UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 000-24394
PENN OCTANE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1790357
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
77-530 ENFIELD LANE, BLDG. D, PALM DESERT, CALIFORNIA 92211
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (760) 772-9080
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---
The number of shares of Common Stock, par value $.01 per share, outstanding on
December 08, 2000 was 14,391,511.
1
<PAGE>
PENN OCTANE CORPORATION
TABLE OF CONTENTS
ITEM PAGE NO.
---- --------
Part I 1. Financial Statements
Report on Review by Independent Certified Public
Accountants 3
Consolidated Balance Sheets as of October 31, 2000
(unaudited) and July 31, 2000 4-5
Consolidated Statements of Operations for the
three months ended October 31, 2000 and 1999 (unaudited) 6
Consolidated Statements of Cash Flows for the
three months ended October 31, 2000 and 1999 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8-23
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24-35
3. Quantitative and Qualitative Disclosures About Market Risk 35
Part II 1. Legal Proceedings 36
2. Changes in Securities 36
3. Defaults Upon Senior Securities 36
4. Submission of Matters to a Vote of Security Holders 36
5. Other Information 36
6. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 36-37
7. Signatures 38
2
<PAGE>
Review by Independent Certified Public Accountants
Board of Directors and Shareholders
Penn Octane Corporation
We have reviewed the accompanying consolidated balance sheet of Penn Octane
Corporation and subsidiaries (Company) as of October 31, 2000, and the related
consolidated statements of operations and cash flows for the three month period
ended October 31, 2000. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of July 31, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended (not presented herein) and in our report dated September 29,
2000, we expressed an unqualified opinion on those consolidated financial
statements. Our report letter contained a paragraph stating that conditions
existed which raised substantial doubt about the Company's ability to continue
as a going concern. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of July 31, 2000, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Brownsville, Texas
December 5, 2000
3
<PAGE>
<TABLE>
<CAPTION>
PART I
ITEM 1.
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31,
2000 July 31,
(Unaudited) 2000
------------ -----------
<S> <C> <C>
Current Assets
Cash $ 551,658 $ 25,491
Trade accounts receivable, less allowance for doubtful accounts of 6,281,243 3,816,685
$562,950 and $562,950 (note H)
Notes receivable (note C) 214,355 770,016
Inventories (note E) 10,889,648 7,323,209
Prepaid expenses and other current assets 296,723 338,187
Property held for sale (note H) 1,908,000 1,908,000
------------ -----------
Total current assets 20,141,627 14,181,588
Property, plant and equipment - net (note D) 17,589,230 16,756,816
Lease rights (net of accumulated amortization of $581,599 and $570,150) 572,440 583,889
Other non-current assets 21,120 14,870
------------ -----------
Total assets $ 38,324,417 $31,537,163
============ ===========
The accompanying notes and accountant's report are an integral part of these statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31,
2000 July 31,
(Unaudited) 2000
-------------- --------------
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt (note F) $ 3,810,863 $ 3,859,266
Short-term debt (note F) 5,415,649 4,980,872
Revolving line of credit (note H) 3,019,597 3,538,394
LPG trade accounts payable (note H) 10,554,979 5,226,958
Deferred revenues (note M) 1,685,250 -
Other accounts payable and accrued liabilities 3,212,333 2,833,434
-------------- --------------
Total current liabilities 27,698,671 20,438,924
Long-term debt, less current maturities (note F) 1,464,984 1,464,984
Commitments and contingencies (notes G and H) - -
Stockholders' Equity (note G)
Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding at October 31, 2000 and July 31, 2000 - -
Series B - Senior preferred stock-$.01 par value, $10 liquidation value,
5,000,000 shares authorized; no shares issued and outstanding at October
31, 2000 and July 31, 2000 - -
Common stock - $.01 par value, 25,000,000 shares authorized;
13,686,795 and 13,435,198 shares issued and outstanding at October 31,
2000 and July 31, 2000 136,868 134,352
Additional paid-in capital 21,796,224 21,782,638
Notes receivable from officers of the Company and a related party for
exercise of warrants, less reserve of $516,762 and $496,077 at October
31, 2000 and July 31, 2000 ( 3,761,350) ( 3,263,350)
Accumulated deficit ( 9,010,980) ( 9,020,385)
-------------- --------------
Total stockholders' equity 9,160,762 9,633,255
-------------- --------------
Total liabilities and stockholders' equity $ 38,324,417 $ 31,537,163
============== ==============
The accompanying notes and accountant's report are an integral part of these statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
--------------------------
October 31, October 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues $38,381,119 $15,970,900
Cost of goods sold 36,792,694 14,965,012
------------ ------------
Gross profit 1,588,425 1,005,888
Selling, general and administrative expenses
Legal and professional fees 204,514 165,729
Salaries and payroll related expenses 257,473 209,792
Travel 35,160 58,020
Other (note K) 178,253 133,897
------------ ------------
675,400 567,438
------------ ------------
Operating income 913,025 438,450
Other income (expense)
Interest expense (note F) ( 806,157) ( 66,027)
Interest income 2,537 3,528
Settlement of litigation (note H) ( 100,000) -
------------ ------------
Income before taxes 9,405 375,951
Provision for income taxes - -
------------ ------------
Net income $ 9,405 $ 375,951
============ ============
Net income per common share (note B) $ 0.00 $ 0.03
============ ============
Net income per common share assuming dilution (note B) $ 0.00 $ 0.02
============ ============
Weighted average common shares outstanding 13,583,756 12,476,371
============ ============
The accompanying notes and accountant's report are an integral part of these statements.
</TABLE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
6
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
------------------
October 31, October 31,
2000 1999
------------- -----------
<S> <C> <C>
Increase (Decrease) In Cash
Cash flows from operating activities:
Net income $ 9,405 $ 375,951
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 184,309 58,374
Amortization of lease rights 11,449 11,449
Loan discount 452,027 -
Other 63,291 -
Changes in current assets and liabilities:
Trade accounts receivable ( 2,464,558) ( 870,599)
Deferred revenues 1,685,250 -
Inventories ( 3,566,439) ( 493,076)
Prepaid and other current assets 41,464 1,465
LPG trade accounts payable 5,328,021 1,652,778
Other assets and liabilities, net ( 6,250) ( 52,550)
Other accounts payable and accrued liabilities 378,899 ( 446,592)
------------- -----------
Net cash provided by operating activities 2,116,868 237,200
Cash flows from investing activities:
Capital expenditures ( 1,016,723) ( 409,197)
Payments on note receivable - 20,000
------------- -----------
Net cash used in investing activities ( 1,016,723) ( 389,197)
Cash flows from financing activities:
Revolving credit facilities ( 518,797) -
Costs of registration ( 35,276) -
Issuance of common stock 45,748 1,067,200
Reduction in debt ( 65,653) ( 90,750)
Preferred stock dividends - ( 45,370)
------------- -----------
Net cash (used in) provided by financing activities ( 573,978) 931,080
------------- -----------
Net increase in cash 526,167 779,083
Cash at beginning of period 25,491 1,032,265
------------- -----------
Cash at end of period $ 551,658 $1,811,348
============= ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including capitalized interest of $45,000 in 2000) $ 270,849 $ 57,677
============= ===========
Supplemental disclosures of noncash transactions:
Common stock and warrants issued (note G) $ 561,290 -
============= ===========
Note receivable exchanged for common stock (note C) $ ( 555,661) $ -
============= ===========
The accompanying notes and accountant's report are an integral part of these statements.
</TABLE>
7
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION
Penn Octane Corporation was incorporated in Delaware in August 1992. The
Company has been principally engaged in the purchase, transportation and
sale of liquefied petroleum gas (LPG). From 1997 until March 1999, the
Company was also involved in the provision of equipment and services to the
compressed natural gas (CNG) industry. The Company owns and operates a
terminal facility in Brownsville, Texas (the Brownsville Terminal Facility)
and owns a 50% interest and leases the remaining 50% interest in a LPG
terminal facility in Matamoros, Tamaulipas, Mexico (the Matamoros Terminal
Facility) and pipelines (the US - Mexico Pipelines) which connect the
Brownsville Terminal Facility to the Matamoros Terminal Facility. The lease
of the remaining 50% interest has been capitalized for financial statement
reporting purposes. The Company has a long-term lease agreement for
approximately 132 miles of pipeline (the Leased Pipeline) which connects
Exxon Mobil Corporation's (Exxon) King Ranch Gas Plant in Kleberg County,
Texas and Duke Energy's La Gloria Gas Plant in Jim Wells County, Texas, to
the Company's Brownsville Terminal Facility. In addition, the Company has
access to a twelve-inch pipeline (the ECCPL), which connects Exxon's Viola
valve station in Nueces County, Texas to the inlet of the King Ranch Gas
Plant (see note M). In connection with the Company's lease agreement for
the Leased Pipeline, the Company has access to 21,000,000 gallons of
storage located in Markham, Texas, as well as potential propane pipeline
exchange suppliers, via approximately 155 miles of pipeline located between
Markham, Texas and the Exxon King Ranch Gas Plant. The Company sells LPG
primarily to P.M.I. Trading Limited (PMI). PMI is the exclusive importer of
LPG into Mexico. PMI is also a subsidiary of Petroleos Mexicanos, the
state-owned Mexican oil company (PEMEX). The LPG purchased from the Company
is distributed by PMI in the northeastern region of Mexico.
The Company commenced operations during the fiscal year ended July 31,
1995, upon construction of the Brownsville Terminal Facility. Prior to such
time, the Company was in the "development stage" until the business was
established. Since the Company began operations, the primary customer for
LPG has been PMI. Sales of LPG to PMI accounted for approximately 71% of
the Company's total revenues for the three months ended October 31, 2000.
BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements include the Company and
its subsidiaries, PennWilson and Holdings and its subsidiaries (Company).
All significant intercompany accounts and transactions are eliminated.
The unaudited consolidated balance sheet as of October 31, 2000, the
unaudited consolidated statements of operations for the three months ended
October 31, 2000 and 1999, and the unaudited consolidated statements of
cash flows for the three months ended October 31, 2000 and 1999, have been
prepared by the Company without audit. In the opinion of management, the
unaudited consolidated financial statements include all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
unaudited consolidated financial position of the Company as of October 31,
2000, the unaudited consolidated results of operations for the three months
ended October 31, 2000 and 1999, and the unaudited consolidated cash flows
for the three months ended October 31, 2000 and 1999.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been omitted. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended July 31,
2000.
8
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION - CONTINUED
Certain reclassifications have been made to prior year balances to conform
to the current presentation. All reclassifications have been consistently
applied to the periods presented.
NOTE B - INCOME PER COMMON SHARE
Income per share of common stock is computed on the weighted average number
of shares outstanding. During periods in which the Company incurs losses,
giving effect to common stock equivalents is not presented as it would be
antidilutive.
The following tables present reconciliations from income per common share
to income per common share assuming dilution (see note G for the warrants):
<TABLE>
<CAPTION>
For the three months ended October 31, 2000
-------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- ----------
<S> <C> <C> <C>
Net income $ 9,405 - -
Less: Dividends on preferred stock - - -
--------------
BASIC EPS
Net income available to common stockholders 9,405 13,583,756 $ 0.00
==========
EFFECT OF DILUTIVE SECURITIES
Warrants - 1,239,425 -
Convertible Preferred Stock - - -
-------------- ------------- ----------
DILUTED EPS
Net income available to common stockholders $ 9,405 14,823,181 $ 0.00
============== ============= ==========
For the three months ended October 31, 1999
-------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- ----------
Net income $ 375,951 - -
Less: Dividends on preferred stock ( 45,370) - -
--------------
BASIC EPS
Net income available to common stockholders 330,581 12,476,371 $ 0.03
==========
EFFECT OF DILUTIVE SECURITIES
Warrants - 640,847 -
Convertible Preferred Stock - 166,304 -
-------------- ------------- ----------
DILUTED EPS
Net income available to common stockholders $ 330,581 13,283,522 $ 0.02
============== ============= ==========
</TABLE>
9
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - SALE OF CNG ASSETS
On September 10, 2000, the Board of Directors approved the repayment by the
Buyer (a related party) of the $900,000 promissory note to the Company (the
Buyer was entitled to discounts for early payment of approximately $344,000
as prescribed under the promissory note) through the exchange of 78,373
shares (shares were subsequently canceled) of common stock of the Company
owned by Buyer, which were previously pledged to the Company in connection
with the promissory note. The exchanged shares had a fair market value of
approximately $556,000 at the time of the transaction and the promissory
note had a net book value of $640,000 at that time. Therefore, the Company
recorded a loss of approximately $84,000 as a result of the discount taken
by the Buyer. Such amount was included in the consolidated statement of
operations at July 31, 2000. The remaining note has a balance of $214,355
and is collateralized by the CNG assets and 60,809 shares of the Company's
common stock owned by the Buyer.
NOTE D - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Property, plant and equipment consists of the following (see notes F, H and I):
October 31, July 31,
2000 2000
-------------- --------------
<S> <C> <C>
LPG:
Brownsville Terminal Facility:
Building $ 173,500 $ 173,500
Terminal facilities 3,426,440 3,426,440
Tank Farm 370,855 370,845
Leasehold improvements 291,409 291,409
Capital construction in progress 1,840,941 1,295,825
Equipment 476,203 393,462
-------------- --------------
6,579,348 5,951,481
-------------- --------------
US - Mexico Pipelines and Matamoros Terminal
Facility:
Purchase of 50% interest in the Lease Agreements
Capitalized leases 3,000,000 3,000,000
Other costs paid by the Company 6,400,000 6,400,000
3,046,757 2,674,716
-------------- --------------
12,446,757 12,074,716
-------------- --------------
Saltillo Terminal Facility
799,309 785,699
-------------- --------------
Other:
Automobile
Office equipment 10,800 10,800
42,820 39,615
-------------- --------------
53,620 50,415
-------------- --------------
Less: accumulated depreciation and amortization, 19,879,034 18,862,311
including amounts related to the capital lease of
282,839 and $157, 489 during the three months ended
October 31, 2000 and the year ended July 31, 2000,
respectively. ( 2,289,804) ( 2,105,495)
-------------- --------------
$ 17,589,230 $ 16,756,816
============== ==============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - INVENTORIES
Inventories consist of the following:
October 31, 2000 July 31, 2000
---------------- -------------
Gallons Cost Gallons Cost
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
LPG:
Leased Pipeline and US-Mexico
Pipelines 1,688,778 $ 1,056,980 1,361,850 $ 736,485
Storage:
Brownsville Terminal Facility,
Matamoros Terminal Facility
and railcars leased by the
Company 907,392 567,922 1,037,290 560,964
Markham and other 15,327,693 9,264,746 11,176,125 6,025,760
---------- ----------- ---------- ----------
17,923,863 $10,889,648 13,575,265 $7,323,209
========== =========== ========== ==========
</TABLE>
NOTE F - DEBT OBLIGATIONS
-----------------------------
SHORT-TERM DEBT - ISSUANCE OF NOTES
-----------------------------------
From December 10, 1999 through January 18, 2000, and on February 2, 2000,
the Company completed a series of related transactions in connection with
the private placement of $4,944,000 and $710,000, respectively, of
subordinated notes (Notes) due the earlier of December 15, 2000, or upon
the receipt of proceeds by the Company from any future debt or equity
financing in excess of $2,250,000. Interest at 9% is due on June 15, 2000,
and December 15, 2000 (or the maturity date, if earlier). In connection
with the Notes, the Company granted the holders of the Notes warrants
(Warrants) to purchase a total of 706,763 shares of common stock of the
Company at an exercise price of $4.00 per share, exercisable through
December 15, 2002. The Company was also required to register the shares
issuable in connection with exercise of the Warrants on or before July 15,
2000, subject to certain conditions (see note G).
Net proceeds from the Notes were used for the purchase of the 50% interest
in the US - Mexico Pipelines and Matamoros Terminal Facility (see notes D
and I) and for working capital purposes.
Under the terms of the Notes, the Company has agreed to pledge the
Company's owned interest (50%) in the US - Mexico Pipelines and the
Matamoros Terminal Facility. RZB (see note H) has consented to subordinate
its senior interest in these assets in connection with the Notes.
Upon the issuance of the Notes, the Company recorded a discount of
$1,675,598 related to the fair value of the Warrants issued and other
costs, to be amortized over the life of the Notes. The amount of discount
amortized during three months ended October 31, 2000 was $452,027.
LONG-TERM DEBT
---------------
The Company began utilizing the US-Mexico Pipelines and the Matamoros
Terminal Facility during April 2000. The amounts related to the Settlement
discussed in note H have been recorded in the accompanying consolidated
financial statements as property, plant and equipment and capital lease
obligations.
11
<PAGE>
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - DEBT OBLIGATIONS - CONTINUED
LONG-TERM DEBT- Continued
---------------
Long-term debt consists of the following:
October 31, July 31,
2000 2000
------------ ----------
<S> <C> <C>
Capitalized lease obligations in connection with the US - Mexico Pipelines and the $ 5,070,500 $5,070,500
Matamoros Terminal Facility (see notes D and I).
Contract for Bill of Sale which was extended in April 1999; due in monthly 5,347 14,347
payments of $3,000, including interest at 10%; due in February 2001; collateralized
by a building.
Noninterest-bearing note payable, discounted at 7%, for legal services; due in 200,000 202,750
monthly installments of $20,000 through January 2001; final payment of $110,000
due in February 2001.
Other long-term debt. - 36,653
------------ ----------
5,275,847 5,324,250
Current maturities. 3,810,863 3,859,266
------------ ----------
$ 1,464,984 $1,464,984
============ ==========
</TABLE>
In connection with the notes payable for legal services, the Company agreed
to provide a "Stipulation of Judgment" to the creditor in the event that
the Company defaults under the settlement agreements.
NOTE G - STOCKHOLDERS' EQUITY
COMMON STOCK
-------------
The Company routinely issues shares of its common stock for cash, as a
result of the exercise of warrants, in payment of notes and other
obligations and to settle lawsuits.
During August 2000 and September 2000, the Company issued 12,500 shares and
100,000 shares of common stock of the Company, respectively, in connection
with the settlement of litigation.
During September 2000, a director and officer of the Company exercised
warrants to purchase 200,000 shares of common stock of the Company, at an
exercise price of $2.50 per share. The consideration for the exercise of
the warrants included $2,000 in cash and a $498,000 promissory note. The
principal amount of the note plus accrued interest at an annual rate of
10.5% is due on April 30, 2001. The director and officer of the Company is
personally liable with full recourse to the Company and has provided 60,809
shares of common stock of the Company as collateral. The promissory note
has been recorded as a reduction of stockholders' equity during the quarter
ending October 31, 2000. Interest on the promissory note will be recorded
when the cash is received.
During October 2000, warrants to purchase a total of 7,500 shares of common
stock of the Company were exercised, resulting in cash proceeds to the
Company of $11,250.
During November 2000, warrants to purchase a total of 200,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to
the Company of $602,500.
12
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - STOCKHOLDERS' EQUITY
COMMON STOCK- CONTINUED
-------------
In November 2000, the Company issued 4,716 shares of common stock of the
Company to a consultant in payment for services rendered to the Company
valued at $23,583.
During November 2000, the Company agreed to reduce the exercise price from
$2.50 to $2.00 per share for warrants to purchase 500,000 shares of common
stock of the Company as an inducement for the holder of the warrants to
exercise the warrants. The consideration for the exercise of the warrants
included $5,000 in cash and a $995,000 promissory note. The principal
amount of the note plus accrued interest at an annual rate of 10.5% is due
on April 30, 2001. The holder of the note is liable with full recourse to
the Company and has provided 500,000 shares of common stock of the Company
as collateral.
REGISTRATION RIGHTS
--------------------
In connection with the issuance of shares and warrants by the Company
(Shares), the Company has on numerous instances granted registration rights
to the holders of the Shares, including those shares which result from the
exercise of warrants (Registrable Securities). The Company was obligated to
register the Registrable Securities even though the Registrable Securities
may have been tradable under Rule 144. The registration rights agreements
generally did not contain provisions for damages if the Registration was
not completed, except for certain Shares required to be registered on
December 1, 1999, whereby the Company was required to pay a penalty of
$80,000 in cash and/or common stock of the Company based on the then
current trading price of the common stock of the Company. In connection
with the requirement, the Company issued 11,977 shares of its common stock.
On July 14, 2000, the Company filed a registration statement which included
the Shares. The registration statement was subsequently declared effective
on October 6, 2000.
STOCK AWARD PLAN
------------------
Under the Company's 1997 Stock Award Plan (Plan), the Company has reserved
for issuance 150,000 shares of Common Stock, of which 118,186 shares were
unissued as of October 31, 2000, to compensate consultants who have
rendered significant services to the Company. The Plan is administered by
the Compensation Committee of the Board of Directors of the Company which
has complete authority to select participants, determine the awards of
Common Stock to be granted and the times such awards will be granted,
interpret and construe the Plan for purposes of its administration and make
determinations relating to the Plan, subject to its provisions, which are
in the best interests of the Company and its stockholders. Only consultants
who have rendered significant advisory services to the Company are eligible
to be participants under the Plan. Other eligibility criteria may be
established by the Compensation Committee as administrator of the Plan.
In August 2000, the Company issued 6,500 shares of Common Stock to a
consultant in payment for services rendered to the Company valued at
$41,438.
STOCK WARRANTS
---------------
The Company applies APB 25 for warrants granted to the Company's employees
and to the Company's Board of Directors and SFAS 123 for warrants issued to
acquire goods and services from non-employees.
Board Compensation Plan
-------------------------
The Board of Directors (Board) granted warrants to purchase 10,000 shares
of common stock at an exercise price of $6.94 per share to those outside
directors previously elected and serving on the Board at August 1,
13
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - STOCKHOLDERS' EQUITY - CONTINUED
Board Compensation Plan- Continued
-------------------------
2000. In addition, the Board granted to newly elected directors warrants to
purchase 60,000 shares of common stock, at an exercise of $6.69 per share,
with the vesting period to commence on August 7, 2000. The exercise prices
per share of the warrants issued were equal to or greater than the quoted
market prices per share at the measurement dates. Based on the provisions
of APB 25, no compensation expense was recorded for these warrants.
As a bonus to a director and officer of the Company, during November 2000,
the Company granted warrants to purchase 200,000 shares of common stock of
the Company at an exercise price of $7.00 per share exercisable for five
years. The exercise price per share of the warrants was equal to or greater
than the quoted market price per share at the measurement date. Based on
the provisions of APB 25, no compensation expense will be recorded for
these bonus warrants.
Other
-----
In connection with a consulting agreement between the Company and a
director of the Company, during August 2000, the director received warrants
to purchase 70,000 shares of common stock at an exercise price of $6.38 per
share exercisable through August 6, 2005. The warrants will vest ratably on
a quarterly basis over four years. The warrants were accounted for under
the provisions of SFAS 123 and the resulting expense is being amortized
over the vesting period.
For warrants granted to non-employees, the Company applies the provisions
of SFAS 123 to determine the fair value of the warrants issued. Warrants
granted to non-employees simultaneously with the issuance of debt are
accounted for based on the guidance provided by APB 14, "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants".
In connection with previous warrants issued by the Company, certain of
these warrants contain a call provision whereby the Company has the right
to purchase the warrants for a nominal price if the holder of the warrants
does not elect to exercise the warrants within the call provision.
NOTE H - COMMITMENTS AND CONTINGENCIES
LITIGATION
On October 12, 1999, a Demand for Arbitration (Arbitration) of $780,767
(subsequently amended to $972,515) was filed by A.E. Schmidt Environmental
(Schmidt) against Amwest Surety Insurance Company (Amwest), PennWilson and
Penn Octane Corporation on a performance bond pursuant to a CNG contract.
The Company filed a response with the court opposing the petition by
Schmidt to compel Penn Octane Corporation to participate in the Arbitration
pursuant to an alter ego theory. During April 2000, the court denied
Schmidt's petition to compel Penn Octane Corporation to participate in the
Arbitration. PennWilson had countersued Schmidt in connection with overruns
under the CNG contract. In November 2000, the litigation was settled in
mediation whereby PennWilson agreed to pay Schmidt $100,000 and Amwest
agreed to pay Schmidt $350,000. PennWilson and Penn Octane Corporation
both gave and received mutual general releases with exception only for
unknown latent deficiencies as defined in California Civil Procedure Code
Section 337.15 and third party indemnity claims for injury, death or
property damage.
14
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - COMMITMENTS AND CONTINGENCIES
LITIGATION - CONTINUED
On February 24, 2000, litigation was filed in the 357th Judicial District
Court of Cameron County, Texas, against Cowboy Pipeline Service Company,
Inc. (Cowboy), CPSC International, Inc. (CPSC) and the Company
(collectively referred to as the Defendants) alleging that the Defendants
had illegally trespassed in connection with the construction of the US
Pipelines (see note I) and seeking a temporary restraining order against
the Defendants from future use of the US Pipelines. On March 20, 2000, the
Company acquired the portion of the property which surrounds the area where
the US Pipelines were constructed for cash of $1,908,000, which was paid
during April 2000, and debt in the amount of $1,908,000. As a result, the
litigation was dismissed. The debt bears interest at 10% per annum, payable
monthly in minimum installments of $15,000 with a balloon payment due
during April 2003. The liability of $1,908,000 is included in capital lease
obligations (see note F).
On March 14, 2000, CPSC filed for protection under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court (Court),
Southern District of Texas, Corpus Christi Division.
On April 27, 2000, the Company filed a complaint in the 107th Judicial
District Court of Cameron County, Texas, against Cowboy and the sole
shareholder of Cowboy (Owner) alleging (i) fraud, (ii) aiding and abetting
a breach of fiduciary duty, (iii) negligent misrepresentation, and (iv)
conspiracy to defraud in connection with the construction of the US-Mexico
Pipelines and Matamoros Terminal Facility and the underlying agreements
thereto. The Company also alleges that Cowboy was negligent in performing
its duties. The Company was seeking actual and exemplary damages and other
relief. On June 9, 2000, Cowboy removed the case to the Court.
On May 8, 2000, CPSC filed an adversary proceeding against the Company in
the Court seeking (i) prevention of the Company against the use of the
US-Mexico Pipelines and escrow of all income related to use of the
US-Mexico Pipelines, (ii) sequestering all proceeds related to the sale
from any collateral originally pledged to CPSC, (iii) the avoidance of the
Addendum agreement between the Company and CPSC, and (iv) damages arising
from the Company's breach of the Lease Agreements (see note I) and the
September 1999 Agreements.
During May 2000, the Company filed a motion with the Court seeking to
appoint a Chapter 11 Trustee and the Company also filed a complaint with
the Court seeking a declaratory judgment stating that the US Pipelines be
held in trust for the benefit of the Company and that the US-Mexico
Pipelines are no longer the assets of the bankruptcy estate. The motion and
the complaint are still pending.
On June 2, 2000, additional litigation was filed in the 138th Judicial
District Court of Cameron County, Texas, against Cowboy and the Company
alleging that Cowboy and the Company had illegally trespassed in connection
with the construction of the US Pipelines and seeking declaratory relief,
including damages, exemplary damages and injunctive relief preventing
Cowboy and the Company from utilizing the US Pipelines. On June 9, 2000,
CPSC intervened and removed the case to the Court. During August, 2000, the
litigation was settled through a court ordered mediation by the Company
agreeing to acquire land for which substantially all of the costs will be
offset against the balance of the promissory note due to CPSC (see below).
The settlement is subject to completion of the settlement documents.
15
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - COMMITMENTS AND CONTINGENCIES - CONTINUED
On June 19, 2000, the Company, CPSC, Cowboy and the Owner reached a
settlement (Settlement) whereby the Company has agreed to purchase the
remaining 50% interest in the assets associated with the Lease Agreements
for cash, two promissory notes, transfer of the property owned by the
Company purchased on March 20, 2000, referred to above, and warrants to
acquire common stock of the Company together with a release of all claims
and proceedings between them. The promissory notes are for $900,000 and
$1,462,500 and both bear interest at 9%. Principal and interest are payable
monthly with the notes due in three years. In addition, CPSC will assume
the Company's debt issued in connection with the acquisition of the
property. On July 19, 2000, the Settlement expired without the parties
completing final documentation as provided for in the Settlement. During
November 2000, the parties negotiated a settlement of all disputes and have
submitted a settlement agreement to the Court for approval which has yet to
be received. The accompanying unaudited consolidated financial statements
have been adjusted to reflect the Settlement. If the Settlement is not
finalized, the Company will continue to pursue its legal remedies.
As a result of the aforementioned, the Company may incur additional costs
to complete the US - Mexico Pipelines and Matamoros Terminal Facility,
which amount cannot presently be determined.
In addition, there is no certainty that the Company will (i) acquire the
remaining 50% interest in the US - Mexico Pipelines and Matamoros Terminal
Facility, (ii) continue to utilize the US - Mexico Pipelines and Matamoros
Terminal Facility or (iii) realize its recorded investment in the Lease
Agreements or in the US - Mexico Pipelines and Matamoros Terminal Facility
(see note D).
The Company and its subsidiaries are also involved with other proceedings,
lawsuits and claims. The Company is of the opinion that the liabilities, if
any, ultimately resulting from such proceedings, lawsuits and claims should
not materially affect its consolidated financial position.
CREDIT FACILITY, LETTERS OF CREDIT AND OTHER
As of October 31, 2000, the Company has a $20,000,000 credit facility with
RZB Finance L.L.C. (RZB) for demand loans and standby letters of credit
(RZB Credit Facility) to finance the Company's purchase of LPG. In
connection with the RZB Credit Facility, RZB entered into a participation
agreement with Bayerische Hypo-und Vereinsbank Aktiengeselischaft, New York
Branch (HVB), whereby RZB and HVB will each participate up to $10,000,000
toward the total credit facility. Under the RZB Credit Facility, the
Company pays a fee with respect to each letter of credit thereunder in an
amount equal to the greater of (i) $500, (ii) 2.5% of the maximum face
amount of such letter of credit, or (iii) such higher amount as may be
agreed to between the Company and RZB. Any amounts outstanding under the
RZB Credit Facility shall accrue interest at a rate equal to the rate
announced by the Chase Manhattan Bank as its prime rate plus 2.5%. Pursuant
to the RZB Credit Facility, RZB has sole and absolute discretion to
terminate the RZB Credit Facility and to make any loan or issue any letter
of credit thereunder. RZB also has the right to demand payment of any and
all amounts outstanding under the RZB Credit Facility at any time. In
connection with the RZB Credit Facility, the Company granted a mortgage,
security interest and assignment in any and all of the Company's real
property, buildings, pipelines, fixtures and interests therein or relating
thereto, including, without limitation, the lease with the Brownsville
Navigation District of Cameron County for the land on which the Company's
Brownsville Terminal Facility is located, the Pipeline Lease, and in
connection therewith agreed to enter into leasehold deeds of trust,
security agreements, financing statements and assignments of rent, in forms
satisfactory to RZB. Under the RZB Credit Facility, the Company may not
permit to exist any lien, security interest, mortgage, charge or other
encumbrance of any nature on any of its properties or assets, except in
favor of RZB, without the consent of RZB (see notes F and I).
16
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company's President, Chairman and Chief Executive Officer has
personally guaranteed all of the Company's payment obligations with respect
to the RZB Credit Facility.
In connection with the Company's purchases of LPG from Exxon, PG&E NGL
Marketing, L.P. (PG&E), Duke Energy NGL Services, Inc. (Duke) and/or Koch
Hydrocarbon Company (Koch), the Company issues letters of credit on a
monthly basis based on anticipated purchases.
As of October 31, 2000, letters of credit established under the RZB Credit
Facility in favor of Exxon, PG&E, Duke and Koch for purchases of LPG
totaled $15,133,126 of which $10,554,979 was being used to secure unpaid
purchases. In addition, as of October 31, 2000, the Company had borrowed
$3,019,597 from its revolving line of credit under the RZB Credit Facility
for purchases of LPG. In connection with these purchases, at October 31,
2000, the Company had unpaid invoices due from PMI totaling $6,185,565,
cash balances maintained in the RZB Credit Facility collateral account of
$385,361 and inventory held in storage of $9,264,746 (see note E).
NOTE I - CAPITAL LEASE
On July 26, 1999, the Company was granted a permit by the United States
Department of State authorizing the Company to construct, maintain and
operate two pipelines (US Pipelines) crossing the international boundary
line between the United States and Mexico (from the Brownsville Terminal
Facility near the Port of Brownsville, Texas and El Sabino, Mexico) for the
transport of LPG and refined products (motor gasoline and diesel fuel)
[Refined Products].
On July 2, 1998, Penn Octane de Mexico, S.A. de C.V. (PennMex), an
affiliated company (see note K), received a permit from the Comision
Reguladora de Energia (Mexican Energy Commission) to build and operate one
pipeline to transport LPG (Mexican Pipeline) [collectively, the US
Pipelines and the Mexican Pipeline are referred to as the US - Mexico
Pipelines] from El Sabino (at the point North of the Rio Bravo) to a
terminal facility in the City of Matamoros, State of Tamaulipas, Mexico
(Matamoros Terminal Facility).
In connection with the construction of the US-Mexico Pipelines and the
Matamoros Terminal Facility, the Company and CPSC entered into two separate
Lease / Installation Purchase Agreements, as amended, (Lease Agreements),
whereby CPSC was required to construct and operate the US - Mexico
Pipelines (including an additional pipeline to accommodate Refined
Products) and the Matamoros Terminal Facility and lease these assets to the
Company. Under the terms of the Lease Agreements, the Company was required
to pay monthly rental payments of approximately $157,000, beginning the
date that the US - Mexico Pipelines and Matamoros Terminal Facility were
physically capable of transporting and receiving LPG in accordance with
technical specifications required (Substantial Completion Date). In
addition, the Company agreed to provide a lien on certain assets, leases
and contracts which are currently pledged to RZB (Liens), which Liens would
require consent of RZB, and provide CPSC with a letter of credit of
approximately $1,000,000. The Company also had the option to purchase the
US - Mexico Pipelines and the Matamoros Terminal Facility at the end of the
10th year anniversary and 15th year anniversary for $5,000,000 and
$100,000, respectively. Under the terms of the Lease Agreements, CPSC was
required to pay all costs associated with the design, construction and
maintenance of the US - Mexico Pipelines and Matamoros Terminal Facility.
17
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - CAPITAL LEASE - CONTINUED
During September 1999, December 1999 and February 2000, the Company and
CPSC amended the Lease Agreements whereby the Company agreed to acquire up
to a 100% interest in the Lease Agreements which, as of October 31, 2000,
the Company had acquired a 50% interest pursuant to the December 1999
amendment. During February 2000, the Company determined that CPSC did not
comply with certain obligations under the Lease Agreements. In March 2000,
CPSC filed for protection under Chapter 11 of the United States Bankruptcy
Code. Since that date, the Company has also determined that CPSC did not
comply with other obligations provided for under the Lease Agreements. The
Settlement would provide for 100% ownership of the US-Mexico Pipelines and
Matamoros Terminal Facility by the Company or its affiliates and eliminate
the requirement for the Liens. Until the Settlement is completed, the
Company will continue to record the remaining 50% portion of the US-Mexico
Pipelines and Matamoros Terminal Facility as a capital lease (see notes D,
F, H and K).
With the completion of the US-Mexico Pipelines and Matamoros Terminal
Facility, the Company has established a pipeline infrastructure that allows
it to transport LPG from the United States to Mexico.
The Company or its Mexican affiliates own, lease, or are in the process of
obtaining the land or rights of way used in the construction of the
U.S.-Mexico Pipelines, and own the assets comprising the US-Mexico
Pipelines and Matamoros Terminal Facility. The Company's Mexican affiliate,
Tergas, S.A. de C.V. (Tergas), has been granted the permit to operate the
Matamoros Terminal Facility.
NOTE J - UPGRADES
The Company is currently completing a mid-line pump station which will
include the installation of additional piping, meters, valves, analyzers
and pumps along the Leased Pipeline to increase the capacity of the Leased
Pipeline and make the Leased Pipeline bi-directional. The mid-line pump
station will increase the capacity of the Leased Pipeline to approximately
360,000,000 gallons per year. The total estimated cost to complete the
project is approximately $2,000,000 of which approximately $1,600,000 has
been incurred through October 31, 2000.
The Company has employed a firm to provide the engineering for the design,
installation and construction of pipelines which will connect the
Brownsville Terminal Facility to the water dock facilities at the
Brownsville Ship Channel and install additional storage capacity. The cost
of this project is expected to approximate $2,000,000.
18
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - MEXICAN OPERATIONS
Termatsal, S.A. de C.V. (Termatsal) has completed construction of an
additional LPG terminal facility in Saltillo, Mexico (Saltillo Terminal
Facility) for an estimated cost of $800,000. The Saltillo Terminal Facility
is capable of off loading LPG from railcars to trucks. The Saltillo
Terminal Facility contains storage to accommodate approximately 90,000
gallons of LPG with additional storage planned for 180,000 gallons. The
Saltillo Terminal Facility has three railcar off loading racks and three
truck loading racks. As a result of the Saltillo Terminal Facility, the
Company can directly transport LPG via railcar from the Brownsville
Terminal Facility to the Saltillo Terminal Facility. The Saltillo Terminal
Facility will begin operations upon final approval from local government
authorities.
Tergas leases the land on which the Saltillo Terminal Facility is located
and has been granted the permit to operate the Saltillo Terminal Facility.
Termatsal owns the assets comprising the Saltillo Terminal Facility. The
land lease amount is $69,000 annually and expires in January 2003. Under
the terms of the land lease agreement, any leasehold improvements at the
termination of the lease may be removed.
In connection with the planned operations of the Saltillo Terminal
Facility, Termatsal has leased approximately 50 railcars to transport LPG
between the Brownsville Terminal Facility and the Saltillo Terminal
Facility. The lease amount is $297,000 annually and expires in August 2001.
PennMex, Tergas and Termatsal are Mexican companies, which are owned 90%,
90% and 98%, respectively, by Jorge R. Bracamontes, an officer and director
of the Company (Bracamontes) and the balance by other Mexican citizens
(Minority Shareholders). Under current Mexican law, foreign ownership of
Mexican entities involved in the distribution of LPG or the operation of
LPG terminal facilities is prohibited. Foreign ownership is permitted in
the transportation and storage of LPG. Mexican law also provides that a
single entity is not permitted to participate in more than one of the
defined LPG activities (transportation, storage or distribution).
During November 2000, the Company, Bracamontes and the Minority
Shareholders entered into agreements whereby the Company may acquire up to
100% of the outstanding shares of PennMex and Termatsal for a nominal
amount subject to, among other things, the Settlement. Because the Company
participates in one of the defined LPG activities, Tergas is providing
services to the Company at the Matamoros Terminal Facility and the Saltillo
Terminal Facility.
In connection with the construction of the Mexican Pipeline and the
Matamoros Terminal Facility, CPSC provided all payments and delivery of
equipment through Termatsal.
PennMex, Tergas or Termatsal (i) have entered into leases associated with
the Saltillo Terminal Facility, (ii) have been granted the permit for the
Mexican Pipeline, (iii) have been granted permits to operate the Matamoros
Terminal Facility and the Saltillo Terminal Facility, (iv) own, lease or
are in the process of obtaining the land or rights of way used in the
construction of the Mexican Pipeline, Matamoros Terminal Facility and
Saltillo Terminal Facility and (v) own the assets comprising the Mexican
Pipeline, Matamoros Terminal Facility and Saltillo Terminal Facility, all
of which were funded by the Company or CPSC (see note D). The portion of
funds which were advanced by the Company (totaling $3,800,000 at October
31, 2000) to PennMex or Termatsal are included in property, plant and
equipment. Furthermore, the Company is committed to fund PennMex or
Termatsal for any additional costs required in connection with the Mexican
Pipeline, Matamoros Terminal Facility and the Saltillo Terminal Facility.
During the three months ended October 31, 2000 and 1999, the Company paid
PennMex, Tergas or Termatsal $140,000 and $61,000, respectively, for Mexico
related expenses incurred by those corporations on the Company's behalf.
Such amounts have been expensed.
19
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - MEXICAN OPERATIONS - Continued
The operations of PennMex, Tergas and Termatsal are subject to the tax laws
of Mexico which, among other things, require that Mexican subsidiaries of
foreign entities comply with transfer pricing rules, the payment of income
and/or asset taxes, and possibly taxes on distributions in excess of
earnings. In addition, distributions to foreign corporations may be subject
to withholding taxes, including dividends and interest payments.
NOTE L - REALIZATION OF ASSETS
The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern. The Company has
had an accumulated deficit since inception, has used cash in operations,
and has had a deficit in working capital. The Company presently lacks
sufficient cash to pay the principal amounts of the Notes due on December
15, 2000. The Company is currently negotiating with the holders of the
Notes to renew or extend the due date and is also pursuing other financing
alternatives. The failure of the Company to pay, renew or extend the Notes
may cause an event of default under the Notes (see note F). In addition,
the Company entered into supply agreements for quantities of LPG
substantially in excess of minimum quantities under the New Agreement (see
note M). Although the Company has entered into the Settlement (see note H),
significant uncertainties exist related to the US - Mexico Pipelines and
Matamoros Terminal Facility. As discussed in note A, the Company has
historically depended heavily on sales to one major customer.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts as shown in the
accompanying consolidated balance sheet is dependent upon the Company's
ability to obtain additional financing, renew or extend the Notes referred
to in the preceding paragraph, raise additional equity capital, complete
the transactions related to the US-Mexico Pipelines, Matamoros Terminal
Facility and the Saltillo Terminal Facility and the success of the
Company's future operations. The unaudited consolidated financial
statements do not include any adjustments related to the recoverability and
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be unable to
continue in existence.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to (i) increase sales to its
current customers, (ii) increase its customer base upon deregulation of the
LPG industry in Mexico, (iii) extend the terms and capacity of the Pipeline
Lease and the Brownsville Terminal Facility, (iv) expand its product lines,
(v) obtain additional letters of credit financing, (vi) raise additional
debt and/or equity capital and (vii) resolve the uncertainties related to
the US-Mexico Pipelines, the Matamoros Facility and the Saltillo Terminal
Facility.
At July 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $5,600,000. The ability to
utilize such net operating loss carryforwards may be significantly limited
by the application of the "change of ownership" rules under Section 382 of
the Internal Revenue Code.
20
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE M - CONTRACTS
LPG BUSINESS - SALES AGREEMENT
The Company entered into a new sales agreement with PMI for the period from
April 1, 2000 through March 31, 2001 (New Agreement), for the annual sale
of a minimum of 151,200,000 gallons of LPG, mixed to PMI specifications,
subject to seasonal variability, to be delivered to PMI at the Company's
terminal facilities in Matamoros, Tamaulipas, Mexico and Saltillo,
Coahuila, Mexico.
On October 11, 2000, the New Agreement was amended to increase the minimum
amount of LPG to be purchased during the period from November 2000 through
March 2001 by 7,500,000 gallons resulting in a new annual minimum
commitment of 158,700,000 gallons.
The New Agreement, as amended, represents an increase of 130% over annual
minimum contract volumes under the previous sales agreement with PMI for
the period from April 1, 1999 through March 31, 2000. Actual sales volumes
to PMI during the period from April 1, 1999 through March 31, 2000 exceeded
the minimum contractual volumes by 95%. Under the terms of the New
Agreement, sales prices are indexed to variable posted prices. The New
Agreement also provides for higher fixed margins above the variable posted
prices over the previous sales agreements with PMI depending on the final
delivery point of the LPG. Sales to PMI totaled approximately $27,200,000
for the three months ended October 31, 2000, representing approximately 71%
of total revenues for the period.
The New Agreement also provides for trucking of LPG from the Company's
Brownsville Terminal Facility to the Matamoros Terminal Facility (or
designated locations within the area) and from the Brownsville Terminal
Facility or the Matamoros Terminal Facility to the Saltillo Terminal
Facility (or designated locations within the area) in the event that (i)
the Company is unable to transport LPG through the US-Mexico Pipelines,
(ii) the Saltillo Terminal Facility or railcars to deliver LPG to the
Saltillo Terminal Facility are not utilized or (iii) until the Matamoros
Terminal Facility or the Saltillo Terminal Facility are fully operational.
Under the terms of the New Agreement, in the event that the US-Mexico
Pipelines or railcars are not used, the sales prices received shall be
reduced by the corresponding trucking charges. During April 2000, the
Company began shipping LPG through the US-Mexico Pipelines. During October
2000, approximately 78% of the LPG sold to PMI was delivered through the
US-Mexico Pipelines to the Matamoros Terminal Facility. As of October 31,
2000, the Saltillo Terminal Facility had not commenced operations.
As part of the volume requirements under the New Agreement, the Company has
committed to sell to PMI 3,150,000 gallons of propane at a sales price of
approximately $0.60 per gallon, to be delivered during December 2000 and
February 2001. A portion of the sales price of $1,685,250 has been received
by PMI as of October 31, 2000 and is included in the unaudited consolidated
balance sheet as deferred revenue.
LPG SUPPLY AGREEMENTS
Effective October 1, 1999, the Company and Exxon entered into a ten year
LPG supply contract, as amended (Exxon Supply Contract), whereby Exxon has
agreed to supply and the Company has agreed to take, 100% of Exxon's owned
or controlled volume of propane and butane available at Exxon's King Ranch
Gas Plant (Plant) up to 13,900,000 gallons per month blended in accordance
with the specifications as outlined under the New Agreement (Plant
Commitment). The purchase price is indexed to variable posted prices.
21
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE M - CONTRACTS - Continued
LPG SUPPLY AGREEMENTS - Continued
In addition, under the terms of the Exxon Supply Contract, Exxon made
operational its Corpus Christi Pipeline (ECCPL) during September 2000. The
ability to utilize the ECCPL allows the Company to acquire an additional
supply of propane from other propane suppliers located near Corpus Christi,
Texas (Additional Propane Supply), and bring the Additional Propane Supply
to the Plant (ECCPL Supply) for blending to the proper specifications
outlined under the New Agreement and then delivered into the Leased
Pipeline. In connection with the ECCPL Supply, the Company has agreed to
supply a minimum of 7,700,000 gallons into the ECCPL during the first
quarter from the date that the ECCPL is operational, approximately
92,000,000 gallons the following year and 122,000,000 gallons each year
thereafter and continuing for four years. The Company is required to pay
additional costs associated with the use of the ECCPL.
In September 1999, the Company and PG&E entered into a three year supply
agreement (PG&E Supply Agreement) whereby PG&E has agreed to supply and the
Company has agreed to take, a monthly average of 2,500,000 gallons of
propane (PG&E Supply) beginning in October 1999. The purchase price is
indexed to variable posted prices.
Under the terms of the PG&E Supply Agreement, the PG&E Supply will be
delivered to either the Leased Pipeline or, in the future, to the ECCPL
(after PG&E completes construction of an interconnection) and blended to
the proper specifications as outlined under the New Agreement.
In March 2000, the Company and Koch entered into a three year supply
agreement (Koch Supply Contract) whereby Koch has agreed to supply and the
Company has agreed to take, a monthly average of 8,200,000 gallons (Koch
Supply) of propane beginning April 1, 2000, subject to the actual amounts
of propane purchased by Koch from the refinery owned by its affiliate, Koch
Petroleum Group, L.P. The purchase price is indexed to variable posted
prices. Furthermore, the Company is required to pay additional charges
associated with the construction of a new pipeline interconnection to be
paid through additional adjustments to the purchase price (totaling
approximately $1,000,000) which allows deliveries of the Koch Supply into
the ECCPL.
In connection with the delivery of the Koch Supply, the Company did not
accept the Koch Supply because the ECCPL was not operational until
September 2000. Accordingly, the Company arranged for the sale of the Koch
Supply to third parties (Unaccepted Koch Supply Sales). The Company
incurred additional costs in connection with the disposal of the Unaccepted
Koch Supply Sales.
Under the terms of the Koch Supply Contract, the Koch Supply will be
delivered into the ECCPL and blended to the proper specifications as
outlined under the New Agreement.
During March 2000, the Company and Duke entered into a three year supply
agreement (Duke Supply Contract) whereby Duke has agreed to supply and the
Company has agreed to take, a monthly average of 1,900,000 gallons (Duke
Supply) of propane or propane/butane mix, beginning April 1, 2000. The
purchase price is indexed to variable posted prices.
Pursuant to the terms of the Duke Supply Contract, the Company paid a
minimal amount for modifications related to the interconnections necessary
to allow the Duke Supply to be delivered into the Leased Pipeline
facilities.
The delivery of the PG&E Supply or the Koch Supply will satisfy a portion
or all of the ECCPL Supply requirements under the Exxon Supply Contract.
22
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE M - CONTRACTS - Continued
LPG SUPPLY AGREEMENTS - Continued
The Company is currently purchasing LPG from the above-mentioned suppliers
(Suppliers) to meet the minimum monthly volumes required in the New
Agreement. The Company's costs to purchase LPG (less any applicable
adjustments) are below the sales prices provided for in the New Agreement.
The agreements with the Suppliers currently require that the Company
purchase a minimum supply of LPG, which is significantly higher than
committed sales volumes under the New Agreement.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
liquidity and capital resources should be read in conjunction with the
consolidated financial statements of the Company and related notes thereto
appearing elsewhere herein. References to specific years preceded by "fiscal"
(e.g. fiscal 2000) refer to the Company's fiscal year ended July 31.
FORWARD-LOOKING STATEMENTS
Statements in this report regarding future events or conditions are
forward-looking statements. Actual results, performance or achievements could
differ materially due to, among other things, factors discussed in this report
and in Part I of the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 2000. These forward-looking statements include, but are not
limited to, statements regarding anticipated future revenues, sales, operations,
demand, competition, capital expenditures, the deregulation of the LPG market in
Mexico, the completion and operations of the US - Mexico Pipelines, the
Matamoros Terminal Facility and the Saltillo Terminal Facility, other upgrades
to our facilities, foreign ownership of LPG operations, short term obligations
and credit arrangements, outcome of litigation, and other statements regarding
matters that are not historical facts, and involves predictions which are based
upon a number of future conditions that ultimately may prove to be inaccurate.
We caution you, however, that this list of factors may not be complete.
OVERVIEW
The Company has been principally engaged in the purchase, transportation
and sale of LPG and, from 1997 to March 1999, the provision of equipment and
services to the CNG industry. Since operations commenced, the Company has
bought and sold LPG for distribution into northeast Mexico and the United States
Rio Grande Valley.
During the three months ended October 31, 2000, the Company derived 71.0%
of its revenues from sales of LPG to PMI, its primary customer.
The Company provides products and services through a combination of
fixed-margin and fixed-price contracts. Under the Company's agreements with its
customers and suppliers, the buying and selling prices of LPG are based on
similarly indexed variable posted prices that provide the Company with a fixed
margin. Costs included in cost of goods sold, other than the purchase price of
LPG, may affect actual profits from sales, including costs relating to
transportation, storage, leases and maintenance. Mismatches in volumes of LPG
purchased from suppliers and volumes sold to PMI or others could result in gains
during periods of rising LPG prices or losses during periods of declining LPG
prices as a result of holding inventories.
24
<PAGE>
LPG SALES
The following table shows the Company's volume sold in gallons and average
sales prices of LPG for the three months ended October 31, 2000 and 1999.
Three Months Ended October 31,
-----------------------------
2000 1999
---- ----
Volume Sold
LPG (millions of gallons) - PMI 40.0 33.8
LPG (millions of gallons) - Other 20.1 -
----- -----
60.1 33.8
Average sales price
LPG (per gallon) - PMI $0.68 $0.47
LPG (per gallon) - Other 0.56 -
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2000 COMPARED WITH THREE MONTHS ENDED OCTOBER 31,
1999
Revenues. Revenues for the three months ended October 31, 2000, were $38.4
million compared with $16.0 million for the three months ended October 31,1999,
an increase of $22.4 million or 140.3%. Of this increase, $4.2 million was
attributable to increased volumes of LPG sold to PMI in the three months ended
October 31, 2000, $7.0 million was attributable to increased average sales
prices of LPG sold to PMI in the three months ended October 31, 2000 and $11.2
million was attributable to sales of LPG to customers other then PMI in
connection with the Company's desire to reduce outstanding inventory balances.
Cost of goods sold. Cost of sales for the three months ended October 31,
2000, was $36.8 million compared with $15.0 million for the three months ended
October 31, 1999, an increase of $21.8 million or 145.9%. Of this increase,
$3.7 million was attributable to increased volumes of LPG purchased for sales to
PMI in the three months ended October 31, 2000, $5.9 million (net of
approximately $924,000 of lower priced LPG sold to PMI during the three months
ended October 31, 2000 from the Company's inventory balances held at July 31,
2000) was attributable to increased average sales prices of LPG purchased for
sales to PMI in the three months ended October 31, 2000, $11.5 million was
attributable to sales of LPG to customers other than PMI in connection with the
Company's desire to reduce outstanding inventory balances during the three
months ended October 31, 2000 and $634,089 was attributable to increased
operating costs associated with LPG during the three months ended October 31,
2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $675,400 for the three months ended October 31,
2000 compared with $567,438 for the three months ended October 31, 1999, an
increase of $107,962 or 19.0%. This increase was primarily attributable to
additional professional fees and payroll related expenses incurred during the
three months ended October 31, 2000.
Other income (expense). Other income (expense) was $(903,620) for the
three months ended October 31, 2000 compared with $(62,499) for the three months
ended October 31, 1999, a change of $841,121. The change in other income
(expense) was due primarily to increased interest costs and amortization of
discounts of $740,000 associated with the issuance of debt and an increase of
$100,000 related to the settlement of litigation, which was recorded during the
three months ended October 31, 2000.
25
<PAGE>
Income tax. Due to the availability of net operating loss carryforwards
($5.6 million and $8.0 million at July 31, 2000 and July 31, 1999,
respectively), the Company did not incur any additional income tax expense
during the three months ended October 31, 2000 and 1999. The ability to use
such net operating loss carryforwards, which expire in the years 2010 to 2018,
may be significantly limited by the application of the "change in ownership"
rules under Section 382 of the Internal Revenue Code. The Company can receive a
credit against any future tax payments due to the extent of prior alternative
minimum taxes paid.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception in
1992, has used cash in operations, and has had a deficit in working capital.
The Company presently lacks sufficient cash to pay the principal amounts of the
Notes due on December 15, 2000. The Company is currently negotiating with the
holders of the Notes to renew or extend the due date and is also pursuing other
financing alternatives. The failure of the Company to pay, renew or extend the
Notes may cause an event of default under the Notes. In addition, the Company
is involved in litigation, the outcome of which cannot be determined at the
present time. Although the Company has entered into the Settlement, significant
uncertainties exist related to the US - Mexico Pipelines and Matamoros Terminal
Facility (see note H to the unaudited consolidated financial statements). The
Company depends heavily on sales to one major customer. The Company's sources
of liquidity and capital resources historically have been provided by sales of
LPG, proceeds from the issuance of short-term and long-term debt, revolving
credit facilities and credit arrangements, sale or issuance of preferred and
common stock of the Company and proceeds from the exercise of warrants to
purchase shares of the Company's common stock.
The following summary table reflects comparative cash flows for the three
months ended October 31, 2000 and 1999. All information is in thousands.
<TABLE>
<CAPTION>
Three Months Ended
------------------
October 31, October 31
2000 1999
----------------- ---------------
<S> <C> <C>
Net cash provided by operating activities . . . . . $ 2,117 $ 237
Net cash used in investing activities . . . . . . . ( 1,017) ( 389)
Net cash (used in) provided by financing activities ( 574) 931
----------------- ---------------
Net increase in cash. . . . . . . . . . . . . . . . $ 526 $ 779
================= ===============
</TABLE>
New Agreement. The Company entered into a new sales agreement with PMI for
the period from April 1, 2000 through March 31, 2001 (the "New Agreement"), for
the annual sale of a minimum of 151.2 million gallons of LPG, mixed to PMI
specifications, subject to seasonal variability, to be delivered to PMI at the
Company's terminal facilities in Matamoros, Tamaulipas, Mexico and Saltillo,
Coahuila, Mexico.
On October 11, 2000, the New Agreement was amended to increase the minimum
amount of LPG to be purchased during the period from November 2000 through March
2001 by 7.5 million gallons resulting in a new annual minimum commitment of
158.7 million gallons.
The New Agreement, as amended, represents an increase of 130% over annual
minimum contract volumes under the previous sales agreement with PMI for the
period from April 1, 1999 through March 31, 2000. Actual sales volumes to PMI
during the period from April 1, 1999 through March 31, 2000, exceeded the
minimum contractual volumes by 95%. Under the terms of the New Agreement, sales
prices are indexed to variable posted prices. The New Agreement also provides
for higher fixed margins above the variable posted prices over the previous
sales agreements with PMI depending on the final delivery point of the LPG.
Sales to PMI totaled approximately $27.2 million for the three months ended
October 31, 2000, representing approximately 71.0% of total revenues for the
period.
26
<PAGE>
The New Agreement also provides for trucking of LPG from the Company's
Brownsville Terminal Facility to the Matamoros Terminal Facility (or designated
locations within the area) and from the Brownsville Terminal Facility or the
Matamoros Terminal Facility to the Saltillo Terminal Facility (or designated
locations within the area) in the event that (i) the Company is unable to
transport LPG through the US - Mexico Pipelines, (ii) the Saltillo Terminal
Facility or railcars to deliver LPG to the Saltillo Terminal Facility are not
utilized or (iii) until the Matamoros Terminal Facility or the Saltillo Terminal
Facility are fully operational. Under the terms of the New Agreement, in the
event that the US-Mexico Pipelines or railcars are not used, the sales price
received shall be reduced by the corresponding trucking charges. During April
2000, the Company began shipping LPG through the US - Mexico Pipelines. During
October 2000, approximately 78% of the LPG sold to PMI was delivered through
the US-Mexico Pipelines to the Matamoros Terminal Facility. As of October 31,
2000, the Saltillo Terminal Facility had not commenced operations.
As part of the volume requirements under the New Agreement, the Company has
committed to sell PMI 3.2 million gallons of propane at a sales price of
approximately $0.60 per gallon, to be delivered during December 2000 and
February 2001.
Historically, the Company and PMI have renewed the existing sales agreement
prior to its expiration. The Company intends to negotiate a renewal of the New
Agreement prior to its expiration.
LPG Supply Agreements. During October 1998, the Company entered into a
monthly supply agreement with Exxon Mobil Corporation ("Exxon") pursuant to
which Exxon agreed to supply minimum volumes of LPG to the Company. Effective
November 1, 1998, the Company entered into a supply agreement with Exxon to
purchase minimum monthly volumes of LPG through September 1999.
Effective October 1, 1999, the Company and Exxon entered into a ten year
LPG supply contract, as amended (the "Exxon Supply Contract"), whereby Exxon has
agreed to supply and the Company has agreed to take, 100% of Exxon's owned or
controlled volume of propane and butane available at Exxon's King Ranch Gas
Plant (the "Plant") up to 13.9 million gallons per month blended in accordance
with the specifications as outlined under the New Agreement (the "Plant
Commitment"). The purchase price is indexed to variable posted prices.
In addition, under the terms of the Exxon Supply Contract, Exxon made
operational its Corpus Christi Pipeline (the "ECCPL") during September 2000.
The ability to utilize the ECCPL allows the Company to acquire an additional
supply of propane from other propane suppliers located near Corpus Christi,
Texas (the "Additional Propane Supply"), and bring the Additional Propane Supply
to the Plant (the "ECCPL Supply") for blending to the proper specifications
outlined under the New Agreement and then delivered into the Leased Pipeline.
In connection with the ECCPL Supply, the Company has agreed to supply a minimum
of 7.7 million gallons into the ECCPL during the first quarter from the date
that the ECCPL is operational, approximately 92.0 million gallons the following
year and 122.0 million gallons each year thereafter and continuing for four
years. The Company is required to pay additional costs associated with the use
of the ECCPL.
In September 1999, the Company and PG&E NGL Marketing, L.P. ("PG&E")
entered into a three year supply agreement (the "PG&E Supply Agreement") whereby
PG&E has agreed to supply and the Company has agreed to take, a monthly average
of 2.5 million gallons of propane (the "PG&E Supply") beginning in October 1999.
The purchase price is indexed to variable posted prices.
Under the terms of the PG&E Supply Agreement, the PG&E Supply will be
delivered to either the Leased Pipeline or, in the future, the ECCPL (after PG&E
completes construction of an interconnection), and blended to the proper
specifications as outlined under the New Agreement.
In March 2000, the Company and Koch Hydrocarbon Company ("Koch") entered
into a three year supply agreement (the "Koch Supply Contract") whereby Koch has
agreed to supply and the Company has agreed to take, a monthly average of 8.2
million gallons (the "Koch Supply") of propane beginning April 1, 2000, subject
to the actual amounts of propane purchased by Koch from the refinery owned by
its affiliate, Koch Petroleum Group, L.P. The purchase price is indexed to
variable posted prices. Furthermore, the Company is required to pay additional
charges associated with the construction of a new pipeline interconnection to be
paid through additional adjustments to the purchase price (totaling
approximately $1.0 million) which allows deliveries of the Koch Supply into the
ECCPL.
In connection with the delivery of the Koch Supply, the Company did not
accept the Koch Supply because the ECCPL was not operational until September
2000. Accordingly, the Company arranged for the sale of the Koch Supply to
third parties (the "Unaccepted Koch Supply Sales"). The Company incurred
additional costs in connection with the disposal of the Unaccepted Koch Supply
Sales.
27
<PAGE>
Under the terms of the Koch Supply Contract, the Koch Supply will be
delivered into the ECCPL and blended to the proper specifications as outlined
under the New Agreement.
During March 2000, the Company and Duke Energy NGL Services, Inc. ("Duke")
entered into a three year supply agreement (the "Duke Supply Contract") whereby
Duke has agreed to supply and the Company has agreed to take, a monthly average
of 1.9 million gallons (the "Duke Supply") of propane or propane/butane mix,
beginning April 1, 2000. The purchase price is indexed to variable posted
prices.
Pursuant to the terms of the Duke Supply Contract, the Company paid a
minimal amount for modifications related to the interconnections necessary to
allow the Duke Supply to be delivered into the Pipeline facilities.
The delivery of the PG&E Supply or the Koch Supply will satisfy a portion
or all of the ECCPL Supply requirements under the Exxon Supply Contract.
The Company is currently purchasing LPG from the above-mentioned suppliers
(the "Suppliers") to meet the minimum monthly volumes required in the New
Agreement. The Company's costs to purchase LPG (less any applicable
adjustments) are below the sales prices provided for in the New Agreement.
The agreements with the Suppliers currently require that the Company
purchase a minimum supply of LPG, which is significantly higher than committed
sales volumes under the New Agreement.
The Company may incur significant additional costs associated with the
storage, disposal and/or changes in LPG prices resulting from the excess of the
Plant Commitment, PG&E Supply, Koch Supply or Duke Supply over actual sales
volumes. Under the terms of the Supply Contracts, the Company must provide
letters of credit in amounts equal to the cost of the product to be purchased.
In addition, the cost of the product purchased is tied directly to overall
market conditions. As a result, the Company's existing letter of credit facility
may not be adequate to meet the letter of credit requirements under the
agreements with the Suppliers or other suppliers due to increases in costs of
LPG or LPG volumes purchased by PMI. Upon the implementation of Deregulation,
the Company anticipates entering into contracts with Mexican distributors which
require payments in pesos. In addition, the Mexican distributors may be limited
in their ability to obtain adequate financing.
The ability of the Company to increase sales of LPG into Mexico in the
future is largely dependent on the Company's ability to negotiate future
contracts with PMI and/or with local Mexican distributors once Deregulation in
Mexico is implemented. In addition, there can be no assurance that the Company
will be able to obtain terms equal to or more favorable than those in the New
Agreement. In the event that the Company is unable to meet its intended LPG
sales objectives, then the Company may incur significant losses.
Furthermore, the Company currently utilizes the Brownsville Terminal
Facility and may be required to deliver a portion or all of the minimum monthly
volumes from the Brownsville Terminal Facility in the future. Historically,
sales of LPG from the Brownsville Terminal Facility have not exceeded 12.7
million gallons per month. In addition, breakdowns along the planned
distribution route for the LPG once purchased from the Suppliers, may limit the
ability of the Company to accept or deliver the Plant Commitment, the ECCPL
Supply, the PG&E Supply, the Koch Supply, and the Duke Supply.
As a result of the Exxon Supply Contract, the PG&E Supply Agreement, the
Koch Supply Contract and the Duke Supply Contract, the Company has an adequate
supply of LPG to satisfy the requirements of PMI under the New Agreement. Due to
the strategic location of the Company's pipelines and terminal facilities, the
Company believes that it will be able to enter into future sales agreements to
utilize the excess volumes committed to under the contracts with the Suppliers.
28
<PAGE>
Pipeline Lease. The Pipeline Lease currently expires on December 31,
2013, pursuant to an amendment (the "Pipeline Lease Amendment") entered into
between the Company and Seadrift on May 21, 1997, which became effective on
January 1, 1999 (the "Effective Date"). The Pipeline Lease Amendment provides,
among other things, for additional storage access and inter-connection with
another pipeline controlled by Seadrift, thereby providing greater access to and
from the Leased Pipeline. Pursuant to the Pipeline Lease Amendment, the
Company's fixed annual rent for the use of the Leased Pipeline was increased by
$350,000, less certain adjustments during the first two years from the Effective
Date, and the Company is required to pay a minimum charge for storage of
$300,000 per year, beginning January 1, 2000. In addition, the Pipeline Lease
Amendment provides for variable rental increases based on monthly volumes
purchased and flowing into the Leased Pipeline and storage utilized. The
Company believes that the Pipeline Lease Amendment provides the Company
increased flexibility in negotiating sales and supply agreements with its
customers and suppliers. The Company has made all payments required under the
Pipeline Lease Amendment.
Present Pipeline capacity is approximately 250 million gallons per year.
During the three months ended October 31, 2000, the Company sold approximately
40 million gallons of LPG, substantially all of which flowed through the Leased
Pipeline. The Company can increase the Leased Pipeline's capacity through the
installation of additional pumping equipment (see "Upgrades" below).
Upgrades. The Company has already contracted and intends to further
contract in the near future for design, construction and installation of several
projects which, when completed, will increase its current pipeline and storage
capacity, enhance its existing pipeline and terminal facilities or expand its
ability to accept or deliver LPG supply (the "Upgrades").
The Company is currently completing a mid-line pump station which will
include the installation of additional piping, meters, valves, analyzers and
pumps along the Leased Pipeline to increase the capacity of the Leased Pipeline
and make the Leased Pipeline bi-directional. The mid-line pump station will
increase the capacity of the Leased Pipeline to approximately 360 million
gallons per year. The total estimated cost to complete the project is
approximately $2.0 million of which approximately $1.6 million has been incurred
through October 31, 2000.
The Company has employed a firm to provide the engineering for the design,
installation and construction of pipelines which will connect the Brownsville
Terminal Facility to the water dock facilities at the Brownsville Ship Channel
and install additional storage capacity. The cost of this project is expected
to approximate $2.0 million.
Lease Agreements. In connection with the construction of the US-Mexico
Pipelines and the Matamoros Terminal Facility, the Company and CPSC
International, Inc. ("CPSC") entered into two separate Lease / Installation
Purchase Agreements, as amended, ("the Lease Agreements"), whereby CPSC was
required to construct and operate the US - Mexico Pipelines (including an
additional pipeline to accommodate Refined Products) and the Matamoros Terminal
Facility and lease these assets to the Company. Under the terms of the Lease
Agreements, the Company was required to pay monthly rentals of approximately
$157,000, beginning the date that the US - Mexico Pipelines and Matamoros
Terminal Facility are physically capable of transporting and receiving LPG in
accordance with technical specifications required (the "Substantial Completion
Date"). In addition, the Company agreed to provide a lien on certain assets,
leases and contracts which are currently pledged to RZB (Liens), which Liens
would require the consent of RZB, and provide CPSC with a letter of credit of
approximately $1.0 million. The Company also had the option to purchase the US -
Mexico Pipelines and Matamoros Terminal Facility at the end of the 10th year
anniversary and 15th year anniversary for $5.0 million and $100,000,
respectively. Under the terms of the Lease Agreements, CPSC was required to pay
all costs associated with the construction and maintenance of the US - Mexico
Pipeline and Matamoros Terminal Facility.
29
<PAGE>
During September 1999, December 1999 and February 2000, the Company and
CPSC amended the Lease Agreements whereby the Company agreed to acquire up to a
100% interest in the Lease Agreements which, as of July 31, 2000 the Company had
acquired a 50% interest pursuant to the December 1999 amendment. During February
2000, the Company determined that CPSC did not comply with certain obligations
under the Lease Agreements. In March 2000, CPSC filed for protection under
Chapter 11 of the United States Bankruptcy Code. Since that date, the Company
has also determined that CPSC did not comply with other obligations provided for
under the Lease Agreements. The Settlement would provide for 100% ownership of
the US - Mexico Pipelines and Matamoros Terminal Facility by the Company or its
affiliates and eliminate the requirement for the Liens. Until the Settlement is
completed, the Company will continue to record the remaining 50% portion of the
US - Mexico Pipelines and Matamoros Terminal Facility as a capital lease (see
notes D, F, H and K to the unaudited consolidated financial statements).
FOREIGN OWNERSHIP OF LPG OPERATIONS. PennMex, Tergas and Termatsal are
Mexican companies, which are owned 90%, 90% and 98%, respectively, by Jorge R.
Bracamontes, an officer and director of the Company ("Bracamontes") and the
balance by other Mexican citizens ("Minority Shareholders"). Under current
Mexican law (see "Deregulation of the LPG Market in Mexico" below), foreign
ownership of Mexican entities involved in the distribution of LPG or operation
of LPG terminal facilities is prohibited. Foreign ownership is permitted in the
transportation and storage of LPG. Mexican law also provides that a single
entity is not permitted to participate in more than one of the defined LPG
activities (transportation, storage or distribution).
During November 2000, the Company, Bracamontes and the Minority
Shareholders entered into agreements whereby the Company may acquire up to 100%
of the outstanding shares of PennMex and Termatsal for a nominal amount subject
to, among other things, the Settlement. Because the Company participates in one
of the defined LPG activities (see above), the Company intends to contract with
Tergas for services to be performed by Tergas at the Matamoros Terminal Facility
and the Saltillo Terminal Facility.
In connection with the construction of the Mexican Pipeline and the
Matamoros Terminal Facility, CPSC provided all payments and delivery of
equipment through Termatsal.
PennMex, Tergas or Termatsal (i) have entered into leases associated with
the Saltillo Terminal Facility, (ii) have been granted the permit for the
Mexican Pipeline, (iii) have been granted permits to operate the Matamoros
Terminal Facility and the Saltillo Terminal Facility, (iv) own, lease or intend
to obtain the land or rights of way used in the construction of the Mexican
Pipeline, Matamoros Terminal Facility and Saltillo Terminal Facility and (v) own
the assets comprising the Mexican Pipeline, Matamoros Terminal Facility and
Saltillo Terminal Facility, all of which were funded by the Company or CPSC (see
notes D and K to the unaudited consolidated financial statements). The portion
of funds which were advanced by the Company (totaling $3.8 million at October
31, 2000) to PennMex or Termatsal are included in property, plant and equipment.
Furthermore, the Company intends to fund PennMex or Termatsal for any additional
costs required in connection with the Mexican Pipeline, Matamoros Terminal
Facility and the Saltillo Terminal Facility.
During the three months ended October 31, 2000, the Company paid PennMex,
Tergas or Termatsal $140,000 for Mexico related expenses incurred by those
corporations on the Company's behalf. Such amounts have been expensed.
The operations of PennMex, Tergas and Termatsal are subject to the tax laws
of Mexico which, among other things, require that Mexican subsidiaries of
foreign entities comply with transfer pricing rules, the payment of income
and/or asset taxes, and possibly taxes on distributions in excess of earnings.
In addition, distributions to foreign corporations may be subject to withholding
taxes, including dividends and interest payments.
DEREGULATION OF THE LPG INDUSTRY IN MEXICO. The Mexican petroleum industry
is governed by the Ley Reglarmentaria del Art culo 27 Constitutional en el Ramo
del Petr leo (the Regulatory Law to Article 27 of the Constitution of Mexico
concerning Petroleum Affairs (the "Regulatory Law")), and Ley Org nica del Petr
leos Mexicanos y Organismos Subsidiarios (the Organic Law of Petr leos Mexicanos
and Subsidiary Entities (the "Organic Law")). Under Mexican law and related
regulations, PEMEX is entrusted with the central planning and the strategic
management of Mexico's petroleum industry, including importation, sales and
transportation of LPG. In carrying out this role, PEMEX controls pricing and
distribution of various petrochemical products, including LPG.
30
<PAGE>
Beginning in 1995, as part of a national privatization program, the
Regulatory Law was amended to permit private entities to transport, store and
distribute natural gas with the approval of the Ministry of Energy. As part of
this national privatization program, the Mexican Government is expected to
deregulate the LPG market ("Deregulation"). In June 1999, the Regulatory Law for
LPG was changed to permit foreign entities to participate without limitation in
the defined LPG activities related to transportation and storage. However,
foreign entities will be prohibited from participating in the distribution of
LPG in Mexico. Upon the completion of Deregulation, Mexican entities will be
able to import LPG into Mexico. Under Mexican law a single entity is not
permitted to participate in more than one of the defined LPG activities
(transportation, storage and distribution). The Company expects to sell LPG
directly to independent Mexican distributors as well as PMI. The Company
anticipates that the independent Mexican distributors will be required to obtain
authorization from the Mexican government for the importation of LPG upon
Deregulation prior to entering into contracts with the Company.
Pursuant to the New Agreement, upon Deregulation of the LPG market by the
Mexican government, the Company will have the right to renegotiate the New
Agreement. Depending on the outcome of any such renegotiations, the Company
expects to either (i) enter into contracts directly with independent Mexican LPG
distributors located in the northeast region of Mexico, or (ii) modify the terms
of the New Agreement to account for the effects of Deregulation.
Currently the Company sells LPG to PMI at its Brownsville Terminal Facility
or at the United States-Mexico border for LPG product destined for the Matamoros
Terminal Facility or the Saltillo Terminal Facility. Upon Deregulation, the
Company intends to sell to independent Mexican LPG distributors as well as to
PMI at its Brownsville Terminal Facility or at the United States-Mexico border.
Credit Arrangements. As of October 31, 2000, the Company has a $20.0
million credit facility with RZB Finance L.L.C. (RZB) for demand loans and
standby letters of credit (RZB Credit Facility) to finance the Company's
purchase of LPG. In connection with the RZB Credit Facility, RZB entered into a
participation agreement with Bayerische Hypo-und Vereinsbank Aktiengeselischaft,
New York Branch ("HVB"), whereby RZB and HVB will each participate up to $10.0
million toward the total credit facility. Under the RZB Credit Facility, the
Company pays a fee with respect to each letter of credit thereunder in an amount
equal to the greater of (i) $500, (ii) 2.5% of the maximum face amount of such
letter of credit, or (iii) such higher amount as may be agreed to between the
Company and RZB. Any amounts outstanding under the RZB Credit Facility shall
accrue interest at a rate equal to the rate announced by the Chase Manhattan
Bank as its prime rate plus 2.5%. Pursuant to the RZB Credit Facility, RZB has
sole and absolute discretion to terminate the RZB Credit Facility and to make
any loan or issue any letter of credit thereunder. RZB also has the right to
demand payment of any and all amounts outstanding under the RZB Credit Facility
at any time. In connection with the RZB Credit Facility, the Company granted a
mortgage, security interest and assignment in any and all of the Company's real
property, buildings, pipelines, fixtures and interests therein or relating
thereto, including, without limitation, the lease with the Brownsville
Navigation District of Cameron County for the land on which the Company's
Brownsville Terminal Facility is located, the Pipeline Lease, and in connection
therewith agreed to enter into leasehold deeds of trust, security agreements,
financing statements and assignments of rent, in forms satisfactory to RZB.
Under the RZB Credit Facility, the Company may not permit to exist any lien,
security interest, mortgage, charge or other encumbrance of any nature on any of
its properties or assets, except in favor of RZB, without the consent of RZB.
The Company's President, Chairman and Chief Executive Officer has
personally guaranteed all of the Company's payment obligations with respect to
the RZB Credit Facility.
In connection with the Company's purchases of LPG from Exxon Mobil
Corporation ("Exxon"), PG&E NGL Marketing, L.P. ("PG&E"), Duke Energy NGL
Services, Inc. ("Duke") and/or Koch Hydrocarbon Company ("Koch"), the Company
issues letters of credit on a monthly basis based on anticipated purchases.
31
<PAGE>
As of October 31, 2000, letters of credit established under the RZB Credit
Facility in favor of Exxon, PG&E, Duke and Koch for purchases of LPG totaled
$15.1 million of which $10.6 million was being used to secure unpaid purchases.
In addition, as of October 31, 2000, the Company had borrowed $3.0 million from
its revolving line of credit under the RZB Credit Facility for purchases of LPG.
In connection with these purchases, at October 31, 2000, the Company had unpaid
invoices due from PMI totaling $6.2 million, cash balances maintained in the RZB
Credit Facility collateral account of $385,361 and inventory held in storage of
$9.3 million (see note E to the unaudited consolidated financial statements).
Private Placements and Other Transactions. From December 10, 1999 through
January 18, 2000, and on February 2, 2000, the Company completed a series of
related transactions in connection with the private placement of $4.9 million
and $710,000, respectively, of subordinated notes (the "Notes") due the earlier
of December 15, 2000, or upon the receipt of proceeds by the Company from any
future debt or equity financing in excess of $2.3 million. Interest at 9% is due
on June 15, 2000, and December 15, 2000, (or the maturity date, if earlier). In
connection with the Notes, the Company granted the holders of the Notes,
warrants (the "Warrants") to purchase a total of 706,763 shares of common stock
of the Company at an exercise price of $4.00 per share, exercisable through
December 15, 2002. The Company was also required to register the shares issuable
in connection with exercise of the Warrants on July 15, 2000, subject to certain
conditions (see note G to the unaudited consolidated financial statements).
Net proceeds from the Notes were used for the purchase of the 50% interest
in the US - Mexico Pipelines and Matamoros Terminal Facility (see notes D, F and
I to the unaudited consolidated financial statements) and for working capital
purposes.
Under the terms of the Notes, the Company has agreed to pledge the
Company's owned interest (50%) in the US - Mexico Pipelines and the Matamoros
Terminal Facility. RZB has consented to subordinate its senior interest in these
assets in connection with the Notes.
The Company presently lacks sufficient cash to pay the principal amounts of
the Notes due on December 15, 2000. The Company is currently negotiating with
the holders of the Notes to renew or extend the due date. In addition, the
Company is pursuing other financing alternatives. The failure of the Company to
pay, renew or extend the Notes may cause an event of default under the Notes.
During August 2000 and September 2000, the Company issued 12,500 shares and
100,000 shares of common stock of the Company, respectively, in connection with
the settlement of litigation.
In August 2000 the Company issued 6,500 shares of Common Stock to a
consultant in payment for services rendered to the Company valued at $41,438.
During September 2000, a director and officer of the Company exercised
warrants to purchase 200,000 shares of common stock of the Company at an
exercise price of $2.50 per share. The consideration for the exercise of the
warrants included $2,000 in cash and a $498,000 promissory note. The principal
amount of the note plus accrued interest at an annual rate of 10.5% is due on
April 30, 2001. The director and officer of the Company is personally liable
with full recourse to the Company and has provided 60,809 shares of common stock
of the Company as collateral. The promissory note has been recorded as a
reduction of stockholders' equity during the quarter ending October 31, 2000.
Interest on the promissory note will be recorded when the cash is received.
During October 2000, warrants to purchase a total of 7,500 shares of common
stock of the Company were exercised, resulting in cash proceeds to the Company
of $11,250.
During November 2000, warrants to purchase a total of 200,000 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $602,500.
In November 2000, the Company issued 4,716 shares of common stock to a
consultant in payment for services rendered to the Company valued at $23,583.
32
<PAGE>
During November 2000, the Company agreed to reduce the exercise price from
$2.50 to $2.00 per share for warrants to purchase 500,000 shares of common stock
of the Company as an inducement for the holder of the warrants to exercise the
warrants. The consideration for the exercise of the warrants included $5,000 in
cash and a $995,000 promissory note. The principal amount of the note plus
accrued interest at an annual rate of 10.5% is due on April 30, 2001. The
holder of the note is liable with full recourse to the Company and has provided
500,000 shares of common stock of the Company as collateral.
As a bonus to a director and officer of the Company, during November 2000,
the Company granted warrants to purchase 200,000 shares of common stock of the
Company at an exercise price of $7.00 per share exercisable for five years. The
exercise price per share of the warrants was equal to or greater than the quoted
market price per share at the measurement date. Based on the provisions of APB
25, no compensation expense will be recorded for these bonus warrants.
In connection with previous warrants issued by the Company, certain of
these warrants contain a call provision whereby the Company has the right to
purchase the warrants for a nominal price if the holder of the warrants does not
elect to exercise the warrants within the call provision.
In connection with the issuance of shares and warrants by the Company (the
"Shares"), the Company has on numerous instances granted registration rights to
the holders of the Shares, including those shares which result from the exercise
of warrants (the "Registrable Securities"). The Company was obligated to
register the Registrable Securities even though the Registrable Securities have
been tradable under Rule 144. The registration rights agreements generally did
not contain provisions for damages if the Registration was not completed, except
for certain Shares required to be registered on December 1, 1999, whereby the
Company was required to pay a penalty of $80,000 in cash and/or common stock of
the Company based on the then current trading price of the common stock of the
Company. In connection with the requirements, the Company issued 11,977 shares
of its common stock. On July 14, 2000, the Company filed a registration
statement which included the Shares. The registration statement was subsequently
declared effective on October 6, 2000.
Settlement of Litigation. On February 24, 2000, litigation was filed in
the 357th Judicial District Court of Cameron County, Texas, against Cowboy
Pipeline Service Company, Inc. ("Cowboy"), CPSC International, Inc. ("CPSC") and
the Company (collectively referred to as the "Defendants") alleging that the
Defendants had illegally trespassed in connection with the construction of the
US Pipelines and seeking a temporary restraining order against the Defendants
from future use of the US Pipelines. On March 20, 2000, the Company acquired
the portion of the property which surrounds the area where the US Pipelines were
constructed for cash of $1.9 million, which was paid during April 2000, and debt
in the amount of $1.9 million. As a result, the litigation was dismissed. The
debt bears interest at 10% per annum, payable monthly in minimum installments of
$15,000 with a balloon payment due during April 2003. The liability of $1.9
million is included in capital lease obligations (see note F to the unaudited
consolidated financial statements).
On June 2, 2000, additional litigation was filed in the 138th Judicial
District Court of Cameron County, Texas, against Cowboy and the Company alleging
that Cowboy and the Company had illegally trespassed in connection with the
construction of the US Pipelines and seeking declaratory relief, including
damages, exemplary damages and injunctive relief preventing Cowboy and the
Company from utilizing the US Pipelines. On June 9, 2000, CPSC intervened and
removed the case to the Court. Subsequent to July 31, 2000, the litigation was
settled through a court ordered mediation by the Company agreeing to acquire
land for which substantially all of the costs will be offset against the balance
of the promissory note due to CPSC (see below). The Settlement is subject to
completion of the settlement documents.
33
<PAGE>
On June 19, 2000, the Company, CPSC, Cowboy and the Owner reached a
settlement (the "Settlement") whereby the Company has agreed to purchase the
remaining 50% interest in the assets associated with the Lease Agreements for
cash, two promissory notes, transfer of the property owned by the Company
purchased on March 20, 2000, referred to above, and warrants to acquire common
stock of the Company together with a release of all claims and proceeding
between them. The promissory notes are for $900,000 and $1,462,500 and both
bear interest at 9%. Principal and interest are payable monthly with the notes
due in three years. In addition, CPSC will assume the Company's debt issued in
connection with the acquisition of the property. On July 19, 2000, the
Settlement expired without the parties completing final documents as provided
for in the Settlement Agreement. During November 2000, the parties negotiated a
settlement of all disputes and have submitted a settlement agreement to the
Court for approval which as yet to be received. The accompanying consolidated
financial statements have been adjusted to reflect the Settlement. If the
Settlement is not finalized, the Company will continue to pursue its legal
remedies.
As a result of the aforementioned, the Company may incur additional costs
to complete the US - Mexico Pipelines and Matamoros Terminal Facility, the
amount of which cannot presently be determined.
In addition, there is no certainty that the Company will (i) acquire the
remaining 50% interest in the US - Mexico Pipelines and Matamoros Terminal
Facility, (ii) continue to utilize the US - Mexico Pipelines and Matamoros
Terminal Facility or (iii) realize its recorded investment in the Lease
Agreements or in the US - Mexico Pipelines and Matamoros Terminal Facility (see
note D to the unaudited consolidated financial statements).
In November, 2000 the Amwest litigation was settled in mediation whereby
PennWilson agreed to pay Schmidt $100,000 and Amwest agreed to pay Schmidt
$350,000. PennWilson and Penn Octane Corporation both gave and received mutual
general releases with exception only for unknown latent deficiencies as defined
in California Civil Procedure Code Section 337.15 and third party indemnity
claims for injury, death or property damage (see note H to the unaudited
consolidated financial statements).
Other Litigation. The Company and its subsidiaries are also involved with
other proceedings, lawsuits and claims. The Company is of the opinion that the
liabilities, if any, ultimately resulting from such proceedings, lawsuits and
claims should not materially affect its consolidated financial position.
Realization of Assets. The Company has had an accumulated deficit since
inception, has used cash in operations, and has had a deficit in working
capital. The Company presently lacks sufficient cash to pay the principal
amounts of the Notes due on December 15, 2000. The Company is currently
negotiating with the holders of the Notes to renew or extend the due date and is
also pursuing other financing alternatives. The failure of the Company to pay,
renew or extend the Notes may cause an event of default under the Notes (see
note F to the unaudited consolidated financial statements). In addition, the
Company entered into supply agreements for quantities of LPG substantially in
excess of minimum quantities under the New Agreement (see note M to the
unaudited consolidated financial statements)). Although the Company has entered
into the Settlement (see note H to the unaudited consolidated financial
statements)), significant uncertainties exist related to the US - Mexico
Pipelines and Matamoros Terminal Facility. As discussed in note A to the
unaudited consolidated financial statements, the Company has historically
depended heavily on sales to one major customer.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts as shown in the accompanying
unaudited consolidated balance sheet is dependent upon the Company's ability to
obtain additional financing, renew or extend the Notes referred to in the
preceding paragraph and to raise additional equity capital, complete the
transactions related to the US-Mexico Pipelines, Matamoros Terminal Facility and
the Saltillo Terminal Facility and the success of the Company's future
operations. The unaudited consolidated financial statements do not include any
adjustments related to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to (i) increase sales to its current
customers, (ii) increase its customer base upon deregulation of the LPG industry
in Mexico, (iii) extend the terms and capacity of the Pipeline Lease and the
Brownsville Terminal Facility, (iv) expand its product lines, (v) obtain
additional letters of credit financing, (vi) raise additional debt and/or equity
capital and (vii) resolve the uncertainties related to the US-Mexico Pipelines,
the Matamoros Facility and the Saltillo Terminal Facility.
At July 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $5.6 million. The ability to
utilize such net operating loss carryforwards may be significantly limited by
the application of the "change of ownership" rules under Section 382 of the
Internal Revenue Code.
34
<PAGE>
STATEMENT BY MANAGEMENT CONCERNING REVIEW OF INTERIM INFORMATION BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS.
The unaudited consolidated financial statements included in this filing on
Form 10-Q have been reviewed by Burton McCumber & Cortez, L.L.P., independent
certified public accountants, in accordance with established professional
standards and procedures for such review. The report of Burton McCumber &
Cortez, L.L.P. commenting upon their review accompanies the consolidated
financial statements included in Item 1 of Part I.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
To the extent that the Company maintains quantities of LPG inventory, the
Company is exposed to market risk related to the volatility of LPG prices.
During periods of falling LPG prices, the Company may sell excess inventory to
customers to reduce the risk of these price fluctuations.
As part of the volume requirements under the New Agreement, the Company has
committed to sell PMI 3.2 million gallons of propane at a sales price of
approximately $0.60 per gallon, to be delivered during December 2000 and
February 2001.
If the cost of the 3.2 million gallons of propane increases by 25% from the
cost of propane at October 31, 2000 during the period from December 31, 2000
through February 2001, the Company would realize a loss of approximately
$480,000 upon the sale of the propane based on this commitment.
35
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note H to the unaudited consolidated financial statements and Note
M to the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note G to the unaudited consolidated financial statements and Note
K to the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 2000 for information concerning certain sales of
Securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. Exhibits and Financial Statement Schedules
THE FOLLOWING EXHIBITS ARE INCORPORATED HEREIN BY REFERENCE:
Exhibit No.
------------
10.150 Promissory Note and Pledge and Security Agreement dated September
10, 2000, between Ian Bothwell and the Registrant. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended July 31, 2000, filed on November 14, 2000, SEC File No.
000-24394).
10.151 Promissory Share Transfer Agreement to purchase shares of Termatsal,
S.A. de C.V. dated November 13, 2000, between Jorge Bracamontes and
the Company (Translation from Spanish). (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended July 31,
2000, filed on November 14, 2000, SEC File No. 000-24394).
10.152 Promissory Share Transfer Agreement to purchase shares of Termatsal,
S.A. de C.V. dated November 13, 2000, between Pedro Prado and the
Company (Translation from Spanish). (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 2000,
filed on November 14, 2000, SEC File No. 000-24394).
10.153 Promissory Share Transfer Agreement to purchase shares of Termatsal,
S.A. de C.V. dated November 13, 2000, between Pedro Prado and Penn
Octane International, L.L.C. (Translation from Spanish). (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended July 31, 2000, filed on November 14, 2000, SEC File No.
000-24394).
10.154 Promissory Share Transfer Agreement to purchase shares of Penn
Octane de Mexico, S.A. de C.V. dated November 13, 2000, between Jorge
Bracamontes and the Company (Translation from Spanish). (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended July 31, 2000, filed on November 14, 2000, SEC File No.
000-24394).
10.155 Promissory Share Transfer Agreement to purchase shares of Penn
Octane de Mexico, S.A. de C.V. dated November 13, 2000, between Juan
Jose Navarro Plascencia and the Company (Translation from Spanish).
(Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended July 31, 2000, filed on November 14, 2000, SEC File
No. 000-24394).
36
<PAGE>
10.156 Promissory Share Transfer Agreement to purchase shares of Penn
Octane de Mexico, S.A. de C.V. dated November 13, 2000, between Juan
Jose Navarro Plascencia and Penn Octane International, L.L.C.
(Translation from Spanish). (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended July 31, 2000,
filed on November 14, 2000, SEC File No. 000-24394).
The following Exhibits are filed as part of this report:
10.157 Promissory Note and Pledge and Security Agreement dated November 30,
2000, between Western Wood Equipment Corporation and the Registrant.
27.1 Financial Data Schedule.
b. Reports on Form 8-K
None.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
PENN OCTANE CORPORATION
December 12, 2000 By: /s/ Ian T. Bothwell
---------------------------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant
Secretary, Chief Financial Officer
38
<PAGE>
