UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 000-24394
PENN OCTANE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1790357
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
900 VETERANS BOULEVARD, SUITE 240, REDWOOD CITY, CALIFORNIA 94063
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (415) 368-1501
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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The number of shares of Common Stock, par value $.01 per share,
outstanding on December 5, 1997 was 8,694,600.
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PENN OCTANE CORPORATION
TABLE OF CONTENTS
ITEM PAGE NO.
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Part I 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1997 (unaudited) 3-4
and July 31, 1997
Consolidated Statements of Operations for the three months ended
October 31, 1997 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the three months ended
October 31, 1997 and 1996 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-16
Part I 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-22
Part II 1. Legal Proceedings 23
2. Changes in Securities 23
3. Defaults Upon Senior Securities 23
4. Submission of Matters to a Vote of Security Holders 23
5. Other Information 23
6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 23-25
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<PAGE>
PART I
ITEM 1.
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PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
October 31, July 31,
1997 1997
------------ ----------
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Current Assets
Cash $ 401,196 $ 31,142
Trade accounts receivable, less allowance for doubtful
accounts of $53,406 550,048 281,500
Related party receivables 80,259 171,601
Costs and estimated earnings in excess of billings
on uncompleted contracts (note D) 748,210 196,888
Inventories (note D) 870,738 795,797
Deferred registration costs 370,000 -
Prepaid expenses and other current assets 287,249 83,082
------------ ----------
Total current assets 3,307,700 1,560,010
Property, plant and equipment - net (note C) 3,486,073 3,185,148
Lease rights (net of accumulated amortization of $444,213
and $432,765) (note C) 709,826 721,274
Other noncurrent assets 11,935 29,935
------------ ----------
Total assets $ 7,515,534 $5,496,367
============ ==========
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The accompanying notes are an integral part of these statements.
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PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31, July 31,
1997 1997
-------------- --------------
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Current Liabilities
Current maturities of long-term debt, less unamortized discount of
$75,000 and $0 at October 31, 1997 and July 31, 1997 (note E) $ 1,612,863 $ 1,152,391
Revolving line of credit (note E) - 140,000
Construction accounts payable 52,556 121,801
Trade accounts payable 972,253 481,348
Billings in excess of costs and estimated earnings in excess of billings
on uncompleted contracts (note D) - 7,596
Borrowings from IBC-Brownsville 672,552 672,552
Accrued liabilities 1,161,435 1,055,237
-------------- --------------
Total current liabilities 4,471,659 3,630,925
Long-term debt, less current maturities (note E) 1,078,967 1,112,833
Commitments and contingencies (note G) - -
Stockholders' Equity (note F)
Senior Preferred stock-$.01 par value, 5,000,000 shares authorized; 0 - -
shares issued and outstanding at October 31, 1997 and July 31, 1997
Preferred stock-$.01 par value, 5,000,000 shares authorized; 270,000
convertible shares issued and outstanding at October 31, 1997 and
July 31, 1997 2,700 2,700
Common stock-$.01 par value, 25,000,000 shares authorized; 8,694,600
and 8,169,286 shares issued and outstanding at October 31, 1997 and
July 31, 1997 86,946 81,693
Additional paid-in capital 11,904,264 10,515,266
Notes receivable including accrued interest receivable from the
president of the Company and a related party for exercise of warrants ( 2,892,369) ( 2,834,865)
Accumulated deficit ( 7,136,633) ( 7,012,185)
-------------- --------------
Total stockholders' equity 1,964,908 752,609
-------------- --------------
Total liabilities and stockholders' equity $ 7,515,534 $ 5,496,367
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
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PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
----------------------------
October 31, October 31,
1997 1996
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<S> <C> <C>
Revenues $ 8,188,002 $ 2,546,493
Cost of goods sold 7,758,459 2,752,965
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Gross profit (loss) 429,543 (206,472)
------------- -------------
Selling, general and administrative expenses
Legal and professional fees 152,784 191,431
Salaries and payroll related expenses 207,034 114,283
Travel 82,406 24,036
Other 108,138 97,439
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550,362 427,189
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Operating loss ( 120,819) ( 633,661)
Other income (expense)
Interest expense ( 61,137) ( 54,338)
Interest income 57,508 711
------------- -------------
Net loss before taxes ( 124,448) ( 687,288)
Provision for income taxes - -
------------- -------------
Net loss $ ( 124,448) $ ( 687,288)
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Loss per common share (note B) $ ( 0.01) $ ( 0.13)
============= =============
Weighted average common shares outstanding 8,529,789 5,205,000
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONS OLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
October 31, October 31,
1997 1996
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INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net loss $ ( 124,448) $ ( 687,288)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 67,727 109,745
Amortization of lease rights and other non-current assets 14,449 34,124
Interest income from related party notes receivables ( 57,504) -
Changes in current assets and liabilities:
Restricted cash - ( 500,000)
Trade accounts receivable ( 268,548) ( 314,601)
Related party receivable 91,342 -
Interest receivable 26,233
Costs and estimated earnings in excess of billings on uncompleted contracts ( 551,322) -
Inventories ( 232,537) 82,309
Prepaids and other current assets ( 189,167) ( 17,710)
Deferred registration costs ( 370,000) -
Construction and accounts payable 415,062 412,951
Billings in excess of costs and estimated earnings in excess ( 7,596) -
of billings on uncompleted contracts
Accrued liabilities 225,795 74,556
-------------- --------------
Net cash used in operating activities ( 986,747) ( 779,681)
Cash flows from investing activities:
Capital expenditures ( 211,054) ( 5,375)
-------------- --------------
Net cash used in investing activities ( 211,054) ( 5,375)
Cash flows from financing activities:
Revolving credit facilities ( 140,000) 100,000
Issuance of debt 1,500,000 325,000
Issuance of Common Stock 1,131,250 -
Shareholder notes
Reduction in debt ( 923,395) ( 4,469)
-------------- --------------
Net cash provided by financing activities 1,567,855 420,531
-------------- --------------
Net increase (decrease) in cash 370,054 ( 364,525)
Cash at beginning of period 31,142 364,525
-------------- --------------
Cash at end of period $ 401,196 $ -
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 47,329 $ -
============== ==============
Supplemental disclosures of noncash transactions:
Common stock and warrants issued (note F) $ 263,000 $ -
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
NOTE A - ORGANIZATION
Penn Octane Corporation, which was formerly International Energy Development
Corporation (IEDC) and The Russian Fund, is a Delaware corporation, which was
incorporated on August 27, 1992. On October 21, 1993, IEDC acquired Penn
Octane Corporation, a Texas corporation, whose primary asset was a liquid
petroleum gas (LPG) pipeline lease agreement (Pipeline Lease) with Seadrift
Pipeline Corporation (Seadrift), a subsidiary of Union Carbide Corporation
(Union Carbide). On January 6, 1995, the Board of Directors approved the
change of IEDC's name to Penn Octane Corporation (POC). The Company is
engaged primarily in the business of purchasing, transporting and selling LPG
and providing services and equipment to the compressed natural gas (CNG)
industry. Substantially all of the sales volume since inception has been to
PMI Trading Limited (PMI), a subsidiary of Petroleos Mexicanos (PEMEX), the
Mexican state owned oil company.
POC commenced operations during the fiscal year ended July 31, 1995 upon
construction of its terminal faciliy in Brownsville, Texas (Brownsville
Terminal Facility). Prior to such time, the Company was in the "development
stage." until the business was established and planned principal operations
commenced during the year ended July 31, 1995.
In February 1997, POC formed Wilson Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary, for the purpose of engaging in the
business of designing, constructing, installing and servicing equipment for
CNG fueling stations and related products for use in the CNG industry
throughout the world. The subsidiary's name was changed to PennWilson CNG,
Inc. (PennWilson) in August 1997.
In October 1997, POC formed Penn CNG Holdings, Inc. (Holdings), a Delaware
corporation and a wholly-owned subsidiary, to act as a holding company for
POC's CNG-related operations, including the ownership and operation of CNG
fueling stations, sales of CNG-powered vehicles and other CNG-related
business. The Company intends to transfer the ownership of PennWilson to
Holdings, however, such ownership has not yet been transferred.
BASIS OF PRESENTATION
- -----------------------
The accompanying financial statements include POC and its subsidiaries,
PennWilson and Holdings (Company). All significant intercompany accounts and
transactions are eliminated.
The unaudited consolidated balance sheet as of October 31, 1997, the unaudited
consolidated statements of operations, and the unaudited consolidated
statements of cash flows for the three months ended October 31, 1997 and 1996
have been prepared by 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 unaudited
consolidated financial position of the Company as of October 31, 1997 and the
unaudited consolidated results of operations and unaudited consolidated cash
flows for the three months ended October 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 Annual Report on Form 10-K for the year ended July 31, 1997.
Certain reclassifications have been made to prior period balances to conform
to the current presentation. All reclassifications have been applied
consistently to the periods presented.
<PAGE>
NOTE B - LOSS PER COMMON SHARE
Loss per share of common stock is computed based solely on the weighted
average number of shares outstanding because the Company incurred losses in
each of the periods presented; therefore, giving effect to common stock
equivalents would be antidilutive. Fully diluted 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 than 3% of primary
earnings (loss) per share of common stock.
The FASB issued Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share", which supersedes Accounting Principles Board
Opinion No. 15 (APB 15), "Earnings Per Share". The statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Early adoption is not permitted. The Company does
not expect a material change in earnings per share data as a result of
adopting SFAS 128.
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
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October 31, July 31,
1997 1997
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LPG:
Building $ 173,500 $ 173,500
LPG terminal 3,426,440 3,426,440
Automobiles and equipment 385,038 378,039
Office equipment 24,518 22,202
Leasehold improvements 249,124 237,899
CNG:
Furniture, fixtures and equipment 190,053 162,161
Automobiles 40,523 40,023
Construction in progress 319,718 -
Leasehold improvements 8,575 8,575
-------------- --------------
4,817,489 4,448,839
Less: accumulated depreciation and
Amortization ( 1,331,416) ( 1,263,691)
-------------- --------------
$ 3,486,073 $ 3,185,148
============== ==============
</TABLE>
During May 1997, the Company amended (the Amendment) the Pipeline Lease with
Seadrift to extend the term of the Pipeline Lease through March 31, 2013. The
Amendment will become effective on April 1, 1998. As a result of the
Amendment, the Company changed the useful life of its LPG terminal assets,
leasehold improvements and lease rights through the extension of the amended
lease period. The effect of the change in estimate for the three months ended
October 31, 1997 was to reduce the Company's net loss by $73,262 and reduce
the Company's loss per common share by $.01 per share.
<PAGE>
NOTE D - INVENTORIES
Inventories consist of the following:
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October 31, July 31,
1997 1997
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LPG $ 543,704 $ 492,551
PROPYLENE (PPL) 12,698 -
CNG
Raw material and supplies 196,597 199,519
Work in progress 117,739 103,727
------------ -----------
$ 870,738 $ 795,797
============ ===========
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Costs and estimated earnings on uncompleted contracts consist of the
following:
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October 31, July 31,
1997 1997
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Uncompleted contracts consist of:
Costs incurred on uncompleted contracts $ 1,814,625 $ 488,560
Estimated earnings 203,818 101,294
------------ ------------
2,018,443 589,854
Less: billings to date 1,270,233 400,562
------------ ------------
$ 748,210 189,292
============ ============
Included in the accompanying balance sheet under
the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 748,210 $ 196,888
Billings in excess of costs and estimated
earnings on uncompleted contracts - ( 7,596)
------------ ------------
$ 748,210 $ 189,292
============ ============
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The above amounts include approximately $600,000 related to change-orders for
additional work performed by the Company in connection with the construction
of equipment for a CNG fueling station for the New York City Department of
Transportation, which have been submitted to the customer for approval.
<PAGE>
NOTE E - LONG-TERM DEBT
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Long-term debt consists of the following:
October 31, July 31,
1997 1997
------------ ----------
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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 $ 106,652 $ 113,191
Subordinated note with warrants to purchase 50,000 shares of common stock at $2.50
per share expiring February 28, 2001; principal due August 31, 1997, or upon earlier
receipt of proceeds from a primary equity offering in the minimum amount of
$5,000,000; interest at 10% due annually on the anniversary date of the note;
collateralized by all tanks, pumps, equipment and other terminal property, and proceeds
from a judgment or settlement of litigation (paid in September 1997) - 400,000
Subordinated note with warrants to purchase 50,000 shares of common stock at $2.50
per share expiring April 11, 2001; principal due October 11, 1997, or upon earlier
receipt of proceeds from a primary equity offering in the minimum amount of
$5,000,000; interest at 10% due annually on the anniversary date of the note;
collateralized by all tanks, pumps, equipment and other terminal property and proceeds
from the judgment or settlement of litigation (paid in October 1997) - 500,000
Unsecured note with warrants to purchase 75,000 shares of common stock at $3.00 per
share expiring October 10, 1997; principal due November 7, 1997, or upon receipt of
proceeds from offering of securities prior to payment date in excess of $250,000;
Company shall utilize one half of proceeds from such sale to satisfy this note; interest at
10% due annually on the anniversary date of the note (paid in August 1997) - 75,000
Unsecured note with principal due in equal annual installments of $20,000
beginning June 5, 1998, plus interest at the prime rate (8.5% at October 31, 1997); due
June 5, 2002 100,000 100,000
Unsecured promissory note due May 29, 1998 33,000 33,000
Secured promissory note with warrants to purchase 500,000 shares of common stock at
$2.50 per share expiring June 15, 2002; principal due June 15, 1999, or upon earlier
receipt of proceeds from a primary debt or equity offering in the minimum amount of
$5,000,000; interest at 10.5% due semi-annually on December 15 and June 15;
collateralized by certain specified assets of the Company 1,000,000 1,000,000
$1,500,000 in promissory notes less unamortized discount of $75,000 with warrants to
purchase 250,000 shares of common stock at $6.00 per share expiring October 21,
2000; principal due June 30, 1998, or upon earlier receipt of proceeds from any public
offering of debt or equity of the Company resulting in net proceeds to the Company in
excess of $5,000,000; interest at 10.0% on the principal amount of the promissory
notes is due quarterly on March 31, June 30, September 30 and December 31. The
effective interest rate after consideration of the discount, is 18.0% per annum.
Purchasers of the promissory notes were granted one demand registration right with
respect to the shares issuable upon exercise of the warrants 1,425,000 -
Capitalized lease obligations payable in monthly installments totaling $3,138; due
on various dates through January 1999 27,178 44,033
------------ ----------
2,691,830 2,265,224
Current maturities 1,612,863 1,152,391
------------ ----------
$ 1,078,967 $1,112,833
============ ==========
</TABLE>
In December 1995, the Company obtained a revolving line of credit for
$140,000. The credit line was renewed in December 1996 for the period through
September 30, 1997. Interest is calculated on this credit line at the prime
rate (8.5% at July 31, 1997) plus 3%. During October 1997, the outstanding
balance under the revolving line of credit was repaid.
NOTE F - STOCKHOLDERS' EQUITY
PREFERRED STOCK
- ----------------
On September 18, 1993, in a private placement, the Company issued 150,000
shares of its $.01 par value, 11% convertible, cumulative non-voting
Preferred stock at a purchase price of $10.00 per share. On June 10, 1994
the Company declared a 2-for-1 stock split. The Company has had no earnings
to date and therefore no dividends have been declared or paid. The Preferred
Stock is convertible, at the option of the holder through September 18, 1998,
into voting shares of Common Stock of the Company at a conversion ratio of one
share of Preferred Stock for 3.333 shares of common stock. The Preferred
Stock is not redeemable by the Company. On September 10, 1997, the Board of
Directors of the Company approved the issuance of an additional 100,000 shares
of Common Stock as an inducement for the Preferred stockholders to convert
the shares of Preferred Stock and release all rights with respect to the
Preferred Stock. During December 1997, the Preferred Stockholders
agreed to convert the shares of Preferred Stock.
COMMON STOCK
- -------------
In August 1997, warrants to purchase 75,000 shares of Common Stock of the
Company were exercised in exchange for cancellation of a $75,000 note payable,
plus accrued interest thereon, and a cash payment to the Company of $56,250.
During the quarter ended October 31, 1997, warrants to purchase 430,000 shares
of common stock of the Company were exercised by a director of the Company
(130,000) and other third parties (300,000) at an exercise price of $2.50 per
share resulting in a cash payment received by the Company of $1,075,000. In
connection with the exercise of 100,000 of these warrants (the Exercised
Securities), the Company entered into a Registration Rights Agreement,
agreeing to register the Exercised Securities on or before February 1, 1998.
In the event the Company fails to register the Exercised Securities by
February 1, 1998, for each month beginning March 1, 1998 and ending on
September 1, 1998, the Company will be required to issue to the holder of the
Exercised Securities warrants to purchase 10,000 shares of Common Stock of the
Company at an exercise price of $2.50 per share, exercisable within one year
from the date of issuance.
STOCK AWARD PLAN
On October 21, 1997, the Company adopted the 1997 Stock Award Plan (Plan).
Under the terms of the Plan, the Company has reserved for issuance 150,000
shares of common stock. The purpose of the Plan is to compensate consultants
who have rendered significant services to the Company. The Plan will be
administered by the compensation committee of the Company which shall have
complete authority to select participants, determine the awards of common
stock to be granted and the times such awards will be granted. In October
1997, the Company issued 20,314 shares of common stock of the Company from the
Plan to a Mexican consultant in payment for services rendered to the Company
valued at $113,000.
<PAGE>
NOTE G - COMMITMENTS AND CONTINGENCIES
LITIGATION
On August 24, 1994, the Company filed an Original Petition and
Application for Injunctive Relief against the International Bank of
Commerce-Brownsville ("IBC-Brownsville"), a Texas state banking association,
seeking (i) either enforcement of a credit facility between the Company and
IBC-Brownsville or a release of the Company's property granted as collateral
thereunder consisting of significantly all of the Company's business and
assets; (ii) declaratory relief with respect to the credit facility; and (iii)
an award for damages and attorneys' fees. After completion of an arbitration
proceeding, on February 28, 1996, the 197th District Court in and for Cameron
County, Texas entered judgment (the "Judgment") confirming the arbitral award
for $3,246,754 to the Company by IBC-Brownsville. On June 3, 1996,
IBC-Brownsville filed an appeal.
On April 18, 1996, the Company reached an agreement (the "IBC Settlement
Agreement") to accept $400,000 to settle a lawsuit it filed in October 1995
against International Bank of Commerce-San Antonio, a bank related to
IBC-Brownsville ("IBC-San Antonio"). As part of the settlement agreement, the
parties, including IBC-Brownsville and IBC-San Antonio, executed mutual
releases from future claims related to the IBC-Brownsville litigation.
Additionally, IBC-San Antonio agreed to indemnify the Company for any such
claims made or asserted.
On June 26, 1996, IBC-Brownsville filed a suit against the Company (Case
No. 96-06-3502) in the 357th Judicial District Court of Cameron County
alleging that the Company, in filing the Judgment against IBC-Brownsville in
order to clear title to its assets, slandered the name of IBC-Brownsville.
IBC-Brownsville contends that the Judgment against it prevented it from
selling certain property. IBC-Brownsville has claimed actual damages of
$600,000 and requested punitive damages of $2,400,000. On September 23, 1996,
the court 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 a
breach of the IBC Settlement Agreement. Further, the Company believes this
cause of action is covered by an indemnity agreement from IBC-San Antonio.
In connection with the lawsuit, IBC-Brownsville filed an appeal with the
Texas Court of Appeals on January 21, 1997. The Company responded on February
14, 1997. On September 18, 1997, the appeal was heard by the Texas Court of
Appeals. A decision is expected sometime in 1998. The Company continues to
believe that the Judgment is final, binding and collectible.
The financial statements do not include any adjustments reflecting the
gain contingency of the Judgment, net of attorney's fees, or the offset
(principal and interest). Short-term borrowing of $672,552 and accrued
interest of $206,025 reflect the amount of the offsets at October 31, 1997.
The Judgment will be accounted for when it is actually realized and the offset
will be accounted for at the time IBC has exhausted all appeals.
A former officer of the Company is entitled to a payment of 5% of the net
proceeds (after expenses and legal fees) received by the Company arising from
the above-mentioned litigation.
On July 30, 1996, the Company filed suit in the District Court of Harris
County, Texas against Jorge V. Duran, former Chairman of the Board of the
Company, regarding alleged conversion and fraud by Mr. Duran during his time
as an employee of the Company. The Company has not yet quantified its damages
and is seeking a declaration that the termination of employment of Mr. Duran
was lawful and within the rights of the Company based on Mr. Duran's status as
an at-will employee of the Company. On December 12, 1996, Mr. Duran filed a
counterclaim in the District Court of Harris County, Texas asserting the
following claims: Breach of contract against the Company and Mr. Richter;
wrongful discharge against the Company, Mr. Richter, and Mark Casaday, a
former officer and director of the Company; defamation against the Company,
Mr. Richter, Mark Casaday, and Jorge Bracamontes; and interference with
contract against Jorge Bracamontes. On February 27, 1997, the two actions
were consolidated into Case No. 96-37447, Penn Octane Corporation v. Jorge V.
Duran, in the 164th District Court of Harris County, Texas. Mr. Duran is
seeking (i) judgment against the Company and Messrs. Richter, Casaday and
Bracamontes for unspecified money damages, punitive damages in the amount of
$10,500,000, prejudgment interest as provided for by law, and attorneys' fees;
(ii) 400,000 shares of Common Stock from the Company, (iii) 100,000 shares of
common stock from Mr. Richter; and (iv) such further relief to which he may be
justly entitled. The Company intends to vigorously defend against Mr. Duran's
counterclaim.
CREDIT FACILITY AND LETTERS OF CREDIT
On October 22, 1997, the Company entered into a $6.0 million credit facility
with RZB Finance L.L.C. (RZB) for demand loans and standby letters of credit
(RZB Credit Facility) to finance the Company's purchase of LPG and PPL. Under
the RZB Credit Facility, the Company has agreed to pay a fee with respect to
each letter of credit thereunder in an amount equal to the greater of (i)
$500, (ii) 1.5% of the maximum face amount of such letter of credit, or (iii)
such higher amount as may be agreed between the Company and RZB. Any amounts
outstanding under the RZB Credit Facility accrue interest at a rate
equal to the rate announced by the Chase Manhattan Bank as its prime rate
(8.5% at October 31, 1997) plus 2.5%. Pursuant to the RZB Credit Facility,
RZB has sole and absolute discretion to terminate the RZB Credit Facility and
to make any loan or issue any letter of credit thereunder. RZB also has the
right to demand payment of any and all amounts outstanding under the RZB
Credit Facility at any time. In connection with the RZB Credit Facility, the
Company granted a mortgage, security interest and assignment in any and
all of the Company's real property, buildings, pipelines, fixtures and
interests therein or relating thereto, including, without limitation, the
lease with the Brownsville Navigation District of Cameron County for the land
on which the Company's terminal facility (Brownsville Terminal Facility) is
located, the Pipeline Lease, and in connection therewith agreed to
enter into leasehold deeds of trust, security agreements, financing statements
and assignments of rent, in forms satisfactory to RZB. The Company has also
agreed that it shall not permit to exist any lien, security interest,
mortgage, charge or other encumbrance of any nature on any of its properties
or assets, except in favor of RZB. In connection with the RZB Credit
Facility, the holder of the secured promissory note of the Company has agreed
to subordinate its security interest in the Brownsville Terminal Facility. On
November 5, an irrevocable letter of credit was established under the RZB
Credit Facility in favor of Exxon in the amount of $3.8 million to be used for
the purchase of LPG. The Company's President, Chairman and Chief Executive
Officer has personally guaranteed all of the Company's payment obligations
with respect to the RZB Credit Facility. As of December 4, 1997, $1,801,158
has been presented by Exxon against the letter of credit for purchases of LPG
made by the Company from November 11, 1997 through November 30, 1997, and
$1,988,214 has been invoiced to customers for sales of LPG from November 11,
1997 through November 30, 1997. Upon establishment of the letter of credit,
the Company began invoicing PMI on a weekly basis.
During March 1997, the Company obtained a letter of credit in the amount of
approximately $251,000 in connection with the obligation of PennWilson to
complete certain work under a contract. During September 1997, the letter of
credit was extended to November 26, 1997. The letter of credit expired on
November 26, 1997.
OTHER
During June 1997, PennWilson entered into a performance and payment bond (the
Bonds) in connection with a contract to design, construct and install CNG
equipment totaling approximately $1,487,000. The Bonds remained outstanding
until the equipment was delivered to the customer, as prescribed under the
contract, in December 1997.
<PAGE>
NOTE H - REALIZATION OF ASSETS
The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern. The Company has
incurred losses since its inception, has used cash in operations and has a
deficit in working capital. In addition, the Company is involved in
litigation, the outcome of which cannot be determined at the present time. As
discussed in Note A, the Company has historically depended heavily on sales to
one major customer. In addition, there is no significant operating history on
which to base the results of the additional business generated through
PennWilson, Holdings or contracts to purchase and sell PPL.
In view of the matters described in the preceding paragraph, recoverability of
a major portion of the recorded asset amounts as shown in the accompanying
unaudited consolidated balance sheet at October 31, 1997 is dependent upon the
collection of the Judgment, the Company's ability to obtain additional
financing and to raise additional equity capital, and the success of the
Company's future operations. The unaudited consolidated financial statements
do not include any adjustments related to the recoverability and
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be unable to continue
in existence.
To provide the Company with the ability it believes necessary to continue in
existence, management is taking steps to 1) collect the Judgment, 2) increase
sales to its current customers, 3) increase its customer base, 4) expand its
product lines and 5) raise additional debt and/or equity capital.
At July 31, 1997, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $5,348,000. The ability to utilize such
net operating loss carryforwards may be significantly limited by the
application of the "change of ownership" rules under Section 382 of the
Internal Revenue Code.
NOTE I - CONTRACTS
LPG BUSINESS
The Company has entered into a sales agreement with PMI (PMI Sales Agreement),
to provide a minimum monthly volume of LPG to PMI through September 30, 1998.
During August 1, 1997 through November 10, 1997, the Company was purchasing
LPG on a month-to-month basis from Exxon Company, U.S.A. (Exxon), its major
supplier, to meet the minimum monthly volumes required in the PMI Sales
Agreement. Effective November 11, 1997, the Company entered into a supply
contract with Exxon to purchase minimum monthly volumes of LPG through
September 1998 under payment terms similar to those required in the PMI Sales
Agreement. The supply price is below the sales price provided for in the PMI
Sales Agreement.
PPL BUSINESS
In September 1997, the Company began selling limited quantities of PPL
that it purchased from PMI in Mexico to customers in the United States. The
Company is currently seeking to obtain adequate supplies of high-grade PPL
from PMI and other suppliers. Although the Company has no formal contract for
the supply of PPL, the Company purchases quantities of PPL from PMI on a
month-to-month, as available basis. The Company expects to commence
deliveries under its contract with Union Carbide in early 1998. In July 1997,
the Company entered into a one-year contract with Union Carbide pursuant to
which Union Carbide agreed to purchase from the Company up to 9,000,000 pounds
of high-grade PPL per month, or as otherwise mutually agreed, at a variable
posted price through July 31, 1998.
<PAGE>
CNG BUSINESS
Prior to October 31, 1997, the Company was awarded two contracts for the
design, construction and installation of equipment for CNG fueling stations
for A.E. Schmidt Environmental in connection with CNG fueling stations being
constructed for the New York City Department of Transportation (total contract
amount of approximately $1,487,000) and the Orange County Sanitation District
(total contract amount of approximately $236,000). The Company anticipates
completion of the projects during the second and third quarters of its 1998
fiscal year, respectively. The Company is pursuing additional CNG contracts;
however, the Company has not entered into any CNG contracts subsequent to
October 31, 1997.
NOTE J - SEGMENT INFORMATION
The FASB issued Statement of Financial Accounting Standards No. 131 (SFAS No.
131), "Disclosure about Segments of an Enterprise and Related Information",
effective for years beginning after December 15, 1997, with earlier
application encouraged. The Company adopted SFAS 131 in 1997.
The Company has the following reportable segments: LPG and CNG. The LPG
segment is a distributor of fuel and the CNG segment designs, constructs and
installs equipment for CNG fueling stations.
The accounting policies used to develop segment information correspond to
those described in the summary of significant accounting policies. Segment
profit or loss is based on profit or loss from operations before income taxes.
The reportable segments are distinct business units operating in similar
industries. They are separately managed, with separate marketing and
distribution systems. The following information about the segments is as of
October 31, 1997 and for the three months ended October 31, 1997.
<TABLE>
<CAPTION>
LPG CNG Totals
-------------- -------------------- --------------
<S> <C> <C> <C>
Revenues from external customers $ 6,542,481 $ 1,645,521 $ 8,188,002
Interest expense 59,099 2,038 61,137
Depreciation and amortization 55,871 11,856 67,727
Segment (loss) (44,975) (79,473) (124,448)
Segment assets 5,714,416 1,801,118 7,515,534
Segment liabilities (4,431,981) (1,118,645) (5,550,626)
Expenditure for segment assets 20,542 190,512 211,054
RECONCILIATION TO CONSOLIDATED AMOUNTS
- --------------------------------------
Revenues
Total revenues for reportable segments $ 8,188,002
Other revenues -
Elimination of intersegment revenues -
--------------------
Total consolidated revenues $ 8,188,002
====================
Profit or Loss
Total profit or loss for reportable segments $ ( 124,448)
Other profit or loss -
Elimination of intersegment profits -
Unallocated amounts
Corporate headquarters expense -
Other expenses -
--------------------
Consolidated income before income taxes $ ( 124,448)
====================
Assets
Total assets for reportable segments $ 7,515,534
Other assets -
Corporate headquarters -
Other unallocated amounts -
--------------------
Total consolidated assets $ 7,515,534
====================
Geographic Information Revenues Assets
- ---------------------- -------------- --------------------
United States $ 8,153,149 $ 7,515,534
Canada 34,853 -
-------------- --------------------
$ 8,188,002 $ 7,515,534
============== ====================
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
liquidity and capital resources should be read in conjunction with the
unaudited Consolidated Financial Statements of the Company and related Notes
thereto appearing elsewhere herein. References to specific years preceded by
"fiscal" (e.g. fiscal 1997) refer to the Company's fiscal year ended July 31.
The results of operations of PennWilson, which began operations in March 1997,
have been included in the Company's results of operations for the three months
ended October 31, 1997 discussed below. To date, there has been no
significant activity associated with the operations of Holdings.
OVERVIEW
The Company is principally engaged in the purchase, transportation and
sale of LPG and the provision of equipment and services to the CNG industry.
Since July 1994, the Company has bought and sold LPG for distribution into
northeast Mexico and the U.S. Rio Grande Valley. In March 1997, the Company
expanded its operations to include the design, construction, installation and
maintenance of turnkey CNG fueling stations. In September 1997, the Company
commenced limited sales of PPL, purchased from PMI in Mexico, to consumers in
the United States.
Historically, the Company has derived substantially all of its revenues
from sales to PMI, its primary customer, of LPG purchased from Exxon. For the
three months ended October 31, 1997, the Company derived approximately 79.9%
of its revenues from sales of LPG, of which sales to PMI accounted for 99.4%
of total LPG sales.
As part of its business strategy, in March 1997 the Company acquired
certain assets and hired certain former employees from Wilson Technologies
Incorporated, a company engaged in the engineering, design and construction
of equipment for turnkey CNG fueling stations. In connection with this
acquisition, the Company paid $394,000 and is committed to pay up to
$2.0 million in royalty payments based on future sales, if any. The
acquisition was accounted for as a purchase and is reflected as such in the
Company's financial statements as of October 31, 1997.
The Company provides products and services through a combination of
fixed-margin and fixed-priced contracts. Under the Company's agreements with
its customers and suppliers, the buying and selling prices of LPG and PPL are
based on variable posted prices that provide the Company with a fixed margin.
Costs included in costs of goods sold other than the purchase price of LPG and
PPL may affect actual profits from sales, including costs relating to
transportation, storage, leases, maintenance and financing. The Company
generally attempts to purchase in volumes commensurate with projected sales.
However, mismatches in volumes and prices of LPG purchased from Exxon and sold
to PMI or PPL purchased from PMI and sold to Union Carbide could result in
unanticipated costs.
The Company's CNG revenues are principally derived from contracts awarded
on a fixed-price, as-completed basis. In competing for contracts to construct
equipment for CNG fueling stations, the Company normally must submit bids for
specific projects. The Company's ability to achieve a profit margin for a
specific project is dependent on the accuracy of its assessment of the costs
associated with that project.
<PAGE>
LPG SALES
The following table shows the Company's volume sold in gallons, average
sales price and average purchase price of LPG for the three months ended
October 31, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended
--------------------
October 31, October 31,
1997 1996
------------ ------------
<S> <C> <C>
Volume Sold
LPG (millions of gallons) 15.1 4.7
Average sales price
LPG (per gallon) $ 0.43 $ 0.54
Average purchase price
LPG (per gallon) $ 0.39 $ 0.49
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1997 COMPARED WITH THE THREE MONTHS ENDED
OCTOBER 31, 1996
Revenues. Revenues for the three months ended October 31, 1997 were $8.2
million compared with $2.5 million for the three months ended October 31,
1996, an increase of $5.7 million or 228%. Of this increase (i) $5.6 million
was attributable to increased volumes of LPG sold during the three months
ended October 31, 1997, partially offset by decreased average sales prices for
LPG during the three months ended October 31, 1997 of $1.5 million, and (ii)
$1.6 million was attributable to revenues from sales of equipment for CNG
fueling stations. The increase in volume of LPG sales during the three months
ended October 31, 1997 primarily resulted from the lack of sales to PMI during
August and September 1996 due to the expiration of the Company's previous
sales arrangement with PMI on July 31, 1996. Subsequent thereto, a one-year
sales agreement was entered into with PMI effective October 1, 1996.
Cost of sales. Cost of sales during the three months ended October 31,
1997 was $7.8 million compared with $2.8 million during the three months ended
October 31, 1996, an increase of $5.0 million or 179%. Of this increase (i)
$5.1 million was attributable to increased volumes of LPG sold during the
three months ended October 31, 1997, partially offset by decreased average
purchase prices for LPG during the three months ended October 31, 1997 of $1.6
million, and (ii) $1.5 million was attributable to costs associated with sales
of equipment for CNG fueling stations.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $550,362 during the three months ended October
31, 1997 compared with $427,189 during the three months ended October 31,
1996, an increase of $123,173 or 28.8%. This increase was primarily
attributable to (i) $45,000 of costs associated with the exercise of warrants
and (ii) PennWilson expenses of $239,000, associated with the commencement of
the Company's CNG related operations, partially offset by lower selling,
general and administrative expenses associated with the Company's LPG related
operations.
Other income and expense, net. Other income (expense), net was ($3,629)
during the three months ended October 31, 1997 compared with ($53,627) during
the three months ended October 31, 1996. The decrease of other income
(expense), net, is due to the accrual of interest income from notes receivable
from the President of the Company and a related party.
<PAGE>
Income tax. Due to the net losses during the three months ended October
31, 1997 and 1996, there was no income tax expense in either period. At July
31, 1997, the Company had net operating loss carryforwards for federal income
tax purposes of approximately $5.3 million. The ability to utilize such net
operating loss carryforwards, which expire in the years 2009 to 2012, may be
significantly limited by the application of the "change of ownership" rules
under Section 382 of the Internal Revenue Code.
Historically, the Company has received the majority of its total annual
revenues during the months of October through March. Such pattern is
attributable to the seasonal demand for LPG, which is typically greatest
during the winter months of the second and third quarters of the Company's
fiscal year. The Company's quarterly earnings may vary considerably due to
the impact of such seasonality. Upon expiration of the Company's sales
arrangement with PMI, its primary customer, sales of LPG to PMI were
interrupted during August and September 1996 pending the negotiation of a new
sales contract which became effective in October 1996.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has incurred losses since its inception in 1992,
has used cash in operations and has a deficit in working capital. In
addition, the Company is involved in litigation, the outcome of which cannot
be determined at the present time. The Company depends heavily on sales to
one major customer. In addition, there is no significant operating history on
which to base the results of the additional business generated through
PennWilson, Holdings or contracts to purchase and sell PPL. The Company's
sources of liquidity and capital resources historically have been provided by
sales of LPG and CNG-related equipment, proceeds from the issuance of
short-term and long-term debt, revolving credit facilities and credit
arrangements, sale or issuance of preferred and common stock of the Company
and proceeds from the exercise of warrants to purchase shares of the Company's
common stock.
The following summary table reflects comparative cash flows for the three
months ended October 31, 1997 and 1996. All information is in thousands.
<TABLE>
<CAPTION>
October 31, October 31,
1997 1996
------------- -------------
<S> <C> <C>
Net cash used in operating activities $ ( 987) $ (780)
Net cash used in investing
Activities (211) (5)
Net cash provided by financing activities 1,568 420
------------- -------------
Net increase (decrease) in cash $ 370 $ (365)
============= =============
</TABLE>
The PMI Sales Agreement is effective for the period from October 1, 1997
through September 30, 1998 and provides for the purchase by PMI of minimum
monthly volumes of LPG aggregating a minimum annual volume of 69.0 million
gallons, representing a 15% increase over minimum volume requirements under
the previous sales agreement with PMI effective during the months of October
1, 1996 to September 30, 1997. In November 1997, the Company entered into a
new supply agreement with Exxon pursuant to which Exxon has agreed to supply
minimum volumes of LPG to the Company. The Company believes it has access to
an adequate supply of LPG as a result of its agreement with Exxon to satisfy
the requirements of PMI under the PMI Sales Agreement. Under the current
agreement with Exxon, the Company's current sole source of supply of LPG, the
Company anticipates greater gross margins on its LPG sales as a result of
lower LPG costs. In addition, the Company anticipates increased gross margins
as a result of the elimination of the Company's responsibility for certain
costs associated with transportation and the mixing and testing of LPG
purchased from Exxon.
<PAGE>
Prior to October 31, 1997, the Company was awarded two contracts for the
design, construction and installation of equipment for CNG fueling stations
for A.E. Schmidt Environmental in connection with CNG fueling stations being
constructed for the New York City Department of Transportation (total contract
amount of approximately $1,487,000) and the Orange County Sanitation District
(total contract amount of approximately $236,000). The Company anticipates
completion of the projects during the second and third quarters of its 1998
fiscal year, respectively. The Company is pursuing additional CNG contracts;
however, the Company has not entered into any CNG contracts subsequent to
October 31, 1997. The Company anticipates that there will be adequate
cash flow to fund the Company's performance of its obligations thereunder .
The Company is pursuing additional contracts for the supply of CNG-
related equipment and services in the future.
On October 21, 1997, the Company announced that it is contemplating
filing a registration statement with the SEC for the sale to the public of
additional shares of its Common Stock. No assurance can be given as to the
timing of such offering or that the Company will be successful in raising
additional capital. In connection therewith, the Company has incurred
professional fees and other costs totaling $370,000, which have been recorded
as deferred registration costs at October 31, 1997.
Pipeline Lease. In May 1997, the Company entered into the Pipeline Lease
Amendment with Seadrift which, once effective, will extend the term of the
lease through 2013. Under the Pipeline Lease Amendment, the Company will be
required to make minimum monthly lease payments of $75,000, subject to
abatement during the first two years of the extended term, an increase of
$21,000 per month over the Company's current Pipeline Lease Agreement. The
Pipeline Lease Amendment will be effective no later than April 1, 1998.
Credit Arrangements. In connection with the PMI Sales Agreement,
invoicing is to occur weekly. In November 1996, the Company and PMI made an
arrangement under which PMI guaranteed the Company's credit with Exxon, the
Company's main supplier, and invoicing occurred on a monthly, rather than a
weekly basis.
On October 22, 1997, the Company entered into a $6.0 million credit
facility with RZB to finance the Company's purchase of LPG and PPL. Under the
RZB Credit Facility, the Company has agreed to pay a fee with respect to each
letter of credit thereunder in an amount equal to the greater of (i) $500,
(ii) 1.5% of the maximum face amount of such letter of credit, or (iii) such
higher amount as may be agreed between the Company and RZB. Any amounts
outstanding under the RZB Credit Facility shall accrue interest at a rate
equal to the rate announced by the Chase Manhattan Bank as its prime rate
(8.5% at October 31, 1997) plus 2.5%. Pursuant to the RZB Credit Facility,
RZB has sole and absolute discretion to terminate the RZB Credit Facility and
to make any loan or issue any letter of credit thereunder. RZB also has the
right to demand payment of any and all amounts outstanding under the RZB
Credit Facility at any time. In connection with the RZB Credit Facility, the
Company granted a mortgage, security interest and assignment in any
and all of the Company's real property, buildings, pipelines, fixtures and
interests therein or relating thereto, including, without limitation, the
Brownsville Lease, the Pipeline Lease, and in connection therewith agreed to
Enter into leasehold deeds of trust, security agreements, financing statements
And assignments of rent, in forms satisfactory to RZB. The Company has also
agreed that it shall not permit to exist any lien, security interest,
mortgage, charge or other encumbrance of any nature on any of its properties
or assets, except in favor of RZB. In connection with the RZB Credit
Facility, the holder of the secured promissory note of the Company has agreed
to subordinate its security interest in the Brownsville Terminal Facility.
See "-Private Placements and Other Transactions." On November 5, an
irrevocable letter of credit was established under the RZB Credit Facility in
favor of Exxon in the amount of $3.8 million to be used for the purchase of
LPG. Mr. Richter, the Company's President, Chairman and Chief Executive
Officer, has personally guaranteed all of the Company's payment obligations
with respect to the RZB Credit Facility. As of December 4, 1997, $1,801,158
has been presented by Exxon against the letter of credit for purchases of LPG
made by the Company from November 11, 1997 through November 30, 1997, and
$1,988,214 has been invoiced to customers for sales of LPG from November 11,
1997 through November 30, 1997. Upon establishment of the letter of credit,
the Company began invoicing PMI on a weekly basis.
In March 1997, the Company obtained a letter of credit from the Bay Area
Bank in the amount of approximately $251,000 in connection with the obligation
of PennWilson to complete certain work for the Orange County Sanitation
District. In September 1997, the letter of credit was extended to November
26, 1997. The letter of credit expired on November 26, 1997.
Private Placements and Other Transactions. During August 1997, 75,000
warrants to purchase 75,000 shares of the Common Stock of the Company issued
in connection with the private placement were exercised at prices below the
original stated exercise price in exchange for a cash payment of $56,000,
which the Company used for working capital, and cancellation of $75,000 of
indebtedness from the private placement, plus accrued interest thereon.
<PAGE>
During the quarter ended October 31, 1997, warrants to purchase a total
of 430,000 shares of Common Stock were exercised, resulting in cash proceeds
to the Company of $1.1 million. The proceeds of such exercises were used for
working capital and repayment of Company debt.
On August 29, 1997, in connection with the exercise of warrants to
purchase 100,000 shares of Common Stock of the Company by an unrelated third
party, the Company entered into a Registration Rights Agreement agreeing to
register the Common Stock issued upon exercise on or before February 1, 1998.
In the event the Company fails to register the Common Stock by February 1,
1998, for each month thereafter until September 1, 1997, during which the
shares have not been not registered, the Company will be required to issue the
holder Common Stock warrants to purchase 10,000 shares of Common Stock at an
exercise price of $2.50 per share, exercisable within a year from the date of
issuance.
On October 21, 1997, the Company completed a private placement pursuant
to which it issued promissory notes in the aggregate principal amount of $1.5
million and warrants to purchase 250,000 shares of Common Stock exercisable
until October 21, 2000 at an exercise price of $6.00 per share. The notes are
unsecured. Proceeds raised from the private placement totaled $1.5 million,
which the Company used for working capital requirements. Interest at 10% per
annum is due quarterly on March 31, June 30, September 30 and December 31.
Payment of the principal and any accrued and unpaid interest on the promissory
notes is due on the earlier to occur of June 30, 1998, and the closing of any
public offering of debt or equity securities of the Company resulting in net
proceeds to the Company in excess of $5.0 million. The purchasers in the
private placement were granted one demand registration right with respect to
the shares issuable upon exercise of the warrants.
Pursuant to the 1997 Stock Award Plan, in October 1997, the Company
issued 20,314 shares of Common Stock to a Mexican consultant in payment for
services rendered to the Company valued at $113,000.
Judgment in favor of the Company. Judgment has been rendered in favor of
the Company in connection with its litigation against IBC-Brownsville in the
amount of approximately $3.5 million including accrued interest and legal fees
and expenses, which Judgment is being appealed by the defendant. Although no
assurance can be made, management believes that the Company will ultimately
prevail on appeal and will receive the proceeds from such Judgment. A
significant portion of the Judgment, upon realization by the Company, will be
used to pay attorneys' fees incurred in connection with the IBC-Brownsville
litigation. In addition, a former officer of the Company is entitled to 5% of
the net proceeds (after expenses and legal fees). See Note G to the unaudited
Consolidated Financial Statements.
Realization of Assets. Recoverability of a major portion of the recorded
asset amounts on the Company's balance sheet is dependent upon the collection
of the Judgment, the Company's ability to obtain additional financing and to
raise additional equity capital, and the success of the Company's future
operations. See Note H to the unaudited Consolidated Financial Statements.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to (i) collect the Judgment, (ii)
increase sales to its current customers, (iii) increase its customer base,
(iv) expand its product lines and (v) raise additional debt and/or equity
capital.
FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings per
Share. SFAS 128 supersedes APB Opinion No. 15 (Opinion No. 15), Earnings per
Share, and requires the calculation and dual presentation of basic and diluted
earnings per share (EPS), replacing the measures of primary and fully-diluted
EPS as reported under Opinion No. 15. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. Accordingly, EPS for the periods presented in
the accompanying unaudited consolidated statements of operations are
calculated under the guidance of Opinion No. 15.
<PAGE>
The Company does not expect a material change in earnings per share data
in any of the periods presented in the accompanying unaudited Consolidated
Statements of Operations as a result of adopting SFAS 128.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting
Comprehensive Income and Statement of Financial Accounting Standards No. 131
(SFAS 131), Disclosure about Segments of an Enterprise and Related
Information. Both are effective for periods beginning after December 15,
1997, with earlier application encouraged for SFAS 131. The company adopted
SFAS 131 in fiscal 1997. The Company will adopt SFAS 130 in fiscal 1998.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note G to the unaudited Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following Exhibits are incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit No.
-------------------------------------------------------------------------------------------------------
<C> <S>
10.01 Amendment to Irrevocable Standby Letter of Credit No. 310 dated September 15, 1997. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.02 Release of Lien dated August 1997 by Lauren Constructors, Inc. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
10.03 LPG Purchase Agreement dated August 28, 1997 between PMI Trading Company Ltd. and the
Company. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.04 Continuing Agreement for Private Letters of Credit dated October 14, 1997 between RZB Finance LLC
and the Company. (Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.05 Promissory Note dated October 14, 1997 between RZB Finance LLC and the Company. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.06 General Security Agreement dated October 14, 1997 between RZB Finance LLC and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31,
1997 filed on November 13, 1997, SEC File No. 000-24394)
10.07 Guaranty and Agreement dated October 14, 1997 between RZB Finance LLC and Jerome Richter.
(Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31,
1997 filed on November 13, 1997, SEC File No. 000-24394)
10.08 Purchase Agreement dated October 21, 1997 among Castle Energy Corporation, Clint Norton, Southwest
Concept, Inc., James F. Meara, Jr., Donaldson Luftkin Jenrette Securities Corporation Custodian SEP
FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31,
1997 filed on November 13, 1997, SEC File No. 000-24394)
10.09 Registration Rights Agreement dated October 21, 1997 among Castle Energy Corporation, Clint Norton,
Southwest Concept, Inc., James F. Meara, Jr., Donaldson Luftkin Jenrette Securities Corporation
Custodian SEP FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the
Company. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.10 Promissory Note dated October 21, 1997 between Castle Energy Corporation and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31,
1997 filed on November 13, 1997, SEC File No. 000-24394)
10.11 Common Stock Purchase Warrant dated October 21, 1997 issued to Castle Energy Corporation by the
Company. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.12 Promissory Note dated October 21, 1997 between Clint Norton and the Company. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.13 Common Stock Purchase Warrant dated October 21, 1997 issued to Clint Norton by the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31,
1997 filed on November 13, 1997, SEC File No. 000-24394)
10.14 Promissory Note dated October 21, 1997 between Southwest Concept, Inc. and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended July 31,
1997 filed on November 13, 1997, SEC File No. 000-24394)
10.15 Common Stock Purchase Warrant dated October 21, 1997 issued to Southwest Concept, Inc. by the
Company. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year
ended July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.16 Promissory Noted dated October 21, 1997 between James F. Meara, Jr. and the Company. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.17 Common Stock Purchase Warrant dated October 21, 1997 issued to James F. Meara, Jr. by the
Company. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.18 Promissory Note dated October 21, 1997 between Donaldson Luftkin Jenrette Securities Corporation
Custodian SEP FBO James F. Meara IRA and the Company. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997,
SEC File No. 000-24394)
<PAGE>
10.19 Common Stock Purchase Warrant dated October 21, 1997 issued to Donaldson Luftkin Jenrette
Securities Corporation Custodian SEP FBO James F. Meara IRA and the Company. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.20 Promissory Note dated October 21, 1997 between Lincoln Trust Company FBO Perry D. Snavely IRA
and the Company. (Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.21 Common Stock Purchase Warrant dated October 21, 1997 issued to Lincoln Trust Company FBO Perry
D. Snavely IRA by the Company. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394)
10.22 Agreement dated November 7, 1997 between Ernesto Rubio del Cueto and the Company. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
10.23 LPG Sales Agreement dated November 12, 1997 between Exxon and the Company. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended July 31, 1997 filed on
November 13, 1997, SEC File No. 000-24394)
</TABLE>
The following material contracts are filed as part of the report.
<TABLE>
<CAPTION>
<C> <S>
10.24 Purchase order dated November 7, 1996 between County Sanitation Districts of Orange County and
Wilson Technologies, Inc.
27.01 Financial Data Schedule (Filed herewith).
</TABLE>
b. Reports on Form 8-K.
The following Report on Form 8-K is incorporated herein by reference:
Company's Current Report on Form 8-K filed on October 28, 1997 regarding the
Company's (i) completion of a $1.5 million private placement consisting of
promissory notes and warrants and (ii) contemplation of filing a registration
statement with the Securities and Exchange Commission for the sale of its
Common Stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENN OCTANE CORPORATION
December 15, 1997 By: /S/ Ian T. Bothwell
----------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
COUNTY SANITATION DISTRICTS
OF ORANGE COUNTY
P.O. Box 8127
Fountain Valley, California 92728-8127
(714) 962-2411
FAX (714) 965-0728
VENDOR NO: W11910
WILSON TECHNOLOGIES, INC.
12118 SOUTH BLOOMFIELD
SANTA FE SPRINGS, CA 90670
- ------------------------------
FOB SHIPPING POINT
DESTINATION PREPAY & CHARGE FREIGHT
Include Prepaid Freight Bill with Invoice
-----------------------------------------
Districts cannot Accept Collect Shipments
-----------------------------------------
RECEIVING 10844 ELLIS AVE. WILL
FOUNTAIN VALLEY 92708-7018 CALL
RECEIVING 22212 BROOKHURST
HUNTINGTON BEACH 92646 OTHER
DELIVERY DATE
3/08/97
310-929-6789
BOARDS MO 1/24/96 ITM 11B6B
AUTHORITY
- ---------
PURCHASE ORDER 80057
- --------------------------
DEPARTMENT REQUISITION NO: 89971
- ---------------------------------------
BUYER K YAROSH DATE 11/07/96 BY M
CONFIRMING NON-CONFIRMING
CHANGE ORDER NO DATE
CHANGE
------
ORIG. PREVIOUS
AMOUNT CHANGE(S)
- ------ ---------
THIS ADJUSTED
CHANGE TOTALS
- ------ ------
<TABLE>
<CAPTION>
NOTE: MATERIAL SAFETY DATA SHEETS REQUIRED FOR HAZARDOUS MATERIAL
ITEM FUND ORG ACCOUNT W.O./SCSDOC STK W.E. QUAN UOM PRICE EXTENSION DESCRIPTION
- ---- ---- --- ------- --------------- ---- ---- --- ----- --------- ------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <S> <C> <C>
- ----
1 233,406 PURCHASE OF CNG FUELING STATION
EQUIPMENT, SPECIFICATION NO. E-266,
TAX 18,088.97 (FOR CNG COMPRESSOR SKID PACKAGE
ONLY) PURSUANT TO ALL TERMS AND
CONDITIONS OF THE PRUCASE CONTRACT
DATED, APRIL 25, 1996, AND IN
ACCORDANCE WITH MINUTE ORDER 1/24/96
AUTHORIZING GM TO AWARD
2 9104, 3720, 620702, 53720000
3 NOT TO EXCEED $251,494.97
4 COORDINATE WITH JOHN FALKENSTEIN
EXT 5141
5
P1-51A, SPEC NO 3-266, MO 1/24/96
6
DETTLE 5069
IMPORTANT NOTICE TO VENDOR TAXABLE SUBTOTAL
- --------------------------
1. THIS ORDER IS SUBJECT TO CALIRONIA SALES AND USE TAX SALES TAX
--
2. THIS AGENCY IS EXEMPT FROM ALL FEDERAL TAXES, INDICATE EXCLUSION
---
3. INVOICES MUST BE SUMITTED TO PROMPTLY AND IN DUPLICATE. TOTAL PURCHASE $251,494.97
--------- ============== ===========
4. NOTE ABOVE IDENTIFICATION AND SHIPPING INSTRUCTIONS. AUTHORIZED SIGNATURE
PRICES STATED HEREON ARE CONSIDERED FIRM. ANY CHANGES FROM PRICE =====================
SHOWN MUST BE APPROVED BY THE DISTRICTS PRIOR TO SHIPMENT
</TABLE>
VENDOR
DATA CONTROL NO. 89326
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Penn
Octane Corporation's Quarterly Report on Form 10-Q for the three months ended
October 31, 1997 and is qualified in its entirety by reference to such
Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 401,196
<SECURITIES> 0
<RECEIVABLES> 630,307
<ALLOWANCES> 53,406
<INVENTORY> 870,738
<CURRENT-ASSETS> 3,307,700
<PP&E> 4,817,489
<DEPRECIATION> 1,331,416
<TOTAL-ASSETS> 7,515,534
<CURRENT-LIABILITIES> 4,471,659
<BONDS> 1,078,967
0
2,700
<COMMON> 86,946
<OTHER-SE> 1,875,262
<TOTAL-LIABILITY-AND-EQUITY> 7,515,534
<SALES> 8,188,002
<TOTAL-REVENUES> 8,188,002
<CGS> 7,758,459
<TOTAL-COSTS> 7,758,459
<OTHER-EXPENSES> 550,362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,137
<INCOME-PRETAX> (124,448)
<INCOME-TAX> 0
<INCOME-CONTINUING> (124,448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (124,448)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
