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 October 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to_____________________
Commission file number: 000-24394
PENN OCTANE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1790357
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
77-530 ENFIELD LANE, BLDG. D, PALM DESERT, CALIFORNIA 92211
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (760) 772-9080
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 December 10, 1999 was 12,891,133.
1
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<CAPTION>
PENN OCTANE CORPORATION
TABLE OF CONTENTS
ITEM PAGE NO.
---- --------
<S> <C> <C> <C>
Part I 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1999 (unaudited) 3-4
and July 31, 1999
Consolidated Statements of Operations for the three months
ended October 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows for the three months
ended October 31, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-19
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20-29
3. Quantitative and Qualitative Disclosures About Market Risk 29
Part II 1. Legal Proceedings 30
2. Changes in Securities and Use of Proceeds 30
3. Defaults Upon Senior Securities 30
4. Submission of Matters to a Vote of Security Holders 30
5. Other Information 30
6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30
</TABLE>
2
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PART I
ITEM 1.
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31,
1999 July 31,
(Unaudited) 1999
------------- ----------
<S> <C> <C>
Current Assets
Cash (note I) $ 1,811,348 $1,032,265
Trade accounts receivable, less allowance for doubtful accounts of $521,067 and $521,067 3,376,515 2,505,915
Notes receivables (note F) 85,465 77,605
Inventories (note D) 1,108,232 615,156
Prepaid expenses and other current assets 41,052 42,517
------------- ----------
Total current assets 6,422,612 4,273,458
Property, plant and equipment - net (note C) 3,522,473 3,171,650
Lease rights (net of accumulated amortization of $535,803 and $524,355) 618,236 629,684
Notes receivable (note F) 794,337 822,196
Other non-current assets 64,270 11,720
------------- ----------
Total assets $ 11,421,928 $8,908,708
============= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31,
1999 July 31,
(Unaudited) 1999
--------------- ---------------
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt (note G) 345,692 $ 365,859
LPG trade accounts payable 4,502,975 2,850,197
Other accounts payable and accrued liabilities 936,051 1,382,603
- -
--------------- ---------------
Borrowings from IBC-Brownsville (note M)
Total current liabilities 5,784,718 4,598,659
Long-term debt, less current maturities (note G) 188,034 258,617
Commitments and contingencies (note I) - -
Stockholders' Equity (note H)
Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
No shares issued and outstanding at October 31, 1999 and July 31,
1999 - -
Series B - Senior preferred stock-$.01 par value, $10 liquidation value,
5,000,000 shares authorized; 0 and 90,000 shares issued and
outstanding at October 31, 1999 and July 31, 1999 - 900
Common stock-$.01 par value, 25,000,000 shares authorized;
12,884,133 and 11,845,497 shares issued and outstanding at October
31, 1999 and July 31, 1999 128,842 118,456
Additional paid-in capital 18,190,899 17,133,222
Notes receivable from the president of the Company and a related party
for exercise of warrants, less reserve of $506,302 and $451,141 at
October 31, 1999 and July 31, 1999 ( 2,765,350) ( 2,765,350)
Accumulated deficit ( 10,105,215) ( 10,435,796)
--------------- ---------------
Total stockholders' equity 5,449,176 4,051,432
--------------- ---------------
Total liabilities and stockholders' equity $ 11,421,928 $ 8,908,708
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
October 31, October 31,
1999 1998
------------- -------------
<S> <C> <C>
Revenues $ 15,970,900 $ 6,478,566
Cost of goods sold 14,965,012 5,909,433
------------- -------------
Gross profit 1,005,888 569,133
------------- -------------
Selling, general and administrative expenses
Legal and professional fees 165,729 203,082
Salaries and payroll related expenses 209,792 187,828
Travel 58,020 36,365
Other 133,897 109,735
------------- -------------
567,438 537,010
------------- -------------
Operating income 438,450 32,123
Other income (expense)
Interest expense ( 66,027) ( 92,393)
Interest income 3,528 418
------------- -------------
Income (loss) from continuing operations before taxes 375,951 ( 59,852)
Provision for income taxes - -
------------- -------------
Income (loss) from continuing operations 375,951 ( 59,852)
Discontinued operations, net of taxes (note E)
Income (loss) from operations of CNG segment - ( 81,419)
------------- -------------
Net income (loss) $ 375,951 $ ( 141,271)
============= =============
Income (loss) from continuing operations
per common share (note B) $ 0.03 $ ( 0.01)
============= =============
Net income (loss) per common share (note B) $ 0.03 $ ( 0.01)
============= =============
Income (loss) from continuing operations per common share assuming dilution (note B) $ 0.02 $ ( 0.01)
============= =============
Net income (loss) per common share assuming dilution (note B) $ 0.02 $ ( 0.01)
============= =============
Weighted average common shares outstanding 12,476,371 9,952,673
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
5
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<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
-----------------------------
October 31, October 31,
1999 1998
-------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) $ 375,951 $ ( 141,271)
Adjustments to reconcile net income to net cash used in (provided by) operating
Activities:
Depreciation and amortization 58,374 65,806
Amortization of lease rights 11,449 11,449
Other - ( 3,156)
Changes in current assets and liabilities:
Trade accounts receivable ( 870,599) ( 835,012)
Inventories ( 493,076) ( 25,269)
Prepaids and other current assets 1,465 ( 28,347)
LPG trade accounts payable 1,652,778 302,688
Other assets and liabilities, net ( 52,550) -
Other accounts payable and accrued liabilities ( 446,592) 187,035
-------------- -------------
Net cash provided by (used in) operating activities 237,200 ( 466,077)
Cash flows from investing activities:
Capital expenditures ( 409,197) ( 27,268)
Payments on note receivable 20,000 -
-------------- -------------
Net cash used in investing activities ( 389,197) ( 27,268)
Cash flows from financing activities:
Revolving credit facilities - 359,555
Preferred stock dividends ( 45,370) -
Issuance of common stock 1,067,200 -
Reduction in debt ( 90,750) -
-------------- -------------
Net cash provided by financing activities 931,080 359,555
-------------- -------------
Net increase (decrease) in cash 779,083 ( 133,790)
Cash at beginning of period 1,032,265 157,513
-------------- -------------
Cash at end of period $ 1,811,348 $ 23,723
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 57,677 $ 31,750
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
6
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION
Penn Octane Corporation, formerly International Energy Development Corporation
(IEDC) and The Russian Fund, a Delaware corporation, 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. The Company is engaged primarily in the business of purchasing,
transporting and selling LPG and has provided services and equipment to the
compressed natural gas (CNG) industry. The Company owns and operates a terminal
facility in Brownsville, Texas (Brownsville Terminal Facility). The Company has
a long-term lease agreement for approximately 132 miles of pipeline from certain
gas plants in Texas to the Brownsville Terminal Facility. The Company sells LPG
primarily to P.M.I. Trading Limited (PMI). PMI is the exclusive importer of LPG
into Mexico. PMI is also a subsidiary of Petroleos Mexicanos, the state-owned
Mexican oil company (PEMEX). PMI distributes LPG in the northeastern region of
Mexico.
The Company commenced operations during the fiscal year ended July 31, 1995 upon
construction of the Brownsville Terminal Facility. Prior to such time, the
Company was in the "development stage" until the business was established.
Since the Company began operations, the primary customer for LPG has been PMI.
Sales of LPG to PMI accounted for approximately all of the Company's total
revenues for the three months ended October 31, 1999.
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. 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. To date there has not been significant operations for
any of these entities.
During May 1999, the Company sold certain CNG related assets to a corporation
controlled by a director and officer of the Company (see note E). As a result
of the sale, the Company is no longer in the CNG business and has reflected the
historical results of the CNG segment as discontinued operations. All prior
periods have been restated.
BASIS OF PRESENTATION
- -----------------------
The accompanying financial statements include the Company and its subsidiaries,
PennWilson and Holdings (Company). All significant intercompany accounts and
transactions are eliminated.
The unaudited consolidated balance sheet as of October 31,1999, the unaudited
consolidated statements of operations for the three months ended October 31,
1999 and 1998, and the unaudited consolidated statements of cash flows for the
three months ended October 31, 1999 and 1998 have been prepared by the Company
without audit. In the opinion of management, the financial statements include
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the unaudited consolidated financial position of the Company as
of October 31, 1999 and the unaudited consolidated results of operations for the
three months ended October 31, 1999 and 1998, and unaudited consolidated cash
flows for the three months ended October 31, 1999 and 1998.
7
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION - CONTINUED
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 fiscal year ended July 31, 1999.
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.
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 Financial Accounting Standards Board (FASB) issued SFAS 128, "Earnings Per
Share", which supersedes Accounting Principles Board Opinion (APB) 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 reconciliation's from income (loss) per common
share to income (loss) per common share assuming dilution (see note H for the
convertible preferred stock and the warrants):
<TABLE>
<CAPTION>
For the three months ended October 31, 1999
-----------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- ----------
<S> <C> <C> <C>
Income (loss) from continuing operations $ 375,951 - -
Income (loss) from discontinued operations - - -
--------------
Net income (loss) 375,951 - -
Less: Dividends on preferred stock ( 45,370) - -
BASIC EPS
Income (loss) from continuing operations
available to common stockholders 330,581 12,476,371 $ 0.03
==========
Income (loss) from discontinued operations - 12,476,371 $ 0.00
-------------- ==========
Net income (loss) available to common
stockholders 330,581 12,476,371 $ 0.03
==========
EFFECT OF DILUTIVE SECURITIES
Warrants - 640,847 -
Convertible Preferred Stock - 166,304 -
DILUTED EPS
Income (loss) from continuing operations
available to common stockholders 330,581 13,283,522 $ 0.02
==========
Income (loss) from discontinued operations - 13,283,522 $ 0.00
-------------- ==========
Net income (loss) available to common
stockholders $ 330,581 13,283,522 $ 0.02
============== ============= ==========
</TABLE>
8
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - INCOME (LOSS) PER COMMON SHARE - Continued
<TABLE>
<CAPTION>
For the three months ended October 31, 1998
-----------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- -------------- -----------
<S> <C> <C> <C>
Income (loss) from continuing operations ( $59,852) - -
Income (loss) from discontinued operations ( 81,419) - -
--------------
Net income (loss) ( 141,271) - -
Less: Dividends on preferred stock - - -
BASIC EPS
Income (loss) from continuing operations
available to common stockholders ( 59,852) 9,952,673 $( 0.01)
===========
Income (loss) from discontinued operations ( 81,419) 9,952,673 $( 0.01)
-------------- ===========
Net income (loss) available to common
stockholders ( 141,271) 9,952,673 $( 0.01)
===========
EFFECT OF DILUTIVE SECURITIES
Warrants - - -
Convertible Preferred Stock - - -
DILUTED EPS
Income (loss) from continuing operations
available to common stockholders N/A N/A $ N/A
===========
Income (loss) from discontinued operations N/A N/A $ N/A
===========
Net income (loss) available to common
stockholders $ N/A $ N/A $ N/A
============== ============== ===========
</TABLE>
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
October 31, July 31,
1999 1999
------------- ------------
<S> <C> <C>
LPG: $ 173,500 $ 173,500
Building 3,426,440 3,426,440
LPG terminal 388,839 388,839
Automobile and equipment 37,223 35,738
Office equipment 896,114 572,774
Capital construction in progress (see note J) 375,781 291,409
------------- ------------
Leasehold improvements 5,297,897 4,888,700
Less: accumulated depreciation and (1,775,424) (1,717,050)
------------- ------------
amortization $ 3,522,473 $ 3,171,650
============= ============
</TABLE>
9
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31, July 31,
1999 1999
------------ ---------
<S> <C> <C>
LPG: $ 553,940 $ 434,987
Pipeline 246,310 180,169
LPG terminal 307,982 -
------------ ---------
Storage-Union Carbide (see notes I and L) $ 1,108,232 $ 615,156
============ =========
</TABLE>
NOTE E - DISCONTINUED OPERATIONS
RESULTS OF OPERATIONS
-----------------------
In connection with the sale of assets related to the CNG business during May
1999, the Company has effectively disposed of its CNG segment and has
discontinued operations of that segment. In accordance with APB 30, the results
of operations related to the CNG segment have been recorded as discontinued
operations for all periods presented in the Company's financial statements (see
note F).
NOTE F - SALE OF CNG ASSETS
During May 1999, the Company sold its remaining CNG assets and business to a
company (Buyer) controlled by a director and officer of the Company. Under the
terms of the sale, the Company received promissory notes aggregating $1,200,000
to be paid over a period of 61 months. The notes are collateralized by the CNG
assets, the common stock of the Buyer owned by the director and officer and
warrants to purchase 200,000 shares of common stock of the Company which had
previously been issued to the director and officer by the Company. The director
and officer has personally guaranteed a portion of the balance of the notes.
The notes contain a provision for prepayment at a discount and bear interest at
rates specified therein. The Company discounted the notes for the prepayment
discount, resulting in a discount of $260,000 and a discounted balance of the
notes of $940,000 at the date of issuance, which the Company believes is less
than the fair value of the collateral. The effective interest rate of the
notes after giving affect to the discount is 8.6%. Because the Buyer can pay the
notes at any time, the Company has determined that it will account for interest
income using the cost recovery method to account for collections on the notes.
Under this method, the amounts recorded as notes receivable will not exceed the
discounted cash payoff amounts.
The Stock Pledge and Security Agreement (Agreement) executed in connection with
the sale provides that the Buyer may sell the collateral at fair market value at
any time during the term of the notes without the Company's consent provided
that all proceeds collected from the sale will be applied to the note balances.
In addition, the Company has agreed to subordinate its secured interest in the
collateral after the Buyer has paid $300,000 plus interest at 10% as provided
for in the Agreement.
10
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 31, July 31,
1999 1999
------------ ---------
<S> <C> <C>
Contract for Bill of Sale which was extended in April 1999; due in monthly
payments of $3,000, including interest at 10%; due in February 2001; collateralized
by a building. $ 41,347 $ 50,347
Noninterest bearing note payable, discounted at 7%, for legal services, due in
monthly installments of $10,000 - $20,000 through January 2001 with a final
payment of $110,000 in February 2001. 357,129 387,129
Note payable for legal services in connection with litigation; payable in monthly
installments of $11,092, including interest at 6.9% (see note I). 95,250 127,000
Other long-term debt. 40,000 60,000
------------ ---------
533,726 624,476
Current maturities. 345,692 365,859
------------ ---------
$ 188,034 $ 258,617
============ =========
</TABLE>
In connection with the notes to attorneys, the Company has agreed in the future
to provide a "Stipulation of Judgment" to the creditors in the event that the
Company defaults under the settlement agreements.
NOTE H - STOCKHOLDERS' EQUITY
SERIES B - SENIOR PREFERRED STOCK
- --------------------------------------
At the 1997 Annual Meeting of Stockholders of the Company held on May 29, 1997,
the stockholders authorized the amendment of the Company's Restated Certificate
of Incorporation to authorize 5,000,000 shares, $.01 par value per share, of a
new class of senior preferred stock (Series B Senior Preferred Stock) for
possible future issuance in connection with acquisitions and general corporate
purposes, including public or private offerings of shares for cash and stock
dividends.
In connection with the Company's notice to repurchase 90,000 shares of the
Convertible Stock for $900,000 plus dividends of $45,370 on September 3, 1999,
the holder of the Convertible Stock elected to convert all of the Convertible
Stock into 450,000 shares of common stock of the Company. The Company paid the
$45,370 of dividends in cash.
The Company has granted one demand registration right with respect to the common
stock referred to in the preceding paragraph. The Company and the holder of the
common stock have agreed to share the costs of the registration.
COMMON STOCK
- -------------
During August 1999, warrants to purchase a total of 425,000 shares of common
stock of the Company were exercised, resulting in cash proceeds to the Company
of $681,233. The proceeds of such exercises were used for working capital
purposes.
During October 1999, warrants to purchase a total of 163,636 shares of common
stock of the Company were exercised, resulting in cash proceeds to the Company
of $385,951. The proceeds of such exercises were used for working capital
purposes.
11
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PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - STOCKHOLDERS' EQUITY - Continued
In connection with previous warrants issued by the Company, certain of these
warrants contain a call provision whereby the Company has the right to purchase
the warrants for a nominal price if the holder of the warrants does not elect to
exercise the warrants within the prescribed period.
BOARD COMPENSATION PLAN
- -------------------------
During the Board of Directors (the Board) meeting held on September 3, 1999, the
Board approved the implementation of a plan to compensate each outside director
serving on the Board (the Plan). Under the Plan, all outside directors upon
election to the Board will be entitled to receive warrants to purchase 20,000
shares of common stock of the Company and be granted warrants to purchase 10,000
shares of common stock of the Company for each year of service as a director.
Such warrants will expire five years after the warrants become vested. The
exercise price of the warrants issued under the Plan will be based on the
average trading price of the Company's common stock on the effective date of the
granting of the warrants, and the warrants will vest monthly over a one year
period.
In connection with the Plan, the Board granted warrants to purchase 40,000
shares of common stock at an exercise price of $2.50 for those outside directors
previously elected and serving on the Board at September 3, 1999. In addition,
the Board granted those directors warrants to purchase 20,000 shares of common
stock, at an exercise of $2.50 per share with the vesting period to commence on
August 1, 1999.
REGISTRATION RIGHTS
- --------------------
In connection with the issuance of shares and warrants by the Company (the
Shares), the Company has on numerous instances granted registration rights to
the holders of the Shares, including those shares which result from the exercise
of warrants (the "Registrable Securities"). The obligations of the Company with
respect to the Registrable Securities include one-time demand registration
rights and/or piggy-back registration rights (the "Registration"). The Company
is required to file an effective registration by either September 19, 1999,
December 1, 1999 or January 31, 2000. In connection with the Registration of
the Registrable Securities, the Company is required to provide notice to the
holder of the Registrable Securities, who may or may not elect to be included in
the Registration. The Company is obligated to register the Registrable
Securities even though the Registrable Securities may be tradable under Rule
144. The Company did not file a registration statement for the shares agreed
to be registered by September 19, 1999 or December 1, 1999. The Company has
also received notice of a demand for registration for certain of the Shares.
The Registration Rights Agreements do not contain provisions for damages, if the
Registration is not completed except for those Shares required to be registered
on December 1, 1999, whereby for each month after December 1999 and if the
Company fails to have an effective registration statement, the Company will be
required to pay a penalty of $80,000 to be paid in cash and/or common stock of
the Company based on the then current trading price of the common stock of the
Company. The Company has received an extension with respect to the Shares
required to be registered on December 1, 1999 until January 15, 2000.
The total amount of shares and warrants subject to registration at December 1,
1999, are as follows:
<TABLE>
<CAPTION>
Unexercised
Shares Warrants
--------- -----------
<S> <C> <C>
Demand Registration Rights 1,400,000 -
Piggy-Back Registration Rights 1,522,576 882,500
--------- -----------
Total Registrable Securities 2,922,576 882,500
========= ===========
Registration Rights Subject To
Penalty* 400,000 200,000
<FN>
* Also entitled to piggy-back registration rights
</TABLE>
12
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - STOCKHOLDERS' EQUITY - Continued
STOCK AWARD PLAN
- ------------------
Under the Company's 1997 Stock Award Plan, the Company has reserved for issuance
150,000 shares of Common Stock, of which 124,686 shares were unissued as of
October 31, 1999, to compensate consultants who have rendered significant
services to the Company. The Plan is administered by the Compensation Committee
of the Board of Directors of the Company which has complete authority to select
participants, determine the awards of Common Stock to be granted and the times
such awards will be granted, interpret and construe the 1997 Stock Award Plan
for purposes of its administration and make determinations relating to the 1997
Stock Award Plan, subject to its provisions, which are in the best interests of
the Company and its stockholders. Only consultants who have rendered
significant advisory services to the Company are eligible to be participants
under the Plan. Other eligibility criteria may be established by the
Compensation Committee as administrator of the Plan.
NOTE I - COMMITMENTS AND CONTINGENCIES
LITIGATION
On March 16, 1999, the Company settled in mediation a lawsuit with its former
chairman of the board, Jorge V. Duran. In connection therewith and without
admitting or denying liability, the Company agreed to pay Mr. Duran
approximately $456,300 in cash and common stock of the Company of which $100,000
is to be paid by the Company's insurance carrier. Litigation costs totaled
$221,391. The Company has agreed to register the stock in the future.
On October 14, 1998, a complaint was filed by Amwest Surety Insurance Company
("Amwest") naming as defendants, among others, PennWilson and the Company
seeking reimbursement for payments made to date by Amwest of approximately
$160,000 on claims made against the performance and payment bonds in connection
with services provided by suppliers, laborers and other materials and work to
complete the NYDOT contract (Vendors). These amounts were previously recorded
in the Company's balance sheet at the time of the complaint.
In addition, Amwest was seeking pre-judgment for any amounts ultimately paid by
Amwest relating to claims presented to Amwest against the performance and
payment bonds, but have not yet been authorized or paid to date by Amwest. In
May 1999, the Company and PennWilson reached a settlement agreement with Amwest
whereby Amwest will be reimbursed $160,000 by PennWilson for the payments made
to the Vendors, with the Company acting as guarantor. Upon satisfactory
payment, Amwest will dismiss its pending claims related to the payment bond. On
October 12, 1999, a Demand for Arbitration of $780,767 was filed by A.E. Schmidt
Environmental against Amwest, PennWilson and the Company on the performance bond
pursuant to the NYDOT contract. The Company is currently considering its legal
options and intends to vigorously defend against the claims made against the
performance bond but not yet paid by Amwest.
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, LETTERS OF CREDIT AND OTHER
As of October 31, 1999, the Company has a $10.0 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. 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) 2.5% of the
maximum face amount of such letter of credit, or (iii) such higher amount as may
be agreed to 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
13
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - COMMITMENTS AND CONTINGENCIES - Continued
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.
In connection with the Company's purchases of LPG from Exxon, PG&E NGL
Marketing, L.P. (PG&E) and/or Koch Hydrocarbon Company ("Koch"), the Company
issues letters of credit on a monthly basis based on anticipated purchases.
As of October 31, 1999, letters of credit established under the RZB Credit
Facility in favor of Exxon, PG&E and Koch for purchases of LPG totaled
$7,291,148 of which $4,502,975 was being used to secure unpaid purchases. In
connection with these purchases, the Company had unpaid invoices due from PMI
totaling $3,164,861 and cash balances maintained in the RZB Credit Facility
collateral account of $1,302,470 as of October 31, 1999.
OPERATING LEASE COMMITMENTS
The Pipeline Lease currently expires on December 31, 2013, pursuant to an
amendment (the "Pipeline Lease Amendment") entered into between the Company and
Seadrift on May 21, 1997, which became effective on January 1, 1999 (the
"Effective Date"). The Pipeline Lease Amendment provides, among other things,
for additional storage access and inter-connection with another pipeline
controlled by Seadrift, which the Company believes will provide greater access
to and from the Pipeline. Pursuant to the Pipeline Lease Amendment, the
Company's fixed annual fee associated with the use of the Pipeline was increased
by $350,000 less certain adjustments during the first two years from the
Effective Date and the Company is required to pay for a minimum volume of
storage of $300,000 per year beginning the second year from the Effective Date.
In addition, the Pipeline Lease Amendment also provides for variable rental
increases based on monthly volumes purchased and flowing into the Pipeline and
storage utilized.
CAPITALIZED LEASE COMMITMENT
The following table is a schedule by years (assuming the Substantial Completion
Date is January 1, 2000) of the estimated future minimum lease payments under
the Lease Agreements for the US - Mexico Pipeline and Mexican Terminal
Facilities together with the present value of the net minimum lease payments net
of the 30% interest purchased subsequent to September 16, 1999 (see note J):
14
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - COMMITMENTS AND CONTINGENCIES - Continued
<TABLE>
<CAPTION>
<S> <C>
Year ending July 31,
- -------------------------------------------------------------------
2000 $ 785,000
2001 1,884,000
2002 1,884,000
2003 1,884,000
2004 1,884,000
Later years 19,939,000
--------------
Total minimum lease payments 28,260,000
Less: Amount representing estimated executory costs for operations ( 3,600,000)
--------------
24,660,000
Less: Amounts related to the purchased interest - see note J ( 7,243,567)
--------------
Net minimum lease payments 17,416,433
Less: Amount representing interest ( 9,016,130)
--------------
Present value of net minimum lease payments $ 8,400,303
==============
</TABLE>
NOTE J - LPG EXPANSION PROGRAM (EXPANSION)
On July 26, 1999, the Company was granted a permit by the United States
Department of State authorizing the Company to construct, maintain and operate
two pipelines (the "US Pipeline") crossing the international boundary line
between the United States and Mexico (from the Brownsville Terminal Facilities
near the Port of Brownsville, Texas and El Sabino, Mexico) for the transport of
LPG and refined products (motor gasoline and diesel fuel) [the "Refined
Products"].
Previously, on July 2, 1998, Penn Octane de Mexico, S.A. de C.V. ("PennMex"),
see below, received a permit from the Comision Reguladora de Energia (the
"Mexican Energy Commission") to build and operate one pipeline to transport LPG
(the "Mexican Pipeline") [collectively, the US Pipelines and the Mexican
Pipeline are referred to as the "US-Mexico Pipeline"] between El Sabino (at the
point North of the Rio Bravo) and to a terminal facility in the City of
Matamoros, State of Tamaulipas, Mexico (the "Mexican Terminal Facilities").
In addition to the Expansion, the Company has begun construction of an
additional LPG terminal facility in Saltillo, Mexico (the "Saltillo Terminal
Facilities") at an estimated cost of $500,000. The Saltillo Terminal
Facilities, when complete, will allow for the distribution of LPG by railcars,
which will directly link the Company's Brownsville Terminal Facility and the
Saltillo Terminal Facilities. The Saltillo Terminal Facilities will contain
storage to accommodate approximately 100,000 gallons of LPG.
On May 31, 1999, Tergas, S.A. de C.V. ("Tergas"), see below, was formed for the
purpose of operating LPG terminal facilities in Mexico, including the Mexican
Terminal Facilities and the planned Saltillo Terminal Facilities and future LPG
terminal facilities in Mexico. Tergas has been issued the permit to operate the
Mexican Terminal Facilities and the Company anticipates Tergas will be issued
the permit to operate the Saltillo Terminal Facilities.
In connection with the Expansion, the Company and CPSC International, Inc.
("CPSC") entered into two separate Lease / Installation Purchase Agreements, as
amended, ("the Lease Agreements"), whereby CPSC will construct and operate the
US-Mexico Pipeline (including an additional pipeline to accommodate refined
products) and the Mexican Terminal Facilities and lease these assets to the
Company. Under the terms of the Lease Agreements, the Company will pay monthly
rentals of approximately $157,000, beginning the date that the US-Mexico
Pipeline
15
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - LPG EXPANSION PROGRAM (EXPANSION) - Continued
and Mexican Terminal Facilities are physically capable to transport and receive
LPG in accordance with technical specifications required (the "Substantial
Completion Date"). In addition, the Company has agreed to provide a lien on
certain assets, leases and contracts which are currently pledged to RZB, and
provide CPSC with a letter of credit of approximately $1,000,000. The Company
is currently in negotiations with RZB and CPSC concerning RZB's subordination of
RZB's lien on certain assets, leases and contracts. The Company also has the
option to purchase the US-Mexico Pipeline and the Mexican Terminal Facilities at
the end of the 10th year anniversary and 15th year anniversary for $5,000,000
and $100,000, respectively. Under the terms of the Lease Agreements, CPSC is
required to pay all costs associated with the construction design and
maintenance of the US-Mexico Pipeline and Mexican Terminal Facilities.
On September 16, 1999, the Lease Agreements were amended whereby CPSC agreed to
accept 500,000 shares of common stock of the Company owned by the President of
the Company (the "Collateral") in place of the letter of credit originally
required under the Lease Agreements. The Collateral shall be replaced by a
letter of credit or cash collateral over a ten month period beginning monthly
after the Substantial Completion Date. In addition, the Company has agreed to
guarantee the value of the Collateral based on the fair market value of the
Collateral for up to $1,000,000.
For financial accounting purposes, the Lease Agreements are capital leases.
Therefore, the assets and related liabilities will be recorded in the Company's
balance sheet on the Substantial Completion Date (see note I).
On September 16, 1999, the Company and CPSC entered into an option agreement
whereby the Company will purchase a 30% interest (the "Purchased Interests") in
the US-Mexico Pipeline and the Mexican Terminal Facilities for $3,000,000. In
connection with the Purchased Interests, the Company will not assume any costs
associated with CPSC's obligations under the Lease Agreements until the
Substantial Completion Date is reached, and the Company will receive a minimum
of $54,000 per month from the Company's payments under the Lease Agreements
(approximately 34% of the Company's monthly lease obligations under the Lease
Agreements). The Company is required to pay for the Purchased Interests on
January 3, 2000, or 10 days subsequent to the Substantial Completion Date,
whichever is later (the "Closing Date"). To secure the payment of the
$3,000,000 for the Purchased Interests, the Company has agreed to assign its
interest in the net cash proceeds to be received from the IBC-Brownsville award
judgment (the "Judgment"). In the event that the net cash received from the
Judgment is less than $3,000,000, the Company will be required to pay the
difference. In addition, if the Judgment is not paid by the Closing Date, CPSC
may require the Company to make immediate payment in exchange for the return of
the Judgment assignment.
Included in the agreement for the Purchased Interests, the Company has two
option agreements (the "Options") whereby the Company has the right to acquire
an additional 20% and an additional 50% interest in the Lease Agreements for
$2,000,000 and $7,000,000, respectively, within 90 days from the Closing Date.
The Company paid $50,000 to obtain the Options.
PennMex and/or Tergas are currently the owners of the land which is being
utilized for the Mexican Pipeline and Mexican Terminal Facilities, own the
leases associated with the Saltillo Terminal Facilities, have been granted the
permit for the Mexican Pipeline and have been granted and/or are expected to be
granted permits to operate the Mexican Terminal Facilities and the Saltillo
Terminal Facilities. In addition, the Company has advanced funds to PennMex
and/or Tergas in connection with the purchase of assets associated with the
Mexican Pipeline, Mexican Terminal Facilities and the Saltillo Terminal
Facilities.
Both PennMex and Tergas are Mexican companies which are owned 90% and 95%,
respectively, by Jorge R. Bracamontes, an officer and director of the Company
and the balance by other citizens of Mexico.
16
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - LPG EXPANSION PROGRAM (EXPANSION) - Continued
During the years ended July 31, 1998 and 1999 and for the three months ended
October 31, 1999, the Company paid PennMex $181,000, $125,000 and $61,000,
respectively, for Mexico related expenses incurred by that corporation on the
Company's behalf. Such amounts were expensed. In addition, for the three
months ended October 31, 1999, the Company has advanced on behalf of PennMex
approximately $265,000 for purchases of equipment related to the Expansion which
are included in capital construction in progress in the consolidated balance
sheet.
The actual costs to complete the US-Mexico Pipelines and Mexican Terminal
Facilities are the sole responsibility of CPSC ("the Costs"). In addition, the
Company has spent approximately $555,000 as of October 31, 1999 related to the
Costs, which are included in capital construction in progress in the
consolidated balance sheet.
Under current Mexican law, foreign ownership of Mexican entities involved in the
distribution of LPG and the operation of LPG terminal facilities are prohibited.
However, transportation and storage of LPG by foreigners is permitted.
In October 1999, the Company received a verbal opinion from the Foreign
Investment Section of the Department of Commerce and Industrial Development
("SECOFI") that the operation of the leases in Mexico would be considered as a
transportation rather than a distribution activity, and therefore, could be
performed by a foreign entity or through a foreign-owed Mexican entity. The
Company intends to request a ruling from SECOFI confirming the verbal opinion.
On November 8, 1999, the Company and Jorge Bracamontes and the other
shareholders entered into a purchase agreement to acquire up to 75% of the
common stock of PennMex for a nominal amount. The purchase agreement is subject
to among other things, the receipt of the aforementioned ruling. The Company
intends to contract with Tergas for services to be performed by Tergas at the
Mexican Terminal Facilities and the Saltillo Terminal Facilities.
The operations of PennMex and/or Tergas are subject to the tax laws of Mexico,
which among other things, require that Mexican subsidiaries of foreign entities
comply with transfer pricing rules, the payment of income and/or asset taxes,
and possibly taxes on distributions in excess of earnings. In addition,
distributions to foreign corporations may be subject to withholding taxes,
including dividends and interest payments.
NOTE K - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. The Company has had an accumulated deficit since
inception, has historically used cash in operations, and prior to the quarter
ended October 31, 1999 has had a deficit in working capital. In addition, the
Company is involved in litigation, the outcome of which cannot be determined at
the present time. Although the Company has entered into the Lease Agreements,
the acquisition of the interests in PennMex and the operating agreement with
Tergas have yet to be consummated. As discussed in note A, the Company has
historically depended heavily on sales to one major customer.
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
consolidated 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. The financial
statements do not include any adjustments related to the recoverability and
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be unable to continue in
existence.
To provide the Company with the ability it believes necessary to continue in
existence, management is taking steps to (i) collect the Judgment, (ii) increase
sales to its current customers, (iii) increase its customer base, (iv) extend
the terms and capacity of the Pipeline Lease and the Brownsville Terminal
Facility, (v) expand its product lines, (vi) increase its source of LPG supply
and at more favorable terms, (vii) obtain additional letters of credit financing
and (viii) raise additional debt and/or equity capital.
17
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - REALIZATION OF ASSETS - Continued
At July 31, 1999, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $8,000,000. 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 L - CONTRACTS
LPG BUSINESS
The Company has entered into a sales agreement, as amended, (Agreement) with
PMI, its major customer, to provide a minimum monthly volume of LPG to PMI
through March 31, 2000. Sales to PMI for the three months ended October 31,
1999 totaled $15,957,316, representing approximately all of the total revenues
for the period. The Company is currently purchasing LPG from major suppliers to
meet the minimum monthly volumes required in the Agreement. The suppliers'
prices are below the sales price provided for in the Agreement.
Effective October 1, 1999 (the "Closing Date"), the Company and Exxon entered
into a ten year LPG supply contract (the "Exxon Supply Contract"), whereby Exxon
has agreed to supply and the Company has agreed to take, the supply of propane
and butane available at Exxon's King Ranch Gas Plant (the "Plant") which is
estimated to be between 10,100,000 gallons per month and 13,900,000 gallons per
month blended in accordance with the specifications as outlined under the PMI
Sales Agreement (the "Plant Commitment"), with a minimum of 10,100,000 gallons
per month guaranteed by Exxon to be provided to the Company.
In addition, under the terms of the Exxon Supply Contract, Exxon will make
operational its Corpus Christi Pipeline (the "CCPL") which when completed, will
allow the Company to acquire an additional supply of propane from other propane
suppliers located near Corpus Christi, Texas (the "Additional Propane Supply),
and bring the Additional Propane Supply to the Plant (the "CCPL Supply") for
blending to the proper specifications outlined under the PMI Sales Agreement and
then delivered into the Pipeline. In connection with the CCPL Supply, the
Company has agreed to supply a minimum of 7,700,000 gallons into the CCPL during
the first quarter from the date that the CCPL is operational, approximately
92,000,000 gallons the following year and 122,000,000 gallons each year
thereafter and continuing for four years.
The Exxon Supply Contract currently requires that the Company purchase a minimum
supply of LPG, which is significantly higher than committed sales volumes under
the PMI Sales Agreement. In addition, the Company is required to pay additional
fees associated with the Additional Propane Supply, which will increase its LPG
costs by a minimum of $.01 per gallon without considering the actual cost of the
Additional Propane Supply charged to the Company.
In September 1999, the Company and PG&E NGL Marketing, L.P. ("PG&E") entered
into a three year supply agreement (the "PG&E Supply Agreement") whereby PG&E
has agreed to supply and the Company has agreed to take, a monthly average of
2,500,000 gallons (the "PG&E Supply") of propane beginning during October 1999.
In addition, PG&E is in the process of obtaining up to 3,800,000 gallons per
month of additional propane commitments, which if successful by December 31,
1999, would be an adjustment to the PG&E Supply.
Under the terms of the PG&E Supply Agreement, when the CCPL becomes operational,
the PG&E Supply will be delivered to the CCPL, as described above, and blended
to the proper specifications as outlined under the PMI Sales Agreement. In
addition, by utilizing the PG&E Supply, the Company would satisfy the CCPL
Supply requirements under the Exxon Supply Contract. Prior to the completion of
the CCPL, the Company will receive delivery of the PG&E Supply through the
facilities provided for under the Pipeline Lease Amendment.
The Company may incur significant additional costs associated with the storage,
disposal and/or changes in LPG prices resulting from the excess of the Plant
Commitment and PG&E Supply over actual sales volumes. Furthermore, the
Company's existing letter of credit facility may not be adequate and the Company
may require additional sources of financing to meet the letter of credit
requirements under the Exxon Supply Agreement and the PG&E Supply Agreement.
18
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L - CONTRACTS - Continued
CONSULTING COMMISSION AGREEMENT
The Company has entered into an incentive arrangement with several consultants
(the "Arrangement") whereby the Company will pay a commission based on $.001
plus 5% of every $.01 of gross margin in excess of $.0425 earned by the Company
in connection with the LPG sales of the Company, so long as the volume is in
excess of 7,500,000 gallons per month. The Arrangement became effective July
1, 1999 and is renewable annually. The amounts owed by the Company to the
Consultants for the period from August 1, 1999 through October 31, 1999, were
not material.
NOTE M - AWARD FROM 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.
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
and on June 18, 1998, the Texas Court of Appeals issued its opinion in the case,
ruling essentially in favor of the Company. IBC-Brownsville sought a rehearing
of the case on August 3, 1998. On December 30, 1998, the Court denied the
IBC-Brownsville request for rehearing. On February 16, 1999, IBC-Brownsville
filed a petition for review with the Supreme Court of Texas. On May 10, 1999
the Company responded to the Supreme Court of Texas' request for response of the
Petitioner's petition for review. On May 27, 1999, IBC-Brownsville filed a
reply with the Supreme Court of Texas to the Company's response of the
Petitioner's petition for review. On June 10, 1999, the Supreme Court of Texas
denied the Petitioner's petition for review. During July 1999, the Petitioner
filed an appeal with the Supreme Court of Texas to rehear the Petitioner's
petition for review. On August 26, 1999, the Supreme Court of Texas upheld its
decision to deny the Petitioner's petition for review. During November 1999,
IBC-Brownsville filed a petition for writ of certiorari with the United States
Supreme Court. As of October 31, 1999, the net amount of the Judgment is
approximately $4,000,000, which is comprised of (i) the original judgment,
including attorneys' fees, (ii) post-award interest, and (iii) cancellation of
the note and accrued interest payable to IBC-Brownsville, less attorneys' fees.
There is no certainty that IBC-Brownsville will not continue to seek other legal
remedies against the Judgment.
For the year ended July 31, 1999, the Company recorded a gain of approximately
$987,000, which represented the amount of the Judgment which was recorded as a
liability on the Company's balance sheet at December 31, 1998. The remaining
net amount of the Judgment to be realized by the Company is approximately
$4,000,000, less attorneys fees. In addition, a former officer of the Company
is entitled to 5% of the net proceeds from the Judgment (after expenses and
legal fees). The Company will recognize the remaining amount of the Judgment
when it realizes the proceeds associated with the Judgment.
NOTE N - SUBSEQUENT EVENTS
EQUIPMENT PURCHASE
- -------------------
During November 1999, the Company entered into an agreement to purchase four
storage tanks, pump house and pipeline facilities (the "Purchased Assets")
located near the Brownsville Terminal Facility for a total purchase price of
$195,000. The Company has made payment of the purchase price into an escrow
account subject to final approval by the Brownsville Navigation District (the
"District") for the Company to acquire the rights to the Purchased Assets. In
connection with the purchase, the Company agreed to partially fund the cost for
the clean-up of other assets located near the Purchased Assets required by the
District. The costs are not expected to be material.
19
<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
Consolidated Financial Statements of the Company and related Notes thereto
appearing elsewhere herein. References to specific years preceded by "fiscal"
(e.g. fiscal 1999) refer to the Company's fiscal year ended July 31. The
results of operations related to the Company's CNG segment, primarily consisting
of PennWilson, which began operations in March 1997 and was discontinued during
fiscal 1999, have been presented separately in the Consolidated Financial
Statements of the Company as discontinued operations.
OVERVIEW
The Company has been principally engaged in the purchase, transportation
and sale of LPG and, from 1997 to March 1999, the provision of equipment and
services to the CNG industry. Beginning in July 1994, the Company has bought
and sold LPG for distribution into northeast Mexico and the U.S. Rio Grande
Valley.
Historically, the Company has derived substantially all of its revenues
from sales of LPG to PMI, its primary customer. During the three months ended
October 31, 1999, the Company derived approximately all of its revenues from
sales of LPG.
The Company provides products and services through a combination of
fixed-margin and fixed-price contracts. Under the Company's agreements with its
customers and suppliers, the buying and selling prices of LPG are based on
variable posted prices that provide the Company with a fixed margin. Costs
included in cost of goods sold other than the purchase price of LPG 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 resold to PMI could result in
unanticipated costs.
LPG SALES
The following table shows the Company's volume sold in gallons and average
sales price of LPG for the three months ended October 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
October 31, October 31,
1999 1998
------------ -----------
<S> <C> <C>
Volume Sold
LPG (millions of gallons) 33.8 22.4
Average sales price
LPG (per gallon) $0.47 $0.28
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1999 COMPARED WITH THE THREE MONTHS ENDED
OCTOBER 31, 1998
Revenues. Revenues for the three months ended October 31, 1999 were $16.0
million compared with $6.5 million for the three months ended October 31, 1998,
an increase of $9.5 million or 146.5%. Of this increase $5.4 million was
attributable to increased volumes of LPG sold in the three months ended October
31, 1999 and $4.2 million was attributable to increased average sales prices of
LPG sold in the three months ended October 31, 1999.
Cost of sales. Cost of sales for the three months ended October 31, 1999
was $15.0 million compared with $5.9 million for the three months ended October
31, 1998, an increase of $9.1 million or 153.2%. Of this increase
20
<PAGE>
$4.9 million was attributable to an increased volumes of LPG purchased in the
three months ended October 31, 1999 and $4.2 million was attributable to
increased average sales prices of LPG purchased in the three months ended
October 31, 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $567,438 in the three months ended October 31, 1999
compared with $537,010 in the three months ended October 31, 1998, an increase
of $30,428 or 5.7%. This increase was primarily attributable to additional
administrative costs resulting from the increased volumes of LPG sold.
Other income and expense, net. Other income (expense), net was ($62,499)
in the three months ended October 31, 1999 compared with $(91,975) in the three
months ended October 31, 1998. The decrease in other expense, net was due
primarily to reduced interest charges on outstanding indebtedness during the
three months ended October 31, 1999.
Income tax. Due to the availability of net operating loss carryforwards
($8.0 million and $8.8 million at July 31, 1999 and 1998, respectively), there
was no income tax expense in either period. The ability to use such net
operating loss carryforwards, which expire in the years 2009 to 2018, may be
significantly limited by the application of the "change in ownership" rules
under Section 382 of the Internal Revenue Code.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception in
1992, and until the year ended July 31, 1999, has used cash in operations and
has had 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. The Company's sources
of liquidity and capital resources historically have been provided by sales of
LPG and CNG-related equipment, proceeds from the issuance of short-term and
long-term debt, revolving credit facilities and credit arrangements, sale or
issuance of preferred and common stock of the Company and proceeds from the
exercise of warrants to purchase shares of the Company's common stock.
The following summary table reflects comparative cash flows for the three
months ended October 31, 1999 and 1998. All information is in thousands.
<TABLE>
<CAPTION>
Three months Ended
----------------------------
October 31, October 31,
1999 1998
------------- -------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 237 $ ( 466)
Net cash (used in) investing
Activities . . . . . . . . . . . . . . . . . . . . ( 389) ( 28)
Net cash provided by financing activities . . . . . 931 360
------------- -------------
Net increase (decrease) in cash . . . . . . . . . . $ 779 $ ( 134)
============= =============
</TABLE>
PMI Sales Agreement. The PMI Sales Agreement is effective for the period
from October 1, 1998 through September 30, 1999 and provides for the purchase by
PMI of minimum monthly volumes of LPG aggregating a minimum annual volume of
69.0 million gallons, similar to minimum volume requirements under the previous
sales agreement with PMI effective during the period from October 1, 1997 to
September 30, 1998. During June 1999, the PMI Sales Agreement was amended (the
"PMI Sales Agreement Amendment") to extend the expiration date until March 31,
2000 and to provide the Company with additional margins for any volume exceeding
7.0 million gallons per month during the summer period (April - September) and
9.0 million gallons per month during the winter period (October - March). Under
the PMI Sales Agreement Amendment, PMI is obligated to purchase a minimum volume
of 45.0 million gallons during October 1999 through March 2000.
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LPG Supply Agreement. During October 1998, the Company entered into a
monthly supply agreement with Exxon pursuant to which Exxon agreed to supply
minimum volumes of LPG to the Company. Effective November 1, 1998, the Company
entered into a supply agreement with Exxon to purchase minimum monthly volumes
of LPG through September 1999.
Effective October 1, 1999 (the "Exxon Closing Date"), the Company and Exxon
entered into a ten year LPG supply contract (the "Exxon Supply Contract"),
whereby Exxon has agreed to supply and the Company has agreed to take, the
supply of propane and butane available at Exxon's King Ranch Gas Plant (the
"Plant") which is estimated to be between 10.1 million gallons per month and
13.9 million gallons per month blended in accordance with the specifications
outlined under the PMI Sales Agreement (the "Plant Commitment"), with a minimum
of 10.1 million gallons per month guaranteed by Exxon to be provided to the
Company.
In addition, under the terms of the Exxon Supply Contract, Exxon will make
operational its Corpus Christi Pipeline (the "CCPL") which when completed, will
allow the Company to acquire an additional supply of propane from other propane
suppliers located near Corpus Christi, Texas (the "Additional Propane Supply),
and bring the Additional Propane Supply to the Plant (the "CCPL Supply") for
blending to the proper specifications outlined under the PMI Sales Agreement and
then delivered into the Pipeline. In connection with the CCPL Supply, the
Company has agreed to supply a minimum of 7.7 million gallons into the CCPL
during the first quarter from the date that the CCPL is operational,
approximately 92 million gallons the following year and 122 million gallons each
year thereafter and continuing for four years.
The Exxon Supply Contract currently requires that the Company purchase a
minimum supply of LPG, which is significantly higher than committed sales
volumes under the PMI Sales Agreement. In addition, the Company is required to
pay additional fees associated with the Additional Propane Supply, which will
increase its LPG costs by a minimum of $.01 per gallon without considering the
actual cost of the Additional Supply charged to the Company.
In September 1999, the Company and PG&E NGL Marketing, L.P. ("PG&E")
entered into a three year supply agreement (the "PG&E Supply Agreement") whereby
PG&E has agreed to supply and the Company has agreed to take, a monthly average
of 2.5 million gallons (the "PG&E Supply") of propane beginning during October
1999. In addition, PG&E is in the process of obtaining up to 3.8 million gallons
per month of additional propane commitments, which if successful by December 31,
1999, would be an adjustment to the PG&E Supply.
Under the terms of the PG&E Supply Agreement, when the CCPL becomes
operational the PG&E Supply will be delivered to the CCPL, as described above,
and blended to the proper specifications as outlined under the PMI Sales
Agreement. In addition, by utilizing the PG&E Supply, the Company would satisfy
the CCPL Supply requirements under the Exxon Supply Contract. Prior to the
completion of the CCPL, the Company will receive delivery of the PG&E Supply
through the facilities provided for under the Pipeline Lease Amendment.
In connection with the Plant Commitment and the PG&E Supply, the Company
anticipates lower gross margins on its sales of LPG under the PMI Sales
Agreement of approximately 10% - 40% as a result of increased LPG costs compared
with the previous agreements to purchase LPG. The Company may incur significant
additional costs associated with storage, disposal and/or changes in LPG prices
resulting from the excess of the Plant Commitment and PG&E supply over actual
sales volumes.
The Company believes that the terms of the Exxon Supply Contract and the
PG&E Supply Contract are commensurate with the anticipated future demand for LPG
in Mexico and that any additional costs associated with the Additional Supply as
well as the increase in the costs for LPG over previous agreements will be
offset by increased sales margins on LPG sold to the Company's customers. The
Company further believes that any additional costs incurred in connection with
the Plant Commitment and PG&E Supply, if any, will be short-term in nature.
The ability of the Company to increase sales of LPG into Mexico in the
future is largely dependent on the Company's ability to negotiate future
contracts with PMI and/or with local Mexican distributors once Deregulation in
Mexico is implemented. In addition, there can be no assurance that the Company
will be able to obtain terms as favorable as the PMI Sales Agreement. In the
event that the Company is unable to meet its intended LPG sales objectives, then
the Company may incur significant losses as a result of not being able to meet
its minimum purchase
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<PAGE>
requirements under the Exxon Supply Contract and the PG&E Supply Contract and/or
the costs of LPG may be in excess of prices received on sales of LPG.
Furthermore, until the US-Mexico Pipeline and Mexican Terminal Facilities
and Saltillo Terminal Facilities are completed, the Company will be required to
deliver the minimum monthly volumes from its Brownsville Terminal Facility.
Historically, sales of LPG from the Brownsville Terminal Facility have not
exceeded 12.6 million gallons per month. In addition, breakdowns along the
planned distribution route for the LPG once purchased from PG&E and/or Exxon
and/or other suppliers, may limit the ability of the Company to accept the Plant
Commitment, CCPL Supply and/or the PG&E Supply.
Under the terms of the Exxon Supply Contract and the PG&E Supply Contract,
the Company must provide letters of credit in amounts equal to the cost of the
product purchased. The amount of product to be purchased under the Exxon Supply
Contract and the PG&E Supply Contract are significantly higher than historical
amounts. In addition, the cost of the product purchased is tied directly to
overall market conditions. As a result, the Company's existing letter of credit
facility may not be adequate and the Company may require additional sources of
financing to meet the letter of credit requirements under the Exxon Supply
Contract and the PG&E Supply Agreement. Furthermore upon the implementation of
Deregulation the Company anticipates entering into contracts with Mexican
customers which require payments in pesos. In addition the Mexican customers may
be limited in their ability to provide adequate financing.
As a result of the Exxon Supply Contract and the PG&E Supply Contract, the
Company believes that its has an adequate supply of LPG to satisfy the
requirements of PMI under the PMI Sales Agreement and to meet its future sales
obligations, if any, upon the expiration of the PMI Sales Agreement. Due to
strategic location of the Company's pipelines and terminal facilities, the
Company believes that it will be able to achieve higher margins on the sale of
LPG in the future.
In determining whether any supplier will be utilized, the Company will
consider the applicable prices charged as well as any additional fees that may
be required to be paid under the Pipeline Lease.
Pipeline Lease. The Pipeline Lease currently expires on December 31,
2013, pursuant to an amendment (the "Pipeline Lease Amendment") entered into
between the Company and Seadrift on May 21, 1997, which became effective on
January 1, 1999 (the "Effective Date"). The Pipeline Lease Amendment provides,
among other things, for additional storage access and inter-connection with
another pipeline controlled by Seadrift, thereby providing greater access to and
from the Pipeline. Pursuant to the Pipeline Lease Amendment, the Company's
fixed annual fee associated with the use of the Pipeline was increased by
$350,000, less certain adjustments during the first two years from the Effective
Date and the Company is required to pay for a minimum volume of storage of
$300,000 per year beginning the second year from the Effective Date. In
addition, the Pipeline Lease Amendment provides for variable rental increases
based on monthly volumes purchased and flowing into the Pipeline and storage
utilized. The Company believes that the Pipeline Lease Amendment provides the
Company increased flexibility in negotiating sales and supply agreements with
its customers and suppliers.
Present Pipeline capacity is approximately 265 million gallons per year.
During the three months ended October 31, 1999, the Company sold 33.8 million
gallons of LPG which flowed through the Pipeline. The Company can increase the
Pipeline's capacity through the installation of additional pumping equipment.
(See "LPG Expansion Program" below.)
LPG EXPANSION PROGRAM. On July 26, 1999, the Company was granted a permit
by the United States Department of State authorizing the Company to construct,
maintain and operate two pipelines (the "US Pipeline") crossing the
international boundary line between the United States and Mexico (from the
Brownsville Terminal Facility near the Port of Brownsville, Texas and El Sabino,
Mexico) for the transport of LPG and refined products (motor gasoline and diesel
fuel) [the "Refined Products"].
Previously, on July 2, 1998, Penn Octane de Mexico, S.A. de C.V.
("PennMex"), an affiliated company, received a permit from the Comision
Reguladora de Energia (the "Mexican Energy commission") to build and operate one
pipeline to transport LPG (the "Mexican Pipeline") [collectively, the US
Pipeline and the Mexican Pipeline are
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<PAGE>
referred to as the "US-Mexico Pipeline"] between El Sabino (at the point North
of the Rio Bravo) and to a terminal facility in the City of Matamoros, State
of Tamaulipas, Mexico (the "Mexican Terminal Facilities").
As a result of the above, the Company will be able to transport LPG
directly from the US into Mexico through the US-Mexico Pipeline and to the
Mexican Terminal Facilities (the "Expansion"). Management believes that as a
result of the Expansion, the Company will have additional strengths due to its
ability to penetrate further into Mexico, provide greater volumes of LPG as a
result of reduced cross border trucking delays and greater access to Mexican
distribution resources and the potential to achieve greater margins on its LPG
sales.
In addition to the Expansion, Tergas has begun construction of an
additional LPG terminal facility in Saltillo, Mexico (the "Saltillo Terminal
Facilities") for an estimated cost of $500,000. The Saltillo Terminal
Facilities, when complete, will allow for the distribution of LPG by railcars,
which will directly link the Company's Brownsville Terminal Facility and the
Saltillo Terminal Facilities. The Saltillo Terminal Facilities will contain
storage to accommodate approximately 100,000 gallons of LPG. As a result of the
Saltillo Terminal Facilities, the Company believes that it will be able to
further penetrate the Mexican market for the sale of LPG. Initially, the
Company believes that the Saltillo Terminal Facilities, when complete, will
generate additional sales of 5.0 million gallons monthly, independent of the
Expansion.
On May 31, 1999, Tergas, S.A. de C.V. ("Tergas"), see below, was formed for
the purpose of operating LPG terminal facilities in Mexico, including the
Mexican Terminal Facilities and the planned Saltillo Terminal Facilities and
future LPG terminal facilities in Mexico. Tergas has been issued the permit to
operate the Mexican Terminal Facilities and the Company anticipates Tergas will
be issued the permit to operate the Saltillo Terminal Facilities.
In connection with the Expansion and the Saltillo Terminal Facilities, the
Company is also in the process of completing upgrades at the Brownsville
Terminal Facility (the "Terminal Upgrades") and in January 2000 is planning to
begin certain enhancements to the Pipeline (the "Pipeline Enhancements"). Among
other things, the Terminal Upgrades will include the installation of additional
piping to connect the Pipeline to the loading dock at the railroad spur located
at the Brownsville Terminal Facility and construction of railcar loading
facilities to enable the Company to receive or deliver LPG for distribution of
LPG by railcar into Mexico and to the Saltillo Terminal Facilities. The Company
expects the Terminal Upgrades to be completed by December 1999 at a total cost
of approximately $200,000. Upon the completion of the Terminal Upgrades and the
Saltillo Terminal Facilities, the Company will be able to distribute LPG to
Mexico by railcars, which will directly link the Company's Brownsville Terminal
Facility and the Saltillo Terminal Facilities.
The Pipeline Enhancements will include the installation of additional
piping, meters, valves, analyzers and pumps along the Pipeline to increase the
capacity of the Pipeline and make the Pipeline bi-directional. The Pipeline
Enhancements will increase the capacity of the Pipeline to 360 million gallons
per year, and will provide the Company with access to a greater number of LPG
suppliers and additional storage facilities. The Company expects to begin the
Pipeline Enhancements in January 2000 and to be completed three months
thereafter at a cost of approximately $1.5 million.
During November 1999, the Company entered into an agreement to purchase four
storage tanks, pump house and pipeline facilities (the "Purchased Assets")
located near the Brownsville Terminal Facility for a total purchase price of
$195,000. The Company has made payment of the purchase price into an escrow
account subject to final approval by the Brownsville Navigation District (the
"District") for the Company to acquire the rights to the Purchased Assets. In
connection with the purchase, the Company agreed to partially fund the cost for
the clean-up of other assets located near the Purchased Assets required by the
District. The costs are not expected to be material.
In connection with the Expansion, the Company and CPSC International, Inc.
("CPSC") entered into two separate Lease / Installation Purchase Agreements, as
amended, ("the Lease Agreements"), whereby CPSC will construct the US-Mexico
Pipeline (including an additional pipeline to accommodate Refined Products) and
the Mexican Terminal Facilities and lease these assets to the Company. Under
the terms of the Lease Agreements, the Company will pay monthly rentals of
approximately $157,000, beginning the date that the US-Mexico Pipeline and
Mexican Terminal Facilities are physically capable to transport and receive LPG
in accordance with technical specifications required (the "Substantial
Completion Date"). In addition the Company has agreed to provide a lien on
certain assets, leases and contracts which are currently pledged to RZB, and
provide CPSC with a letter of credit of
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<PAGE>
approximately $1.0 million. The Company is currently in negotiations with RZB
and CPSC concerning RZB's subordination of RZB's lien on certain assets,
leases and contracts. The Company also has the option to purchase the US-Mexico
Pipeline and Mexican Terminal Facilities at the end of the 10th year anniversary
and 15th year anniversary for $5.0 million and $100,000, respectively. Under
the terms of the Lease Agreements, CPSC is required to pay all costs
associated with the construction and maintenance of the US - Mexico Pipeline
and Mexican Terminal Facilities.
On September 16, 1999, the Lease Agreements were amended whereby CPSC
agreed to accept 500,000 shares of common stock of the Company owned by the
President of the Company (the "Collateral") in place of the letter of credit
originally required under the Lease Agreements. The Collateral shall be
replaced by a letter of credit or cash collateral over a ten month period
beginning monthly after the Substantial Completion Date. In addition, the
Company has agreed to guarantee the value of the Collateral based on the fair
market value of the Collateral for up to $1.0 million.
For financial accounting purposes, the Lease Agreements are capital leases.
Therefore, the assets and related liabilities will be recorded in the Company's
balance sheet on the Substantial Completion Date.
On September 16, 1999, the Company and CPSC entered into a purchase and
option agreement whereby the Company will purchase a 30% interest (the
"Purchased Interests") in the US-Mexico Pipeline and Mexican Terminal Facilities
for $3.0 million. In connection with the Purchased Interests, the Company will
not assume any costs associated with CPSC's obligations under the Lease
Agreements until the Substantial Completion Date is reached, and the Company
will receive a minimum of $54,000 per month from the Company's payments under
the Lease Agreements (approximately 34% of the Company's monthly lease
obligations under the Lease Agreements). The Company is required to pay for
the Purchased Interests on January 3, 2000, or 10 days subsequent to the
Substantial Completion Date, whichever is later (the "Closing Date"). To secure
the payment of the $3.0 million for the Purchased Interests, the Company has
agreed to assign its interest in the net cash proceeds to be received from the
IBC-Brownsville award judgment (the "Judgment") of approximately $3.0 million
(see Item 3, "Legal Proceedings"). In the event that the net cash received from
the Judgment is less than $3.0 million, the Company will be required to pay the
difference. In addition, if the Judgment is not paid by the Closing Date, CPSC
may require the Company to make immediate payment in exchange for the return of
the Judgment assignment.
Included in the agreement for the Purchased Interests, the Company has two
option agreements (the "Options") whereby the Company has the right to acquire
an additional 20% and an additional 50% interest in the Lease Agreements for
$2.0 million and $7.0 million, respectively, within 90 days from the Closing
Date. In the event the Company exercises the additional 20% option, then the
Purchased Interests will total 50% and the Company will receive a minimum from
the Purchased Interests of $90,000 per month from the Company's payments under
the Lease Agreements (approximately 57% of the Company's monthly lease
obligations under the Lease Agreements). The Company paid $50,000 to obtain the
Options.
During the years ended July 31, 1998 and 1999 and for the three months
ended October 31, 1999, the Company paid PennMex $181,000, $125,000 and $61,000,
respectively, for Mexico related expenses incurred by that corporation on the
Company's behalf. Such amounts were expensed. In addition, for the three
months ended October 31, 1999, the Company has advanced on behalf of PennMex
approximately $265,000 for purchases of equipment related to the Expansion which
are included in capital construction in progress in the unaudited consolidated
balance sheet.
The actual costs to complete the US-Mexico Pipeline and Mexican Terminal
Facilities are the sole responsibility of CPSC (the "Costs"). In addition, the
Company has spent approximately $555,000 as of October 31, 1999 related to the
Costs, which are included in capital construction in progress in the unaudited
consolidated balance sheet.
Foreign Ownership of LPG Operations. Both PennMex and Tergas are Mexican
companies, which are owned 90% and 95%, respectively, by Jorge R. Bracamontes,
an officer and director of the Company ("Bracamontes") and the balance by other
Mexican citizens ("Minority Shareholders"). Under current Mexican law (see
"Deregulation of the LPG Market in Mexico" below), foreign ownership of Mexican
entities involved in the distribution of LPG and the operation of LPG terminal
facilities are prohibited. However, foreign ownership is permitted in the
transportation and storage of LPG. In October 1999, the Company received a
verbal opinion from the
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Foreign Investment Section of the Department of Commerce and Industrial
Development ("SECOFI"), that the Company's planned strategy of selling LPG to
PMI at the US border and then transporting the LPG through the Mexican portion
of the US - Mexico Pipeline to the Mexican Terminal Facilities would comply with
the LPG regulations. The Company intends to request a ruling (the "Ruling") from
SECOFI confirming the verbal opinion. There is no certainty that the Company
will obtain the Ruling, and if obtained that the Ruling will not be affected by
future changes in Mexican laws.
The Company, Bracamontes and the Minority Shareholders have entered into
agreements whereby the Company may acquire up to 75% of the outstanding shares
of PennMex for a nominal amount, subject to among other things, receipt of the
Ruling. The Company intends to contract with Tergas for services to be
performed by Tergas at the Mexican Terminal Facilities and the Saltillo Terminal
Facilities.
The operations of PennMex and/or Tergas are subject to the tax laws of
Mexico, which among other things, require that Mexican subsidiaries of foreign
entities comply with transfer pricing rules, the payment of income and/or asset
taxes, and possibly taxes on distributions in excess of earnings. In addition,
distributions to foreign corporations may be subject to withholding taxes,
including dividends and interest payments.
Deregulation of the LPG Market in Mexico. The Mexican petroleum industry
is governed by the Ley Reglarmentaria del Art culo 27 Constitutional en el Ramo
del Petr leo (the Regulatory Law to Article 27 of the Constitution of Mexico
concerning Petroleum Affairs (the "Regulatory Law")), and Ley Org nica del Petr
leos Mexicanos y Organismos Subsidiarios (the Organic Law of Petr leos Mexicanos
and Subsidiary Entities (the "Organic Law")). Under Mexican law and related
regulations, PEMEX is entrusted with the central planning and the strategic
management of Mexico's petroleum industry, including importation, sales and
transportation of LPG. In carrying out this role, PEMEX controls pricing and
distribution of various petrochemical products, including LPG.
Beginning in 1995, as part of a national privatization program, the
Regulatory Law was amended to permit private entities to transport, store and
distribute natural gas with the approval of the Ministry of Energy. As part of
this national privatization program, the Mexican Government is expected to
deregulate the LPG market ("Deregulation"). In June 1999, the Regulatory Law
for LPG was changed to permit foreign entities to participate without limitation
in LPG activities related to transportation and storage. Upon the completion of
Deregulation, Mexican entities will be able to import LPG into Mexico. However,
foreign entities will be prohibited from participating in the distribution of
LPG in Mexico. Accordingly, the Company expects to sell LPG directly to
independent Mexican distributors as well as PMI. Upon Deregulation, it is
anticipated that the independent Mexican distributors will be required to obtain
authorization from the Mexican government for the importation of LPG prior to
entering into contracts with the Company.
Pursuant to the PMI Sales Agreement upon Deregulation by the Mexican
government of the LPG market, the Company will have the right to renegotiate the
PMI Sales Agreement. Depending on the outcome of any such renegotiation, the
Company expects to either (i) enter into contracts directly with independent
Mexican LPG distributors located in the northeast region of Mexico, or (ii)
modify the terms of the PMI Sales Agreement to account for the effects of
Deregulation.
Currently the Company sells LPG to PMI at its Brownsville Terminal
Facility. Upon the completion of the US - Mexico Pipeline and Mexican Terminal
Facilities, the Company will sell LPG to PMI at the U.S. border and transport
the LPG to the Mexican Terminal Facilities through the US-Mexico Pipeline. Upon
Deregulation, the Company intends to sell to independent Mexican LPG
distributors as well as PMI.
Credit Arrangements. As of October 31, 1999, the Company has a $10.0
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. 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) 2.5% of the maximum face amount of such letter of credit, or
(iii) such higher amount as may be agreed to 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
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<PAGE>
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.
In connection with the Company's purchases of LPG from Exxon, PG&E NGL
Marketing, LP (PG&E) and/or Koch Hydrocarbon Company ("Koch"), the Company
issues letters of credit on a monthly basis based on anticipated purchases.
As of October 31, 1999, letters of credit established under the RZB Credit
Facility in favor of Exxon, PG&E and Koch for purchases of LPG totaled $7.3
million of which $4.5 million was being used to secure unpaid purchases. In
connection with these purchases, the Company had unpaid invoices due from PMI
totaling $3.2 million and cash balances maintained in the RZB Credit Facility
collateral account of $1.3 million as of October 31, 1999.
Private Placements and Other Transactions. In connection with the
Company's notice to repurchase 90,000 shares of the Convertible Stock for
$900,000 plus dividends of $45,370 on September 3, 1999, the holder of the
Convertible Stock elected to convert all of the Convertible Stock into 450,000
shares of common stock of the Company. The Company paid the $45,370 of
dividends in cash.
The Company has granted one demand registration right with respect to the
common stock referred to in the preceding paragraph. The Company and the holder
of the common stock have agreed to share the costs of the registration.
During August 1999, warrants to purchase a total of 425,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $681,233. The proceeds of such exercises were used for working
capital purposes.
During October 1999, warrants to purchase a total of 163,636 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $385,951. The proceeds of such exercises were used for working
capital purposes.
In connection with previous warrants issued by the Company, certain of
these warrants contain a call provision whereby the Company has the right to
purchase the warrants for a nominal price if the holder of the warrants does not
elect to exercise the warrants within the call provision.
In connection with the issuance of shares and warrants by the Company (the
"Shares"), the Company has on numerous instances granted registration rights to
the holders of the Shares, including those shares which result from the exercise
of warrants (the "Registrable Securities"). The obligations of the Company with
respect to the Registrable Securities include one-time demand registration
rights and/or piggy-back registration rights (the "Registration"). The Company
is required to file an effective registration by either September 19, 1999,
December 1, 1999 or January 31, 2000. In connection with the Registration of the
Registrable Securities, the Company is required to provide notice to the holder
of the Registrable Securities, who may or may not elect to be included in the
Registration. The Company is obligated to register the Registrable Securities
even though the Registrable Securities may be tradable under Rule 144. The
Company did not file a registration statement for the shares agreed to be
registered by September 19, 1999. The Company has also received notice of a
demand for registration for certain of the Shares. The Registration Rights
Agreements do not contain provisions for damages, if the Registration is not
completed except for those Shares required to be registered on December 1, 1999,
whereby for each month after December 1999 and if the Company fails to have an
effective registration statement, the Company will be required to pay a penalty
of $80,000 to be paid in cash and/or common stock of the Company based on the
then current trading price of the common stock of the Company. The Company has
received an extension with respect to the Shares required to be registered on
December 1, 1999 until January 15, 2000.
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Judgment in favor of the Company. Judgment has been rendered in favor of
the Company in connection with its litigation against IBC-Brownsville. On
August 26, 1999, IBC-Brownsville was denied a rehearing of an earlier decision
on June 10, 1999 in which the Supreme Count of Texas denied IBC's-Brownsville
petition for review. During November 1999, IBC- Brownsville field a petition
for writ of certiorari with the United States Supreme Court. As of July 31,
1999, the net amount of the award is approximately $4.0 million, which is
comprised of the sum of (i) the original award, including attorney's fees, (ii)
post-award interest, and (iii) cancellation of the note and accrued interest
payable, less attorneys' fees. Although no assurance can be made that
IBC-Brownsville will not continue to seek other legal remedies against the
Judgment, management believes that the Company will ultimately prevail, and will
receive the proceeds from such Judgment. In addition, a former officer of the
Company is entitled to 5% of the net proceeds (after expenses and legal fees).
Settlement of Litigation. On March 16, 1999, the Company settled in
mediation a lawsuit with its former chairman of the board, Jorge V. Duran. In
connection therewith and without admitting or denying liability the Company
agreed to pay Mr. Duran approximately $456,000 in cash and common stock of the
Company of which $100,000 is to be paid by the Company's insurance carrier. The
Company has agreed to register the stock in the future.
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
and expansion program, which includes the acquisition of the interests in
PennMex and the consummation of an operating agreement with Tergas.
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)
extend the terms and capacity of the Pipeline Lease and the Brownsville Terminal
Facility, (v) expand its product lines, (vi) increase its source of LPG supply
and at more favorable terms, (vii) obtain additional letters of credit financing
and (viii) raise additional debt and/or equity capital. See note K to the
unaudited consolidated financial statements.
At July 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $8.0 million. 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.
Year 2000 Date Conversion. Management has determined that the consequences
of its Year 2000 issues will not have a material effect on the Company's
business, results of operations, or financial condition.
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
consolidated statements of operations are calculated under the guidance of SFAS
128.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income and Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosure about Segments of an Enterprise and Related Information. Both are
effective for periods beginning after December 15, 1997, with earlier
application encouraged for SFAS 131. The Company adopted SFAS 131 in fiscal
1997.
28
<PAGE>
FORWARD-LOOKING STATEMENTS
Statements in this report regarding future events or conditions are
forward-looking statements. Actual results, performance or achievements could
differ materially due to, among other things, factors discussed in this report
and in Part I of the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1999. These forward-looking statements include, but are not
limited to, statements regarding anticipated future revenues, sales, operations,
demand, competition, capital expenditures, the deregulation of the LPG market in
Mexico, the completion and operations of the US - Mexico Pipeline, the Mexican
Terminal Facilities and the Saltillo Terminal Facilities, foreign ownership of
LPG operations, credit arrangements and other statements regarding matters that
are not historical facts, and involves predictions which are based upon a number
of future conditions that ultimately may prove to be inaccurate. We caution
you, however, that this list of factors may not be complete.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
29
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note I to the unaudited Consolidated Financial Statements and Note
N to the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note H to the unaudited consolidated financial statements and Note
L to the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1999.
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.
a. Exhibits and Financial Statement Schedules
The following Exhibits and Financial Statement Schedules are filed as part
of this report:
EXHIBIT NO.
- ------------
10.140 Transfer of Shares Agreement dated November 4, 1999 between Jorge
Bracamontes Aldana and the Company.
10.141 Transfer of Shares Agreement dated November 4, 1999 between Juan
Jose Navarro Plascencia and the Company.
27.1 Financial Data Schedule.
b. Reports on Form 8-K.
None.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENN OCTANE CORPORATION
December 13, 1999 By: /s/Ian T. Bothwell
--------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
31
<PAGE>
[TRANSLATION]
TRANSFER OF SHARES AGREEMENT
THIS TRANSFER OF SHARES AGREEMENT IS ENTERED INTO ON NOVEMBER 4, 1999,
BETWEEN JORGE BRACAMONTES ALDANA (HEREINAFTER REFERRED TO AS "SELLER") AND PENN
OCTANE CORPORATION, REPRESENTED IN THIS ACT BY __________________ (HEREINAFTER
REFERRED TO AS "BUYER").
WHEREAS, SELLER is an individual of Mexican nationality who desires to
transfer to BUYER, 32 (Thirty Two) ordinary and nominative shares, with a face
value of $1,000.00 Pesos National Currency (One Thousand Pesos, National
Currency) each, representative of the Series "A" of the fixed capital of PENN
OCTANE DE MEXICO, S.A. DE C.V. (hereinafter referred to as "PENN OCTANE MEX"),
with respect to which, is the sole and legitimate owner;
WHEREAS, BUYER is a mercantile corporation organized under the laws of
United States of America and desires to buy the shares of PENN OCTANE MEX, of
which the SELLER is the owner;
WHEREAS, as shown in the records of PENN OCTANE MEX, the shares that are
transferred through this agreement are the property of the SELLER and have been
totally subscribed and paid.
BASED ON THE ABOVE RECITALS and in consideration of the mutual agreements
and promises of this agreement, the SELLER and the BUYER enter into this
agreement in accordance with the following:
CLAUSES
1. Transfer of Shares. Subject to the terms and conditions of this
--------------------
agreement, SELLER transfers to BUYER, 32 (Thirty Two) ordinary and nominative
shares, with a face value of $1,000.00 National Currency (One Thousand Pesos,
National Currency) each, representative of the Series "A" of the fixed capital
of PENN OCTANE MEX. Said transfer shall be recorded in the book of the
shareholders' registry of PENN OCTANE MEX, as well as give the corresponding
notices to the National Registry of Foreign Investments.
2. Authorization of the Transfers. The SELLER states that prior to the date
-------------------------------
of execution of this agreement, PENN OCTANE MEX held a Board of Directors
meeting wherein this transfer was authorized, in accordance with that set forth
in its bylaws.
3. Value of Transfer. In accordance with that set forth in the preceding
-------------------
clause 1 (one), in consideration of the transfer of the shares agreed and
documented in this agreement, the BUYER agrees to pay the SELLER for the shares
transferred, the amount of $32,000.00 National Currency (Thirty Two Thousand
Pesos National Currency), which represents the face value of such, certifying
that said price has been totally and fully paid by the BUYER to the SELLER, who
have received it and found to be satisfactory.
1
<PAGE>
4. Effective date of the Transfer. All rights and obligations derived from
--------------------------------
this Agreement and transfer of title to the shares subject matter of this
Agreement shall be effective as of the execution date of this Agreement.
Notwithstanding the above, this Agreement and its legal effects shall remain in
force until any of the following conditions are met:
a) That the Mexican Department of Commerce and Industrial Development,
Registry of Foreign Investment denies to PENN OCTANE MEX its ruling request
whereby it is confirmed that foreign investment may participate in its equity,
taking into account its main corporate purpose as to the transportation of LP
Gas by ducts;
b) That the Registry of Foreign Investment from the Department of
Commerce and Industrial Development denies, cancels or revokes registry of the
investment made by BUYER in connection with the shares of PENN OCTANE MEX, which
are the subject matter of this Agreement;
c) That after the execution of this Agreement BUYER, in its exclusive
discretion, resolves that transfer of the shares subject matter of this
Agreement is not convenient to BUYER as a result of any inconsistency in the
financial statements of PENN OCTANE MEX;
d) That following execution of this Agreement and after the legal audit
conducted to PENN OCTANE MEX is carried out BUYER, in its exclusive discretion,
resolves that transfer of the shares subject matter of this Agreement is not
convenient to BUYER as a result of any inconsistency in connection with the
operation and management of PENN OCTANE MEX.
If any of the above conditions is met all legal effects of this Agreement
shall be deemed null and void in which case BUYER and SELLER shall return any
consideration given in connection with this Agreement as if this Agreement had
not been executed.
SELLER and BUYER hereby agree that if after the legal audit conducted to
PENN OCTANE MEX is carried out it is discovered that the outstanding paid-in
capital and number of shares issued by PENN OCTANE MEX is higher than $50,000.00
National Currency (Fifty Thousand Pesos National Currency), represented by 50
shares, both parties shall cooperate and execute any further transfer of shares
transactions as necessary to keep the proportion of 75% of outstanding shares in
the name of PENN OCTANE CORPORATION and 25% of outstanding shares in the name of
JORGE BRACAMONTES ALDANA.
In order to cancel this Agreement pursuant to the above, BUYER shall
endorse back to SELLER all share certificates and SELLER shall reimburse BUYER
the purchase price for the shares subject matter of this Agreement.
5. Representations and Warranties of SELLER. SELLER represents and warrants
----------------------------------------
to BUYER that PENN OCTANE MEX is duly organized in accordance with the laws of
the Mexican Republic.
2
<PAGE>
6. Efficacy of the Transfer. This agreement will be considered effective
---------------------------
and the transfer of the property of the shares of PENN OCTANE MEX shall be
perfected, once this agreement has been executed and the stock certificates have
been endorsed, subject to the conditions stated in Article 4 above
7. Continuity of Agreement. This agreement shall be binding for all the
-------------------------
contracting parties, as well as their heirs, assigns, as well as any other third
party with respect to which there shall be transfers or the rights of the
transfers of same.
8. Originals. This agreement shall be simultaneously signed by two or more
---------
originals, considering in each case an original and executing an original in its
totality as one instrument.
In witness of the foregoing, the parties hereto execute this Agreement
effective this fourth of November 1999.
THE SELLER:
JORGE BRACAMONTES ALDANA
______________________________
THE BUYER:
PENN OCTANE CORPORATION
By:__________________________________
Name: ______________________________
Its: ______________________________
WITNESS WITNESS
By:______________________________ By:______________________________
Name: __________________________ Name: __________________________
Address:_________________________ Address:_________________________
_________________________________ _________________________________
_________________________________ _________________________________
3
<PAGE>
[TRANSLATION]
TRANSFER OF SHARES AGREEMENT
THIS TRANSFER OF SHARES AGREEMENT IS ENTERED INTO ON NOVEMBER 4, 1999,
BETWEEN JUAN JOSE NAVARRO PLASCENCIA (HEREINAFTER REFERRED TO AS "SELLER") AND
PENN OCTANE CORPORATION, REPRESENTED IN THIS ACT BY __________________
(HEREINAFTER REFERRED TO AS "BUYER"), ACCORDING WITH THE FOLLOWING:
STATEMENTS AND WARRANTIES
WHEREAS, SELLER is an individual of Mexican nationality, owner of 5 (Five)
ordinary and nominative shares, with a face value of $1,000.00 National Currency
(One Thousand Pesos, National Currency), representative of the Series "A" of the
fixed capital of PENN OCTANE DE MEXICO, S.A. DE C.V. (hereinafter referred to as
"PENN OCTANE MEX");
WHEREAS, SELLER desires to transfer to PENN OCTANE CORPORATION, 5 (Five)
ordinary and nominative shares, with a face value of $1,000.00 National Currency
(One Thousand Pesos, National Currency) each, representative of the Series "A"
of the fixed capital of PENN OCTANE MEX.
WHEREAS, PENN OCTANE CORPORATION is a mercantile corporation organized
under the laws of United States of America and desires to buy shares of PENN
OCTANE MEX, of which SELLER is the owner;
WHEREAS, as shown in the records of PENN OCTANE MEX, the shares that are
transferred through this agreement are the property of the SELLER and have been
totally subscribed and paid and subscribed.
BASED ON THE ABOVE RECITALS and in consideration of the mutual agreements
and promises of this agreement, the SELLER and the BUYER enter into this
agreement in accordance with the following:
CLAUSES
1. Transfer of Shares. Subject to the terms and conditions of this
--------------------
agreement, SELLER transfers to PENN OCTANE CORPORATION, 5 (Five) ordinary and
nominative shares, with a face value of $1,000.00 National Currency (One
Thousand Pesos, National Currency) each, representative of the Series "A" of the
fixed capital of PENN OCTANE MEX. Said transfer shall be recorded in the book of
the shareholders' registry of PENN OCTANE MEX, as well as give the corresponding
notices to the National Registry of Foreign Investments.
2. Authorization of the Transfer. SELLER states that prior to the date of
--------------------------------
execution of this agreement, PENN OCTANE MEX held a Board of Directors meeting
wherein this transfer was authorized, in accordance with that set forth in its
bylaws.
3. Value of Transfer. In accordance with that set forth in the preceding
-------------------
clause 1 (one), in consideration of the transfer of the shares agreed and
documented in this agreement, PENN OCTANE CORPORATION agrees to pay SELLER for
the shares transferred, the amount of $5,000.00 National Currency (Five Thousand
Pesos National Currency), which represents the face value of such, certifying
that said price has been totally and fully paid by PENN OCTANE CORPORATION to
SELLER, who have received it and found to be satisfactory.
1
<PAGE>
4. Effective date of the Transfer. All rights and obligations derived from
--------------------------------
this Agreement and transfer of title to the shares subject matter of this
Agreement shall be effective as of the execution date of this Agreement.
Notwithstanding the above, this Agreement and its legal effects shall remain in
force until any of the following conditions are met:
a) That the Mexican Department of Commerce and Industrial Development,
Registry of Foreign Investment denies to PENN OCTANE MEX its ruling request
whereby it is confirmed that foreign investment may participate in its equity,
taking into account its main corporate purpose as to the transportation of LP
Gas by ducts;
b) That the Registry of Foreign Investment from the Department of
Commerce and Industrial Development denies, cancels or revokes registry of the
investment made by BUYER in connection with the shares of PENN OCTANE MEX, which
are the subject matter of this Agreement;
c) That after the execution of this Agreement BUYER, in its exclusive
discretion, resolves that transfer of the shares subject matter of this
Agreement is not convenient to BUYER as a result of any inconsistency in the
financial statements of PENN OCTANE MEX;
d) That following execution of this Agreement and after the legal audit
conducted to PENN OCTANE MEX is carried out BUYER, in its exclusive discretion,
resolve that transfer of the shares subject matter of this Agreement is not
convenient to BUYER as a result of any inconsistency in connection with the
operation and management of PENN OCTANE MEX.
If any of the above conditions is met all legal effects of this Agreement
shall be deemed null and void in which case BUYER and SELLER shall return any
consideration given in connection with this Agreement as if this Agreement had
not been executed.
SELLER and BUYER hereby agree that if after the legal audit conducted to
PENN OCTANE MEX is carried out it is discovered that the outstanding paid-in
capital and number of shares issued by PENN OCTANE MEX is higher than $50,000.00
National Currency (Fifty Thousand Pesos National Currency), represented by 50
shares, both parties shall cooperate and execute any further transfer of shares
transactions as necessary to keep the proportion of 75% of outstanding shares in
the name of PENN OCTANE CORPORATION and 25% of outstanding shares in the name of
JORGE BRACAMONTES ALDANA.
In order to cancel this Agreement pursuant to the above, BUYER shall endorse
back to SELLER all share certificates and SELLER shall reimburse BUYER the
purchase price for the shares subject matter of this Agreement.
5. Representations and Warranties of SELLER. SELLER represents and warrants
----------------------------------------
to BUYER that PENN OCTANE MEX is duly organized in accordance with the laws of
the Mexican Republic.
2
<PAGE>
6. Efficacy of the Transfer. This agreement will be considered effective
---------------------------
and the transfer of the property of the shares of PENN OCTANE MEX shall be
perfected, once this agreement has been executed and the stock certificates have
been endorsed, subject to the conditions stated in Article 4 above.
7. Continuity of Agreement. This agreement shall be binding for all the
-------------------------
contracting parties, as well as their heirs, assigns, as well as any other third
party with respect to which there shall be transfers or the rights of the
transfers of same.
8. Originals. This agreement shall be simultaneously signed by two or more
---------
originals, considering in each case an original and executing an original in its
totality as one instrument.
In witness of the foregoing, the parties hereto execute this Agreement
effective as of the Fourth of November, 1999.
SELLER:
JUAN JOSE NAVARRO PLASCENCIA
_______________________________
BUYER:
PENN OCTANE CORPORATION
By:__________________________________
Name: ______________________________
Its: ______________________________
WITNESS WITNESS
By:______________________________ By:______________________________
Name: __________________________ Name: __________________________
Address:_________________________ Address:_________________________
_________________________________ _________________________________
_________________________________ _________________________________
3
<PAGE>
<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
October 31, 1999 and is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 1811348
<SECURITIES> 0
<RECEIVABLES> 3983047
<ALLOWANCES> 521067
<INVENTORY> 1108232
<CURRENT-ASSETS> 6422612
<PP&E> 5297897
<DEPRECIATION> 1775424
<TOTAL-ASSETS> 11421928
<CURRENT-LIABILITIES> 5784718
<BONDS> 188034
0
0
<COMMON> 128842
<OTHER-SE> 5320334
<TOTAL-LIABILITY-AND-EQUITY> 11421928
<SALES> 15970900
<TOTAL-REVENUES> 15970900
<CGS> 14965012
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<OTHER-EXPENSES> 567438
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<INTEREST-EXPENSE> 66027
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<NET-INCOME> 375951
<EPS-BASIC> .03
<EPS-DILUTED> .02
</TABLE>
