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 March 31, 2005
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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
The number of shares of Common Stock, par value $.01 per share, outstanding on
May 13, 2005 was 15,522,745.
1
PENN OCTANE CORPORATION
TABLE OF CONTENTS
ITEM PAGE NO.
---- --------
Part I 1. Financial Statements
Independent Certified Public Accountants' Review Report 3
Unaudited Consolidated Balance Sheets as of March 31, 4-5
2005 and December 31, 2004
Unaudited Consolidated Statements of Operations for the
three months ended March 31, 2005 and 2004 6
Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 and 2004 7
Notes to Consolidated Financial Statements (Unaudited) 8-21
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22-40
3. Quantitative and Qualitative Disclosures About Market
Risk 41
4. Controls and Procedures 41
Part II 1. Legal Proceedings 42
2. Unregistered Sales of Equity Securities and Use of
Proceeds 42
3. Defaults Upon Senior Securities 42
4. Submission of Matters to a Vote of Security Holders 42
5. Other Information 42
6. Exhibits 42
Signatures 43
2
Independent Certified Public Accountants' Review Report
Board of Directors and Stockholders
Penn Octane Corporation
We have reviewed the consolidated balance sheets of Penn Octane Corporation and
subsidiaries (Company) as of March 31, 2005 and December 31, 2004, and the
consolidated statements of operations and cash flows for the three months ended
March 31, 2005. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, 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 reviews, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with United States generally accepted accounting principles.
The accompanying consolidated statements of operations and cash flows of Penn
Octane Corporation and subsidiaries for the three months ended March 31, 2004
were not audited, reviewed, or compiled by us and, accordingly, we do not
express an opinion or any other form of assurance on them.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Penn Octane Corporation and Subsidiaries as of July 31, 2004 (not
presented herein), 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 5, 2004, we expressed an unqualified
opinion on those consolidated financial statements.
Our auditors' report on the Company's financial statements as of July 31, 2004
included an explanatory paragraph referring to the matters discussed in Note S
of those financial statements which raised substantial doubt about the Company's
ability to continue as a going concern. As indicated in Note K to the
accompanying unaudited interim consolidated financial statements, conditions
continue to exist which raise substantial doubt about the Company's ability to
continue as a going concern.
/s/ BURTON MCCUMBER & CORTEZ, L.L.P.
Brownsville, Texas
April 25, 2005
3
PART I
ITEM 1.
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
March 31, December 31,
2005 2004
----------- -------------
Current Assets
Cash $ 140,893 $ 374,567
Restricted cash 4,683,705 5,367,516
Trade accounts receivable (less allowance for doubtful accounts of $0) 11,058,446 9,222,035
Inventories 2,066,780 3,541,390
Prepaid expenses and other current assets 233,636 114,204
----------- -------------
Total current assets 18,183,460 18,619,712
Property, plant and equipment - net 15,785,658 15,979,182
Lease rights (net of accumulated amortization of $783,861 and $772,412 at
March 31, 2005 and December 31, 2004) 370,178 381,627
Other non-current assets 29,702 28,932
----------- -------------
Total assets $34,368,998 $ 35,009,453
=========== =============
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
(UNAUDITED)
March 31, December 31,
2005 2004
------------- --------------
Current Liabilities
Current maturities of long-term debt $ 1,562,176 $ 1,874,618
Revolving line of credit 5,818,836 1,397,249
LPG and fuel products trade accounts payable 7,268,950 13,215,832
Other accounts payable 1,181,174 1,661,360
U.S. and foreign taxes payable 15,953 36,099
Accrued liabilities 2,170,756 1,007,145
------------- --------------
Total current liabilities 18,017,845 19,192,303
Long-term debt, less current maturities 82,014 55,581
Minority interest in Rio Vista Energy Partners L.P. 14,719,331 14,614,370
Commitments and contingencies - -
Stockholders' Equity
Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
No shares issued and outstanding at March 31, 2005 and December 31,
2004 - -
Series B - Senior preferred stock-$.01 par value, $10 liquidation value,
5,000,000 shares authorized; No shares issued and outstanding at March
31, 2005 and December 31, 2004 - -
Common stock - $.01 par value, 25,000,000 shares authorized;
15,522,745 and 15,316,495 shares issued and outstanding at March 31,
2005 and December 31, 2004 155,227 153,165
Additional paid-in capital 28,741,122 28,536,987
Note receivable from an officer of the Company and another party for
exercise of warrants, less reserve of $468,693 at March 31, 2005 and
December 31, 2004 (2,728,000) (2,728,000)
Accumulated deficit (24,618,541) (24,814,953)
------------- --------------
Total stockholders' equity 1,549,808 1,147,199
------------- --------------
$ 34,368,998 $ 35,009,453
============= ==============
Total liabilities and stockholders' equity
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
--------------------------
March 31, March 31,
2005 2004
------------ ------------
Revenues $59,726,894 $50,787,314
Cost of goods sold 57,337,945 47,690,864
------------ ------------
Gross profit 2,388,949 3,096,450
Selling, general and administrative expenses
Legal and professional fees 447,426 274,933
Salaries and payroll related expenses 648,450 757,915
Other 520,427 201,864
------------ ------------
1,616,303 1,234,712
------------ ------------
Operating income 772,646 1,861,738
Other income (expense)
Interest and LPG and Fuel Products financing expense (391,942) (350,297)
Interest income 4,363 42,335
Minority interest in earnings of Rio Vista Energy Partners L.P. (169,045) -
Other income - -
------------ ------------
Income before taxes 216,022 1,553,776
Provision for income tax 19,610 34,590
------------ ------------
Net income $ 196,412 $ 1,519,186
============ ============
Net income per common share $ 0.01 $ 0.10
============ ============
Net income per common share assuming dilution $ 0.01 $ 0.10
============ ============
Weighted average common shares outstanding 15,422,120 15,302,336
============ ============
The accompanying notes and accountants' report are an integral part of these
statements.
6
PENN OCTANE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
---------------------------
March 31, March 31,
2005 2004
------------- ------------
Cash flows from operating activities:
Net income $ 196,412 $ 1,519,186
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization 255,986 240,614
Amortization of lease rights 11,449 11,449
Non-employee stock based costs and other - 41,622
Amortization of loan discount related to detachable warrants 81,846 28,326
Interest income - (32,334)
Minority interest in Rio Vista Energy Partners L.P. 169,045 -
Changes in current assets and liabilities:
Trade accounts receivable ( 1,836,411) ( 848,359)
Inventories 1,474,610 182,499
Prepaid and other current assets (119,431) ( 495,216)
LPG and Fuel Products trade accounts payable (5,946,882) (2,045,580)
Other accounts payable and accrued liabilities 783,431 (439,963)
US and Foreign taxes payable (20,146) 24,590
------------- ------------
Net cash (used in) provided by operating activities (4,950,091) (1,813,166)
Cash flows from investing activities:
Capital expenditures (6,999) 107,434
Property held for sale - 220,000
(Increase) decrease in other non-current assets (770) ( 750)
------------- ------------
Net cash provided by (used in) investing activities ( 7,769) 326,684
Cash flows from financing activities:
(Increase) decrease in restricted cash 683,811 1,431,501
Revolving credit facilities 4,421,587 -
Issuance of common stock 97,750 -
Distributions paid by Rio Vista to limited partners (477,664) -
Reduction in debt (1,298) (203,520)
------------- ------------
Net cash provided by (used in) financing activities 4,724,186 1,227,981
------------- ------------
Net increase (decrease) in cash ( 233,674) ( 258,501)
Cash at beginning of period 374,567 278,188
------------- ------------
Cash at end of period $ 140,893 $ 19,687
============= ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest and LPG and Fuel Products financing expense $ 303,044 $ 397,809
============= ============
Supplemental disclosures of noncash transactions:
Equity-common stock and warrants issued and other $ 108,450 $ 167,170
============= ============
Stock exchanged for note receivable $ - $ 169,520
============= ============
The accompanying notes and accountants' report are an integral part of these
statements.
7
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION
Penn Octane Corporation, formerly known as International Energy Development
Corporation (International Energy), was incorporated in Delaware in August
1992. Penn Octane Corporation (Penn Octane) and its consolidated
subsidiaries are hereinafter referred to as the Company. 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 in Brownsville, Texas (Brownsville Terminal Facility) and owns a
LPG terminal facility in Matamoros, Tamaulipas, Mexico (Matamoros Terminal
Facility) and approximately 23 miles of 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 ExxonMobil 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 from 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), as well as other potential
propane pipeline suppliers, via approximately 155 miles of pipeline located
between Markham and the Exxon King Ranch Gas Plant.
The Company commenced commercial operations for the purchase, transport and
sale of LPG in the fiscal year ended July 31, 1995, upon construction of
the Brownsville Terminal Facility. The primary market for the Company's LPG
is the northeastern region of Mexico, which includes the states of
Coahuila, Nuevo Leon and Tamaulipas. Since operations commenced, the
Company's primary customer for LPG has been P.M.I. Trading Limited (PMI).
PMI is a subsidiary of Petroleos Mexicanos, the state-owned Mexican oil
company, which is commonly known by its trade name "PEMEX." PMI is the
exclusive importer of LPG into Mexico. The LPG purchased by PMI from the
Company is sold to PEMEX which distributes the LPG purchased from PMI into
the northeastern region of Mexico. Sales of LPG to PMI accounted for
approximately 47.5% of the Company's total revenues and 91.7% of the
Company's LPG revenues for the three months ended March 31, 2005. The
Company's gross profit is dependent on sales volume of LPG to PMI, which
fluctuates in part based on the seasons. The demand for LPG is strongest
during the winter season.
During June 2004, the Company began operations as a reseller of gasoline
and diesel fuel (Fuel Products). The Company sells Fuel Products (Fuel
Sales Business) through transactional, bulk and/or rack transactions.
Typical transactional and bulk sales are made based on a predetermined net
spread between the purchase and sales price over posted monthly variable
prices and/or daily spot prices. Rack sales transactions are based on
variable sale prices charged by the Company which are tied to posted daily
spot prices and purchase costs which are based on a monthly average or 3
day average based on posted prices. The Company pays pipeline and terminal
fees based on regulated rates.
The Company has the ability to access certain pipeline and terminal
systems located in California, Arizona, Nevada and Texas, where it is able
to deliver its Fuel Products.
For bulk and transactional sales, the Company enters into individual
sales contracts for each sale. Rack sales are subject to credit limitations
imposed on each individual buyer by the Company. The Company has several
supply contracts for each of the Fuel Products it sells. The supply
contracts are for annual periods with flexible volumes but they may be
terminated sooner by the supplier if the Company consistently fails to
purchase minimum volumes of Fuel Products. Fuel sales approximated 48.1% of
total revenues for the three months ended March 31, 2005.
8
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ORGANIZATION - CONTINUED
On September 30, 2004, Penn Octane Corporation (Penn Octane) completed a
series of transactions involving (i) the transfer of substantially all of
its owned pipeline and terminal assets in Brownsville and Matamoros to its
wholly owned subsidiary Rio Vista Operating Partnership L.P. and its
subsidiaries (RVOP) (ii) transferred its 99.9% interest in RVOP to its
wholly owned subsidiary, Rio Vista Energy Partners L.P. and its
subsidiaries (Rio Vista) and (iii) distributed all of its limited
partnership interest (Common Units) in Rio Vista to its common stockholders
(Spin-Off), resulting in Rio Vista becoming a separate public company. The
Common Units represented 98% of Rio Vista's outstanding units. The
remaining 2% of such units, which is the general partner interest, is owned
and controlled by Rio Vista GP LLC (General Partner), a wholly owned
subsidiary of Penn Octane, and the General Partner is responsible for the
management of Rio Vista. Accordingly the Company has control of Rio Vista
by virtue of its ownership and related voting control of the General
Partner and therefore, Rio Vista is consolidated with the Company and the
interests of the limited partners are classified as minority interests in
the Company's unaudited consolidated financial statements. Subsequent to
the Spin-Off, Rio Vista sells LPG directly to PMI and purchases LPG from
Penn Octane under a long-term supply agreement. The purchase price of the
LPG from Penn Octane is determined based on the cost of LPG under Penn
Octane's LPG supply agreements with its suppliers, other direct costs
related to PMI sales and a formula that takes into consideration operating
costs of Penn Octane and Rio Vista.
During December 2004, Penn Octane changed its fiscal year end from
July 31 to December 31.
BASIS OF PRESENTATION
-----------------------
The accompanying unaudited consolidated financial statements include Penn
Octane and its United States subsidiaries including Penn Octane
International, L.L.C., PennWilson CNG, Inc. (PennWilson) and Penn CNG
Holdings, Inc. and Rio Vista and its U.S. and Mexican subsidiaries, Penn
Octane de Mexico, S. de R.L. de C.V. (PennMex), Termatsal, S. de R.L. de
C.V. (Termatsal) and Tergas, S. de R.L. de C.V. (Tergas), a consolidated
affiliate, and its other inactive Mexican subsidiaries. All significant
intercompany accounts and transactions are eliminated.
The unaudited consolidated balance sheets as of March 31, 2005 and December
31, 2004, the unaudited consolidated statements of operations and cash
flows for the three months ended March 31, 2005 and 2004, 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 March 31,
2005 and December 31, 2004, the unaudited consolidated results of
operations and cash flows for the three months ended March 31, 2005 and
2004.
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 year ended
July 31, 2004.
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.
9
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - INCOME (LOSS) PER COMMON SHARE
Income (loss) per share of common stock is computed on the weighted
average number of shares outstanding. During periods in which the Company
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 March 31, 2005 For the three months ended March 31, 2004
----------------------------------------------- -----------------------------------------------
Income (loss) Shares Per-Share Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------- ------------- --------------- --------------- ------------- ---------------
Net income (loss) $ 196,412 $ 1,519,186
BASIC EPS
Net income (loss) available to
common stockholders 196,412 15,422,120 $ 0.01 1,519,186 15,302,336 $ 0.10
=============== ===============
EFFECT OF DILUTIVE SECURITIES
Warrants - 78,291 - -
--------------- ------------- --------------- -------------
DILUTED EPS
Net income (loss) available to
common stockholders $ 196,412 15,500,411 $ 0.01 $ 1,519,186 15,302,336 $ 0.10
=============== ============= =============== =============== ============= ===============
10
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - STOCK-BASED COMPENSATION
The Company accounts for stock option plans in accordance with the provisions of
APB No. 25, "Accounting for Stock Issued to Employees", and related
interpretations which recognizes compensation expense on the grant date if the
current market price of the stock exceeds the exercise price.
Had compensation cost related to the warrants granted to employees been
determined based on the fair value at the grant dates, consistent with the
provisions of SFAS 123, the Company's pro forma net income (loss), and net
income (loss) per common share would have been as follows:
Three Months Ended
------------------------
March 31, March 31,
2005 2004
----------- -----------
Net income (loss), as reported $ 196,412 $1,519,186
Add: Stock-based employee compensation cost expense
included in reported net income (loss), net of related
tax effects - -
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (34,443) (9,724)
----------- -----------
Net income (loss), pro forma $ 161,969 $1,509,462
=========== ===========
Net income (loss) per common share, as reported $ 0.01 $ 0.10
=========== ===========
Net income (loss) per common share, pro forma $ 0.01 $ 0.10
=========== ===========
Net income (loss) per common share assuming dilution,
as reported $ 0.01 $ 0.10
=========== ===========
Net income (loss) per common share assuming dilution,
pro forma $ 0.01 $ 0.10
=========== ===========
The following assumptions were used for grants of warrants to employees in
the three months ended March 31, 2005, to compute the fair value of the
warrants using the Black-Scholes option-pricing model; dividend yield of
0%; expected volatility of 68% and 63%; risk free interest rate of 4.08%,
3.51% and 3.52% and expected lives of 5 years.
The following assumptions were used for grants of warrants to employees in
the three months ended March 31, 2004, to compute the fair value of the
warrants using the Black-Scholes option-pricing model; dividend yield of
0%; expected volatility of 72% and 81%; risk free interest rate of 3.22%
and 3.27% and expected lives of 5 years.
During December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard No. 123 (revised 2004)
"Share-Based Payment" (SFAS 123R). SFAS 123R replaces SFAS 123, "Accounting
for Stock-Based Compensation", and supercedes APB Opinion 25, "Accounting
for Stock Issued to Employees" (APB 25). SFAS 123R requires that the cost
of share-based payment transactions (including those with employees and
non-employees) be recognized in the financial statements as compensation
cost. That cost will be measured based on the fair value of equity or
liability instrument issued. SFAS 123R is effective for the Company
beginning January 1, 2006. The Company will apply the modified prospective
method as provided for in SFAS 123R, and therefore the financial statements
of the Company for interim and annual periods prior to the adoption of SFAS
123R will not reflect any restatements.
11
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
March 31, December 31,
2005 2004
------------ --------------
LPG:
Midline pump station (b) $ 2,326,985 $ 2,326,985
Brownsville Terminal Facility: (a)
Building 173,500 173,500
Terminal facilities 3,631,207 3,631,207
Tank Farm 373,945 373,945
Leasehold improvements 318,807 318,807
Equipment 226,285 226,285
Truck 25,968 25,968
------------ --------------
7,076,697 7,076,697
------------ --------------
US - Mexico Pipelines and Matamoros Terminal
Facility: (a)(c)
U.S. Pipelines and Rights of Way 6,782,242 6,775,242
Mexico Pipelines and Rights of Way 993,300 993,300
Matamoros Terminal Facility 5,874,781 5,874,781
Land 856,358 856,358
------------ --------------
14,506,681 14,499,681
------------ --------------
Total LPG 21,583,378 21,576,378
------------ --------------
Other:
Office equipment (b) 106,953 106,953
Software (b) 57,163 1,700
------------ --------------
164,116 108,653
------------ --------------
21,747,494 21,685,031
Less: accumulated depreciation and amortization (5,961,836) (5,705,849)
------------ --------------
$15,785,658 $ 15,979,182
============ ==============
(a) Rio Vista assets
(b) Penn Octane and Subsidiaries other than Rio Vista
(c) Rio Vista owns, leases, or is in the process of obtaining the land
or rights of way used related to the US-Mexico Pipelines
Property, plant and equipment, net of accumulated depreciation,
includes $5,643,844 and $5,745,793 of costs located in Mexico at March 31,
2005 and December 31, 2004, respectively.
12
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - INVENTORIES
Inventories are valued at the lower of FIFO cost or market (LCM) and
consist of the following:
March 31, 2005 December 31, 2004
--------------------- ---------------------
Gallons LCM Gallons LCM
--------- ---------- --------- ----------
LPG:
Leased Pipeline 1,175,958 $1,027,840 1,175,958 $ 930,156
Brownsville Terminal Facility and
Matamoros Terminal Facility 295,688 258,445 369,508 292,272
Markham Storage and other 609,701 532,906 - -
--------- ---------- --------- ----------
2,081,347 1,819,191 1,545,466 1,222,428
========= =========
Fuel Products 151,578 247,589 1,847,191 2,318,962
========= ---------- ========= ----------
$2,066,780 $3,541,390
========== ==========
NOTE F - DEBT OBLIGATIONS
Debt consists of the following:
March 31, December 31,
2005 2004
------------- -------------
Noninterest-bearing note payable, discounted at 7%, for legal services; due in February
2002. $ 137,500 $ 137,500
Restructured Notes and $280,000 Notes 1,371,751 1,711,924
Other debt. 134,939 80,775
------------- -------------
Total debt 1,644,190 1,930,199
Less: Current maturities 1,562,176 1,874,618
------------- -------------
Long-term debt $ 82,014 $ 55,581
============= =============
EXTENSION OF CERTAIN OF THE NEW ACCEPTING NOTEHOLDERS' NOTES, ADDITIONAL
NOTE AND $250,000 NOTE TOTALING $1,525,000 (COLLECTIVELY THE RESTRUCTURED
NOTES)
On January 16, 2004, the Restructured Notes which were due on December
15, 2003 were renewed and extended (Restructuring). In connection with the
Restructuring, the due date of the Restructured Notes was extended to
December 15, 2005. The Restructured Notes can be repaid at any time without
penalty. Annual interest on the Restructured Notes is 16.5% and the Company
also agreed to pay a fee of 1.5% on any principal balance of the
Restructured Notes outstanding at the end of each quarterly period,
beginning December 15, 2003. Interest and fees are payable quarterly
beginning March 15, 2004. In addition, the Company issued an additional
37,500 warrants to purchase shares of common stock of Penn Octane to
certain holders of the Restructured Notes.
In addition, the Company agreed to extend the expiration date on
outstanding warrants to purchase common stock of Penn Octane held by
holders of the Restructured Notes until December 15, 2008 and agreed to
issue 110,250 warrants (which includes 20,000 warrants to purchase Rio
Vista common units held by Philadelphia Brokerage Corporation (see below))
to purchase Rio Vista Common Units (Rio Vista Warrants). The Rio Vista
Warrants will expire on December 15, 2006 and the exercise price is $5.00
per warrant.
13
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - DEBT OBLIGATIONS - CONTINUED
EXTENSION OF CERTAIN OF THE NEW ACCEPTING NOTEHOLDERS' NOTES, ADDITIONAL
NOTE AND $250,000 NOTE TOTALING $1,525,000 (COLLECTIVELY THE RESTRUCTURED
NOTES) - CONTINUED
Certain holders of promissory notes totaling approximately $280,000 of
principal due December 15, 2003, who did not agree to the Restructuring
(Declining Noteholders), were paid by the Company. In connection with
amounts due to the Declining Noteholders, the Company issued $280,000 of
promissory notes ($280,000 Notes). The terms of the $280,000 Notes are
substantially similar to the Restructured Notes, except that the holders of
the $280,000 Notes were not entitled to receive any warrants to purchase
shares of common stock of Penn Octane.
The holders of the Restructured Notes and $280,000 Notes consented to
the Spin-Off of Rio Vista provided that (1) the assets of Penn Octane
transferred to Rio Vista continue to be pledged as collateral for payment
of those notes, (2) Rio Vista guarantees Penn Octane's obligations under
the notes and (3) Rio Vista be prohibited from making any distributions in
the event that Penn Octane is in default under the Restructured Notes and
$280,000 Notes.
In connection with the Restructured Notes and $280,000 Notes, Philadelphia
Brokerage Corporation (PBC) acted as placement agent and received a fee
equal to 1.5% of the Restructured Notes and $280,000 Notes. PBC also
received warrants to purchase 20,000 units in Rio Vista. The terms of the
warrants are the same as the Rio Vista Warrants.
In connection with the issuance of the new warrants of Penn Octane and
the extension of the warrants of Penn Octane, the Company recorded a
discount of $194,245 related to the fair value of the newly issued,
modified warrants and including fees of $27,075 of which $125,450 has been
amortized through March 31, 2005.
Jerome Richter, Chief Executive Officer of Penn Octane continues to
provide collateral to the Restructured Notes and the $280,000 Notes
noteholders with 2,000,000 shares of common stock of Penn Octane owned by
him. As a result of the Spin-Off, he is also required to provide as
collateral 250,000 Common Units of Rio Vista owned by him.
NOTE G - STOCKHOLDERS' EQUITY
COMMON STOCK
-------------
During January 2005, the Company issued 100,000 shares of common stock
of Penn Octane to a consultant in payment of amounts owed by the Company at
December 31, 2004.
During March 2005, warrants to purchase a total of 106,250 shares of
common stock of Penn Octane were exercised resulting in cash proceeds to
the Company of $97,750.
The Company routinely issues shares of its common stock for cash, the
exercise of warrants, in payment of notes and other obligations and to
settle lawsuits.
14
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - STOCKHOLDERS' EQUITY - CONTINUED
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.
On September 30, 2004, pursuant to the terms of an employment agreement
dated May 13, 2003 with Richard Shore, Jr., the Company issued warrants to
purchase 763,737 shares of Penn Octane's common stock at an exercise price
of $1.14 per share. The warrants expire on July 10, 2006.
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.
PENN OCTANE 2001 WARRANT PLAN
On March 9, 2005, the board of directors of Penn Octane approved the
grant of warrants to purchase a total of 1,005,000 shares of Penn Octane
common stock under Penn Octane's 2001 Warrant Plan previously approved by
the Penn Octane stockholders. Of the total number of warrants granted,
625,000 were granted to executive officers of Penn Octane, 255,000 were
issued to outside directors of Penn Octane and 125,000 were issued to a
consultant. The exercise price for the warrants is $1.50 per share, which
was the closing price for Penn Octane's common stock as reported by the
Nasdaq Stock Market on March 9, 2005. Warrants granted to executive
officers vest in equal monthly installments over a period of 36 months from
the date of grant. Warrants granted to outside directors vest in equal
monthly installments over a period of 12 months from the date of grant. All
warrants become fully exercisable upon a change in control event and expire
five years from the date of grant.
NOTE H - OPTIONS AND WARRANTS OF RIO VISTA
GENERAL PARTNER OPTIONS
Penn Octane's 100% interest in the General Partner may be decreased to
50% as a result of the exercise by Shore Capital LLC (Shore Capital), an
affiliate of Richard Shore, Jr., and Mr. Richter of options to each acquire
25% of the General Partner (General Partner Options). The exercise price
for each option is approximately $82,000. The options expire on July 10,
2006. Following the exercise of any of the General Partner Options, Penn
Octane will retain voting control of the General Partner pursuant to a
voting agreement.
COMMON UNIT WARRANTS
In connection with Mr. Shore's employment agreement with Penn Octane,
Shore Capital received warrants to acquire 97,415 common units of Rio Vista
at $8.47 per unit. The warrants expire on July 10, 2006.
15
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - OPTIONS AND WARRANTS OF RIO VISTA
COMMON UNIT WARRANTS - CONTINUED
On March 9, 2005, the board of managers of the General Partner of Rio
Vista, approved the Rio Vista 2005 Equity Incentive Plan (the "2005 Plan").
The 2005 Plan permits the grant of common unit options, common unit
appreciation rights, restricted common unit and phantom common units to any
person who is an employee (including to any executive officer) or
consultant of Rio Vista or the General Partner or any affiliate of Rio
Vista or the General Partner. The 2005 Plan provides that each outside
manager of the General Partner shall be granted a common unit option once
each fiscal year for not more than 5,000 common units, in an equal amount
as determined by the board of managers. The aggregate number of common
units authorized for issuance as awards under the 2005 Plan is 750,000. The
2005 Plan shall remain available for the grant of awards until March 9,
2015, or such earlier date as the board of managers may determine. The 2005
Plan is administered by the compensation committee of the board of
managers. Under the terms of the Agreement and applicable rules of the
Nasdaq Stock Market, no approval by the common unitholders of Rio Vista was
required.
On March 9, 2005, the board of managers of the General Partner of Rio
Vista approved the grant of options to purchase a total of 108,750 common
units under the 2005 Plan. Of the total number of options granted, 93,750
were granted to certain executive officers of the General Partner and Mr.
Richter and 15,000 were issued to outside managers of the General Partner.
The exercise price for the options is $12.51 per common unit, which is the
average of the high and low sales prices for Rio Vista common units as
reported by the Nasdaq Stock Market on March 9, 2005. The options granted
to executive officers (including Mr. Richter) were fully vested on the date
of grant. The options granted to outside managers vest in equal monthly
installments over a period of 12 months from the date of grant. All options
become fully exercisable upon a change in control event and expire three
years from the date of grant.
NOTE I - COMMITMENTS AND CONTINGENCIES
CREDIT FACILITY, LETTERS OF CREDIT AND OTHER
As of March 31, 2005, Penn Octane had a $20,000,000 credit facility
with RZB Finance, LLC (RZB) for demand loans and standby letters of credit
(RZB Credit Facility) to finance Penn Octane's purchases of LPG and Fuel
Products. The RZB Credit facility is an uncommitted facility under which
the letters of credit have an expiration date of no more than 90 days and
the facility is reviewed annually at March 31. In connection with the RZB
Credit Facility, the Company granted RZB a security interest and assignment
in any and all of the Company's accounts, 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 for the land on which the Company's Brownsville
Terminal Facility is located, the Pipeline Lease, and in connection
therewith entered into leasehold deeds of trust, security agreements,
financing statements and assignments of rent. 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.
After the Spin-Off and transfer of assets to Rio Vista, RZB continues to
retain a security interest in the transferred assets.
16
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
CREDIT FACILITY, LETTERS OF CREDIT AND OTHER - CONTINUED
Under the RZB Credit Facility, the Company is required to pay 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 loan 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 (5.75% at March 31, 2005) plus 2.5%. Pursuant to the
RZB Credit Facility, RZB has sole and absolute discretion to limit or
terminate its participation in the RZB Credit Facility and to refrain from
making any loans or issuing any letters 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 addition to the fees described above,
the Company is required to pay RZB annual fees of $50,000.
Based on current minimum purchase commitments under the Company's LPG
supply agreement and current LPG prices, the amount available to finance
Fuel Products and LPG purchases in excess of current minimum purchase
commitments is limited and therefore the ability of the Company to grow the
Fuel Sales Business is dependent on future increases in its RZB Credit
Facility or other sources of financing, the reduction of LPG supply
commitments and/or the reduction in LPG or Fuel Products purchase prices.
Under the terms of the RZB Credit Facility, either Penn Octane or Rio
Vista is required to maintain net worth of a minimum of $10,000,000.
Jerome B. Richter has personally guaranteed all of Penn Octane's payment
obligations with respect to the RZB Credit Facility.
In connection with the Company's purchases of LPG and Fuel Products,
letters of credit are issued based on anticipated purchases. Outstanding
letters of credit for purchases of LPG and Fuel Products at March 31, 2005
totaled approximately $10,507,000 of which approximately $7,972,000
represents March 2005 purchases and approximately $2,535,000 represents
April 2005 purchases.
In connection with the Company's purchase of LPG and Fuel Products, under
the RZB Credit Facility, assets related to product sales (Assets) are
required to be in excess of borrowings and commitments (including
restricted cash of approximately $4,200,000 at March 31, 2005). At March
31, 2005, the Company's borrowings and commitments were less than the
amount of the Assets.
In connection with the Company's Fuel Sales Business, the Company has
issued bonds totaling $662,000 to the states of California, Nevada, Arizona
and Texas (Bonds) to secure payments of excise and other taxes collected
from customers in connection with sales of Fuel Products. The Bonds are
partially secured by letters of credit totaling $452,600. At March 31,
2005, such taxes of approximately $800,577 were due. The letters of credit
issued have all been secured by cash in the amount of approximately
$458,000 which is included in restricted cash in the Company's balance
sheet at March 31, 2005.
LPG and Fuel Products financing expense associated with the RZB Credit
Facility totaled $203,301 and $185,013 for the three months ended March 31,
2005 and 2004.
17
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
DISTRIBUTIONS OF AVAILABLE CASH
All Rio Vista unitholders have the right to receive distributions of
"available cash" as defined in the Rio Vista partnership agreement
(Agreement) from Rio Vista in an amount equal to at least the minimum
distribution of $0.25 per quarter per unit, plus any arrearages in the
payment of the minimum quarterly distribution on the units from prior
quarters. The General Partner receives a distribution corresponding to its
2% general partnership interest. The distributions are to be paid 45 days
after the end of each calendar quarter. However, Rio Vista is prohibited
from making any distributions to unitholders if it would cause an event of
default, or an event of default is existing, under any obligation of Penn
Octane which Rio Vista has guaranteed.
Cash distributions from Rio Vista will be shared by the holders of Rio
Vista common units and the General Partner as described in the Agreement
based on a formula whereby the General Partner will receive
disproportionately more distributions per percentage interest than the
holders of the common units as annual cash distributions exceed certain
milestones.
On February 14, 2005, Rio Vista made a cash distribution of $487,000.
On April 21, 2005, the board of managers of Rio Vista approved the
payment of a $0.25 cash distribution per unit to all Rio Vista common
unitholders and a corresponding distribution to the General Partner as of
the record date of May 9, 2005. The distribution is to be paid on May 13,
2005 (see note L).
PARTNERSHIP TAX TREATMENT
Rio Vista is not a taxable entity (see below) and incurs no federal
income tax liability. Instead, each unitholder of Rio Vista is required to
take into account that unitholder's share of items of income, gain, loss
and deduction of Rio Vista in computing that unitholder's federal income
tax liability, even if no cash distributions are made to the unitholder by
Rio Vista. Distributions by Rio Vista to a unitholder are generally not
taxable unless the amount of cash distributed is in excess of the
unitholder's adjusted tax basis in Rio Vista.
Section 7704 of the Internal Revenue Code (Code) provides that publicly
traded partnerships shall, as a general rule, be taxed as corporations
despite the fact that they are not classified as corporations under Section
7701 of the Code. Section 7704 of the Code provides an exception to this
general rule for a publicly traded partnership if 90% or more of its gross
income for every taxable year consists of "qualifying income" (Qualifying
Income Exception). For purposes of this exception, "qualifying income"
includes income and gains derived from the exploration, development, mining
or production, processing, refining, transportation (including pipelines)
or marketing of any mineral or natural resource. Other types of "qualifying
income" include interest (other than from a financial business or interest
based on profits of the borrower), dividends, real property rents, gains
from the sale of real property, including real property held by one
considered to be a "dealer" in such property, and gains from the sale or
other disposition of capital assets held for the production of income that
otherwise constitutes "qualifying income".
No ruling has been or will be sought from the IRS and the IRS has made
no determination as to Rio Vista's classification as a partnership for
federal income tax purposes or whether Rio Vista's operations generate a
minimum of 90% of "qualifying income" under Section 7704 of the Code.
If Rio Vista were classified as a corporation in any taxable year,
either as a result of a failure to meet the Qualifying Income Exception or
otherwise, Rio Vista's items of income, gain, loss and deduction would be
reflected only on Rio Vista's tax return rather than being passed through
to Rio Vista's unitholders, and Rio Vista's net income would be taxed at
corporate rates.
18
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
PARTNERSHIP TAX TREATMENT - CONTINUED
If Rio Vista were treated as a corporation for federal income tax purposes,
Rio Vista would pay tax on income at corporate rates, which is currently a
maximum of 35%. Distributions to unitholders would generally be taxed again
as corporate distributions, and no income, gains, losses, or deductions
would flow through to the unitholders. Because a tax would be imposed upon
Rio Vista as a corporation, the cash available for distribution to
unitholders would be substantially reduced and Rio Vista's ability to make
minimum quarterly distributions would be impaired. Consequently, treatment
of Rio Vista as a corporation would result in a material reduction in the
anticipated cash flow and after-tax return to unitholders and therefore
would likely result in a substantial reduction in the value of Rio Vista's
common units.
Current law may change so as to cause Rio Vista to be taxable as a
corporation for federal income tax purposes or otherwise subject Rio Vista
to entity-level taxation. The Agreement provides that, if a law is enacted
or existing law is modified or interpreted in a manner that subject Rio
Vista to taxation as a corporation or otherwise subjects Rio Vista to
entity-level taxation for federal, state or local income tax purposes, then
the minimum quarterly distribution amount and the target distribution
amount will be adjusted downward to reflect the impact of that law on Rio
Vista.
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 J - CONTRACTS
LPG SALES TO PMI
During December 2004, the Company and PMI entered into a three month
agreement for the period January 1, 2005 to March 31, 2005 for the minimum
sale of 11,700,000 gallons of LPG for the months of January and February
and 11,050,000 gallons of LPG for the month of March (Quarterly Agreement)
at reduced margins compared with those in effect during 2004. Actual
volumes sold were 12,700,000 gallons, 9,900,000 gallons and 9,600,000
gallons for January, February and March 2005, respectively. In April 2005,
the Company entered into a one month contract with PMI for the sale of a
minimum of 10,450,000 gallons at a further reduction in margin (see note
L).
The shortfall for the month of February 2005 was attributable to the
Company not having a sufficient supply of LPG to meet the minimum contract
volume. The shortfall for the month of March 2005 was attributable to PMI
not purchasing the minimum contract volume. In accordance with the
Quarterly Agreement, PMI paid approximately $104,000 representing the total
amount due associated with the shortfall volumes for March 2005.
The Company continues to negotiate for the extension and/or renewal of
the LPG contract with PMI. There is no assurance that the LPG contract with
PMI will be extended and/or renewed, and if so, that the terms will be more
or less favorable than prior agreements.
PMI has primarily used the Matamoros Terminal Facility to load LPG
purchased from the Company for distribution by truck in Mexico. The Company
continues to use the Brownsville Terminal Facility in connection with LPG
delivered by railcar to other customers, storage and as an alternative
terminal in the event the Matamoros Terminal Facility cannot be used.
19
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - CONTRACTS
LPG SUPPLY AGREEMENTS
The Company's agreement with Exxon expires in 2009 (Exxon Supply Contract)
requires the Company to purchase minimum quantities of LPG totaling up to
approximately 13,900,000 gallons per month although the actual amounts
supplied under the Exxon Supply Contract averaged approximately 9,295,000
gallons per month for the three months ended March 31, 2005.
During January 2005, the Company amended the Koch supply contract whereby
beginning February 2005 and continuing through September 30, 2005, the
Company is not required to purchase any LPG from Koch under the existing
Koch supply contract. In addition under the terms of the amendment, the
Koch supply contract terminates on September 30, 2005.
In addition to the LPG costs charged by its suppliers, the Company
also incurs additional costs to deliver 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 LPG purchased under the Exxon Supply Contract over actual sales
volumes to PMI. Under the terms of the Exxon Supply Contract, 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 Exxon Supply Contract or other suppliers if there
are increases in quantities of LPG purchased and/or to finance future price
increases of LPG.
NOTE K - 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 and has
historically had a deficit in working capital. In addition, substantially
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
$280,000 Notes and the RZB Credit Facility, and therefore, the Company may
be unable to obtain additional financing collateralized by those assets.
The Restructured Notes and the $280,000 Notes are due December 15, 2005.
The RZB Credit Facility may be insufficient to finance the Company's LPG
sales and/or Fuel Products sales, assuming increases in product costs per
gallon, or volumetric growth in product sales, and maybe terminated by RZB
with 90 days notice.
Since April 1, 2004, the Company has been operating under monthly
agreements and the Quarterly Agreement with PMI (see note J). The monthly
volumes of LPG sold to PMI since April 1, 2004 have been materially less
than historical levels and since April 1, 2005 the margins have been
materially reduced. The Company's gross profits on sales may be
insufficient to pay its expenses if (i) the volume of LPG sold under any
future sales agreements declines below an average of approximately
11,000,000 gallons per month and/or the margins are materially reduced from
historical levels (see note L), and/or (ii) the Company cannot successfully
reduce the minimum volumes and/or purchase costs required under the Exxon
Supply Contract and/or (iii) the Company cannot sufficiently reduce its
other expenses, and/or (iv) the Company's new Fuel Sales Business, is not
sufficiently successful.
20
PENN OCTANE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - REALIZATION OF ASSETS
The Company's cash flow has been materially reduced as a result of
materially lower volumes of sales to PMI and materially reduced margins.
Additionally, the Company has begun to incur the additional public company
compliance and income tax preparation costs for Rio Vista. Rio Vista has
declared and will pay a cash distribution on May 13, 2005. As a result of
these factors, the Company may not have sufficient cash flow to pay its
obligations when due and/or make future distributions to Rio Vista's
unitholders. In the event Penn Octane does not pay its obligations when
due, Rio Vista's guarantees to Penn Octane and Penn Octane's creditors may
be triggered. Accordingly, Rio Vista may be required to pay such
obligations of Penn Octane to avoid foreclosure against its assets by Penn
Octane's creditors. If the Company's revenues and other sources of
liquidity are not adequate to pay its obligations, Rio Vista may be
required to reduce or eliminate the quarterly distributions to unitholders
and Penn Octane or Rio Vista may be required to raise additional funds to
avoid such foreclosure. There can be no assurance that such additional
funding will be available on terms attractive to either Penn Octane or Rio
Vista or available at all. If additional amounts cannot be raised and the
Company is unable to restructure its obligations, the Company would suffer
material adverse consequences to its business, financial condition and
results of operations and Penn Octane and/or Rio Vista would likely be
required to seek other alternatives, which could include the sale of
assets, closure of operations and up to and including protection under the
U.S. bankruptcy laws.
In view of the matters described in the preceding paragraphs,
recoverability of the recorded asset amounts shown in the accompanying
unaudited consolidated balance sheet is dependent upon the ability of the
Company to generate sufficient cash flow through operations or additional
debt or equity financing to pay its liabilities and obligations when due.
The ability for the Company to generate sufficient cash flows is
significantly dependent on the continued sale of LPG to PMI at acceptable
average monthly sales volumes and margins, the success of the Fuel Sales
Business and the adequacy of the RZB Credit Facility to finance such sales.
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 negotiating with PMI to increase LPG sales at
acceptable monthly volumes and margins on a long-term basis. In addition,
management is taking steps to (i) expand its Fuel Sales Business, (ii)
further diversify its operations to reduce dependency on sales of LPG,
(iii) increase the amount of financing for its products and operations,
(iv) raise additional debt and/or equity capital and (v) reduce its supply
costs and operating expenses.
NOTE L - SUBSEQUENT EVENTS
On May 5, 2005, the Company entered into a contract with PMI for the
sale of a minimum of 6,000,000 gallons of LPG for the period May 5, 2005 to
May 31, 2005 at the reduced margin received in April 2005. For the period
May 1, 2005 to May 4, 2005, PMI did not purchase any LPG from the Company.
On May 13, 2005, Rio Vista made a cash distribution of $487,000 (see
note I).
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PENN OCTANE CORPORATION ("PENN OCTANE") AND ITS CONSOLIDATED SUBSIDIARIES
WHICH INCLUDES RIO VISTA ENERGY PARTNERS L.P. ("RIO VISTA") AND ITS SUBSIDIARIES
ARE HEREINAFTER REFERRED TO AS THE "COMPANY".
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. References to specific years preceded by "fiscal"
(e.g. fiscal 2004) refer to the Company's fiscal year ended December 31.
FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report that are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
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 inherently involve risks and uncertainties. From
time to time, the Company has made or may make forward-looking statements,
orally or in writing. These forward-looking statements include statements
regarding anticipated future revenues, sales, LPG supply, LPG pricing,
operations, demand, competition, capital expenditures, future acquisitions,
additional financing, the deregulation of the LPG market in Mexico, the
operations of the US - Mexico Pipelines, the Matamoros Terminal Facility, the
remaining Saltillo Terminal assets, other upgrades to facilities, foreign
ownership of LPG operations, short-term obligations and credit arrangements,
Fuel Sales Business, the Spin-Off, cash distributions, "Qualifying Income" 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 "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as those discussed elsewhere in this Report. We caution you, however, that
the following list of factors may not include all material risks facing the
Company.
RISK FACTORS
Business Factors. The expiration of the LPG sales contract with PMI
effective March 31, 2004 and the resulting lower LPG sales volumes and margins
have adversely affected the Company's results of operations. Penn Octane has
one major customer for LPG, Rio Vista, and Rio Vista has only one customer for
LPG in Mexico, PMI. The Company commenced its Fuel Sales Business less than one
year ago. The Company cannot be sure that PMI will continue to purchase LPG
from Rio Vista or in quantities or prices that are profitable. There are a
limited number of suppliers of LPG that connect to Rio Vista's pipelines and a
limited supply of LPG. The Company may lose its competitive advantage when the
Company's Seadrift pipeline lease expires in 2013. The Company may be unable to
successfully develop additional sources of revenue in order to reduce its
dependence on PMI. The Company may not have sufficient cash to meet its
obligations. All of the Company's assets are pledged as collateral for existing
debt, and the Company therefore may be unable to obtain additional financing
collateralized by such assets. The Company is at risk of economic loss due to
fixed margin contracts. If the Company does not have sufficient capital
resources for acquisitions or opportunities for expansion, the Company's growth
will be limited. The Company's ability to grow the Fuel Sales Business is
largely dependent on available financing which may be limited. Future
acquisitions and expansions may not be successful, may substantially increase
the Company's indebtedness and contingent liabilities, and may create
integration difficulties. The Company's business would be adversely affected if
operations at Rio Vista's transportation, terminal and distribution facilities
were interrupted. The Company's business would also be adversely affected if the
operations of the Company's customers and suppliers were interrupted.
Competitive Factors. The energy industry is highly competitive. There is
competition within the industries and also with other industries in supplying
the energy and fuel needs of the industry and individual consumers. The Company
competes with other firms in the sale or purchase of LPG and Fuel Products as
well as the transportation of these products in the US and Mexican markets and
employs all methods of competition which are lawful and appropriate for such
purposes. A key component of the Company's competitive position, particularly
given the commodity-based nature of many of its products, is its ability to
manage its expenses successfully, which requires continuous management focus on
reducing unit costs and improving efficiency and its ability to secure unique
opportunities for the purchase, sale and/or delivery methods of its products.
22
International Factors. Mexican economic, political and social conditions
may change and adversely affect Rio Vista's operations. Rio Vista may not be
able to continue operations in Mexico if Mexico restricts the existing ownership
structure of its Mexican operations, requiring Rio Vista to increase its
reliance on Mexican nationals to conduct its business. The LPG market in Mexico
is undergoing deregulation, the results of which may hinder Rio Vista's ability
to negotiate acceptable contracts with distributors. Rio Vista's contracts and
Mexican business operations are subject to volatility in currency exchange rates
which could negatively impact its earnings.
Political Factors. The operations and earnings of the Company and its
consolidated affiliate in the US and Mexico have been, and may in the future be,
affected from time to time in varying degree by political instability and by
other political developments and laws and regulations, such as forced
divestiture of assets; restrictions on production, imports and exports; war or
other international conflicts; civil unrest and local security concerns that
threaten the safe operation of the Company's facilities; price controls; tax
increases and retroactive tax claims; expropriation of property; cancellation of
contract rights; and environmental regulations. Both the likelihood of such
occurrences and their overall effect upon the Company vary greatly and are not
predictable.
Industry and Economic Factors. The operations and earnings of the Company
and its consolidated affiliate throughout the US and Mexico are affected by
local, regional and global events or conditions that affect supply and demand
for the Company's products. These events or conditions are generally not
predictable and include, among other things, general economic growth rates and
the occurrence of economic recessions; the development of new supply sources for
its products; supply disruptions; weather, including seasonal patterns that
affect energy demand and severe weather events that can disrupt operations;
technological advances, including advances in exploration, production, refining
and advances in technology relating to energy usage; changes in demographics,
including population growth rates and consumer preferences; and the
competitiveness of alternative hydrocarbon or other energy sources or product
substitutes.
Project Acquisition Factors. In additional to the factors cited above, the
advancement, cost and results of particular projects sought by the Company,
including projects which do not specifically fall within the areas of the
Company's current lines of businesses will depend on: the outcome of
negotiations for such acquisitions; the ability of the Company's management to
manage such businesses; the ability of the Company to obtain financing for such
acquisitions; changes in operating conditions or costs; and the occurrence of
unforeseen technical difficulties.
Market Risk Factors. See "Notes to Consolidated Financial Statements
(Unaudited)," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Quantitative and Qualitative Disclosures About
Market Risk" in this report for discussion of the impact of market risks,
inflation and other uncertainties.
Internal Control Factors. Pursuant to Section 404 of the Sarbanes Oxley
Act of 2002, beginning with the fiscal year ended December 31, 2005, the Company
is required to complete an annual evaluation of its internal control systems.
In addition, the Company's independent auditors are required to provide an
opinion regarding such evaluation and the adequacy of the Company's internal
accounting controls. The Company's internal controls may be found to be
inadequate, deficiencies or weaknesses may be discovered, and remediation may
not be successful. As the Company grows, the Company will need to strengthen
its internal control systems. If the Company acquires an existing business, the
internal control systems of the acquired business may be inadequate and may
require additional strengthening.
Projections. Projections, estimates and descriptions of the Company's plans
and objectives included herein are forward-looking statements. Actual future
results could differ materially due to, among other things, the factors
discussed above and elsewhere in this report.
OVERVIEW
The Company has been principally engaged in the purchase, transportation
and sale of LPG for distribution into northeast Mexico. To the extent that Penn
Octane purchases quantities of LPG under its supply contract in excess of LPG
sold to PMI, the Company sells the excess LPG to U.S. and other customers.
23
During the three months ended March 31, 2005, the Company derived 47.5% of
its total revenues and 91.7% of LPG 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.
During June 2004, the Company began the Fuel Sales Business with the
ability to access certain pipeline and terminal systems located in California,
Arizona, Nevada and Texas. Fuel Sales approximated $28.8 million for the three
months ended March 31, 2005 which represents approximately 48.1% of total
revenues.
On September 30, 2004, Penn Octane completed a series of transactions
involving (i) the transfer of substantially all of its owned pipeline and
terminal assets in Brownsville and Matamoros to RVOP (ii) transferred its 99.9%
interest in RVOP to Rio Vista and (iii) the Spin-Off, resulting in Rio Vista
becoming a separate public company. The Common Units represented 98% of Rio
Vista's outstanding units. The remaining 2% of such units, which is the general
partner interest, is owned and controlled by the General Partner, and the
General Partner will is responsible for the management of Rio Vista. Accordingly
the Company has control of Rio Vista by virtue of its ownership and related
voting control of the General Partner and therefore, Rio Vista is consolidated
with the Company and the interests of the limited partners are classified as
minority interests in the Company's consolidated financial statements.
Subsequent to the Spin-Off, Rio Vista sells LPG directly to PMI and purchases
LPG from Penn Octane under a long-term supply agreement. The purchase price of
the LPG from Penn Octane is determined based on the cost of LPG under Penn
Octane's LPG supply agreements with its suppliers, other direct costs related to
PMI sales and a formula that takes into consideration operating costs of Penn
Octane and Rio Vista.
Penn Octane continues to sell LPG to PMI through its supply contract with
Rio Vista, and it shifted certain costs of operations related to the Brownsville
and Matamoros terminals and pipelines, and certain administrative costs to Rio
Vista. In addition, it continues to manage Rio Vista through the General Partner
and to explore opportunities to acquire and grow other lines of business such as
the Fuel Sales Business described below. Penn Octane will benefit from the
Spin-Off indirectly based on the success of Rio Vista through Penn Octane's
ownership of the General Partner.
LPG SALES
The following table shows the Company's volume sold and delivered in
gallons and average sales price for the three months ended March 31, 2005 and
2004;
2005 2004
----- -----
Volume Sold
LPG (millions of gallons) - PMI 32.3 57.4
LPG (millions of gallons) - Other 3.6 11.1
----- -----
35.9 68.5
===== =====
Average sales price
LPG (per gallon) - PMI $0.88 $0.76
LPG (per gallon) - Other 0.72 0.51
24
RECENT TRENDS. Since April 2004, PMI has contracted with the Company for
volumes which are significantly lower than amounts purchased by PMI in similar
periods during previous years. See Liquidity and Capital Resources - Sales to
PMI below. The Company believes that the reduction of volume commitments is
based on additional LPG production by PEMEX being generated from the Burgos
Basin field in Reynosa, Mexico, an area within the proximity of the Company's
Matamoros Terminal Facility and increased competition from U.S. suppliers (see
below). Although the Company is not aware of the total amount of LPG actually
being produced by PEMEX from the Burgos Basin, it is aware that PEMEX has
constructed and is operating two new cryogenic facilities at the Burgos Basin
which it believes may have a capacity of producing up to 12 million gallons of
LPG per month. The Company also believes that PEMEX is intending to install two
additional cryogenic facilities, with similar capacity, to be operational in
early 2006. The Company is also not aware of the capacity at which the current
cryogenic facilities are being operated. Furthermore, the Company is not aware
of the actual gas reserves of the Burgos Basin or the gas quality, each of which
could significantly impact LPG production amounts. The Company still believes
that its LPG supplies are competitive with the necessary U.S. imports of LPG by
PEMEX and that the LPG volumes which are actually produced from the Burgos Basin
would not eliminate the need for U.S. LPG imports by PEMEX and that LPG volumes
produced from the Burgos Basin would be more economically suited for
distribution to points further south in Mexico rather than in the Company's
strategic zone.
During June 2004, Valero L.P., a U.S. limited partnership ("Valero") began
operation of a newly constructed LPG terminal facility in Nuevo Laredo, Mexico
and a newly constructed pipeline connecting the terminal facility in Nuevo
Laredo, Mexico to existing pipelines in Juarez, Texas which connect directly to
Valero Energy Corporation's Corpus Christi, Texas and Three Rivers, Texas
refineries. Valero has contracted with PMI under a five year agreement to
deliver approximately 6.3 million gallons (of which 3.2 million gallons were
previously delivered by truck from Three Rivers, Texas) of LPG per month.
Valero has also indicated that it intends to increase capacity of its Nuevo
Laredo terminal to 10.1 million gallons per month. The Company believes that if
Valero intends to maximize capacity of these facilities, then it would be
required to obtain additional LPG supplies from major LPG hubs located in Corpus
Christi and Mont Belvieu, Texas. Accordingly, the Company believes that any
additional supplies over amounts currently available to the Mexican market
through Valero's system could be more expensive than the Company's currently
available supplies and delivery systems.
During 2004, a pipeline operated by El Paso Energy between Corpus Christi,
Texas and Hidalgo County, Texas was closed. Historically these facilities had
supplied approximately 5.0 million gallons of LPG per month to the Company's
strategic zone. The Company is not aware of any future plans for these
facilities.
During 2003, PMI constructed and began operations of a refined products
cross border pipeline connecting a pipeline running from PEMEX's Cadereyta
Refinery in Monterey, Mexico to terminal facilities operated by Transmontagne,
Inc., in Brownsville, Texas. Transmontagne is a U.S. corporation. The pipeline
crosses the US-Mexico border near the proximity of the Company's pipelines. In
connection with the construction of the pipeline, PMI was required to obtain an
easement from the Company for an approximate 21.67 acre portion of the pipeline.
Under the terms of the easement, PMI has warranted that it will not transport
LPG through October 15, 2017.
25
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2004
Revenues. Revenues for the three months ended March 31, 2005, were $59.7
million compared with $50.8 million for the three months ended March 31, 2004,
an increase of $8.9 million or 17.6%. Of this increase, $28.8 million was
attributable to new revenues generated from the Company's Fuel Sales Business
which commenced operations in June 2004, $7.0 million was attributable to
increases in average sales prices of LPG sold to PMI during the three months
ended March 31, 2005 and $3.0 million was attributable to increased average
sales prices of LPG sold to customers other than PMI during the three months
ended March 31, 2005, partially offset by $22.0 million attributable to
decreased volumes of LPG sold to PMI during the three months ended March 31,
2005 and $7.8 million was attributable to decreased volumes of LPG sold to
customers other than PMI during the three months ended March 31, 2005.
Cost of goods sold. Cost of goods sold for the three months ended March
31, 2005 was $57.3 million compared with $47.7 million for the three months
ended March 31, 2004, an increase of $9.6 million or 20.2%. Of this increase,
$27.7 million was attributable to new costs of goods sold arising from the
Company's Fuel Sales Business which commenced operations in June 2004, $6.6
million was attributable to increases in the cost of LPG sold to PMI during the
three months ended March 31, 2005 and $4.1 million was attributable to increased
costs of LPG sold to customers other than PMI during the three months ended
March 31, 2005, partially offset by $19.8 million attributable to decreased
volume of LPG sold to PMI during the three months ended March 31, 2005 and $8.7
million was attributable to decreased volumes of LPG sold to customers other
than PMI during the three months ended March 31, 2005.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.6 million for the three months ended March 31,
2005, compared with $1.2 million for the three months ended March 31, 2004, an
increase of $381,591 or 30.9%. The increase during the three months ended March
31, 2005 was principally due to increases in professional fees and Texas state
franchise taxes and Mexican ad valorem taxes, partially offset by reduced
payroll related costs. The above amounts include selling, general and
administrative expenses related to the Fuel Sales Business of $172,328 for the
three months ended March 31, 2005.
Other income (expense). Other expense was $556,624 for the three months
ended March 31, 2005, compared with $307,962 for the three months ended March
31, 2004. The increase in other expense was due primarily to minority interest
in the earnings of Rio Vista of $169,045, increased interest costs associated
with the Fuel Sales Business of $80,816 and reduced interest income during the
three months ended March 31, 2005.
Income tax. The Company calculated income taxes of $19,610 during the three
months ended March 31, 2005. Income taxes consisted of alternative minimum tax
of $1,461, state income tax expense of $16,756 and Mexican income tax expense of
$1,393 during the three months ended March 31, 2005.
26
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has had an accumulated deficit since its inception and
has historically had a deficit in working capital. In addition, substantially
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 $280,000 Notes
and the RZB Credit Facility, and therefore, the Company may be unable to obtain
additional financing collateralized by those assets. The Restructured Notes and
the $280,000 Notes are due December 15, 2005. The RZB Credit Facility is an
uncommitted facility which is authorized every ninety days and is reviewed
annually at March 31. The Company may need to increase its credit facility for
increases in quantities of LPG and Fuel Products purchased and/or to finance
future price increases of LPG and Fuel Products. The Company depends heavily on
sales to one major customer, PMI. From April 1, 2004 to March 31, 2005, the
Company has been operating under monthly contracts with PMI and under a three
month contract which expired March 31, 2005. Since April 1, 2005, the Company
has operated under monthly contracts with PMI (see below). The Company's sources
of liquidity and capital resources historically have been provided by sales of
LPG and Fuel Products, 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 Company's cash flow has been materially reduced as a result of
materially lower volumes of sales to PMI and materially reduced margins.
Additionally, the Company has begun to incur the additional public company
compliance and income tax preparation costs for Rio Vista. Rio Vista has
declared and paid a cash distribution on May 13, 2005. As a result of these
factors, the Company may not have sufficient cash flow to pay its obligations
when due and/or make future distributions to Rio Vista's unitholders. In the
event Penn Octane does not pay its obligations when due, Rio Vista's guarantees
to Penn Octane and Penn Octane's creditors may be triggered. Accordingly, Rio
Vista may be required to pay such obligations of Penn Octane to avoid
foreclosure against its assets by Penn Octane's creditors. If the Company's
revenues and other sources of liquidity are not adequate to pay its obligations,
Rio Vista may be required to reduce or eliminate the quarterly distributions to
unitholders and Penn Octane or Rio Vista may be required to raise additional
funds to avoid such foreclosure. There can be no assurance that such additional
funding will be available on terms attractive to either Penn Octane or Rio Vista
or available at all.
Although Rio Vista is not required to do so, if Penn Octane is unable to
pay its obligations when they become due, Rio Vista may lend the necessary funds
to Penn Octane. Conversely, if Rio Vista does not have the funds necessary to
pay its obligations and to make its distributions, to the extent that Penn
Octane has sufficient cash to do so, it intends to lend such amounts to Rio
Vista.
In the event Penn Octane and/or Rio Vista is required to raise additional
funds, management does not believe that either would be able to obtain such
financing from traditional commercial lenders. Rather, they would likely have
to conduct sales of equity and/or debt securities through public or private
financings, collaborative relationships or other arrangements.
If additional amounts cannot be raised and the Company is unable to
restructure its obligations, the Company would suffer material adverse
consequences to its business, financial condition and results of operations and
Penn Octane and/or Rio Vista would likely be required to seek other alternatives
which could include the sale of assets, closure of operations up to and
including protection under the U.S. bankruptcy laws.
Further, if Penn Octane is determined to have a federal income tax
liability as a result of the Spin-Off and if Penn Octane is unable to pay such
liabilities, the Internal Revenue Service may assert that the Penn Octane
stockholders who received common units in the Spin-Off are liable for unpaid
federal income taxes of Penn Octane, including interest and any penalties, up to
the value of the Rio Vista Common Units received by each stockholder.
27
The following summary table reflects comparative cash flows for three
months ended March 31, 2005, and 2004. All information is in thousands.
2005 2004
-------- --------
Net cash (used) in operating activities . . . . . . $(4,950) $(1,813)
Net cash (used in) provided by investing activities (8) 326
Net cash provided by financing activities. . . . . . 4,724 1,228
-------- --------
Net increase (decrease) in cash. . . . . . . . . . . $ ( 234) $( 259)
======== ========
Sales to PMI. On March 31, 2004, the Company's sales agreement with PMI
("Contract") expired. During the months of April 2004 through December 2004,
the Company and PMI entered into monthly agreements for the sale of LPG (the
"Monthly 2004 Contracts"). During December 2004, the Company and PMI entered
into a three month agreement for the period January 1, 2005 to March 31, 2005
(the "Quarterly Agreement") at margins lower than those in effect during 2004.
For April 2005, the Company entered into a one month agreement with PMI at
further reduced margins. On May 5, 2005, the Company entered into a contract
with PMI for the sale of a minimum of 6,000,000 gallons of LPG for the period
May 5, 2005 to May 31, 2005 at the reduced margin received in April 2005. For
the period May 1, 2005 to May 4, 2005, PMI did not purchase any LPG from the
Company. The following table describes the minimum monthly volumes of LPG to
be purchased by PMI and the actual monthly volumes purchased by PMI under
monthly contracts from April 1, 2004 through December 31, 2004, the Quarterly
Agreement and contracts for April and May 2005:
MINIMUM ACTUAL
CONTRACT VOLUMES
VOLUMES SOLD
(IN MILLIONS (IN MILLIONS
MONTH YEAR OF GALLONS) OF GALLONS)
- --------- ---- ------------- -------------
April 2004 13.0 13.1
May 2004 13.0 13.4
June 2004 13.0 13.8
July 2004 11.7 12.3
August 2004 11.7 12.4
September 2004 11.7 11.8
October 2004 11.1 10.9
November 2004 11.1 12.4
December 2004 11.1 13.9
January 2005 11.7 12.7
February 2005 11.7 9.9
March 2005 11.1 9.6
April 2005 10.5 10.8
May 2005 6.0 *
<FN>
* Not yet available
The shortfall for the month of February 2005 was attributable to the
Company not having a sufficient supply of LPG to meet minimum contract volume.
The shortfall for the month of March 2005 was attributable to PMI not purchasing
the minimum contract volume. In accordance with the Quarterly Agreement, PMI
paid approximately $104,000 representing the total amount due associated with
the shortfall volumes for March 2005.
28
If the actual volume sold in May 2005 approximates the minimum contract
volume, cash flows for May 2005 will be less than expected cash operating and
other expenses, by approximately $300,000 assuming current expense levels and
excluding net cash flows associated with the Fuel Sales Business,. The Company
intends to take certain measures to reduce cash operating costs and other
expenses immediately. There can be no assurance that costs and expenses can be
reduced sufficiently to mitigate negative cash flows at such reduced volumes at
current or lower margins.
The Company continues to negotiate for the extension and/or renewal of the
LPG contract with PMI. There is no assurance that the LPG contract with PMI
will be extended and/or renewed, and if so, that the terms will be more or less
favorable than prior agreements. Until the terms of a new long-term contract
are reached, the Company expects to enter into additional monthly agreements
similar to the Quarterly Agreement.
The Company's management believes that PMI's reduction of volume
commitments for April 2004 through May 2005 is based on additional LPG
production by PEMEX being generated from the Burgos Basin field in Reynosa,
Mexico, an area within the proximity of the Company's Matamoros Terminal
Facility and increased competition from U.S. suppliers (see Recent Trends
above). In the event the volume of LPG purchased by PMI under future agreements
decline below an average of approximately 11 million gallons per month and/or
margins are further reduced, the Company could suffer material adverse
consequences to its business, financial condition and results of operations. If
the Company is unsuccessful in lowering its LPG costs to offset a decline in
volumes and/or the Company is forced to accept similar or lower margins for
sales to PMI, the results of operations of the Company may be adversely
affected. The Company may not have sufficient cash flow or available credit to
absorb such reductions in gross profit.
PMI has primarily used the Matamoros Terminal Facility to load LPG
purchased from the Company for distribution by truck in Mexico. The Company
continues to use the Brownsville Terminal Facility in connection with LPG
delivered by railcar to other customers, storage and as an alternative terminal
in the event the Matamoros Terminal Facility cannot be used.
Revenues from PMI sales totaled approximately $28.4 million and $43.4
million for the three months ended March 31, 2005 and 2004, respectively,
representing approximately 47.5% and 85.5% of total revenues for the periods and
91.7% and 85.6% of the Company's total LPG revenues for the periods.
Seasonality. The Company's gross profit is dependent on sales volume of
LPG to PMI, which fluctuates in part based on the seasons. The demand for LPG
is strongest during the winter season.
LPG Supply Agreements. 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 up to 13.9 million gallons per month blended in
accordance with required specifications. For the three months ended March 31,
2005, under the Exxon Supply Contract, Exxon has supplied an average of
approximately 9.3 million gallons of LPG per month. The purchase price is
indexed to variable posted prices.
In addition, under the terms of the Exxon Supply Contract, Exxon made its
Corpus Christi Pipeline (the "ECCPL") operational in 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 required specifications and then
delivered into the Leased Pipeline. The Company agreed to flow a minimum of
122.0 million gallons per year of Additional Propane Supply through the ECCPL
until December 2005. The Company is required to pay minimum utilization fees
associated with the use of the ECCPL until December 2005. Thereafter the
utilization fees will be based on the actual utilization of the ECCPL.
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. In March 2003 the Company extended
the Koch Supply Contract for an additional year pursuant to the Koch Supply
Contract which provides for automatic annual renewals unless terminated in
writing by either party. During December 2003, the Company and Koch entered
into a new three year supply agreement. The terms of the new agreement are
similar to the agreement previously in effect between the parties.
29
During January 2005, the Company amended the Koch supply contract whereby
beginning February 2005 and continuing through September 30, 2005, the Company
is not required to purchase any LPG from Koch under the existing Koch supply
contract. In addition under the terms of the amendment, the Koch supply contract
terminates on September 30, 2005.
For the month of January 2005, under the Koch supply contract, Koch
supplied 6.5 million gallons of propane.
During April 2005, 9.2 million gallons of LPG was supplied under the Exxon
Supply Contract and 1.2 million gallons were purchased on a spot monthly basis
from another supplier.
The Company is currently purchasing LPG under the Exxon Supply Contract.
The Company's aggregate costs per gallon to purchase LPG (less any applicable
adjustments) are below the aggregate sales prices per gallon of LPG sold to its
customers.
In addition to the LPG costs charged by its supplier, 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 LPG
purchased under the Exxon Supply Contract over actual sales volumes to PMI.
Under the terms of the Exxon Supply Contract, 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 Exxon Supply
Contract or other suppliers if there are increases in quantities of LPG
purchased and/or to finance future price increases of LPG.
Fuel Sales Business. During June 2004, the Company began the Fuel Sales
Business. The Company sells Fuel Products through transactional, bulk and/or
rack transactions. Typical transactional and bulk sales are made based on a
predetermined net spread between the purchase and sales price over posted
monthly variable prices and/or daily spot prices. Rack sales transactions are
based on variable sale prices charged by the Company which are tied to posted
daily spot prices and purchase costs which are based on a monthly average or 3
day average based on posted prices. The Company pays pipeline and terminal fees
based on regulated rates.
The Fuel Sales Business on the west coast of the United States is
characterized by limited pipeline and terminal space to move sufficient Fuel
Products to locations where demand for Fuel Products exists. The Company has
the ability to access to certain pipeline and terminal systems located in
California, Arizona, Nevada and Texas, where it is able to deliver its Fuel
Products. The markets where the Company has targeted its products are generally
in areas where the Fuel Products are difficult to deliver due to the
infrastructure limitations and accordingly, the Company's access provides an
advantage over other potential competitors who may not have access to these
pipelines or terminals. In addition, the Company's supply contracts provide it
with greater flexibility to manage changes in the prices of the Fuel Products.
The Company believes it has an advantage over other competitors based on its
favorable supply contracts and existing access to certain pipelines and
terminals.
For bulk and transactional sales, the Company enters into individual sales
contracts for each sale. Rack sales are subject to credit limitations imposed
on each individual buyer by the Company. The Company has several supply
contracts for each of the Fuel Products it sells. The supply contracts are
for annual periods with flexible volumes but they may be terminated sooner by
the supplier if the Company consistently fails to purchase minimum volumes of
Fuel Products. Fuel sales approximated 48.1% of total revenues for the three
months ended March 31, 2005.
Fuel Sales totaled $28.8 million and cost of fuel and other direct
operating expenses totaled $28.0 during the three months ended March 31, 2005.
Future success of the Fuel Sales Business is dependent on the demand for Fuel
Products in the Company's markets and the Company's ability to manage
fluctuations in the price of such products.
The ability of the Company to participate in the Fuel Sales Business is
largely dependent on the Company's ability to finance its supplies. Currently,
the Company utilizes the RZB Credit Facility to finance the purchases of Fuel
Products. Based on the Company's commitments under the Exxon Supply Contract,
increases in the costs of LPG and/or the increases in the costs of Fuel
Products, the amount of financing available for the Fuel Sales Business may be
reduced.
30
Federal and State agencies require the Company to obtain the necessary
regulatory and other approvals for its Fuel Sales Business.
Credit Arrangements. As of March 31, 2005, Penn Octane had a $20.0 million
credit facility with RZB Finance LLC ("RZB") for demand loans and standby
letters of credit (the "RZB Credit Facility") to finance Penn Octane's purchases
of LPG and Fuel Products. The RZB Credit facility is an uncommitted facility
under which the letters of credit have an expiration date of no more than 90
days and the facility reviewed annually at March 31. In connection with the RZB
Credit Facility, the Company granted RZB a security interest and assignment in
any and all of the Company's accounts, 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 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. 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. After the Spin-Off and transfer of assets to
Rio Vista, RZB continues to retain a security interest in the transferred
assets.
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 loan 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 (5.75% at
March 31, 2005) plus 2.5%. Pursuant to the RZB Credit Facility, RZB has sole
and absolute discretion to limit or terminate its participation in the RZB
Credit Facility and to refrain from making any loans or issuing any letters 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 addition to
the fees described above, the Company is required to pay RZB annual fees of
$50,000.
Based on current minimum purchase commitments under the Company's LPG
supply agreement and current LPG prices, the amount available to finance Fuel
Products and LPG purchases in excess of current minimum purchase commitments is
limited and therefore the ability of the Company to grow the Fuel Sales Business
is dependent on future increases in its RZB Credit Facility or other sources of
financing, the reduction of LPG supply commitments and/or the reduction in LPG
or Fuel Products prices.
Under the terms of the RZB Credit Facility, either Penn Octane or Rio Vista
is required to maintain net worth of a minimum of $10.0 million.
Jerome B. Richter has personally guaranteed all of Penn Octane's payment
obligations with respect to the RZB Credit Facility.
In connection with the Company's purchases of LPG and Fuel Products,
letters of credit are issued based on anticipated purchases. Outstanding letters
of credit for purchases of LPG and Fuel Products at March 31, 2005 totaled
approximately $10.5 million of which approximately $8.0 million represents March
2005 purchases and approximately $2.5 million represents April 2005 purchases.
In connection with the Company's purchase of LPG and Fuel Products, under
the RZB Credit Facility, assets related to product sales (the "Assets") are
required to be in excess of borrowings and commitments (including restricted
cash of approximately $4.2 million at March 31, 2005). At March 31, 2005, the
Company's borrowings and commitments were less than the amount of the Assets.
In connection with the Company's Fuel Sales Business, the Company has
issued bonds totaling $662,000 to the states of California, Nevada, Arizona and
Texas (the "Bonds") to secure payments of excise and other taxes collected from
customers in connection with sales of Fuel Products. The Bonds are partially
secured by letters of credit totaling $452,600. At March 31, 2005, such taxes
of approximately $800,577 were due. The letters of credit issued have all been
secured by cash in the amount of approximately $458,000 which is included in
restricted cash in the Company's balance sheet at March 31, 2005.
LPG and Fuel Products financing expense associated with the RZB Credit
Facility totaled $203,301, and $185,013 for the three months ended March 31,
2005 and 2004.
31
The following is a summary of the Company's estimated minimum contractual
obligations and commercial obligations as of March 31, 2005. Where applicable,
LPG prices are based on the March 31, 2005 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
- --------------------------------------- ------- ---------- ----------- ------------ --------
Long-Term Debt Obligations $ 1.5 $ 1.5 $ - $ - $ -
Operating Leases 8.8 1.1 2.0 2.0 3.7
LPG Purchase Obligations 608.6 135.3 270.6 202.7 -
Other Long-Term Obligations .1 - .1 - -
------- ---------- ----------- ------------ --------
Total Contractual Cash Obligations $ 619.0 $ 137.9 $ 272.7 $ 204.7 $ 3.7
======= ========== =========== ============ ========
AMOUNT OF COMMITMENT EXPIRATION
PER PERIOD
(AMOUNTS IN MILLIONS)
----------------------------------------------------
Total Amounts Less than 1 - 3 4 - 5 Over
Commercial Commitments Committed 1 Year Years Years 5 Years
- --------------------------------- -------------- ---------- ------ ------ --------
Lines of Credit $ 5.8 $ 5.8 $ - $ - $ -
Standby Letters of Credit 11.0 11.0 - - -
Guarantees N/A N/A N/A N/A N/A
Standby Repurchase Obligations N/A N/A N/A N/A N/A
Other Commercial Commitments N/A N/A N/A N/A N/A
-------------- ---------- ------ ------ --------
Total Commercial Commitments $ 16.8 $ 16.8 $ - $ - $ -
============== ========== ====== ====== ========
Distributions of Available Cash. All Rio Vista unitholders, have the right
to receive distributions of "available cash" as defined in the Rio Vista
partnership agreement (the "Agreement") from Rio Vista in an amount equal to the
minimum distribution of $0.25 per quarter per unit, plus any arrearages in the
payment of the minimum quarterly distribution on the units from prior quarters.
The General Partner receives a distribution corresponding to its 2% general
partnership interest. The distributions are to be paid 45 days after the end of
each calendar quarter. However, Rio Vista is prohibited from making any
distributions to unitholders if it would cause an event of default, or an event
of default is existing, under any obligation of Penn Octane which Rio Vista has
guaranteed.
Cash distributions from Rio Vista will be shared by the holders of Rio
Vista common units and the General Partner as described in the Agreement based
on a formula whereby the General Partner will receive disproportionately more
distributions per percentage interest than the holders of the common units as
annual cash distributions exceed certain milestones.
On January 14, 2005, the Board of Managers of Rio Vista approved the
payment of a $0.25 cash distribution per unit to all Rio Vista common
unitholders and a corresponding distribution to the General Partner as of the
record date of February 9, 2005. The distribution of $487,000 was paid on
February 14, 2005.
On April 21, 2005, the Board of Managers of Rio Vista approved the payment
of a $0.25 cash distribution per unit to all Rio Vista common unitholders and a
corresponding distribution to the General Partner as of the record date of May
9, 2005. The distribution of $487,000 was paid on May 13, 2005 (see note L to
the unaudited consolidated financial statements).
32
Rio Vista's ability to make distributions may be impacted by sales to PMI
at acceptable volumes and margins, payments on its guarantees, costs and
expenses and the inability to obtain additional financing on its pledged assets.
Although Penn Octane is not required to do so, to the extent that Penn Octane
has sufficient cash to do so, it intends to lend amounts to Rio Vista to meet
the minimum distributions. If Rio Vista's revenues and other sources of
liquidity after its quarterly distributions are not adequate to satisfy such
payment obligations of Penn Octane and/or Penn Octane does not have the
necessary cash to loan to Rio Vista, Rio Vista may be required to reduce or
eliminate the quarterly distributions to unitholders and/or Penn Octane and/or
Rio Vista may be required to raise additional funds to avoid foreclosure against
their assets. However, there can be no assurance that such additional funding
will be available on terms attractive to either Penn Octane or Rio Vista or
available at all.
The following is a reconciliation of Rio Vista's consolidated net income to
distributable cash flow for the three months ended December 31, 2004 and March
31, 2005.
Three Months Ended
--------------------------------
December 31,
2004 March 31, 2005
-------------- ----------------
Net income (loss) $ (63,000) $ 172,000
Plus interest and other expense, net 101,000 119,000
Plus depreciation and amortization 178,000 205,000
Plus other non-cash expenses 344,000 -
-------------- ----------------
EBITDA 560,000 496,000
Less cash interest, net (101,000) (61,000)
-------------- ----------------
Distributable cash flow 459,000 435,000
Distributable cash flow applicable to general partner (9,000) (9,000)
-------------- ----------------
Distributable cash flow applicable to limited partners $ 450,000 $ 426,000
============== ================
Rio Vista utilizes two financial measures, EBITDA and distributable cash
flow, which are not defined in GAAP. Management uses these financial measures
because they are widely accepted financial indicators used by investors to
compare partnership performance. In addition, management believes that these
measures provide investors an enhanced perspective of the operating performance
of Rio Vista's assets and the cash flow the business is generating. Neither
EBITDA nor distributable cash flow are intended to represent cash flows for the
period, nor are they presented as an alternative to net income. They should not
be considered in isolation or as substitutes for a measure of performance
prepared in accordance with GAAP.
Partnership Tax Treatment. Rio Vista is not a taxable entity (see below)
and incurs no federal income tax liability. Instead, each unitholder of Rio
Vista is required to take into account that unitholder's share of items of
income, gain, loss and deduction of Rio Vista in computing that unitholder's
federal income tax liability, even if no cash distributions are made to the
unitholder by Rio Vista. Distributions by Rio Vista to a unitholder are
generally not taxable unless the amount of cash distributed is in excess of the
unitholder's adjusted tax basis in Rio Vista.
Section 7704 of the Internal Revenue Code (the "Code") provides that
publicly traded partnerships shall, as a general rule, be taxed as corporations
despite the fact that they are not classified as corporations under Section 7701
of the Code. Section 7704 of the Code provides an exception to this general rule
for a publicly traded partnership if 90% or more of its gross income for every
taxable year consists of "qualifying income" (the "Qualifying Income
Exception"). For purposes of this exception, "qualifying income" includes income
and gains derived from the exploration, development, mining or production,
processing, refining, transportation (including pipelines) or marketing of any
mineral or natural resource. Other types of "qualifying income" include interest
(other than from a financial business or interest based on profits of the
borrower), dividends, real property rents, gains from the sale of real property,
including real property held by one considered to be a "dealer" in such
property, and gains from the sale or other disposition of capital assets held
for the production of income that otherwise constitutes "qualifying income".
33
No ruling has been or will be sought from the IRS and the IRS has made no
determination as to Rio Vista's classification as a partnership for federal
income tax purposes or whether Rio Vista's operations generate a minimum of 90%
of "qualifying income" under Section 7704 of the Code.
If Rio Vista were classified as a corporation in any taxable year, either
as a result of a failure to meet the Qualifying Income Exception or otherwise,
Rio Vista's items of income, gain, loss and deduction would be reflected only on
Rio Vista's tax return rather than being passed through to Rio Vista's
unitholders, and Rio Vista's net income would be taxed at corporate rates.
If Rio Vista were treated as a corporation for federal income tax purposes,
Rio Vista would pay tax on income at corporate rates, which is currently a
maximum of 35%. Distributions to unitholders would generally be taxed again as
corporate distributions, and no income, gains, losses, or deductions would flow
through to the unitholders. Because a tax would be imposed upon Rio Vista as a
corporation, the cash available for distribution to unitholders would be
substantially reduced and Rio Vista's ability to make minimum quarterly
distributions would be impaired. Consequently, treatment of Rio Vista as a
corporation would result in a material reduction in the anticipated cash flow
and after-tax return to unitholders and therefore would likely result in a
substantial reduction in the value of Rio Vista's common units.
Current law may change so as to cause Rio Vista to be taxable as a
corporation for federal income tax purposes or otherwise subject Rio Vista to
entity-level taxation. The Agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subject Rio Vista to
taxation as a corporation or otherwise subjects Rio Vista to entity-level
taxation for federal, state or local income tax purposes, then the minimum
quarterly distribution amount and the target distribution amount will be
adjusted downward to reflect the impact of that law on Rio Vista.
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 is $1.0 million including monthly
service payments. The service payments are subject to an annual adjustment
based on a labor cost index and an electric power cost index. In connection
with the Pipeline Lease, the Company 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 at its own expense, installed 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 and 360
million gallons per year.
Other. The Company intends to upgrade its computer and information systems
at a total estimated cost of approximately $350,000 during 2005.
Mexican Operations. Under current Mexican law, foreign ownership of
Mexican entities involved in the distribution of LPG or the operation of
receiving, conveying, storing and delivering LPG to final users is prohibited.
Foreign ownership is permitted in the transportation and storage of LPG.
Mexican law also provides that an entity with a permit to transport LPG is not
permitted to obtain permits for the other defined LPG activities (storage or
distribution). PennMex has a transportation permit and Termatsal owns, leases,
or is in the process of obtaining the land or rights of way used in the
construction of the Mexican portion of the US-Mexico Pipelines, and owns the
Mexican portion of the assets comprising the US-Mexico Pipelines and the
Matamoros Terminal Facility. The Company's consolidated Mexican affiliate,
Tergas, S. de R.L. de C.V. ("Tergas"), has been granted the permit to operate
the Matamoros Terminal Facility and the Company relies on Tergas' permit to
continue its delivery of LPG at the Matamoros Terminal Facility. The Company
pays Tergas its actual cost for distribution services at the Matamoros Terminal
Facility plus a small profit.
34
Through its operations in Mexico and the operations of the Mexican
Subsidiaries and Tergas, a consolidated affiliate, the Company is subject to the
tax laws of Mexico which, among other things, require that the Company comply
with transfer pricing rules, the payment of income, asset and ad valorem taxes,
and possibly taxes on distributions in excess of earnings. In addition,
distributions to foreign corporations, including dividends and interest payments
may be subject to Mexican withholding taxes.
During July 2003, the Company acquired an option to purchase Tergas, an
affiliate 95% owned by Mr. Vicente Soriano and the remaining balance owned by
Mr. Abelardo Mier, a consultant of the Company, for a nominal price of
approximately $5,000. Since inception the operations of Tergas have been funded
by the Company and the assets, liabilities and results of operations of Tergas
are included in the Company's consolidated financial statements.
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")), Reglamento de Gas Licuado
de Petroleo (Regulation of LPG) 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 Regulation of LPG
was enacted 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, an entity with a permit to transport LPG is not permitted to
obtain permits for the other defined LPG activities (storage and distribution).
The Company or its consolidated affiliate 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.
In connection with the above, in August 2001, Tergas received a one year
permit from the Mexican government to import LPG. During September 2001, the
Mexican government decided to delay the implementation of Deregulation and asked
Tergas to defer use of the permit and as a result, the Company did not sell 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 August 2002, which was again delayed. To
date the Mexican government has continued to delay implementation of
Deregulation. Tergas' permit to import LPG expired during August 2002. Tergas
intends to obtain a new permit when the Mexican government again begins to
accept applications. 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 to 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.
For LPG delivered into Mexico, PMI is the importer of record.
Private Placements and Other Transactions. During January 2005, the
Company issued 100,000 shares of common stock of Penn Octane to a consultant in
payment of amounts owed by the Company at December 31, 2004.
During March 2005, warrants to purchase a total of 106,250 shares of common
stock of Penn Octane were exercised resulting in cash proceeds to the Company of
$97,750.
35
On September 30, 2004, pursuant to the terms of an employment agreement
dated May 13, 2003 with Richard Shore, Jr., the Company issued warrants to
purchase 763,737 shares of Penn Octane's common stock at an exercise price of
$1.14 per share. The warrants expire on July 10, 2006.
On March 9, 2005, the board of directors of Penn Octane approved the grant
of warrants to purchase a total of 1,005,000 shares of Penn Octane common stock
under Penn Octane's 2001 Warrant Plan previously approved by the Penn Octane
stockholders. Of the total number of warrants granted, 625,000 were granted to
executive officers of Penn Octane, 255,000 were issued to outside directors of
Penn Octane and 125,000 were issued to a consultant. The exercise price for the
warrants is $1.50 per share, which was the closing price for Penn Octane's
common stock as reported by the Nasdaq Stock Market on March 9, 2005. Warrants
granted to executive officers vest in equal monthly installments over a period
of 36 months from the date of grant. Warrants granted to outside directors vest
in equal monthly installments over a period of 12 months from the date of grant.
All warrants become fully exercisable upon a change in control event and expire
five years from the date of grant.
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.
OPTIONS AND WARRANTS OF RIO VISTA
GENERAL PARTNER OPTIONS. Penn Octane's 100% interest in the General Partner
may be decreased to 50% as a result of the exercise by Shore Capital LLC ("Shore
Capital"), an affiliate of Richard Shore, Jr., and Mr. Richter of options to
each acquire 25% of the General Partner (the "General Partner Options"). The
exercise price for each option is approximately $82,000. The options expire on
July 10, 2006. Following the exercise of any of the General Partner Options,
Penn Octane will retain voting control of the General Partner pursuant to a
voting agreement.
COMMON UNIT WARRANTS. In connection with Mr. Shore's employment agreement
with Penn Octane, Shore Capital received warrants to acquire 97,415 common units
of Rio Vista at $8.47 per unit. The warrants expire on July 10, 2006.
The Company issued 90,250 warrants to purchase Rio Vista units to the
holders of the Restructured Notes and $280,000 Notes and 20,000 warrants to
purchase Rio Vista units to PBC (see note F to the unaudited consolidated
financial statements). The calculated exercise price per warrant to purchase a
Rio Vista Unit for these Rio Vista Warrants is $5.00.
On March 9, 2005, the board of managers of the General Partner of Rio
Vista, approved the Rio Vista 2005 Equity Incentive Plan (the "2005 Plan"). The
2005 Plan permits the grant of common unit options, common unit appreciation
rights, restricted common unit and phantom common units to any person who is an
employee (including to any executive officer) or consultant of Rio Vista or the
General Partner or any affiliate of Rio Vista or the General Partner. The 2005
Plan provides that each outside manager of the General Partner shall be granted
a common unit option once each fiscal year for not more than 5,000 common units,
in an equal amount as determined by the board of managers. The aggregate number
of common units authorized for issuance as awards under the 2005 Plan is
750,000. The 2005 Plan shall remain available for the grant of awards until
March 9, 2015, or such earlier date as the board of managers may determine. The
2005 Plan is administered by the compensation committee of the board of
managers. Under the terms of the Agreement and applicable rules of the Nasdaq
Stock Market, no approval by the common unitholders of Rio Vista was required.
36
On March 9, 2005, the board of managers of the General Partner of Rio Vista
approved the grant of options to purchase a total of 108,750 common units under
the 2005 Plan. Of the total number of options granted, 93,750 were granted to
certain executive officers of the General Partner and Mr Richter and 15,000 were
issued to outside managers of the General Partner. The exercise price for the
options is $12.51 per common unit, which is the average of the high and low
sales prices for Rio Vista common units as reported by the Nasdaq Stock Market
on March 9, 2005. The options granted to executive officers (including Mr.
Richter) were fully vested on the date of grant. The options granted to outside
managers vest in equal monthly installments over a period of 12 months from the
date of grant. All options become fully exercisable upon a change in control
event and expire three years from the date of grant.
The Spin-Off. During September 2003, the Company's board of directors and
the independent committee of its board of directors formally approved the terms
of the Spin-Off (see below) and Rio Vista filed a Form 10 registration statement
with the Securities and Exchange Commission ("SEC"). On September 30, 2004,
all of Penn Octane's limited partnership interest in Rio Vista was distributed
to Penn Octane's stockholders. Each stockholder of Penn Octane on September 30,
2004, received on common unit of the limited partnership interest of Rio Vista
for every eight shares of Penn Octane's common stock owned.
As a result of the Spin-Off, Rio Vista owns and operates the LPG,
distribution, transportation and marketing business previously conducted by Penn
Octane. All of the assets transferred to Rio Vista in connection with the
Spin-Off have been transferred at historical costs and related accumulated
depreciation of Penn Octane at the date of the Spin-Off. Rio Vista began
selling LPG to PMI upon the completion of the Spin-Off and at that time also
began purchasing LPG from Penn Octane under the LPG Supply Agreement.
The General Partner is responsible for managing the operations and
activities of Rio Vista. Common unitholders do not participate in the management
of Rio Vista. Penn Octane controls Rio Vista by virtue of its current ownership,
management and voting control of the General Partner. Therefore, Rio Vista is
accounted for as a consolidated subsidiary of Penn Octane for financial
accounting purposes.
INTERCOMPANY PURCHASE AGREEMENT FOR LPG
Penn Octane entered into a long-term supply agreement with Rio Vista
pursuant to which Rio Vista agrees to purchase all of its LPG requirements for
sales which utilize the assets transferred to Rio Vista by Penn Octane to the
extent Penn Octane is able to supply such LPG requirements. This agreement
further provides that Rio Vista has no obligation to purchase LPG from Penn
Octane to the extent the distribution of such LPG to Rio Vista's customers would
not require the use of any of the assets Penn Octane contributed to Rio Vista or
Penn Octane ceases to have the right to access the Seadrift pipeline.
Under the LPG Supply Agreement, Penn Octane supplies all of Rio Vista's LPG
requirements in connection with its LPG sales obligations to PMI. The purchases
of the LPG are at fluctuating prices and are determined based on the cost of LPG
under Penn Octane's agreements with its LPG suppliers for volumes sold to Rio
Vista for sale to PMI or to other Rio Vista customers, other direct costs
related to PMI and other LPG sales of Rio Vista and a formula that takes into
consideration operating costs of Penn Octane and Rio Vista. Rio Vista expects
the aggregate costs per gallon to purchase LPG (less any applicable adjustments)
to be below the aggregate sales prices per gallon of LPG sold to PMI. Rio Vista
believes that its LPG Supply Agreement with Penn Octane provides it with an
advantage over competitors in the supply of LPG to PMI based on Penn Octane's
adequate volumes and price provided for in its agreements with its LPG
suppliers, and Penn Octane's Leased Pipeline which takes the LPG directly to Rio
Vista's Brownsville Terminal Facility from those suppliers. The Leased
Pipeline's capacity is estimated to be between 25.0 million and 30.0 million
gallons per month.
Under the terms of the Exxon Supply Contract, Penn Octane 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, Penn Octane's existing letter of credit
facility may not be adequate to meet the letter of credit requirements under the
Exxon Supply Contract or other suppliers if there are increases in quantities of
LPG purchased and/or to finance future price increases of LPG.
37
The LPG Supply Agreement terminates on the earlier to occur of:
- Penn Octane ceases to have the right to access the Leased Pipeline that
connects to Rio Vista's Brownsville Terminal Facility; and
- Rio Vista ceases to sell LPG using any of the assets contributed by
Penn Octane to Rio Vista pursuant to the Spin-Off.
OMNIBUS AGREEMENT
In connection with the Spin-Off, Penn Octane entered into an Omnibus
Agreement with Rio Vista and its subsidiaries that governs, among other things,
indemnification obligations among the parties to the agreement, related party
transactions, the provision of general administration and support services by
Penn Octane.
The Omnibus Agreement prohibits Rio Vista from entering into any material
agreement with Penn Octane without the prior approval of the conflicts committee
of the board of managers of the General Partner. For purposes of the Omnibus
Agreement, the term material agreements means any agreement between Rio Vista
and Penn Octane that requires aggregate annual payments in excess of $100,000.
The Omnibus Agreement may be amended by written agreement of the parties;
provided, however that it may not be amended without the approval of the
conflicts committee of the General Partner if such amendment would adversely
affect the unitholders of Rio Vista. The Omnibus Agreement has an initial term
of five years that automatically renews for successive five-year terms and,
other than the indemnification provisions, will terminate if Rio Vista is no
longer an affiliate of Penn Octane.
Realization of Assets. The Company's unaudited consolidated financial
statements included elsewhere herein, 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 and has historically had a deficit in
working capital. In addition, substantially 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 $280,000 Notes and the RZB Credit Facility, and
therefore, the Company may be unable to obtain additional financing
collateralized by those assets. The Restructured Notes and the $280,000 Notes
are due December 15, 2005. The RZB Credit Facility may be insufficient to
finance the Company's LPG sales and/or Fuel Products sales, assuming increases
in product costs per gallon, or volumetric growth in product sales, and maybe
terminated by RZB with 90 days notice.
Since April 1, 2004, the Company has been operating under monthly
agreements and Quarterly Agreement with PMI (see note J to the unaudited
consolidated financial statements). The monthly volumes of LPG sold to PMI
since April 1, 2004 have been materially less than historical levels and since
April 1, 2005 the margins have been materially reduced. The Company's gross
profits on sales may be insufficient to pay its expenses if (i) the volume of
LPG sold under any future sales agreements declines below an average of
11,000,000 gallons per month and/or the margins are materially reduced from
historical levels, and/or (ii) the Company cannot successfully reduce the
minimum volumes and/or purchase costs required under the Exxon Supply Contract
and/or (iii) the Company cannot sufficiently reduce its other expenses, and/or
(iv) the Company's new Fuel Sales Business is not sufficiently successful.
The Company's cash flow has been materially reduced as a result of
materially lower volumes of sales to PMI and materially reduced margins.
Additionally, the Company has begun to incur the additional public company
compliance and income tax preparation costs for Rio Vista. Rio Vista has
declared and paid a cash distribution on May 13, 2005. As a result of these
factors, the Company may not have sufficient cash flow to pay its obligations
when due and/or make future distributions to Rio Vista's unitholders. In the
event Penn Octane does not pay its obligations when due, Rio Vista's guarantees
to Penn Octane and Penn Octane's creditors may be triggered. Accordingly, Rio
Vista may be required to pay such obligations of Penn Octane to avoid
foreclosure against its assets by Penn Octane's creditors. If the Company's
revenues and other sources of liquidity are not adequate to pay its obligations,
Rio Vista may be required to reduce or eliminate the quarterly distributions to
unitholders and Penn Octane or Rio Vista may be required to raise additional
funds to avoid such foreclosure. There can be no assurance that such
additional funding will be available on terms attractive to either Penn Octane
or Rio Vista or available at all. If additional amounts cannot be raised and
the Company is unable to restructure its obligations, the Company would suffer
material adverse consequences to its business,
38
financial condition and results of operations and Penn Octane and/or Rio vista
would likely be required to seek other alternatives which could include the sale
of assets, closure of operations up to and including protection under the U.S.
bankruptcy laws.
In view of the matters described in the preceding paragraphs,
recoverability of the recorded asset amounts shown in the accompanying unaudited
consolidated balance sheet included elsewhere herein, is dependent upon the
ability of the Company to generate sufficient cash flow through operations or
additional debt or equity financing to pay its liabilities and obligations when
due. The ability for the Company to generate sufficient cash flows is
significantly dependent on the continued sale of LPG to PMI at acceptable
average monthly sales volumes and margins, the success of the Fuel Sales
Business and the adequacy of the RZB Credit Facility to finance such sales. The
unaudited consolidated financial statements included elsewhere herein 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 negotiating with PMI to increase LPG sales at
acceptable monthly volumes and margins on a long-term basis. In addition,
management is taking steps to (i) expand its Fuel Sales Business, (ii) further
diversify its operations to reduce dependency on sales of LPG, (iii) increase
the amount of financing for its products and operations, (iv) raise additional
debt and/or equity capital and (v) reduce its supply costs and operating
expenses.
IMPACT OF INFLATION
Inflation in the United States has been relatively low in recent years and
did not have a material impact on the unaudited consolidated financial
statements of the Company. However, inflation remains a factor in the United
States economy and could increase the Company's cost to acquire or replace
property, plant and equipment as well as our labor and supply costs.
The Company may be adversely impacted as a result of increases in LPG
prices, which are related to oil and natural gas prices, because of limits on
the RZB Credit Facility.
ENVIRONMENTAL MATTERS
The Company's operations are subject to environmental laws and regulations
adopted by various governmental authorities in the jurisdictions in which these
operations are conducted. Under the Omnibus Agreement, Penn Octane will
indemnify Rio Vista for five years after the completion of the Spin-Off against
certain potential environmental liabilities associated with the assets it
contributed to Rio Vista relating to events or conditions that existed before
the completion of the Spin-Off.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
During 2004, the Company adopted Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Entities" ("FIN 46"), which
was amended by FIN 46R. This interpretation of Accounting Research Bulletin No.
51, "Consolidated Financial Statements", addresses consolidation by business
enterprises of variable interest entities ("VIE") that do not have sufficient
equity investment at risk to permit the entity to finance its activities without
additional subordinated financial support. FIN 46R requires the beneficiary of
a VIE to consolidate in its financial statements the assets, liabilities and
results of operations of the VIE. Tergas, an affiliate of the Company, is a VIE
and therefore, its assets, liabilities and results of operations have been
included in the accompanying unaudited consolidated financial statements of the
Company.
In November 2004, the FASB issued Statement of Financial Accounting
Standard No. 151, "Inventory Costs - An Amendment of ARB No. 43 Chapter 4"
("SFAS 151") which clarifies that abnormal amounts of idle facility expense,
freight, handling costs and spoilage should be expensed as incurred and not
included in overhead. Further, SFAS 151 requires that allocation of fixed
production overheads to conversion costs should be based on normal capacity of
the production facilities. The provisions in SFAS 151 are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company has determined that SFAS 151 will not have a material impact on their
consolidated results of operations, financial position or cash flows.
39
During December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 123 (revised 2004)
"Share-Based Payment" ("SFAS 123R"). SFAS 123R replaces SFAS 123, "Accounting
for Stock-Based Compensation", and supercedes APB Opinion 25, "Accounting for
Stock Issued to Employees" ("APB 25"). SFAS 123R requires that the cost of
share-based payment transactions (including those with employees and
non-employees) be recognized in the financial statements as compensation cost.
That cost will be measured based on the fair value of equity or liability
instrument issued. SFAS 123R is effective for the Company beginning January 1,
2006. The Company currently accounts for stock options issued to employees under
APB 25.
In December 2004, the FASB issued Statement of Financial Accounting
Standard No. 153, "Exchanges of Nonmonetary Assets-An Amendment of APB Opinion
No. 29" ("SFAS 153"). The amendments made by SFAS 153 are based on the
principle that exchanges on nonmonetary assets should be measured based on the
fair value of the assets exchanged. The provisions in SFAS 153 are effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Early application is permitted and companies must apply the standard
prospectively. The Company has determined that SFAS 153 will not have a
material impact on their consolidated results of operations, financial position
or cash flows.
CRITICAL ACCOUNTING POLICIES
The unaudited consolidated financial statements of the Company reflect the
selection and application of accounting policies which require management to
make significant estimates and judgments. See note B to the Company's
consolidated financial statements included in its Annual Report on Form 10-K for
the fiscal year ended July 31, 2004, "Summary of Significant Accounting
Policies". The Company believes that the following reflect the more critical
accounting policies that affect the financial position and results of
operations.
Revenue recognition - the Company expects in the future to enter into
sales agreements to sell LPG for future delivery. The Company will not
record sales until the LPG is delivered to the customer.
Impairment of long-lived assets - The determination of whether impairment
has occurred is based on an estimate of undiscounted cash flows
attributable to assets in future periods. If impairment has occurred, the
amount of the impairment loss recognized will be determined by estimating
the fair value of the assets and recording a loss if the fair value is less
than the carrying value. Assessments of impairment are subject to
management's judgments and based on estimates that management is required
to make.
Depreciation and amortization expenses - Property, plant and equipment
are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization rates are based on management's estimate of
the future utilization and useful lives of the assets.
Stock-based compensation - The Company accounts for stock-based
compensation using the provisions of APB 25 (intrinsic value method), which
is permitted by SFAS 123. The difference in net income, if any, between the
intrinsic value method and the method provided for by SFAS 123 (fair value
method) is required to be disclosed in the financial statements on an
annual and interim basis as a result of the issuance of SFAS 148.
Allowance for doubtful accounts - The carrying value of trade accounts
receivable is based on estimated fair value. The determination of fair
value is subject to management's judgments and is based on estimates that
management is required to make.
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.
40
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.
The Company does not maintain quantities of LPG inventory in excess of
quantities actually ordered by PMI. Therefore, the Company has not currently
entered into and does not currently expect to enter into any arrangements in the
future to mitigate the impact of commodity price risk.
To the extent the Company maintains quantities of Fuel Products inventory
in excess of commitments for quantities of undelivered Fuel Products, the
Company is exposed to market risk related to the volatility of Fuel Product
prices. In the event that inventory balances exceed commitments for undelivered
Fuel Products, during periods of falling Fuel Products prices, the Company may
sell excess inventory to customers to reduce the risk of these price
fluctuations.
The Company has historically borrowed only at fixed interest rates. All
current interest bearing debt is at a fixed rate. Trade accounts receivable
from the Company's limited number of customers and the Company's trade and other
accounts payable generally do not bear interest. The Company's credit facility
with RZB does not bear interest since generally no cash advances are made to the
Company by RZB. Fees paid to RZB for letters of credit are based on a fixed
schedule as provided in the Company's agreement with RZB. Therefore, the
Company currently has limited, if any, interest rate risk.
The Company routinely converts U.S. dollars into Mexican pesos to pay
terminal operating costs and income taxes. Such costs have historically been
less than $1 million per year and the Company expects such costs will remain at
less than $1 million in any year. The Company does not maintain Mexican peso
bank accounts with other than nominal balances. Therefore, the Company has
limited, if any, risk related to foreign currency exchange rates.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management, including the principal executive officer and
principal financial officer, conducted an evaluation of the Company's disclosure
controls and procedures, as such term is defined under Rule 13a-15 promulgated
under the Securities Exchange Act of 1934, as of the end of the period. Based
on their evaluation, the Company's principal executive officer and principal
accounting officer concluded that the Company's disclosure controls and
procedures are effective.
There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph above.
41
PART II
ITEM 1. LEGAL PROCEEDINGS
See note L to the Company's consolidated financial statements included
in its Annual Report on Form 10-K for the fiscal year ended July 31,
2004.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
See note G to the accompanying unaudited consolidated financial
statements included elsewhere herein and notes J and K to the
Company's consolidated financial statements included in its Annual
Report on Form 10-K for the fiscal year ended July 31, 2004, for
information concerning certain sales of Securities.
With respect to the issuances of securities discussed in note G to the
accompanying unaudited consolidated financial statements included
elsewhere herein, the transactions were exempt from registration under
the Securities Act of 1933, pursuant to Section 4(2) thereof because
the issuance did not involve any public offering of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
THE FOLLOWING EXHIBITS ARE INCORPORATED BY REFERENCE TO PREVIOUSLY
FILED REPORTS, AS NOTED.
Exhibit No.
- ------------
10.1 Amendment to Product Sales Agreement made effective as of the 28th day
of January 2005 by and between Penn Octane Corporation and Koch
Hydrocarbon, L.P. (Incorporated by reference to the Company's
Transition Report on Form 10-Q for the transition period ended
December 31, 2004 filed on February 22, 2005, SEC File No. 000-24394)
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
10.2* Penn Octane Corporation 2001 Warrant Plan
10.3* Rio Vista Energy Partners L.P. 2005 Equity Incentive Plan
15 Accountant's Acknowledgment
31.1 Certification Pursuant to Rule 13a - 14(a) / 15d - 14(a) of the
Exchange Act.
31.2 Certification Pursuant to Rule 13a - 14(a) / 15d - 14(a) of the
Exchange Act.
32 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes -Oxley Act of 2002.
* indicates management contract or compensatory plan or arrangement.
42
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
May 20, 2005 By: /s/Ian T. Bothwell
--------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant
Secretary, Chief Financial Officer
43