UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission file number: 000-24394
PENN OCTANE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1790357
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
77-530 ENFIELD LANE, BLDG. D, PALM DESERT, CALIFORNIA 92211
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (760) 772-9080
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of Common Stock, par value $.01 per share, outstanding
on May 31, 2002 was 14,857,694.
PENN OCTANE CORPORATION
TABLE OF CONTENTS
ITEM PAGE NO.
---- --------
Part I 1. Financial Statements
Independent Certified Public Accountants' Review Report 3
Consolidated Balance Sheets as of April 30, 2002 (unaudited) 4-5
and July 31, 2001
Unaudited Consolidated Statements of Operations for the three months
and nine months ended April 30, 2002 and 2001 6
Unaudited Consolidated Statement of Stockholders' Equity for the nine
months ended April 30, 2002 7
Unaudited Consolidated Statements of Cash Flows for the nine months
ended April 30, 2002 and 2001 8
Notes to Unaudited Consolidated Financial Statements 9-17
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-27
3. Quantitative and Qualitative Disclosures About Market Risk 27
Part II 1. Legal Proceedings 28
2. Changes in Securities and Use of Proceeds 28
3. Defaults Upon Senior Securities 28
4. Submission of Matters to a Vote of Security Holders 28-29
5. Other Information 29
6. Exhibits and Reports on Form 8-K 29
7. Signatures 30
2
Independent Certified Public Accountants' Review Report
Board of Directors and Shareholders
Penn Octane Corporation
We have reviewed the accompanying consolidated balance sheets of Penn Octane
Corporation and subsidiaries (Company) as of April 30, 2002, the related
consolidated statements of operations for the three months and nine months ended
April 30, 2002, the consolidated statement of stockholders' equity for the nine
months ended April 30, 2002 and the consolidated statements of cash flows for
the nine months ended April 30, 2002 and 2001. 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 auditing standards generally accepted in the United States of
America, 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 accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
July 31, 2001, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated October 12, 2001, 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, 2001, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ BURTON MCCUMBER & CORTEZ, L.L.P.
Brownsville, Texas
June 7, 2002
3
PART I
ITEM 1.
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
April 30, July 31,
2002 2001
(Unaudited)
------------ -----------
Current Assets
Cash (including restricted cash of $1,590,998 and $971,875) $ 1,982,126 $ 1,322,560
Trade accounts receivable (less allowance for doubtful accounts of $0 and $779,663) 7,093,583 4,802,897
Notes receivable (including related parties' notes of $414,355 and $214,355) 614,355 439,053
Inventories 1,394,113 12,384,847
Prepaid expenses and other current assets 318,006 298,828
------------ -----------
Total current assets 11,402,183 19,248,185
Property, plant and equipment - net 18,339,252 18,260,384
Lease rights (net of accumulated amortization of $650,291 and $615,945) 503,748 538,094
Mortgage receivable 1,925,063 1,934,872
Other non-current assets 185,426 312,808
------------ -----------
Total assets $ 32,355,672 $40,294,343
============ ===========
The accompanying notes and accountants' report are an integral part of these statements.
4
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
April 30, July 31,
2002 2001
(Unaudited)
------------- -------------
Current Liabilities
Current maturities of long-term debt $ 979,248 $ 918,885
Short-term debt 3,083,749 5,650,430
LPG trade accounts payable 10,659,138 9,537,825
Obligation to deliver LPG - 10,942,817
Other accounts payable and accrued liabilities 4,886,445 4,867,870
------------- -------------
Total current liabilities 19,608,580 31,917,827
Long-term debt, less current maturities 2,753,480 3,273,969
Commitments and contingencies - -
Stockholders' Equity
Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized; - -
No shares issued and outstanding at April 30, 2002 and July 31, 2001
Series B - Senior preferred stock-$.01 par value, $10 liquidation value, - -
5,000,000 shares authorized; No shares issued and outstanding at April
30, 2002 and July 31, 2001
Common stock - $.01 par value, 25,000,000 shares authorized; 148,578 144,270
14,857,694 and 14,427,011 shares issued and outstanding at April 30,
2002 and July 31, 2001
Additional paid-in capital 26,941,737 25,833,822
Notes receivable from officers of the Company and a related party for (3,761,350) (3,761,350)
exercise of warrants, less reserve of $679,176 and $596,705 at April
30, 2002 and July 31, 2001
Accumulated deficit (13,335,353) (17,114,195)
------------- -------------
Total stockholders' equity 9,993,612 5,102,547
------------- -------------
Total liabilities and stockholders' equity $ 32,355,672 $ 40,294,343
============= =============
The accompanying notes and accountants' report are an integral part of these statements.
5
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine months Ended
-------------------------- ----------------------------
April 30, April 30, April 30, April 30,
2002 2001 2002 2001
------------ ------------ ------------- -------------
Revenues $45,482,202 $38,116,259 $110,251,749 $124,134,679
Cost of goods sold 39,328,681 37,838,026 101,210,101 122,223,000
------------ ------------ ------------- -------------
Gross profit 6,153,521 278,233 9,041,648 1,911,679
Selling, general and administrative expenses
Legal and professional fees 331,014 217,404 1,275,800 867,337
Salaries and payroll related expenses 434,705 295,897 1,103,636 871,878
Travel 41,916 53,107 141,161 153,560
Other 242,243 228,008 656,290 579,039
------------ ------------ ------------- -------------
1,049,878 794,416 3,176,887 2,471,814
------------ ------------ ------------- -------------
Operating income (loss) 5,103,643 (516,183) 5,864,761 (560,135)
Other income (expense)
Interest expense (420,673) (923,688) (2,064,663) (2,584,478)
Interest income (3,790) 8,728 25,438 31,019
Settlement of litigation - (34,000) - (148,173)
------------ ------------ ------------- -------------
Income (loss) before taxes 4,679,180 (1,465,143) 3,825,536 (3,261,767)
Provision for income taxes - net 100,000 9,641 46,694 9,641
------------ ------------ ------------- -------------
Net income (loss) $ 4,579,180 $(1,474,784) $ 3,778,842 $ (3,271,408)
============ ============ ============= =============
Net income (loss) per common share $ 0.31 $ (0.10) $ 0.26 $ (0.23)
============ ============ ============= =============
Net income (loss) per common share assuming dilution $ 0.30 $ (0.10) $ 0.25 $ (0.23)
============ ============ ============= =============
Weighted average common shares outstanding 14,857,694 14,410,842 14,766,428 14,057,336
============ ============ ============= =============
The accompanying notes and accountants' report are an integral part of these statements.
6
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED APRIL 30, 2002
(UNAUDITED)
ACCUMULATED
SENIOR ADDITIONAL STOCK- OTHER
PREFERRED PREFERRED COMMON PAID-IN HOLDERS' ACCUMULATED COMPREHENSIVE
STOCK STOCK STOCK CAPITAL NOTES DEFICIT LOSS
---------- ---------- -------- ----------- ------------ ------------- ---------------
Balance at July 31, 2001 $ - $ - $144,270 $25,833,822 $(3,761,350) $(17,114,195) $ -
Comprehensive income (loss)
Net income 3,778,842
Unrealized loss on
derivatives, net of tax as of
January 31, 2002 (192,694)
Realization of loss on
derivatives, net of tax as of
April 30, 2002 192,694
Total comprehensive income
Exercise of warrants 788 137,025
Exchange of debt for exercise of
warrants 3,135 611,698
Discount on extension of debt 207,283
Other 10 2,284
Stock issued as payment for
consulting services 375 149,625
---------- ---------- -------- ----------- ------------ ------------- ---------------
Balance at April 30, 2002 $ - $ - $148,578 $26,941,737 $(3,761,350) $(13,335,353) $ -
========== ========== ======== =========== ============ ============= ===============
TOTAL
------------
Balance at July 31, 2001 $ 5,102,547
Comprehensive income (loss)
Net income 3,778,842
Unrealized loss on
derivatives, net of tax (192,694)
Reclassification adjustment
for loss realized in net loss,
net of tax 192,694
------------
Total comprehensive income 3,778,842
Exercise of warrants 137,813
Exchange of debt for exercise of
warrants 614,833
Discount on extension of debt 207,283
Other 2,294
Stock issued as payment for
consulting services 150,000
------------
Balance at April 30, 2002 $ 9,993,612
============
The accompanying notes and accountants' report are an integral part of these statements.
7
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months Ended
---------------------------
April 30,
---------------------------
2002 2001
------------- ------------
Cash flows from operating activities:
Net income (loss) $ 3,778,842 $(3,271,408)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 608,561 577,983
Amortization of lease rights 34,346 34,346
Non-employee stock based costs 318,651 -
Loan discount 905,602 1,384,080
Other (7,785) 255,054
Changes in current assets and liabilities:
Trade accounts receivable (2,290,686) (9,140,768)
Inventories 10,990,734 187,965
Prepaid and other current assets (352,545) 32,062
LPG trade accounts payable 1,121,313 6,072,909
Obligation to deliver LPG (10,942,817) -
Other assets and liabilities, net 127,382 (6,250)
Other accounts payable and accrued liabilities 44,199 284,853
------------- ------------
Net cash provided by (used in) operating activities 4,335,797 (3,589,174)
Cash flows from investing activities:
Capital expenditures (687,429) (2,026,102)
------------- ------------
Net cash used in investing activities (687,429) (2,026,102)
Cash flows from financing activities:
Revolving credit facilities - 4,384,607
Issuance of common stock 137,813 1,439,329
Costs of registration (505) (83,674)
Issuance of debt 100,000 991,000
Debt issuance costs - (326,232)
Reduction in debt (3,226,110) (669,727)
------------- ------------
Net cash (used in) provided by financing activities (2,988,802) 5,735,303
------------- ------------
Net increase in cash 659,566 120,027
Cash at beginning of period 1,322,560 25,491
------------- ------------
Cash at end of period $ 1,982,126 $ 145,518
============= ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (including capitalized interest of $120,000 in 2001) $ 1,223,494 $ 1,240,983
============= ============
Supplemental disclosures of noncash transactions:
Preferred stock, common stock and warrants issued $ 974,915 $ 3,551,802
============= ============
Notes receivable exchanged for common stock $ - $ (555,661)
============= ============
Mortgage receivable $ - $ 1,925,596
============= ============
The accompanying notes and accountants' report are an integral part of these statements.
8
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). The Company owns and operates a
terminal facility on leased property in Brownsville, Texas (Brownsville
Terminal Facility) and owns a LPG terminal facility in Matamoros,
Tamaulipas, Mexico (Matamoros Terminal Facility) and pipelines (US - Mexico
Pipelines) which connect the Brownsville Terminal Facility to the Matamoros
Terminal Facility. The Company has a long-term lease agreement for
approximately 132 miles of pipeline (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 (ECCPL), which connects Exxon's Viola
valve station in Nueces County, Texas to the inlet of the King Ranch Gas
Plant as well as existing and other potential propane pipeline suppliers
which have the ability to access the ECCPL. In connection with the
Company's lease agreement for the Leased Pipeline, the Company may access
up to 21,000,000 gallons of storage located in Markham, Texas (Markham
Storage), as well as other potential propane pipeline exchange suppliers,
via approximately 155 miles of pipeline located between Markham, Texas and
the Exxon King Ranch Gas Plant. The Company also has up to 8,400,000
gallons of available storage in Mont Belvieu, Texas. 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
by PMI is generally destined for consumption 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. Since the
Company began operations, the primary customer for LPG has been PMI. Sales
of LPG to PMI accounted for approximately 82% of the Company's total
revenues for the nine months ended April 30, 2002.
BASIS OF PRESENTATION
-----------------------
The accompanying consolidated financial statements include the Company and
its United States subsidiaries, Penn Octane International, L.L.C.,
PennWilson CNG, Inc. (PennWilson) and Penn CNG Holdings, Inc. and
subsidiaries, its Mexican subsidiaries, Penn Octane de Mexico, S.A. de C.V.
(PennMex) and Termatsal, S.A. de C.V. (Termatsal) and its other inactive
Mexican subsidiaries, (collectively the Company). All significant
intercompany accounts and transactions have been eliminated.
The unaudited consolidated balance sheet as of April 30, 2002, the
unaudited consolidated statements of operations for the three months and
nine months ended April 30, 2002 and 2001, the unaudited consolidated
statement of stockholders' equity for the nine months ended April 30, 2002
and the unaudited consolidated statements of cash flows for the nine months
ended April 30, 2002 and 2001, 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 April 30, 2002, the unaudited
consolidated results of operations for the three months and nine months
ended April 30, 2002 and 2001, the unaudited consolidated statement of
stockholders' equity for the nine months ended April 30, 2002 and the
unaudited consolidated statements of cash flows for the nine months ended
April 30, 2002 and 2001.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America 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, 2001.
9
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION - CONTINUED
Certain reclassifications have been made to prior period balances to
conform to the current presentation. All reclassifications have been
consistently applied to the periods presented.
NOTE B - INCOME (LOSS) PER COMMON SHARE
Income (loss) per share of common stock is computed on the weighted average
number of shares outstanding. During periods in which the Company incurs
losses, giving effect to common stock equivalents is not presented as it
would be antidilutive.
The following tables present reconciliations from income (loss) per common
share to income (loss) per common share assuming dilution:
For the three months ended April 30, 2002 For the three months ended April 30, 2001
----------------------------------------- ------------------------------------------
Income (loss) Shares Per-Share Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ------------- ---------- -------------- ------------- -----------
Net income (loss) $ 4,579,180 - - $ (1,474,784) - -
BASIC EPS
Net income (loss) available to common
stockholders 4,579,180 14,857,694 $ 0.31 (1,474,784) 14,410,842 $ (0.10)
========== ===========
EFFECT OF DILUTIVE SECURITIES
Warrants - 399,144 - - N/A -
Convertible Preferred Stock - - - - N/A -
-------------- ------------- -------------- -------------
DILUTED EPS
Net income (loss) available to common
stockholders $ 4,579,180 15,256,838 $ 0.30 $ N/A N/A $ N/A
============== ============= ========== ============== ============= ===========
For the three months ended April 30, 2002 For the three months ended April 30, 2001
----------------------------------------- ------------------------------------------
Income (loss) Shares Per-Share Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ------------- ---------- -------------- ------------- -----------
Net income (loss) $ 3,778,842 - - $ (3,271,408) - -
BASIC EPS
Net income (loss) available to common
stockholders 3,778,842 14,766,428 $ 0.26 (3,271,408) 14,057,336 $ (0.23)
========== ===========
EFFECT OF DILUTIVE SECURITIES
Warrants - 314,533 - - N/A -
Convertible Preferred Stock - - - - N/A -
-------------- ------------- -------------- -------------
DILUTED EPS
Net income (loss) available to common
stockholders $ 3,778,842 15,080,961 $ 0.25 $ N/A N/A $ N/A
============== ============= ========== ============== ============= ===========
NOTE C - NOTES FROM RELATED PARTIES
As of April 30, 2002, the amounts due from notes issued to the Company by
certain officers, directors and a related party (Note Issuers) for the
exercise of warrants have not been paid as required by the terms of the
notes. All accrued but unpaid interest from officers, directors and a
related party has been reserved. During November 2001, the Company and the
Note Issuers agreed to exchange 36,717 shares of common stock of the
10
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company held by the Note Issuers for payment of all unpaid interest owing
to the Company through October 31, 2001 ($146,869). The Company will extend
the due date of the notes to October 31, 2003 when the common stock is
exchanged.
During January 2002, the Company received a note in the amount of $200,000
for a loan to the Company's president. The note bears interest at the prime
rate and the note plus accrued interest are due on April 30, 2003. The note
is collateralized by shares collateralizing another obligation of the
President to the Company.
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
April 30, July 31,
2002 2001
------------ ------------
LPG:
Brownsville Terminal Facility:
Building
Terminal facilities $ 173,500 $ 173,500
Tank Farm 3,631,207 3,631,207
Midline pump station 370,855 370,855
Leasehold improvements 2,449,628 2,293,121
Capital construction in progress 298,157 291,409
Equipment 96,212 67,002
496,249 469,545
------------ ------------
US - Mexico Pipelines and Matamoros Terminal 7,515,808 7,296,639
Facility:
U.S. Pipelines and Rights of Way
Mexico Pipelines and Rights of Way 6,322,703 6,245,614
Matamoros Terminal Facility 993,300 993,300
Saltillo Terminal Facility 5,074,087 5,078,336
Land 1,027,267 799,309
Total LPG 795,526 644,526
------------ ------------
Other: 21,728,691 21,057,724
------------ ------------
Automobile
Office equipment 10,800 10,800
72,728 56,266
------------ ------------
83,528 67,066
------------ ------------
Less: accumulated depreciation and amortization 21,812,219 21,124,790
(3,472,967) (2,864,406)
------------ ------------
$18,339,252 $18,260,384
============ ============
The above includes $6,848,134, and $6,738,746, net of accumulated
depreciation, of costs of property, plant and equipment located in Mexico
at April 30, 2002 and July 31, 2001, respectively.
NOTE E - DEBT OBLIGATIONS
SHORT-TERM DEBT
----------------
Restructuring of Notes
------------------------
During December 2000, the Company entered into agreements (Restructuring
Agreements) with the holders of $5,409,000 in principal amount of the
promissory notes (Notes) providing for the restructuring of such Notes
(Restructuring).
11
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Under the terms of the Restructuring Agreements, the due dates for the
restructured Notes (Restructured Notes) were extended to December 15, 2001
and were payable on December 17, 2001 (see below). Additionally, beginning
December 16, 2000, the annual interest rate on the Restructured Notes was
increased to 13.5% (subject to adjustment). Interest payments were due
quarterly beginning March 15, 2001.
Issuance of New Promissory Notes
------------------------------------
On January 31, 2001, the Company completed the placement of $991,000 in
principal amount of promissory notes (New Notes), which were due December
15, 2001, and were payable on December 17, 2001 (see below). The terms of
the New Notes are substantially the same as those contained in the
Restructured Notes issued in connection with the Restructuring described
above.
Payment on Restructured Notes
--------------------------------
During August 2001 and September 2001, warrants to purchase 313,433 shares
of common stock of the Company owned by certain holders of the Restructured
Notes were exercised. The exercise price was satisfied by the Company
reducing the outstanding debt and accrued interest due on the Restructured
Notes by $614,833.
Extension of Restructured Notes and New Notes
---------------------------------------------------
During December 2001, the Company and certain holders of the New Notes and
the Restructured Notes (Accepting Noteholders) reached an agreement whereby
the due date for $3,135,000 of principal due on the Accepting Noteholders'
Restructured Notes and/or New Notes was extended to June 15, 2002 (see note
K). In connection with the extension, the Company agreed to (i) continue
paying interest at a rate of 16.5% annually on the Accepting Noteholders'
Restructured Notes and/or New Notes, payable quarterly, (ii) pay the
Accepting Noteholders a fee equal to 1% of the Restructured Notes and/or
New Notes extended, (iii) modify the warrants held by the Accepting
Noteholders by extending the expiration date to December 14, 2004 and (iv)
remove the Company's repurchase rights with regard to the warrants.
In connection with the issuance of the Restructured Notes and New Notes,
the Company recorded a discount of $1,946,634, to be amortized over the
life of the Restructured Notes and New Notes. At April 30, 2002, the entire
discount has been amortized. Amortization of discounts totaling $749,570
related to the Restructured Notes and New Notes is included in the
unaudited consolidated statement of operations for the nine months ended
April 30, 2002.
In connection with the extension of the Accepting Noteholders' warrants,
the Company recorded a discount of $207,283, of which $156,032 has been
amortized as of April 30, 2002.
12
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - DEBT OBLIGATIONS - CONTINUED
Extension of Restructured Notes and New Notes - Continued
-----------------------------------------------------------------
The remaining principal amount of Restructured Notes and New Notes which
were not extended totaled approximately $2,676,000, plus accrued interest
and was paid during December 2001 and January 2002.
LONG-TERM DEBT
--------------
Long-term debt consists of the following:
April 30, July 31,
2002 2001
---------- ----------
Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility, due in monthly installments of $46,000 including
interest at 9% through February 2004 (CPSC Note); collateralized by the US portion of
the US - Mexico Pipelines $ 933,147 $1,263,634
Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility, due in monthly installments of $29,000 including
interest at 9% through March 2004; collateralized by the US portion of the US - Mexico
Pipelines 626,462 811,532
Promissory note issued in connection with the purchase of property, due in monthly
minimum installments of $15,000 or $.001 for each gallon that flows through the US
Pipelines including interest at 10% with a balloon payment due in April 2003 (Mortgage
Note) 1,925,063 1,934,872
Promissory note issued in connection with the purchase of property, due in annual
installments of $20,000 plus accrued interest at 7% through May 2007. 100,000 -
Unsecured noninterest-bearing note payable, discounted at 7%, for legal services; due in
February 2001 137,500 147,500
Other long-term debt 10,556 35,316
---------- ----------
3,732,728 4,192,854
Current maturities 979,248 918,885
---------- ----------
$2,753,480 $3,273,969
========== ==========
The Company's President is providing a personal guarantee for the punctual
payment and performance under the CPSC Note until collateral pledged in
connection with the note is perfected.
CPSC International, Inc. (CPSC) agreed to be responsible for payments
required by the Mortgage Note in connection with a settlement in March 2001
between CPSC and the Company. CPSC's obligations under the Mortgage Note
are to be paid by the Company to the extent that there are amounts owed by
the Company under the CPSC Note, through direct offsets by the Company
against the CPSC Note. After the CPSC Note is fully paid, the Company will
no longer have any payment obligation to CPSC in connection with the
Mortgage Note. Thereafter, CPSC will be fully responsible to the Company
for any remaining obligations in connection with the Mortgage Note
(Remaining Obligations). CPSC's obligations to the Company relating to the
Remaining Obligations are collateralized by a deed of trust lien granted by
CPSC in favor of the Company against the land pledged as collateral under
the Mortgage Note. The principal of $1,908,000 plus accrued and unpaid
interest is included in long-term debt and the corresponding amount
required to be paid by CPSC has been recorded as a mortgage receivable.
In connection with the note payable for legal services, the Company has not
made all of the required payments. The Company provided a "Stipulation of
Judgment" to the creditor in the event that the Company defaulted under a
settlement agreement.
13
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - 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 and September 2001, warrants to purchase 37,500 and 275,933
shares, respectively, of common stock of the Company owned by certain
holders of the Restructured Notes were exercised. The exercise price was
satisfied by reductions of debt obligations (see note E).
During November 2001, warrants to purchase a total of 78,750 shares of
common stock of the Company were exercised, resulting in cash proceeds to
the Company of $137,813.
STOCK AWARD PLAN (PLAN)
--------------------------
During September 2001, the Company issued 37,500 shares of common stock of
the Company pursuant to the Plan to a consultant in payment for services
rendered to the Company valued at $150,000.
STOCK WARRANTS
---------------
The Company applies APB 25 for warrants granted to the Company's employees
and to the Company's Board of Directors serving in the capacity as
directors and SFAS 123 for warrants issued to acquire goods and services
from non-employees.
In connection with warrants previously 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 during the call provision period.
BOARD COMPENSATION PLAN (BOARD PLAN)
In connection with the Board Plan, during August 2001 the Board granted
warrants to purchase 10,000 and 20,000 shares of common stock of the
Company at exercise prices of $3.99 and $4.05 per share to outside
directors. Based on the provisions of APB 25, no compensation expense was
recorded for these warrants.
In connection with the Board Plan, during November 2001 the Board granted
warrants to purchase 30,000 shares of common stock of the Company at
exercise prices of $3.66 per share to a newly appointed outside director.
Based on the provisions of APB 25, no compensation expense was recorded for
these warrants.
14
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - COMMITMENTS AND CONTINGENCIES
LITIGATION
On March 2, 2000, litigation was filed in the Superior Court of California,
County of San Bernardino by Omnitrans against Penn Octane Corporation, Penn
Wilson and several other third parties alleging breach of contract, fraud
and other causes of action related to the construction of a refueling
station by a third party. Penn Octane Corporation and PennWilson have been
dismissed from the litigation pursuant to summary judgments.
On July 10, 2001, litigation was filed in the 164th Judicial District Court
of Harris County, Texas by Jorge V. Duran, a former chairman of the board,
and Ware, Snow, Fogel & Jackson L.L.P. against the Company alleging breach
of contract, common law fraud and statutory fraud in connection with the
settlement agreement between the parties dated July 26, 2000. Plaintiffs
seek actual and punitive damages. The Company believes the claims are
without merit and intends to vigorously defend against the lawsuit.
On August 7, 2001, a Mexican company, Intertek Testing Services de Mexico,
S.A. de C.V. (Plaintiff), which contracts with PMI for LPG testing
services, filed suit in the Superior Court of California, County of San
Mateo against the Company alleging breach of contract. The Company has no
contract with the Plaintiff and, therefore, believes that the complaint is
without merit and intends to vigorously defend against the lawsuit.
The Company and its subsidiaries are also involved with other proceedings,
lawsuits and claims. The Company believes that the liabilities, if any,
ultimately resulting from such proceedings, lawsuits and claims should not
materially affect its consolidated financial statements.
CREDIT FACILITY, LETTERS OF CREDIT AND OTHER
As of April 30, 2002, the Company has a $20,000,000 credit facility with
RZB Finance L.L.C. (RZB) and 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 for demand
loans and standby letters of credit (RZB Credit Facility) to finance the
Company's purchases of LPG. Under the RZB Credit Facility, the Company pays
a fee with respect to each letter of credit thereunder in an amount equal
to the greater of (i) $500, (ii) 2.5% of the maximum face amount of such
letter of credit, or (iii) such higher amount as may be agreed to between
the Company and RZB. Any amounts outstanding under the RZB Credit Facility
shall accrue interest at a rate equal to the rate announced by the JPMorgan
Chase Bank as its prime rate plus 2.5%. Pursuant to the RZB Credit
Facility, RZB and HVB each have sole and absolute discretion to limit or
terminate their participation in 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 security interest and assignment in any and all of the
Company's accounts (including cash of $1,590,998 at April 30, 2002),
inventory, real property, buildings, pipelines, fixtures and interests
therein or relating thereto, including, without limitation, the lease with
the Brownsville Navigation District of Cameron County (District) 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 subsequent 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.
HVB has not participated in the RZB Credit Facility since September 2001,
effectively reducing the Company's credit facility to $10,000,000.
15
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - 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, El Paso NGL
Marketing Company, L.P. (El Paso), Duke Energy NGL Services, Inc. (Duke)
and/or Koch Hydrocarbon Company (Koch), letters of credit are issued on a
monthly basis based on anticipated purchases.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
include cash balances at banks which at times exceed the federal deposit
insurance.
NOTE H - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America, 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 continues to have a deficit in working capital.
In addition, significantly all of the Company's assets are pledged or
committed to be pledged as collateral on existing debt in connection with
the Restructured Notes, the New Notes, the RZB Credit Facility and the
notes related to the Settlement. The Restructured Notes and the New Notes
total $3,135,000 at April 30, 2002 (see note K). In addition, the Company
entered into supply agreements for quantities of LPG totaling 26,500,000
gallons per month (actual deliveries have been approximately 22,400,000
gallons for the three months ended April 30, 2002) although the new sales
agreement with PMI provides for lesser quantities (see note I). As
discussed in note A, the Company has historically depended heavily on sales
to PMI.
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 sheets is dependent upon the Company's
ability to obtain additional financing, repay, renew or extend the
Restructured Notes and the New Notes referred to in the preceding paragraph
and to raise additional equity capital, resolve uncertainties related to
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 assuming deregulation of
the LPG industry in Mexico, (iii) extend the terms of the Pipeline Lease
and the Brownsville Lease, (iv) expand its product lines, (v) obtain
additional letters of credit financing, (vi) raise additional debt and/or
equity capital, (vii) increase the current credit facility and (viii)
relocate the Saltillo Terminal Facility to another location in or near
Saltillo, Coahuila, Mexico.
At July 31, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $12,000,000. The ability to
utilize such net operating loss carryforwards may be significantly limited
by the application of the "change of ownership" rules under Section 382 of
the Internal Revenue Code.
16
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I- CONTRACTS
LPG SALES TO PMI
Upon the expiration of the Old Agreements, PMI confirmed to the Company in
writing (Confirmation) on April 26, 2001, the following terms of a new
agreement (Proposed Agreement) effective April 1, 2001, subject to
revisions to be provided by PMI's legal department. The Confirmation
provided for minimum monthly volumes of 19,000,000 gallons at indexed
variable posted prices plus premiums that provided the Company with annual
fixed margins, which were to increase annually over a three year period.
The Company was also entitled to receive additional fees for any volumes
which were undelivered. From April 1, 2001 through December 31, 2001, the
Company and PMI operated under the terms provided for in the Confirmation
for which a total of approximately 36,224,000 gallons were undelivered
(recorded as obligation to deliver LPG). During January 1, 2002 through
February 28, 2002, PMI purchased monthly volumes of approximately
17,000,000 gallons per month at slightly higher premiums than those
specified in the Confirmation.
Effective March 1, 2002, the Company and PMI entered into a contract for
the minimum monthly sale of 17,000,000 gallons of LPG, subject to monthly
adjustments based on seasonality (Contract). The Contract expires on May
31, 2004, except that the Contract may be terminated by either party on or
after May 31, 2003 upon 90 days written notice, or upon a change of
circumstances as defined under the Contract.
In connection with the Contract, the parties also executed a settlement
agreement (Settlement Agreement), whereby the parties released each other
in connection with all disputes between the parties arising during the
period April 1, 2001 through February 28, 2002, and previous claims related
to the contract for the period April 1, 2000 through March 31, 2001.
In addition to the amounts described above, during the month of January
2002 and for the period from February 1, 2002 through March 31, 2002, the
Company delivered to PMI the remaining portion of the obligation to deliver
LPG (3,906,000 gallons and 32,318,000 gallons, respectively).
NOTE J - INCOME TAX
During the nine months ended April 30, 2002, the Company recorded a
provision for income taxes of $100,000 (which was partially offset by a
refund previously received), representing alternative minimum tax due. Due
to the availability of net operating loss carryforwards (approximately
$12,000,000 at July 31, 2001), the Company did not incur any additional
income tax expense during the three months ended April 30, 2002. The
Company can receive a credit against, any future tax payments due to the
extent of any prior alternative minimum taxes paid.
NOTE K- SUBSEQUENT EVENT - UNAUDITED
Extension of Restructured Notes and New Notes
During June 2002, the Company and certain holders of the New Notes and the
Restructured Notes (New Accepting Noteholders) reached an agreement whereby
the due date for approximately $2,985,000 of principal due on the New
Accepting Noteholders' Restructured Notes and/or New Notes were extended to
December 15, 2002. The Company has the option to pay the notes or a portion
thereof on a pro rata basis, on August 15, 2002 and October 15, 2002. The
New Accepting Noteholders' Restructured Notes and/or New Notes will
continue to bear interest at 16.5% per annum. Interest is payable on the
outstanding balances on July 1, 2002 (previously June 15, 2002), August 15,
2002, October 15, 2002 and December 15, 2002. The Company also agreed to
pay a fee of 1.5% on the principal amount of the New Accepting Noteholders'
Restructured Notes and/or New Notes, due July 1, 2002. The principal amount
of the Restructured Notes and/or New Notes which were not extended is due
on June 15, 2002.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
liquidity and capital resources should be read in conjunction with the unaudited
consolidated financial statements of the Company and related notes thereto
appearing elsewhere herein.
FORWARD-LOOKING STATEMENTS
The statements contained in this Report that are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933. These forward-looking statements may be identified by the use of
forward-looking terms such as "believes," "expects," "may," "will", "should" or
anticipates" or by discussions of strategy that involve risks and uncertainties.
From time to time, we have made or may make forward-looking statements, orally
or in writing. These forward-looking statements include statements regarding
anticipated future revenues, sales, LPG supply, operations, demand, competition,
capital expenditures, the deregulation of the LPG market in Mexico, the
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 involve predictions which are based upon a number of future conditions that
ultimately may prove to be inaccurate. Actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that may cause or contribute to
such differences include those discussed under Part I of the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 2001, as well as those
discussed elsewhere in this Report. 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 for distribution into northeastern Mexico. In connection with
the Company's desire to reduce quantities of inventory, the Company also sells
LPG to U.S. and Canadian customers.
During the nine months ended April 30, 2002, the Company derived 82% 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. 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 or
disposing of excess inventories.
18
LPG SALES
The following table shows the Company's volume sold and delivered in
gallons and average sales price for the three and nine months ended April 30,
2002 and 2001.
Three months ended April 30, Nine months ended April 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- ---------------
Volume Sold and Delivered
LPG (millions of gallons) - PMI 85.1 41.3 193.0 131.3
LPG (millions of gallons) - Other 14.3 16.3 55.7 50.0
--------------- --------------- -------------- ---------------
99.4 57.6 248.7 181.3
=============== =============== ============== ===============
Average sales price
LPG (per gallon) - PMI $ 0.48 $ 0.71 $ 0.47 $ 0.73
LPG (per gallon) - Other 0.36 0.53 0.36 0.58
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2002 COMPARED WITH THREE MONTHS ENDED APRIL 30,
2001
Revenues. Revenues for the three months ended April 30, 2002, were $45.5
million, including $15.3 million (32.3 million gallons) related to the delivery
during the quarter of LPG associated with the obligation to deliver, compared
with $38.1 million for the three months ended April 30, 2001, an increase of
$7.4 million or 19.3%. This increase was attributable to increases of $20.8
million associated with increased volumes of LPG sold to PMI during the three
months ended April 30, 2002, partially offset by decreases of $9.9 million
attributable to decreases in average sales prices of LPG sold to PMI during the
three months ended April 30, 2002, $2.8 million attributable to decreased
average sales prices of LPG sold to customers other than PMI during the three
months ended April 30, 2002 in connection with the Company's desire to reduce
quantities of inventory and $732,654 attributable to decreased volumes of LPG
sold to customers other than PMI during the three months ended April 30, 2002.
Cost of goods sold. Cost of goods sold for the three months ended April 30,
2002, was $39.3 million compared with $37.8 million for the three months ended
April 30, 2001, an increase of $1.5 million or 3.9%. Of this increase, $17.7
million was attributable to increased volume of LPG sold to PMI during the three
months ended April 30, 2002 and $1.0 million was attributable to net increases
in other operating costs associated with LPG during the three months ended April
30, 2002, partially offset by $10.0 million attributable to decreases in the
cost of LPG sold to PMI during the three months ended April 30, 2002, $6.9
million attributable to the decreased costs of LPG sold to customers other than
PMI in connection with the Company's desire to reduce quantities of inventory
during the three months ended April 30, 2002 and $380,730 attributable to
decreased volume of LPG sold to customers other than PMI during the three months
ended April 30, 2002.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.0 million for the three months ended April 30,
2002, compared with $794,416 for the three months ended April 30, 2001, an
increase of $255,462 or 32.2%. The increase during the three months ended
April 30, 2002, was principally due to increased salary costs and professional
fees.
Other income (expense). Other income (expense) was $(424,463) for the
three months ended April 30, 2002, compared with $(948,960) for the three months
ended April 30, 2001, a decrease of $524,497. The decrease in other expense was
due primarily to decreased interest costs and amortization of discounts on
outstanding debt during the three months ended April 30, 2002.
19
Income tax. During the three months ended April 30, 2002, the Company
recorded a provision for income taxes of $100,000, representing alternative
minimum tax due. Due to the availability of net operating loss carryforwards
(approximately $12.0 million at July 31, 2001), the Company did not incur any
additional income tax expense during the three months ended April 30, 2002. The
Company can receive a credit against, any future tax payments due to the extent
of any prior alternative minimum taxes paid.
NINE MONTHS ENDED APRIL 30, 2002 COMPARED WITH NINE MONTHS ENDED APRIL 30, 2001
Revenues. Revenues for the nine months ended April 30, 2002, were $110.3
million, including $22.0 million (39.6 million gallons) related to the delivery
during the period December 2001 through April 2002 of LPG associated with the
obligation to deliver, compared with $124.1 million for the nine months ended
April 30, 2001, a decrease of $13.9 million or 11.2%. Of this decrease, $33.6
million was attributable to decreases in average sales prices of LPG sold to PMI
during the nine months ended April 30, 2002, and $11.1 million was attributable
to decreased average sales prices of LPG sold to customers other than PMI during
the nine months ended April 30, 2002, in connection with the Company's desire to
reduce quantities of inventory, partially offset by increases of $28.9 million
attributable to increased volumes of LPG sold to PMI and $2.0 million
attributable to increased volumes of LPG sold to customers other than PMI during
the nine months ended April 30, 2002.
Cost of goods sold. Cost of goods sold for the nine months ended April 30,
2002, was $101.2 million compared with $122.2 million for the nine months ended
April 30, 2001, a decrease of $21.0 million or 17.2%. Of this decrease, $37.7
million was attributable to decreases in the cost of LPG sold to PMI during the
nine months ended April 30, 2002, $10.1 million was attributable to the
decreased costs of LPG sold to customers other than PMI in connection with the
Company's desire to reduce quantities of inventory during the nine months ended
April 30, 2002, partially offset by increases of $23.5 million attributable to
increased volume of LPG sold to PMI during the nine months ended April 30, 2002,
$2.4 million attributable to increased volume of LPG sold to customers other
than PMI during the nine months ended April 30, 2002, and $937,467 attributable
to net increases in other operating costs associated with LPG during the nine
months ended April 30, 2002.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $3.2 million for the nine months ended April 30,
2002, compared with $2.5 million for the nine months ended April 30, 2001, an
increase of $705,073 or 28.5%. The increase during the nine months ended April
30, 2002, was principally due to nonrecurring legal and consulting fees and
salary increases.
Other income (expense). Other income (expense) was $(2.0) million for the
nine months ended April 30, 2002, compared with $(2.7) million for the nine
months ended April 30, 2001, a decrease of $662,407. The decrease in other
expense was due primarily to decreased interest costs and amortization of
discounts on outstanding debt during the nine months ended April 30, 2002.
Income tax. During the nine months ended April 30, 2002, the Company
recorded a provision for income taxes of $100,000 (which was partially offset by
a refund previously received), representing alternative minimum tax due. Due to
the availability of net operating loss carryforwards (approximately $12.0
million at July 31, 2001), the Company did not incur any additional income tax
expense during the three months ended April 30, 2002. The Company can receive a
credit against, any future tax payments due to the extent of any prior
alternative minimum taxes paid.
20
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception,
has used cash in operations and continues to have a deficit in working capital.
In addition, significantly all of the Company's assets are pledged or committed
to be pledged as collateral on existing debt in connection with the Restructured
Notes, the New Notes, the RZB Credit Facility and the notes related to the
Settlement. The Restructured Notes and the New Notes total approximately $3.1
million at April 30, 2002 (SEE PRIVATE PLACEMENTS AND OTHER TRANSACTIONS
BELOW). The Company may need to increase its credit facility for increases in
quantities of LPG purchased and/or to finance future price increases of LPG. 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 nine
months ended April 30, 2002 and 2001. All information is in thousands.
APRIL 30, APRIL 30,
2002 2001
----------- -----------
Net cash provided by (used in) operating activities $ 4,336 $ (3,589)
Net cash used in investing activities . . . . . . . (687) (2,026)
Net cash provided by (used in) financing activities (2,989) 5,735
----------- -----------
Net increase in cash. . . . . . . . . . . . . . . . $ 660 $ 120
=========== ===========
Sales to PMI. Upon the expiration of the Old Agreements, PMI confirmed to
the Company in writing (the "Confirmation") on April 26, 2001, the following
terms of a new agreement (the "Proposed Agreement") effective April 1, 2001,
subject to revisions to be provided by PMI's legal department. The Confirmation
provided for minimum monthly volumes of 19.0 million gallons at indexed variable
posted prices plus premiums that provided the Company with annual fixed margins,
which were to increase annually over a three year period. The Company was also
entitled to receive additional fees for any volumes which were undelivered.
From April 1, 2001 through December 31, 2001, the Company and PMI operated under
the terms provided for in the Confirmation for which a total of approximately
36.2 million gallons were undelivered (recorded as obligation to deliver LPG).
During January 1, 2002 through February 28, 2002, PMI purchased monthly volumes
of approximately 17.0 million gallons per month at slightly higher premiums than
those specified in the Confirmation.
Effective March 1, 2002, the Company and PMI entered into a contract for
the minimum monthly sale of 17.0 million gallons of LPG, subject to monthly
adjustments based on seasonality (the "Contract"). The Contract expires on May
31, 2004, except that the Contract may be terminated by either party on or after
May 31, 2003 upon 90 days written notice, or upon a change of circumstances as
defined under the Contract.
In connection with the Contract, the parties also executed a settlement
agreement (Settlement Agreement), whereby the parties released each other in
connection with all disputes between the parties arising during the period April
1, 2001 through February 28, 2002, and previous claims related to the contract
for the period April 1, 2000 through March 31, 2001.
In addition to the amounts described above, during the month of January
2002 and for the period from February 1, 2002 through March 31, 2002, the
Company delivered to PMI the remaining portion of the obligation to deliver LPG
(3.9 million gallons and 32.3 million gallons, respectively).
LPG Supply Agreements. The Company has entered into supply agreements for
quantities of LPG totaling approximately 26.5 million gallons per month (actual
deliveries have been approximately 22.4 million gallons for the three months
ended April 30, 2002) although the new sales agreement with PMI provides for
lesser quantities (see note I to the unaudited consolidated financial
statements).
21
In addition to the LPG costs charged by the Suppliers, the Company also
incurs additional costs to deliver the LPG to the Company's facilities.
Furthermore, 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, El Paso 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 quantities
of LPG purchased and/or to finance future price increases of LPG.
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 is $1.0 million for the use of the Leased Pipeline beginning January 1,
2001 until its expiration. The Company is required to pay a minimum charge for
storage of $300,000 per year (based on reserved storage of 8.4 million gallons).
In connection with the Pipeline Lease, the Company reserved up to 12.6 million
gallons of storage through December 31, 2002, and may reserve up to 21.0 million
gallons each year thereafter provided that the Company notifies Seadrift in
advance.
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.
The Company recently began utilizing a mid-line pump station which included
the installation of additional piping, meters, valves, analyzers and pumps along
the Leased Pipeline to increase the capacity of the Leased Pipeline. The Leased
Pipeline's capacity is estimated to be between 300 million gallons per year and
360 million gallons per year.
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.
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 are prohibited from participating in the distribution of LPG in
Mexico. Upon 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 or its affiliates expect to sell LPG directly to
independent Mexican distributors as well as PMI upon Deregulation. 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.
During July 2001, the Mexican government announced that it would begin to
accept applications from Mexican companies for permits to allow for the
importation of LPG pursuant to provisions already provided for under existing
Mexican law.
22
In connection with the above, in August 2001, Tergas received a permit from
the Mexican government to import LPG. Tergas has also received authorization
from Mexican customs authorities regarding the use of the US-Mexico Pipelines
for the importation of LPG.
Although Tergas is currently able to import LPG into Mexico by virtue of
the permit, the Mexican government has asked Tergas to defer use of the permit
and, as a result, the Company has not sold LPG to distributors other than PMI.
In March 2002, the Mexican government again announced its intention to issue
permits for free importation of LPG into Mexico by distributors and others
beginning in the near future. As a result of the foregoing, it is uncertain as
to when, if ever, Deregulation will actually occur and the effect, if any, it
will have on the Company. However, should Deregulation occur, it is the
Company's intention to sell LPG directly to distributors in Mexico as well as
PMI.
The point of sale for LPG which flows through the US-Mexico Pipelines for
delivery to the Matamoros Terminal Facility is the United States-Mexico border.
Revenue is not recognized on these transactions until physical delivery.
Credit Arrangements and Other. As of April 30, 2002, the Company has a
$20.0 million credit facility with RZB Finance L.L.C. ("RZB") and 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 for demand loans and standby letters of credit (RZB Credit Facility) to
finance the Company's purchases of LPG. Under the RZB Credit Facility, the
Company pays a fee with respect to each letter of credit thereunder in an amount
equal to the greater of (i) $500, (ii) 2.5% of the maximum face amount of such
letter of credit, or (iii) such higher amount as may be agreed to between the
Company and RZB. Any amounts outstanding under the RZB Credit Facility shall
accrue interest at a rate equal to the rate announced by the JPMorgan Chase Bank
as its prime rate plus 2.5%. Pursuant to the RZB Credit Facility, RZB and HVB
each have sole and absolute discretion to limit or terminate their participation
in 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 security interest and assignment in
any and all of the Company's accounts (including cash of approximately $1.6
million at April 30, 2002), inventory, real property, buildings, pipelines,
fixtures and interests therein or relating thereto, including, without
limitation, the lease with the Brownsville Navigation District of Cameron County
(the "District") 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 subsequent 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. HVB
has not participated in the RZB Credit Facility since September 2001,
effectively reducing the Company's credit facility to $10.0 million.
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, El Paso, Duke
and/or Koch, letters of credit are issued on a monthly basis based on
anticipated purchases.
23
Private Placements and Other Transactions. During December 2000, the
Company entered into agreements (the "Restructuring Agreements") with the
holders of $5.4 million in principal amount of the promissory notes (the
"Notes") providing for the restructuring of such remaining Notes (the
"Restructuring").
Under the terms of the Restructuring Agreements, the due dates for the
restructured notes (the "Restructured Notes") were extended to December 15, 2001
and were payable on December 17, 2001 (see below). Additionally, beginning
December 16, 2000, the annual interest rate on the Restructured Notes was
increased to 13.5% (subject to adjustment). Interest payments were due quarterly
beginning March 15, 2001.
Under the terms of the Restructuring Agreements, the Company is also
required to provide the holders of the Restructured Notes with collateral to
secure the Company's payment obligations under the Restructured Notes consisting
of a senior interest in substantially all of the Company's assets which are
located in the United States (the "US Assets") and Mexico (the "Mexican
Assets"), excluding inventory, accounts receivable and sales contracts with
respect to which the Company is required to grant a subordinated security
interest (collectively referred to as the "Collateral"). The Company's President
has also pledged 2.0 million shares of common stock of the Company owned by the
President (1.0 million shares to be released when the required security
interests in the US Assets have been granted and perfected and all of the shares
are to be released when the required security interests in all of the Collateral
have been granted and perfected). The granting and perfection of the security
interests in the Collateral, as prescribed under the Restructured Notes, have
not been finalized. Accordingly, the interest rate under the Restructured Notes
increased to 16.5% on March 16, 2001 (see below). The Collateral is also being
pledged in connection with the issuance of other indebtedness by the Company.
PMG has agreed to serve as the collateral agent.
On January 31, 2001, the Company completed the placement of $991,000 in
principal amount of promissory notes (the "New Notes") which were due December
15, 2001 and were payable on December 17, 2001 (see below). The terms of the New
Notes are substantially the same as those contained in the Restructured Notes
issued in connection with the Restructuring described above. As described above,
the Company's payment obligations under the New Notes will also be
collateralized by the Collateral and the shares of the Company which are being
pledged by the Company's President.
During August 2001 and September 2001, warrants to purchase 313,433 shares
of common stock of the Company owned by certain holders of the Restructured
Notes were exercised. The exercise price was satisfied by the Company reducing
the outstanding debt and accrued interest due on the Restructured Notes by
$614,833.
During December 2001, the Company and certain holders of the New Notes and
the Restructured Notes (the "Accepting Noteholders") reached an agreement
whereby the due date for approximately $3.0 million of principal due on the
Accepting Noteholders' Restructured Notes and/or New Notes was extended to June
15, 2002. In connection with the extension, the Company agreed to (i) continue
paying interest at a rate of 16.5% annually on the Accepting Noteholders'
Restructured Notes and/or New Notes, payable quarterly, (ii) pay the Accepting
Noteholders a fee equal to 1% of the Restructured Notes and/or New Notes
extended, (iii) modify the warrants held by the Accepting Noteholders by
extending the expiration date to December 14, 2004 and (iv) remove the Company's
repurchase right with regard to the warrants.
In connection with the issuance of the Restructured Notes and New Notes,
the Company recorded a discount of approximately $1.9 million to be amortized
over the life of the Restructured Notes and New Notes. At April 30, 2002, the
entire discount has been amortized. Amortization of discounts totaling $749,570
related to the Restructured Notes and New Notes is included in the unaudited
consolidated statement of operations for the nine months ended April 30, 2002.
In connection with the extension of the Accepting Noteholders' warrants,
the Company recorded a discount of $207,283, of which $156,032 has been
amortized as of April 30, 2002.
The remaining principal amount of Restructured Notes and New Notes which
were not extended totaled approximately $2.7 million, plus accrued interest and
was paid during December 2001 and January 2002.
During June 2002, the Company and certain holders of the New Notes and the
Restructured Notes (the "New Accepting Noteholders") reached an agreement
whereby the due date for approximately $3.0 million of principal due on the New
Accepting Noteholders' Restructured Notes and/or New Notes were extended to
December 15, 2002. The Company has the option to pay the notes or a portion
thereof on a pro rata basis, on August 15, 2002 and October 15, 2002. The New
Accepting Noteholders' Restructured Notes and/or New Notes will continue to bear
interest at 16.5% per annum. Interest is payable on the outstanding balances on
July 1, 2002 (previously June 15, 2002), August 15, 2002, October 15, 2002 and
December 15, 2002. The Company also agreed to pay a fee of 1.5% on the principal
amount of the New Accepting Noteholders' Restructured Notes and/or New Notes,
due July 1, 2002. The principal amount of the Restructured Notes and/or New
Notes which were not extended is due on June 15, 2002.
24
During September 2001, the Company issued 37,500 shares of common stock of
the Company to a consultant in payment for services rendered to the Company
valued at $150,000.
During November 2001, warrants to purchase a total of 78,750 shares of
common stock of the Company were exercised, resulting in cash proceeds to the
Company of $137,813.
As of April 30, 2002, the amounts due from notes issued to the Company by
certain officers, directors and a related party (the "Note Issuers") for the
exercise of warrants have not been paid as required by the terms of the notes.
All accrued but unpaid interest from officers, directors and a related party has
been reserved. During November 2001, the Company and the Note Issuers agreed to
exchange 36,717 shares of common stock of the Company held by the Note Issuers
for payment of all unpaid interest owing to the Company through October 31, 2001
($146,869). The Company will extend the due date of the notes to October 31,
2003 when the common stock is exchanged.
During January 2002 the Company received a note in the amount of $200,000
for a loan to the Company's president. The note bears interest at the prime rate
and the note plus accrued interest are due on April 30, 2003. The note is
collateralized by shares collateralizing another obligation of the president to
the Company.
In connection with warrants previously 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 during the call provision period.
Litigation. On March 2, 2000, litigation was filed in the Superior Court of
California, County of San Bernardino by Omnitrans against Penn Octane
Corporation, Penn Wilson and several other third parties alleging breach of
contract, fraud and other causes of action related to the construction of a
refueling station by a third party. Penn Octane Corporation and PennWilson have
recently been dismissed from the litigation pursuant to summary judgments.
On July 10, 2001, litigation was filed in the 164th Judicial District Court
of Harris County, Texas by Jorge V. Duran, a former chairman of the board, and
Ware, Snow, Fogel & Jackson L.L.P. against the Company alleging breach of
contract, common law fraud and statutory fraud in connection with the settlement
agreement between the parties dated July 26, 2000. Plaintiffs seek actual and
punitive damages. The Company believes the claims are without merit and intends
to vigorously defend against the lawsuit.
On August 7, 2001, a Mexican company, Intertek Testing Services de Mexico,
S.A. de C.V. (the "Plaintiff"), which contracts with PMI for LPG testing
services, filed suit in the Superior Court of California, County of San Mateo
against the Company alleging breach of contract. The Company has no contract
with the Plaintiff and, therefore, believes that the complaint is without merit
and intends to vigorously defend against the lawsuit.
The Company and its subsidiaries are also involved with other proceedings,
lawsuits and claims. The Company believes that the liabilities, if any,
ultimately resulting from such proceedings, lawsuits and claims should not
materially affect its consolidated financial statements.
25
Realization of Assets. The Company has had an accumulated deficit since
inception, has used cash in operations and continues to have a deficit in
working capital. In addition, significantly all of the Company's assets are
pledged or committed to be pledged as collateral on existing debt in connection
with the Restructured Notes, the New Notes, the RZB Credit Facility and the
notes related to the Settlement. The Restructured Notes and the New Notes total
approximately $3.1 million at April 30, 2002 (see note K to the unaudited
consolidated financial statements). The Company may need to increase its credit
facility for the purchase of quantities of LPG in excess of current quantities
sold and/or to finance future price increases of LPG, if any. In addition, the
Company entered into supply agreements for quantities of LPG totaling
approximately 26.5 million gallons per month (actual deliveries have been
approximately 22.4 million gallons for the three months ended April 30, 2002)
although the new sales agreement with PMI provides for lesser quantities (see
note I to the unaudited consolidated financial statements). As discussed in note
A to the accompanying unaudited consolidated financial statements, the Company
has historically depended heavily on sales to PMI.
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 sheets is dependent upon the Company's ability to obtain
additional financing, repay, renew or extend the Restructured Notes and the New
Notes referred to in the preceding paragraph and to raise additional equity
capital, resolve uncertainties related to the Saltillo Terminal Facility and the
success of the Company's future operations. The accompanying 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 assuming Deregulation, (iii) extend
the terms of the Pipeline Lease and the Brownsville Lease, (iv) expand its
product lines, (v) obtain additional letters of credit financing, (vi) raise
additional debt and/or equity capital, (vii) increase the current credit
facility and (viii) relocate the Saltillo Terminal Facility to another location
in or near Saltillo, Coahuila, Mexico.
At July 31, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $12.0 million. The ability to
utilize such net operating loss carryforwards may be significantly limited by
the application of the "change of ownership" rules under Section 382 of the
Internal Revenue Code.
The following is a summary of the Company's estimated minimum contractual
obligations and commercial obligations as of April 30, 2002. Where applicable
LPG prices are based on the April 2002 monthly average as published by Oil Price
Information Services.
PAYMENTS DUE BY PERIOD
(AMOUNTS IN MILLIONS)
--------------------------------------------
Less than 1 - 3 4 - 5 After
Contractual Obligations Total 1 Year Years Years 5 Years
----------------------- ------ ---------- ------ ------ --------
Debt $ 3.7 $ 1.0 $ 2.7 $ - $ -
Operating Leases 15.5 1.4 2.8 2.8 8.5
LPG Purchase Obligations 515.7 107.3 127.2 127.2 153.9
------ ---------- ------ ------ --------
Total Contractual Cash Obligations $534.9 $ 109.7 $132.7 $130.0 $ 162.4
====== ========== ====== ====== ========
26
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 on their review, accompanies the unaudited
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 in
excess of commitments for quantities of undelivered LPG and/or has commitments
for undelivered LPG in excess of inventory balances, the Company is exposed to
market risk related to the volatility of LPG prices. In the event that
inventory balances exceed commitments for undelivered LPG, during periods of
falling LPG prices, the Company may sell excess inventory to customers to reduce
the risk of these price fluctuations. In the event that commitments for
undelivered LPG exceed inventory balances, the Company may purchase contracts
which protect the Company against future price increases of LPG.
27
PART II
ITEM 1. LEGAL PROCEEDINGS
See note G to the accompanying unaudited consolidated financial
statements and note L to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 2001.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See note F to the accompanying unaudited consolidated financial
statements and notes J and K to the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 2001, for information
concerning certain sales of Securities.
In connection with the issuances of securities discussed in notes E
and F to the accompanying unaudited consolidated financial statements,
the transactions were issued without registration under the Securities
Act of 1933, as amended, in reliance upon the exemptions from the
registration provisions thereof, contained in Section 4(2) thereof and
Rule 506 of Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of Stockholders of the Company (the "Meeting")
was held at the Company's executive offices on December 14, 2001. The
record date for the Meeting was November 19, 2001. Proxies for the
meeting were solicited pursuant to Regulation 14A under the Exchange
Act. There was no solicitation in opposition to management's five
proposals, and all of the nominees for election as director were
elected. The results of the voting by the stockholders for each
proposal are presented below.
Proposal #1 Election of Directors
Name of Director Elected Votes For Votes Withheld
------------------------ ---------- --------------
Jerome B. Richter 11,065,592 165,130
Jorge R. Bracamontes 11,065,592 165,130
Ian T. Bothwell 11,065,592 165,130
Jerry L. Lockett 11,065,592 165,130
Charles Handly 11,065,592 165,130
Stewart J. Paperin 11,065,592 165,130
Harvey L. Benenson 11,065,592 165,130
Emmett M. Murphy 11,065,592 165,130
Proposal #2 Proposal to ratify the compensation of the outside directors of
the Company by the issuance of warrants of the Company.
For Against Abstain
--------- ------- -------
6,518,165 359,477 17,370
Proposal #3 Proposal to ratify the issuance of warrants of the Company to
certain executive officers of the Company as bonus compensation.
For Against Abstain
--------- ------- -------
6,492,465 377,077 25,470
Proposal #4 Proposal to ratify the adoption of a warrant plan for the
benefit of Company officers, directors, employees, and
consultants.
28
For Against Abstain
--------- ------- -------
6,527,365 361,477 6,170
Proposal #5 Proposal to ratify the appointment of Burton McCumber & Cortez,
L.L.P. as the independent auditors of the Company for the fiscal
year ending July 31, 2002.
For Against Abstain
---------- ------- -------
10,962,222 259,950 8,550
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
THE FOLLOWING EXHIBITS ARE INCORPORATED HEREIN BY REFERENCE:
10.01 Form of Amendment to Promissory Note (the "Note") of Penn Octane
Corporation (the "Company") due December 15, 2001, and related
agreements and instruments dated November 28, 2001, between the
Company and the holders of the Notes (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended October 31, 2001 filed on December 17, 2001, SEC
File No. 000-24394).
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
10.02 LPG sales agreement entered into as of March 1, 2002 by and
between Penn Octane Corporation ("Seller") and P.M.I. Trading
Limited ("Buyer").
10.03 Settlement agreement, dated as of March 1, 2002 by and between
P.M.I. Trading Limited and Penn Octane Corporation.
10.04 Form of Amendment to Promissory Note (the "Note") of Penn Octane
Corporation (the "Company") due June 15, 2002, and related
agreements and instruments dated June 5, 2002, between the
Company and the holders of the Notes.
b. Reports on Form 8-K
None.
29
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
June 13, 2002 By: /s/ Ian T. Bothwell
--------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
30