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 April 30, 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 of (I.R.S. Employer Identification No.)
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 June 12, 1998 was 9,967,673.
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PENN OCTANE CORPORATION
TABLE OF CONTENTS
ITEM PAGE NO.
- - - - ------- --------
<S> <C> <C> <C>
Part I 1. Financial Statements
Consolidated Balance Sheets as of April 30, 1998 (unaudited)
and July 31, 1997 3-4
Consolidated Statements of Operations for the three and nine months
ended April 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months ended
April 30, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-18
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19-25
Part II 1. Legal Proceedings 26
2. Changes in Securities 26
3. Defaults Upon Senior Securities 26
4. Submission of Matters to a Vote of Security Holders 26
5. Other Information 26
6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26-28
</TABLE>
<PAGE>
PART I
ITEM 1.
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
April 30, July 31,
1998 1997
------------ ----------
<S> <C> <C>
(Unaudited)
Current Assets
Cash (note G). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 268,663 $ 31,142
Trade accounts receivable, less allowance for doubtful accounts of
$53,406 (notes D and G). . . . . . . . . . . . . . . . . . . . . . . . 2,731,135 281,500
Related party receivables. . . . . . . . . . . . . . . . . . . . . . . 147,009 171,601
Costs and estimated earnings in excess of billings on uncompleted
contracts (note D) . . . . . . . . . . . . . . . . . . . . . . . . . . 63,580 196,888
Inventories (note D) . . . . . . . . . . . . . . . . . . . . . . . . . 759,270 795,797
Deferred registration costs. . . . . . . . . . . . . . . . . . . . . . 479,870 -
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 129,850 83,082
------------ ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 4,579,377 1,560,010
Property, plant and equipment - net (note C). . . . . . . . . . . . . . 4,124,545 3,185,148
Lease rights (net of accumulated amortization of $467,111 and $432,765)
(note C). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686,928 721,274
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . 72,946 29,935
------------ ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,463,796 $5,496,367
============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
April 30, July 31,
1998 1997
-------------- --------------
Current Liabilities (Unaudited)
<S> <C> <C>
Current maturities of long-term debt, less unamortized discount of
$18,750 and $0 at April 30, 1998 and July 31, 1997 (note E) . . . . . . . $ 1,625,447 $ 1,152,391
Revolving line of credit (notes E and G). . . . . . . . . . . . . . . . . 526,328 140,000
Construction accounts payable . . . . . . . . . . . . . . . . . . . . . . - 121,801
Trade accounts payable (note G) . . . . . . . . . . . . . . . . . . . . . 2,284,312 481,348
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
1,176,995 1,055,237
-------------- --------------
Accrued liabilities
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 6,285,634 3,630,925
Long-term debt, less current maturities (note E) . . . . . . . . . . . . . 80,000 1,112,833
Commitments and contingencies (notes D and G). . . . . . . . . . . . . . . - -
Stockholders' Equity (note F)
Senior Preferred stock-$.01 par value, 5,000,000 shares authorized; 0
shares issued and outstanding at April 30, 1998 and July 31, 1997 . . . . - -
Preferred stock-$.01 par value, 5,000,000 shares authorized; 0 and
270,000 convertible shares issued and outstanding at April 30, 1998 and
July 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,700
Common stock-$.01 par value, 25,000,000 shares authorized; 9,952,673
and 8,169,286 shares issued and outstanding at April 30, 1998 and
July 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,527 81,693
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 13,152,034 10,515,266
Notes receivable including accrued interest receivable from the
president of the Company and a related party for exercise of warrants . . ( 3,007,377) ( 2,834,865)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 7,146,022) ( 7,012,185)
-------------- --------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . 3,098,162 752,609
-------------- --------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . $ 9,463,796 $ 5,496,367
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
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<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------------- -------------------------
April 30, April 30, April 30, April 30,
1998 1997 1998 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . $ 7,867,571 $8,021,182 $26,162,629 $24,080,126
Cost of goods sold . . . . . . . . . . . . . . 7,263,748 7,634,879 24,119,208 23,116,092
------------ ----------- ------------ ------------
Gross profit. . . . . . . . . . . . . . . . . 603,823 386,303 2,043,421 964,034
------------ ----------- ------------ ------------
Selling, general and administrative expenses
Legal and professional fees . . . . . . . . . 154,329 201,576 486,182 581,471
Salaries and payroll related expenses . . . . 238,441 74,899 725,163 321,670
Travel. . . . . . . . . . . . . . . . . . . . 43,208 63,165 155,752 156,298
Other . . . . . . . . . . . . . . . . . . . . 160,469 97,234 485,303 270,635
------------ ----------- ------------ ------------
596,447 436,874 1,852,400 1,330,074
------------ ----------- ------------ ------------
Operating income (loss) . . . . . . . . . . . 7,376 ( 50,571) 191,021 ( 366,040)
Other income (expense)
Interest expense. . . . . . . . . . . . . . . ( 109,916) ( 48,840) ( 276,196) ( 172,346)
Interest income . . . . . . . . . . . . . . . 59,476 53 176,340 766
------------ ----------- ------------ ------------
Net income (loss) before taxes. . . . . . . ( 43,064) ( 99,358) 91,165 ( 537,620)
Provision for income taxes . . . . . . . . . . - - - -
------------ ----------- ------------ ------------
Net income (loss) . . . . . . . . . . . . . $ ( 43,064) $( 99,358) $ 91,165 $( 537,620)
------------ ----------- ------------ ------------
(Loss) per common share and (loss) per common
share assuming dilution (note B) . . . . . . . $ ( 0.00) $ ( 0.02) $ ( 0.01) $ ( 0.10)
============ =========== ============ ============
Weighted average common shares outstanding . . 9,764,127 5,936,108 8,993,546 $ 5,443,346
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
-------------- -------------
April 30, April 30,
1998 1997
-------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,165 $ ( 537,620)
Adjustments to reconcile net loss to net cash used in operating
Activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 204,948 326,232
Amortization of lease rights . . . . . . . . . . . . . . . . . . . 34,346 97,826
Amortization of loan discount. . . . . . . . . . . . . . . . . . . 56,250 -
Interest income from related party notes receivables . . . . . . . ( 172,512) -
Changes in current assets and liabilities:
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . ( 2,449,635) ( 303,489)
Related party receivable . . . . . . . . . . . . . . . . . . . . . 24,592 -
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . - 26,233
Costs and estimated earnings in excess of billings on uncompleted
contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,308 -
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,528 ( 149,301)
Prepaid and other current assets . . . . . . . . . . . . . . . . . ( 28,768) ( 284,561)
Deferred registration costs. . . . . . . . . . . . . . . . . . . . ( 479,870) -
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . - 451,703
Construction and accounts payable. . . . . . . . . . . . . . . . . 1,674,565 ( 300,929)
Billings in excess of costs and estimated earnings in excess
of billings on uncompleted contracts. . . . . . . . . . . . . ( 7,596) -
Other assets and liabilities, net. . . . . . . . . . . . . . . . . ( 61,010) 2,163
Note receivable. . . . . . . . . . . . . . . . . . . . . . . . . . - ( 37,500)
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . 274,009 ( 7,747)
-------------- -------------
Net cash used in operating activities. . . . . . . . . . . . . . ( 669,680) ( 716,990)
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . ( 1,171,526) ( 100,914)
-------------- -------------
Net cash used in investing activities. . . . . . . . . . . . . . ( 1,171,526) ( 100,914)
Cash flows from financing activities:
Revolving credit facilities. . . . . . . . . . . . . . . . . . . . 386,327 -
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 325,000
Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . . 1,131,250 931,260
Reduction in debt. . . . . . . . . . . . . . . . . . . . . . . . . ( 938,850) ( 379,938)
-------------- -------------
Net cash provided by financing activities. . . . . . . . . . . . 2,078,727 876,322
-------------- -------------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . 237,521 58,418
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . 31,142 364,525
-------------- -------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . $ 268,663 $ 422,943
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 244,495 $ 106,753
============== =============
Supplemental disclosures of noncash transactions:
Common stock and warrants issued (notes F and G) . . . . . . . . . $ 1,520,651 $ 3,086,971
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 future Mexico CNG-related operations, including the ownership
and operation of CNG fueling stations, sales of CNG-powered vehicles and other
CNG-related business. In February 1998, the Company formed PennWill, S.A. de
C.V., Camiones Ecologicos, S.A. de C.V., Grupo Ecologico Industrial, S.A. de
C.V., Estacion Ambiental, S.A. de C.V., Estacion Ambiental II, S.A. de C.V., and
Serinc, S.A. de C.V. (collectively Estacion), all Mexican corporations, for the
Company's future Mexico CNG-related operations.
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, the unaudited consolidated statements
of operations, and the unaudited consolidated statements of cash flows contained
herein 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 April 30, 1998, the
unaudited consolidated results of operations for the three and nine months ended
April 30, 1998 and 1997 and the unaudited consolidated statements of cash flows
for the nine months ended April 30, 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
Reports on Form 10-Q for the quarterly periods ended October 31, 1997 and
January 31, 1998.
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>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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.
THE FOLLOWING TABLE PRESENTS RECONCILIATIONS FROM (LOSS) PER COMMON SHARE TO
(LOSS) PER COMMON SHARE ASSUMING DILUTION:
<TABLE>
<CAPTION>
For the three months ended April 30, 1998 For the nine months ended April 30, 1998
------------------------------------------ ------------------------------------------
Income (loss) Shares Per-Share Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ------------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss). . . . . . . . . . $ ( 43,064) $ 91,165
Less: Dividends on preferred stock. - ( 225,000)
BASIC EPS
Net (loss) available to common
stockholders . . . . . . . . . . . ( 43,064) 9,764,127 $ ( 0.00) ( 133,835) 8,993,546 $ ( 0.01)
=========== ===========
EFFECT OF DILUTIVE SECURITIES
Warrants . . . . . . . . . . . . . - - - -
Convertible Preferred Stock. . . . . - - - -
DILUTED EPS
Net (loss) available to common
stockholders . . . . . . . . . . . $ ( 43,064) 9,764,127 $ ( 0.00) $ ( 133,835) 8,993,546 $ ( 0.01)
============== ============= =========== ============== ============= ===========
</TABLE>
<TABLE>
<CAPTION>
For the three months ended April 30, 1997 For the nine months ended April 30, 1997
------------------------------------------------ -----------------------------------------------
Income (loss) Shares Per-Share Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ------------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) . . . . . . . . . . . . . $ ( 99,358) $ ( 537,620)
Less: Dividends on preferred stock. - -
BASIC EPS
Net (loss) available to common
stockholders. . . . . . . . . . . . ( 99,358) 5,936,108 $ ( 0.02) ( 537,620) 5,443,346 $ ( 0.10)
=========== ===========
EFFECT OF DILUTIVE SECURITIES
Warrants. . . . . . . . . . . . . . - - - -
Convertible Preferred Stock. . . . . - - - -
DILUTED EPS
Net (loss) available to common
stockholders. . . . . . . . . . . . $ ( 99,358) 5,936,108 $ ( 0.02) $ ( 537,620) 5,443,346 $ ( 0.10)
============== ============= =========== ============== ============= ===========
</TABLE>
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
April 30, July 31,
1998 1997
------------- --------------
<S> <C> <C>
LPG:
Building . . . . . . . . . . . . . $ 173,500 $ 173,500
LPG terminal . . . . . . . . . . . 3,426,440 3,426,440
Automobiles and equipment. . . . . 390,538 378,039
Office equipment . . . . . . . . . 29,914 22,202
Leasehold improvements . . . . . . 373,824 237,899
CNG:
Furniture, fixtures and equipment. 191,589 162,161
Automobiles. . . . . . . . . . . . 500 40,023
Capital construction in progress . 998,297 -
Leasehold improvements . . . . . . 8,575 8,575
------------- --------------
5,593,177 4,448,839
Less: accumulated depreciation and
amortization. . . . . . . . . . . ( 1,468,632) ( 1,263,691)
------------- --------------
$ 4,124,545 $ 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 became effective on April 1, 1998. As a result of the Amendment, the
Company changed the useful life of its LPG terminal assets, leasehold
improvements and lease rights through the extension of the amended lease period.
The effect of the change in estimate for the three and nine months ended April
30, 1998 was to increase the Company's net income by $71,017 and $213,051 and
increase the Company's income per common share by $.01 and $.02 respectively.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
April 30, July 31,
1998 1997
---------- -----------
<S> <C> <C>
LPG. . . . . . . . . . . . $ 574,117 $ 492,551
CNG
Raw material and supplies 185,153 199,519
Work in progress. . . . . - 103,727
---------- -----------
$ 759,270 $ 795,797
========== ===========
</TABLE>
Costs and estimated earnings on uncompleted contracts consist of the following:
<TABLE>
<CAPTION>
April 30, July 31,
1998 1997
---------- --------------
Uncompleted contracts consist of:
<S> <C> <C>
Costs incurred on uncompleted contracts. . . . . . . . . . . . . . . $2,130,588 $ 488,560
Estimated earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . 168,024 101,294
---------- --------------
2,298,612 589,854
Less: billings to date. . . . . . . . . . . . . . . . . . . . . . . . . 2,235,032 400,562
---------- --------------
$ 63,580 189,292
========== ==============
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts
Billings in excess of costs and estimated . . . . . . . . . . . . . . . $ 63,580 $ 196,888
earnings on uncompleted contracts
- ( 7,596)
---------- --------------
$ 63,580 $ 189,292
========== ==============
</TABLE>
As of April 30, 1998, 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 which was
subsequently provided on May 15, 1998. On April 30, 1998, the Company received
notification from A.E. Schmidt Environment ("AES") that it was in default under
the agreement between AES and the Company relating to the NYDOT CNG fueling
station. The Company has responded to AES indicating that AES is in default
with the terms of the agreement and that the Company is awaiting satisfactory
resolution of these matters prior to completion of the remaining work outlined
under the agreement. The Company is currently exploring legal remedies
available.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - LONG-TERM DEBT
<TABLE>
<CAPTION>
April 30, 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 . . . . . . . . . $ 91,197 $ 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
(extinguished in April 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,000,000
1,500,000 in promissory notes, less unamortized discount of $18,750, 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 . 1,481,250 -
Capitalized lease obligations payable in monthly installments totaling $3,138; due
on various dates through January 1999. . . . . . . . . . . . . . . . . . . . . . . . . - 44,033
---------- ----------
1,705,447 2,265,224
Current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,625,447 1,152,391
---------- ----------
$ 80,000 $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. The
issuance of the additional 100,000 shares was recorded as a common stock
dividend in the amount of $225,000 at January 30, 1998.
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 June 1, 1998, the
Company had failed to register any of the warrants and as such has issued to the
holder of the Exercised Securities 40,000 warrants to purchase 40,000 shares of
common stock of the Company at an exercise price of $2.50 per share, exercisable
within one year from their respective dates of issuance.
Effective April 7, 1998, the Company sold to the holder of the Secured
Promissory Note 258,163 shares of newly issued shares of the Company at $4.00
per share in payment of all principal and interest balances owing on the Secured
Promissory Note as of April 7, 1998 of $1,032,652.
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.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
$235,208 reflect the amount of the offsets at April 30, 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>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 was seeking judgment against the Company and PennWilson CNG, Inc.
for delivery of the equipment under the contract or the contract value of
$251,494, consequential damages, costs of suit, interest, incidental damages and
other relief. Orange County was also seeking from all defendants general,
special, exemplary and punitive damages and costs of suit and other relief. On
April 23, 1998, the suit was settled whereby the Company agreed to repay Orange
County $202,812 plus interest thereon (10% per annum), to be paid in 4
installments on April 23, 1998, May 23, 1998, June 23, 1998 and July 23, 1998 in
the amounts of $50,703, $51,953, $51,564 and $51,119, respectively. The Company
has made the April 23, 1998 and May 23, 1998 payments. In connection with the
settlement, the Company agreed to provide Orange County with a Stipulation of
Judgement and both Orange County and the Company signed mutual releases.
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 pays a fee with respect to
each letter of credit thereunder in an amount equal to the greater of (i) $500,
(ii) 1.5% of the maximum face amount of such letter of credit, or (iii) such
higher amount as may be agreed between the Company and RZB. Any amounts
outstanding under the RZB Credit Facility shall accrue interest at a rate equal
to the rate announced by the Chase Manhattan Bank as its prime rate plus 2.5%.
Pursuant to the RZB Credit Facility, RZB has sole and absolute discretion to
terminate the RZB Credit Facility and to make any loan or issue any letter of
credit thereunder. RZB also has the right to demand payment of any and all
amounts outstanding under the RZB Credit Facility at any time. In connection
with the RZB Credit Facility, the Company granted a mortgage, security interest
and assignment in any and all of the Company's real property, buildings,
pipelines, fixtures and interests therein or relating thereto, including,
without limitation, the lease with the Brownsville Navigation District of
Cameron County for the land on which the Company's Brownsville Terminal Facility
is located, the Pipeline Lease, and in connection therewith agreed to enter into
leasehold deeds of trust, security agreements, financing statements and
assignments of rent, in forms satisfactory to RZB. Under the RZB Credit
Facility, the Company may not permit to exist any lien, security interest,
mortgage, charge or other encumbrance of any nature on any of its properties or
assets, except in favor of RZB, without the consent of RZB. The Company's
President, Chairman and Chief Executive Officer has personally guaranteed all of
the Company's payment obligations with respect to the RZB Credit Facility. Upon
establishment of the RZB Credit Facility, beginning November 11, 1997, the
Company began invoicing PMI on a weekly basis.
Effective April 22, 1998, the aggregate amount available under the RZB Credit
Facility was increased to $7,000,000.
As of April 30, 1998, letters of credit established under the RZB Credit
Facility in favor of Exxon for purchases of LPG was $5,200,000 of which
$1,405,642 was being used to secure unpaid purchases from Exxon as of April 30,
1998. In addition, as of April 30, 1998, the Company had approximately $526,328
of loans outstanding under the RZB Credit Facility. In connection with these
purchases, as of April 30, 1998, the Company had unpaid invoices due from PMI
totaling $1,618,791 and cash balances maintained in the RZB Credit Facility
collateral account of $60,112.
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. The letter of
credit expired on April 30, 1998.
During June 1998, a letter of credit was established under the RZB Credit
Facility in favor of PG&E NGL Marketing, L.P. for purchases of LPG totaling
$360,000.
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. As of April 30, 1998, PennWilson had failed to make
certain payments to vendors and as such several of PennWilson's vendors have
made clams against the Bonds.
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 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.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 April 30, 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. As of April 30, 1998 the Company has not entered into any
additional contracts for the supply and sale of PPL.
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 April 30, 1998, the Company was awarded two contracts for the design,
construction and installation of equipment for CNG fueling stations for AES 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 April 30, 1998, the Company has substantially
completed the NYDOT contract. On May 15, 1998, AES provided notice to
PennWilson that it was terminating its contract with the Company due to the
Company's failure to cure a default condition. The Company believes that AES is
in default with the terms as prescribed under the contract. The Company is
currently exploring legal remedies available (see Note D). In connection with
the Orange County contract, on February 13, 1998, Orange County filed suit
against the Company. On April 23, 1998, Orange County and the Company entered
into a settlement. (see Note G).
The Company has not entered into any CNG contracts subsequent to April 30, 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.
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 April 30, 1998 and for the
nine months ended April 30, 1998.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
LPG CNG Totals
-------------- ------------ --------------
<S> <C> <C> <C>
Revenues from external customers . . . . . . . $ 24,197,199 $ 1,965,430 $ 26,162,629
Interest expense . . . . . . . . . . . . . . . 260,143 16,053 276,196
Depreciation and amortization. . . . . . . . . 209,452 29,842 239,294
Segment income (loss). . . . . . . . . . . . . 313,537 ( 222,372) 91,165
Segment assets . . . . . . . . . . . . . . . . 8,123,113 1,340,683 9,463,796
Segment liabilities. . . . . . . . . . . . . . ( 5,442,928) ( 922,706) ( 6,365,634)
Expenditure for segment assets . . . . . . . . 1,154,435 17,091 1,171,526
RECONCILIATION TO CONSOLIDATED AMOUNTS
- - - - ----------------------------------------------
Revenues
Total revenues for reportable segments $26,162,629
Other revenues -
Elimination of intersegment revenues -
------------
Total consolidated revenues $26,162,629
============
Profit or Loss
Total profit or loss for reportable segments $ 91,165
Other profit or loss -
Elimination of intersegment profits -
Unallocated amounts
Corporate headquarters expense -
Other expenses -
------------
Consolidated income before income taxes $ 91,165
============
Assets
Total assets for reportable segments $ 9,463,796
Other assets -
Corporate headquarters -
Other unallocated amounts -
------------
Total consolidated assets $ 9,463,796
============
Geographic Information . . . . . . . . . . . . Revenues Assets
- - - - ---------------------------------------------- -------------- ------------
United States. . . . . . . . . . . . . . . . . $ 26,102,199 $ 9,463,796
--------------
Canada . . . . . . . . . . . . . . . . . . . . 60,430 -
-------------- ------------
$ 26,162,629 $ 9,463,796
============== ============
</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 nine
months ended April 30, 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 nine months ended April 30, 1998, the Company derived approximately
97.3% and 90.7% of its revenues from sales of LPG, of which sales to PMI
accounted for 100% 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 April 30, 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 nine months ended April 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
April 30, April 30, April 30, April 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Volume Sold
LPG (millions of gallons) 23.6 19.1 64.8 46.5
Average sales price
LPG (per gallon). . . . . $ .32 $ .41 $ .37 $ .51
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1998 COMPARED WITH THE THREE MONTHS ENDED
APRIL 30, 1997
Revenues. Revenues for the three months ended April 30, 1998 were $7.9
million compared with $8.0 million for the three months ended April 30, 1997, a
decrease of $153,611 or 2%. Of this decrease, (i) $1.6 million was attributable
to decreased average sales prices for LPG during the three months ended April
30, 1998 and (ii) $167,643 was attributable to lower revenues from sales of
equipment for CNG fueling stations, partially offset by (i) increased volumes of
LPG sold during the three months ended April 30, 1998 of $1.5 million and (ii)
increased volumes of PPL sold during the three months ended April 30, 1998 of
$168,489.
Cost of sales. Cost of sales during the three months ended April 30, 1998
was $7.3 million compared with $7.6 million during the three months ended April
30, 1997, a decrease of $371,131 or 4.9%. Of this decrease (i) $1.6 million was
attributable to decreased average purchase prices for LPG during the three
months ended April 30, 1998 and (ii) $92,379 was attributable to lower costs
associated with sales of equipment for CNG fueling stations, partially offset by
(i) increased volumes of LPG sold during the three months ended April 30, 1998
of $1.2 million and (ii) increased volumes of PPL sold during the three months
ended April 30, 1998 of $142,547.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $596,447 during the three months ended April 30,
1998 compared with $436,874 during the three months ended April 30, 1997, an
increase of $159,573 or 36.5%. This increase was primarily attributable to (i)
PennWilson expenses of $8,515, associated with the commencement of the Company's
CNG related operations and (ii) 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 ($50,440)
during the three months ended April 30, 1998 compared with ($48,787) during the
three months ended April 30, 1997. The decrease of other income (expense), net,
is due to the accrual of interest income on 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 net loss during the three months ended April 30, 1998 and April 30, 1997,
there was no income tax expense.
<PAGE>
NINE MONTHS ENDED APRIL 30, 1998 COMPARED WITH THE NINE MONTHS ENDED APRIL 30,
1997
Revenues. Revenues for the nine months ended April 30, 1998 were $26.2
million compared with $24.1 million for the nine months ended April 30, 1997, an
increase of $2.1 million or 8.7%. Of this increase (i) $6.7 million was
attributable to increased volumes of LPG sold during the nine months ended April
30, 1998, (ii) 197,676 was attributable to increased volumes of PPL sales, (iii)
176,434 was attributable to other income, and (iv) $1.8 million was attributable
to revenues from sales of equipment for CNG fueling stations, partially offset
by decreased average sales prices for LPG during the nine months ended April 30,
1998 of $6.8 million. The increase in volume of LPG sales during the nine months
ended April 30, 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 nine months ended April 30, 1998
was $24.1 million compared with $23.1 million during the nine months ended April
30, 1997, an increase of $1.0 million or 4.3%. Of this increase (i) $5.9
million was attributable to increased volumes of LPG sold during the nine months
ended April 30, 1998, (ii) $173,779 was attributable to increased volumes of PPL
sold, and (iii) $1.7 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 nine months ended April 30, 1998 of $6.6
million and (ii) reduced LPG terminal costs as a result of efficiencies of
$159,637.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.9 million during the nine months ended April 30,
1998 compared with $1.3 million during the nine months ended April 30, 1997, an
increase of $522,326 or 39.3%. This increase was primarily attributable to (i)
$45,000 of costs associated with the exercise of warrants, (ii) PennWilson
expenses of $323,724, 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 ($99,856)
during the nine months ended April 30, 1998 compared with ($171,580) during the
nine months ended April 30, 1997. The decrease of other income (expense), net,
is due to the accrual of interest income on 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
nine months ended April 30, 1998 did not result in any income tax expense. Due
to the net loss for the nine months ended April 30, 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.
The following table summarizes cash flows for the nine months ended April
30, 1998 and 1997.
<TABLE>
<CAPTION>
Nine months Ended
----------------------------
April 30, April 30,
1998 1997
-------------- ------------
<S> <C> <C>
Net cash used in operating activities . . $ ( 669,680) $( 716,990)
Net cash used in investing
activities. . . . . . . . . . . . . . . . ( 1,171,526) ( 100,914)
Net cash provided by financing activities 2,078,727 876,322
-------------- ------------
Net increase in cash. . . . . . . . . . . $ 237,521 $ 58,418
============== ============
</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 period from 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 April 30, 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 April 30, 1998, the Company has substantially
completed the NYDOT contract. In connection with the Orange County contract,
Orange County had filed suit against the Company and the parties subsequently
reached a settlement agreement (see Notes D, G and I to the Company's
consolidated financial statements).
The Company has not entered into any CNG contracts subsequent to April 30,
1998.
As of April 30, 1998, the Parent has loaned PennWilson a total of $1.7
million and intends to continue to make periodic loans to PennWilson for working
capital requirements. Effective January 31, 1998, the Parent 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 $479,870, which have been recorded as deferred registration costs
at April 30, 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
became effective April 1, 1998. As of April 30, 1998, Seadrift had yet to make
certain improvements as prescribed under the Pipeline Lease Amendment.
Accordingly, the Company will continue to make payments as prescribed under the
Pipeline Lease Agreement.
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 pays a fee with
respect to each letter of credit thereunder in an amount equal to the greater of
(i) $500, (ii) 1.5% of the maximum face amount of such letter of credit, or
(iii) such higher amount as may be agreed between the Company and RZB. Any
amounts outstanding under the RZB Credit Facility shall accrue interest at a
rate equal to the rate announced by the Chase Manhattan Bank as its prime rate
plus 2.5%. Pursuant to the RZB Credit Facility, RZB has sole and absolute
discretion to terminate the RZB Credit Facility and to make any loan or issue
any letter of credit thereunder. RZB also has the right to demand payment of
any and all amounts outstanding under the RZB Credit Facility at any time. In
connection with the RZB Credit Facility, the Company granted a mortgage,
security interest and assignment in any and all of the Company's real property,
buildings, pipelines, fixtures and interests therein or relating thereto,
including, without limitation, the lease with the Brownsville Navigation
District of Cameron County for the land on which the Company's Brownsville
Terminal Facility is located, the Pipeline Lease, and in connection therewith
agreed to enter into leasehold deeds of trust, security agreements, financing
statements and assignments of rent, in forms satisfactory to RZB. Under the RZB
Credit Facility, the Company may not permit to exist any lien, security
interest, mortgage, charge or other encumbrance of any nature on any of its
properties or assets, except in favor of RZB, without the consent of RZB. The
Company's President, Chairman and Chief Executive Officer has personally
guaranteed all of the Company's payment obligations with respect to the RZB
Credit Facility. Upon establishment of the RZB Credit Facility, beginning
November 11, 1997, the Company began invoicing PMI on a weekly basis.
Effective April 22, 1998, the aggregate amount available under
the RZB Credit Facility was increased to $7,000,000.
As of April 30, 1998, letters of credit established under the RZB
Credit Facility in favor of Exxon for purchases of LPG totaled $5,200,000 of
which $1,405,642 was being used to secure unpaid purchases from Exxon as of
April 30, 1998. In addition, as of April 30, 1998, the Company had
approximately $526,328 of loans outstanding under the RZB Credit Facility. In
connection with these purchases, as of April 30, 1998, the Company had unpaid
invoices due from PMI totaling $1,618,791 and cash balances maintained in the
RZB Credit Facility collateral account of $60,112.
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. The
letter of credit expired as April 30, 1998.
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.
During June 1998, a letter of credit was established under the RZB Credit
Facility in favor of PG&E NGL Marketing, L.P. for purchases of LPG totaling
$360,000.
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 June 1,
1998, the Company had failed to register any of the warrants and as such has
issued to the holder of the Exercised Securities 40,000 warrants to purchase
40,000 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.
Effective April 7, 1998, the Company sold to the holder of the Secured
Promissory Note 258,163 shares of newly issued shares of the Company at $4.00
per share in payment of all principal and interest balances owing on the Secured
Promissory Note as of April 7, 1998 of $1,032,652.
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 $3.7 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 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)
The following exhibits are filed as part of the report.
10.25 Amendment letter dated April 22, 1998 between RZB Finance LLC and the Company.
10.26 Lease dated May 8, 1998 between Nine-C Corporation and J.B. Richter, Capital Resources and J.B. Richter and J.B.
Richter, an individual, with respect to the Company's executive offices.
10.27 Employment Agreement dated October 20, 1997 between the Company and Vicente Soriano.
10.28 Employment Agreement dated November 17, 1997 between the Company and Jerry L. Lockett.
27.01 Financial Data Schedule (Filed herewith).
b. Reports on Form 8-K.
</TABLE>
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
June 12, 1998 By: /s/ Ian T. Bothwell
--------------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
<PAGE>
[RZB LOGO]
April 22, 1998
Penn Octane Corporation
900 Veterans Blvd., #240
Redwood City, CA 94063
Attention: Mr. Jerry Richter
Gentlemen:
We wish to advise you that effective April 22, 1998 the terms of our line
letter dated October 14, 1997 are amended as follows: The aggregate principal
sum and face amount available under the credit facility is Seven million dollars
($7,000,000) instead of six million dollars ($6,000,000). All other terms and
conditions remain unchanged.
This amendment letter forms an integral part of the line letter dated October
14, 1997.
Very truly yours,
RZB FINANCE LLC
By: Pearl Geffers
--------------------
By:
Accepted and Agreed to on this
__24___ day of _April, 1998
------ -----
Penn Octane Corporation
By: J.B. Richter - President
---------------------------
By: Ian T. Bothwell - V.P.
--------------------------
RZB FINANCE LLC 1133 Avenue of the Americas, 16th Floor, New York, NY. 10036 -
- - - - -----------------
Telephone - (212) 845-4100, Fax - (212) 944-2093, Telex:
7500227 RZBLLCNY - A WHOLLY OWNED SUBSIDIARY OF RAIFFEISEN ZENTRALBANK STERREICH
AG (RZB-AUSTRIA) -
Head Office: A-1030 Vienna, Am Stadtpark 9, Postal address: A-1011 Vienna, PO
Box 50 - Member of UNICO Banking Group
RZB FINANCE LLC 1133 Avenue of the Americas, 16th Floor, New York, NY. 10036 -
- - - - -----------------
Telephone - (212) 845-4100, Fax - (212) 944-2093, Telex:
7500227 RZBLLCNY - A WHOLLY OWNED SUBSIDIARY OF RAIFFEISEN ZENTRALBANK STERREICH
AG (RZB-AUSTRIA) -
Head Office: A-1030 Vienna, Am Stadtpark 9, Postal address: A-1011 Vienna, PO
Box 50 - Member of UNICO Banking Group
<PAGE>
PROMISSORY NOTE
PROMISSORY NOTE (the "Note") of the Borrower named below delivered to RZB
----
Finance LLC ("RZB") dated April 22, 1998
---
1. SPECIAL TERMS
--------------
The following terms and provisions shall apply to this Note; definitions of
terms in this or other sections of this Note expressed in the singular shall
include the plural and vice versa.
---- -----
Borrower: Penn Octane Corporation
--------
a ___Delaware_____________ Corporation
--------
(jurisdiction of incorporation)
Principal Amount of this Note:
----------------------------------
Seven Million Dollars
($7,000,000)
Margin: 1% p.a.
------
Loan Documents: Amendment to Line Letter dated April 22, 1998 between the
---------------
Borrower and RZB, Line Letter dated October 14, 1997, between the Borrower and
RZB, General Security Agreement dated October 14, 1997, between the Borrower and
RZB, Continuing Agreement for Letters of Credit dated October 14, 1997, between
the Borrower and RZB, Guaranty and Agreement dated October 14, 1997 between
Jerome Richter (the "Guarantor") and RZB, and all other agreements from time to
time executed by the Borrower or the Guarantor for the benefit of RZB, in each
case as amended, modified or supplemented from time to time.
Minimum Repayment Amount: $100,000
--------------------------
2. PRINCIPAL AND INTEREST
------------------------
FOR VALUE RECEIVED, the Borrower promises to pay to the order of RZB, ON
DEMAND, the Principal Amount of this Note specified in Section 1 or, if less,
the then-outstanding principal amount of all loans (each a "Loan" and
----
collectively, the "Loans") made to the Borrower by RZB pursuant to the Loan
-----
Documents. In no event shall the maturity date of any Loan be more than 30 days
after the date such Loan is made.
The Borrower promises also to pay interest on the unpaid principal amount
of each Loan (after as well as before judgment) from the date thereof until
maturity (whether on demand, by acceleration or otherwise) at a rate per annum
equal to the Margin specified in Section 1 plus the Base Lending Rate from time
to time in effect, such interest to be payable on the last Business Day of each
calendar month and at such maturity.
Notwithstanding the preceding sentence, the Borrower shall also pay
interest at a rate per annum equal to 2% plus the Margin plus the Base Lending
Rate from time to time in effect, on any principal of the Loan and, to the
extent permitted by law, on any interest or other amount payable by the Borrower
hereunder which shall not be paid in full when due (whether on demand, by
acceleration or otherwise) from such due date until paid in full (after as well
as before judgment), such interest to be payable on demand.
All interest shall be computed on the basis of the number of days actually
elapsed in a 360-day year.
Definitions
-----------
The term "Business Day" means any day other than a Saturday, Sunday, or any
------------
day which shall be in New York City a legal holiday or a day on which banking
institutions are authorized by law to close.
The term "Base Lending Rate" means, for any day, the higher of (i) the rate
-----------------
announced by The Chase Manhattan Bank (the "Bank") from time to time at its
principal office in New York, New York as its prime rate for domestic (United
States) commercial loans in effect on such day and (ii) the Federal Funds Rate
in effect on such day plus 1/2%. (Such Base Lending Rate is not necessarily
intended to be the lowest rate of interest charged by the Bank in connection
with extensions of credit.) Each change in the Base Lending Rate shall result
in a corresponding change in the interest rate and such change shall be
effective on the effective date of such change in the Base Lending Rate.
The term "Federal Funds Rate" means, for any day, the overnight federal
--------------------
funds rate in New York City, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) in the Federal Reserve
Statistical Release H.15 (519) or any successor publication, or if such rate is
not so published for any day which is a Business Day, the average of the
quotations for such day on overnight federal funds transactions in New York City
received by the Bank from three federal funds brokers of recognized standing
selected by the Bank.
3. ALL PAYMENTS
-------------
Each payment by the Borrower pursuant to this Note shall be made prior to
1:00 P.M. (New York time) on the date due and shall be made without set-off or
counterclaim to RZB at such account as RZB shall designate, or in the absence of
such designation, to RZB at its office, presently located at 1133 Avenue of the
Americas, New York, NY 10036, or as RZB may otherwise direct and in such amounts
as may be necessary in order that all such payments (after withholding for or on
account of any present or future taxes, levies, imposts, duties or other similar
charges of whatsoever nature imposed by any government or any political
subdivision or taxing authority thereof, other than any tax on or measured by
the net income of RZB pursuant to the income tax laws of the jurisdiction where
RZB's principal or lending office is located) shall not be less than the amounts
otherwise specified to be paid under this Note. Each such payment shall be made
in lawful currency of the United States of America and in immediately available
funds. If the stated due date of any payment required hereunder is other than a
Business Day, such payment shall be made on the next succeeding Business Day and
interest at the applicable rate shall accrue thereon during such extension.
The Borrower will have the right to repay all or any portion of a Loan
prior to demand only if RZB has been notified prior to 10:00 a.m. (New York
time) on the day of any repayment, provided that each partial repayment shall
not be less than the Minimum Repayment Amount. All repayments pursuant to this
paragraph shall be accompanied by the payment of all accrued interest on the
principal amount so paid.
4. REPRESENTATIONS AND WARRANTIES
--------------------------------
The Borrower represents and warrants that all acts, filings, conditions and
things required to be done and performed and to have happened (including,
without limitation, the obtaining of necessary governmental approvals) precedent
to the issuance of this Note to constitute this Note the duly authorized, legal,
valid and binding obligation of the Borrower, enforceable in accordance with its
terms, have been done, performed and have happened in due and strict compliance
with all applicable laws.
5. DEFAULT
-------
Without limiting the right of RZB to demand payment of the Loans evidenced
hereby at any time in its sole discretion, if any of the following events shall
occur: default in payment of any amount due hereunder to the holder hereof,
whether on demand or otherwise; suspension or liquidation by the Borrower of its
usual business or suspension or expulsion of the Borrower from any exchange;
calling of a meeting of creditors; assignment by the Borrower for the benefit of
creditors; dissolution, bulk sale or notice thereof effected or given by the
Borrower; creation of a security interest in any assets of the Borrower which
are or shall be subject to liens granted to the holder hereof by the Borrower
without consent of the holder hereof; insolvency of any kind, attachment,
distraint, garnishment, levy, execution, judgment, application for or
appointment of a receiver or custodian, filing of a voluntary or involuntary
petition under any provision of the U.S. Bankruptcy Code or amendments thereto,
of, by or against the Borrower or any property or rights of the Borrower; filing
of a petition or institution of any proceeding by or against the Borrower for
any relief under any bankruptcy or insolvency laws or any laws relating to the
relief of debtors, readjustment of indebtedness, reorganizations, compositions
or extensions; any governmental authority or any court at the instance of any
governmental authority shall take possession of any substantial part of the
property of the Borrower or shall assume control over the affairs or operations
of the Borrower; any statement, representation or warranty made by the Borrower
in any document, agreement or financial statement delivered to RZB shall prove
to be false in any material respect when made; failure of the Borrower or any
other party thereto to comply with any term of any of the Loan Documents;
failure of the Borrower, on request, to furnish to RZB any financial
information, or to permit inspection by RZB of any books or records; any change
in, or discovery with regard to, the condition or affairs of the Borrower which,
in RZB's opinion, increases its credit risk; or if RZB for any other reason
deems itself insecure; then, the indebtedness evidenced by this Note, and all
accrued interest thereon shall become absolute, due and payable without demand
or notice to the Borrower. Upon default in the due payment of this Note, or
whenever the same or any installment of principal or interest hereof shall
become due in accordance with any of the provisions hereof (whether on demand or
otherwise), RZB may, but shall not be required to, exercise any or all of its
rights and remedies, whether existing by contract, law or otherwise, with
respect to any collateral security delivered in respect of the indebtedness
evidenced hereby.
6. MISCELLANEOUS
-------------
This Note is delivered pursuant to, and entitled to the benefits of, the
Loan Documents.
The Loans and principal repayments thereof may be recorded on the records
of RZB and, prior to any transfer of, or any action to collect, this Note, the
outstanding principal amount of each Loan shall be endorsed on this Note,
together with the date of such endorsement. Any such recordation or endorsement
shall constitute prima facie evidence of the accuracy of the information so
----- -----
recorded or endorsed (provided, however, that the failure of RZB to record any
of the foregoing shall not limit or otherwise affect the obligation of the
Borrower to repay all the Loans (including interest thereon) and its other
obligations hereunder and under the Loan Documents). The Bank may charge any
account of the Borrower with the Bank for amounts payable under this Note.
Each payment of principal of, or interest on, the Loans shall constitute an
acknowledgment of the indebtedness of the Borrower under the Loan Documents and
this Note. The Borrower:
a. waives presentment, demand, protest and other notice of any kind in
connection with this Note, and
b. agrees to pay to the holder hereof, on demand, all costs and
expenses (including reasonable legal fees) incurred in connection with the
enforcement and collection of this Note.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF
THE STATE OF NEW YORK (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW), BUT
THIS SHALL NOT LIMIT THE RATE OF INTEREST WHICH MAY BE CHARGED BY RZB UNDER
OTHER APPLICABLE LAW.
The Borrower hereby agrees that ANY LEGAL ACTION OR PROCEEDING AGAINST THE
BORROWER WITH RESPECT TO THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE STATE OF
NEW YORK IN THE CITY OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE
SOUTHERN DISTRICT OF NEW YORK as RZB may elect, and, by execution and delivery
hereof, the Borrower accepts and consents to, for itself and in respect to its
property, generally and unconditionally, the jurisdiction of the aforesaid
courts and agrees that such jurisdiction shall be exclusive, unless waived by
RZB in writing, with respect to any action or proceeding brought by it against
RZB and any questions relating to usury. Nothing herein shall limit the right
of RZB to bring proceedings against the Borrower in the courts of any other
jurisdiction. Service of process out of any such courts may be made by mailing
copies thereof by registered or certified mail, postage prepaid, to the Borrower
at its address for notices as specified herein and will become effective 30 days
after such mailing. The Borrower agrees that Sections 5-1401 and 5-1402 of the
General Obligations Law of the State of New York shall apply to this Note and,
to the maximum extent permitted by law, waives any right to stay or to dismiss
any action or proceeding brought before said courts on the basis of forum non
----- ---
conveniens.
- - - - -----------
AFTER REVIEWING THIS PROVISION SPECIFICALLY WITH ITS RESPECTIVE COUNSEL,
EACH OF THE BORROWER AND RZB HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS NOTE
OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR
WRITTEN), OR ACTIONS OF THE BORROWER OR RZB. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR RZB MAKING THE LOANS TO THE BORROWER.
Nothing contained in this Note shall be deemed to establish or require the
payment of a rate of interest in excess of the maximum rate permitted by
applicable law (the "Maximum Rate"). If the amount of interest payable for any
------------
interest payment period ending on any interest payment date calculated in
accordance with the provisions of this Note (said amount, the "Calculated
----------
Interest") exceeds the amount of interest that would be payable for such
--
interest payment period had interest for such interest payment period been
-
calculated at the Maximum Rate, there shall be paid on such interest payment
date an amount of interest calculated on the basis of the Maximum Rate for such
interest payment period. If on any subsequent interest payment date, (i) the
Calculated Interest for the interest payment period ending on such subsequent
interest payment date (the "Current Interest Period") is less than the amount of
-----------------------
interest that would be payable for such Current Interest Period had interest for
such Current Interest Period been calculated on the basis of the Maximum Rate
and (ii) any portion of the excess (if any) of Calculated Interest for any prior
interest payment period over interest calculated at the Maximum Rate for such
prior interest payment period (the "Outstanding Interest Amount") remains
-----------------------------
unpaid, then on such subsequent interest payment date there shall be paid, as
provided herein, additional interest for such Current Interest Period in an
amount equal to the lesser of (i) the theretofore unpaid Outstanding Interest
Amounts for all prior interest payment periods or (ii) an amount that, when
added to the amount of Calculated Interest payable for such Current Interest
Period, results in the payment of interest for such Current Interest Period at
the Maximum Rate.
IN WITNESS WHEREOF, the undersigned has caused this Note to be duly
executed and delivered by its duly authorized officer(s).
PENN OCTANE CORPORATION.
By____J.B. Richter__________________
-------------
Name:
Title:
Address of Borrower for Notices:
____________________________________
____________________________________
____________________________________
COMMERCIAL LEASE
This lease, dated for reference purposes only this 28 day of May, 1998, is
made between NINE-C CORPORATION (the "Landlord") and Penn Octane Corporation &
J.B.Richter, an individual (the "Ten-ant").
1. PREMISES.
1.01 Description. Landlord hereby leases to Tenant and Tenant hires from
------------
Landlord on the terms, covenants and conditions set forth herein, those premises
specifically known as Suite 240 designated and identified by crosshatching on
Exhibit "A" attached hereto, (the "Leased Premises"), and incorporated by
reference herein. The Leased Premises, approximately 1325 square feet of usable
space, and approximately 1559 square feet of rentable space (by BOMA Modified
Standards), is located at 900 Veterans Boule-vard, Redwood City, Califor-nia
(the "Building"). The Building is a part of a commercial project which includes
the Building, an adjacent parking lot and parking structure and the underlying
real property (the "Project").
1.02 Confirmation of Terms. Within thirty (30) days after Landlord
------------------------
delivers a fully executed copy of this Lease to Tenant, Tenant's architect may,
at Tenant's expense, verify the rentable area contained in the Leased Premises.
The term "rentable area" as used in this Lease means the rentable area as
determined by the most recent version of the BOMA (Building Owners and Managers
Association International) American National Standard. If tenant's verification
of the rentable area differs from the rentable area specified in Paragraph 1.01,
then the parties shall immediately execute "Confirmation of Lease Terms" to
confirm the rentable area, the Base Rent, Tenant's Pro Rata Share and other
changes that are based on the rentable area of the Premises.
2. BASE RENT.
<PAGE>
2.01 Tenant agrees to pay Landlord as base rent (Base Rent), without
notice, demand, deduction, or offset, the monthly sum of $4910.85 for the first
12 months, adjusted as provided in Paragraph 2.03 for all months thereafter, in
advance on or before the first day of each and every successive calendar month
during the term hereof, except that last month's deposit shall be paid upon
execution hereof. Credit will be given for Tenant's current deposit. The rent
shall commence on the First day of July, 1998 (the "Commencement Date"). All
payments to Landlord under this Lease shall be paid to Landlord at the address
for notice set forth in paragraph 32.15, or at such other address provided to
Tenant by Landlord in writing from time to time.
2.02 Rent for any period which is for less than one month shall be a
prorated portion of the monthly rental based upon a thirty (30) day month.
Tenant acknowledges that late payment by Tenant to Landlord of rent or other
sums due hereunder will cause Landlord to incur certain costs not contemplated
by this Lease, the exact amount of which would be extremely difficult and
impractical to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any trust deed covering the Leased Premises.
Therefore, in the event Tenant shall fail to pay any installments of rent or any
sum due hereunder within five (5) days after receiving notice of such
delinquency, Tenant shall pay to Landlord as additional rent a late charge equal
to TEN percent (10%) of each such installment or other sum. A $15.00 charge
will be paid by the Tenant to the Landlord for each returned check, in addition
to the late charge.
2.03 INTENTIIONALLY OMMITTED
3. PROJECT OPERATING COSTS.
3.01(a) In order that the Rent payable during the Term reflect any
increase in Project Operating Costs (described below), Tenant agrees to pay to
Landlord as Rent, Tenant's Proportionate Share (defined in Paragraph 3.02) of
all increases in costs, expenses and obligations attributable to the Project and
its operation, all as provided below.
(b) If, during any Calendar year during the Term, Project Operating
Costs exceed the Project Operating Costs for the calandar year of the Occupancy,
Tenant shall pay to Landlord, in addition to the Base Rent and all of the
payments due under this Lease, an amount equal to Tenant's Proportionate Share
of such excess Project Operating Costs in accordance with the provisions of this
Paragraph 3.01(b).
(c) The term "Project Operating Costs" shall include all those items
described in the following subparagraphs (1) and (2).
<PAGE>
(1) All taxes, assessments, water and sewer charges and other similar
governmental charges levied on or attributable to the Building or Project as a
whole or their operation, including without limitation, (i) real property taxes
or assessments levied or assessed against the Building or Project as a whole,
and (ii) assessments or charges levied or assessed against the Building or
Project as a whole by any redevelopment agency; but excluding any tax measured
by gross rentals received from the leasing of the Premises, Building or Project.
(2) Operating costs incurred by Landlord in maintaining and operating the
Building and Project, including without limitation the following: costs of (i)
utilities; (ii) supplies; (iii) insurance (including public liability, property
damage, earthquake, and fire and extended coverage insurance for the full
replacement costs of the Building and Project as required by Landlord or its
lenders for the Project; (iv) services of independent contractors; (v)
compensation (including employment taxes and fringe benefits) of all persons who
perform duties connected with the operation, maintenance, repair or overhaul of
the Building or Project, and the HVAC system, equipment, improve-ments and
facilities located within the Project, including without limitation engineers,
janitors, painters, floor waxers, window washers, security and parking
personnel, landscapers and gardeners (but excluding persons performing services
not uniformly available to or performed for substantially all Building or
Project tenants); (vi) operation and maintenance of a room for delivery and
distribu-tion of mail to tenants of the Building or Project as required by the
U.S. Postal Service (including, without limitation, an amount equal to the fair
market rental value of the mail room premises); (vii) management of the Building
or Project, whether managed by Landlord or an independent contractor (including,
without limita-tion, an amount equal to the fair market value of any on-site
manager's office, but excluding any commission or fee for leasing or collecting
rents); (viii) rental expenses for (or a reasonable depreciation allowance on)
personal property used in the main-tenance, operation or repair of the Building
or Project: (ix) costs, expenditures or charges (whether capitalized or not)
required by any governmental or quasi-governmental authority; (x) amortization
of capital expenses (including financing costs) (1) required for the Building as
a whole by a governmental entity for energy conservation or life safety
purposes, or (2) made by Landlord to reduce Project Operating Costs; and (xi)
any other costs or expenses incurred by Landlord under this Lease and not
otherwise reimbursed by tenants of the Project.
(3) Project Operating Costs shall not include costs or expenses only for
the benefit of other tenants.
(d) Tenant's Proportionate Share of Project Operating Costs shall be
payable by Tenant to Landlord as follows:
<PAGE>
(1) Beginning with the second year of the term and for each year
thereafter ("Comparison Year"), Tenant shall pay Landlord an amount equal to
Tenant's Proportionate Share of the Project Operating Costs incurred by Landlord
in the Comparison Year which exceeds the total amount of Project Operating Costs
payable by Landlord for the first year of the term. This excess is referred to
as the "Excess Expenses."
(2) To provide for current payments of Excess Expenses, Tenant shall,
at landlord's request, pay as additional rent during each Comparison Year, an
amount equal to Tenant's Proportionate Share of the Excess Expenses payable
during such Comparison Year, as estimated by Landlord from time to time. Such
payments shall be made in monthly installments, commencing on the first day of
the month following the month in which Landlord notifies Tenant of the amount it
is to pay hereunder and continuing until the first day of the month following
the month in which Landlord gives Tenant a new notice of estimated Excess
Expenses. It is the intention hereunder to estimate from time to time the
amount of the Excess Expenses for each Comparison Year and Tenant's
Proportionate Share thereof, and then to make an adjustment in the following
year based on the actual Excess Expenses incurred for that Comparison Year.
(e) On or before the 90th day of each Comparison Year after the first
Comparison Year (or as soon thereafter as is practical), Landlord shall deliver
to Tenant a statement setting forth Tenant's Proportionate Share of the Excess
Expenses for the preceding Comparison Year. If Tenant's Proportionate Share of
the actual Excess Expenses for the previous Comparison Year exceeds the total of
the estimated monthly payments made by Tenant for such year, Tenant shall pay
Landlord the amount of the deficiency within ten (10) days of the receipt of the
statement. If such total exceeds Tenant's Proportionate Share of the actual
Excess Expenses for such Comparison Year, then Landlord shall credit against
Tenant's next ensuing monthly installment(s) of additional rent an amount equal
to the difference until the credit is exhausted. If a credit is due from
Landlord on the Expiration Date, Landlord shall pay Tenant the amount of the
credit. The obligations of Tenant and Landlord to make payments required under
this Paragraph 3.01 shall survive the Expiration Date.
(f) Tenant's Proportionate Share of Excess Expenses in any Comparison
Year having less than 365 days shall be appropriate-ly prorated.
<PAGE>
(g) If any dispute arises as to the amount of any additional rent due
hereunder, Tenant shall have the right after reasonable notice and at reasonable
times to inspect Landlord's accounting records at Landlord's accounting office
and, if after such inspection Tenant still disputes the amount of additional
rent owed, Landlord and Tenant shall refer the dispute to an independent
certified public accountant selected by them for certification of the proper
amount. Such accountant's certification of the amount and direction as to the
allocation between Landlord and Tenant of the cost of certification shall be
final and conclusive.
3.02 Tenant's Proportionate share shall be 2.78%, the usable area
of the Leased Premises divided by the useable area of the Building, times 100,
computed as follows:
Premises Usable Area: 1325 = .278 x 100 = 2.78%
----
Building Usable Area: 47,692 sq. ft.
3.03 All costs and expenses which Tenant assumes or agrees to pay
to Landlord under this Lease shall be deemed additional rent (which, together
with the Base Rent, is sometimes referred to as the "Rent"). The Rent shall be
paid to the Building manager (or other person) and at such place, as Landlord
may from time to time designate in writing, without any prior demand therefor
and without deduction or offset, in lawful money of the United States of
America.
3.04 In addition to the Rent and any other charges to be paid by
Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all
taxes payable by Landlord (other than net income taxes) which are not otherwise
reimbursable under this Lease, whether or not now customary or within the
contemplation of the parties, where such taxes are upon, measured by or
reasonably attributable to (a) the cost or value of Tenant's equipment,
furniture, fixtures and other personal property located in the Premises, or the
cost or value of any leasehold improvements made in or to the Premises by or for
Tenant, other than standard tenant improvements made by Landlord, regardless of
whether title to such improvements is held by Tenant or Landlord; (b) the gross
or net Rent payable under this Lease, including, without limitation, any rental
or gross receipts tax levied by any taxing authority with respect to the receipt
of the Rent hereunder; (c) the possession, leasing, operation, management,
maintenance, alteration, repair, use or occupancy by Tenant of the Premises or
any portion thereof; or (d) this transaction or any document to which Tenant is
a party creating or transferring an interest or an estate in the Premises. If
it becomes unlawful for Tenant to reimburse Landlord for any costs as required
under this Lease, the Base Rent shall be revised to net Landlord the same net
Rent after imposition of any tax or other charge upon Landlord as would have
been payable to Landlord but for the reimbursement being unlawful.
3.05 Landlord agrees to operate the Project in a prudent manner
with a view to controlling costs in a manner consistent with the sound operation
of the Project.
<PAGE>
4. CONDITION OF THE PREMISES. Tenant's taking possession of the
Premises shall be deemed conclusive evidence that as of the date of taking
possession the Premises are in good order and satisfactory condition, except for
such matters as to which Tenant gave Landlord written notice on or before the
Commencement Date. No promise of Landlord to alter, remodel, repair or improve
the Premises or the Building and no representation, express or implied,
respecting any matter or thing relating to the Premises or Building or this
Lease (including, without limitation, the condition of the Premises or the
Building) have been made to Tenant by Landlord or its Broker or Sales Agent,
other than as may be contained herein or in a separate exhibit or addendum
signed by Landlord and Tenant.
5. TERM.
5.01 The lease term shall commence on the Commencement Date and
shall be for a period of 15 MONTHS ending September 30, 1999.
6. USE OF PREMISES. The Leased Premises may be used and occupied only
for offices and for no other purpose without Landlord's prior written consent.
Landlord does not represent nor warrant that the premises can be used for such
purpose, as it is incumbent upon Tenant to ascertain from the proper
governmental authorities whether or not the premises can be used for Tenant's
intended use. Tenant shall promptly comply with all laws, ordinances, orders
and regulations affecting the Leased Premises and their cleanliness, safety,
occupation and use. Tenant shall not commit, or suffer to be committed, any
waste on the Premises, nor shall Tenant maintain, commit, or permit the
maintenance or commission of any nuisance, as defined in California Civil Code
----------
Section 3479, on the Premises. This provision shall specifically preclude the
storage in or on the Premises, or release in or about the Premises, of hazardous
materials as that term is defined in Federal and California laws, statutes,
rules and regulations.
7. UTILITIES INTERRUPTION. Landlord shall not be liable in damages or
otherwise for any failure or interruption of any utility service, and no such
failure or interruption shall entitle Tenant to terminate this Lease or abate
the rent and other charges.
8. ALTERATIONS, MECHANICS LIENS.
8.01 Alterations may not be made to the Leased Premises without
the prior written consent of Landlord and any alterations of the Leased Premises
except movable furniture and trade fixtures shall at Landlord's option become
part of the realty and belong to the Landlord.
<PAGE>
9. FIRE INSURANCE HAZARDS.
9.01 No use shall be made or permitted to be made of the Leased
Premises, nor acts done, which will increase the existing rate of insurance upon
the Building or cause the cancellation of any insurance policy covering the
Building, or any part thereof, nor shall Tenant sell, or permit to be kept, used
or sold, in or about the Leased Premises, any article which may be prohibited by
the standard form of fire insurance policies. Tenant shall, at its sole cost
and expense, comply with any and all requirements pertaining to the Leased
Premises of any insurance organization or company, necessary for the maintenance
of reasonable fire and public liability insurance, covering the Leased Premises,
or the Building of which it is a part. Tenant agrees to pay to Landlord as
additional rent, any increase in premiums on policies which may be carried by
Landlord on the Leased Premises covering damages to the Building and loss of
rent caused by fire and the perils normally included in extended coverage above
the rates for the least hazardous type of occupancy for industrial, warehousing,
office and distribution operations.
9.02 Tenant shall maintain in full force and effect on all of its
fixtures and equipment in the Leased Premises a policy or policies of fire and
extended coverage insurance with malicious mischief and theft endorsements to
the extent of at least eighty percent (80%) of their insurable value. During
the term of this Lease the proceeds from any such policy or policies of
insurance shall be used for the repair or replacement of the fixtures and
equipment so insured. Landlord shall have no interest in the insurance upon
Tenant's equipment ad fixtures and will sign all documents necessary or proper
in connection with the settlement of any claim or loss by Tenant. Landlord will
not carry insurance on Tenant's possessions, nor on any leasehold improvements
made by Tenant. Tenant shall furnish Landlord with a certificate of such policy
within thirty (30) days of the commencement of this Lease and whenever required
shall satisfy Landlord that such policy is in full force and effect.
<PAGE>
10. LIABILITY INSURANCE. Tenant, commencing upon Tenant's initial
entry into the premises, at its own expense, shall provide and keep in force
with companies acceptable to Landlord public liability insurance for the benefit
of Landlord and Tenant jointly against liability for bodily injury and property
damage in the amount of not less than One Million Dollars ($1,000,000) in
respect to injuries to or death of one person and in an amount of not less than
Two Million Dollars ($2,000,000) in respect to injuries to or death of more than
one person in any one occurrence, and in the amount of not less than Four
Hundred Ninety-Five Thousand Dollars ($495,000) per occurrence in respect to
damage to property, such limits to be in any greater amounts as may be
reasonably indicated by circumstances from time to time existing. Tenant shall
upon occupancy furnish Landlord with a certificate of such policy and whenever
required shall satisfy Landlord that such policy is in full force and effect.
Such policy shall name Landlord as an additional insured and shall be primary
and non-contributing with any insurance carried by Landlord. The policy shall
further provide that it shall not be canceled or altered without twenty (20)
days' prior written notice to Landlord. Insurance required hereunder shall be
in companies rated A+, AAA or better in "Best's Insurance Guide."
11. INDEMNIFICATION BY TENANT.
11.01 This Lease is made on the express condition that Landlord shall
not be liable for or suffer loss by reason of injury to person or property from
any cause (excluding Landlord's negligent act or omission and excluding any
environmental matters not caused by Tenant) in any way connected with the
condition or use of the Leased Premises or the installation or construction of
improvements or personal property therein, including without limitation any
liability for injury to the person or property of Tenant, its agents, officers,
employees or invitees. Tenant agrees to indemnify Landlord and hold it harmless
from any and all liability, loss, cost, or obligation on account of, or arising
out of, any such injury or loss.
11.02 In case any action, suit or proceeding is brought against
Landlord by reason of any such occurrence, under the paragraph above, Tenant,
upon Landlord's request, will at Tenant's expense, resist and defend such
action, suit or proceeding, or cause the same to be resisted and defended by
counsel designated by the insurer whose policy covers the occurrence or by
counsel designated by Tenant and approved by Landlord. The obligations of
Tenant under this section arising by reason of any occurrence taking place
during the Lease Term shall survive any termination of this Lease.
12. REPAIRS.
<PAGE>
12.01 Tenant shall, at Tenant's sole cost and expense, keep the
Premises and every part thereof in good condition and repair (except as
hereinafter provided with respect to Landlord's obligations) including without
limitation, the maintenance, replacement and repair of any storefront, doors,
window casements and glazing. Tenant shall, upon the expiration or sooner
termina-tion of this Lease hereof, surrender the Leased Premises to the Landlord
in good condition, broom clean, ordinary wear and tear and damage from causes
beyond the reasonable control of Tenant excepted. Any damage to adjacent
premises caused by Tenant's use of the Premises shall be repaired at the sole
cost and expense of Tenant.
12.02 Notwithstanding the Provisions of Paragraph 12.01 hereinabove,
Landlord shall repair and maintain the structural portions of the Leased
Premises, including the exterior walls and roof, plumbing, pipes, electrical
wiring and conduits, unless such maintenance and repairs are caused in part or
in whole by the act, neglect, fault or omission of any duty by the Tenant, its
agents, servants, employees, invitees, or any damage caused by breaking and
entering, in which case Tenant shall pay to Landlord the reasonable cost of such
maintenance and repairs. All costs and expenses of Landlord under this
Paragraph 12.02 shall be Project Operating Costs under Paragraph 3.01. Landlord
shall not be liable for any failure to make any such repairs or to perform any
maintenance unless such failure shall persist for an unreasonable time after
written notice of the need of such repairs or maintenance is given to Landlord
by Tenant. Except as provided in Article 16 hereof, there shall be no abatement
of rent and no liability of Landlord by reason of any injury to or interference
with Tenant's business arising from the making of any repairs, alterations or
improvements in or to any portion of the Leased Premises or building of which
the Leased Premises are a part, or in or to fixtures, appurtenances and
equipment therein. Tenant waives the right to make repairs at Landlord's
expense under any law, statute or ordinance now or hereafter in effect.
13. PARKING AND COMMON AREAS. Tenant, for the use and benefit of
Tenant, its agents, employees, customers, licensees and subtenants, shall have
the non-exclusive right in common with Landlord, and other present and future
owners, tenants and their agents, employees, customers, licensees and
subtenants, to use the Common areas and parking garage adjacent to the building
during the entire term of this Lease, for ingress and egress, and automobile
parking.
14. SIGNS. The Tenant shall obtain Landlord's approval before signs
are placed on the exterior and/or interior of the Building.
<PAGE>
15. ENTRY BY LANDLORD. Tenant shall permit Landlord and Landlord's
agents to enter the Leased Premises after business hours on weekdays, and on
weekends, for the purpose of inspecting the same or for the purpose of
maintaining the Leased Premises or adjacent premises or for the purpose of
making repairs, altera-tions, or additions to any portion of same including the
erection and maintenance of such scaffolding, canopies, fences, and props as may
be required, or for the purpose of posting notices of non-responsibility for
alterations, additions, or repairs without any rebate of rent and without any
liability to Tenant for any loss of occupation or quiet enjoyment of the Leased
Premises thereby occasioned. For each of the aforesaid purposes, Landlord shall
at all times have and retain a key with which to unlock all of the doors in,
upon and about the Leased Premises, excluding Tenant's vaults and safes. The
tenant shall not alter any lock or install a new or additional lock or any bolt
on any door of the Leased Premises without prior written consent of the
Landlord. If Landlord shall give its consent, the Tenant shall in each case
furnish the Landlord with a key for any such lock.
16. DESTRUCTION OR DAMAGE.
16.01 If the Premises or the portion of the Building necessary for
Tenant's occupancy is damaged by fire, earthquake, act of God, the elements or
other casualty, Landlord shall, subject to the provisions of this Article,
promptly repair the damage, if such repairs can, in Landlord's opinion, be
completed within (90) ninety days. If Landlord determines that repairs can be
completed within ninety (90) days, this Lease shall remain in full force and
effect, except that if such damage is not the result of the negligence or
willful misconduct of Tenant or Tenant's agents, employees, contractors,
licensees or invitees, the Base Rent shall be abated to the extent Tenant's use
of the Premises is impaired, commencing with the date of damage and continuing
until completion of the repairs required of Landlord under Paragraph 16.04.
16.02. If in Landlord's opinion, such repairs to the Premises or
portion of the Building necessary for Tenant's occupancy cannot be completed
within ninety (90) days, Landlord shall notify Tenant of that opinion in writing
within thirty (30) days after the date of such fire or other casualty. In such
event, Landlord and Tenant may each terminate this Lease unilaterally by giving
the other party written notice of such termination within 15 days of the
effective date of the notice described above, and this Lease shall terminate as
of the date of such fire or casualty. If neither party notifies the other of
such termination, this Lease shall continue in full force and effect, but the
Base Rent shall be partially abated as provided in Paragraph 16.01.
<PAGE>
16.03(a) If any other portion of the Building or Project is totally
destroyed or damaged to the extent that in Landlord's opinion repair thereof
cannot be completed within ninety (90) days, Landlord may elect upon notice to
Tenant given within thirty (30) days after the date of such fire or other
casualty, to repair such damage, in which event this Lease shall continue in
full force and effect, but the Base Rent shall be partially abated as provided
in Paragraph 16.01. If Landlord does not elect to make such repairs, this Lease
shall terminate as of the date of such fire or other casualty.
16.03(b) If any other such portion of the Building or Project is
totally destroyed or damaged to the extent that in Landlord's opinion repair
thereof cannot be completed within ninety (90) days, and Tenant's business
operations are substantially and adversely impacted by such damage, and Landlord
elects to repair such damage, then, nevertheless, Tenant shall have the right to
terminate this Lease if the substantial adverse impact is not cured by Landlord
within one hundred fifty (150) days of the date of such fire or casualty.
Tenant shall exercise this right by giving written notice to Landlord no later
than one hundred fifty-five (155) days after the date of such fire or casualty.
16.04 If the Premises are to be repaired under this Article, Landlord
shall repair at its cost any injury or damage to the Building and standard
tenant improvements in the Premises. Tenant shall be responsible at its sole
cost and expense for the repair, restoration and replacement of any other
Leasehold improvements and Tenant's Property. Landlord shall not be liable for
any loss of business, inconvenience or annoyance arising from any repair or
restoration of any portion of the Premises or Building as a result of any damage
from fire or other casualty.
16.05 This Lease shall be considered an express agreement governing any
case of damage to or destruction of the Premises or Building by fire or other
casualty, and any present or future law which purports to govern the rights of
Landlord and Tenant in such circumstances in the absence of express agreement,
shall have no application. The opinions and determinations of Landlord under
this Section 16 shall be reasonable.
<PAGE>
17. ASSIGNMENT AND SUBLETTING. Tenant shall not either voluntarily, or
by operation of law, assign, transfer, mortgage, pledge, hypothecate or encumber
this Lease or any interest therein, and shall not sublet the Leased Premises or
any part thereof, or any right or privilege appurtenant thereto, or allow any
other person (the employees, agents, servants and invitees or Tenant excepted)
to occupy or use the Leased Premises, or any portion thereof, without the
written consent of Landlord first had and obtained, which consent shall not be
unreasonably withheld. A consent to one assignment, subletting, occupation or
use by any other person shall not be deemed to be a consent to any subsequent
assignment, subletting, occupation or use by another persona. Consent to any
such assignment or subletting shall not relieve Tenant of any liability under
this Lease. Any such assignment or subletting without such consent shall be
void, and shall, at the option of the Landlord, constitute a default under the
terms of this Lease.
In the event that Landlord shall consent to a sublease or assignment
hereunder, Tenant shall pay Landlord reasonable fees, not to exceed One Thousand
Dollars ($1,000.00), incurred in connection with the processing of documents
necessary to giving of such consent and assumption by the assignee.
18. TENANT'S DEFAULT. The occurrence of any one or more of the
following events shall constitute a default and breach of this Lease by Tenant:
A. The vacating or abandonment of the Premises by Tenant.
B. The failure by Tenant to make any payment or rent or any other
payment required to be made by Tenant hereunder, as and when due.
C. The failure by Tenant to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by the
Tenant, other than described in B, above, where such failure shall continue for
a period of fifteen (15) days after written notice thereof by Landlord to
Tenant; provided, however, that if the nature of Tenant's default is such that
more than fifteen (15) days are reasonably required for its cure, then Tenant
shall not be deemed to be in default if Tenant commences such cure within said
fifteen (15) days period and thereafter diligently prosecutes such cure to
completion.
D. The making by Tenant of any general assignment or general
arrangement for the benefit of creditors; or the filing by or against Tenant of
a petition to have Tenant adjudged a bankrupt, or a petition or reorganization
or arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Tenant, the same is dismissed within sixty (60) days); or
the appointment of a trustee or a receiver to take possession of substantially
all of Tenant's assets located at the Premises or of Tenant's interest in this
Lease, where possession is not restored to Tenant within thirty (30) days; or
the attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Leased Premises or of Tenant's interest in this
Lease, where such seizure is not discharged in thirty (30) days.
<PAGE>
19. REMEDIES ON DEFAULT. In the event of any such default or breach by
Tenant, Landlord may at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of a right or remedy which
Landlord may have by reason of such default or breach:
A. Terminate Tenant's right to possession of the Premises by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Premises to Landlord. In such event Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default including, but not limited to: the cost of recovering
possession of the Premises; expenses of reletting, including necessary
renovation and alteration of the Premises; reasonable attorney's fees; the worth
at the time of award by the court having jurisdiction thereof of the amount by
which the unpaid rent and other charges and adjustments called for herein for
the balance of the term after the time of such award exceeds the amount of such
loss for the same period that Tenant proves could be reasonably avoided; and
that portion of the tenant improvements installed by the Landlord for the Tenant
& applicable to the unexpired term of this lease; and that portion of any
leasing commission paid by Landlord and applicable to the unexpired term of this
Lease. Unpaid installments of rent or other sums shall bear interest from the
date due at the rate of ten percent (10%) per annum. "Worth" as used in this
provision, is computed by discount-ing the total at the discount rate of the
Federal Reserve Bank of San Francisco at the time of the judgment, or award,
plus one percent (1%).
B. Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant shall have abandoned the
Premises. In such event, Landlord shall be entitled to enforce all of
Landlord's rights and remedies under this Lease, including the right to recover
the rent and any other charges and adjustments as may become due hereunder; or
C. Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the State in which the Premises are located.
20. LANDLORD'S RIGHT TO CURE DEFAULTS. Landlord may, but shall not be
obligated to, cure, any anytime, without notice, any default by Tenant under
this Lease; and whenever Landlord so elects, all costs and expenses incurred by
Landlord including without limitation reasonable attorney's fees and expenses,
together with interest on the amount of costs and expenses so incurred at the
maximum legal rate then in effect in the State of California shall be paid by
Tenant to Landlord on demand.
<PAGE>
21. DEFAULT BY LANDLORD. Landlord shall not be in default unless
Landlord or the beneficiary under any deed of trust fails to perform obligations
required of Landlord within a reasonable time, but in no event later than thirty
(30) days after written notice by Tenant to Landlord and to the beneficiary of
any deed of trust covering the Premises whose name and address shall have
theretofore been furnished to Tenant in writing, specifying wherein Landlord has
failed to perform such obligation; provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are required for
performance, then Landlord shall not be in default if Landlord or said
beneficiary commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion. In no event shall
Tenant have the right to terminate this Lease as a result of Landlord's default
and Tenant's remedies shall be limited to damages and/or an injunction.
22. ATTORNEY'S FEES/COLLECTION CHARGES. In the event of any legal
action or proceeding between the parties hereto, reasonable attorney's fees and
expenses of the prevailing party in any such action or proceeding may be added
to the judgment therein, including attorney's fees on appeal. In addition to
the charges provided for above, Tenant shall pay a charge of $25.00 to Landlord
for preparation of each demand for delinquent rent.
23. SURRENDER OF LEASE NOT MERGER. The voluntary or other surrender of
this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger,
and shall, at the option of Landlord terminate all or any existing subleases,
and/or subtenan-cies, or may, at the option of Landlord, operate as an
assignment to it of any or all of such subleases or subtenancies.
24. CONDEMNATION. If any part of the Leased Premises or the
building of which it is a part, or the Center or parking or common areas
therein, shall be taken or condemned for a public or quasi-public use, and a
part thereof remains which is reasonably suitable for Tenant's purposes
hereunder, this Lease shall, as to the part so taken, terminate as of the date
title shall vest in the condemnor, and the rent payable hereunder shall be
equitably adjusted. If all the Leased Premises, or such part thereof be taken
or condemned so that there does not remain a portion reasonably suitable for
Tenant's purposes hereunder, this Lease shall thereupon terminate.
<PAGE>
25. WAIVER. The waiver by Landlord of any breach of any term,
covenant, or condition herein contained shall not be deemed to be a waiver of
such term, covenant, or condition or any subsequent breach of the same or any
other term, covenant, or condition herein contained. The subsequent acceptance
of rent hereunder by Landlord shall not be deemed to be a waiver of any
preceding breach by Tenant of any term, covenant, or condition of this Lease,
other than the failure of Tenant to pay the particular rental so accepted,
regardless of Landlord's knowledge of such preceding breach at the time of
acceptance of such rent.
26. EFFECT OF HOLDING OVER. If Tenant should remain in possession
of the Leased Premises after the expiration of the Lease Term and without
executing a new Lease, then such holding over shall be construed as a tenancy
from month-to-month, subject to all the conditions, provisions, and obligations
of this Lease insofar as the same are applicable to a month-to-month tenancy;
provided, however, that Base Rent during any such holding over shall be 150% of
the Base Rent in effect immediately prior to the expiration of the Lease term.
27. TENANT'S STATEMENT. Tenant shall at any time and from time to
time upon not less than five (5) days prior written notice from Landlord
execute, acknowledge and deliver to Landlord a statement in writing (a)
certifying that this Lease is unmodified and in full force and effect (or, if
modified, stating the nature of such modification and certifying that this Lease
as so modified is in full force and effect), and the date to which the rental
and +other charges are paid in advance, if any, and (b) acknowledging that there
are not, to Tenant's knowledge, any uncured defaults on the part of the Landlord
hereunder, or specifying such defaults if any are claimed, and (c) setting forth
the date of commencement of rents and expiration of the term hereof. Any such
statement may be relied upon by any prospective purchaser or encumbrancer of all
or any portion of the real property of which the Premises are a part.
28. TENANT'S FINANCIAL INFORMATION. Tenant shall promptly furnish
to Landlord, from time to time, financial statements and annual reports,
reflecting Tenant's current financial condition, whenever requested by Landlord.
29. RELATIONSHIP OF THE PARTIES. Nothing contained herein shall be
deemed or construed by the parties hereto nor by any third party, as creating
the relationship of principal and agent or of partnership or of joint venture
between the parties hereto, it being understood and agreed that neither the
method of computation of rent nor any other provision contained herein, nor any
acts of the parties hereto, shall be deemed to create any relationship other
than Landlord and Tenant.
<PAGE>
30. RULES AND REGULATIONS. Tenant shall faithfully observe and
comply with all reasonable rules and regulations that Landlord shall from time
to time promulgate and/or modify (see Exhibit "C" attached hereto). The rules
and regulations shall be binding upon the Tenant upon delivery of a copy of them
to Tenant. Landlord shall not be responsible to Tenant for the nonperformance
of any said rules and regulations by any other tenants or occupants. Said rules
may include (1) the restricting of employee parking, and (2) regulation of waste
removal.
31. GENERAL PROVISIONS.
31.01 Plats and Riders. Clauses, plats, riders and addendums, if any,
------------------
affixed to this Lease are a part hereof.
31.02 Venue. Landlord will execute this Lease and will receive the
------
rent and other payments at Landlord's office. Therefore the county in which
Landlord's office is located is hereby deemed to be a proper place of venue for
transitory actions.
31.03 Marginal Headings. The marginal headings and article titles to
-------------------
the articles of this Lease are not a part of this Lease and shall have no effect
upon the construction or interpreta-tion of any part hereof.
31.04 Time. Time is of the essence of this Lease and each and all of
-----
its provisions in which performance is a factor.
31.05. Successors and Assigns. The covenants and condi-tions herein
-------------------------
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
31.06. Recordation. Neither Landlord nor Tenant shall record this
------------
Lease, but a short form memorandum hereof may be recorded at the request of the
Landlord.
31.07. Quiet Possession. Upon Tenant paying the rent reserved
------------------
hereunder and observing and performing all of the covenants, conditions and
provisions on Tenant's part to be observed and performed hereunder, Tenant shall
have quiet posses-sion of the Premises for the entire term hereof, subject to
all the provisions of this Lease.
31.08. Prior Agreements. This Lease contains all of the agreements of
------------------
the parties hereto with respect to any matter covered or mentioned in this
Lease, and no prior agreements or understand-ing pertaining to any such matter
shall be effective for any purpose. No provision of this Lease may be amended
or added to except by an agreement in writing signed by the parties hereto or
their respective successors in interest. This Lease shall not be effective or
binding on any party until fully executed by both parties hereto.
<PAGE>
31.09. Inability to Perform. This lease and the obliga-tions of the
----------------------
Tenant hereunder shall not be affected or impaired because the Landlord is
unable to fulfill any of its obligations hereunder or is delayed in doing so, if
such inability or delay is caused by reason of strike, labor troubles, acts of
God, or any other cause beyond the reasonable control of the Landlord.
31.10. Partial Invalidity. Any provision of this Lease which shall
--------------------
prove to be invalid, void, or illegal shall in no way affect,impair or
invalidate any other provisions hereof and such other provision shall remain in
full force and effect.
31.11. Cumulative Remedies. No remedy or election hereunder shall be
---------------------
deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
31.12. Choice of Law. This Lease shall be governed by the laws of the
---------------
State of California.
31.13. Sale of Premises by Landlord. In the event of any sale of the
-------------------------------
Premises by Landlord, Landlord shall be and is hereby entirely freed and
relieved of all liability under any and all of its covenants and obligations
contained in or derived from this Lease arising out of any act, occurrence or
omission occurring after the consummation of such sale; but only if the
purchaser at such sale or any subsequent sale of the Premises shall have assumed
and agreed to carry out any and all of the covenants and obliga-tions of the
Landlord under this Lease.
31.14. Subordination, Attornment. Upon request of the Landlord, Tenant
--------------------------
will in writing subordinate its rights hereunder to the lien of any mortgage, or
deed of trust, to any bank, insurance company or other lender (including the
Building owner and its successors and assigns) now or hereafter in force against
the premises, and to all advances made or hereafter to be made upon the security
thereof, provided that such company or institution agrees to honor this Lease
for the full term hereof so long as Tenant is not in default hereunder.
In the event any proceedings are brought for foreclosure, or in the event
of the exercise of the power of sale under any mortgage or deed of trust made by
the Landlord covering the Premises, the Tenant shall attorn to the purchaser
upon any such foreclosure or sale and recognize such purchaser as the Landlord
under this Lease.
<PAGE>
31.15. Notices. All notices and demands which may be or are required
--------
or permitted to be given by either party on the other hereunder shall be in
writing. All notices and demands by the Landlord to the Tenant shall be sent by
United States Mail, postage prepaid, addressed to the Tenant at the Premises,
and to the address hereinbelow, or to such other place as Tenant may from time
to time designate in a notice to the Landlord. All notices and demands by the
Tenant to the Landlord shall be sent by United States Mail, postage prepaid,
addressed to the Landlord at the address set forth herein, and to such other
person or place as the Landlord may from time to time designate in a notice to
the Tenant.
To Landlord at: NINE C CORPORATION
900 Veterans Blvd. #540
Redwood City, CA 94063
To Tenant at: Penn Octane Corporation
900 Veterans Blvd. #240
Redwood City, CA 94063
32. SERVICES TO PREMISES. Notwithstanding anything herein to the
contrary, the Landlord shall provide water, power, heating, air conditioning,
janitorial and other services, including but not limited to floor waxing, trash
removal, window washing and all facilities regarding maintenance of the exterior
of the building, including gardening, subject to payment or reimbursement by
Tenant as provided herein.
Exhibit "B" hereto more completely sets forth the types and frequency of
service and the minimum acceptable service standard levels.
33. VALIDITY OF LEASE. The Lease shall be effective only after
Tenant has received a fully executed copy of this Lease from Landlord.
34. TOXIC/HAZARDOUS MATERIALS CONSIDERATION. Upon request Lessor will
make available a Toxic Report that shows Benzene under the garage area. This is
being monitored by the County Health Department at this time. Lessor believes
it does not present a hazard.
<PAGE>
THE PARTIES HAVE EXECUTED THIS LEASE THE DATE AND YEAR SET BELOW THEIR
SIGNATURE:
LANDLORD TENANT
-------- ------
NINE-C CORPORATION PENN OCTANE CORPORATION
By:____________________________ By:____________________________
James E. Burney J. B. Richter
Title: President Title: Principal -
Date:__________________________ Date:__________________________
By:___________________________
J.B. Richter, an individual
Address:
Date:
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
---------
October 20, 1997 (the "Effective Date"), by and between PENN OCTANE CORPORATION,
--------------
a Delaware corporation (the "Company") or the "Employer") and VICENTE SORIANO
------- --------
(the "Officer"), with reference to the following:
-------
RECITALS
Employer desires to employ the Officer as Vice President of the Company and
the Officer is willing to accept such employment by the Company on the terms and
subject to the conditions set forth in this Agreement.
AGREEMENT
1. EMPLOYMENT, AUTHORITY AND DUTIES.
1.1 EMPLOYMENT. During the term of this Agreement, the Officer
agrees to be employed by and to serve as a Vice President of the Company, and
the Company agrees to employ, retain and elect the Officer in such capacity.
1.2 POSITION. The Officer shall serve as a Vice President of the Company
and will be responsible for the duties as outlined in Schedule A.
1.3 PLACE OF EMPLOYMENT; WORKING FACILITIES. The Officer's
principal place of business with respect to his services to the Employer
initially shall be located in Mexico City, Mexico. Employer will provide the
Officer with an office and such other facilities and equipment at such location
as is suitable to the Officer's position and necessary for the performance of
his duties.
2. TERMS OF EMPLOYMENT.
2.1 DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
(a) "Termination for Cause" shall mean termination by
-----------------------
Employer of the Officer's employment hereunder by reason of (i) the Officer's
willful and continued failure to substantially perform his duties hereunder
(other than any such failure resulting from the Officer's incapacity due to
physical or mental illness), (ii) the Officer's act or acts of personal
dishonesty or moral turpitude, (iii) the Officer's conviction of a felony, or
(iv) the Officer's willful breach of a material provision of this Agreement.
For purposes of this Agreement, no act or failure to act, on the Officer's part
will be considered "willful" unless done, or omitted to be done, by the Officer
in bad faith without reasonable belief that such actions or omissions were in
the best interest of Employer.
(b) "Termination for Good Reason" shall mean the election of
----------------------------
the Officer to terminate his employment hereunder following a determination in
good faith by the Officer that any of the following has occurred: (i) the
assignment of the Officer to any duties or position which results in any
diminution of the Officer's authority, duties or responsibilities under this
Agreement, as determined in good faith by the Officer, (ii) a reduction in the
Officer's Base Salary or other benefits under this Agreement, (iii) the transfer
or forced relocation of the principal place of business of the officer to any
geographic location outside Mexico City, or (iv) the breach or assertion of the
invalidity or unenforceability of this Agreement or any provision thereof by
Employer or a Successor Entity (as defined in Section 7.7).
(c) "Termination Without Cause" shall mean termination by
---------------------------
Employer of the Officer's employment hereunder other than pursuant to (i) a
Termination for Cause, (ii) a termination by reason of the Officer's disability
(as described in Section 2.5), or (iii) a termination by reason of the Officer's
death (as described in Section 2.6).
(d) "Voluntary Termination" shall mean a termination by the
----------------------
Officer of the Officer's employment hereunder, other than (i) a termination by
reason of the Officer's disability (as described in Section 2.5), (ii) a
termination by reason of the Officer's death (as described in Section 2.6), or
(iii) a Termination for Good Reason.
2.2 TERM OF EMPLOYMENT. The term of employment of the Officer by
Employer hereunder shall be from November 1, 1997 (the "Effective Date") through
--------------
December 31, 1999, unless the Officer's employment hereunder is terminated
earlier pursuant to this Agreement. Upon expiration of the stated term of the
Agreement on December 31, 1999, this Agreement shall continue for another year
until terminated in accordance with its terms.
2.3 TERMINATION FOR CAUSE. A Termination for Cause may be
effected by Employer at any time during the term of this Agreement. Upon a
Termination for Cause, the Officer shall be paid all accrued salary and benefits
to the date of termination and any bonus compensation to the extent earned under
Section 3.2 and/or Section 3.3 and/or Section 3.4, but the Officer shall not be
paid any other compensation or reimbursement of any kind (including, without
limitation, severance compensation pursuant to Section 6) and all rights and
obligations hereunder shall terminate, except as specifically provided herein or
required by law.
2.4 TERMINATION WITHOUT CAUSE. Notwithstanding anything else in
this Agreement, Employer shall have the right to effect a Termination without
Cause at any time during the term of this Agreement. Upon any Termination
Without Cause, the Officer shall be paid all accrued salary and benefits to the
date of termination, bonus compensation to the extent earned under Section 3.2
and/or Section 3.3 and/or Section 3.4, and severance compensation as provided in
Section 6, but shall be paid no other compensation or reimbursement of any kind,
and all other rights and obligations hereunder shall terminate, except as
specifically provided herein or required by law.
2.5 TERMINATION BY REASON OF DISABILITY. If, during the term of
the Officer's employment by the Company, the Officer has been substantially
unable to perform his duties under this Agreement on a full-time basis due to
illness or physical or mental incapacity for thirty (30) consecutive calendar
days, and within thirty (30) days after notice to the Officer of the Company's
intention to terminate his employment by reason of such disability (which notice
may only be given after the end of the initial thirty (30) day period), the
Officer has not reasonably demonstrated the ability to perform his duties
hereunder on a full-time basis, Employer shall have the right to terminate the
Officer's employment hereunder. Upon any such termination the Officer shall be
paid all accrued salary and benefits, including, without limitation, disability
benefits payable to the Officer pursuant to the terms of any long-term
disability insurance policy or program obtained by Employer for the benefit of
its executives and bonus compensation to the extent earned under Section 3.2
and/or Section 3.3 and/or Section 3.4, but no other compensation or
reimbursement of any kind (including, without limitation, severance compensation
pursuant to Section 6) and all rights and obligations hereunder shall terminate,
except as specifically provided herein or required by law.
2.6 DEATH. The Officer's employment hereunder shall terminate
upon the Officer's death and Employer shall pay to his estate all accrued salary
and benefits (including, without limitation, any life insurance benefits) to the
date of termination and bonus compensation to the extent earned under Section
3.2 and/or Section 3.3 and/or Section 3.4, but no other compensation or
reimbursement of any kind, including, without limitation, severance compensation
pursuant to Section 6, and all other rights and obligations hereunder shall
terminate, except as specifically provided herein or required by law.
2.7 VOLUNTARY TERMINATION. A Voluntary Termination may be
effected by the Officer during the term of this Agreement upon thirty (30) days'
prior written notice to Employer. In the event of a Voluntary Termination, the
Officer shall immediately be paid all accrued salary and benefits to the date of
termination and bonus compensation to the extent earned under Section 3.2 and/or
Section 3.3 and/or Section 3.4, but no other compensation or reimbursement of
any kind (including, without limitation, severance compensation pursuant to
Section 6) and all other rights and obligations hereunder shall terminate,
except as specifically provided herein or required by law.
2.8 TERMINATION FOR GOOD REASON. Upon any Termination for Good
Reason, the Officer shall be paid all accrued salary and benefits to the date of
termination, bonus compensation to the extent earned under Section 3.2 and/or
Section 3.3 and/or Section 3.4 and severance compensation as provided in Section
6, but shall be paid no other compensation or reimbursement of any kind, and all
other rights and obligations hereunder shall terminate, except as specifically
provided herein or required by law.
3. BASE SALARY; BONUSES.
3.1 BASE SALARY. In consideration for the Officer's agreement to
be employed by and serve the Company pursuant to the terms of this Agreement,
Employer will pay the Officer a base salary (the "Base Salary") during each
-----------
calendar year payable bi-monthly, in accordance with Employer's normal payment
practices. The Officer's Base Salary shall be reviewed annually at the end of
each calendar year, commencing with calendar year 1997.
3.2 INCENTIVE BONUS. The Company is in the process of approving
the performance standards for the Company's incentive bonus program and the
Company shall adopt such standards by no later than January 31, 1998. The
Officer shall participate in the Company's incentive bonus program and shall be
eligible to receive an incentive bonus as set forth by the terms in Schedule A.
The Officer shall be eligible to participate in any additional bonus and
incentive programs for which the Company may maintain or establish from time to
time for the Company's executives, subject to and on a basis consistent with the
terms, conditions and overall administration of any such plan or arrangement by
the Company.
3.3 FINANCING BONUS. Each Financing Bonus shall be due and
payable on the pay period immediately succeeding the date the commitment for the
applicable financing is consummated.
3.4 SPECIAL BONUS. As set forth in Schedule A.
4. BUSINESS EXPENSE.
4.1 GENERAL EXPENSES. During the term of the Officer's employment
by Employer, the Officer will be entitled to receive prompt reimbursement for
all reasonable expenses incurred by him (in accordance with the policies and
procedures of Employer for its senior executive officers) in performing the
services hereunder, including reasonable expenses for entertainment, travel and
similar items, provided that the Officer properly accounts for such expenses in
accordance with the policies and procedures of Employer.
4.2 HEALTH BENEFITS. The Officer will be entitled to participate
in or receive benefits under any employee group health, medical, dental, life,
disability and any other similar benefit plan or arrangement which the Company
may maintain or establish from time to time for the Company's executives,
subject to and on a basis consistent with the terms, conditions and overall
administration of any such plan or arrangement by the Company and on terms and
conditions at least as favorable to the Officer as the terms and conditions to
which each of the other senior executive officers of the Company are subject.
Nothing paid to the Officer under any such plan or arrangement will be deemed to
be in lieu of the compensation otherwise payable to the Officer hereunder. Any
payments or benefits payable to the officer with respect to a fiscal year will
be prorated based on the number of days during the fiscal year the Officer is
actually employed by Employer.
5. WARRANTS. So long as this Agreement has not been earlier terminated
in accordance with its terms, Employer shall grant to the Officer Twenty-five
Thousand (25,000) of the Company's $6.00 Class A Warrants (the "Class A
-------
Warrants") on each of the first, second and third anniversaries of the Effective
Date.
6. SEVERANCE; PAYMENTS. Upon the occurrence of a Termination Without
Cause or a Termination for Good Reason, in addition to any other amounts payable
to the Officer hereunder, the Officer shall be paid severance compensation in
the amount of three (3) months of Base Salary (measured by the monthly Base
Salary in effect immediately prior to such termination) plus all accrued but
unpaid salary, bonus compensation to the extent earned under Section 3.2 and/or
Section 3.3 and/or Section 3.4, and/or Section 3.5 and other benefits due and
payable to the Officer on and as of the date of any such termination. Any
severance compensation payable under this Section 6 shall be payable to the
Officer in immediately available funds within ten (10) business days of any
Termination Without Cause or Termination for Good Reason, as the case may be.
7. MISCELLANEOUS.
7.1 CONFIDENTIAL INFORMATION. The Officer acknowledges that, in
the course of performing services on behalf of the Company, he may receive or be
privy to certain producer, end user or transporting pipeline client lists, trade
secrets, programs, lists of customers or trading accounts, business records or
audits of the Company, corporate insider information, proprietary financing
structures and other confidential information and knowledge concerning the
business of the Company, its corporate parent, stockholders or subsidiaries
(herein collectively referred to as the "Confidential Information") which the
------------------------
Company desires to protect. The Officer understands that the Confidential
Information is confidential and the Officer covenants and agrees not to reveal
the Confidential Information to any person or entity, directly or indirectly,
outside the Company so long as the confidential or secret nature of the
Confidential Information shall continue, unless the Officer is legally compelled
to disclose such Confidential Information. The Officer further agrees that he
will at no time use the Confidential Information in competing with the Company.
Upon termination of this Agreement, the Officer shall surrender to the Company
all papers, documents, writings, and other property produced by him or in his
possession by or through his relationship with the Company (including computer
programs or information derived from the Company's computer database) and the
Officer agrees that all such materials shall at all times remain the property of
the Company. This Section 7.1 shall be inoperative as to any Confidential
Information which (a) becomes generally available to the public on or after the
Effective Date hereof other than as a result of a disclosure in violation of
this Section 7.1, or (b) was available to the Officer on a non-confidential
basis prior to its disclosure to the Officer, or (c) becomes available to the
Officer on a non-confidential basis from a source other than the Company, which
source is not itself bound by a confidentiality obligation to the Company.
7.2 WAIVER. The waiver of the breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent breach
of the same or other provision thereof.
7.3 ENTIRE AGREEMENT; MODIFICATIONS. Except as otherwise provided
herein, this Agreement represents the entire understanding among the parties
with respect to the subject matter hereof, and this Agreement supersedes any and
all prior understandings, agreements and negotiations, whether written or oral,
with respect to the subject matter hereof, including, without limitation, any
understandings, agreements or obligations respecting any past or future
compensation, bonuses, reimbursements or other payments to the Officer from
Employer. All modifications to the Agreement must be in writing and signed by
the party against whom enforcement of such modification is sought.
7.4 NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be given by hand delivery or first class
mail, certified or registered with return receipt requested, to the respective
persons named below. Each notice under this Section 7.4 shall be deemed to have
duly given upon receipt or, if sent by first class mail, three (3) days after
mailing, or if sent by certified or registered mail, on the date of the return
receipt, in each case, to the address or telecopier number of the intended
recipient set forth below:
If to the Company: Penn Octane Corporation
900 Veterans Boulevard, Suite 240
Redwood City, California 94063
Attention: President
If to the Officer: Mr. Vicente Soriano
Diagonal San Antonio 938
Col. Del Valle
Mexico, D.F. 03100
Any party may change such party's address for notices by notice duly given
pursuant to this Section 7.4.
7.5 HEADINGS. The Section headings herein are intended for
reference and shall not by themselves determine the construction or
interpretation of this Agreement.
7.6 SEVERABILITY. Should a court or other body of competent
jurisdiction determine that any provision of this Agreement is excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, so that it is enforceable to the maximum extent
possible, and all other provisions of this Agreement shall be deemed valid and
enforceable to the fullest extent possible.
7.7 SUCCESSORS AND ASSIGNS. This Agreement shall (a) not be
assignable either by the Officer or by Employer, (b) be binding upon and inure
to the benefit of and shall be enforceable by, the parties hereto and their
respective successors and permitted assigns, and (c) be binding upon and fully
enforceable by the Officer against any entity which succeeds to the Company by
merger, consolidation, reorganization, sale of all or substantially all of the
Company's assets or other similar transaction or series of transactions or which
acquires substantially all of the assets of the Company (any such entity a
"Successor Entity").
-------------
7.8 WITHHOLDINGS. All compensation and benefits to the Officer
hereunder, including, without limitation, severance compensation, shall be
reduced by all federal, state, local and other withholdings and similar taxes
and payments required by applicable law.
7.9 INDEMNIFICATION. The Officer shall be entitled to
indemnification by the Company to the same extent that any other officer or
director of the Company is entitled to indemnification under the charter
documents of or by contract with, the Company.
7.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which taken
together shall constitute one and the same Agreement.
7.11 ATTORNEYS' FEES. In the event of litigation related to this
Agreement, the prevailing party will be entitled to recover reasonable
attorneys' fees and other costs.
7.12 GOVERNING LAW; CONSENT TO JURISDICTION. this Agreement shall
be governed by and construed in accordance with the laws of the State of
California. Each party to this Agreement hereby submits to the exclusive
jurisdiction and venue of the Superior Court of the State of California for the
County of San Mateo or the United States District Court for the Northern
District of California for purposes of any legal action which may arise in
connection with this Agreement. Each party agrees that service upon such party
in any such action may made by first class mail, certified or registered, in the
manner provided for delivery of notices in Section 7.4.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
EMPLOYER: PENN OCTANE CORPORATION
By: ___________________________
Name: _________________________
Title: ___________________________
OFFICER: _______________________________
Vicente Soriano
EMPLOYMENT AGREEMENT
JERRY L. LOCKETT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
---------
November 17, 1997 (the "Effective Date"), by and between PENN OCTANE
---------------
CORPORATION, a Delaware corporation (the "Company") or the "Employer") and Jerry
------- --------
L. Lockett (the "Officer"), with reference to the following:
RECITALS
Employer desires to employ the Officer as Vice President of the Company and
the Officer is willing to accept such employment by the Company on the terms and
subject to the conditions set forth in this Agreement.
AGREEMENT
1. EMPLOYMENT, AUTHORITY AND DUTIES.
1.1 EMPLOYMENT. During the term of this Agreement, the Officer
agrees to be employed by and to serve as a Vice President of the Company, and
the Company agrees to employ and retain the Officer in such capacity.
1.2 POSITION. The Officer shall serve as a Vice President of
the Company and will be responsible for the marketing and purchasing of liquid
gases.
1.3 PLACE OF EMPLOYMENT; WORKING FACILITIES. The Officer's
principal place of business with respect to his services to the Employer
initially shall be located in Houston, TX. Employer will provide the Officer
with an office and such other facilities and equipment at such location as is
suitable to the Officer's position and necessary for the performance of his
duties.
2. TERMS OF EMPLOYMENT.
2.1 DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
(a) "Termination for Cause" shall mean termination by
-----------------------
Employer of the Officer's employment hereunder by reason of (i) the Officer's
willful and continued failure to substantially perform his duties hereunder
(other than any such failure resulting from the Officer's incapacity due to
physical or mental illness), (ii) the Officer's act or acts of personal
dishonesty or moral turpitude, (iii) the Officer's conviction of a felony, or
(iv) the Officer's willful breach of a material provision of this Agreement.
For purposes of this Agreement, no act or failure to act, on the Officer's part
will be considered "willful" unless done, or omitted to be done, by the Officer
in bad faith without reasonable belief that such actions or omissions were in
the best interest of Employer.
(b) "Termination for Good Reason" shall mean the election of
----------------------------
the Officer to terminate his employment hereunder following a determination in
good faith by the Officer that any of the following has occurred: (i) the
assignment of the Officer to any duties or position which results in any
diminution of the Officer's authority, duties or responsibilities under this
Agreement, as determined in good faith by the Officer, (ii) failure to pay any
or all of Officer's Base Salary or other benefits under this Agreement, (iii)
the transfer or forced relocation of the principal place of business of the
officer to any geographic location outside the Houston, Texas area, or (iv) the
breach or assertion of the invalidity or unenforceability of this Agreement or
any provision thereof by Employer or a Successor Entity (as defined in Section
7.7).
(c) "Termination Without Cause" shall mean termination by
---------------------------
Employer of the Officer's employment hereunder other than pursuant to (i) a
Termination for Cause, (ii) a termination by reason of the Officer's disability
(as described in Section 2.5), or (iii) a termination by reason of the Officer's
death (as described in Section 2.6).
(d) "Voluntary Termination" shall mean a termination by the
----------------------
Officer of the Officer's employment hereunder, other than (i) a termination by
reason of the Officer's disability (as described in Section 2.5), (ii) a
termination by reason of the Officer's death (as described in Section 2.6), or
(iii) a Termination for Good Reason.
2.2 TERM OF EMPLOYMENT. The term of employment of the Officer by
Employer hereunder shall be from November 17, 1997 (the "Effective Date")
--------------
through November 30, 1998, unless the Officer's employment hereunder is
terminated earlier pursuant to this Agreement. Upon expiration of the stated
term of the Agreement on November 30, 1998, this Agreement shall continue for
another year until terminated in accordance with its terms, unless notified by
either party sixty (60) days in advance.
2.3 TERMINATION FOR CAUSE. A Termination for Cause may be
effected by Employer at any time during the term of this Agreement. Upon a
Termination for Cause, the Officer shall be paid all accrued salary and benefits
to the date of termination and any bonus compensation to the extent earned under
Section 3.2 and/or Section 3.3 and/or Section 3.4, but the Officer shall not be
paid any other compensation or reimbursement of any kind (including, without
limitation, severance compensation pursuant to Section 6) and all rights and
obligations hereunder shall terminate, except as specifically provided herein or
required by law.
2.4 TERMINATION WITHOUT CAUSE. Notwithstanding anything else in
this Agreement, Employer shall have the right to effect a Termination without
Cause at any time during the term of this Agreement. Upon any Termination
Without Cause, the Officer shall be paid all accrued salary and benefits to the
date of termination, bonus compensation to the extent earned under Section 3.1
and/or Section 3.2, and severance compensation as provided in Section 6, but
shall be paid no other compensation or reimbursement of any kind except as
modified below, and all other rights and obligations hereunder shall terminate,
except as specifically provided herein or required by law. If such termination
without cause is effected by Employer at any time after may 17, 1998 (i.e. on or
after the 6th month of employment), then Officer shall be entitled to the grant
of fifty thousand (50,000) of the Company's $5.00 Class E Warrants (the "Class E
Warrants") as specified in Article 5.
2.5 TERMINATION BY REASON OF DISABILITY. If, during the term of
the Officer's employment by the Company, the Officer has been substantially
unable to perform his duties under this Agreement on a full-time basis due to
illness or physical or mental incapacity for thirty (30) consecutive calendar
days, and within thirty (30) days after notice to the Officer of the Company's
intention to terminate his employment by reason of such disability (which notice
may only be given after the end of the initial thirty (30) day period), the
Officer has not reasonably demonstrated the ability to perform his duties
hereunder on a full-time basis, Employer shall have the right to terminate the
Officer's employment hereunder. Upon any such termination the Officer shall be
paid all accrued salary and benefits, including, without limitation, disability
benefits payable to the Officer pursuant to the terms of any long-term
disability insurance policy or program obtained by Employer for the benefit of
its executives and bonus compensation to the extent earned under Section 3.1
and/or Section 3.2, but no other compensation or reimbursement of any kind
except as specified below (including, without limitation, severance compensation
pursuant to Section 6) and all rights and obligations hereunder shall terminate,
except as specifically provided herein or required by law. If such Termination
by reason of Disability is effected by Employer at any time after May 17, 1998
(i.e. on or after the 6th month of employment), then Officer shall be entitled
to the grant of fifty thousand (50,000) of the Company's $5.00 Class E Warrants
(the "Class E Warrants") as specified in Article 5.
2.6 DEATH. The Officer's employment hereunder shall terminate
upon the Officer's death and Employer shall pay to his estate all accrued salary
and benefits (including, without limitation, any life insurance benefits) to the
date of termination and bonus compensation to the extent earned under Section
3.1 and/or Section 3.2, but no other compensation or reimbursement of any kind,
including, without limitation, severance compensation pursuant to Section 6, and
all other rights and obligations hereunder shall terminate, except as
specifically provided herein or required by law. If such Termination by Death
is effected by Employer at any time after May 17, 1998 (i.e. on or after the 6th
month of employment), then Officer's Estate shall be entitled to the grant of
fifty thousand (50,000) of the Company's $5.00 Class E Warrants (the "Class E
Warrants") as specified in Article 5.
2.7 VOLUNTARY TERMINATION. A Voluntary Termination may be
effected by the Officer during the term of this Agreement upon sixty (60) days
prior written notice to Employer. In the event of a Voluntary Termination, the
Officer shall immediately be paid all accrued salary and benefits to the date of
termination and bonus compensation to the extent earned under Section 3.1 and/or
Section 3.2, but no other compensation or reimbursement of any kind (including,
without limitation, severance compensation pursuant to Section 6) and all other
rights and obligations hereunder shall terminate, except as specifically
provided herein or required by law.
2.8 TERMINATION FOR GOOD REASON. Upon any Termination for Good
Reason, the Officer shall be paid all accrued salary and benefits to the date of
termination, bonus compensation to the extent earned under Section 3.1 and/or
Section 3.2 and severance compensation as provided in Section 6, but shall be
paid no other compensation or reimbursement of any kind, and all other rights
and obligations hereunder shall terminate, except as specifically provided
herein or required by law. If such Termination for Good Reason is effected by
Employer at any time after August 17, 1998 (i.e. on or after the 9th month of
employment), then Officer shall be entitled to the grant of fifty thousand
(50,000) of the Company's $5.00 Class E Warrants (the "Class E Warrants") as
specified in Article 5.
3. BASE SALARY; BONUSES.
3.1 BASE SALARY. In consideration for the Officer's agreement to
be employed by and serve the Company pursuant to the terms of this Agreement,
Employer will pay the Officer a base salary (the "Base Salary") during each
-----------
calendar year of One Hundred Twenty Thousand Hundred Dollars ($120,000) payable
bi-monthly, in accordance with Employer's normal payment practices. The
Officer's Base Salary shall be reviewed annually at the end of each calendar
year, commencing with calendar year 1997. Further, an additional $1,000 pre
month shall be paid to Officer for automobile expenses over and above
reimbursement of other expenses incurred by Officer as specified in Article 4.1.
3.2 INCENTIVE BONUS. The Company is in the process of
approving the performance standards for the Company's incentive bonus program
and the Company shall adopt such standards by no later than January 31, 1998.
The Officer shall participate in the Company's incentive bonus program and shall
be eligible to receive an incentive bonus each year which is equivalent to the
maximum bonus payable to any other senior executive officer of the Company for
such year. The Officer shall be eligible to participate in any additional bonus
and incentive programs for which the Company may maintain or establish from time
to time for the Company's executives, subject to and on a basis consistent with
the terms, conditions and overall administration of any such plan or arrangement
by the Company.
3.3 VACATION PAY. Officer shall be entitled to an annual vacation
leave of fifteen (15) business days at full pay. The time for such vacation
shall be selected by the Officer. In lieu of the vacation leave specified, the
Officer may elect to receive payment for the whole or any portion of the
vacation time to which the Officer is entitled, such vacation timer to be valued
at the amount of the regular salary earned by the Officer during an equivalent
period of time.
3.4 HOLIDAYS. During each calendar year, the Officer shall be
entitled to a holiday with full pay on the days designated by the corporation
set out above as being paid holidays.
3.5 PAID SICK LEAVE. The Officer shall be entitled to twelve
(12) days per year as sick leave with full pay. 'Sick Leave" is defined as
short-term absences from employment that are necessary due to illness or injury.
4. BUSINESS EXPENSE.
4.1 GENERAL EXPENSES. During the term of the Officer's employment
by Employer, the Officer will be entitled to receive prompt reimbursement for
all reasonable expenses incurred by him (in accordance with the policies and
procedures of Employer for its senior executive officers) in performing the
services hereunder, including reasonable expenses for entertainment, travel and
similar items, provided that the Officer properly accounts for such expenses in
accordance with the policies and procedures of Employer.
4.2 HEALTH BENEFITS. The Officer will be entitled to participate
in or receive benefits under any employee group health, medical, dental, life,
disability and any other similar benefit plan or arrangement which the Company
may maintain or establish from time to time for the Company's executives,
subject to and on a basis consistent with the terms, conditions and overall
administration of any such plan or arrangement by the Company and on terms and
conditions at least as favorable to the Officer as the terms and conditions to
which each of the other senior executive officers of the Company are subject.
Nothing paid to the Officer under any such plan or arrangement will be deemed to
be in lieu of the compensation otherwise payable to the Officer hereunder. Any
payments or benefits payable to the officer with respect to a fiscal year will
be prorated based on the number of days during the fiscal year the Officer is
actually employed by Employer.
5. WARRANTS. So long as this Agreement has not been earlier terminated
in accordance with its terms, except to the extent provided in Articles 2.4,
2.5, 2.6 and 2.8, Employer shall grant to the Officer Fifty Thousand (50,000) of
the Company's $5.00 Class E Warrants on each of the first anniversary of the
effective date, i.e. 11/17/98, and an additional Fifty Thousand (50,000) Class E
Warrants on the second anniversary of the effective date if this Agreement is
still in effect, at an exercise price per warrant equal to the average bid price
for the seven day trading period prior to such anniversary.
6. SEVERANCE; PAYMENTS. Upon the occurrence of a Termination Without
Cause or a Termination for Good Reason, in addition to any other amounts payable
to the Officer hereunder, the Officer shall be paid severance compensation in
the amount of three (3) months of Base Salary (measured by the monthly Base
Salary in effect immediately prior to such termination) plus all accrued but
unpaid salary, bonus compensation to the extent earned under Section 3.2 for
benefits due and payable to the Officer on and as of the date of any such
termination. Any severance compensation payable under this Section 6 shall be
payable to the Officer in immediately available funds within ten (10) business
days of any Termination Without Cause or Termination for Good Reason, as the
case may be.
7. MISCELLANEOUS.
7.1 CONFIDENTIAL INFORMATION. The Officer acknowledges that, in
the course of performing services on behalf of the Company, he may receive or be
privy to certain producer, end user or transporting pipeline client lists, trade
secrets, programs, lists of customers or trading accounts, business records or
audits of the Company, corporate insider information, proprietary financing
structures and other confidential information and knowledge concerning the
business of the Company, its corporate parent, stockholders or subsidiaries
(herein collectively referred to as the "Confidential Information") which the
------------------------
Company desires to protect. The Officer understands that the Confidential
Information is confidential and the Officer covenants and agrees not to reveal
the Confidential Information to any person or entity, directly or indirectly,
outside the Company so long as the confidential or secret nature of the
Confidential Information shall continue, unless the Officer is legally compelled
to disclose such Confidential Information. The Officer further agrees that he
will at no time use the Confidential Information in competing with the Company.
Upon termination of this Agreement, the Officer shall surrender to the Company
all papers, documents, writings, and other property produced by him or in his
possession by or through his relationship with the Company (including computer
programs or information derived from the Company's computer database) and the
Officer agrees that all such materials shall at all times remain the property of
the Company. This Section 7.1 shall be inoperative as to any Confidential
Information which (a) becomes generally available to the public on or after the
Effective Date hereof other than as a result of a disclosure in violation of
this Section 7.1, or (b) was available to the Officer on a non-confidential
basis prior to its disclosure to the Officer, or (c) becomes available to the
Officer on a non-confidential basis from a source other than the Company, which
source is not itself bound by a confidentiality obligation to the Company.
7.2 WAIVER. The waiver of the breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent breach
of the same or other provision thereof.
7.3 ENTIRE AGREEMENT; MODIFICATIONS. Except as otherwise provided
herein, this Agreement represents the entire understanding among the parties
with respect to the subject matter hereof, and this Agreement supersedes any and
all prior understandings, agreements and negotiations, whether written or oral,
with respect to the subject matter hereof, including, without limitation, any
understandings, agreements or obligations respecting any past or future
compensation, bonuses, reimbursements or other payments to the Officer from
Employer. All modifications to the Agreement must be in writing and signed by
the party against whom enforcement of such modification is sought.
7.4 NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be given by hand delivery or first class
mail, certified or registered with return receipt requested, to the respective
persons named below. Each notice under this Section 7.4 shall be deemed to have
duly given upon receipt or, if sent by first class mail, three (3) days after
mailing, or if sent by certified or registered mail, on the date of the return
receipt, in each case, to the address or telecopier number of the intended
recipient set forth below:
If to the Company: Penn Octane Corporation
900 Veterans Boulevard
Redwood City, California 94063
Attention: President
If to the Officer: Mr. Jerry L. Lockett
1635 Scenic Shore Drive
Kingwood, TX 77345
Any party may change such party's address for notices by notice duly given
pursuant to this Section 7.4.
7.5 HEADINGS. The Section headings herein are intended for
reference and shall not by themselves determine the construction or
interpretation of this Agreement.
7.6 SEVERABILITY. Should a court or other body of competent
jurisdiction determine that any provision of this Agreement is excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, so that it is enforceable to the maximum extent
possible, and all other provisions of this Agreement shall be deemed valid and
enforceable to the fullest extent possible.
7.7 SUCCESSORS AND ASSIGNS. This Agreement shall (a) not be
assignable either by the Officer or by Employer, (b) be binding upon and inure
to the benefit of and shall be enforceable by, the parties hereto and their
respective successors and permitted assigns, and (c) be binding upon and fully
enforceable by the Officer against any entity which succeeds to the Company by
merger, consolidation, reorganization, sale of all or substantially all of the
Company's assets or other similar transaction or series of transactions or which
acquires substantially all of the assets of the Company (any such entity a
"Successor Entity").
-------------
7.8 WITHHOLDINGS. All compensation and benefits to the Officer
hereunder, including, without limitation, severance compensation, shall be
reduced by all federal, state, local and other withholdings and similar taxes
and payments required by applicable law.
7.9 INDEMNIFICATION. The Officer shall be entitled to
indemnification by the Company to the same extent that any other officer or
director of the Company is entitled to indemnification under the charter
documents of or by contract with, the Company.
7.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which taken
together shall constitute one and the same Agreement.
7.11 ATTORNEYS' FEES. In the event of litigation related to this
Agreement, the prevailing party will be entitled to recover reasonable
attorneys' fees and other costs.
7.12 GOVERNING LAW; CONSENT TO JURISDICTION. this Agreement shall
be governed by and construed in accordance with the laws of the State of
California. Each party to this Agreement hereby submits to the exclusive
jurisdiction and venue of the Superior Court of the State of California for the
County of San Mateo or the United States District Court for the Northern
District of California for purposes of any legal action which may arise in
connection with this Agreement. Each party agrees that service upon such party
in any such action may made by first class mail, certified or registered, in the
manner provided for delivery of notices in Section 7.4.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
EMPLOYER: PENN OCTANE CORPORATION
By: /s/ J.B. Richter
---------------------------
Name: J.B. Richter
Title: President & CEO
OFFICER: /s/ Jerry L. Lockett
---------------------------
Jerry L. Lockett
<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 April
30, 1998 and is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<CASH> 268663
<SECURITIES> 0
<RECEIVABLES> 2784541
<ALLOWANCES> 53406
<INVENTORY> 759270
<CURRENT-ASSETS> 4579377
<PP&E> 5593177
<DEPRECIATION> 1468632
<TOTAL-ASSETS> 9463796
<CURRENT-LIABILITIES> 6285634
<BONDS> 80000
<COMMON> 99527
0
0
<OTHER-SE> 2998635
<TOTAL-LIABILITY-AND-EQUITY> 9463796
<SALES> 26162629
<TOTAL-REVENUES> 26162629
<CGS> 24119208
<TOTAL-COSTS> 24119208
<OTHER-EXPENSES> 1852400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 276196
<INCOME-PRETAX> 91165
<INCOME-TAX> 0
<INCOME-CONTINUING> 91165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91165
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>