UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ----------------------
Commission file number: 000-24394
PENN OCTANE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1790357
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
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 June 13, 2000 was 13,435,198.
<PAGE>
PENN OCTANE CORPORATION
TABLE OF CONTENTS
ITEM PAGE NO.
---- --------
Part I 1. Financial Statements
Report on Review by Independent Certified Public Accountants 3
Consolidated Balance Sheets as of April 30, 2000 (unaudited)
and July 31, 1999 4-5
Consolidated Statements of Operations for the three
and nine months ended April 30, 2000 and 1999 (unaudited) 6
Consolidated Statements of Cash Flows for the nine
months ended April 30, 2000 and 1999 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8-27
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28-40
3. Quantitative and Qualitative Disclosures About Market Risk 41
Part II 1. Legal Proceedings 42
2. Changes in Securities 42
3. Defaults Upon Senior Securities 42
4. Submission of Matters to a Vote of Security Holders 42
5. Other Information 42
6. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 43
7. Signatures 44
2
<PAGE>
Review by Independent Certified Public Accountants
Board of Directors and Shareholders
Penn Octane Corporation
We have reviewed the accompanying consolidated balance sheet of Penn Octane
Corporation and subsidiaries (Company) as of April 30, 2000, and the related
consolidated statements of operations and cash flows for the three-month and
nine-month period ended April 30, 2000. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of July 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended (not presented herein) and in our report dated October 8,
1999, we expressed an unqualified opinion on those consolidated financial
statements. Our report letter contained a paragraph stating that conditions
existed which raised substantial doubt about the Company's ability to continue
as a going concern. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of July 31, 1999, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Brownsville, Texas
June 19, 2000
3
<PAGE>
PART I
ITEM 1.
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
April 30,
2000 July 31,
(Unaudited) 1999
----------- ----------
<S> <C> <C>
Current Assets
Cash $ 1,195,477 $1,032,265
Trade accounts receivable, less allowance for doubtful accounts of 4,431,858 2,505,915
$521,067 and $521,067
Notes receivable (note F) 122,764 77,605
Inventories (note D) 5,263,327 615,156
Prepaid expenses and other current assets 361,615 42,517
Property held for sale (see note I) 1,908,000 -
----------- ----------
Total current assets 13,283,041 4,273,458
Property, plant and equipment - net (note C) 15,614,242 3,171,650
Lease rights (net of accumulated amortization of $558,701 and $524,355) 595,338 629,684
Notes receivable, net (note F) 737,038 822,196
Other non-current assets 14,870 11,720
----------- ----------
Total assets $30,244,529 $8,908,708
=========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
April 30,
2000 July 31,
(Unaudited) 1999
----------------- ------------------
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt (note G) $ 7,919,167 $ 365,859
Revolving line of credit (note I) 1,280,900 -
LPG trade accounts payable (note I) 6,940,094 2,850,197
Other accounts payable and accrued liabilities 1,661,790 1,382,603
----------------- ------------------
Total current liabilities 17,801,951 4,598,659
Long-term debt, less current maturities (note G) 2,843,266 258,617
Commitments and contingencies (note I) - -
Stockholders' Equity (note H)
Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized; - -
No shares issued and outstanding at April 30, 2000 and July 31, 1999
Series B - Senior preferred stock-$.01 par value, $10 liquidation value, - 900
5,000,000 shares authorized; 0 and 90,000 shares issued and outstanding at
April 30, 2000 and July 31, 1999
Common stock-$.01 par value, 25,000,000 shares authorized; 13,377,949 133,780 118,456
and 11,845,497 shares issued and outstanding at April 30, 2000 and July 31,
1999
Additional paid-in capital 21,686,030 17,133,222
Notes receivable from the president and an officer of the Company and a ( 3,265,350) ( 2,765,350)
note receivable from a related party for exercise of warrants, less reserve of
624,726 and $451,141 at April 30, 2000 and July 31, 1999
Accumulated deficit ( 8,955,148) ( 10,435,796)
----------------- ------------------
Total stockholders' equity 9,599,312 4,051,432
----------------- ------------------
Total liabilities and stockholders' equity $ 30,244,529 $ 8,908,708
================= ==================
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
April 30, April 30, April 30, April 30,
2000 1999 2000 1999
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 25,683,797 $ 8,841,244 $ 60,661,528 $23,672,837
Cost of goods sold 25,873,726 7,933,161 58,661,806 21,256,379
-------------- ------------ -------------- ------------
Gross profit (loss) ( 189,929) 908,083 1,999,722 2,416,458
-------------- ------------ -------------- ------------
Selling, general and administrative expenses
Legal and professional fees 179,396 117,404 801,446 544,103
Salaries and payroll related expenses 436,456 233,467 981,563 640,165
Travel 36,669 31,679 124,652 111,784
Other 191,600 191,279 515,897 449,479
-------------- ------------ -------------- ------------
844,121 563,829 2,423,558 1,745,531
-------------- ------------ -------------- ------------
Operating income (loss) ( 1,034,050) 344,254 ( 423,836) 670,927
Other income (expense)
Interest expense ( 732,601) ( 134,951) ( 1,036,598) ( 428,025)
Interest income 23,470 1,442 29,856 2,739
Award from litigation, net (note M) - - 3,036,638 987,114
-------------- ------------ -------------- ------------
Income (loss) from continuing ( 1,743,181) 210,745 1,606,060 1,232,755
operations before taxes
Provision for income taxes 10,042 - 80,042 -
-------------- ------------ -------------- ------------
Income (loss) from continuing ( 1,753,223) 210,745 1,526,018 1,232,755
operations
Discontinued operations, net of taxes (note E)
Income (loss) from operations of CNG - ( 72,666) - ( 275,488)
-------------- ------------ -------------- ------------
segment
Net income (loss) ($1,753,223) $ 138,079 $ 1,526,018 $ 957,267
============== ============ ============== ============
Income (loss) from continuing operations ($0.13) $ 0.01 $ 0.12 $ 0.11
============== ============ ============== ============
per common share (note B)
Net income (loss) per common share (note B) ($0.13) $ 0.00 $ 0.12 $ 0.08
============== ============ ============== ============
Income (loss) from continuing operations per ($0.13) $ 0.01 $ 0.10 $ 0.10
============== ============ ============== ============
common share assuming dilution (note B)
Net income (loss) per common share assuming ($0.13) $ 0.00 $ 0.10 $ 0.08
============== ============ ============== ============
dilution (note B)
Weighted average common shares outstanding 13,092,040 10,983,467 12,815,511 10,466,197
============== ============ ============== ============
The accompanying notes are an integral part of these statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
------------------------------------
April 30, April 30,
2000 1999
------------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income $ 1,526,018 $ 957,267
Adjustments to reconcile net income to net cash used in (provided by) operating
activities:
Depreciation and amortization 174,033 187,144
Amortization of lease rights 34,346 34,345
Amortization of loan discount 566,062 141,382
Award from litigation - ( 987,114)
Other 93,333 -
Changes in current assets and liabilities:
Trade accounts receivable ( 1,925,942) ( 978,639)
Inventories ( 4,648,171) ( 106,700)
Prepaid and other assets ( 55,581) 20,800
Construction and trade accounts payable - ( 326,927)
LPG trade accounts payable 4,089,897 1,305,571
Other accounts payable and accrued liabilities 279,147 496,258
------------------- ---------------
Net cash provided by operating activities 133,142 743,387
Cash flows from investing activities:
Capital expenditures ( 7,624,625) ( 337,475)
Investment in leased interests ( 3,000,000) -
Payments on note receivable 40,000 -
------------------- ---------------
Net cash used in investing activities ( 10,584,625) ( 337,475)
Cash flows from financing activities:
Revolving credit facilities 1,280,900 ( 991,823)
Issuance of debt 7,659,743 -
Preferred stock dividends ( 45,370) -
Issuance of common stock 2,031,672 1,152,500
Reduction in debt ( 312,250) ( 48,298)
------------------- ---------------
Net cash provided by financing activities 10,614,695 112,379
------------------- ---------------
Net increase in cash 163,212 518,291
Cash at beginning of period 1,032,265 157,513
------------------- ---------------
Cash at end of period $ 1,195,477 $ 675,804
=================== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 309,400 $ 320,710
=================== ===============
Supplemental disclosures of non-cash transactions: $ 2,191,282 $ 1,385,385
=================== ===============
Common stock and warrants issued
Capital lease obligations $ 1,992,000 $ -
=================== ===============
The accompanying notes are an integral part of these statements.
</TABLE>
7
<PAGE>
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 ("Company").
The Company is engaged primarily in the business of purchasing,
transporting and selling LPG. Prior to March 1999, PennWilson CNG, Inc.
("PennWilson"), a subsidiary of the Company, 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") and owns a 50% interest and leases the remaining 50%
interest in a LPG terminal facility in Matamoros, Tamaulipas, Mexico (the
"Matamoros Terminal Facility") and pipelines (the "US-Mexico Pipelines")
which connects the Brownsville Terminal Facility to the Matamoros 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 the LPG purchased from the Company 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 88% of
the Company's total revenues for the nine months ended April 30, 2000.
BASIS OF PRESENTATION
---------------------
The accompanying financial statements include the Company and its
subsidiaries (hereinafter referred to as the "Company"). All significant
intercompany accounts and transactions are eliminated.
The unaudited consolidated balance sheet as of April 30, 2000, the
unaudited consolidated statements of operations for the three and nine
months ended April 30, 2000 and 1999, and the unaudited consolidated
statements of cash flows for the nine months ended April 30, 2000 and 1999
have been prepared by the Company without audit. In the opinion of
management, the financial statements include all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
unaudited consolidated financial position of the Company as of April 30,
2000, the unaudited consolidated results of operations for the three and
nine months ended April 30, 2000 and 1999, and the unaudited consolidated
cash flows for the nine months ended April 30, 2000 and 1999.
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.
8
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - INCOME (LOSS) PER COMMON SHARE
Income (loss) per share of common stock is computed on the weighted average
number of shares outstanding. During periods in which the Company incurred
losses, giving effect to common stock equivalents is not presented as it
would be antidilutive.
The 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 April 30, 2000 For the three months ended April 30,1999
------------------------------------------- ------------------------------------------
Income (Loss) Shares Per-Share Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- -------------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing ($1,753,223) - - $ 210,745 - -
Operations
Income (loss) from discontinued - - - ( 72,666) - -
-------------- --------------
operations
Net income (loss) ( 1,753,223) - - 138,079 - -
Less: Dividends on preferred - - - ( 132,162) - -
stock
BASIC EPS
Income (loss) from continuing ( 1,753,223) 13,092,040 ($0.13) 78,583 10,983,467 $ 0.01
=========== ===========
operations available to
common stockholders
Income (loss) from discontinued - 13,092,040 $ 0.00 ( 72,666) 10,983,467 ($0.01)
-------------- =========== -------------- ===========
operations
Net income (loss) available to ( 1,753,223) 13,092,040 ($0.13) 5,917 10,983,467 $ 0.00
=========== ===========
common stockholders
EFFECT OF DILUTIVE SECURITIES
Warrants - - - - 96,167 -
Convertible Preferred Stock - - - - 237,273 -
DILUTED EPS
Income (loss) from continuing N/A N/A $ N/A 78,583 11,316,907 $ 0.01
=========== ===========
operations available to
common stockholders
Income (loss) from discontinued N/A N/A $ N/A ( 72,666) 11,316,907 ($0.01)
-------------- =========== -------------- ===========
operations
Net income (loss) available to $ N/A $ N/A $ N/A $ 5,917 11,316,907 $ 0.00
============== ============== =========== ============== ============= ===========
common stockholders
</TABLE>
9
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - INCOME (LOSS) PER COMMON SHARE - CONTINUED
<TABLE>
<CAPTION>
For the nine months ended April 30, 2000 For the nine months ended April 30,1999
----------------------------------------- ------------------------------------------
Income (Loss) Shares Per-Share Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ------------- ---------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
Operations $ 1,526,018 - - $ 1,232,755 - -
Income (loss) from discontinued
operations - - - ( 275,488) - -
-------------- --------------
Net income (loss) 1,526,018 - - 957,267 - -
Less: Dividends on preferred
stock ( 45,370) - - ( 132,162) - -
BASIC EPS
Income (loss) from continuing
operations available to
common stockholders 1,480,648 12,815,511 $ 0.12 1,100,593 10,466,197 $ 0.11
========== ===========
Income (loss) from discontinued
operations - 12,815,511 $ 0.00 ( 275,488) 10,466,197 ($0.03)
-------------- ========== -------------- ===========
Net income (loss) available to
common stockholders 1,480,648 12,815,511 $ 0.12 825,105 10,466,197 $ 0.08
========== ===========
EFFECT OF DILUTIVE SECURITIES
Warrants - 1,356,324 - - 58,341 -
Convertible Preferred Stock - - - - 76,765 -
DILUTED EPS
Income (loss) from continuing
operations available to
common stockholders 1,480,648 14,171,835 $ 0.10 1,100,593 10,601,303 $ 0.10
========== ===========
Income (loss) from discontinued
Operations - 14,171,835 $ 0.00 ( 275,488) 10,601,303 ($0.02 )
-------------- ========== -------------- ===========
Net income (loss) available to
common stockholders $ 1,480,648 14,171,835 $ 0.10 $ 825,105 10,601,303 $ 0.08
============== ============= ========== ============== ============= ===========
</TABLE>
10
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (see notes G, I
and J):
<TABLE>
<CAPTION>
April 30, July 31,
2000 1999
-------------- --------------
<S> <C> <C>
LPG: $ 173,500 $ 173,500
Brownsville Terminal Facility: 3,426,440 3,426,440
Building 292,568 -
Terminal facilities 291,409 291,409
Tank Farm 557,244 -
Leasehold improvements 393,461 378,039
Capital construction in progress
Equipment 5,134,622 4,269,388
-------------- --------------
US-Mexico Pipelines and Matamoros Terminal 3,000,000 -
Facility: 7,194,464 512,000
Purchase of 50% interest in the Lease Agreements 1,558,726 60,774
-------------- --------------
Capitalized leases 11,753,190 572,774
-------------- --------------
Other costs paid by the Company
568,396 -
-------------- --------------
Saltillo Terminal Facility
10,800 10,800
Other: 38,317 35,738
Automobile
Office Equipment 49,117 46,538
-------------- --------------
17,505,325 4,888,700
( 1,891,083) ( 1,717,050)
Less: accumulated depreciation and amortization $ 15,614,242 $ 3,171,650
============== ==============
</TABLE>
11
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
April 30, 2000 July 31, 1999
------------------------ ------------------------
Gallons Cost Gallons Cost
---------- ------------ --------- --------------
<S> <C> <C> <C> <C>
LPG: 1,361,850 $ 648,445 1,175,958 $ 434,987
Pipeline and US-Mexico Pipelines
Storage:
Brownsville Terminal Facility and 552,628 263,134 487,076 180,169
Matamoros Terminal Facility 8,889,833 4,351,748 - -
---------- ------------ --------- --------------
Union Carbide (see notes I and L)
10,804,311 $ 5,263,327 1,663,034 $ 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 ("Security 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 Security Agreement.
12
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - LONG-TERM DEBT
ISSUANCE OF NOTES
-----------------
From December 10, 1999 through January 18, 2000, and on February 2, 2000,
the Company completed a series of related transactions in connection with
the private placement of $4,944,000 and $710,000, respectively, of
subordinated notes (the "Notes") due the earlier of December 15, 2000 or
upon the receipt of proceeds by the Company from any future debt or equity
financing in excess of $2,250,000. Interest at 9% is due on June 15, 2000,
and December 15, 2000 (or the maturity date, if earlier). In connection
with the Notes, as of April 30, 2000, the Company has granted the holders
of the Notes, warrants (the "Warrants") to purchase a total of 662,387
shares of common stock of the Company at an exercise price of $4.00 per
share, exercisable through December 15, 2002 and during May 2000 in
accordance with the Notes, the Company granted the holders of the Notes,
additional warrants (the "Additional Warrants") to purchase a total of
44,376 shares of common stock of the Company at an exercise price of $4.00
per share, exercisable through December 15, 2002. The Company was also
required to register the shares issuable in connection with exercise of the
Warrants and the Additional Warrants on or before April 15, 2000, subject
to certain conditions (see note H).
Net proceeds from the Notes were used for the purchase of the 50% interest
in the US-Mexico Pipelines and Matamoros Terminal Facility (see notes C and
J) and for working capital purposes.
Under the terms of the Notes, the Company has agreed to pledge the
Company's interests in the US-Mexico Pipelines and the Matamoros Terminal
Facility.
In connection with the issuance of $3,869,000 and $710,000 of Notes from
December 10, 1999 through January 18, 2000 and February 2, 2000,
respectively, the Company paid a fee equal to a cash payment of $270,830
and $49,700 and warrants to purchase a total of 96,725 shares and 17,750
shares, respectively, of common stock of the Company at an exercise price
of $4.00 per share, exercisable for three years. The Company also granted
piggy back registration rights to the holders of the warrants issued for
fees.
Upon the issuance of the Notes, the Company recorded a discount of
$1,675,598 related to the fair value of the Warrants and the Additional
Warrants issued and other costs, to be amortized over the life of the
Notes.
CAPITALIZED LEASE
-----------------
The Company began utilizing the US- Mexico Pipelines and the Matamoros
Terminal Facility during April 2000. The amounts related to the Settlement
discussed in note I, have been recorded in the accompanying financial
statements as property, plant and equipment and capital lease obligations
included in long-term debt.
13
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - LONG-TERM DEBT - CONTINUED
Long-term debt consists of the following:
April 30, July 31,
2000 1999
----------- ---------
<S> <C> <C>
$ 4,528,844 -
5,654,000 in promissory notes, less unamortized discount of $1,125,156;
principal due December 15, 2000, or upon earlier receipt of proceeds from any
public offering of debt or equity of the Company resulting in net proceeds to
the Company in excess of $2,250,000; interest at 9.0% (effective interest rate of
approximately 45% after consideration of the discount and loan fees) on the
principal amount of the promissory notes is due June 15, 2000 and December
15, 2000.
Capitalized lease obligations in connection with the US-Mexico Pipelines and the 5,808,000 -
Matamoros Terminal Facility (see notes I and J).
Contract for Bill of Sale which was extended in April 1999; due in monthly 23,347 $ 50,347
payments of $3,000, including interest at 10%; due in February 2001; collateralized
by a building.
Noninterest bearing note payable, discounted at 7%, for legal services, due in 262,750 387,129
monthly installments of $20,000 through January 2001 with a final payment of
110,000 in February 2001.
Note payable for legal services in connection with litigation; payable in monthly 31,750 127,000
installments of $11,092, including interest at 6.9% (see note I).
Other long-term debt. 107,742 60,000
----------- ---------
10,762,433 624,476
Current maturities. 7,919,167 365,859
----------- ---------
$ 2,843,266 $ 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) (the "Convertible 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.
14
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
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 $390,951. The proceeds of such exercises were used for
working capital purposes.
During January 2000, the Company issued 17,000 shares of common stock of
the Company in exchange for services performed.
During February 2000, warrants to purchase a total of 95,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to
the Company of $308,750. The proceeds of such exercises were used for
working capital purposes.
During March 2000, a director and officer of the Company exercised warrants
to purchase 200,000 shares of common stock of the Company at an exercise
price of $2.50 per share. The consideration for the exercise of the
warrants included $2,000 in cash and a $498,000 promissory note. The note
accrues interest at the prime rate per annum and is payable October 31,
2000. The director and officer has also agreed to personally guaranty
repayment of the promissory note. The promissory note is collateralized by
200,000 shares of common stock of the Company owned by the director and
officer of the Company and has been recorded as a reduction of
stockholders' equity. Interest on the promissory note will be recorded when
the cash is received.
On April 19, 2000, the Company issued 181,818 shares of common stock of the
Company for an amount of $1,000,000. Net proceeds from the sale were used
for working capital purposes. The Company has agreed to register the shares
issued by July 15, 2000.
During May 2000 and June 2000, warrants to purchase a total of 48,750
shares of common stock of the Company were exercised, resulting in cash
proceeds to the Company of $120,000. The proceeds of such exercises were
used for working capital purposes.
During June 2000, the Company issued 8,499 shares of common stock of the
Company in exchange for fees due.
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.
15
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
BOARD COMPENSATION PLAN - CONTINUED
-----------------------------------
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.
INCENTIVE PLAN
--------------
During December 1999, the Board authorized the implementation of a
management incentive program whereby officers and directors of the Company
received warrants to purchase 1,400,000 shares of common stock of the
Company and warrants to purchase 100,000 shares of common stock of the
Company were received by other members of management and consultants (the
"Incentive Warrants"). The Incentive Warrants have an exercise price equal
to $4.60 per share and will vest ratably on a monthly basis over three
years or immediately upon a change in control in the Company.
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 demand registration rights and/or piggy-back registration rights
and/or the Company is required to file an effective registration by either
September 19, 1999, December 1, 1999, January 31, 2000, April 15, 2000 or
July 15, 2000 (the "Registration"). 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, December 1,
1999, January 31, 2000 or April 15, 2000. 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 monthly anniversary after
December 1, 1999 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. Through May 31, 2000, the
Company has issued 8,499 shares of common stock of the Company in
connection with certain penalties incurred. The Company has received an
extension of time to file the registration statement with respect to
certain of the Shares required to be registered on December 1, 1999 and
April 15, 2000.
The total amount of shares and warrants subject to registration at June 13,
2000, are as follows:
<TABLE>
<CAPTION>
Unexercised
Shares Warrants
--------- -----------
<S> <C> <C>
Demand Registration Rights* 2,014,976 883,013
Piggy-Back Registration Rights 1,241,667 701,975
--------- -----------
Total Registrable Securities 3,256,643 1,584,988
========= ===========
Registration Rights Subject To
Penalty* 400,000 200,000
* Also entitled to piggy-back registration rights
</TABLE>
16
<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 "Stock Award Plan"), the
Company has reserved for issuance 150,000 shares of Common Stock, of which
124,686 shares were unissued as of April 30, 2000, to compensate
consultants who have rendered significant services to the Company. The
Stock Award 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 Stock Award
Plan for purposes of its administration and make determinations relating to
the 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 Stock Award Plan. Other eligibility criteria may be
established by the Compensation Committee as administrator of the Stock
Award 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
$250,000 in cash and the issuance of 100,000 shares of common stock of the
Company of which $100,000 is to be paid by the Company's insurance carrier.
The total settlement costs recorded by the Company at July 31, 1999 was
$456,300. The Company has agreed to register the common stock issuable in
the future. The parties have agreed to extend the date which the payments
required in connection with the settlement, including the issuance of the
common stock, are to be made.
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 (the "Arbitration") of $780,767 was filed by A.E. Schmidt
Environmental ("Schmidt") against Amwest, PennWilson and the Company on the
performance bond pursuant to the NYDOT contract. The Company filed a
response with the court opposing the petition by Schmidt to compel Penn
Octane Corporation to participate in the Arbitration and during April,
2000, the Court denied Schmidt's petition to compel Penn Octane Corporation
to participate in the Arbitration. 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.
17
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
On January 28, 2000, a complaint was filed by WIN Capital Corporation
("WIN") in the Supreme Court of the State of New York, County of New York,
against the Company for breach of contract seeking specific performance and
declaratory relief in connection with an investment banking agreement. In
connection with the lawsuit, WIN is seeking damages of no less than
$1,500,000, issuance of warrants to purchase 150,000 shares of common stock
of the Company at an exercise price of $1.75 per share exercisable for five
years from November 10, 1998 and issuance of warrants to purchase 225,000
shares of common stock of the Company at a exercise price of $3.25 per
share exercisable for five years from November 10, 1998. In addition, WIN
is demanding that the warrants to be issued be registered by the Company.
The Company believes the allegations are without merit and does not expect
a material adverse result from the allegations made by WIN.
On February 24, 2000, litigation was filed in the 357th Judicial District
Court of Cameron County, Texas, against Cowboy Pipeline Service Company,
Inc. ("Cowboy"), CPSC International, Inc. ("CPSC") and the Company
(collectively referred to as the "Defendants") alleging that the Defendants
had illegally trespassed in connection with the construction of the US
Pipelines and seeking a temporary restraining order against the Defendants
from future use of the US Pipelines. On March 20, 2000, the Company
acquired the portion of the property which surrounds the area where the US
Pipelines were constructed for cash of $1,908,000 to be paid at the
commencement of operations of the US Pipelines (paid during April 2000) and
debt in the amount of $1,908,000. As a result, the litigation was
dismissed. The debt bears interest at 10% per annum, payable monthly in
minimum installments of $15,000 with a balloon payment due at the end of 36
months from the date of commencement of operations of the US Pipelines. The
$1,908,000 is included in capital lease obligations (see note G).
On March 14, 2000, CPSC filed for protection under Chapter 11 of the United
States Bankruptcy Code United States Bankruptcy Court (the "Court"),
Southern District of Texas, Corpus Christi Division.
On April 27, 2000, the Company filed a complaint in the 107th Judicial
District Court of Cameron County, Texas, against Cowboy and the sole
shareholder of Cowboy ("Owner") alleging (i) fraud, (ii) aiding and
abetting a breach of fiduciary duty, (iii) negligent misrepresentation, and
(iv) conspiracy to defraud in connection with the construction of the US
Pipelines and Matamoros Terminal Facility and the underlying agreements
thereto. The Company also alleges that Cowboy was negligent in performing
its duties. The Company is seeking actual and exemplary damages and other
relief. On June 9, 2000, Cowboy removed the case to the Court.
On May 8, 2000, CPSC filed an adversary proceeding against the Company in
the Court seeking (i) prevention of the Company against the use of the US
Pipelines and escrow of all income related to use of the US Pipelines, (ii)
sequestering all proceeds related to the sale from any collateral
originally pledged to CPSC, (iii) the voidance of the Addendum agreement
between the Company and CPSC, and (iv) damages arising from the Company's
breach of the Lease Agreements and the September 1999 Agreements.
During May 2000, the Company filed a motion with the Court seeking to
appoint a Chapter 11 Trustee and the Company also filed a complaint with
the Court seeking a declaratory judgment stating that the US Pipelines be
held in trust for the benefit of the Company and that the US Pipelines are
no longer the assets of the bankruptcy estate. The motion and the complaint
are still pending.
On June 2, 2000, additional litigation was filed in the 138th Judicial
District Court of Cameron County, Texas, against Cowboy and the Company
alleging that Cowboy and the Company had illegally trespassed in connection
with the construction of the US Pipelines and seeking declaratory relief,
including damages, exemplary damages and injunctive relief preventing
Cowboy and the Company from utilizing the US Pipelines. On June 9, 2000,
CPSC intervened and removed the case to the Court. The Company is currently
reviewing its legal options and does not expect a material adverse result
from this litigation.
18
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
On June 19, 2000, the Company, CPSC, Cowboy and the Owner reached a
settlement (the "Settlement") whereby the Company has agreed to purchase
the remaining 50% interest in the assets associated with Lease Agreements
for a promissory note, transfer of the property owned by the Company
referred to above and warrants to acquire common stock of the Company. In
addition, CPSC will assume the Company's debt issued in connection with the
acquisition of the property. The accompanying financial statements have
been adjusted to reflect the Settlement. The Settlement is subject to final
documentation and approval of the Court.
As a result of the aforementioned, the Company may incur additional costs
to complete the US-Mexico Pipelines and Matamoros Terminal Facility, the
amount of which cannot presently be determined.
As a result of the foregoing, there is no certainty that the Company will;
(i) acquire the remaining 50% interest in the US-Mexico Pipelines and
Matamoros Terminal Facility, (ii) utilize the US-Mexico Pipelines and
Matamoros Terminal Facility or (iii) realize its recorded investment in the
Lease Agreements or in the US-Mexico Pipelines and Matamoros Terminal
Facility (see note C).
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 April 30, 2000, the Company had a $10,000,000 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 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.
19
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
In connection with the Company's purchases of LPG from Exxon Mobil
Corporation ("Exxon"), PG&E NGL Marketing, L.P. ("PG&E"), Duke Energy NGL
Services, Inc. ("Duke") and/or Koch Hydrocarbon Company ("Koch"), the
Company issues letters of credit on a monthly basis based on anticipated
purchases.
As of April 30, 2000, letters of credit established under the RZB Credit
Facility in favor of Exxon, PG&E, Duke and Koch for purchases of LPG
totaled $8,912,821 of which $6,940,094 was being used to secure unpaid
purchases. In addition, as of April 30, 2000, the Company had borrowed
$1,280,900 from its revolving line of credit under the RZB Credit Facility
for purchases of LPG. In connection with these purchases, at April 30,
2000, the Company had unpaid invoices due from PMI totaling $4,332,336,
cash balances maintained in the RZB Credit Facility collateral account of
$35,902 and inventory held in storage of $4,351,748 (see note D).
During May 2000, the Company and RZB amended the RZB Credit Facility
whereby the RZB Credit Facility was increased to $20,000,000 from
$10,000,000. In connection with the increase, RZB entered into a
participation agreement with Bayerische Hypo-und Vereinsbank
Aktiengesellschaft, New York Branch ("HVB"), whereby RZB and HVB will each
participate up to $10,000,000 toward the total credit facility.
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 January 1,
2000. 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.
NOTE J - 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 Pipelines") 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") (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 Pipelines"]
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
"Matamoros Terminal Facility). The construction and operation of the
US-Mexico Pipelines and the Matamoros Terminal Facility are referred to as
the "Expansion."
20
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - LPG EXPANSION PROGRAM - CONTINUED
In addition to the Expansion, the Company (i) has begun construction of a
midline pump station on the Pipeline (estimated cost of $1,500,000), (ii)
has begun an expansion of the Brownsville Terminal Facility to allow for
the loading and unloading of railcars, (iii) has begun construction of an
additional LPG terminal facility in Saltillo, Mexico (the "Saltillo
Terminal Facility") at an estimated cost of $500,000, and (iv) has
completed the purchase of a tank farm for a purchase price of $195,000
(plus costs related to the clean up of the tank farm), which after
additional improvements will be capable of storing and distributing refined
products. The Saltillo Terminal Facility, 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 Facility. The
Saltillo Terminal Facility will contain storage to accommodate
approximately 100,000 gallons of LPG. In connection with the purchase of
the tank farm, the Company entered into a lease agreement for rental of the
land which the tank farm occupies and for the use of a refined products
pipeline connecting the tank farm with public dock facilities.
In connection with the Expansion, the Company and CPSC entered into two
separate Lease / Installation Purchase Agreements, as amended, (the "Lease
Agreements"), whereby CPSC agreed to construct and maintain the US-Mexico
Pipelines (including an additional pipeline to accommodate refined
products) and the Matamoros Terminal Facility and agreed to lease these
assets to the Company. Under the terms of the Lease Agreements, the Company
is required to make monthly rental payments of approximately $157,000,
beginning the date that the US-Mexico Pipelines and Matamoros Terminal
Facility reach substantial completion, as defined under the Lease
Agreements (the "Substantial Completion Date"). During January 2000, CPSC
notified the Company that the Substantial Completion Date had occurred. 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 "LOC"). 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 Pipelines and the
Matamoros Terminal Facility 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 design, construction and maintenance of the US-Mexico Pipelines
and Matamoros Terminal Facility.
On September 16, 1999, the Lease Agreements were amended (the "September
1999 Agreements") 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 LOC 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.
During December 1999, the Company and CPSC amended (the "Addendum") the
Lease Agreements, which modified certain terms of the Lease Agreements,
including all prior amendments, modifications, options, extensions and
renewals, which were entered into from the date of the Lease Agreements
until the date of the Addendum. In connection with the Addendum, the
Company purchased 50% of the US-Mexico Pipelines and Matamoros Terminal
Facility, including a 50% interest in the underlying Lease Agreements for
$3,000,000 and the right to receive a minimum per month of the greater of
$62,800 or 40% of the monthly net income from the Lease Agreements.
21
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - LPG EXPANSION PROGRAM - CONTINUED
In addition, under the Addendum, the Company received an option until
December 15, 2000 to acquire the remaining 50% of the US-Mexico Pipelines
and Matamoros Terminal Facility, including the remaining 50% interest in
the Lease Agreements for $6,000,000 and the issuance of (i) warrants to
purchase 200,000 shares of common stock of the Company exercisable for
three years at an exercise price of $4.00 per share if the option is
exercised by June 15, 2000 or (ii) warrants to purchase 300,000 shares of
common stock of the Company exercisable for three years at an exercise
price of $4.00 per share if the option is exercised thereafter.
In connection with the Addendum, the Company is also entitled to offset any
amounts which have been paid by the Company on behalf of CPSC related to
the completion of CPSC's obligations under the Lease Agreements, except for
the $3,000,000 paid for the 50% interest, described herein, against the
Company's future rental obligations under the Lease Agreements and/or
against the option price of $6,000,000 to purchase the remaining 50%
interest in the US-Mexico Pipelines and Matamoros Terminal Facility,
including a 50% interest in the underlying Lease Agreements. The Company
may also offset against its monthly rent obligations under the Lease
Agreements any amounts to be received from its interests in the Lease
Agreements so long as the Company is current on all of the lease payments
required under the Lease Agreements.
On February 21, 2000, the Company and CPSC entered into a letter of
agreement (the "Letter Agreement") whereby the Company modified the terms
associated with acquiring the remaining 50% interest in the US-Mexico
Pipelines and Matamoros Terminal Facility, whereby the Company will only be
required to make a cash payment of $4,500,000 ($2,000,000 to be paid on or
prior to March 3, 2000, $1,000,000 payable on or before August 21, 2000 and
$1,500,000 payable in twelve equal monthly installments beginning March 31,
2000) and warrants to purchase 200,000 shares of common stock of the
Company exercisable for three years at an exercise price of $4.00 per
share. In addition, the Company agreed to pay Cowboy $150,000 on or before
June 1, 2000 as full satisfaction of a disputed claim arising from a
previous consulting agreement entered into between Cowboy and the Company.
The Company also agreed that all payments made by the Company on behalf of
CPSC in connection with the Lease Agreements would be assumed by the
Company.
In connection with the Settlement (see note I), the Company has acquired
100% of the interests in the Lease Agreements. Accordingly, the Company is
no longer required to make lease payments, provide a lien on certain
assets, provide the LOC, and the President of the Company is not required
to provide the Collateral as prescribed under the Lease Agreements and
amendments thereto.
For financial accounting purposes, the Lease Agreements are capital leases.
Therefore, the assets and related liabilities determined as a result of the
Settlement have been recorded in the accompanying balance sheet at April
30, 2000 (see notes C and G).
On May 31, 1999, Tergas, S.A. de C.V., a Mexican company ("Tergas") (see
below), was formed for the purpose of operating LPG terminal facilities in
Mexico, including the Matamoros Terminal Facility and the planned Saltillo
Terminal Facility and future LPG terminal facilities in Mexico. Tergas has
been issued the permit to operate the Matamoros Terminal Facility and the
Company anticipates Tergas will be issued the permit to operate the
Saltillo Terminal Facility.
In connection with the construction of the Mexico Pipelines and the
Matamoros Terminal Facility, CPSC provided all payments and delivery of
equipment through Termatsal, S.A. de C.V., a Mexican company ("Termatsal")
(see below).
22
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - LPG EXPANSION PROGRAM - CONTINUED
PennMex, Tergas or Termatsal are currently the owners of the land which is
being utilized for the Mexican Pipeline and Matamoros Terminal Facility,
have entered into leases associated with the Saltillo Terminal Facility,
have been granted the permit for the Mexican Pipeline, have been granted
and/or are expected to be granted permits to operate the Matamoros Terminal
Facility and the Saltillo Terminal Facility, or have title to the assets
associated with the Mexican Pipeline and Matamoros Terminal Facility
acquired by the Company, which were funded by the Company and CPSC (see
notes C and I). In addition, the Company has advanced funds (totaling
$1,558,726 at April 30, 2000) to PennMex, Tergas or Termatsal in connection
with the purchase of property, plant and equipment associated with the
construction of the Mexican Pipeline, Matamoros Terminal Facility and the
Saltillo Terminal Facility, which are included in property, plant and
equipment as "other costs paid by the Company" (see note C). Furthermore,
the Company intends to fund PennMex, Tergas or Termatsal for any additional
costs required in connection with the Mexican Pipeline, Matamoros Terminal
Facility and the Saltillo Terminal Facility.
During the years ended July 31, 1998 and 1999 and for the nine months ended
April 30, 2000, the Company paid PennMex, Tergas or Termatsal $181,000,
$125,000 and $171,000, respectively, for Mexico related expenses incurred
by those corporations on the Company's behalf. Such amounts have been
expensed.
PennMex, Tergas and Termatsal are Mexican companies which are owned 90%,
90% and 98%, respectively, by Jorge R. Bracamontes ("Bracamontes"), an
officer and director of the Company, and the balance by other citizens of
Mexico.
Under current Mexican law, foreign ownership of Mexican entities involved
in the distribution of LPG and the operation of LPG terminal facilities is
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 Mexican Pipeline and Matamoros
Terminal Facility would be considered a transportation rather than a
distribution activity, and therefore, could be performed by a foreign
entity or through a foreign-owned Mexican entity. The Company intends to
request a ruling from SECOFI confirming the verbal opinion. On November 4,
1999, the Company and 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 formalize
contracts among the Company, PennMex, Tergas and Termatsal for services to
be performed in connection with the operations of the Mexican Pipeline, the
Matamoros Terminal Facility and the Saltillo Terminal Facility.
The operations of PennMex, Tergas or Termatsal are subject to the tax laws
of Mexico, which among other things, require that Mexican subsidiaries of
foreign entities or transactions between Mexican and 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.
The transfer of any of the interests acquired by the Company or the
formalization of any contractual arrangements related to assets which are
located in Mexico are dependent upon the determination of the ultimate
legal structure of the ownership of such assets.
23
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 and has entered
into supply agreements for quantities of LPG substantially in excess of
minimum quantities under the New Agreement (see note L). Although the
Company has entered into the Settlement, there exists significant
uncertainties related to the US-Mexico Pipelines and Matamoros Terminal
Facility. In addition, the acquisition of the interests in PennMex and the
operating agreements among the Company, Tergas, PennMex or Termatsal 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 Company's
ability to obtain additional financing and to raise additional equity
capital, the completion of the transactions related to the US-Mexico
Pipelines and Matamoros Terminal Facility 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) increase sales to its
current customers, (ii) increase its customer base, (iii) extend the terms
and capacity of the Pipeline Lease and the Brownsville Terminal Facility,
(iv) expand its product lines, (v) increase its source of LPG supply and at
more favorable terms, (vi) obtain additional letters of credit financing,
(vii) raise additional debt and/or equity capital and (viii) resolve the
issues related to the US-Mexico Pipelines, the Matamoros Terminal Facility
and the Saltillo Terminal Facility.
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 - SALES AGREEMENT
The Company had entered into a sales agreement, as amended (the
"Agreement"), with PMI, its major customer, to provide a minimum monthly
volume of LPG to PMI through March 31, 2000. Effective April 1, 2000 the
Company entered into a new sales agreement with PMI (the "New Agreement")
for the annual sale of a minimum of 168,000,000 gallons of LPG to be
delivered to Matamoros, Tamaulipas, Mexico and Saltillo, Coahuila, Mexico.
The New Agreement represents an increase of 119% over annual minimum
contract volumes under the Agreement. Under the term of the New Agreement,
sale prices are indexed to variable posted prices. The New Agreement also
provides for higher fixed margins above the variable posted prices over the
Agreement based on the final delivery point of the LPG. Sales to PMI for
the nine months ended April 30, 2000 totaled $53,174,645 representing
approximately 88% of total revenues for the period.
Under the terms of the New Agreement, the Company will sell LPG to PMI in
Brownsville, Texas at the United States-Mexican border and deliver the LPG
to PMI at the Matamoros Terminal Facility or the Saltillo Terminal
Facility.
24
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L - CONTRACTS - CONTINUED
The New Agreement also provides for interim trucking of LPG from its
Brownsville Terminal Facility to the Matamoros Terminal Facility (or
designated locations within the area) and from the Brownsville Terminal
Facility or the Matamoros Terminal Facility to the Saltillo Terminal
Facility (or designated locations within the area) in the event that (i)
the Company is unable to transport LPG through the US - Mexico Pipelines,
(ii) the Saltillo Terminal Facility or railcars to deliver LPG to the
Saltillo Terminal Facility are not operating or (iii) PMI has yet to
recognize the Matamoros Terminal Facility or the Saltillo Terminal Facility
as fully operational. Under the terms of the New Agreement, in the event
interim trucking is utilized, the amount of sales prices received shall be
reduced by the corresponding trucking charges. During April 2000, the
Company began partially shipping LPG through the US - Mexico Pipelines.
LPG BUSINESS - SUPPLY AGREEMENTS
Effective October 1, 1999, 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 New Agreement (the "Plant Commitment"), with a minimum of 10,100,000
gallons per month guaranteed by Exxon to be provided to the Company. The
purchase price is indexed to variable posted prices.
In addition, under the terms of the Exxon Supply Contract, Exxon is
required to make operational its Corpus Christi Pipeline (the "CCPL") which
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
New 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
Company is required to pay additional costs associated with the use of the
CCPL. The CCPL has yet to be completed.
In September 1999, the Company and 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. The purchase
price is indexed to variable posted prices.
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 New
Agreement. 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.
25
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L - CONTRACTS - Continued
In March 2000, the Company and Koch entered into a three year supply
agreement (the "Koch Supply Contract") whereby Koch has agreed to supply
and the Company has agreed to take, a monthly average of 8,200,000 gallons
(the "Koch Supply") of propane beginning April 1, 2000, subject to the
actual amounts of propane purchased by Koch from the refinery owned by its
affiliate, Koch Petroleum Group, L.P. The purchase price is indexed to
variable posted prices. Furthermore, the Company has agreed to pay
additional charges associated with the construction of a new pipeline
interconnection to be paid through additional adjustments to the purchase
price (totaling approximately $1,000,000) which would allow deliveries of
the Koch Supply into the CCPL. Koch has not yet begun construction.
In connection with the delivery of the Koch Supply, Exxon has yet to make
operational the CCPL. Accordingly, the Company will not be able to accept
the Koch Supply until the completion of the CCPL. During the period April
1, 2000 to the date the CCPL is completed, the Company will arrange for the
sale of the Koch Supply to third parties (the "Unaccepted Koch Supply
Sales"). The Company anticipates that the net cost to the Company in
connection with the Unaccepted Koch Supply Sales will be between $0.00 per
gallon and $.0275 per gallon.
Under the terms of the Koch Supply Contract, when the CCPL becomes
operational, the Koch Supply will be delivered into the CCPL, as described
above, and blended to the proper specifications as outlined under the New
Agreement.
During March 2000, the Company and Duke entered into a three year supply
agreement (the "Duke Supply Contract") whereby Duke has agreed to supply
and the Company has agreed to take, a monthly average of 1,900,000 gallons
(the "Duke Supply") of propane or propane/butane mix, beginning April 1,
2000. The purchase price is indexed to variable posted prices.
Under the terms of the Duke Supply Contract, the Company will be required
to pay for modifications related to the connections necessary to bring a
portion of the Duke Supply into the Pipeline facilities. These costs are
expected to be minimal. All other Duke Supply will be delivered through
facilities provided for under the Pipeline Lease Amendment, and blended to
the proper specifications as outlined under the New Agreement.
In addition, upon completion of the CCPL, the delivery of the PG&E Supply
or the Koch Supply would satisfy a portion or all of the CCPL Supply
requirements under the Exxon Supply Contract.
The Company is currently purchasing LPG from major suppliers to meet the
minimum monthly volumes required in the New Agreement. The Company's costs
to purchase LPG (less any applicable adjustments) are below the sales price
provided for in the New Agreement.
The Exxon Supply Contract, the PG&E Supply Agreement, the Koch Supply
Contract and the Duke Supply Contract currently require that the Company
purchase a minimum supply of LPG, which is significantly higher than
committed sales volumes under the New Agreement.
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, PG&E Supply, Koch Supply or Duke 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 Contract, the PG&E Supply Agreement, the Koch Supply Contract or the
Duke Supply Contract.
26
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 (the "Petitioner") 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, the Petitioner 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, the Petitioner filed a petition for writ of
certiorari with the United States Supreme Court. On January 24, 2000, the
United States Supreme Court denied the Petitioner's request for review and
the Judgment became final and binding. During March 2000, the Company
received a cash payment from IBC-Brownsville of $4,254,347 of which
approximately $1,300,000 was paid for legal fees and for other expenses
associated with the Judgment.
For the quarter ended January 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 (non-cash). The cash portion of the Judgment received by the Company,
net of all contingent expenses, has been recorded as a gain during the
three months ended January 31, 2000.
27
<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.
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 Pipelines, the
Matamoros Terminal Facility and the Saltillo Terminal Facility, 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.
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 nine months ended
April 30, 2000, the Company derived approximately 88% of its revenues from sales
of LPG to PMI.
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
similarly indexed 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 suppliers 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 and nine months ended April 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
April 30, April 30, April 30, April 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Volume Sold
31.7 30.7 102.1 84.7
LPG (millions of gallons) - PMI 14.4 - 14.4 -
---------- ---------- ---------- ----------
LPG (million of gallons) - Other 46.1 30.7 116.5 84.7
Average sales price
$ 0.58 $ 0.29 $ 0.52 $ 0.28
LPG (per gallon) - PMI 0.51 - 0.51 -
LPG (per gallon) - Other
</TABLE>
28
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
APRIL 30, 1999
Revenues. Revenues for the three months ended April 30, 2000 were $25.7
million compared with $8.9 million for the three months ended April 30, 1999, an
increase of $16.8 million or 190.5%. Of this increase $556,453 was attributable
to increased volumes of LPG sold to PMI in the three months ended April 30,
2000, $8.8 million was attributable to increased average sales prices of LPG
sold to PMI in the three months ended April 30, 2000 and $7.4 million was
attributable to sales of LPG to customers other then PMI in connection with the
Company's desire to reduce outstanding inventory balances.
Cost of sales. Cost of sales for the three months ended April 30, 2000 was
$25.9 million compared with $7.9 million for the three months ended April 30,
1999, an increase of $17.9 million or 226.2%. Of this increase $536,503 was
attributable to increased volumes of LPG purchased for sales to PMI in the three
months ended April 30, 2000, $9.7 million was attributable to increased average
sales prices of LPG purchased for sales to PMI in the three months ended April
30, 2000, $7.4 million was attributable to sales of LPG to customers other then
PMI in connection with the Company's desire to reduce outstanding inventory
balances and $343,079 was attributable to increased operating costs associated
with LPG during the three months ended April 30, 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $844,121 for the three months ended April 30, 2000
compared with $563,829 for the three months ended April 30, 1999, an increase of
$280,292 or 49.7%. This increase was primarily attributable to additional
professional fees and payroll related expenses incurred during the three months
ended April 30, 2000.
Other income and expense, net. Other income (expense), net was ($709,131)
for the three months ended April 30, 2000 compared with ($133,509) for the three
months ended April 30, 1999, a decrease of ($575,622). The decrease in other
income, net was due primarily to increased interest costs and amortization of
discounts associated with the issuance of debt, which was recorded during the
three months ended April 30, 2000.
Income tax. During the three months ended April 30, 2000, the Company
recorded a provision for income taxes of $10,042, representing the alternative
minimum tax due. Due to the net loss for the three months ended April 30, 2000
and the availability of net operating loss carryforwards ($8.0 million at July
31, 1999), the Company did not incur any additional income tax expense during
the three months ended April 30, 2000. Due to the availability of net operating
loss carryforwards at June 31, 1998 of $8.8 million, there was no income tax
expense recorded during the three months ended April 30, 1999. 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. The Company
can receive a credit against any future tax payments due to the extent of prior
alternative minimum taxes paid.
NINE MONTHS ENDED APRIL 30, 2000 COMPARED WITH THE NINE MONTHS ENDED APRIL
30, 1999
Revenues. Revenues for the nine months ended April 30, 2000 were $60.7
million compared with $23.7 million for the nine months ended April 30, 1999, an
increase of $37.0 million or 156.3%. Of this increase $9.1 million was
attributable to increased volumes of LPG sold to PMI in the nine months ended
April 30, 2000, $20.6 million was attributable to increased average sales prices
of LPG sold to PMI in the nine months ended April 30, 2000 and $7.4 million was
attributable to sales of LPG to customers other then PMI in connection with the
Company's desire to reduce outstanding inventory balances.
Cost of sales. Cost of sales for the nine months ended April 30, 2000 was
$58.7 million compared with $21.3 million for the nine months ended April 30,
1999, an increase of $37.4 million or 176.0%. Of this increase $8.4 million was
attributable to increased volumes of LPG purchased in the nine months ended
April 30, 2000, $20.9 million was attributable to increased average sales prices
of LPG purchased for sales to PMI in the nine months ended April 30, 2000, $7.4
million was attributable to sales of LPG to customers other then PMI in
connection with the Company's desire to reduce outstanding inventory balances
and $775,930 was attributable to increased operating costs associated with LPG
during the nine months ended April 30, 2000.
29
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.4 million for the nine months ended April 30,
2000 compared with $1.7 million for the nine months ended April 30, 1999, an
increase of $678,027 or 38.8%. This increase was primarily attributable to
additional professional fees and payroll related expenses incurred during the
nine months ended April 30, 2000.
Other income and expense, net. Other income (expense), net was $2.0
million for the nine months ended April 30, 2000 compared with $561,828 for the
nine months ended April 30, 1999, an increase of $1.5 million. The increase in
other income, net was due primarily to increased income from the award from
litigation of $2.0 million which was recorded during the nine months ended April
30, 2000 compared with the award from litigation recorded during the nine months
ended April 30, 2000, partially offset by increased interest costs and
amortization of discounts associated with the issuance of debt, which was
recorded during the nine months ended April 30, 2000.
Income tax. During the nine months ended April 30, 2000, the Company
recorded a provision for income taxes of $80,042, representing the alternative
minimum tax due. Due to the availability of net operating loss carryforwards
($8.0 million at July 31, 1999), the Company did not incur any additional income
tax expense during the nine months ended April 30, 2000. Due to the
availability of net operating loss carryforwards at June 31, 1998 of $8.8
million, there was no income tax expense recorded during the nine months ended
April 30, 1999. 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. The Company can receive a credit against any future tax payments
due to the extent of prior alternative minimum taxes paid.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception in
1992, 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. Although the Company has entered into the Lease
Agreements, significant uncertainties exist related to the substantial
completion of the US-Mexico Pipelines and Matamoros Terminal Facility (see note
J to the unaudited consolidated financial statements). 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 nine
months ended April 30, 2000 and 1999. All information is in thousands.
<TABLE>
<CAPTION>
Nine months Ended
------------------------
April 30, April 30,
2000 1999
----------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 133 $ 743
Net cash (used in) investing ( 10,585) ( 337)
Activities
Net cash provided by financing activities 10,615 112
----------- -----------
Net increase in cash $ 163 $ 518
=========== ===========
</TABLE>
New Agreement. The Company had entered into a sales agreement, as
amended (the "Agreement"), with PMI, its major customer, to provide a minimum
monthly volume of LPG to PMI through March 31, 2000. Effective April 1, 2000 the
Company entered into a new sales agreement with PMI (the "New Agreement") for
the annual sale of a minimum of 168.0 million gallons of LPG to be delivered to
Matamoros, Tamaulipas, Mexico and Saltillo, Coahuila, Mexico.
The New Agreement represents an increase of 119% over annual minimum
contract volumes under the Agreement. Under the term of the New Agreement,
sale prices are indexed to variable posted prices. The New Agreement also
provides for higher fixed margins above the variable posted prices over the
Agreement based on the final delivery point of the LPG. Sales to PMI for the
30
<PAGE>
nine months ended April 30, 2000 totaled $53.2 million representing
approximately 88% of total revenues for the period.
Under the terms of the New Agreement, the Company will sell LPG to PMI in
Brownsville, Texas at the United States-Mexican border and deliver the LPG to
PMI at the Matamoros Terminal Facility or the Saltillo Terminal Facility.
The New Agreement also provides for interim trucking of LPG from its
Brownsville Terminal Facility to the Matamoros Terminal Facility (or designated
locations within the area) and from the Brownsville Terminal Facility or the
Matamoros Terminal Facility to the Saltillo Terminal Facility (or designated
locations within the area) in the event that (i) the Company is unable to
transport LPG through the US - Mexico Pipelines, (ii) the Saltillo Terminal
Facility or railcars to deliver LPG to the Saltillo Terminal Facility are not
operating or (iii) PMI has yet to recognize the Matamoros Terminal Facility or
the Saltillo Terminal Facility as fully operational. Under the terms of the New
Agreement, in the event interim trucking is utilized, the amount of sales prices
received shall be reduced by the corresponding trucking charges. During April
2000, the Company began partially shipping LPG through the US - Mexico Pipelines
and expects to have full service available by July 31, 2000. The Company also
expects to have the Saltillo Terminal Facility completed by July 31, 2000.
LPG Supply Agreements. During October 1998, the Company entered into a
monthly supply agreement with Exxon Mobil Corporation ("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 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 as outlined under the New
Agreement (the "Plant Commitment"), with a minimum of 10.1 million gallons per
month guaranteed by Exxon to be provided to the Company. The purchase price is
indexed to variable posted prices.
In addition, under the terms of the Exxon Supply Contract, Exxon is
required to make operational its Corpus Christi Pipeline (the "CCPL") which 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 New 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 92.0
million gallons the following year and 122.0 million gallons each year
thereafter and continuing for four years. The Company is required to pay
additional costs associated with the use of the CCPL. The CCPL has yet to be
completed.
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. The purchase price is indexed to variable posted prices.
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 New Agreement.
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 March 2000, the Company and Koch Hydrocarbon Company ("Koch") entered
into a three year supply agreement (the "Koch Supply Contract") whereby Koch has
agreed to supply and the Company has agreed to take, a monthly average of 8.2
million gallons (the "Koch Supply") of propane beginning April 1, 2000, subject
to the actual amounts of propane purchased by Koch from the refinery owned by
its affiliate, Koch Petroleum Group, L.P. The purchase price is indexed to
variable posted prices. Furthermore, the Company has agreed to pay additional
charges associated with the construction of a new pipeline interconnection to be
paid through additional adjustments to the purchase price (totaling
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approximately $1.0 million) which would allow deliveries of the Koch Supply into
the CCPL. Koch has not yet begun construction.
In connection with the delivery of the Koch Supply, Exxon has yet to make
operational the CCPL. Accordingly, the Company will not be able to accept the
Koch Supply until the completion of the CCPL. During the period April 1, 2000
to the date the CCPL is completed, the Company will arrange for the sale of the
Koch Supply to third parties (the "Unaccepted Koch Supply Sales"). The Company
anticipates that the net cost to the Company in connection with the Unaccepted
Koch Supply Sales will be between $0.00 per gallon and $.0275 per gallon.
Under the terms of the Koch Supply Contract, when the CCPL becomes
operational, the Koch Supply will be delivered into the CCPL, as described
above, and blended to the proper specifications as outlined under the New
Agreement.
During March 2000, the Company and Duke Energy NGL Services, Inc. ("Duke")
entered into a three year supply agreement (the "Duke Supply Contract") whereby
Duke has agreed to supply and the Company has agreed to take, a monthly average
of 1.9 million gallons (the "Duke Supply") of propane or propane/butane mix,
beginning April 1, 2000. The purchase price is indexed to variable posted
prices.
Under the terms of the Duke Supply Contract, the Company will be required
to pay for modifications related to the connections necessary to bring a portion
of the Duke Supply into the Pipeline facilities. These costs are expected to be
minimal. All other Duke Supply will be delivered through facilities provided
for under the Pipeline Lease Amendment, and blended to the proper specifications
as outlined under the New Agreement.
In addition, upon completion of the CCPL, the delivery of the PG&E Supply
or the Koch Supply would satisfy a portion or all of the CCPL Supply
requirements under the Exxon Supply Contract.
The Company is currently purchasing LPG from major suppliers to meet the
minimum monthly volumes required in the New Agreement. The Company's costs to
purchase LPG (less any applicable adjustments) are below the sales price
provided for in the New Agreement.
The Exxon Supply Contract, the PG&E Supply Agreement, the Koch Supply
Contract and the Duke Supply Contract currently require that the Company
purchase a minimum supply of LPG, which is significantly higher than committed
sales volumes under the New Agreement.
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, PG&E Supply, Koch Supply or Duke 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 Contract, the PG&E Supply
Agreement, the Koch Supply Contract or the Duke Supply Contract.
The Company believes that the terms of the Exxon Supply Contract, the PG&E
Supply Agreement, the Koch Supply Contract and the Duke Supply Contract are
commensurate with the anticipated future demand for LPG in Mexico and that any
additional costs associated with the Excess Supply as well as the increase in
the costs for LPG over previous agreements during fiscal year 1999 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, the CCPL Supply, the PG&E Supply, the Koch Supply, and the
Duke 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 New 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
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purchase requirements under the Exxon Supply Contract, the PG&E Supply
Agreement, the Koch Supply Contract and the Duke Supply Contract or the costs of
LPG may be in excess of prices received on sales of LPG.
Furthermore, until the US-Mexico Pipelines and the Matamoros Terminal
Facility and the Saltillo Terminal Facility are completed and begin to be fully
utilized, the Company will be required to deliver a portion or all of the
minimum monthly volumes from the Brownsville Terminal Facility (see note J to
the unaudited consolidated financial statements). Historically, sales of LPG
from the Brownsville Terminal Facility have not exceeded 12.7 million gallons
per month. In addition, breakdowns along the planned distribution route for the
LPG once purchased from Exxon, PG&E, Koch or Duke or other suppliers, may limit
the ability of the Company to accept the Plant Commitment, the CCPL Supply, the
PG&E Supply, the Koch Supply, and the Duke Supply.
Under the terms of the Exxon Supply Contract, the PG&E Supply Agreement, the
Koch Supply Contract and the Duke 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, the PG&E
Supply Agreement, the Koch Supply Contract and the Duke 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, the PG&E Supply Agreement, the
Koch Supply Contract and the Duke Supply Contract. 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, the PG&E Supply Agreement, the Koch
Supply Contract and the Duke Supply Contract, the Company believes that its has
an adequate supply of LPG to satisfy the requirements of PMI under the New
Agreement and to meet its future sales obligations, if any, upon the expiration
of the New 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 considers
the applicable prices charged as well as any additional fees that may be
required to be paid under the Pipeline Lease Amendment and other costs.
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 January 1, 2000. 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.
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 Pipelines") 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") (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 Pipelines"] 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 "Matamoros Terminal Facility). The
construction and operation of the US-Mexico Pipelines and the Matamoros Terminal
Facility are referred to as 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
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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, the Company (i) has begun construction of a
midline pump station on the Pipeline (estimated cost of $1.5 million), (ii) has
begun an expansion of the Brownsville Terminal Facility to allow for the loading
and unloading of railcars, (iii) has begun construction of an additional LPG
terminal facility in Saltillo, Mexico (the "Saltillo Terminal Facility") at an
estimated cost of $500,000, and (iv) has completed the purchase of a tank farm
for a purchase price of $195,000 (plus costs related to the clean up of the tank
farm), which after additional improvements will be capable of storing and
distributing refined products. The Saltillo Terminal Facility, 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 Facility. The
Saltillo Terminal Facility will contain storage to accommodate approximately
100,000 gallons of LPG. In connection with the purchase of the tank farm, the
Company entered into a lease agreement for rental of the land which the tank
farm occupies and for the use of a refined products pipeline connecting the tank
farm with public dock facilities.
In connection with the Expansion, the Company and CPSC entered into
two separate Lease / Installation Purchase Agreements, as amended, (the "Lease
Agreements"), whereby CPSC agreed to construct and maintain the US-Mexico
Pipelines (including an additional pipeline to accommodate refined products) and
the Matamoros Terminal Facility and agreed to lease these assets to the Company.
Under the terms of the Lease Agreements, the Company is required to make monthly
rental payments of approximately $157,000, beginning the date that the US-Mexico
Pipelines and Matamoros Terminal Facility reach substantial completion, as
defined under the Lease Agreements (the "Substantial Completion Date"). During
January 2000, CPSC notified the Company that the Substantial Completion Date had
occurred. 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 $1.0 million (the "LOC"). 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 Pipelines and the
Matamoros Terminal Facility 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
design, construction and maintenance of the US-Mexico Pipelines and Matamoros
Terminal Facility.
On September 16, 1999, the Lease Agreements were amended (the "September
1999 Agreements") 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 LOC 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.
During December 1999, the Company and CPSC amended (the "Addendum")
the Lease Agreements, which modified certain terms of the Lease Agreements,
including all prior amendments, modifications, options, extensions and renewals,
which were entered into from the date of the Lease Agreements until the date of
the Addendum. In connection with the Addendum, the Company purchased 50% of the
US-Mexico Pipelines and Matamoros Terminal Facility, including a 50% interest in
the underlying Lease Agreements for $3.0 million and the right to receive a
minimum per month of the greater of $62,800 or 40% of the monthly net income
from the Lease Agreements.
In addition, under the Addendum, the Company received an option until
December 15, 2000 to acquire the remaining 50% of the US-Mexico Pipelines and
Matamoros Terminal Facility, including the remaining 50% interest in the Lease
Agreements for $6.0 million and the issuance of (i) warrants to purchase 200,000
shares of common stock of the Company exercisable for three years at an exercise
price of $4.00 per share if the option is exercised by June 15, 2000 or (ii)
warrants to purchase 300,000 shares of common stock of the Company exercisable
for three years at an exercise price of $4.00 per share if the option is
exercised thereafter.
In connection with the Addendum, the Company is also entitled to offset any
amounts which have been paid by the Company on behalf of CPSC related to the
completion of CPSC's obligations under the Lease Agreements, except for the $3.0
million paid for the 50% interest, described herein, against the Company's
future rental obligations under the Lease Agreements and/or against the option
price of $6.0 million to purchase the remaining 50% interest in the US-Mexico
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Pipelines and Matamoros Terminal Facility, including a 50% interest in the
underlying Lease Agreements. The Company may also offset against its monthly
rent obligations under the Lease Agreements any amounts to be received from its
interests in the Lease Agreements so long as the Company is current on all of
the lease payments required under the Lease Agreements.
On February 21, 2000, the Company and CPSC entered into a letter of
agreement (the "Letter Agreement") whereby the Company modified the terms
associated with acquiring the remaining 50% interest in the US-Mexico Pipelines
and Matamoros Terminal Facility, whereby the Company will only be required to
make a cash payment of $4.5 million ($2.0 million to be paid on or prior to
March 3, 2000, $1.0 million payable on or before August 21, 2000 and $1.5
million payable in twelve equal monthly installments beginning March 31, 2000)
and warrants to purchase 200,000 shares of common stock of the Company
exercisable for three years at an exercise price of $4.00 per share. In
addition, the Company agreed to pay Cowboy $150,000 on or before June 1, 2000 as
full satisfaction of a disputed claim arising from a previous consulting
agreement entered into between Cowboy and the Company. The Company also agreed
that all payments made by the Company on behalf of CPSC in connection with the
Lease Agreements would be assumed by the Company.
In connection with the Settlement (see note I to the unaudited consolidated
financial statements), the Company has acquired 100% of the interests in the
Lease Agreements. Accordingly, the Company is no longer required to make lease
payments, provide a lien on certain assets, provide the LOC, and the President
of the Company is not required to provide the Collateral as prescribed under the
Lease Agreements and amendments thereto.
For financial accounting purposes, the Lease Agreements are capital leases.
Therefore, the assets and related liabilities determined as a result of the
Settlement, have been recorded in the Company's balance sheet at April 30, 2000
(see notes C and G to the unaudited consolidated financial statements).
On May 31, 1999, Tergas, S.A. de C.V., a Mexican company ("Tergas") (see
below), was formed for the purpose of operating LPG terminal facilities in
Mexico, including the Matamoros Terminal Facility and the planned Saltillo
Terminal Facility and future LPG terminal facilities in Mexico. Tergas has been
issued the permit to operate the Matamoros Terminal Facility and the Company
anticipates Tergas will be issued the permit to operate the Saltillo Terminal
Facility.
In connection with the construction of the Mexico Pipelines and the
Matamoros Terminal Facility, CPSC provided all payments and delivery of
equipment through Termatsal, S.A. de C.V., a Mexican company ("Termatsal") (see
below).
PennMex, Tergas or Termatsal are currently the owners of the land which is
being utilized for the Mexican Pipeline and Matamoros Terminal Facility, have
entered into leases associated with the Saltillo Terminal Facility, have been
granted the permit for the Mexican Pipeline, have been granted and/or are
expected to be granted permits to operate the Matamoros Terminal Facility and
the Saltillo Terminal Facility, or have title to the assets associated with the
Mexican Pipeline and Matamoros Terminal Facility acquired by the Company, which
were funded by the Company and CPSC (see notes C and I to the unaudited
consolidated financial statements). In addition, the Company has advanced funds
(totaling $1.6 million at April 30, 2000) to PennMex, Tergas or Termatsal in
connection with the purchase of property, plant and equipment associated with
the construction of the Mexican Pipeline, Matamoros Terminal Facility and the
Saltillo Terminal Facility, which are included in property, plant and equipment
as "other costs paid by the Company" (see note C to the unaudited consolidated
financial statements). Furthermore, the Company intends to fund PennMex,,
Tergas or Termatsal for any additional costs required in connection with the
Mexican Pipeline, Matamoros Terminal Facility and the Saltillo Terminal
Facility.
During the years ended July 31, 1998 and 1999 and for the nine months ended
April 30, 2000, the Company paid PennMex, Tergas or Termatsal $181,000, $125,000
and $171,000, respectively, for Mexico related expenses incurred by those
corporations on the Company's behalf. Such amounts have been expensed.
Foreign Ownership of LPG Operations. PennMex, Tergas and Termatsal are
Mexican companies which are owned 90%, 90% and 98%, respectively, by Jorge R.
Bracamontes ("Bracamontes"), an officer and director of the Company and the
balance by other citizens of Mexico.
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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 Mexican Pipeline and Matamoros Terminal
Facility would be considered a transportation rather than a distribution
activity, and therefore, could be performed by a foreign entity or through a
foreign-owned Mexican entity. The Company intends to request a ruling from
SECOFI confirming the verbal opinion. On November 4, 1999, the Company and
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 formalize contracts among the
Company, PennMex, Tergas and Termatsal for services to be performed in
connection with the operations of the Mexican Pipeline, the Matamoros Terminal
Facility and the Saltillo Terminal Facility.
The operations of PennMex, Tergas or Termatsal, are subject to the tax laws of
Mexico, which among other things, require that Mexican subsidiaries of foreign
entities or transactions between Mexican and 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.
The transfer of any of the interests acquired by the Company or the
formalization of any contractual arrangements related to assets which are
located in Mexico are dependent upon the determination of the ultimate legal
structure of the ownership of such assets.
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 New Agreement upon Deregulation by the Mexican government of the
LPG market, the Company will have the right to renegotiate the New Agreement.
Depending on the outcome of any such re-negotiation, 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 New 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 Pipelines and Matamoros Terminal
Facility, the Company will sell LPG to PMI at the U.S. border and transport the
LPG to the Matamoros Terminal Facility through the US-Mexico Pipelines. Upon
Deregulation, the Company intends to sell to independent Mexican LPG
distributors as well as PMI.
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Credit Arrangements. As of April 30, 2000, 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 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, Duke
and/or Koch, the Company issues letters of credit on a monthly basis based on
anticipated purchases.
As of April 30, 2000, letters of credit established under the RZB Credit
Facility in favor of Exxon, PG&E, Duke and Koch for purchases of LPG totaled
$8.9 million of which $6.9 million was being used to secure unpaid purchases.
In addition, as of April 30, 2000, the Company had borrowed $1.3 million from
its revolving line of credit under the RZB Credit Facility for purchases of LPG.
In connection with these purchases, at April 30, 2000, the Company had unpaid
invoices due from PMI totaling $4.3 million, cash balances maintained in the RZB
Credit Facility collateral account of $35,902 and inventory held in storage of
$4.4 million (see note D to the unaudited consolidated financial statements).
During May 2000, the Company and RZB amended the RZB Credit Facility whereby the
RZB Credit Facility was increased to $20,000,000 from $10,000,000. In
connection with the increase, RZB entered into a participation agreement with
Bayerische Hypo-und Vereinsbank Aktiengesellschaft, New York Branch ("HVB"),
whereby RZB and HVB will each participate up to $10,000,000 toward the total
credit facility.
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 $390,951. The proceeds of such exercises were used for working capital
purposes.
From December 10, 1999 through January 18, 2000, and on February 2, 2000,
the Company completed a series of related transactions in connection with the
private placement of $4.9 million and $710,000, respectively, of subordinated
notes (the "Notes") due the earlier of December 15, 2000 or upon the receipt of
proceeds by the Company from any future debt or equity financing in excess of
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$2.3 million. Interest at 9% is due on June 15, 2000, and December 15, 2000 (or
the maturity date, if earlier). In connection with the Notes, as of April 30,
2000, the Company has granted the holders of the Notes, warrants (the
"Warrants") to purchase a total of 662,387 shares of common stock of the Company
at an exercise price of $4.00 per share, exercisable through December 15, 2002
and during May 2000 in accordance with the Notes, the Company granted the
holders of the Notes, additional warrants (the "Additional Warrants") to
purchase a total of 44,376 shares of common stock of the Company at an exercise
price of $4.00 per share, exercisable through December 15, 2002. The Company
was also required to register the shares issuable in connection with exercise of
the Warrants and the Additional Warrants on or before April 15, 2000, subject to
certain conditions (see note H to the unaudited consolidated financial
statements).
Net proceeds from the Notes were used for the purchase of the 50% interest in
the US-Mexico Pipelines and Matamoros Terminal Facility (see notes C and J to
the unaudited consolidated financial statements) and for working capital
purposes.
Under the terms of the Notes, the Company has agreed to pledge the Company's
interests in the US-Mexico Pipelines and the Matamoros Terminal Facility.
In connection with the issuance of $3.9 million and $710,000 of Notes from
December 10, 1999 through January 18, 2000 and February 2, 2000, respectively,
the Company paid a fee equal to a cash payment of $270,830 and $49,700 and
warrants to purchase a total of 96,725 shares and 17,750 shares, respectively,
of common stock of the Company at an exercise price of $4.00 per share,
exercisable for three years. The Company also granted piggy back registration
rights to the holders of the warrants issued for fees.
During January 2000, the Company issued 17,000 shares of common stock of
the Company in exchange for services performed.
During February 2000, warrants to purchase a total of 95,000 shares of common
stock of the Company were exercised, resulting in cash proceeds to the Company
of $308,750. The proceeds of such exercises were used for working capital
purposes.
During March 2000, a director and officer of the Company exercised warrants
to purchase 200,000 shares of common stock of the Company at an exercise price
of $2.50 per share. The consideration for the exercise of the warrants included
$2,000 in cash and a $498,000 promissory note. The note accrues interest at the
prime rate per annum and is payable October 31, 2000. The director and officer
has also agreed to personally guaranty repayment of the promissory note. The
promissory note is collateralized by 200,000 shares of common stock of the
Company owned by the director and officer of the Company and has been recorded
as a reduction of stockholders' equity. Interest on the promissory note will be
recorded when the cash is received.
On April 19, 2000, the Company issued 181,818 shares of common stock of the
Company for an amount of $1.0 million. Net proceeds from the sale were used for
working capital purposes. The Company has agreed to register the shares issued
by July 15, 2000.
During May 2000 and June 2000, warrants to purchase a total of 48,750
shares of common stock of the Company were exercised, resulting in cash proceeds
to the Company of $120,000. The proceeds of such exercises were used for
working capital purposes.
During June 2000, the Company issued 8,499 shares of common stock of the Company
in exchange for fees due.
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 demand registration rights and/or
piggy-back registration rights and/or the Company is required to file an
effective registration by either September 19, 1999, December 1, 1999, January
31, 2000, April 15, 2000 or July 15, 2000 (the "Registration"). In connection
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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, December 1, 1999,
January 31, 2000 or April 15, 2000. 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 monthly anniversary after December 1, 1999 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. Through May 31, 2000, the Company has issued 8,499 shares of common
stock of the Company in connection with certain penalties incurred. The
Company has received an extension of time to file the registration statement
with respect to certain of the Shares required to be registered on December 1,
1999 and April 15, 2000.
Judgment in favor of the Company. During March 2000, the Company received
the cash portion of the Judgment from IBC-Brownsville of $4.3 million of which
approximately $1.3 million was paid for legal fees and for other expenses
associated with the Judgment.
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 $250,000 in cash and the issuance of 100,000 shares of
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.
The parties have agreed to extend the date which the payments required in
connection with the settlement, including the issuance of the common stock, are
to be made.
On February 24, 2000, litigation was filed in the 357th Judicial District
Court of Cameron County, Texas, against Cowboy Pipeline Service Company, Inc.
("Cowboy"), CPSC International, Inc. ("CPSC") and the Company (collectively
referred to as the "Defendants") alleging that the Defendants had illegally
trespassed in connection with the construction of the US Pipelines and seeking a
temporary restraining order against the Defendants from future use of the US
Pipelines. On March 20, 2000, the Company acquired the portion of the property
which surrounds the area where the US Pipelines were constructed for cash of
$1.9 million to be paid at the commencement of operations of the US Pipelines
(paid during April 2000) and debt in the amount of $1.9 million. As a result,
the litigation was dismissed. The debt bears interest at 10% per annum, payable
monthly in minimum installments of $15,000 with a balloon payment due at the end
of 36 months from the date of commencement of operations of the US Pipelines.
The $1.9 million is included in capital lease obligations (see note G to the
unaudited consolidated financial statements).
On June 19, 2000, the Company, CPSC, Cowboy and the Owner reached a
settlement (the "Settlement") whereby the Company has agreed to purchase the
remaining 50% interest in the assets associated with Lease Agreements for a
promissory note, transfer of the property owned by the Company referred to above
and warrants to acquire common stock of the Company. In addition, CPSC will
assume the Company's debt issued in connection with the acquisition of the
property. The unaudited consolidated financial statements have been adjusted to
reflect the Settlement. The Settlement is subject to final documentation and
approval of the Court.
As a result of the aforementioned, the Company may incur additional costs to
complete the US-Mexico Pipelines and Matamoros Terminal Facility, the amount of
which cannot presently be determined.
As a result of the foregoing, there is no certainty that the Company will; (i)
acquire the remaining 50% interest in the US-Mexico Pipelines and Matamoros
Terminal Facility, (ii) utilize the US-Mexico Pipelines and Matamoros Terminal
Facility or (iii) realize its recorded investment in the Lease Agreements or in
the US-Mexico Pipelines and Matamoros Terminal Facility (see note C to the
unaudited consolidated financial statements).
Other Litigation. The Company and its subsidiaries are also involved with
other proceedings, lawsuits and claims. The Company is of the opinion that the
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liabilities, if any, ultimately resulting from such proceedings, lawsuits and
claims should not materially affect its consolidated financial position (see
note I to the unaudited consolidated financial statements).
Realization of Assets. Recoverability of a major portion of the recorded
asset amounts as shown in the Company's consolidated balance sheet is dependent
upon (i) the Company's ability to obtain additional financing and raise
additional equity capital, (ii) the completion of the transactions related to
the US-Mexico Pipelines, the Matamoros Terminal Facility and the Saltillo
Terminal Facility, (iii) the success of the Company's future operations and
Expansion Program, and (iv) the consummation of the acquisition of the interests
in PennMex and the operating agreements among the Company, PennMex, Tergas or
Termatsal.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to (i) increase sales to its current
customers, (ii) increase its customer base, (iii) extend the terms and capacity
of the Pipeline Lease and the Brownsville Terminal Facility, (iv) expand its
product lines, (v) increase its source of LPG supply and at more favorable
terms, (vi) obtain additional letters of credit financing, (vii) raise
additional debt and/or equity capital and (viii) resolve the issues related to
the US-Mexico Pipelines, Matamoros Terminal Facility and the Saltillo Terminal
Facility. 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.
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.
STATEMENT BY MANAGEMENT CONCERNING REVIEW OF INTERIM INFORMATION BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS.
The unaudited consolidated financial statements included in this filing on Form
10-Q have been reviewed by Burton McCumber & Cortez, L.L.P., independent
certified public accountants, in accordance with established professional
standards and procedures for such review. The report of Burton McCumber &
Cortez, L.L.P. commenting upon their review accompanies the consolidated
financial statements included in Item 1 of Part I.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
To the extent that the Company maintains quantities of LPG inventory, the
Company is exposed to market risk related to the volatility of LPG prices.
During periods of falling LPG prices, the Company may sell excess inventory to
customers to reduce the risk of these price fluctuations.
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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 Notes G and 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 for information concerning certain sales of Securities.
The Notes, Warrants, Additional Warrants and other securities were issued
without registration under the Securities Act of 1933, as amended, in reliance
upon the exemptions from the registration provisions thereof, contained in
Section 4(2) and Section 4(6) and Rule 506 of Regulation D promulgated
thereunder.
Pennsylvania Merchant Group acted as placement agent for the Company in
connection with certain of the transactions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
The 2000 Annual Meeting of Stockholders of the Company (the "Meeting") was held
on April 28, 2000 at the Company's executive offices. The record date for the
Meeting was March 7, 2000. Proxies for the meeting were solicited pursuant to
Regulation 14A under the Exchange Act. There was no solicitation in opposition
to management's two proposals, and all of the nominees for election as director
were elected. The results of the voting by the stockholders for each proposal
are presented below.
Proposal #1 Election of Directors
Name of Director Elected Votes For Votes Withheld
--------------------------- ---------- ---------------
Jerome B. Richter 8,943,361 7,278
Ian T. Bothwell 8,943,361 7,278
Jorge R. Bracamontes 8,943,361 7,278
Jerry L. Lockett 8,943,361 7,278
Kenneth G. Oberman 8,943,361 7,278
Stewart J. Paperin 8,943,361 7,278
Proposal #2 Proposal to ratify the appointment of Burton McCumber & Cortez,
L.L.P. as the independent auditors of the Company.
For Against Abstain
--- ------- -------
8,903,109 44,400 3,130
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. Exhibits and Financial Statement Schedules
The following Exhibits are incorporated herein by reference:
EXHIBIT NO.
------------
10.140 Transfer of Shares Agreement dated November 4, 1999 between Jorge
Bracamontes and the Company. (Incorporated by reference to the
Company's Quarterly report on Form 10-Q for the quarterly period
ended October 31, 1999, filed on December 14, 1999, SEC File No.
000-24394).
10.141 Transfer of Shares Agreement dated November 4, 1999 between Juan Jose
Navarro Plascencia and the Company. (Incorporated by reference to
the Company's Quarterly report on Form 10-Q for the quarterly period
ended October 31, 1999, filed on December 14, 1999, SEC File No.
000-24394).
10.142 Addendum dated December 15, 1999 between CPSC International, Inc. and
the Company. (Incorporated by reference to the Company's Quarterly
report on Form 10-Q for the quarterly period ended January 31, 2000,
filed on March 21, 2000, SEC File No. 000-24394).
The following Exhibits and Financial Statement Schedules are filed as part of
this report:
10.143 LPG Mix Purchase Contract (DTIR-010-00) dated March 31, 2000 between
PMI Trading Limited and the Company.
10.144 LPG Mix Purchase Contract (DTIR-011-00) dated March 31, 2000 between
PMI Trading Limited and the Company.
10.145 Product Sales Agreement dated February 23, 2000 between Koch
Hydrocarbon Company and the Company.
10.146 First Amendment Line Letter dated May 2000 between RZB Finance LLC
and the Company
27.1 Financial Data Schedule.
b. Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENN OCTANE CORPORATION
June 19, 2000 By: /s/Ian T. Bothwell
--------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
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