Acquisition of Regional Enterprizes, Inc.
On July 27, 2007, Rio Vista completed the Merger Agreement with New Regional, Old Regional, the shareholders of Old Regional and W. Gary Farrar, Jr. The Merger Agreement provided for Rio Vista to acquire the business of Old Regional by means of a merger of Old Regional into New Regional, a newly-formed, wholly-owned subsidiary of Rio Vista. The transactions contemplated by the Merger Agreement were completed on July 27, 2007. The principal business of Regional is storage, transportation and railcar transloading of bulk liquids, including chemical and petroleum products owned by its customers.  The total consideration pursuant to the Merger Agreement was $9.0 million, of which Rio Vista paid $8.0 million in cash, less certain working capital and other adjustments and subject to certain amounts held in escrow, with the remaining $1.0 million to be paid in four equal semiannual installments beginning six months from the date of the Regional Acquisition. Under the terms of the Merger Agreement, Rio Vista is entitled to net working capital of Old Regional of $500,000, subject to adjustments.  Under the terms of the Merger Agreement, a total of $1.5 million was placed into escrow to secure certain indemnification obligations of the former shareholders of Old Regional. Rio Vista funded the Regional Acquisition through a loan of $5.0 million (RZB Note) from RZB Finance LLC (RZB) and the remaining amounts due at closing were paid from available working capital.
In connection with the Regional Acquisition, Rio Vista entered into a loan agreement (the Loan Agreement) with RZB dated July 26, 2007. The principal amount of the RZB Note is $5.0 million, due on demand, with a one-year maturity. The RZB Note carries a variable annual rate of interest equal to the higher of (a) the rate of interest established from time to time by JPMorgan Chase Bank, N.A. as its “base rate” or its “prime rate,” or (b) the weighted average overnight funds rate of the Federal Reserve System plus 0.50%, in each case plus a margin of 4.75%. In connection with the RZB Note, New Regional granted to RZB a security interest in all of New Regional’s assets, including a deed of trust on real property owned by New Regional, and Rio Vista delivered to RZB a pledge of the outstanding capital stock of New Regional.  On July 26, 2007, as a further condition of the Loan Agreement, Penn Octane also entered into a Guaranty & Agreement (Guaranty) with RZB. Pursuant to the Guaranty, Penn Octane agreed to guaranty all of the indebtedness, liabilities and obligations of Rio Vista to RZB under the Loan Agreement and otherwise.   The RZB Note is also guaranteed by New Regional and RVOP.
In addition, in connection with the above transactions, Regional also entered into a one-year employment contract with an executive of Regional which provides for an annual salary of $210,000 plus commissions based on future revenues of Regional.  The agreement may be terminated by Regional at any time, provided however, that if the agreement is canceled within one year of the commencement date, the employee will be entitled to receive the remaining unpaid portion of his first year’s annual salary.  In connection with the agreement, Rio Vista agreed to grant to the employee options to purchase 25,000 common units of Rio Vista.  The options vest over a two year period. 
The accompanying unaudited consolidated financial statements include the operations of Regional since the date of acquisition.  The assets acquired and liabilities assumed have been recorded at their estimated fair values at the date of acquisition.  Rio Vista is in the process of obtaining third party valuations of certain assets and finalizing certain provisions of the Merger Agreement.  Therefore, the amount and allocation of the purchase price is subject to refinement.
The accompanying unaudited consolidated balance sheet includes goodwill in the amount of $4.6 million resulting from the acquisition.  Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets associated with acquisition transactions.  Rio Vista has adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (FASB 142).  Under FASB 142, goodwill is not amortized.  Rio Vista is required to make at least an annual test of the fair value of the intangible to determine if impairment has occurred.  Rio Vista will perform its annual impairment test for goodwill in the fourth quarter of each calendar year.

GM Oil Properties, Inc.

On October 25, 2007, Rio Vista Penny (see below), a newly formed and wholly-owned subsidiary of Rio Vista, entered into an Asset Purchase Agreement (GM Agreement) with G M Oil Properties, Inc., an Oklahoma corporation (GM Oil).  The GM Agreement is effective as of the first day of the month in which closing occurs.  The GM Agreement provides for Rio Vista Penny to acquire the real and personal property interests of GM Oil in certain oil and gas properties located in McIntosh, Pittsburg and Haskell counties in Oklahoma, including approximately 33.33% of the outstanding capital stock of MV Pipeline Company, an Oklahoma corporation (collectively, the GM Assets).   The total purchase price for the GM Assets is payable by assumption of GM Oil’s indebtedness in the principal amount of $16.5 million plus accrued but unpaid interest of approximately $600,000 (Senior Secured Debt).  The Senior Secured Debt is payable to certain noteholders and is administered by the agent for the noteholders (the Senior Secured Lender) pursuant to a $30 million credit facility (the Senior Secured Credit Facility) currently provided by the Senior Secured Lender to GM Oil.  GM Oil is in default in its obligations with respect to the Senior Secured Credit Facility. 

The GM Agreement contains customary representations, warranties and covenants of the parties and is subject to customary conditions to closing, including Rio Vista Penny’s satisfaction with its due diligence review of the GM Assets. In addition, the closing is contingent upon receipt of consent from the Senior Secured Lender to the assumption of the Senior Secured Debt by Rio Vista Penny. It is anticipated that Rio Vista Penny will assume the Senior Secured Debt pursuant to definitive agreements regarding the assignment of the Senior Secured Credit Facility to Rio Vista Penny, including certain modified terms and conditions of the existing Senior Secured Credit Facility (see below).  Rio Vista Penny may terminate the GM Agreement if it determines for any reason that it is not feasible to proceed with the transactions contemplated by the agreement.  If the Senior Secured Lender does not consent to the GM Agreement on or before November 19, 2007, the closing will occur within five business days following receipt of such consent.

On October 15, 2007, Rio Vista entered into a letter of intent (the Letter of Intent) with the Senior Secured Lender regarding proposed terms of a credit facility between the Senior Secured Lender and Rio Vista and its affiliates.  The Letter of Intent is not a binding commitment by the Senior Secured Lender to proceed with the financing of these acquisitions.   Subject to the foregoing, the Letter of Intent contemplates that the Senior Secured Lender would enter into a $30 million senior secured credit facility with affiliates of Rio Vista. The proposed credit facility is subject to satisfactory completion of the Senior Secured Lender’s due diligence review, approval by the Senior Secured Lender’s investment committee, execution of definitive agreements among the parties, execution of a management services agreement satisfactory to the Senior Secured Lender, and various other conditions.

As a result of Rio Vista Penny’s conclusion that it would be able to either reach a definitive agreement on acceptable terms regarding the acquisition of the GM Assets from GM Oil or if unsuccessful, obtain the GM Assets through the purchase of the GM Assets from the Senior Secured Lender in the event of a likely foreclosure, Rio Vista Penny and Rio Vista GO agreed to fund the additional deposits, totaling $2.3 million, in connection with the agreements with Penny Petroleum Corporation and GO LLC on October 22, 2007 as described below. 

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