
a shareholders agreement between the Corporation and
all of its shareholders;
(i) any other matter requiring the approval or
authorization of shareholders under Delaware law.
ARTICLE III
Board of Directors
Section 1. General Powers. The business and affairs of the Corporation
shall be managed by the Board of Directors, which may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by statute
or by the Certificate of Incorporation or these Bylaws or any agreement between
or among the Corporation's stockholders, directed or required to be exercised
and done by the stockholders.
Section 2. Number and Term of Office. The number of directors which
shall constitute the whole Board shall be not less than one (1) nor more than
ten (10). Until such time as the size of the Board is modified in the manner
provided below, the Board shall consist of five (5) directors. Within the
limits specified in the first sentence of this Section 2, and in the Amended
and Restated Certificate of Incorporation of the Corporation, the number of
directors
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shall be determined by resolution of the Board or by the stockholders at the
annual meeting or at any special meeting. Directors need not be stockholders.
Each director shall hold office until the annual meeting of the stockholders
next following his election or until his successor shall have been elected and
shall qualify, or until his death, or until he shall resign, or until he shall
have been removed in the manner herein provided.
Section 3. Quorum and Manner of Acting. Except as otherwise provided
by statute or by these Bylaws, a majority of the directors in office shall be
required to constitute a quorum for the transaction of business at any meeting,
and the act of a majority of the directors present at any meeting at which a
quorum is present shall be the act of the Board of Directors. In the absence of
a quorum, a majority of the directors present may adjourn any meeting from time
to time until a quorum shall be present. No notice other than announcement at
the meeting of any adjourned meeting need be given.
Section 4. Place of Meetings, etc. The Board of Directors may hold its
meetings, have one or more offices, and keep the books and records of the
Corporation at such place or places within or without the State of Delaware as
the Board from time to time may determine.
Section 5. First Meeting. The first meeting of each newly elected
Board of Directors shall be held at such time and place as shall be fixed by
the vote of the stockholders at the annual meeting, and no notice of such
meeting shall be necessary to the newly elected directors in order legally to
constitute the meeting, provided a quorum shall be present, or it may convene
at such place and time as shall be fixed by the consent in writing of all the
directors.
Section 6. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such places and at such times as the Board shall
from time to time determine. If any day fixed for a regular meeting shall be a
legal holiday at the place where the meeting is to be held, then the meeting
which otherwise would be held on that day shall be held at said place at the
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same hour on the next succeeding day not a legal holiday. Notice of regular
meetings need not be given.
Section 7. Special Meetings; Notice. Special meetings of the Board of
Directors shall be held whenever called by the President or by a majority of
the directors. Notice of each such meeting shall be mailed to each director,
addressed to him at his residence or usual place of business, at least three
(3) days before the day on which the meeting is to be held, or shall be sent to
him at such place by telegraph, facsimile, telex or cable, or be delivered
personally by telephone, not later than one day before the day upon which the
meeting is to be held. Each such notice shall state the time and place of the
meeting but need not state the purposes thereof except as otherwise herein
expressly provided. Notice of any meeting of the Board need not be given to any
director, however, if waived by him in writing or by telegraph, cable or telex,
whether before or after such meeting shall be held, or if he shall be present
at such meeting; and any meeting of the Board shall be a legal meeting without
any notice thereof having been given, if all the directors of the Corporation
then in office shall be present thereat.
Section 8. Action Without Meeting. Any action required or permitted to
be taken at a meeting of the Board of Directors may be taken without a meeting
if a consent in writing setting forth the action so taken shall be signed by
all of the members of the Board and filed with the minutes of proceedings of
the Board.
Section 9. Action by Telephone Conference. Members of the Board of
Directors or any committee designated thereby may participate in any meeting of
such Board or Committee by means of conference telephone or similar
communications equipment in which all persons participating can hear each
other. Participation in a meeting pursuant to this section shall constitute
presence in person at such meeting.
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Section 10. Resignation. Any director of the Corporation may resign at
any time by giving written notice to the President or to the Secretary of the
Corporation. The resignation of any director shall take effect at the time
specified therein; and, unless otherwise specified therein, acceptance of such
resignation shall not be necessary to make it effective.
Section 11. Removal of Directors. Any director may be removed, either
with or without cause, at any time, but such removal shall require the
affirmative vote of the holders of a majority of all of the shares of the class
of stock by whom he was elected, and the election of a director to fill the
unexpired portion of the term of any director so removed shall require a vote
of at least a majority of the outstanding shares of such class of stock of the
Corporation.
Section 12. Vacancies. Except as otherwise provided by statute or by
these Bylaws, any vacancy in the Board of Directors caused by death,
resignation, disqualification, or any other cause other than removal of
stockholders, may be filled either by a majority vote of the remaining
directors, though less than a quorum, or by the stockholders of the Corporation
entitled to vote by class thereon at the next annual meeting or at any special
meeting called for the purpose. A director elected to fill a vacancy shall be
elected for the unexpired term of his predecessor in office. Any directorship
to be filled by reason of an increase in a number of directors may be filled by
election of a majority vote of the then serving directors at any annual meeting
or at a special meeting of the class of stockholders entitled to vote called
for that purpose.
Section 13. Compensation. Directors, as such, shall not receive any
stated salary for their services, but by resolution of the Board of Directors a
fixed sum and expenses of attendance, if any, may be allowed for attendance at
each regular and special meeting of the Board. Nothing herein contained shall
be construed so as to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefore.
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Section 14. Directors' Committees. The Board of Directors may, by
resolution adopted by a majority of the directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation, which, to the extent provided in the resolution, shall have and
may exercise the powers of the Board of Directors in the management of the
business and affairs of the Corporation and may authorize the seal of the
Corporation to be affixed to all papers which may require it. Such a committee
or committees shall have such name or names as may be determined from time to
time by resolution adopted by the Board of Directors.
ARTICLE IV
Officers
Section 1. Number. The officers of the Corporation shall be a
President, one or more Vice Presidents, a Secretary, a Treasurer and such other
officers as may be appointed by the Board of Directors. In addition, the Board
of Directors may elect a Chairman. Any number of offices may be held by the
same person.
Section 2. Election and Term of Office. The officers shall be elected
annually by the Board of Directors, and each shall hold office until the next
annual election of officers and until his successor shall have been duly
elected and qualified or until his death, or until he shall resign by written
notice to the Corporation, or until he shall have been removed in the manner
hereinafter provided. A vacancy in any office because of death, resignation,
removal or for any other cause shall be filled for the unexpired portion of the
term in the manner prescribed in these Bylaws for election or appointment to
such office.
Section 3. Removal. Any officer may be removed by the vote of a
majority of the Board of Directors at a special meeting called for the purpose
whenever in the judgment of the Board of Directors the best interests of the
Corporation will be served thereby, but such removal
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shall be without prejudice to the contract rights, if any, of the person so
removed. The purpose shall be stated in a notice or waiver of notice of such
meeting unless all the directors of the Corporation shall be present thereat.
Section 4. Chairman. The Chairman of the Board of Directors, if one is
elected, shall preside at all meetings of the Board or Directors and shall have
and perform such other duties as from time to time may be assigned to the
Chairman by the Board of Directors.
Section 5. President. The President shall have direct charge of the
management of the business operations of the Corporation, subject to general
control of the Board of Directors, and shall preside at all meetings of the
Board of Directors and at all meetings of the stockholders. He shall execute
bonds, mortgages, and other contracts requiring the seal of the Corporation,
except where required or permitted by law to be otherwise signed and executed
and except where the signing and execution thereof shall be expressly delegated
by the Board of Directors to some other officer or agent of the Corporation.
Section 6. Vice Presidents. The Vice President (or, in the event that
there is more than one Vice President, the Vice Presidents in the order
designated at the time of their election, or in the absence of any delegation,
then in the order of their election) shall perform such duties as from time to
time may be assigned to him by the President or by the Board of Directors.
Section 7. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors or President, under whose supervision
he shall be. He shall have custody of the corporate seal of the Corporation and
he shall have authority to affix the same to any instrument requiring it and,
when so affixed, it may be
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attested by his signature. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his signature.
Section 8. Treasurer. If required by the Board of Directors, the
Treasurer shall give a bond for the faithful discharge of his duties, in such
sum and with such surety or securities as the Board of Directors shall
determine. The Treasurer shall keep and disburse the moneys of the Corporation,
as directed by the Board of Directors; shall keep correct books of account;
shall render to the President and to the Board of Directors at the regular
meetings thereof, or whenever requested by them, reports of financial
transactions by him and of the financial condition of the Corporation; and, in
general, shall perform all duties incident to the office of Treasurer.
Section 9. Other Officers. The Corporation may have such other
officers and agents as may be deemed necessary by the Board of Directors, who
shall be appointed in such manner, have such duties, and hold their offices for
such terms as may be determined by resolution of the Board of Directors
Section 10. Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors, and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a director of the
Corporation.
ARTICLE V
Contracts and Accounts
Section 1. Contracts, Checks, Notes, Bank Accounts, etc. All contracts
and agreements authorized by the Board or Directors, and all checks, drafts,
notes, bonds, bills of exchange and orders for the payment of money, shall be
signed by the President, or such officer or officers or employee or employees
as the Board of Directors may from time to time designate. The President, or
any other officer or employee so authorized by the Board of
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Directors, may enter into any contract or execute and deliver any contract or
other instrument in the name and on behalf of the Corporation, and such
authority may be general or confined to specific instances. Unless authorized
so to do by these Bylaws or by the Board of Directors, no officer, agent or
employee shall have any power or authority to bind the Corporation by any
contract or engagement, or to pledge its credit, or to render it liable
pecuniary for any purpose or in any amount.
Section 2. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
as the Board of Directors or the President shall direct, in such banks, trust
companies or other depositories as the Board of Directors may select or as may
be selected by any officer or officers or agent or agents of the Corporation to
whom power in that respect shall have been delegated by the Board of Directors.
For the purpose of deposit, and for the purpose of collection for the account
of the Corporation, checks, drafts and other orders for the payment of money
that are payable to the order of the Corporation may be endorsed, assigned and
delivered by any officer or agent of the Corporation.
Section 3. General and Special Bank Accounts. The Board of Directors
may from time to time authorize the opening and keeping of general and special
bank accounts with such banks, trust companies or other depositories as the
Board of Directors may select, or as may be selected by any officer or
officers, agent or agents of the Corporation to whom power in that respect
shall have been delegated by the Board of Directors. The Board of Directors may
make such special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VI
Capital Stock
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Section 1. Certificates of Stock. Every stockholder shall be entitled
to have a certificate signed by, or in the name of the Corporation by, the
President and the Secretary of the Corporation, certifying the number of shares
of stock of the Corporation owned by him. The certificate shall be sealed with
the seal of the Corporation, or a facsimile thereof. No certificate shall be
issued for any share until such share is fully paid. Each certificate
representing shares shall state that the Corporation is organized under the
laws of the State of Delaware, the name of the person to whom issued, and the
par value of each share represented by such certificate or a statement that the
shares are without par value. Such certificate shall be transferable on the
stock books of the Corporation in person or by attorney, but, except as
hereinafter provided in the case of loss, destruction or mutilation of
certificates, no transfer of stock shall be entered until the previous
certificate, if any, given for the same shall have been surrendered and
canceled.
Section 2. Closing of Transfer Books. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders,
or stockholders entitled to receive payment of any dividend, or in order to
make a determination of stockholders for any proper purpose, the Board of
Directors may provide that the stock transfer books shall be closed for a
stated period but not to exceed, in any case, sixty (60) days. If the stock
transfer books shall be closed for the purpose of determining stockholders
entitled to notice of or to vote at a meeting of stockholders, such books shall
be closed for at least ten (10) days immediately preceding such meeting. In
lieu of closing the stock transfer books, the Board of Directors may fix in
advance a date as the record for any determination of stockholders, such date
in any case to be not more than sixty (60) days, and in case of a meeting of
stockholders not less than ten (10) days, prior to the date upon which the
particular action requiring such determination of stockholders is to be taken.
If the stock transfer books are not closed and no record date is fixed for the
C-13
<PAGE>
determination of stockholders entitled to vote at a meeting thereof or to
receive payment of a dividend, the date on which notice of the meeting is
mailed or the date on which the resolution of the Board of Directors declaring
such dividends is adopted, as the case may be, shall be the record date for
such determination of stockholders.
Section 3. Lost, Destroyed or Mutilated Certificate. The Board of
Directors may direct a new certificate or certificates to be issued in place of
any certificate or certificates heretofore issued by the Corporation alleged to
have been lost, destroyed or mutilated upon the making of an affidavit of that
fact by the person claiming the certificates for shares to be lost or
destroyed. When authorizing such issuance of a new certificate or certificates,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost or destroyed certificate
or certificates, or his legal representative, to advertise the same in such
manner as it shall require, or to give the Corporation a bond in such sums as
it may direct, as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost or
destroyed.
ARTICLE VII
Dividends
Section 1. Payment of Dividends. The Board of Directors may declare
and the Corporation may pay dividends on its outstanding shares in cash,
property, or its shares pursuant to law and subject to the provisions of its
Certificate of Incorporation and Bylaws.
Section 2. Reserves. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors from time to time, in their absolute discretion,
deem proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for preparing or maintaining any property of the Corporation, or
for such other purpose as the Board of Directors shall deem conducive to the
C-14
<PAGE>
interest of the Corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
ARTICLE VIII
Seal
The Board of Directors may provide a corporate seal, which shall be in
form of a circle and shall have inscribed thereon the name of the Corporation,
the years of its organization and the state of incorporation. The seal may be
used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
ARTICLE IX
Fiscal Year
The Fiscal year of the Corporation shall be as determined by the Board
of Directors.
ARTICLE X
Amendments
Subject to the reserved power of the stockholders to make, alter and
repeal these Bylaws, these Bylaws, or any of them, may be altered, amended or
repealed, or new Bylaws may be made, at any meeting of the Board of Directors,
by vote of a majority of the Board of Directors, provided that the proposed
action in respect thereof shall be stated in the notice or waiver of notice of
such meeting or that all of the directors of the Corporation shall be present
at such meeting.
ARTICLE XI
Indemnity of Directors and Officers
The Corporation shall indemnify its directors, officers, employees and
agents and each of their respective heirs, executors and administrators, to the
full extent permitted by the Delaware General Corporation Law, as amended.
C-15
<PAGE>
I HEREBY CERTIFY that the foregoing is a full, true and correct copy
of the Bylaws of Penn Octane Corporation, a Delaware corporation, as in effect
on the first day or February, 1995.
C-16
<PAGE>
PENN OCTANE CORPORATION
This Proxy is solicited on behalf of the Board of Directors. The undersigned
hereby appoints Jerome B. Richter and Ian T. Bothwell as proxies, each with full
power of substitution, and hereby authorizes them to vote all the shares of
Common Stock of Penn Octane Corporation held of record by the undersigned on
April 18, 1997 at the Annual Meeting of Stockholders to be held on May 29,
1997, or any adjournment thereof, as designated below and, in their discretion,
on such other matters as may properly come before the Annual Meeting or any
adjournment thereof.
The Board of Directors recommends a vote FOR each of the nominees listed in
Proposal No. 1 and FOR Proposals 2, 3, 4 and 5.
1. ELECTION OF DIRECTORS
FOR all nominees listed below / / WITHHOLD Authority
to vote for all nominees listed below / /
to vote for individual nominee(s)
indicated below / /
(Instruction: To withhold authority to vote for any individual nominee strike a
line through the nominee's name in the list below.)
Jerome B. Richter, Ian T. Bothwell, Jorge R. Bracamontes, John P. Holmes,
Kenneth G. Oberman, Stewart J. Paperin and John H. Robinson
2. PROPOSAL TO APPROVE AN AMENDMENT OF THE RESTATED CERTIFICATE OF
INCORPORATION TO AUTHORIZE 5,000,000 SHARES OF A NEW CLASS OF
SENIOR PREFERRED STOCK
/ / FOR / / AGAINST / / ABSTAIN
3. PROPOSAL TO APPROVE AN AMENDMENT TO THE BY-LAWS TO ALLOW THE
BOARD OF DIRECTORS TO AMEND THE BY-LAWS AND TO TAKE CERTAIN
OTHER ACTION WITHOUT THE CONSENT OF THE SHAREHOLDERS
/ / FOR / / AGAINST / / ABSTAIN
- --------------------------------------------------------------------------------
IMPORTANT: This Proxy is continued on the reverse side. Please mark, sign
and date the reverse side and return promptly.
(continued from other side)
4. PROPOSAL TO APPROVE AND RATIFY CERTAIN TRANSACTIONS APPROVED BY THE BOARD OF
DIRECTORS.
/ / FOR / / AGAINST / / ABSTAIN
5. PROPOSAL TO RATIFY THE APPOINTMENT OF BURTON MCCUMBER &
PRICHARD, L.L.P. AS THE INDEPENDENT AUDITORS FOR PENN OCTANE
CORPORATION.
/ / FOR / / AGAINST / / ABSTAIN
6. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING
OR ANY ADJOURNMENT THEREOF.
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" THE ELECTION OF ALL NOMINEES FOR ELECTION AS DIRECTORS AND "FOR"
PROPOSALS 2, 3, 4 AND 5.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation or a
partnership, please sign in corporate or partnership name by authorized person.
DATED:_________________, 1997 --------------------------------------
PLEASE VOTE, SIGN, DATE AND Signature
RETURN THIS PROXY CARD USING
THE ENCLOSED ENVELOPE. --------------------------------------
Signature if held jointly
<PAGE>
"The following pages are the consolidated financial statements of Penn Octane
Corporation for the Fiscal Quarter Ended January 31, 1997 and the Fiscal Year
Ended July 31, 1996 which are incorporated into the Definitive Proxy Statement
by reference."
<PAGE>
Penn Octane Corporation
PART I - ITEM 1
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
ASSETS January 31, 1997
<S> <C>
Cash $ 49,469
Restricted cash 4,685
Trade accounts receivable 464,442
Inventories 745,977
Prepaid expenses 86,408
-------------
Total current assets 1,350,981
Property, plant and equipment (net of accumulated
depreciation of $1,033,660) 3,182,561
Lease rights (net of accumulated amortization of $375,063) 778,977
Other noncurrent assets 13,257
-------------
Total assets $ 5,325,776
=============
LIABILITIES & STOCKHOLDERS' EQUITY
Short-term borrowing 772,552
Current maturities of long-term debt 1,401,403
Construction accounts payable 440,021
Trade accounts payable 554,566
Accrued liabilities 615,664
-------------
Total current liabilities 3,784,206
Long-term debt 60,043
Stockholders' equity
Preferred stock-$.01 par value, 5,000,000 shares authorized;
270,000 convertible shares issued and outstanding at
January 31, 1997 2,700
Common stock-$.01 par value, 25,000,000 shares authorized;
5,205,000 shares issued and outstanding at January 31, 1997 52,050
Additional paid-in capital 5,954,566
Accumulated deficit ( 4,527,789)
--------------
Total stockholders' equity 1,481,527
-------------
Total liabilities and stockholders' equity $ 5,325,776
=============
</TABLE>
See Notes to Financial Statements
3
<PAGE>
Penn Octane Corporation
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31, January 31, January 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 13,513,164 $ 6,716,715 $ 16,059,657 $ 12,273,507
Cost of goods sold 12,728,248 6,327,356 15,481,213 11,592,906
------------ ------------ ------------ ------------
Gross profit 784,916 389,359 578,444 680,601
Selling, general and administrative expenses 466,011 402,947 893,200 728,924
------------ ------------ ------------ ------------
Operating income (loss) 318,905 (13,588) (314,756) (48,323)
Other income (expense)
Interest income (expense) (69,879) (63,501) (123,506) (117,862)
------------ ------------ ------------ ------------
Net income (loss) before taxes 249,026 (77,089) (438,262) (166,185)
Provision for income taxes 0 0 0 0
------------ ------------ ------------ ------------
Net income (loss) 249,026 $ (77,089) $ (438,262) $ (166,185)
============ ============ ============ ============
Earnings (loss)
per common share $ .04 $(.02) $ (.08) $ (.03)
============ ============ ============ =============
Weighted average common
shares outstanding 5,205,000 5,085,000 5,205,000 5,082,283
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
4
<PAGE>
Penn Octane Corporation
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31, January 31, January 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) $ 249,026 $ (77,089) $(438,262) $(166,185)
Adjustments to reconcile net loss to net cash
provided by (used in) operating
activities:
Depreciation and Amortization 140,094 173,299 283,963 341,820
Changes in current assets and liabilities
Restricted cash 495,315 0 (4,685) 0
Trade accounts receivable (117,959) (75,985) (432,560) (96,191)
Interest receivable 0 134 26,233 273
Note receivable 0 0 0 100,000
NPEG note 0 0 0 190,843
Inventories 55,574 (94,661) (300,926) (94,661)
Prepaids and other current assets (1,579) 1,229 (19,289) 52,567
Construction and accounts payable (750,338) 74,217 101,422 (56,370)
Advances from and to related party (net) 0 (8,225) 0 (47,360)
Accrued liabilities (9,803) (47,942) 64,753 (49,306)
Other assets and liabilities, net (7,836) 0 (7,836) 0
---------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 52,494 (55,023) (727,187) 175,430
Cash flows from investing activities
Capital expenditures (25) 247 (5,400) (70,833)
Other 0 8,759 0 7,529
---------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (25) 9,006 (5,400) (63,574)
Cash flows from financing activities:
Short-term borrowing 0 0 100,000 (160,000)
Long-term debt borrowing 0 (2,325) 325,000 (3,842)
Reduction in long-term debt (3,000) 0 (7,469) 0
Increase (decrease) in bank overdraft 0 22,919 0 2,942
---------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (3,000) 20,574 417,531 (160,900)
Net increase (decrease) in cash 49,469 (25,423) 315,056 (49,044)
Cash at beginning of period 0 31,165 364,525 56,786
---------- ----------- ----------- -----------
Cash at end of period $ 49,469 $ 7,742 $ 49,469 $ 7,742
============== ========== =========== ---========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The balance sheet as of January 31, 1997, the statements of operations,
and statements of cash flows for the three and six months ended January
31, 1997 and 1996 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
January 31, 1997 and the results of operations and cash flows for the
three and six months ended January 31, 1997 and 1996.
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, 1996 and Form 10-QSB for the quarter ended October 31, 1996.
Certain reclassifications have been made to prior year balances to
conform to the current presentation. All reclassifications have been
applied consistently to the periods presented.
2. Earnings (Loss) per Common Share
Earnings (loss) per share of common stock is computed based on the
weighted average number of shares outstanding after giving effect to
common stock equivalents. Fully diluted earnings (loss) per share of
common stock assumes the conversion of preferred stock and is only
presented in periods where such computation results in dilution greater
that 3% of primary earnings (loss) per share of common stock.
3. Commitments and Contingencies
During 1994, the Company entered into discussions with International
Bank of Commerce-Brownsville, a Texas state banking association (IBC),
for a proposed letter of credit, term loan, and working capital
financing. In anticipation of receiving funding, the Company executed
various documents including a Security Agreement dated July 1, 1994,
assigning and granting to IBC a security interest in substantially all
of the Company's business and assets, including its pipeline lease
agreement, its leased land at the Port of Brownsville, its terminal
facilities and related equipment, inventories and all contracts and
accounts receivable.
Beginning July 1, 1994, IBC advanced to the Company directly or made
payments directly to certain of the Company's creditors a total of
$1,507,552 against the collateral. On August 5, 1994, IBC notified the
Company that it would not honor certain of the Company's checks but
would continue to honor its irrevocable letters of credit issued on
behalf of the Company.
On August 24, 1994 the Company filed an Original Petition and
Application for Injunctive Relief against IBC seeking: (1) either
enforcement of a credit facility between the Company and IBC or a
release of the Company's collateral consisting of significantly all of
the Company's business and
6
<PAGE>
assets; (2) declaratory relief with respect to the credit facility; and
(3) an award for damages and attorney's fees.
In response to the Company's request for injunctive relief, IBC 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 to
resolve all of the Company's claims against IBC in final arbitration.
The arbitration was conducted through the American Arbitration
Association, Commercial Arbitration No. B 70 148 0133 94 A.
On November 3, 1994, IBC filed a Responsive Pleading in Arbitration
alleging that there was no loan agreement between the Company and IBC.
In addition, IBC requested that the arbitrators declare that IBC was
not liable to the Company as alleged, and that IBC was entitled to an
award of $25,000,000 for Business Disparagement/Defamation and
$100,000,000 in Punitive Damages plus reasonable attorney's fees.
On November 7, 1994, the Company and IBC agreed to a partial release of
certain collateral (accounts receivable) after the Company made
cumulative payments through that date to IBC totaling $800,000. The
remaining unpaid balance to IBC at that date totaled $672,552,
excluding interest ($30,448) and fees ($39,853).
On May 5, 1995, IBC filed a First Amended Responsive Pleading in
Arbitration again alleging there was no loan agreement between the
Company and IBC and requesting damages in excess of $750,000 plus
$3,500,000 for Business Disparagement/Defamation plus an amount of
Punitive Damages to be determined by the trier of fact.
The arbitration hearing, held before a panel of three neutral
arbitrators, commenced on July 19, 1995, and concluded on August 2,
1995. On October 10, 1995, the Company received notification of the
Award of Arbitrators (Award) which called for IBC to pay to the Company
the sum of (a) $3,246,754 for Breach of Contract and (b) attorneys'
fees of $568,000. In addition, the Award stated that IBC was entitled
to an offset of (a) the sum of $804,016 and (b) attorneys' fees of
$200,000 on IBC's counterclaim against the Company for Breach of
Contract. Both parties' awards accrue post-award interest at 9.75%
compounded annually.
On February 28, 1996, after hearing and 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-
7
<PAGE>
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
(principal and interest). 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.
On April 18, 1996, the Company reached agreement to accept $400,000 to
settle a lawsuit it filed in October 1995 against a bank related to
IBC-Brownsville (related Bank). As part of the settlement agreement,
the parties executed mutual releases from future claims related to the
IBC-Brownsville litigation. Additionally, the defendant provided an
indemnity agreement to the Company against future claims from
IBC-Brownsville. The amount is recorded in the statement of operations
for the year ended July 31, 1996.
On June 26, 1996, IBC-Brownsville filed 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 Company's
judgment against them prevented them 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 which
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. The Company believes the case to
be frivolous and is a breach of the settlement agreement entered into
with the related Bank. Further, the Company believes this cause of
action is covered by an indemnity agreement from that related Bank.
In connection with the IBC-Brownsville suit, IBC-Brownsville filed an
appeal with the Texas Court Of Appeals on January 21, 1997. The Company
responded on February 14, 1997.
4. Purchase Commitment
On September 26, 1996, the Company entered into a Term Sale Agreement
with its main propane supplier. The agreement is for a one year period
beginning on October 1, 1996. The terms of this agreement, such as
pricing and volumes, mirror the terms of the Company's sales agreement
with its major customer.
5. Letters of Credit
In January of 1996, the Company obtained a standby letter of credit in
favor of a propane supplier. The standby letter of credit was for
$40,000 and expired December 1, 1996. In August of 1996,
8
<PAGE>
the Company obtained a $40,000 standby letter of credit for another
supplier. The letter of credit expired on September 30, 1996.
In accordance with the purchase commitment discussed above, in
September of 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,
accrues interest at the prime rate (8.25% as of October 31, 1996) plus
3%, and is guaranteed by the Company's president.
On November 5, 1996, the Company's main propane supplier presented for
payment $495,315.10, which was paid through the initial collateral
deposit. As a result of the this draw down, the balance available under
the letter of credit remained $625,000, and $4,685 represented the
remaining balance of the collateral deposit. In early March 1997, the
letter of credit and collateral was released.
In December 1995, the Company obtained a revolving line of credit for
$140,000 which was renewed in December 1996 through September 30, 1997.
Interest is calculated on this credit line at the prime rate (8.25%
during the six months ended January 31, 1997) plus 3%. At January 31,
1997, the outstanding balance was $100,000, which is reflected in
short-term borrowings.
6. Long-term debt
During October, 1996, the Company issued 6.5 units in a private
placement totaling $325,000 (the "Units"). Each Unit consists of (i) a
Promissory Note and (ii) Common Stock Purchase Warrants (the
"Warrants") to purchase Fifty Thousand (50,000) Shares of Common Stock
(the "Common Stock") of the Company at an exercise price of $3.00 per
share.
The Promissory Notes accrue interest at 10% annually and are payable on
November 7, 1997 (the "Payment Date"). In the event the Company
receives in excess of two hundred fifty thousand ($250,000) dollars in
connection with any offering of its securities prior to the Payment
Date, the Company shall utilize up to one-half of the proceeds from
such sale to satisfy the Promissory Note. In the event such payment
does not fully satisfy the Promissory Note, the Company shall pay the
balance due on the Payment Date.
7. Compressed Natural Gas:
Wilson Acquisition Corporation
In connection with the Company's plans to enter the compressed natural
gas ("CNG") refueling business, on March 7, 1997, Wilson Acquisition
Corporation ("WAC"), a newly formed wholly-owned subsidiary of the
Company, and Wilson Technologies Incorporated. ("Wilson"), a leading
supplier of CNG refueling stations which is engaged in the business of
selling, designing, manufacturing, installing and servicing CNG
refueling stations and related products for use in the CNG industry
throughout the world, had entered into a Interim Operating Agreement
("Arrangement"). Under the terms of the Arrangement, effective as of
February 17, 1997, WAC will be granted the right to use the Wilson
name, technology and employees, subject to certain restrictions, as
well as rights to perform contracts which Wilson has currently not
begun to perform, in exchange for monthly payments of $84,000, and
royalty payments of 5% on gross
9
<PAGE>
revenues. WAC will be entitled to all revenues earned by WAC and by
certain businesses of Wilson commencing as of February 17, 1997. In
addition, Zimmerman Holdings Inc. ("ZHI"), the parent of Wilson, has
agreed to reimburse the Company for 50% of the net operating cash
deficit of WAC, if any. WAC will also be entitled to use the Wilson
premises as well as available inventory of Wilson in carrying out the
business at a price of cost plus 10%. The Arrangement will terminate 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 is not
completed within 90 days, the Arrangement may be extended by WAC for up
to three years.
Simultaneously with Arrangement, the Company, WAC, Wilson and ZHI
entered into a purchase agreement (the "Acquisition"), whereby WAC will
acquire certain assets, including trademarks and licenses, and certain
ongoing businesses of Wilson, including Wilson's Canadian and Mexican
subsidiaries, in exchange for the assumption of certain liabilities, a
$3 million contingent royalty note of WAC, a note based upon certain
operating expenses issued by WAC and a $220,000 convertible debenture
issued by the Company. The Acquisition is subject to several
conditions, including obtaining satisfactory restructuring of all of
Wilson's creditor obligations involving the consent of such creditors
to the proposed Acquisition.
Dina Dealership
In November 1996, the Company acquired the right to a Dina dealership
(the "Dealership") which was conditionally granted to Mr. Roberto
Keoseyan ("Keoseyan") by Grupo Dina, S.A. de C.V., one of the largest
bus and truck manufacturers in Mexico. In connection with the
acquisition, the Company agreed to make certain monthly payments to
Keoseyan and has agreed to issue Keoseyan 100,000 warrants in the
common stock of the Company once the Dealership has been officially
granted to the Company.
8. Equity
Warrant Exchange
During February 1997, the Company and certain prior officers the
("Officers") of the Company agreed to an exchange offer whereby the
Officers, on a weighted average basis, received newly issued shares of
the Company's common stock in exchange for outstanding warrants
tendered (the "Exchange"). As a result of the Exchange, the Company
will issue a total of 164,286 shares of its common stock in exchange
for receipt of 702,856 warrants.
10
<PAGE>
Penn Octane Corporation
BALANCE SHEETS
July 31,
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------------- --------------
<S> <C> <C>
Current Assets
Cash $ 364,525 $ 56,786
Trade accounts receivable 29,463 --
Notes receivable from stockholder (note C) -- 100,000
Amount due from NPEG under Settlement
Agreement (note M) -- 779,957
Interest receivable (note C) 26,233 26,728
Inventory (note B1) 445,051 373,295
Prepaid expenses 47,461 15,543
Other Current Assets 349 133,589
------------- -------------
Total current assets 913,082 1,485,898
Property, plant and equipment - net
(notes B2 and D) 3,395,150 3,357,736
Lease rights (net of accumulated amortization of
$317,361 and $201,957) (note B2) 836,679 952,082
Other noncurrent assets (notes B2, C and E) 45,421 363,671
------------- -------------
Total assets $ 5,190,332 $ 6,159,387
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Penn Octane Corporation
BALANCE SHEETS - CONTINUED
July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
--------------- --------------
<S> <C> <C>
Current Liabilities
Bank Overdraft $ -- $ 133,133
Amount due factor (note N) -- 160,000
Short-term borrowings (notes F and L) 672,552 672,552
Current maturities of long-term debt (note I) 83,871 87,558
Construction payables (note H) 609,107 1,530,445
Accounts payable - trade 284,057 564,026
Advances from related parties (note C) -- 67,977
Accrued liabilities 560,912 523,190
----------- -----------
Total current liabilities 2,210,499 3,738,881
Long-term debt, net of current maturities (note I) 1,060,044 94,609
----------- -----------
Total liabilities 3,270,543 3,833,490
Commitments and contingencies (Notes C and L) -- --
Stockholders' Equity (notes J and K)
Preferred stock-$.01 par value, 5,000,000 shares
authorized; 270,000 convertible shares issued
and outstanding at July 31, 1996 and 1995 2,700 2,700
Common stock-$.01 par value, 25,000,000
shares authorized; 5,205,000 and 5,065,000
shares issued and outstanding at July 31, 1996
and 1995, respectively 52,050 50,650
Additional paid-in capital 5,954,565 5,637,965
Accumulated deficit ( 4,089,526) ( 3,365,418)
----------- -----------
Total stockholders' equity 1,919,789 2,325,897
----------- -----------
Total liabilities and stockholders' equity $ 5,190,332 $ 6,159,387
=========== ===========
</TABLE>
2
<PAGE>
Penn Octane Corporation
STATEMENTS OF OPERATIONS
Years ended July 31,
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Sales (note A) $26,270,673 $14,787,467
Cost of sales 24,978,265 14,615,431
---------- ----------
Gross profit 1,292,408 172,036
Selling, general and administrative expenses 2,237,402 1,854,600
---------- ----------
Operating loss (944,994) (1,682,564)
Gain on sale of option (note M) 10,886 722,212
Award from litigation (note L) 400,000 -
Other income 65,447 -
Interest expense, net ( 255,447) (1,087,137)
----------- -----------
Net loss $( 724,108) $(2,047,489)
=========== ==========
Loss per common share (note B4) $( 0.14) $( 0.47)
========== ==========
Weighted average common shares outstanding 5,130,191 4,340,632
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Penn Octane Corporation
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended July 31, 1995 and 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at August 1, 1994 300,000 $ 3,000 3,750,000 $ 37,500
Issuance of common stock on
September 29, 1994 to
stockholder for partial payment on
promissory note 300,000 3,000
Issuance of common stock on
January 31, 1995 to stockholder
for payment on promissory note
300,000 3,000
Issuance of common stock on
March 1, 1995 for cancellation of
commission agreement
200,000 2,000
Issuance of common stock on
April 12, 1995 to stockholder in
exchange for note 150,000 1,500
Issuance of common stock on
April 19, 1995 to stockholder in
exchange for note 100,000 1,000
Conversion of 30,000 shares of
preferred stock to 100,000 shares
of common stock on May 15,
1995 (30,000) ( 300) 100,000 1,000
Issuance of common stock on July
5, 1995 in exchange for note 165,000 1,650
Net loss for the year - - - -
------- ---------- --------- ----------
Balance at July 31, 1995 270,000 2,700 5,065,000 50,650
Issuance of 40,000 shares of common
stock for services and settlement
of an accrued liability and grant
of 530,000 warrants for services 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
Net loss for the year - - - -
------- ---------- --------- ----------
Balance at July 31, 1996 270,000 $ 2,700 5,205,000 $ 52,050
======= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Additional Retained Total
paid-in earnings Stockholders'
capital (deficit) Equity
------- --------- ------
<S> <C> <C> <C>
Balance at August 1, 1994 $ 3,019,500 $( 1,317,929) $ 1,742,071
Issuance of common stock on
September 29, 1994 to
stockholder for partial payment on
promissory note 671,137 674,137
Issuance of common stock on
January 31, 1995 to stockholder
for payment on promissory note
724,178 727,178
Issuance of common stock on
March 1, 1995 for cancellation of
commission agreement
398,000 400,000
Issuance of common stock on
April 12, 1995 to stockholder in
exchange for note 298,500 300,000
Issuance of common stock on
April 19, 1995 to stockholder in
exchange for note 199,000 200,000
Conversion of 30,000 shares of
preferred stock to 100,000 shares
of common stock on May 15,
1995 ( 700) -
Issuance of common stock on July
5, 1995 in exchange for note 328,350 330,000
Net loss for the year - ( 2,047,489) ( 2,047,489)
----------- ------------- ------------
Balance at July 31, 1995 5,637,965 ( 3,365,418) 2,325,897
Issuance of 40,000 shares of common
stock for services and settlement
of an accrued liability and grant
of 530,000 warrants for services 192,600 193,000
Issuance of common stock upon
exercise of warrants on February
16, 1996 in exchange for future
legal services 124,000 125,000
Net loss for the year - ( 724,108) ( 724,108)
----------- ------------- ------------
Balance at July 31, 1996 $ 5,954,565 $ (4,089,526) $ 1,919,789
=========== ============= ============
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
Penn Octane Corporation
STATEMENTS OF CASH FLOWS
Years ended July 31,
<TABLE>
<CAPTION>
1996 1995
--------------------- -------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net loss $ (724,108) $ (2,047,489)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 414,412 378,431
Amortization of lease rights and other non-current assets 656,807 173,940
Gain on sale of option (10,886) (722,212)
NPEG interest - (79,957)
Changes in current assets and liabilities:
Trade accounts receivable (29,463) 474,885
Interest receivable 495 7,208
Inventories (71,756) 57,208
Prepaid expenses (19,918) 169,321
Other current assets 133,240 (123,501)
Construction and accounts payable (1,201,307) (601,402)
Advances from and to related party (net) (67,977) (140,353)
Accrued liabilities 112,722 350,620
------------ -------------
Net cash used in operating activities (807,739) (2,103,301)
Cash flows from investing activities:
NPEG note 790,843 300,000
Capital expenditures (451,826) (78,518)
Note receivable from stockholder 100,000 500,000
Other 7,846 12,874
------------ -------------
Net cash provided by investing activities 446,863 708,608
Cash flows from financing activities:
Proceeds from:
Long-term borrowing 1,000,000 ( 8,566)
Issuance of common stock - 2,231,315
Used for:
Short-term borrowing (160,000) (808,482)
Long-term, borrowing (38,252) -
Increase (decrease) in bank overdraft (133,133) 37,212
------------ -------------
Net cash provided by financing activities 668,615 1,451,479
Net increase in cash 307,739 56,786
Cash at beginning of period 56,786 -
------------ -------------
Cash at end of period $ 364,525 $ 56,786
============ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 308,458 $ 827,400
============ ============
Supplemental disclosures of non cash transactions:
Common Stock issued (Note J) $ 318,000 $ 400,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE A - ORGANIZATION
Penn Octane Corporation (the Company), was formerly International Energy
Development Corporation (IEDC) and The Russian Fund, a Delaware corporation
which was incorporated on August 27, 1992. On October 2l, 1993, IEDC
acquired Penn Octane Corporation, a Texas corporation, (POC) whose primary
asset was a liquid petroleum gas (LPG) pipeline lease agreement with
Seadrift Pipeline Corporation, a subsidiary of Union Carbide Corporation.
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. A significant portion
of the sales volume since inception has been to one major customer. This
customer purchases LPG at the Company's terminal in Brownsville, Texas
where the customer transports the LPG across the border for distribution
throughout northeastern Mexico.
The Company was in the "development stage" until the business was
established and planned principal operations commenced during the year
ended July 31, 1995.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
1. Inventory
Inventory is stated at the lower of cost or market. Cost is determined on a
weighted average basis. Inventory consists of propane and butane gas.
2. Property, Plant and Equipment, Lease Rights and Consulting Services
Contract
Property, plant and equipment are recorded at cost. All automobile,
equipment and trailers are depreciated using the straight-line method based
on their estimated useful lives and the LPG terminal is being amortized
over the life of the pipeline lease as follows:
LPG terminal, building and leasehold
improvements 10 years
Automobile 3 years
Equipment 3-5 years
Trailers 8 years
6
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
2. Property, Plant and Equipment Lease Rights and Consulting Services
Contract
- Continued
The lease rights are being amortized over 10 years. Consulting and service
contracts are being amortized as follows:
Consulting services (see note C) 41 - 48 months
Financial advisory services (see note E) 12 months
Legal services 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 Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Live Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121),
to be effective for fiscal years beginning after December 15, 1995. The
provisions of SFAS 121 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 should be charged to operations. The application
of the new standard is not expected to have a material effect on the
Company's financial position as of July 31, 1997, or the results of its
operations for the year then ended.
3. Income Taxes
The Company accounts for deferred taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). 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 the installment method of accounting for the sale of certain assets.
4. Loss Per Common Share
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.
7
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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, liabilities,
revenues and expenses. Actual results could differ from the estimates and
assumptions used.
7. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107) 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
amount of cash, cash equivalents, current receivables and payables and
long-term debt approximates fair value because of the short maturity of
these instruments.
8. Reclassifications
Certain reclassifications have been made to prior year balances to conform
to the current presentation. All reclassifications have been applied
consistently to the periods presented.
NOTE C - RELATED PARTIES
Directors, Officers and Shareholders
During the year ended July 31, 1996, POC made advances to, and received
advances from, three of the Company's nine directors. At July 31, 1995, the
Company owed $19,762 to a director of the Company. As of July 31, 1996, a
director owed the Company a balance of $26,233 for interest on notes that
the Company made to the director's related businesses. All previous loans
and receivables from the director have been settled except for the interest
receivable referred to above. The amount of $19,249 owed to two directors
as of July 31, 1995, was repaid by March 1996.
In March 1996 and April 1996, the Company received $500,000 loans from two
shareholders. The notes bear interest at 10%, and have accrued interest of
$20,833 and $15,000, respectively. No payments have been made as of July
31, 1996 (see note I).
8
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE C - RELATED PARTIES - Continued
Directors, Officers and Shareholders - Continued
In addition, the advances of $6,866 and $22,100 owed to two shareholders as
of July 31, 1995, were settled in August 1995; and the $100,000 receivable
from a shareholder for the purchase of common stock as of July 31, 1995,
was collected in August 1995.
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 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.
The consulting firm was paid commissions of $0 and $182,667 for the years
ended July 31, 1996 and 1995, respectively.
On July 31, 1996, the Company determined that no future benefit would be
derived from the consulting services contract; therefore, the remaining
balance was charged to operations.
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of July 31,:
1996 1995
------------- --------------
Building $ 173,500 $ 173,500
LPG terminal 3,426,440 3,357,807
Automobile and equipment 407,020 73,827
Leasehold improvements 220,629 170,629
------------ ------------
4,227,589 3,775,763
Less: accumulated depreciation and (832,439) (418,027)
amortization ------------ ------------
$ 3,395,150 $ 3,357,736
============ ============
9
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE E - 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.
At 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,:
1996 1995
------------ --------------
Consulting services $ - $ 400,000
Accumulated amortization - ( 58,536)
Other noncurrent assets 45,421 22,207
---------- -----------
$ 45,421 $ 363,671
========== ===========
NOTE F - SHORT-TERM BORROWING
The Company had short-term borrowings of $672,552 from International Bank
of Commerce-Brownsville as of July 31, 1996 and 1995, respectively (see
note L).
10
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE G - INCOME TAXES
At July 31, 1996, the approximate amount of net operating loss
carryforwards and expiration dates for U.S. income tax purposes were as
follows:
Expiration date of Loss Tax Loss
Carryforward Carryforward
----------------------- --------------
2009 $ 930,000
2010 2,370,000
------------
$ 3,300,000
Deferred tax assets and liabilities were as follows as of July 31,:
<TABLE>
<CAPTION>
1996 1995
----------------------------- ---------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation of premises and $ 20,000 $ - $ 14,000 $ -
equipment
Capitalized start-up costs 5,000 - 7,000 -
Installment sale of NPEG option - - - 160,000
Bad debt reserve 11,000 - - -
Amortization of professional fees 112,000 - - -
Deferred compensation expense 12,000 - - -
Net operating loss carryforward 1,122,000 - 1,220,000 -
--------- --------- ---------- ---------
1,282,000 - 1,241,000 160,000
Less: valuation allowance 1,282,000 - 1,081,000 -
--------- --------- ---------- ---------
$ $ - $ 160,000 $ 160,000
========== ========= ========== =========
</TABLE>
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.
11
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE H - 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. 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. 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 made a balloon payment on August 15, 1996, for the remaining balance
due. 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 will execute a
promissory note for the remaining balance due. In addition, the Company
will provide 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. If the entire amount
due Lauren and Janik is not paid by April 14, 1997, the Company would be
considered to be in breach of the agreement and the interest rate would
escalate to 18% or the maximum rate allowed by law, whichever is lower.
12
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE I - LONG-TERM DEBT
Long-term debt consists of the following at July 31,:
<TABLE>
<CAPTION>
1996 1995
------------------------ -----------------------
<S> <C> <C>
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 (a) $ 143,915 $ 173,500
Automobile loan; due in monthly payments of $831,
including interest at 10.5%; paid in June 1996 - 8,667
Subordinate note with warrants to purchase 50,000
shares of common stock at $5.00 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 500,000 -
Subordinate note with warrants to purchase 50,000
shares of common stock at $5.00 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 a judgment or
settlement of litigation 500,000 -
----------- -----------
1,143,915 182,167
Current Maturities 83,871 87,558
----------- -----------
$ 1,060,044 $ 94,609
=========== ===========
</TABLE>
(a) The first scheduled payment of $22,469 toward the purchase of the building
was made in May 1996. Six monthly payments of $3,000 made beginning in
February 1996, apply toward the second semi-annual payment. This payment
schedule of $3,000 per month was approved by Brownsville Navigation
District.
Schedules maturities are as follows:
Year ending July 31,
1997 $ 83,871
1998 1,038,850
1999 21,194
$1,143,915
In December 1995, the Company obtained a revolving line of credit for $140,000
expiring on December 10, 1996. Interest is calculated on this credit line at the
prime rate (8.25% in September 1996) plus 3%. At July 31, 1996, the Company did
not have a balance outstanding.
13
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE J - STOCKHOLDERS' EQUITY
On September 18, 1993, the Company entered into a private placement
offering for the sale of 150,000 shares of its $.01 par value, 11 %
convertible non-cumulative, non-voting preferred stock at a purchase price
of $10.00 per share. The preferred stock will pay semi-annual dividends
upon declaration and will be convertible, at the option of the holder for a
period of 5 years, into common voting shares of the Company at a conversion
ratio of one share of preferred stock for 3.33 shares of common stock. Upon
the expiration of the 5 year conversion period, the remaining preferred
stock will automatically be converted into common shares under the
aforementioned terms. The preferred stock is not redeemable by the Company.
On September 29, 1994, the Company agreed to issue 300,000 common shares at
approximately $2.25 per share in exchange for partial payment on an
existing promissory note with a shareholder.
On January 31, 1995, the Company agreed to issue 300,000 common shares at
approximately $2.42 per share in exchange for full payment on an existing
promissory note with a shareholder.
Effective March 1, 1995, the Company agreed to issue 200,000 common shares
at $2.00 per share to the Company's sales agent in exchange for canceling
the original agreement which will expire June 30, 1998. The value assigned
to the commission agreement was being amortized over the life of the
original agreement (see notes C and E).
On April 12, 1995, and April 19, 1995, the Company issued 150,000 and
100,000 common shares, respectively, at $2.00 per share to two existing
shareholders in exchange for subscription agreements that were paid in full
during May 1995.
On May 15, 1995, one shareholder converted 30,000 preferred shares to
100,000 common shares.
On July 5, 1995, the Company issued 165,000 common shares at $2.00 per
share to a new shareholder in exchange for promissory notes that were paid
in full as of August 23, 1995.
14
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE J - STOCKHOLDERS' EQUITY - Continued
On August 25, 1995, the Board of Directors agreed to issue 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 will receive a "cash success" fee and common stock
warrants based on capital raised (see note E).
On February 16, 1996, the Board of Directors agreed to allow the holder of
100,000 of the Company's $1.25 per share warrants to convert the warrants
into common stock in exchange for a three year retainer contract for future
legal fees (see note E).
On February 26, 1996, the Board of Directors granted 330,000 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 Board of Directors granted 200,000 warrant to the
new Chairman of the Board to purchase 200,000 shares of common stock for
$2.50 per share through February 29, 2000.
On July 16, 1996, the Board of Directors agreed to issue 20,000 shares of
common stock as settlement for consulting services previously accrued
during the year ended July 31, 1995.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), 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 nonemployees. The Company adopted this standard
during the year ended July 31, 1996.
15
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE K - STOCK WARRANTS
The following is a summary of common stock warrants outstanding:
<TABLE>
<CAPTION>
Price Per Expiration
Shares Share Date
----------- ------------ ----------
<S> <C> <C> <C>
Class A Granted
August 27, 1992 1,000,000 $ 1.25 April 13, 1997
----------- ------------
Outstanding at
July 31, 1993 1,000,000 1.25
Class A Granted
October 21, 1993 150,000 1.25 October 21, 1996
Class A Granted
April 14, 1994 340,000 1.25 April 13, 1998
Class A 2 for 1 split
June 10, 1994 1,490,000 1.25
----------- ------------
Outstanding at
July 31, 1994 2,980,000 1.25
Class A Granted
July 5, 1994 215,000 2.50 August 31, 1998
Class A Granted
November 14, 1984 255,000 2.50 April 13, 1997
Class B Granted
January 6, 1995 50,000 7.50 October 31, 1997
Class A Granted
May 1, 1995 450,000 2.50 May 1, 1998
----------- ------------
Outstanding at
July 31, 1995 3,950,000 1.25 - 7.50
</TABLE>
16
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE K - STOCK WARRANTS - Continued
<TABLE>
<CAPTION>
Price Per Expiration
Shares Share Date
----------- ------------ -----------------
<S> <C> <C> <C>
Class A Granted
April 12, 1995;
Issued
September 14, 1995 200,000 2.50 May 31, 1999
Class A exercised ( 100,000)
February 16, 1996 1.25
Class A Granted
February 26, 1996 330,000 2.50 February 8, 2000
Class A Granted
February 26, 1996 200,000 2.50 February 29, 2000
Class A Granted
June 6, 1996 50,000 5.00 February 28, 2001
Class A Granted
June 6, 1996 50,000 5.00 April 11, 2001
----------- ------------
Outstanding at
July 31, 1996 4,680,000 $1.25 - $7.50
=========== ============
</TABLE>
17
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE L - COMMITMENTS AND CONTINGENCIES
Bank Litigation
During 1994, the Company entered into discussions with International Bank
of Commerce-Brownsville, a Texas state banking association, (IBC) for a
proposed letter of credit, term loan, and working capital financing. In
anticipation of receiving funding, the Company executed various documents
including a Security Agreement dated July 1, 1994, assigning and granting
to IBC a security interest in significantly all of the Company's business
and assets, including its pipeline lease agreement, its leased land at the
Port of Brownsville, its terminal facilities and related equipment,
inventories and all contracts and accounts receivable.
Beginning July 1, 1994, IBC advanced the Company directly or made payments
directly to certain of the Company's creditors a total of $1,507,552
against the collateral. On August 5, 1994, IBC notified the Company that it
would not honor certain of the Company's checks but would continue to honor
its irrevocable letters of credit issued on behalf of the Company.
On August 24, 1994, the Company filed an Original Petition and Application
for Injunctive Relief against IBC seeking 1) either enforcement of the
credit facility between the Company and IBC 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's fees.
In response to the Company's request for injunctive relief, IBC 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 to resolve
all of the Company's claims against IBC in final arbitration. The
arbitration was conducted through the American Arbitration Association,
Commercial Arbitration No. B 70 148 0133 94 A.
On November 3, 1994, IBC filed a Responsive Pleading in Arbitration
alleging that there was no loan agreement between the Company and IBC. In
addition, IBC requested that the arbitrators declare that IBC was not
liable to the Company as alleged, and that IBC was entitled to an award of
$25,000,000 for Business Disparagement/Defamation and $100,000,000 in
Punitive Damages plus reasonable attorney's fees.
On November 7, 1994, the Company and IBC agreed to a partial release of
certain collateral (accounts receivable) after the Company made cumulative
payments through that date to IBC totaling $800,000. The remaining unpaid
balance to IBC at that date totaled $672,552, excluding interest ($30,448)
and fees ($39,853). The release allowed the Company to obtain the accounts
receivable financing discussed in note N.
On May 5, 1995, IBC filed a First Amended Responsive Pleading in
Arbitration again alleging there was no loan agreement between the Company
and IBC and requesting damages in excess of $750,000 plus $3,500,000 for
Business Disparagement/Defamation plus an amount of Punitive Damages to be
determined by the trier of fact.
18
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE L - COMMITMENTS AND CONTINGENCIES - Continued
The arbitration hearing, held before a panel of three neutral arbitrators,
commenced on July 19, 1995, and concluded on August 2, 1995. On October 10,
1995, the Company received notification of the Award of Arbitrators (Award)
which called for IBC to pay to the Company the sum of (a) $3,246,754 for
Breach of Contract and (b) attorneys' fees of $568,000. In addition, the
Award stated that IBC was entitled to an offset of (a) the sum of $804,016
and (b) attorney's fees of $200,000 on IBC's counterclaim against the
Company for Breach of Contract. Both parties' awards accrue post-award
interest at 9.75% compounded annually.
On February 28, 1996, after hearing and 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 the 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 ordered that International Energy Development
Corporation n/k/a Penn Octane Corporation shall have and recover from
International Bank of Commerce Brownsville attorney's 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 attorney's 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
the time IBC-Brownsville has exhausted all appeals.
19
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE L - COMMITMENTS AND CONTINGENCIES - Continued
On April 18, 1996, the Company reached agreement to accept $400,000 to
settle a lawsuit it filed in October 1995 against a bank related to
IBC-Brownsville (related Bank). As part of the settlement agreement, the
parties executed mutual releases from future claims related to the
IBC-Brownsville litigation. Additionally, the defendant provided an
indemnity agreement to the Company against future claims from
IBC-Brownsville. The amount is recorded in the statement of operations for
the year ended July 31, 1996.
On June 26, 1996, IBC-Brownsville filed 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 Company's judgment against them prevented
them 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 which 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. The Company believes
the case to be frivolous and is a breach of the settlement agreement
entered into with the related Bank. Further, the Company believes this
cause of action is covered by an indemnity agreement from that related
Bank.
Purchase Commitment
On September 26, 1996, the Company entered into a Term Sale Agreement with
its main propane supplier. The agreement is for a one year period beginning
on October 1, 1996. The terms of this agreement, such as pricing and
volumes, mirror the terms of the Company's sales agreement with its major
customer (see note P).
Letters of Credit
In January of 1996, the Company obtained a standby letter of credit in
favor of a propane supplier. The standby letter of credit is for $40,000
and expires December 1, 1996. In August of 1996, the Company obtained a
$40,000 standby letter of credit for another supplier. The letter of credit
expired on September 30, 1996.
In accordance with the purchase commitment discussed above, in September of
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 expires September 30, 1997, the Company executed a $625,000
demand promissory note to the issuing bank. The note is collateralized by a
$500,000 deposit, accrues interest at the prime rate (8.25% in September
1996) plus 3% and is guaranteed by the Company's president.
20
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE L - COMMITMENTS AND CONTINGENCIES - Continued
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 and monthly service payments of $8,690 through March 2004. The
service payments are subject to an annual adjustment based on a labor cost
index and an electric power cost index. 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 operating lease for the land requires semi-annual payments of $17,712
through October 1998, and gives the Company the option of one additional
five year term.
Rent expense was $688,932 and $730,011 for the years ended July 31, 1996
and 1995, respectively. As of July 31, 1996, the minimum lease payments are
as follows:
Year ending July 31,
--------------------
1997 $ 732,960
1998 690,856
1999 661,668
2000 654,288
2001 654,288
Thereafter 1,744,768
-------------
$ 5,138,828
=============
The Company has not made all payments required by the lease agreements.
Approximately $110,000 is owed under the pipeline lease for reimbursement
for repairs to the pipeline made prior to the commencement of the lease.
The July 1, 1996 monthly pipeline lease payment was paid in August 1996. In
addition, approximately $3,400 is owed for late fees under the land lease.
Neither lessor has made demand for payment. The Company has included the
amounts owed in the accompanying balance sheet as accounts payable-trade.
21
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE L - COMMITMENTS AND CONTINGENCIES - Continued
Employment Contracts
The Company had three employment contracts with two of its executives and
one former executive as of July 31, 1995. The contract with the former
executive was canceled as of July 31, 1996. The Company's two remaining
employment contracts expire October 31, 1996 and January 31, 2001.
Aggregate compensation under employment agreements totaled $327,692 and
$196,000 for the years ended July 31, 1996 and 1995, respectively. Minimum
salaries under the remaining agreements will amount to $332,308 for the
year ended July 31, 1997 and $300,000 per year thereafter.
NOTE M - OPTION TO ACQUIRE NATIONAL POWER EXCHANGE GROUP, INC.
On October 30, 1994, the Company signed an agreement to sell its option to
purchase National Power Exchange Group (NPEG) in exchange for a promissory
note of $2,000,000 to be paid 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. 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 to $779,957 at July
31, 1995. 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 payables (see note H).
22
<PAGE>
Penn Octane Corporation
NOTES TO FINANCIAL STATEMENTS
July 31, 1996 and 1995
NOTE N - ACCOUNTS RECEIVABLE FACTORING AND SECURITY AGREEMENT
On October 24, 1994, the Company entered into an Accounts Receivable
Factoring and Security Agreement under which the Company submitted all
invoices and was advanced funds sufficient to pay for LPG purchases. As of
July 31, 1995, the Company and the factor negotiated an acceptable payoff
schedule for the outstanding balance due under the agreement. The principal
balance of $160,000 outstanding at July 31, 1995, was paid in August 1995.
NOTE 0 - 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. As discussed in Note A, the Company depends
heavily on sales to one major customer and has no significant operating
history on which to base such an assumption.
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 balance sheet is dependent upon the collection of the Award of
Arbitrators or 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 Award of
Arbitration, 2) increase sales to its current customers and 3) increase its
customer base.
NOTE P - SUBSEQUENT EVENT
The Company's arrangement with its major customer had expired at July 31,
1996. After two months of negotiation, a new agreement for a one year
period commencing October 1, 1996 was reached on October 10, 1996. Under
the terms of this agreement, the Company has committed to supply and the
customer has committed to purchase a minimum monthly volume of LPG with
seasonal variability. The minimum volume to be sold under this agreement
exceeds the minimum volume sold under the previous arrangement.
23
