UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number: 000-24394
PENN OCTANE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1790357
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
900 VETERANS BOULEVARD, SUITE 240, REDWOOD CITY, CALIFORNIA 94063
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (650) 368-1501
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
------- -------
The number of shares of Common Stock, par value $.01 per share,
outstanding on March 4, 1998 was 9,694,510.
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION
TABLE OF CONTENTS
ITEM PAGE NO.
---- --------
<S> <C> <C> <C>
Part I 1. Financial Statements
Consolidated Balance Sheets as of January 31, 1998 (unaudited) 3-4
and July 31, 1997
Consolidated Statements of Operations for the three and six months
ended January 31, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the six months ended
January 31, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-17
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-23
Part II 1. Legal Proceedings 24
2. Changes in Securities 24
3. Defaults Upon Senior Securities 24
4. Submission of Matters to a Vote of Security Holders 24
5. Other Information 24
6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24-26
</TABLE>
<PAGE>
PART I
ITEM 1.
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
January 31, July 31,
1998 1997
------------ ----------
<S> <C> <C>
Current Assets
Cash (note G). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,055,232 $ 31,142
Trade accounts receivable, less allowance for doubtful
accounts of $53,406 (note G) . . . . . . . . . . . . . . . . . . . . 2,239,131 281,500
Related party receivables. . . . . . . . . . . . . . . . . . . . . . . 123,792 171,601
Costs and estimated earnings in excess of billings on. . . . . . . . . 63,670 196,888
uncompleted contracts (note D)
Inventories (note D) . . . . . . . . . . . . . . . . . . . . . . . . . 811,008 795,797
Deferred registration costs. . . . . . . . . . . . . . . . . . . . . . 473,132 -
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 180,237 83,082
------------ ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 4,946,202 1,560,010
Property, plant and equipment - net (note C). . . . . . . . . . . . . . 3,864,604 3,185,148
Lease rights (net of accumulated amortization of $455,662 and $432,765)
(note C). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 698,377 721,274
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . 111,449 29,935
------------ ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,620,632 $5,496,367
============ ==========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
January 31, July 31,
1998 1997
-------------- --------------
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt, less unamortized discount of
$46,875 and $0 at January 31, 1998 and July 31, 1997 (note E) . . . . . $ 1,612,777 $ 1,152,391
Revolving line of credit (note E) . . . . . . . . . . . . . . . . . . . . - 140,000
Construction accounts payable . . . . . . . . . . . . . . . . . . . . . . - 121,801
Trade accounts payable (note G) . . . . . . . . . . . . . . . . . . . . . 2,883,766 481,348
Billings in excess of costs and estimated earnings in excess of billings
on uncompleted contracts (note D) . . . . . . . . . . . . . . . . . . . - 7,596
Borrowings from IBC-Brownsville (note G). . . . . . . . . . . . . . . . . 672,552 672,552
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,205,458 1,055,237
-------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 6,374,553 3,630,925
Long-term debt, less current maturities (note E) . . . . . . . . . . . . . 1,080,000 1,112,833
Commitments and contingencies (note G) . . . . . . . . . . . . . . . . . . - -
Stockholders' Equity (note F)
Senior Preferred stock-$.01 par value, 5,000,000 shares authorized; 0
shares issued and outstanding at January 31, 1998 and July 31, 1997 . . - -
Preferred stock-$.01 par value, 5,000,000 shares authorized; 0 and
270,000 convertible shares issued and outstanding at January 31, 1998
and July 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,700
Common stock-$.01 par value, 25,000,000 shares authorized; 9,694,510
and 8,169,286 shares issued and outstanding at January 31, 1998 and
July 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,945 81,693
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 11,896,965 10,515,266
Notes receivable including accrued interest receivable from the
president of the Company and a related party for exercise of warrants . ( 2,949,873) ( 2,834,865)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 6,877,958) ( 7,012,185)
-------------- --------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . 2,166,079 752,609
-------------- --------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . $ 9,620,632 $ 5,496,367
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
January 31, January 31, January 31, January 31,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . . . . . . . . $ 10,107,056 $ 13,512,451 $ 18,295,058 $ 16,058,944
Cost of goods sold. . . . . . . . . . . . . . 9,097,001 12,728,248 16,855,460 15,481,213
------------- ------------- ------------- -------------
Gross profit . . . . . . . . . . . . . . . . 1,010,055 784,203 1,439,598 577,731
------------- ------------- ------------- -------------
Selling, general and administrative expenses
Legal and professional fees. . . . . . . . . 207,194 188,464 359,978 379,895
Salaries and payroll related expenses. . . . 279,688 132,490 486,722 246,771
Travel . . . . . . . . . . . . . . . . . . . 30,138 69,097 112,544 93,133
Other. . . . . . . . . . . . . . . . . . . . 188,571 75,960 296,709 173,401
------------- ------------- ------------- -------------
705,591 466,011 1,255,953 893,200
------------- ------------- ------------- -------------
Operating income (loss). . . . . . . . . . . 304,464 318,192 183,645 ( 315,469)
Other income (expense)
Interest expense . . . . . . . . . . . . . . ( 105,143) ( 69,168) ( 166,280) ( 123,506)
Interest income. . . . . . . . . . . . . . . 59,356 2 116,864 713
------------- ------------- ------------- -------------
Net income (loss) before taxes . . . . . . 258,677 249,026 134,229 ( 438,262)
Provision for income taxes. . . . . . . . . . - - - -
------------- ------------- ------------- -------------
Net income (loss). . . . . . . . . . . . . $ 258,677 $ 249,026 $ 134,229 $ ( 438,262)
------------- ------------- ------------- -------------
Income (loss) per common share (note B) . . . $ 0.03 $ 0.05 $ 0.02 $ ( 0.08)
============= ============= ============= =============
Income (loss) per common share assuming
dilution (note B). . . . . . . . . . . . . . $ 0.02 $ 0.04 $ 0.01 $ ( 0.08)
============= ============= ============= =============
Weighted average common shares outstanding. . 8,716,337 5,205,000 8,620,819 $ 5,082,283
============= ============= ============= =============
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONS OLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
------------------------------
January 31, January 31,
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 134,229 $ ( 438,262)
Adjustments to reconcile net loss to net cash used in operating
Activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 136,945 217,988
Amortization of lease rights and other non-current assets. . . . . 28,898 65,975
Amortization of loan discount. . . . . . . . . . . . . . . . . . . 28,125
Interest income from related party notes receivables . . . . . . . ( 115,008) -
Changes in current assets and liabilities:
Restricted cash ( 4,685)
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . ( 1,957,631) ( 432,560)
Related party receivable . . . . . . . . . . . . . . . . . . . . . 47,809 -
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . - 26,233
Costs and estimated earnings in excess of billings on uncompleted
contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,218 -
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 15,210) ( 300,926)
Prepaid and other current assets . . . . . . . . . . . . . . . . . ( 85,155) ( 19,289)
Deferred registration costs. . . . . . . . . . . . . . . . . . . . ( 473,132) -
Construction and accounts payable. . . . . . . . . . . . . . . . . 2,274,019 101,422
Billings in excess of costs and estimated earnings in excess
of billings on uncompleted contracts . . . . . . . . . . . . . . ( 7,596) -
Other assets and liabilities, net. . . . . . . . . . . . . . . . . ( 99,514) ( 7,836)
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . 269,819 64,753
-------------- --------------
Net cash provided by (used in) operating activities. . . . . . . 299,816 ( 727,187)
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . ( 843,581) ( 5,400)
-------------- --------------
Net cash used in investing activities. . . . . . . . . . . . . . ( 843,581) ( 5,400)
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 -
Reduction in debt. . . . . . . . . . . . . . . . . . . . . . . . . ( 923,395) ( 7,469)
-------------- --------------
Net cash provided by financing activities. . . . . . . . . . . . 1,567,855 417,531
-------------- --------------
Net increase (decrease) in cash. . . . . . . . . . . . . . . . 1,024,090 ( 315,056)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . 31,142 364,525
-------------- --------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . $ 1,055,232 $ 49,469
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 129,007 $ -
============== ==============
Supplemental disclosures of noncash transactions:
Common stock and warrants issued (note F). . . . . . . . . . . . . $ 263,000 $ -
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
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 (Company or Parent). 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 LPG sales volume since inception has been to
PMI Trading Limited (PMI), a subsidiary of Petroleos Mexicanos (PEMEX), the
Mexican state owned oil company.
The Company commenced operations during the fiscal year ended July 31, 1995 upon
construction of its terminal facility in Brownsville, Texas (Brownsville
Terminal Facility). Prior to such time, the Company was in the "development
stage" until the business was established and planned principal operations
commenced during the year ended July 31, 1995.
In February 1997, the Company formed Wilson Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary, for the purpose of engaging in the
business of designing, constructing, installing and servicing equipment for CNG
fueling stations and related products for use in the CNG industry throughout the
world. The subsidiary's name was changed to PennWilson CNG, Inc. (PennWilson)
in August 1997.
In October 1997, the Company formed Penn CNG Holdings, Inc. (Holdings), a
Delaware corporation and a wholly-owned subsidiary, to act as a holding company
for the Company's CNG-related operations, including the ownership and operation
of CNG fueling stations, sales of CNG-powered vehicles and other CNG-related
business. In February 1998, the Company formed PennWill, S.A. de C.V., Camiones
Ecologicos, S.A. de C.V., Grupo Ecologico Industrial, S.A. de C.V., Estacion
Ambiental, S.A. de C.V., Estacion Ambiental II, S.A. de C.V., and Serinc, S.A.
de C.V. (collectively Estacion), all Mexican corporations, for the Company's
future Mexico CNG-related operations, including the ownership and operation of
CNG fueling stations, sales of CNG-powered vehicles and other CNG-related
business.
BASIS OF PRESENTATION
- -----------------------
The accompanying financial statements include the Company and its subsidiaries.
All significant intercompany accounts and transactions are eliminated.
The unaudited consolidated balance sheet as of January 31, 1998, the unaudited
consolidated statements of operations, and the unaudited consolidated statements
of cash flows for the three and six months ended January 31, 1998 and 1997 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 January 31, 1998 and the unaudited
consolidated results of operations and unaudited consolidated cash flows for the
three and six months ended January 31, 1998 and 1997.
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 and the Company's Quarterly
Report on Form 10-Q for the three months ended October 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 - INCOME (LOSS) PER COMMON SHARE
Income (loss) per share of common stock is computed on the weighted average
number of shares outstanding. During periods in which the Company incurred
losses, giving effect to common stock equivalents is not presented as it would
be antidilutive. Fully diluted loss per share of common stock for the three and
six months ended January 31, 1997 assumes the conversion of the Company's
preferred 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 became effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Early adoption was not permitted. Had the Company applied the
provisions of SFAS 128 in periods prior to December 15, 1997, income (loss) per
share would not have been materially different from the amounts presented.
NOTE C - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
-------------- --------------
<S> <C> <C>
LPG:
Building . . . . . . . . . . . . . $ 173,500 $ 173,500
LPG terminal . . . . . . . . . . . 3,426,440 3,426,440
Automobiles and equipment. . . . . 385,038 378,039
Office equipment . . . . . . . . . 29,914 22,202
Leasehold improvements . . . . . . 281,544 237,899
CNG:
Furniture, fixtures and equipment. 191,588 162,161
Automobiles. . . . . . . . . . . . 500 40,023
Capital construction in progress . 768,133 -
Leasehold improvements . . . . . . 8,575 8,575
-------------- --------------
5,265,232 4,448,839
Less: accumulated depreciation and
Amortization. . . . . . . . . . . ( 1,400,628) ( 1,263,691)
-------------- --------------
$ 3,864,604 $ 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 and six months ended January
31, 1998 was to increase the Company's net income by $71,017 and $142,034 and
increase the Company's income per common share by $.01 and $.02, respectively.
<PAGE>
NOTE D - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
------------ -----------
<S> <C> <C>
LPG. . . . . . . . . . . . $ 574,072 $ 492,551
CNG
Raw material and supplies 236,936 199,519
Work in progress. . . . . - 103,727
------------ -----------
$ 811,008 $ 795,797
============ ===========
</TABLE>
Costs and estimated earnings on uncompleted contracts consist of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
------------ ------------
Uncompleted contracts consist of:
<S> <C> <C>
Costs incurred on uncompleted contracts. . . $ 2,148,681 $ 488,560
Estimated earnings. . . . . . . . . . . . . . . 150,021 101,294
------------ ------------
2,298,702 589,854
Less: billings to date. . . . . . . . . . . . . 2,235,032 400,562
------------ ------------
$ 63,670 $ 189,292
============ ============
Included in the accompanying balance sheet under
the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts . . . . . . $ 63,670 $ 196,888
Billings in excess of costs and estimated
earnings on uncompleted contracts . . . . . . - ( 7,596)
------------ ------------
$ 63,670 $ 189,292
============ ============
</TABLE>
The above amounts include approximately $821,994 related to change-orders for
additional work performed by the Company in connection with the construction of
equipment for a CNG fueling station for the New York City Department of
Transportation (NYDOT), which have been submitted to the customer for approval.
During March 1998, the Company was requested to furnish additional documentation
with respect to the submitted change-orders.
<PAGE>
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
------------ ----------
<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. . . . . . . . . . . . . . . . $ 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 ; 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 $46,875, 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 . . . . . . . . . . . . . . . 1,453,125 -
Capitalized lease obligations payable in monthly installments totaling $3,138; due on
various dates through January 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 44,033
------------ ----------
2,692,777 2,265,224
Current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,612,777 1,152,391
------------ ----------
$ 1,080,000 $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 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 preferred stock was convertible into voting shares of
common stock of the Company at a conversion ratio of one share of preferred
stock for 3.333 shares of common stock. On September 10, 1997, the Board of
Directors of the Company approved the issuance of an additional 100,000 shares
of common stock as an inducement for the preferred stockholders to convert the
shares of preferred stock and release all rights with respect to the preferred
stock. In January 1998, all 270,000 shares of the preferred stock were converted
into an aggregate of 999,910 shares of common stock of the Company.
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 August 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. As of March 1, 1998, the
Company had failed to register the warrants and as such is obligated to issue to
the holder of the Exercised Securities 10,000 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.
In connection with the issuance of $1,500,000 of promissory notes, holders of
the promissory notes received warrants to purchase 250,000 shares of common
stock of the Company at an exercise price of $6.00 per share, exercisable on or
before October 21, 2000 (the Promissory Warrants). In connection with the
issuance of the Promissory Warrants, the Company entered into a Registration
Rights Agreement.
STOCK AWARD PLAN
On October 21, 1997, the Company adopted the 1997 Stock Award Plan (Plan).
Under the terms of the Plan, the Company 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 is 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.
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.
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 attorneys' fees, or the offset (principal
and interest). Short-term borrowing of $672,552 and accrued interest of
$220,858 reflect the amount of the offsets at January 31, 1998. 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.
<PAGE>
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.
On February 13, 1998, County Sanitation Districts of Orange County,
California (Orange County) filed a suit (Case No. 790409) in the Superior Court
of the State of California asserting the following claims: Specific performance,
possession of personal property and damages and breach of contract against the
Company and PennWilson, CNG, Inc.; fraud/misrepresentation, negligent
misrepresentation and interference with contract against the Company,
PennWilson, CNG, Inc., Penn CNG Holdings, Inc., Michael Jadeski, an employee of
the Company and John Weber and James Antione, former employees of the Company.
Orange County is seeking judgment against the Company and PennWilson CNG, Inc.
for delivery of the equipment under the contract or the contract value of
$251,494, consequential damages, costs of suit, interest, incidental damages and
other relief. Orange County is also seeking from all defendants general,
special, exemplary and punitive damages and costs of suit and other relief. The
Company intends to file a counter suit against Orange County for breach of
contract, among other things. The Company intends to vigorously defend against
Orange County's claims.
The Company and its subsidiaries are also involved with other proceedings,
lawsuits and claims. The Company is of the opinion that the liabilities, if
any, ultimately resulting from such proceedings, lawsuits and claims should not
materially affect its consolidated financial position.
CREDIT FACILITY 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 propylene
(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
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. Under the RZB Credit Facility, the Company may not permit to exist any
lien, security interest, mortgage, charge or other encumbrance of any nature on
any of its properties or assets, except in favor of RZB, without the consent of
RZB. 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. The Company's President, Chairman and
Chief Executive Officer has personally guaranteed all of the Company's payment
obligations with respect to the RZB Credit Facility. Upon establishment of the
RZB Credit Facility, beginning November 11, 1997, the Company began invoicing
PMI on a weekly basis.
As of January 31, 1998, letters of credit established under the RZB Credit
Facility in favor of Exxon for purchases of LPG was $5,150,000 of which
$1,837,352 was being used to secure unpaid purchases from Exxon as of January
31, 1998. In connection with these purchases, as of January 31, 1998, the
Company had unpaid invoices due from PMI totaling $1,079,163 and cash balances
maintained in the RZB Credit Facility collateral account of $995,545.
During February 1998, a letter of credit was established under the RZB Credit
Facility in favor of PMI for purchases of PPL totaling $367,400.
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.
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 had an
accumulated deficit since 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 January 31, 1998 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 monthly volumes required under 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.
PPL BUSINESS
In September 1997, the Company sold limited quantities of PPL that it purchased
from PMI in Mexico to customers in the United States. During January and
February 1998, the Company entered into contracts expiring March 1998 for the
supply of PPL purchased from PMI and sold to Chevron Chemical Company (Chevron).
The supply price from PMI is below the sales price provided for in the Chevron
sales agreement.
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. During December 1997, due to
the Company's inability to obtain high grade PPL, the contract was cancelled.
CNG BUSINESS
Prior to January 31, 1998, the Company was awarded two contracts for the design,
construction and installation of equipment for CNG fueling stations for A.E.
Schmidt Environmental in connection with CNG fueling stations being constructed
for the NYDOT (total contract amount of approximately $1,487,000) and the County
Sanitation Districts of Orange County, California (Orange County) (total
contract amount of approximately $251,000). As of January 31, 1998, the Company
has substantially completed the NYDOT contract. In connection with the Orange
County contract, Orange County has filed suit against the Company and the
Company intends to file a counter suit against Orange County (see Note G).
The Company is pursuing additional CNG contracts; however, the Company has not
entered into any CNG contracts subsequent to January 31, 1998.
In connection with the Company's plans to develop its CNG business strategy, the
Company is currently planning to design, construct, install and operate CNG
refueling stations in Mexico, through Estacion.
NOTE J - BOARD OF DIRECTORS
Effective February 17, 1998, Mr. John H. Robinson resigned as Director of the
Company. A replacement for Mr. Robinson has not yet been elected to the Board
of Directors.
<PAGE>
NOTE K - 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 January 31, 1998 and for
the six months ended January 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
LPG CNG Totals
-------------- -------------------- --------------
<S> <C> <C> <C>
Revenues from external customers . . . . . . . $ 16,356,247 $ 1,938,811 $ 18,295,058
Interest expense . . . . . . . . . . . . . . . 159,609 6,671 166,280
Depreciation and amortization. . . . . . . . . 174,440 19,528 193,968
Segment income (loss). . . . . . . . . . . . . 317,446 ( 183,217) 134,229
Segment assets . . . . . . . . . . . . . . . . 8,408,425 1,212,207 9,620,632
Segment liabilities. . . . . . . . . . . . . . ( 6,301,830) ( 1,152,723) ( 7,454,553)
Expenditure for segment assets . . . . . . . . 826,490 17,091 843,581
RECONCILIATION TO CONSOLIDATED AMOUNTS
- ----------------------------------------------
Revenues
Total revenues for reportable segments $ 18,295,058
Other revenues -
Elimination of intersegment revenues -
--------------------
Total consolidated revenues $ 18,295,058
====================
Profit or Loss
Total profit or loss for reportable segments $ 134,229
Other profit or loss -
Elimination of intersegment profits -
Unallocated amounts
Corporate headquarters expense -
Other expenses -
--------------------
Consolidated income before income taxes $ 134,229
====================
Assets
Total assets for reportable segments $ 9,620,632
Other assets -
Corporate headquarters -
Other unallocated amounts -
--------------------
Total consolidated assets $ 9,620,632
====================
Geographic Information . . . . . . . . . . . . Revenues Assets
- ---------------------------------------------- -------------- --------------------
United States. . . . . . . . . . . . . . . . . $ 18,244,883 $ 9,620,632
-------------- --------------------
Canada . . . . . . . . . . . . . . . . . . . . 50,175 -
-------------- --------------------
$ 18,295,058 $ 9,620,632
============== ====================
</TABLE>
<PAGE>
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 and six
months ended January 31, 1998 discussed below. To date, there has been no
significant activity associated with the operations of Holdings or Estacion.
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 and six months ended January 31, 1998, the Company derived approximately
94.8% and 87.9% of its revenues from sales of LPG, of which sales to PMI
accounted for 99.8% and 99.8% of total LPG sales respectively.
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 January 31, 1998.
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 Chevron 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 and average
sales price of LPG for the three and six months ended January 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
January 31, January 31, January 31, January 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Volume Sold
LPG (millions of gallons) 26.1 22.6 41.2 27.3
Average sales price
LPG (per gallon). . . . . $ 0.37 $ 0.59 $ 0.39 $ 0.58
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED WITH THE THREE MONTHS ENDED
JANUARY 31, 1997
Revenues. Revenues for the three months ended January 31, 1998 were $10.1
million compared with $13.5 million for the three months ended January 31, 1997,
a decrease of $3.4 million or 25%. Of this decrease, $5.0 million was
attributable to decreased average sales prices for LPG during the three months
ended January 31, 1998, partially offset by (i) increased volumes of LPG sold
during the three months ended January 31, 1998 of $1.3 million, and (ii)
$293,290 was attributable to revenues from sales of equipment for CNG fueling
stations.
Cost of sales. Cost of sales during the three months ended January 31,
1998 was $9.1 million compared with $12.7 million during the three months ended
January 31, 1997, a decrease of $3.6 million or 29%. Of this decrease (i) $5.0
million was attributable to decreased average purchase prices for LPG during the
three months ended January 31, 1998 and (ii) reduced costs as a result of
efficiencies of approximately $100,000, partially offset by (i) increased
volumes of LPG sold during the three months ended January 31, 1998 of $1.2
million, and (ii) $291,111 was attributable to costs associated with sales of
equipment for CNG fueling stations.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $705,591 during the three months ended January 31,
1998 compared with $466,011 during the three months ended January 31, 1997, an
increase of $239,580 or 51.4%. This increase was primarily attributable to (i)
$45,000 of costs associated with the exercise of warrants, (ii) PennWilson
expenses of $101,290, associated with the commencement of the Company's CNG
related operations and (iii) higher corporate selling, general and
administrative expenses associated with the Company's LPG and CNG related
operations.
Other income and expense, net. Other income (expense), net was ($45,787)
during the three months ended January 31, 1998 compared with ($69,166) during
the three months ended January 31, 1997. 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 partially offset by
increased interest costs associated with the RZB Credit Facility and additional
indebtedness incurred by the Company.
Income tax. 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. Due
to the availability of net operating loss carryforwards, net income during the
three months ended January 31, 1998 did not result in any income tax expense.
Due to the net loss for the six months ended January 31, 1997, there was no
income tax expense during the three months ended January 31, 1997.
SIX MONTHS ENDED JANUARY 31, 1998 COMPARED WITH THE SIX MONTHS ENDED
JANUARY 31, 1997
Revenues. Revenues for the six months ended January 31, 1998 were $18.3
million compared with $16.1 million for the six months ended January 31, 1997,
an increase of $2.2 million or 13.9%. Of this increase (i) $5.4 million was
attributable to increased volumes of LPG sold during the six months ended
January 31, 1998, partially offset by decreased average sales prices for LPG
during the six months ended January 31, 1998 of $5.1 million, and (ii) $1.9
million was attributable to revenues from sales of equipment for CNG fueling
stations. The increase in volume of LPG sales during the six months ended
January 31, 1998 resulted primarily 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 six months ended January 31, 1998
was $16.9 million compared with $15.5 million during the six months ended
January 31, 1997, an increase of $1.4 million or 8.9%. Of this increase (i)
$4.9 million was attributable to increased volumes of LPG sold during the six
months ended January 31, 1998 and (ii) $1.8 million was attributable to costs
associated with sales of equipment for CNG fueling stations, partially offset by
(i) decreased average purchase prices for LPG during the six months ended
January 31, 1998 of $5.2 million and (ii) reduced costs as a result of
efficiencies of approximately $100,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.3 million during the six months ended January
31, 1998 compared with $893,200 during the six months ended January 31, 1997, an
increase of $362,753 or 40.6%. This increase was primarily attributable to (i)
$45,000 of costs associated with the exercise of warrants, (ii) PennWilson
expenses of $315,219, associated with the commencement of the Company's CNG
related operations and (iii) higher corporate selling, general and
administrative expenses associated with the Company's LPG and CNG related
operations.
Other income and expense, net. Other income (expense), net was ($49,416)
during the six months ended January 31, 1998 compared with ($122,793) during the
six months ended January 31, 1997. 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 partially offset by increased
interest costs associated with the RZB Credit Facility and additional
indebtedness incurred by the Company.
Income tax. 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. Due
to the availability of net operating loss carryforwards, net income during the
six months ended January 31, 1998 did not result in any income tax expense. Due
to the net loss for the six months ended January 31, 1997, there was no income
tax expense.
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 that became
effective in October 1996.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception in
1992, has used cash in operations and has a deficit in working capital. 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.
<PAGE>
The following table summarizes cash flows for the six months ended January
31, 1998 and 1997.
<TABLE>
<CAPTION>
Six Months Ended
------------- -------------
January 31, January 31,
1998 1997
------------- -------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 299,816 $ ( 727,187)
Net cash used in investing
Activities. . . . . . . . . . . . . . . . . . . . . ( 843,581) ( 5,400)
Net cash provided by financing activities . . . . . 1,567,855 417,531
------------- -------------
Net increase (decrease) in cash . . . . . . . . . . $ 1,024,090 $ ( 315,056)
============= =============
</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.
Prior to January 31, 1998, the Company was awarded two contracts for the
design, construction and installation of equipment for CNG fueling stations for
A.E. Schmidt Environmental in connection with CNG fueling stations being
constructed for the New York City Department of Transportation (NYDOT) (total
contract amount of approximately $1.5 million) and the County Sanitation
Districts of Orange County, California (Orange County) (total contract amount of
approximately $251,000). As of January 31, 1998, the Company has substantially
completed the NYDOT contract. In connection with the Orange County contract,
Orange County has filed suit against the Company and the Company intends to file
a counter suit against Orange County (see Note G to the Company's consolidated
financial statements).
The Company is pursuing additional CNG contracts for the supply of
CNG-related equipment and services in the future; however, the Company has not
entered into any CNG contracts subsequent to January 31, 1998.
As of January 31, 1998, the Parent has loaned PennWilson a total of
$1.3 million and intends to ontinue to make periodic loans to PennWilson for
working capital requirements. Effective January 31, 1998, the Parent has agreed
to cancel $1.0 million of such indebtedness in exchange for certain assets of
PennWilson.
In connection with the Company's plans to develop its CNG business
strategy, the Company is currently planning to design, construct, install and
operate CNG refueling stations in Mexico, through Estacion.
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 $473,132, which have been recorded as deferred registration costs
at January 31, 1998.
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 Finance L.L.C. (RZB) for demand loans and standby letters of credit
(RZB Credit Facility) to finance the Company's purchase of LPG and propylene
(PPL). Under the RZB Credit Facility, the Company 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
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. Under the RZB Credit Facility, the Company may not permit to exist any
lien, security interest, mortgage, charge or other encumbrance of any nature on
any of its properties or assets, except in favor of RZB, without the consent of
RZB. 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. The Company's President, Chairman and
Chief Executive Officer has personally guaranteed all of the Company's payment
obligations with respect to the RZB Credit Facility. Upon establishment of the
RZB Credit Facility, beginning November 11, 1997, the Company began invoicing
PMI on a weekly basis.
As of January 31, 1998, letters of credit established under the RZB
Credit Facility in favor of Exxon for purchases of LPG was $5.2 million of which
$1.8 million was being used to secure unpaid purchases from Exxon as of January
31, 1998. In connection with these purchases, as of January 31, 1998, the
Company had unpaid invoices due from PMI totaling $1.1 million and cash balances
maintained in the RZB Credit Facility collateral account of $995,545.
During February 1998, a letter of credit was established under the RZB
Credit Facility in favor of PMI for purchases of PPL totaling $367,400.
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.
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.
During August 1997, warrants to purchase a total of 430,000 shares of
Common Stock were exercised, resulting in cash proceeds to the Company of $1.1
million. The proceeds of such exercises were used for working capital and
repayment of Company debt.
On August 29, 1997, in connection with the exercise of warrants to purchase
100,000 shares of Common Stock of the Company by an unrelated third party, the
Company entered into a Registration Rights Agreement 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. As of March 1,
1998, the Company had failed to register the warrants and as such is obligated
to issue to the holder of the Exercised Securities 10,000 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.
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 $3.6 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 Company's 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 became effective for financial statements issued
for periods ending after December 15, 1997; earlier application was not
permitted. Accordingly, EPS for the periods presented in the accompanying
unaudited consolidated statements of operations are calculated under the
guidance of SFAS 128.
Had the Company applied the provisions of SFAS 128 in periods prior to
December 15, 1997, income (loss) per share would not have been materially
different from the amounts presented in the Company's Consolidated Statements of
Operations.
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>
Operator: Please take care in this section, Item 14 - There are a number of
"Color: White" codes. 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)
10.24 Purchase order dated November 7, 1996 between County Sanitation Districts of Orange County and Wilson
Technologies, Inc. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the three
months ended October 31, 1997 filed on December 15, 1997, SEC File No. 000-24394)
</TABLE>
The following exhibits are filed as part of the report.
27.01 Financial Data Schedule (Filed herewith).
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
March 17, 1998 By: /s/ Ian T. Bothwell
-----------------------------------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
<TABLE> <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 quarterly period ended
January 31, 1998 and is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
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<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
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0
0
<OTHER-SE> 2069134
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