<PAGE> 1
As filed with the Securities and Exchange Commission on July 14, 2000
REGISTRATION NO. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-3
Registration Statement Under
The Securities Act of 1933
------------------------------
PENN OCTANE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1790357
(State or Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
77-530 ENFIELD LANE, BUILDING D
PALM DESERT, CALIFORNIA 92211
(760) 772-9080
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
JEROME B. RICHTER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
77-530 ENFIELD LANE, BUILDING D
PALM DESERT, CALIFORNIA 92211
(760) 772-9080
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
COPIES TO:
ALLAN B. DUBOFF
NIA STEFANY
RICHMAN, MANN, CHIZEVER, PHILLIPS & DUBOFF
9601 WILSHIRE BOULEVARD, PENTHOUSE
BEVERLY HILLS, CALIFORNIA 90210
(310) 274-8300 (PHONE)
(310) 274-2831 (FAX)
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable from time to time after the effective date of this registration
statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class Proposed Maximum Proposed Maximum
of Securities to be Amount to be Offering Price Per Aggregate Offering Amount of
Registered Registered Unit(1) Price(1) Registration Fee
------------------- ------------ ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
Common Stock, par 7,246,131 $7.00 $50,722,917 $14,963.26
value $.01 per share
</TABLE>
(1) Estimated solely for purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933. Based on the
average of the high and low prices per share of Common Stock of the
registrant as reported on the Nasdaq SmallCap Market on July 10, 2000.
------------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
<PAGE> 3
SUBJECT TO COMPLETION DATE ______, 2000
PENN OCTANE CORPORATION
7,246,131 SHARES
COMMON STOCK, $.01 PAR VALUE
This prospectus pertains to an offering by some of our current
stockholders of shares of our stock which they currently own or may acquire
through the exercise of stock purchase warrants. We have registered this
offering pursuant to registration rights held by some of the selling
stockholders. The selling stockholders are not required to sell the Common Stock
or to sell the stock which they purchase upon exercise of the warrants. The sale
of any Common Stock is entirely at the discretion of each selling stockholder.
All of the offered shares are being offered by the selling stockholders.
We will not be selling any stock as part of this offering. The selling
stockholders will receive the proceeds from the sale of the offered stock. We
will not receive any of such proceeds, but if the selling stockholders exercise
warrants, we will receive proceeds from the sale of stock to those selling
stockholders. The stockholders will sell the stock on the open market at market
price or in negotiated transactions.
Our Common Stock is quoted on the Nasdaq SmallCap market under the
symbol POCC. On July 10, 2000, the closing price for our stock was $6.94 per
share.
We will pay the costs of registering these shares. We are entitled to
reimbursement by certain selling stockholders for a portion of these costs.
YOU SHOULD CAREFULLY CONSIDER EACH OF THE RISK
FACTORS DESCRIBED UNDER "RISK FACTORS" BEGINNING
ON PAGE 4 OF THIS PROSPECTUS.
------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY
PERSON TO TELL YOU OTHERWISE.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY..............................................................................1
THE COMPANY.................................................................1
THE OFFERING................................................................2
SUMMARY CONSOLIDATED FINANCIAL DATA.........................................3
RISK FACTORS.........................................................................4
Going Concern Uncertainty...................................................4
Need for Additional Financing...............................................4
Substantial Reliance on PMI.................................................5
Risks Relating to Operations in Mexico......................................5
Economic and Political Conditions and Government Policies...................5
Operations in Mexico........................................................6
Administration Issues of Operating in Mexico................................7
Restrictions on Foreign Ownership...........................................7
Deregulation of the LPG Market in Mexico....................................8
Currency Exchange Risk......................................................9
Dependence on Certain Sources of Supply of LPG..............................9
Risks Associated with Take or Pay Contracts.................................9
LPG Price Volatility.......................................................10
Dependence on Leases.......................................................10
Pipeline lease.............................................................10
Brownsville lease..........................................................10
Risks Associated with Fixed Margin Contracts...............................11
Dependence Upon Key Personnel..............................................11
Operating Hazards and Insurance............................................11
Litigation.................................................................11
Governmental Regulation of Business Operations.............................12
Environmental Risks and Regulation.........................................12
Alternative Fuels and Technological Changes................................12
Sensitivity to Weather; Seasonality........................................13
Management of Growth.......................................................13
Competition................................................................13
Control by Management......................................................13
Volatility of Stock Prices.................................................13
Income Tax; Net Operating Losses...........................................14
Absence of Dividends.......................................................14
Future Issuance of Stock by the Company
without Stockholder Approval; Antitakeover Consideration...................14
USE OF PROCEEDS.....................................................................14
SELLING STOCKHOLDERS................................................................15
PLAN OF DISTRIBUTION................................................................24
LEGAL MATTERS.......................................................................24
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.....................................24
INDEMNIFICATION.....................................................................25
AVAILABLE INFORMATION...............................................................25
</TABLE>
<PAGE> 5
SUMMARY
This summary highlights selected information from this prospectus and
may not contain all of the information that is important to you. We encourage
you to read the prospectus in its entirety.
THE COMPANY
As used in this prospectus, "we," "us," "our," "company, " and "Penn
Octane" mean Penn Octane Corporation and, unless the context requires otherwise,
our wholly owned subsidiary Penn Wilson CNG, Inc. ("PennWilson")
We are engaged in the purchase, transportation and sale of liquefied
petroleum gas ("LPG"). We began commercial operations for the purchase,
transport and sale of LPG in July 1994. The primary market for our LPG is the
rapidly growing northeast region of Mexico. This region includes the states of
Coahuila, Nuevo Leon and Tamaulipas. We believe we have a competitive advantage
in the supply of LPG for the northeast region of Mexico because of our access to
pipelines and terminal facilities which allow us to bring supplies of LPG close
to consumers of LPG in major cities in that region. We sell our LPG primarily to
P.M.I. Trading Limited ("PMI") who distributes the LPG purchased from us in the
northeast region of Mexico. PMI is the exclusive importer of LPG into Mexico.
PMI is also a subsidiary of Petroleos Mexicanos, the state-owned Mexican oil
company ("PEMEX"). Since 1994, our primary customer for LPG has been PMI.
We own and operate a terminal facility in Brownsville, Texas
("Brownsville Terminal Facility"). We have a long-term lease agreement for
approximately 132 miles of pipeline ("Pipeline") from certain gas plants in
Texas to the Brownsville Terminal Facility. We have expanded our LPG operations
in Mexico to include the delivery of LPG via pipelines ("US-Mexico Pipelines")
directly from the Brownsville Terminal Facility to a terminal facility in
Matamoros, Mexico ("Mexican Terminal Facilities"). The US-Mexico Pipelines and
the Mexican Terminal Facilities were principally constructed and owned by CPSC
International, Inc. ("CPSC"), which filed for bankruptcy during March 2000.
Subsequently, we purchased all of the US-Mexico Pipelines and the Mexican
Terminal Facilities owned by CPSC, which is currently subject to final
documentation and approval by the U.S. Bankruptcy Court. We utilize our
affiliated Mexican companies including Penn Octane de Mexico, S.A., de C.V.
("PennMex"), Termatsal, S.A. de C.V. ("Termatsal") and Tergas, S.A. de C.V.
("Tergas") to conduct the business operations of the Mexican portion of the
US-Mexico Pipelines (the "Mexican Pipelines") and the Mexican Terminal
Facilities. We have made and will continue to make additional improvements to
the US-Mexico Pipelines and the Mexican Terminal Facilities.
We intend to upgrade the Pipeline to increase capacity. We have
upgraded the Brownsville Terminal Facility to allow for the loading of LPG by
railcars. We are responsible for funding these upgrades ("Upgrades").
We are constructing and intend to have Tergas operate a new terminal
facility in Saltillo, Mexico capable of loading LPG by railcars ("Saltillo
Terminal Facilities"). This will directly link the Brownsville Terminal Facility
and the Saltillo Terminal Facilities. We are funding the Saltillo Terminal
Facilities.
We believe our business strengths and opportunities include:
- our lease rights to the Pipeline and our ownership of the
US-Mexico Pipelines
- the geographic proximity of the Brownsville Terminal
Facility and the Mexican Terminal Facilities and the to be
completed Saltillo Terminal Facilities to the northeast
region of Mexico
- our relationships with key purchasers and suppliers of LPG
- growing LPG industry with significant barriers to entry
At present, our operation and our existing business are subject to
many risk factors. See "Risk Factors" generally.
<PAGE> 6
THE OFFERING
This prospectus pertains to an offering by some of our current
stockholders of shares of our stock which they currently own or may acquire
through the exercise of stock purchase warrants. We have registered this
offering pursuant to registration rights held by some of the selling
stockholders. The selling stockholders are not required to sell the Common Stock
or to sell the stock which they purchase upon exercise of the warrants. The sale
of any Common Stock is entirely at the discretion of each selling stockholder.
All of the offered shares are being offered by the selling
stockholders. We will not be selling any stock as part of this offering. The
selling stockholders will receive the proceeds from the sale of the offered
stock. We will not receive any of such proceeds, but if the selling stockholders
exercise warrants, we will receive proceeds from the sale of stock to those
selling stockholders. The stockholders will sell the stock on the open market at
market price or in negotiated transactions.
We will pay the costs of registering these shares. We are entitled to
reimbursement by certain selling stockholders for a portion of these costs.
Common Stock Offered by the Selling Stockholders............... 7,246,131 shares
Nasdaq SmallCap Market Symbol.................................. POCC
OUR CONTACT
JEROME B. RICHTER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
77-530 ENFIELD LANE, BUILDING D
PALM DESERT, CALIFORNIA 92211
(760) 772-9080
2
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------
SELECTED FINANCIAL DATA 1995 1996 1997 1998 1999 Nine months
---- ---- ---- ---- ---- Ended
April 30,
2000
----
<S> <C> <C> <C> <C> <C> <C>
Revenues .................................. $ 14,787 $ 26,271 $ 29,699(1) $ 30,801(1) $ 35,338(1) $ 60,662
Income (loss) from continuing operations .. (2,047) (724) (2,886) (2,072) 1,125 1,526
Net income (loss) ......................... (2,047) (724) (2,923) (3,744) 545 1,526
Net income (loss) per common share ........ (.47) (.14) (.48) (.43) .05 .12
Total assets .............................. 6,159 5,190 5,496 6,698 8,909 30,245
Long-term debt, less current maturities ... 95 1,060 1,113 60 259 2,843
</TABLE>
(1) The operations of PennWilson for the period from February 12, 1997
(date of incorporation) through May 25, 1999, the date operations were
discontinued, are presented in the Consolidated Financial Statements
as discontinued operations.
<TABLE>
<CAPTION>
July 31, 1999 April 30, 2000
------------- --------------
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C>
Cash .................................................................... $ 1,032 $ 1,195
Total assets ............................................................ 8,909 30,245
Long-term debt, less current maturities ................................. 259 2,843
Total stockholders' equity .............................................. 4,051 9,599
Total liabilities and stockholders' equity .............................. $ 8,909 $30,245
</TABLE>
3
<PAGE> 8
RISK FACTORS
Before you invest in our stock, you should be aware that there are
risks in doing so, including those described below. You should consider
carefully these risk factors together with all of the other information included
in this prospectus, any prospectus supplement and the documents we have
incorporated by reference.
If any of the following risks actually occurs, then our business,
financial condition or results of operations could be materially adversely
affected. In such event, the trading price of our stock could decline and you
may lose all or part of your investment.
The statements contained in this Prospectus that are not historical
facts are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933. These forward-looking statements may be identified by
the use of forward-looking terms such as "believes," "expects, " "may", "will, "
"should" or "anticipates" or by discussions of strategy that involve risks and
uncertainties. From time to time, we have made or may make forward-looking
statements, orally or in writing. These forward-looking statements include
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 Mexican Terminal
Facilities, the Saltillo Terminal Facilities, and the Upgrades, foreign
ownership of LPG operations, credit arrangements, and other statements regarding
matters that are not historical facts, involve predictions which are based upon
a number of future conditions that ultimately may prove to be inaccurate. Our
actual results, performance or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements. Factors
that may cause or contribute to such differences include those discussed under
"Risk Factors," Form 10-K, Fiscal Year End 1999 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," Form
10-Q, Quarter End April 30, 2000 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as those discussed
elsewhere in this Prospectus. We caution you however, that this list of factors
may not be complete.
GOING CONCERN UNCERTAINTY
Our independent certified public accountants have included an
explanatory paragraph in their report on our Consolidated Financial Statements
for the Fiscal Year End 1999 stating that the Consolidated Financial Statements
have been prepared based on the assumption that we will continue as a going
concern. Notwithstanding this assumption, we have not sustained profitable
operations, we have outstanding litigation, we have not sustained surplus
working capital, we have not finalized agreements related to the purchase of
CPSC's interest in the US-Mexico Pipelines and the Mexican Terminal Facilities,
and we have entered into purchase commitments for quantities of LPG
substantially in excess of minimum contractual sales commitments. This raises
substantial doubt about our ability to continue as a going concern. Despite our
business plans and strategy to achieve profitability, we cannot be sure that we
will successfully implement our business plan or that we will achieve
profitability by generating sufficient revenues to offset costs. See Form 10-K,
Fiscal Year End 1999 - "Report of Independent Certified Accountant" and Form
10-Q, Quarter End April 30, 2000 - "Review by Independent Certified Accountant."
NEED FOR ADDITIONAL FINANCING
We will need to raise additional capital to finance our future growth,
including our current expansion projects, unanticipated working capital needs,
and capital expenditure requirements. We may need to raise additional money to
take advantage of unanticipated opportunities, such as more rapid international
expansion of our LPG operations or acquisitions of companies that are
complementary to our current operations, or to develop new products or services.
Additionally, we may need to increase our credit facility for additional
opportunities, increases in purchases of LPG supplies, and/or increases in the
costs of LPG. We may also need to finance the excess inventory resulting from
LPG purchase commitments over actual sales volumes, pay for the purchase of the
CPSC interests or refinance short-term obligations. See Form 10-Q, Quarter End
April 30, 2000 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources - Private Placement
and Other Transactions." See "Risk Factors-Operating Hazards and Insurance."
4
<PAGE> 9
If we decide to raise additional funds by borrowing, it would likely
become subject to restrictive financial terms or we may be limited as a result
of existing loan covenants and any new financing will likely be subject to
restrictive financial terms. If additional funds are raised through the issuance
of equity securities, the percentage ownership of our then current stockholders
would be reduced and may be diluted and, if such equity securities take the form
of preferred stock, the holders of such preferred stock may have rights,
preferences or privileges senior to those of holders of Common Stock. In the
event that we are unable to obtain additional capital or are unable to obtain
additional capital timely on acceptable terms, it could adversely affect our
business, operating results, financial condition and ability to compete. See
Form 10-Q, Quarter End April 30, 2000 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations." See "Risk Factors - Volatility
of Stock Prices."
SUBSTANTIAL RELIANCE ON PMI
PMI is a subsidiary of PEMEX, the state oil and gas company of Mexico.
Under current Mexican law, PMI is the exclusive importer of LPG into Mexico. We
derive a substantial portion of our revenues from sales of LPG to PMI, pursuant
to sales agreements ("PMI Sales Agreements") that expire on March 31, 2001. LPG
sales to PMI accounted for substantially all of our total sales for the fiscal
years ended July 31, 1995, 1996, 1997, 1998, 1999, and the nine months ended
April 30, 2000. Our sales of LPG to PMI were interrupted from August 1996 to
September 1996 pending the negotiation of a new sales agreement. The Mexican
Government has taken initial measures to privatize the petroleum industry in
Mexico, and we believe that the LPG market in Mexico will eventually be
completely deregulated. As a result of such deregulation, PMI would no longer be
the exclusive importer of LPG into Mexico. At that time we will need to
negotiate new sales agreements with PMI or other Mexican distributors of LPG. We
are currently unable to predict the timing of such deregulation or its effect on
our sales of LPG. Until deregulation is in effect, we will not be able to expand
our LPG customer base and we will remain dependent for substantially all of our
revenues upon sales of LPG to PMI. The loss of PMI as our customer, any
disruption or expiration of the PMI Sales Agreements, or any failure to renew
the PMI Sales Agreements upon their expiration, would result in a substantial
reduction in revenues to us and would harm our business, operating results and
financial condition. We are not sure that we will be able to negotiate future
sales agreements with PMI or upon deregulation, with other Mexican distributors
of LPG. Even if we are able to negotiate new sales agreements there can be no
assurance that the terms will be as favorable to us, or that we will be able to
successfully compete against other companies. Furthermore, there is no assurance
that upon deregulation our business will be impacted favorably. See Form 10-K,
Fiscal Year End 1999 - "Business - Liquefied Petroleum Gas" and "Business -
Liquefied Petroleum Gas - Deregulation of the LPG market in Mexico." See Form
10-Q, Quarter End April 30, 2000. See "Risk Factors - Deregulation of the LPG
Market in Mexico."
RISKS RELATING TO OPERATIONS IN MEXICO
ECONOMIC AND POLITICAL CONDITIONS AND GOVERNMENT POLICIES
Our business involves activities in Mexico, including sales of LPG to
PMI, contracts to, and leases among, Mexican companies, reliance on Mexican
affiliated companies and employees, and the operation of LPG pipelines and
terminal facilities in Mexico. Our operations in Mexico have been and will
continue to be subject to certain social, political, economic and other
uncertainties which, if they occur, could harm our business. These uncertainties
include:
- risks of renegotiation or nullification of existing contracts
- changing laws and policies affecting trade and investment
- changing laws affecting business operations
- overlapping or different tax structures
- war
- expropriation
- nationalization of assets
- the general hazards associated with the assertion of sovereignty
over certain areas in which operations are conducted
- changing social and political conditions
- changing economic conditions including:
5
<PAGE> 10
- high inflation
- high interest rates
- unemployment
- devaluation of the peso
- governmental cutbacks in spending
The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. It is not possible to determine
what effect the Mexican government will have on the Mexican economy or on our
business. Future Mexican government actions could have a significant effect on
market conditions, prices and returns on investments in Mexico, including those
of our business.
Adverse social, political or economic developments in or affecting
Mexico, could harm our operations, hinder our ability to obtain additional
financing, or have a negative impact on our Mexican customers. This would harm
our business, operating results and financial condition. See Form 10-K, Fiscal
Year End 1999 -"Business - Liquefied Petroleum Gas - Deregulation of the LPG
Market in Mexico; Foreign Ownership of LPG Operations."
OPERATIONS IN MEXICO
We have expanded our LPG operations in Mexico to include the
transportation of LPG via the US-Mexico Pipelines directly from the Brownsville
Terminal Facility to the Mexican Terminal Facilities. The US-Mexico Pipelines
and the Mexican Terminal Facilities were principally constructed and owned by
CPSC, which filed for bankruptcy during March 2000. Subsequently, we purchased
all of the US-Mexico Pipelines and the Mexican Terminal Facilities owned by
CPSC, which is currently subject to final documentation and approval by the U.S.
Bankruptcy Court. We utilize our affiliated Mexican companies including PennMex,
Termatsal and Tergas, to conduct the business operations of the Mexican portion
of the US-Mexico Pipelines and the Mexican Terminal Facilities.
Our investment in the US-Mexico Pipelines and Mexican Terminal
Facilities may be adversely affected if the purchase is not successful, not
approved by the U.S. Bankruptcy Court, or we do not have available financing.
Furthermore, we may not be able to obtain satisfactory legal title to the
US-Mexico Pipelines and Mexican Terminal Facilities or favorable legal remedies.
We are involved in litigation with CPSC in connection with CPSC's breach of
certain obligations arising from construction of the US-Mexico Pipelines and
Mexican Terminal Facilities. Our purchase of the US-Mexican Pipelines and
Mexican Terminal Facilities from CPSC contemplated the costs we have estimated
that we will incur. These costs may not encompass all costs related to CPSC's
breach of its obligations in connection with the original construction of
US-Mexico Pipelines and Mexican Terminal Facilities. See "Risk Factors -
Litigation."
We have made and will continue to make additional improvements to the
US-Mexico Pipelines and the Mexican Terminal Facilities. The completion of
improvements is subject is to all risks associated with construction projects,
such as weather conditions, availability of materials, availability of labor,
cost and time overruns, construction accidents, quality control problems,
sufficient capital, available financing and others. See "Risk Factors -
Operating Hazards and Insurance."
We intend to upgrade the Pipeline to increase capacity. We have
upgraded the Brownsville Terminal Facility to allow for the loading of LPG by
railcars. We intend to complete upgrades which will provide us with the ability
to load and unload vessels at public dock facilities leased by us. We are
responsible for funding these upgrades ("Upgrades"). See "Risk Factors - Need
for Additional Financing."
We are constructing and intend to have Tergas operate a new terminal
facility in Saltillo, Mexico capable of loading LPG by railcars ("Saltillo
Terminal Facilities"). This will directly link the Brownsville Terminal Facility
and the Saltillo Terminal Facilities. We are funding the Saltillo Terminal
Facilities. See Form 10-Q, Quarter End April 30, 2000. See "Risk Factors - Need
for Additional Financing."
We anticipate that deregulation will take effect in Mexico in the near
future. Upon deregulation, we anticipate that we will enter into sales
agreements directly with local Mexican distributors of LPG or PMI. Depending on
the terms of these agreements as well as the financial stability of these
distributors, we may not be able to finance sales of LPG to these parties and if
we elect to extend credit, we may suffer losses as a result of uncollectible
accounts receivable.
6
<PAGE> 11
Furthermore, the local distributors earn income in pesos and there is no
guaranty that they will have sufficient pesos to pay for LPG purchased from us
in US dollars.
The future success of our US-Mexico Pipelines and Mexican Terminal
facilities are subject to all of the risks associated with the operation of
petroleum pipelines, such as equipment failures, leakage, accidents,
environmental remediation, and maintenance expenses. See "Risk Factors -
Operating Hazards and Insurance."
ADMINISTRATION ISSUES OF OPERATING IN MEXICO
The operation of the Mexican portion of the US-Mexico Pipelines, the
Mexican Terminal Facilities and the Saltillo Terminal Facilities are regulated
by the laws of Mexico. We employ Mexican citizens to perform the required
services. The successful administration of the Mexican operations is subject to
many risk factors including cultural differences in business operations,
language barriers, international logistics and physical distances which may
impede immediate access to these facilities. Furthermore, the US-Mexico
Pipelines, the Mexican Terminal Facilities, and the Saltillo Terminal Facilities
are expected to be administered and operated under Mexican business standards
which may vary from American business standards. This includes differences in
technology, utilities, equipment, financial reporting and operating procedures.
Our business may be harmed if we are unable to properly administer operations in
Mexico.
RESTRICTIONS ON FOREIGN OWNERSHIP
PennMex, Termatsal and Tergas are owned 90%, 98%, and 90%,
respectively, by Jorge R. Bracamontes, an officer and director of the Company,
and the balance by other Mexican citizens ("Minority Shareholders"). PennMex,
Tergas or Termatsal are currently the owners of the land which is being utilized
for the Mexican Pipelines and Mexican Terminal Facilities, have entered into
leases associated with the Saltillo Terminal Facilities, have been granted the
permit for the Mexican Pipelines, have been granted and/or are expected to be
granted permits to operate the Mexican Terminal Facilities and the Saltillo
Terminal Facilities, or have title to the assets associated with the Mexican
Pipelines and Mexican Terminal Facilities. In addition, we have advanced funds
to PennMex, Tergas or Termatsal in connection with the purchase of property,
plant and equipment associated with the construction of the Mexican Pipelines,
Mexican Terminal Facilities and the Saltillo Terminal Facilities. Furthermore,
we intend to fund PennMex, Tergas or Termatsal for any additional costs required
in connection with the completion, additional improvements, or for day to day
operation of the Mexican Pipelines, Mexican Terminal Facilities and the Saltillo
Terminal Facilities. See Form 10-Q, Quarter End April 30, 2000. See "Risk
Factors - Need for Additional Financing."
Foreign ownership is not permitted in the distribution of LPG, but is
permitted in the transportation and storage of LPG. In October 1999, we received
a verbal opinion from the Foreign Investment Section of the Department of
Commerce and Industrial Development ("SECOFI"), that our planned strategy of
selling LPG to PMI at the US border and then transporting the LPG through the
Mexican portion of the US-Mexico Pipelines to the Mexican Terminal Facilities
would comply with the LPG regulations. We intend to request a ruling (the
"Ruling") from SECOFI confirming the verbal opinion. There is no certainty that
we will obtain the Ruling, or if obtained, that the Ruling will not be affected
by future changes in Mexican laws. We, Jorge R. Bracamontes and the Minority
Shareholders have entered into agreements whereby we may acquire up to 75% of
the outstanding shares of PennMex for a nominal amount, subject to, among other
things, receipt of the Ruling. We have not entered into any other contracts with
the Mexican affiliated companies related to services to be performed or for
advances made on behalf of the Mexican Pipelines, the Mexican Terminal
Facilities and the Saltillo Terminal Facilities. In connection with our Mexican
operations, we are planning to implement contractual and ownership structures of
our Mexican affiliated companies and the underlying assets and contracts. We
cannot be certain that we will develop structures which will be successful in
allowing us to realize our investment as currently planned. See Form 10-K,
Fiscal Year End 1999 - "Business - Liquified Petroleum Gas - Foreign Ownership
of LPG Operation." See "Risk Factors - Deregulation of the LPG Market in
Mexico."
Our earnings from the operations of the Mexican affiliated companies,
including PennMex, Termatsal and Tergas, are subject to the tax laws of Mexico
which, among other things, requires that Mexican subsidiaries of foreign
entities comply with transfer pricing rules, the payment of income and/or asset
taxes, and possibly taxes on distributions in excess of earnings. In addition,
distributions to foreign corporations may be subject to withholding taxes,
including dividends and
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<PAGE> 12
interest payments. As stated previously, if we are able to acquire any shares of
PennMex, we may receive up to 75% of the net profits. See Form 10-K, Fiscal Year
End 1999 - "Business - Liquefied Petroleum Gas - Expansion Program."
Unless we obtain the Ruling and enter into contracts with PennMex,
Termatsal or Tergas, we are dependent upon Mr. Bracamontes to act in our best
interests. While we expect Mr. Bracamontes will do so, we cannot be certain that
he will. And, if Mr. Bracamontes were to die, his stock in PennMex, Termatsal,
and Tergas would pass to other persons who may or may not control these
companies in ways beneficial to us. If the Mexican affiliated companies,
including PennMex, Termatsal and/or Tergas were to do business with our
competitors or otherwise act against our interests, serious harm could be done
to our business, operating results and financial conditions.
In owning and controlling PennMex, Termatsal, and Tergas, Mr.
Bracamontes is acting on our behalf at our request. While we believe that the
arrangements comply with Mexican law, Mexican authorities could assert that we
are the actual owner of the Mexican affiliated companies, including PennMex,
Termatsal and Tergas, and take action to modify or terminate our Mexican
operations. We have not obtained any Mexican government approvals of our
arrangements with Mr. Bracamontes because we believe that none are required.
There is no certainty as to the amount of profit that we will receive
in connection with the Mexican operations expansion program or our ability to be
repaid funds we have made or will make on behalf of the Mexican affiliated
companies, including PennMex, Termatsal or Tergas.
DEREGULATION OF THE LPG MARKET IN MEXICO
The Mexican petroleum industry is governed by the Ley Reglarmentaria
del Articulo 27 Constitutional en el Ramo del Petroleo (the Regulatory Law to
Article 27 of the Constitution of Mexico concerning Petroleum Affairs (the
"Regulatory Law")), and Ley Organica del Petroleos Mexicanos y Organismos
Subsidiarios (the Organic Law of Petroleos 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. 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, we expect 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 us.
Upon the completion of such deregulation, we expect to be able to sell
LPG directly to independent distributors in Mexico, but 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 us,
and they may not be able to obtain such authorization quickly or at all. We may
not be able to negotiate or secure any acceptable contracts with the
distributors. In the event we are able to negotiate contracts directly with LPG
distributors located in the northeast region of Mexico, the terms of the
contracts may differ substantially from the terms of the PMI Sales Agreement.
This may or may not be favorable to us. We are unable to predict the impact of
deregulation on the Mexican LPG market and our business. See Form 10 - K, Fiscal
Year End 1999 - "Business - Liquefied Petroleum Gas - Deregulation of the LPG
Market in Mexico." See "Risk Factors - Substantial Reliance on PMI." See "Risk
Factors - Competition."
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<PAGE> 13
CURRENCY EXCHANGE RISK
Since we commenced operations in Mexico, there has been substantial
volatility in the peso-dollar exchange rate. The history of volatility in
Mexican exchange rates indicates that any peso-denominated contracts we enter
into in Mexico may subject us to substantial risk of exchanging such payments
into U.S. dollars at unfavorable rates of exchange. Although our PMI Sales
Agreements require payment for sales of LPG in U.S. dollars, upon deregulation,
we anticipate entering into contracts with Mexican customers in the future which
may permit payment to us in pesos. We cannot be sure future exchange rate
fluctuations will not adversely affect:
- the relative value of payments we received under future peso-dominated
contracts with its Mexican customers.
- our costs of goods and services sold.
- our operating margins.
The overall impact of future exchange rate fluctuations on our
financial statements cannot be accurately predicted, and may result in exchange
rate losses. Fluctuations in the peso-dollar exchange rate may harm our
business, operating results and financial condition. See Form 10-K, Fiscal Year
End 1999 - "Business - Liquefied Petroleum Gas."
Historically, we have not engaged in exchange rate hedging activities,
but we may do so in the future if we receive more of our revenues in Mexican
pesos. Although generally intended to reduce exposure to fluctuating foreign
exchange rates, any currency hedging activities in which we engage in the future
may involve a great deal of risk and result in substantial currency exchange
losses. Currency exchange losses would harm our business, operating results and
financial condition.
DEPENDENCE ON CERTAIN SOURCES OF SUPPLY OF LPG
We have entered into supply agreements with various suppliers for the
purchase of LPG which extend for periods ranging from approximately three to ten
years. The LPG supply is for sufficient volumes to meet our estimated sales
needs, but is in excess of current contractual sales commitments. There can be
no assurance, however, that our suppliers will be able to supply us with
adequate volumes of LPG to meet a significant increase in demand beyond the
levels currently being supplied, or that we will be able to continue the supply
agreements with our suppliers beyond the current terms and/or negotiate new
supply agreements upon their expiration. Any disruption in our future supply of
LPG would harm our business, operating results and financial condition.
We will be relying on our suppliers to meet their obligations under
their supply agreements. Under certain conditions, our suppliers may not be able
to deliver the required LPG supply due to many factors, including internal
disruptions in service as a result of refinery breakdowns, maintenance, or
weather. We may not be able to accept LPG from our suppliers as a result of many
factors including breakdowns affecting the Pipeline, US-Mexico Pipelines,
Brownsville Terminal Facility and Mexican Terminal Facilities or due to matters
affecting our customers ability to receive product from our terminal facilities.
In addition, we may not be able to accept LPG due to lower than expected sales
volumes or unavailable storage. We intend to provide LPG to our Saltillo
Terminal Facilities by railcars. The railcars and railroad are owned and
operated by third parties. Therefore, our ability to deliver LPG to our Saltillo
Terminal Facilities could be adversely affected by operating arrangements with
third parties or conditions affecting the railcar and the railroad. If our
suppliers are unable to deliver supply to us or we are unable to accept the
supply from our suppliers, or we are unable to arrange for delivery of supply to
our Saltillo Terminal Facilities, it may harm our business, operating results
and financial condition.
RISKS ASSOCIATED WITH TAKE OR PAY CONTRACTS
The supply agreements currently require that we purchase a minimum
supply of LPG for periods that are significantly longer than committed sales
volumes under the PMI Sales Agreements. In addition, volumes committed to under
the PMI Sales Agreements have been historically much lower than those committed
to under our current supply agreements. In addition to minimum volume purchase
requirements under our supply agreements, we may be required to pay through-put
fees, blending fees, costs associated with pipeline interconnections and other
fees. We believe that the terms of the supply agreements are commensurate with
the anticipated future demand for LPG in Mexico. If we are unable
9
<PAGE> 14
to accept, store and/or relocate the minimum volume requirements under certain
supply agreements, we may incur material additional losses. See "Risk Factors -
Dependence on Certain Sources of Supply of LPG."
Until the US-Mexico Pipelines and Mexican Terminal Facilities and
Saltillo Terminal Facilities are completed and fully utilized, we will be
required to deliver the minimum monthly volumes from our Brownsville Terminal
Facility. Historically, sales of LPG from the Brownsville Terminal Facility have
not exceeded 12.6 million gallons per month.
We believe that any costs associated with any unsold supply will be
short-term in nature and that we will be successful in storing and/or relocating
it. If we cannot store and/or relocate the unsold supply, we may incur material
additional losses. See "Risk Factors - LPG Price Volatility."
LPG PRICE VOLATILITY
To the extent that we maintain quantities of LPG inventory, we are
exposed to market risk related to the volatility of LPG prices. During periods
of falling LPG prices, we may sell excess inventory to customers to reduce the
risk of these price fluctuations.
DEPENDENCE ON LEASES
The Company's business is dependent on the Company's ability to
maintain certain lease arrangements.
PIPELINE LEASE
One of our primary assets is a lease with Seadrift Corporation under
which we have the exclusive use of the Pipeline. We currently rely exclusively
on the Pipeline for transporting LPG to our Brownsville Terminal Facility. The
term of the pipeline lease expires December 31, 2013. There can be no assurance
that we will be able to renew the pipeline lease upon its expiration. Pursuant
to the pipeline lease, our fixed annual fee associated with the use of the
Pipeline is $1,000,000, less certain adjustments during the first two years, and
we are required to pay for a minimum volume of storage of $300,000 per year,
beginning the second year. In addition, the pipeline lease amendment provides
for variable rental increases based on monthly volumes purchased and flowing
into the Pipeline and storage utilized. Seadrift has the right to terminate the
lease agreement under certain limited circumstances, as provided for in the
lease agreement at specific times in the future by giving twelve months written
notice. There are certain terms in the lease which we believe are remote risks
which allow Seadrift to elect to use a portion of the Pipeline beginning in
January 2007. If this occurs it may harm our business operations and
profitability. Any disruption of the pipeline lease or any failure to renew the
pipeline lease would harm our business, operating results and financial
condition. See Form 10-K, Fiscal Year End 1999 - "Business Liquefied Petroleum
Gas - The Pipeline."
BROWNSVILLE LEASE
We have a lease with the Brownsville Navigation District of Cameron
County, Texas for use of certain property on which we have constructed and
operate our Brownsville Terminal Facility ("Brownsville Lease"). Under the
Brownsville Lease, we have the right to use the land on which the Brownsville
Terminal Facility is located and we have a pipeline easement, providing us with
access to public water dock facilities until October 14, 2003. Although we are
in negotiations with the Brownsville Navigation District to extend the term of
the Brownsville Lease through 2013, we cannot be sure that we will be able to
extend or renew the Brownsville Lease beyond its current expiration date with
our suppliers and customers. Our inability to renew or extend the Brownsville
Lease would harm our business, operating results and financial condition. See
Form 10-K, Fiscal Year End 1999 - "Business - Liquefied Petroleum Gas -
Brownsville Terminal Facility."
The Brownsville Lease provides that if we comply with all the lease
conditions and covenants, then at the end of the lease, we may remove the
leasehold improvements. If we should fail to comply with all the lease
conditions and covenants, then we might lose these leasehold improvements at the
end of the lease, which could harm our business, operating results and financial
condition. See Form 10-K, Fiscal Year End 1999 - "Business - Liquefied Petroleum
Gas - Brownsville Terminal Facility."
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<PAGE> 15
RISKS ASSOCIATED WITH FIXED MARGIN CONTRACTS
We currently purchase and sell LPG under fixed margin agreements with
our customers and suppliers. Under these agreements, the buying and selling
price of LPG is based on similarly indexed variable posted prices intended to
provide us with a fixed spread between the resale price and the purchase cost of
LPG. While these contracts and arrangements in theory provide us with a fixed
margin, actual profits from sales may be affected by costs of goods sold other
than by the purchase price of LPG, such as costs relating to transportation,
storage, leases, maintenance and financing. We generally try to purchase LPG in
volumes equal to projected sales. However, mismatches in volumes and prices of
LPG purchased from suppliers and resold to customers could cause lower overall
profits and even losses to us, and otherwise harm our business, operating
results and financial condition. See Form 10-K, Fiscal Year End 1999 - "Business
- Liquefied Petroleum Gas."
DEPENDENCE UPON KEY PERSONNEL
The success of our operations during the near future will depend
largely upon the services of its three senior officers, Jerome B. Richter,
Chairman of the Board, President and Chief Executive Officer; Ian T. Bothwell,
Vice President, Treasurer, Assistant Secretary, Chief Financial Officer and
Principal Accounting Officer; and Jorge R. Bracamontes, Executive Vice President
and Secretary, as well as President and Chief Executive Officer of PennMex,
Termatsal, and Tergas. Our continued growth and success depends in part on our
ability to hire and keep qualified managers and on the ability of our executive
officers and key employees to manage our operations successfully. The loss of
any of our senior management or key personnel, or our inability to hire and keep
key management personnel in the future, could have a material adverse effect on
our results of operations and financial condition. We currently have only one
executive employment agreement, which is with Mr. Richter. We have no key-man
life insurance policies on any of our three senior officers. If we lose the
services of any of Messrs. Richter, Bothwell or Bracamontes, we cannot be sure
that we would be able to find a suitable replacement. Any loss of a senior
officer may harm our business, operating results and financial conditions. We
are dependent upon Mr. Bracamontes to act in our best interest. If Mr.
Bracamontes were to die, his stock in PennMex, Termatsal and Tergas would pass
to other persons who may or may not control these companies in ways beneficial
to us. If PennMex, Termatsal and/or Tergas were to do business with our
competitors or otherwise act against our interests, serious harm could be done
to our business, operating results and financial conditions.
See "Risk Factors - Restrictions on Foreign Ownership," Form 10-K, - Fiscal
Year End 1999 - "Director and Executive Officers of Registrant - Directors and
Officers of the Company."
OPERATING HAZARDS AND INSURANCE
The LPG business has a variety of operating risks, such as fire,
explosions, blow-outs, pipe failure, clogs and environmental hazards such as gas
or chemical spills, gas leaks, ruptures or discharges of toxic gases. Our
operations could also be disrupted by hurricanes, floods, fires and other acts
of God. Any of these occurrences could result in substantial losses to us due to
injury, loss of life, damage to property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. In the event there is
a disruption or loss as a result of the above, we may not have adequate
resources to make timely repairs or replacements to restore operations
effectively. See "Risk Factors - Need for Additional Financing."
We maintain insurance against some, but not all, potential risks. We
cannot be sure such insurance will be adequate to cover all losses or exposure
for liability or that we will timely receive insurance proceeds. We do not know
whether insurance will continue to be available at acceptable premium levels or
at all. Losses not covered fully by insurance could harm our business, operating
results and financial condition.
LITIGATION
On June 19, 2000, our company, CPSC, Cowboy Pipeline Service Company,
Inc. ("Cowboy"), and Cowboy's sole shareholder reached a settlement (the
"Settlement") whereby we agreed to purchase the remaining 50% interest in the
US-Mexico Pipelines and Mexican Terminal Facilities. The Settlement is subject
to final documentation and approval of the U.S. Bankruptcy Court.
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<PAGE> 16
As a result of the aforementioned, we may incur additional costs to
complete the US-Mexico Pipelines and Mexican Terminal Facilities, the amount of
which cannot presently be determined.
As a result of the foregoing, there is no certainty that we will: (i)
acquire the remaining 50% interest in the US- Mexico Pipelines and Mexican
Terminal Facilities, (ii) utilize the US-Mexico Pipelines and Mexican Terminal
Facilities or (iii) realize our recorded investment in the US-Mexico Pipelines
and Mexican Terminal Facilities.
We are also involved in other litigation of which the outcome cannot
be determined at the present time. If the outcome of the litigation is not in
our favor, it may harm our business and operations. See Form 10-Q, Quarter End
April 30, 2000.
GOVERNMENTAL REGULATION OF BUSINESS OPERATIONS
Our operations are or may be subject to various federal, state and
local governmental regulations in both the United States and Mexico. These
regulations may be changed from time to time. Matters regulated include pipeline
and terminal operations, safety, trucking, rail, vessels, environmental,
corporate compliance and reports concerning operations and taxation. Changes to
these laws could harm our business. Legal requirements are frequently changed.
We cannot predict changes or their effect on our business. We are affected by
state and federal regulation. Although we believe that our operations are in
material compliance with applicable laws and regulations, we cannot be sure that
this is or will remain true. We cannot be sure that new laws or regulations or
new interpretations of existing laws and regulations will not substantially
increase the costs of compliance or otherwise harm our business, operating
results and financial condition. See Form 10-K, Fiscal Year End 1999 - "Business
- Environmental and Other Regulations." See "Risk Factors - Risks Relating to
Operations in Mexico."
ENVIRONMENTAL RISKS AND REGULATION
There are many environmental hazards in the storage, handling and
transportation of LPG. LPG may be discharged in many ways, such as leakage from
pipelines, dispensing equipment, transportation facilities, and storage tanks,
and sudden discharges from damage or explosion. LPG degrades slowly in soil and
water, which makes clean-up costly, and LPG may travel through soil to water
supplies.
Our operations, and their environmental hazards, are or will be
subject to a variety of U.S. and Mexican federal, state and municipal
environmental laws and regulations. We must comply with environmental
requirements on use of land and the storage, handling, and transportation of
fuels. Such laws and regulations may cause liability to the governments of the
United States or Mexico, or to other third parties, in the event of discharges
(whether or not accidental) and may require us to incur costs to remedy such
discharges. Although we believe that our operations are in compliance with
applicable environmental laws and regulations, we cannot be sure that this is or
will be true. We have not budgeted any material amounts for environmental
compliance for the current fiscal year. Risks of substantial costs and
liabilities are inherent in pipeline, terminal and processing operations, and we
cannot be sure that significant costs and liabilities will not be covered. While
we have no knowledge of any planned regulatory changes, our plans for our
operations could be harmed if environmental regulatory changes impose more
difficult requirements on our operations. We cannot be sure future laws or
regulations will not harm our business, operating results and financial
condition. See Form 10-K, Fiscal Year End 1999 - "Business - Environmental and
Other Regulations."
ALTERNATIVE FUELS AND TECHNOLOGICAL CHANGES
Factors affecting alternative fuel preferences include availability of
alternative fuel infrastructures (such as refineries, pipelines and other
systems of distribution), costs and environmental safety. These factors may
discourage potential customers from selecting LPG as a fuel over other
alternative fuels in the market and thereby reduce the demand for LPG. If other
alternative fuels become more widely accepted than LPG for home cooking and
heating, our business, financial condition and results of operations could be
materially adversely affected.
The growth and success of our LPG operations in Mexico may be affected
by the growth and success of natural gas as a replacement for home cooking and
heating and the expansion of propane as an alternative fuel to gasoline for
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<PAGE> 17
vehicles.
SENSITIVITY TO WEATHER; SEASONALITY
Because our LPG sales are directly related to heating requirements,
weather patterns during the winter months can have a material effect on our
sales of LPG. As a result, volumes of LPG sold to PMI may be subject to seasonal
variations. Temperatures warmer than normal during the winter season could
reduce our sales of LPG. Historically, we have earned a majority of our revenues
during the months of November through April. Temperatures in future years might
be above normal, resulting in lower sales of LPG. If our revenues fall below
those normally expected during the months of November through April, our
business, operating results and financial condition could be harmed. Our
agreements for LPG supply are not seasonal. If sales of LPG become seasonal it
may effect our profitability. See "Risk Factors - Risks Associated with Fixed
Margin Contracts." See Form 10-K, Fiscal Year End 1999 - "Business - Liquefied
Petroleum Gas."
MANAGEMENT OF GROWTH
We are currently growing in terms of size, products and location of
operations. Our growth has placed, and is likely to continue to place, strains
on our management, administrative, operating and financial resources. As we
expand further, existing management personnel will be required to supervise more
wide-spread and diversified operations and additional management personnel will
have to be hired and trained. Our ability to manage recent and future growth
will require us to devote additional management time to our financial and
management controls, reporting systems and procedures and to expand, train,
motivate and manage our sales and technical personnel. We can't be sure that we
will be able to manage our growth successfully. Failure to do so could harm our
business, operating results and financial condition. See "Risk Factors - Risks
Related to Operations in Mexico - Administration Issues with Operations in
Mexico." See "Risk Factors - Need for Additional Financing."
COMPETITION
Our business is highly competitive. Several companies, including
PEMEX, offer products and services that compete directly with our LPG products
and services. The attractiveness of any such business could attract additional
competitors. As we expand into new geographic markets in connection with the
sale of LPG, we will face competition from other suppliers. Upon deregulation or
other changes in the petroleum industry the attractiveness of our business may
cause greater competition. Many of our competitors have greater financial,
technical and marketing resources and greater experience and name recognition
than we have. To the extent our competitors attempt to compete in our market
niche in the supply of LPG in northeastern Mexico, we may be forced to reduce
our profit margin in order to maintain or expand our market share. We can't be
sure that we will be able to continue to compete successfully in the markets we
serve or expand into new geographic markets. Any reduction in profit margin or
inability to maintain or expand market share would harm our business, operating
results and financial condition. See Form 10-K, Fiscal Year End 1999 - "Business
- Competition" and "Risk Factors - Deregulation of the LPG Market in Mexico."
CONTROL BY MANAGEMENT
As of July 10, 2000, certain officers and directors and their
affiliates beneficially own 5,062,703 shares of our outstanding Common Stock
(35.67% of the voting power of the Company, including 30.13% held by Mr.
Richter, our Chairman of the Board, President and Chief Executive Officer). As a
result, current directors and officers can exert significant influence over the
election of all of the members of our Board of Directors and corporate actions
requiring stockholder approval. Such concentration of ownership may have the
effect of delaying or preventing a change in control of the company, including
transactions in which the holders of the Common Stock might otherwise sell their
stock for more than market value. We are not aware of any agreement by or among
any of our directors and officers to act together. See Form 10-K, Fiscal Year
End 1999 - "Security Ownership of Certain Beneficial Owners and Management."
VOLATILITY OF STOCK PRICE
Stock prices for LPG transport companies depend upon a variety of
factors, including the prevailing prices for the LPG, seasonality, supply and
demand for products, media and analysts' reports and changes in environmental
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<PAGE> 18
regulations and other governmental policies. The price of the Common Stock has
been and likely will continue to be, affected by these factors. The trading
price of the Common Stock could be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, announcements of
unanticipated operating results by us, trading activity, additional issuances of
stock and other events or factors. In addition, the stock market has from time
to time experienced extreme price and volume fluctuations, which have
particularly affected the market price for certain companies in a manner often
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Common Stock. See Form
10-K, Fiscal Year End 1999 - "Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
INCOME TAX; NET OPERATING LOSSES
As of July 31, 1999, we had net operating loss carryforwards for
federal income tax purposes of approximately $8.0 million. The ability to
utilize such net operating loss carryforwards, which expire in the years 2009 to
2018, may be significantly limited by the application of the "change of
ownership" rules under Section 382 of the Internal Revenue Code.
ABSENCE OF DIVIDENDS
We have not paid any cash dividends on our Common Stock since our
initial public offering of Common Stock in January 1993 and do not expect to pay
any dividends on our Common Stock in the foreseeable future. The payment of
future dividends will be at the discretion of the Board of Directors and will
depend on, among other things, our earnings, capital requirements and financial
condition. We can't be sure that our results of operations will ever permit the
payment of such dividends. See Form 10-K, Fiscal Year End 1999 - "Dividend
Policy."
FUTURE ISSUANCES OF STOCK BY THE COMPANY WITHOUT STOCKHOLDER APPROVAL;
ANTI-TAKEOVER CONSIDERATION
As of July 10, 2000, we have outstanding 13,435,198 shares of Common
Stock out of a total of 25,000,000 shares of Common Stock authorized. We have
reserved up to (i) 150,000 shares of Common Stock for issuance under our 1997
Stock Award Plan, of which 124,686 were unissued as of July 10, 2000, and (ii)
4,114,988 shares of Common Stock issuable upon exercise of outstanding Warrants
(1,152,778 are unvested 60 days subsequent to July 10, 2000). If the maximum
number of shares of Common Stock are issued pursuant to the 1997 Stock Award
Plan and upon exercise of Warrants, a total of 17,674,872 shares of Common Stock
will be issued and outstanding. This Prospectus covers 7,246,131 shares, which
are issuable upon exercise of Warrants. See "Selling Stockholders" below.
The remaining 7,325,128 shares of Common Stock, 5,000,000 shares of
Series A Preferred Stock, and 4,910,000 shares of Series B Preferred Stock
authorized but not issued may be issued without any action or approval of our
stockholders if the aggregate total number of shares does not exceed 20% of the
outstanding shares sold in a transaction and, with respect to the Series B
Preferred Stock, with such designations, rights, preferences and designations as
the Board of Directors shall decide. Although there are no present plans,
agreements or undertakings involving the issuance of such shares, except as
disclosed in this Prospectus, any such issuance could be used as a method of
discouraging, delaying or preventing a change in control of the company or could
significantly dilute the public ownership of the company, which could adversely
affect the market for Common Stock. There can be no assurance that we will not
undertake to issue such shares if deemed appropriate to do so. See Form 10-K,
Fiscal Year End 1999 - "Principal Shareholders," and "Security Ownership of
Certain Beneficial Owners and Management."
USE OF PROCEEDS
The selling stockholders selling their shares of Common Stock will
receive the proceeds from any sales, not us. Some of the shares to be sold are
already owned by the selling stockholders, and the remainder are issuable to
them upon exercise of Warrants. See the table in "Selling Stockholders." We
would receive the proceeds of sale upon the exercise of these Warrants. The
total amount we would receive if all of these Warrants were exercised is
approximately $15,981,948 (approximately $5,302,779 of which include proceeds
from Warrants unvested 60 days subsequent to July 10, 2000). We have not made
any plans for use of these proceeds other than to add them to working capital.
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SELLING STOCKHOLDERS
All of the Common Stock being offered in this prospectus is being
offered by the stockholders listed below. We have registered this offering
pursuant to registration rights held by some of the selling stockholders. The
selling stockholders are not required to sell all or any of the shares listed as
being offered. Some of the Common Stock listed in the table is not presently
owned by the selling stockholders, but is issuable upon exercise of Warrants.
The selling stockholders are not required to sell the stock. We believe that the
registration of the shares underlying the Warrants, even though we may not be
obligated to do so, will encourage the warrant holders to exercise the Warrants,
thereby benefiting us through the warrant stock sales.
This table shows the names of the selling stockholders, how many shares they
own, the maximum number of shares they plan to sell in this offering, how many
shares they will own if they sell the planned maximum number of shares, and the
percentage of the total number of shares they will own before and after their
sales.
<TABLE>
<CAPTION>
Shares Beneficially Owned Number of Shares to Shares Beneficially
Name Prior to Offering be Sold in Offering Owned After Offering
---- ----------------- --------------------- --------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Jerome Richter(a) 4,476,500(1) 32.05% 530,000(1) 3,946,500 28.26%
CEC, Inc. 1,521,834(2) 10.96% 1,020,834(2) 501,000 3.61%
The Apogee Fund, L.P. 1,100,000 8.19% 950,000 150,000 1.12%
Western Wood Equipment
Corp. 758,163(3) 5.44% 500,000(3) 258,163 1.85%
Jorge Bracamontes(b) 545,200(4) 3.96% 530,000(4) 15,200 (*)
Trellus Partners L.P. 534,000(5) 3.94% 125,000(5) 409,000 3.02%
Van Moer Santerre & Co. 440,000 3.27% 322,500 117,500 (*)
Jerry L. Lockett(c) 356,225(6) 2.59% 330,000(6) 26,225 (*)
Europa International Inc. 337,500(7) 2.49% 337,500(7) -- --
Ian T. Bothwell(d) 330,000(8) 2.40% 330,000(8) -- --
Igor Kent 280,000 2.08% 280,000 -- --
Jose Vicente Soriano 200,000(9) 1.47% 200,000(9) -- --
RA Associates, LLC 181,818 1.35% 181,818 -- --
Lincoln Trust Company FBO
Perry D. Snavely
IRA 180,582(10) 1.34% 180,582(10) -- --
Stewart Paperin(e) 180,000(11) 1.33% 130,000(11) 50,000 (*)
Steve Payne 165,909 1.23% 165,909 -- --
Valor Capital Management 112,500(12) (*) 112,500(12) -- --
</TABLE>
15
<PAGE> 20
<TABLE>
<CAPTION>
Shares Beneficially Owned Number of Shares to Shares Beneficially
Name Prior to Offering be Sold in Offering Owned After Offering
---- ----------------- --------------------- --------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Kenneth G. Oberman(f) 97,000(13) (*) 30,000(13) 67,000 (*)
Fredric R. Richman 79,000(14) (*) 79,000(14) -- --
Clint Norton 69,000(15) (*) 69,000(15) -- --
Pennsylvania Mercant Group 68,685(16) (*) 68,685(16) -- --
Amir L. Ecker 61,940(17) (*) 61,940(17) -- --
Southwest Concept 46,000(18) (*) 46,000(18) -- --
Donaldson Lufkin & Jenrette
Securities Corp. as Custodian
FBO Amir L. Ecker IRA 42,500(19) (*) 42,500(19) -- --
Sterling 2000 Investments 40,000(20) (*) 40,000(20) -- --
Bear Stearns Security Corp.
F/A/O Almarc Trading LLC 37,500(21) (*) 37,500(21) -- --
Donaldson, Lufkin & Jenrette
Securities Corporation,
Custodian SEP FBO James F.
Meara IRA 30,375(22) (*) 29,375(22) 1,000 (*)
James Meara, Jr 29,375(23) (*) 29,375(23) -- --
Dennis L. Adams 25,000(24) (*) 25,000(24) -- --
FBO Alexander A. Maguire,
IRA Rollover HHG Custodian 25,000(25) (*) 25,000(25) -- --
Lostly Capital Management 25,000(26) (*) 25,000(26) -- --
Marci & Company as
Custodian FBO James W.
Weaver IRA 25,000(27) (*) 25,000(27) -- --
The Ecker Family Partnership 25,000(28) (*) 25,000(28) -- --
Paul Buongiorno 19,250(29) (*) 6,250(29) 13,000 (*)
Kien Hean Chen and Yung San
Chen JTTEN 18,750(30) (*) 18,750(30) -- --
The Investor Relations Group 15,000 (*) 15,000 -- --
Peter S. Rawlings 13,500(31) (*) 13,500(31) -- --
Allen J. Butler and Kay W.
Butler JTTEN 12,500(32) (*) 12,500(32) -- --
Victor M. Dandridge III 12,500(33) (*) 12,500(33) -- --
</TABLE>
16
<PAGE> 21
<TABLE>
<CAPTION>
Shares Beneficially Owned Number of Shares to Shares Beneficially
Name Prior to Offering be Sold in Offering Owned After Offering
---- ----------------- --------------------- --------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Donald Lufkin & Jenrette
Securities Corp. as Custodian
FBO R. Scott Williams IRA 12,500(34) (*) 12,500(34) -- --
E. Stephen Ellis, MD and Carol
Ellis MD JTTEN 12,500 (*) 12,500(35) -- --
Richard W. Hubbert 12,500(36) (*) 12,500(36) -- --
Richard A. Jacoby 12,500(37) (*) 12,500(37) -- --
Rupley Holdings Inc. 12,500(38) (*) 12,500(38) -- --
Greg Wood 12,500(39) (*) 12,500(39) -- --
Donaldson Lufkin & Jenrette
Securities Corp. as custodian
FBO Leonid Roytman IRA 10,000(40) (*) 10,000(40) -- --
Gerald M. Chizever 10,000(41) (*) 10,000(41) -- --
Dian Griesel 10,000(42) (*) 10,000(42) -- --
Joe Martinez(g) 10,000 (*) 10,000 -- --
Peter J. Almeroth 9,376(43) (*) 9,376(43) -- --
R. Scott Williams 9,000(44) (*) 9,000(44) -- --
Phillip R. Leicht 8,650(45) (*) 8,650(45) -- --
Marc R. Gordon Esq. And Mrs. 8,126(46) (*) 3,126(46) 5,000 (*)
Helen Gordon JTWROS
Irvin Block 6,250(47) (*) 6,250(47) -- --
Janis Chack 6,250(48) (*) 6,250(48) -- --
Claudie Williams c/f Daniel
Joseph Williams UGMA/PA 6,250(49) (*) 6,250(49) -- --
Donald A. Wissner and
Beverlie F. Wissner
JTTEN 6,250(50) (*) 6,250(50) -- --
Donaldson Lufkin & Jenrette
Securities Corp. as custodian
FBO Joseph Evancich IRA 6,250(51) (*) 6,250(51) -- --
Cathy A. Wichert 6,250(52) (*) 6,250(52) -- --
Carolyn Wittenbraker 6,250(53) (*) 6,250(53) -- --
Wycliffe Capital Management 6,250(54) (*) 6,250(54) -- --
Richard A. Hansen 5,200(55) (*) 5,200(55) -- --
</TABLE>
17
<PAGE> 22
<TABLE>
<CAPTION>
Shares Beneficially Owned Number of Shares to Shares Beneficially
Name Prior to Offering be Sold in Offering Owned After Offering
---- ----------------- --------------------- --------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Alexander A. Maguire 5,000(56) (*) 5,000(56) -- --
Joseph M. Evancich 4,750(57) (*) 4,750(57) -- --
William B. Parker Jr 4,726(58) (*) 4,726(58) -- --
Robert Ayerle and Patricia
Ayerle JTTEN 4,726(59) (*) 4,726(59) -- --
Ben Buongiorno 4,625(60) (*) 3,125(60) 1,500 (*)
Beral Corporation 3,500 (*) 3,500 -- --
Quaestor USA Corporation 3,500 (*) 3,500 -- --
Frank A. Abruzzese 3,375(61) (*) 3,375(61) -- --
Susan M. Barrett 3,126(62) (*) 3,126(62) -- --
Donaldson Lufkin & Jenrette
Securities Corp. as custodian
FBO Ira Lish IRA 3,126(63) (*) 3,126(63) -- --
Virginia M.W. Gardiner 3,126(64) (*) 3,126(64) -- --
Harry John Cornbleet and
Phillis Joanne Cornbleet 3,126(65) (*) 3,126(65) -- --
Henry B. Maguire Spouse IRA 3,126(66) (*) 3,126(66) -- --
Thomas V. Lefevre 3,126(67) (*) 3,126(67) -- --
Edward H. Maguire 3,126(68) (*) 3,126(68) -- --
Susanna P. Maguire 3,126(69) (*) 3,126(69) -- --
O'Brien Transport, Inc. 3,126(70) (*) 3,126(70) -- --
Pennsylvania Merchant Group
401K Plan FBO Joseph
Evancich 3,125(71) (*) 3,125(71) -- --
Allan B. Duboff 2,500(72) (*) 2,500(72) -- --
Donaldson Lufkin & Jenrette
Securities Corp. as custodian
FBO G. Barth IRA 2,500(73) (*) 2,500(73) -- --
Linda P. Nicholas 1,600(74) (*) 1,600(74) -- --
William B. Parker Sr 1,600(75) (*) 1,600(75) -- --
Parec Portfolio Partners 1,600(76) (*) 1,600(76) -- --
Brian S. Colligan 1,000(77) (*) 1,000(77) -- --
Jerry S. Phillips 1,000(78) (*) 1,000(78) -- --
</TABLE>
18
<PAGE> 23
<TABLE>
<CAPTION>
Shares Beneficially Owned Number of Shares to Shares Beneficially
Name Prior to Offering be Sold in Offering Owned After Offering
---- ----------------- --------------------- --------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
G. Kirk Ellis 1,000(79) (*) 1,000(79) -- --
Nia Stefany 1,000(80) (*) 1,000(80) -- --
Raylene Pyren 1,000(81) (*) 1,000(81) -- --
Richard L. Mann 1,000(82) (*) 1,000(82) -- --
Ronald D. Garber 1,000(83) (*) 1,000(83) -- --
Darya Pace 500(84) (*) 500(84) -- --
Jens Koepke 500(85) (*) 500(85) -- --
Wendy Muramoto 500(86) (*) 500(86) -- --
---------- ---------
12,807,219 7,246,131 5,561,088
========== ========= =========
</TABLE>
(a) Mr. Richter currently serves as our President, Chief Executive
Officer and Chairman of the Board.
(b) Mr. Bracamontes currently serves as our Executive Vice President,
Secretary, and is a Director.
(c) Mr. Lockett currently serves as our Vice President and is a
Director.
(d) Mr. Bothwell currently serves as our Vice President,
Treasure/Assistant Secretary, Chief Financial Officer, Principal
Accounting Officer, and is a Director.
(e) Mr. Paperin currently serves as a Director.
(f) Mr. Oberman currently serves as a Director
(*) Less than 1%
Percentage of ownership for each holder is calculated on 13,435,198 shares of
Common Stock outstanding on July 10, 2000. Beneficial ownership is determined in
accordance with the rules of the SEC and generally includes shares over which
the holder has voting or investment power, subject to community property laws.
All shares of Common Stock subject to options or warrants (including those that
are not currently exercisable or exercisable within 60 days subsequent to July
10, 2000) are considered to be beneficially owned by the person holding the
options or warrants for computing that person's percentage, but are not treated
as outstanding for computing the percentage of any other person.
(1) Includes 530,000 shares of Common Stock issuable upon exercise
of Common Stock purchase Warrants, of which 384,259 shares of
Common Stock issuable upon exercise of Common Stock purchase
Warrants are unvested 60 days subsequent to July 10, 2000.
(2) Includes 454,167 shares of Common Stock issuable upon exercise
of Common Stock purchase Warrants.
(3) Includes 500,000 shares of Common Stock issuable upon exercise
of Common Stock purchase Warrants.
(4) Includes 330,000 shares of Common Stock issuable upon exercise
of Common Stock purchase Warrants, of which 230,556 shares of
Common Stock issuable upon exercise of Common Stock purchase
Warrants are unvested 60 days subsequent to July 10, 2000.
19
<PAGE> 24
(5) Includes 125,000 shares of Common Stock issuable upon exercise
of Common Stock purchase Warrants.
(6) Includes 330,000 shares of Common Stock issuable upon exercise
of Common Stock purchase Warrants, of which 153,704 shares of
Common Stock issuable upon exercise of Common Stock purchase
Warrants are unvested 60 days subsequent to July 10, 2000.
(7) Includes 112,500 shares of Common Stock issuable upon exercise
of Common Stock purchase Warrants.
(8) Includes 330,000 shares of Common Stock issuable upon exercise
of Common Stock purchase Warrants, of which 76,852 shares of
Common Stock issuable upon exercise of Common Stock purchase
Warrants are unvested 60 days subsequent to July 10, 2000.
(9) Includes 200,000 shares of Common Stock issuable upon exercise
of Common Stock purchase Warrants, of which 153,704 shares of
Common Stock issuable upon exercise of Common Stock purchase
Warrants are unvested 60 days subsequent to July 10, 2000.
(10) Includes 78,333 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(11) Includes 130,000 shares of Common Stock issuable upon exercise
of Common Stock purchase Warrants, of which 76,852 shares of
Common Stock issuable upon exercise of Common Stock purchase
Warrants are unvested 60 days subsequent to July 10, 2000.
(12) Includes 37,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(13) Includes 30,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(14) Includes 79,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 60,713 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
(15) Includes 46,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(16) Includes 68,685 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(17) Includes 61,940 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(18) Includes 31,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(19) Includes 42,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(20) Includes 40,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(21) Includes 37,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(22) Includes 29,375 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(23) Includes 29,375 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(24) Includes 25,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(25) Includes 25,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(26) Includes 25,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(27) Includes 25,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
20
<PAGE> 25
(28) Includes 25,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(29) Includes 6,250 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(30) Includes 18,750 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(31) Includes 13,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(32) Includes 12,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(33) Includes 12,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(34) Includes 12,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(35) Includes 12,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(36) Includes 12,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(37) Includes 12,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(38) Includes 12,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(39) Includes 12,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(40) Includes 10,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(41) Includes 10,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 7,685 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
(42) Includes 10,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(43) Includes 9,376 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(44) Includes 9,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(45) Includes 8,650 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(46) Includes 3,126 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(47) Includes 6,250 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(48) Includes 6,250 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(49) Includes 6,250 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(50) Includes 6,250 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(51) Includes 6,250 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(52) Includes 6,250 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(53) Includes 6,250 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(54) Includes 6,250 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(55) Includes 5,200 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
21
<PAGE> 26
(56) Includes 5,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(57) Includes 4,750 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(58) Includes 4,726 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(59) Includes 4,726 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(60) Includes 3,125 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(61) Includes 3,375 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(62) Includes 3,126 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(63) Includes 3,126 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(64) Includes 3,126 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(65) Includes 3,126 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(66) Includes 3,126 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(67) Includes 3,126 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(68) Includes 3,126 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(69) Includes 3,126 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(70) Includes 3,126 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(71) Includes 3,125 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(72) Includes 2,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 1,921 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
(73) Includes 2,500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(74) Includes 1,600 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(75) Includes 1,600 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(76) Includes 1,600 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants.
(77) Includes 1,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 769 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
(78) Includes 1,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 769 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
(79) Includes 1,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 769 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
22
<PAGE> 27
(80) Includes 1,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 769 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
(81) Includes 1,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 769 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
(82) Includes 1,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 769 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
(83) Includes 1,000 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 769 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
(84) Includes 500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 384 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
(85) Includes 500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 384 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
(86) Includes 500 shares of Common Stock issuable upon exercise of
Common Stock purchase Warrants, of which 384 shares of Common
Stock issuable upon exercise of Common Stock purchase Warrants
are unvested 60 days subsequent to July 10, 2000.
23
<PAGE> 28
PLAN OF DISTRIBUTION
The selling stockholders will be selling their stock either on the
Nasdaq SmallCap market, at quoted prices, or directly to buyers at negotiated
prices.
We will pay the costs of registering these shares. We are entitled to
reimbursement by certain selling stockholders for a portion of these costs.
Offering these shares for sale does not guarantee that anyone will buy
them.
LEGAL MATTERS
The law firm of Richman, Mann, Chizever, Phillips & Duboff, of Beverly
Hills, California, will pass upon the validity of the securities offered by this
prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We are incorporating by reference in this Prospectus our Annual Report
on Form 10-K for the Fiscal Year End July 31, 1999, our Quarterly Report on Form
10-Q for the Quarter End October 31, 1999, our Quarterly Report on Form 10-Q for
the Quarter End January 31, 2000, and our Quarterly Report on Form 10-Q for the
Quarter End April 30, 2000, filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose to you important information
contained in other documents filed with the SEC by referring you to those
documents. The information incorporated by reference is an important part of
this prospectus. Information we later file with the SEC will automatically
update and supersede this information. We also incorporate by reference the
documents listed below:
- our Annual Report on Form 10-K for the Fiscal Year End July 31,
1998;
- all other reports filed pursuant to section 13(a) or 15(d) of
the Exchange Act since the end of the Fiscal Year covered by our
last Annual Report on Form 10-K (July 31, 1999).
- the description of the Common Stock in our registration
statement on Form 8-A (File No. 0-24394) filed pursuant to the
Securities Exchange Act of 1934 on June 20, 1994, and any
amendments or reports filed to update the description; and
- all documents filed by us under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 between the date of
this prospectus and the termination of the offering.
If information in incorporated documents conflicts with information in
this prospectus you should rely on the most recent information. If information
in an incorporated document conflicts with information in another incorporated
document, you should rely on the most recent incorporated document.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Penn Octane Corporation
77-530 Enfield Lane, Building D
Palm Desert, California 92211
Telephone: (760) 772-9080
You should only rely on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. We are making offers of
the
24
<PAGE> 29
securities only in states where the offer is permitted. You should not assume
that the information in this prospectus or any prospectus supplement is accurate
as of any date other than the date on the front of those documents.
INDEMNIFICATION
Our certificate of incorporation allows us to indemnify our officers
and directors to the maximum extent allowed under Delaware law. This includes
indemnification for liability which could arise under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
AVAILABLE INFORMATION
Information about our company, including audited financial statements,
can be found in our Annual Report on Form 10-K which we filed with the SEC.
This prospectus is part of a Registration Statement on Form S-3 that
has been filed with the SEC. It does not include all of the information that is
in the registration statement and the additional documents filed as exhibits
with it. For more detail you should read the exhibits themselves.
We are subject to the informational requirements of the Exchange Act
and, in accordance therewith, are required to file reports, proxy and
information statements and other information with the Commission. Such reports,
proxy and information statements and other information can be inspected and
copied at the Public Reference Section of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
filed reports, proxy and information statements and other information can be
obtained form the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, upon payment of prescribed rates or in certain
cases by accessing the Commission's World Wide Web site at http://www.sec.gov.
Our Common Stock is traded on the Nasdaq SmallCap Market under the symbol POCC,
and such reports, proxy statements and other information concerning the Company
also can be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
25
<PAGE> 30
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, AND SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, COMMON
STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
--------------------
7,246,131 SHARES
PENN OCTANE CORPORATION
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
JULY 14, 2000
26
<PAGE> 31
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized estimate of fees and
expenses payable by the registrant in connection with the offering described in
this registration statement:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee............................................................................. $14,963.26
Nasdaq additional listing fee.................................................................... TBD
Counsel fees and expenses........................................................................ TBD
Accounting fees and expenses..................................................................... TBD
Blue Sky fees and expenses....................................................................... TBD
Printing expenses................................................................................ TBD
Transfer agent and registrar fees................................................................ TBD
Miscellaneous.................................................................................... TBD
Total..................................................................................... $
----------
</TABLE>
All of the above expenses will be paid by the registrant. The
registrant is entitled to reimbursement by certain stockholders for a portion of
such costs.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes, inter
alia, a corporation generally to indemnify any person ("indemnitee") who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or in the right of
the corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation, in a similar position with another corporation or
entity, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. With respect to actions or suits by or in the right of the
corporation, however, an indemnitee who acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation is generally limited to attorneys' fees and other expenses, and no
indemnification shall be made if such person is adjudged liable to the
corporation unless and only to the extent that a court of competent jurisdiction
determines that indemnification is appropriate. Section 145 further provides
that any indemnification shall be made by the corporation only as authorized in
each specific case upon a determination by the (i) stockholders, (ii) board of
directors by a majority vote of directors who were not parties to such action,
suit or proceeding or (iii) independent counsel, that indemnification of the
indemnitee is proper because such has met the applicable standard of conduct.
Section 145 provides that indemnification pursuant to its provisions is not
exclusive of other rights of indemnification to which a person may be entitled
under any by-law, agreement, vote of stockholders or disinterested directors or
otherwise.
The Company's By-Laws provide that the Company will indemnify, to the
fullest extent permitted by law, any person or such person's heir, distributees,
next of kin, successors, appointees, executors, administrators, legal
representatives and assigns who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company was a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, or other enterprise, domestic or foreign, against expenses, attorneys'
fees, court costs, judgments, fines, amounts paid in settlement and other losses
actually and reasonably incurred by such person in connection with such action,
suit or proceeding.
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The Restated Certificate of Incorporation, as amended also provides
that no director of the Company will be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty by such a
director as a director other than for: (i) any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) liability under Section 174 of the General Corporation Law of Delaware, or
(iv) any transaction from which such director derived an improper personal
benefit.
ITEM 16. EXHIBITS
Exhibit No.
-----------
5 Opinion of Richman, Mann, Chizever, Phillips & Duboff (to be
filed by amendment)
23.1 Consent of Richman, Mann, Chizever, Phillips & Duboff. (included
in Exhibit 5)
23.2* Consent of Burton McCumber & Cortez, LLP
24* Powers of attorney (included on the signature page in Part II of
this Registration Statement)
99* Awareness letter of Burton McCumber & Cortez, LLP
------------------------
* Filed herewith
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(4) That, for purposes of determining any liability under
the Securities Act of 1933, each filing of the registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
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<PAGE> 33
(5) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions
described in Item 15, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(6) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has
duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Palm
Desert, State of California, on this 14th day of July, 2000.
PENN OCTANE CORPORATION
By: /s/ JEROME B. RICHTER
-------------------------------------
Jerome B. Richter
Chairman of the Board, President
and Chief Executive Officer
By: /s/ IAN BOTHWELL
-------------------------------------
Ian Bothwell
Chief Financial Officer, Vice President,
Treasurer, Assistant Secretary, and
Principal Accounting Officer
II-3
