SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 1997
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
Incorporation or Organization) (I.R.S. Employer Identification No.)
900 VETERANS BOULEVARD, SUITE 240, REDWOOD CITY, CALIFORNIA 94063
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (415) 368-1501
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K or any amendment to this Form 10-K.
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of October 31, 1997 was $26,189,549. The last reported sale
price of the Registrant's Common Stock as reported on the Nasdaq SmallCap
Market on October 31, 1997 was $5.94 per share.
The number of shares of Common Stock, par value $.01 per share,
outstanding on October 31, 1997 was 8,694,600.
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DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
ITEM PAGE NO.
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<S> <C> <C> <C>
Part I 1. Business 3
2. Properties 9
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 11
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
6. Selected Financial Data 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
7A. Quantitative and Qualitative Disclosures About Market Risks 20
8. Financial Statements and Supplementary Data 21
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 57
Part III 10. Directors and Executive Officers of the Registrant 58
11. Executive Compensation 60
12. Security Ownership of Certain Beneficial Owners and Management 62
13. Certain Relationships and Related Transactions 63
Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 64
</TABLE>
<PAGE>
PART I
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, (the "Securities Act"),
and may include the words "believes," "will enable," "will depend," and
"intends to" or similar expressions as well as other statements of
expectations, beliefs, future strategies and comments concerning matters which
are not historical facts. These forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those expressed or implied by the statements.
ITEM 1. BUSINESS.
INTRODUCTION
Penn Octane Corporation (the "Company"), formerly known as International
Energy Development Corporation ("International Energy"), was incorporated in
Delaware in August 1992. The Company is principally engaged in the purchase,
transportation and sale of liquified petroleum gas ("LPG") and the provision
of equipment and services to the compressed natural gas ("CNG") industry. The
Company owns and operates a terminal facility in Brownsville, Texas (the
"Brownsville Terminal Facility") and has a long-term lease agreement for
approximately 132 miles of pipeline from certain gas plants in Texas to the
Brownsville Terminal Facility (the "Pipeline"). The Company sells its LPG
primarily to PMI Trading Limited ("PMI"), which is the exclusive importer of
LPG into Mexico and a subsidiary of Petroleos Mexicanos, the state-owned
Mexican oil company ("PEMEX"), for distribution in the northeast region of
Mexico. The Company's CNG activities include the design, packaging,
construction, operation and maintenance of CNG fueling stations. In addition,
the Company is planning the construction and operation of a CNG vehicle and
station infrastructure in Mexico City, Mexico. The Company has recently
entered the business of buying, transporting and selling propylene ("PPL").
On October 21, 1993, International Energy purchased 100% of the common
stock of Penn Octane Corporation, a Texas corporation ("POC"), and merged POC
into International Energy as a division. As a result of the merger of POC
with and into the Company, the Company assumed the lease agreement between POC
and Seadrift Pipeline Corporation ("Seadrift") relating to the Pipeline which
connects Exxon Company, U.S.A.'s ("Exxon") King Ranch Gas Plant in Kleberg
County, Texas and Duke Energy's LaGloria Gas Plant in Jim Wells County, Texas,
to the Company's Brownsville Terminal Facility. In January 1995, the Board of
Directors approved the change of the Company's name to Penn Octane
Corporation.
The Company commenced commercial operations for the purchase, transport
and sale of LPG in July 1994 upon completion of construction of the
Brownsville Terminal Facility. The primary market for the Company's LPG is
the northeast region of Mexico, which includes the states of Coahuila, Nuevo
Leon and Tamaulipas. The Company believes it has a competitive advantage in
the supply of LPG for the northeast region of Mexico as a result of the
geographic proximity of its Brownsville Terminal Facility to consumers of LPG
in such major Mexican cities as Matamoros, Reynosa and Monterrey. Since 1994,
the Company's primary customer for LPG has been PMI. Sales of LPG to PMI
accounted for 90%, 96% and 95% of the Company's total revenues for the fiscal
years ended July 31, 1995, 1996 and 1997, respectively.
In March 1997, the Company, through its wholly-owned subsidiary
PennWilson CNG, Inc., a Delaware corporation ("PennWilson"), acquired certain
assets, including inventory, equipment and intangibles, from Wilson
Technologies Incorporated ("WTI"), a company formerly engaged in the design,
construction, installation and maintenance of turnkey CNG fueling stations,
hired certain of WTI's former employees and commenced operations for the
provision of equipment and services used in the CNG industry. See Note C to
the Consolidated Financial Statements. As of October 31, 1997, the Company had
substantially completed performance under two contracts relating to the
design, construction and installation of CNG equipment valued at approximately
$1.7 million and was bidding for additional contracts. The Company currently
intends to expand its CNG-related operations into Mexico through the
development of a CNG vehicle and station infrastructure in Mexico City (the
"Mexico City Project").
On October 28, 1997, the Company formed Penn CNG Holdings, Inc. ("Penn
CNG"), a Delaware corporation and wholly-owned subsidiary, to act as the
holding company for the Company's CNG operations in the United States, Mexico
and other countries.
In September 1997, the Company began selling limited volumes of PPL to
U.S. customers, purchased from PMI and entered into negotiations with PMI and
other suppliers to obtain a long-term PPL supply agreement.
Pursuant to an option, the Company currently intends to acquire ownership
of Penn Octane de Mexico S.A. de C.V. ("PennMex"), a Mexican company which has
had minimal operations since its inception and is owned 90% by Jorge R.
Bracamontes, an officer and director of the Company, for a nominal sum, to
pursue opportunities in Mexico other than CNG.
The Company's principal executive offices are located at 900 Veterans
Boulevard, Suite 240, Redwood City, California 94063, and its telephone number
is (415) 368-1501. The offices of PennWilson are located at 12118 South
Bloomfield, Santa Fe Springs, California 90670, and its telephone number is
(562) 929-6789.
LIQUIFIED PETROLEUM GAS
OVERVIEW. Since July 1994, the primary business of the Company has been
the purchase, transportation and sale of LPG. LPG is a mixture of propane and
butane principally used for residential and commercial heating and cooking.
LPG is also widely used as a motor fuel.
Mexico is the largest market for LPG in the world. LPG is the most
widely used domestic fuel in Mexico and is the primary energy source for
nearly two-thirds of Mexican households. In 1996, domestic sales of LPG in
Mexico averaged approximately 11.1 million gallons per day, an increase of
3.9% over sales for 1995, of which approximately 2.3 million gallons per day
were imported from the United States. The majority of Mexico's domestic LPG
production is located in the southeastern region of Mexico, while consumption
is heaviest in central, northern and Pacific coast regions. Demand for LPG in
Mexico is projected to grow at a compounded annual growth rate of
approximately 3% from 1996 to 2000.
The Company has been able to successfully compete with other LPG
suppliers in the provision of LPG to customers in northeast Mexico primarily
as a result of the Pipeline and the geographic proximity of its Brownsville
Terminal Facility to consumers of LPG in such major cities as Matamoros,
Reynosa and Monterrey, Mexico. Prior to the commencement of operations by the
Company at its Brownsville Terminal Facility in 1994, LPG exports to northeast
Mexico from the United States had been transported by truck and rail primarily
through Eagle Pass, Texas which is approximately 240 miles northwest of
Brownsville. The Company's Brownsville Terminal Facility provides
significantly reduced trucking distances from Ciudad Madero and Piedras
Negras, the principal LPG supply centers (other than Brownsville) used by PMI,
to points of distribution in northeast Mexico. The Company's Brownsville
Terminal Facility is approximately 331 miles closer to Matamoros than either
Ciudad Madero or Piedras Negras, and approximately 57 miles closer to
Monterrey than Piedras Negras.
THE BROWNSVILLE TERMINAL FACILITY. The Company's Brownsville Terminal
Facility occupies approximately 31 acres of land located adjacent to the
Brownsville Ship Channel, a major deep-water port serving northeastern Mexico,
including the city of Monterrey, and southeastern Texas. Total rated storage
capacity of the Brownsville Terminal Facility is approximately 675,000 gallons
of LPG. The Brownsville Terminal Facility includes 11 storage and mixing
tanks, 4 mixed product truck loading racks, one specification product propane
loading rack and two racks capable of receiving LPG delivered by truck. The
truck loading racks are linked to a computer-controlled loading and remote
accounting system. The Brownsville Terminal Facility also contains a railroad
spur.
The Company leases the land on which the Brownsville Terminal Facility is
located from the Brownsville Navigation District under a lease agreement (the
"Brownsville Lease") that expires on October 15, 1998 and is renewable by the
Company for an additional five (5) year term which would expire on October 15,
2003. The Brownsville Lease contains a pipeline easement to the Brownsville
Navigation District oil dock.
THE PIPELINE. The Company has a lease agreement (the "Pipeline Lease")
with Seadrift, a subsidiary of Union Carbide Corporation ("Union Carbide"),
for approximately 132 miles of pipeline which connects Exxon's King Ranch Gas
Plant in Kleberg County, Texas and Duke Energy Corporation's LaGloria Gas
Plant in Jim Wells County, Texas, to the Company's Brownsville Terminal
Facility.
The Pipeline Lease currently expires in March 2004. On May 21, 1997,
the Company and Seadrift entered into an amendment to the Pipeline Lease to
extend the term of the Pipeline Lease through March 31, 2013. This amendment
will become effective on the earlier of April 1, 1998 and the completion of
certain enhancements to the Pipeline by the Company, at the Company's option.
The Company believes the extension of the Pipeline Lease will give the Company
increased flexibility in negotiating sales and supply agreements with its
customers.
Present Pipeline capacity is approximately 265 million gallons per year.
In fiscal year 1997, the Company transported 61.7 million gallons of LPG
through the Pipeline. The Company can increase the Pipeline's capacity to
approximately 350 million gallons per year through the installation of
additional pumping equipment.
DISTRIBUTION. Historically, all of the LPG from the Pipeline has been
delivered to the Company's customers at the Brownsville Terminal Facility and
then transported by truck to the U.S. Rio Grande Valley and northeast Mexico
either by the customers or by the Company on behalf of the customers. The
Company is currently considering constructing extensions to the Pipeline from
the Brownsville Terminal Facility to the Brownsville Navigation District oil
dock and to the railroad spur located at the Brownsville Terminal Facility,
which would enable the Company to transport LPG by ocean-going vessels and by
railcar to customers in Mexico, the United States or elsewhere. The Company
is also exploring the possibility of constructing a terminal facility in
Matamoros, Mexico and a pipeline to connect such a terminal facility with the
Brownsville Terminal Facility to enable the Company to transport LPG by
pipeline directly into northeast Mexico for subsequent sale and distribution.
The Company owns 14 trailers which are approved for the transport of
petrochemicals over U.S. roadways. These trailers have been used to transport
LPG on behalf of PMI from the Brownsville Terminal Facility to points of
distribution in northeast Mexico, and to transport PPL from Mexico to the
United States.
LPG SALES AGREEMENT. Since July of 1994, the Company has been a supplier
of LPG to PMI, which, under current Mexican law, has exclusive responsibility
for importing LPG into Mexico. PMI is the Company's largest customer, with
sales of LPG to PMI accounting for 90%, 96% and 95% of the Company's total
revenues for the fiscal years ended July 31, 1995, 1996 and 1997,
respectively. The Company and PMI have entered into a sales agreement (the
"PMI Sales Agreement") for the period October 1, 1997 through September 30,
1998, under which PMI has committed to purchase from the Company a minimum
volume of LPG each month, mixed to PMI's specifications, subject to seasonal
variability, with a total committed minimum annual volume of 69.0 million
gallons, representing a 15% increase over minimum volume requirements under
the previous sales agreement with PMI effective during the period from October
1, 1996 through September 30, 1997.
DEREGULATION OF THE LPG MARKET IN MEXICO. The Mexican petroleum industry
is governed by the Ley Reglarmentaria del Arti culo 27 Constitutional en el
Ramo del Petroleo (the Regulatory Law to Article 27 of the Constitution of
Mexico concerning Petroleum Affairs (the "Regulatory Law"), and Ley Organica
del Petroleos Mexicanos y Organismos Subsidiarios (the Organic Law of 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
completely deregulate the LPG market. Upon the completion of such
deregulation, the Company expects to be able to import LPG into Mexico for
sale directly to independent distributors. Pursuant to the PMI Sales
Agreement upon deregulation by the Mexican government of the LPG market, the
Company will have the right to renegotiate the PMI Sales Agreement. Depending
on the outcome of any such renegotiation, the Company expects either to (i)
enter into contracts directly with LPG distributors located in the northeast
region of Mexico, or (ii) modify the terms of the PMI Sales Agreement to
account for the effects of such deregulation.
LPG SUPPLY. Historically, the Company has purchased LPG from Exxon,
mixed to PMI's specifications, at variable posted prices below those provided
for in the PMI Sales Agreement thereby providing the Company with a fixed
margin over the cost of LPG. Between November 1, 1996 and early November
1997, PMI guaranteed the Company's credit with Exxon. In November 1997, the
Company obtained a $3.8 million letter of credit in favor of Exxon under a
$6.0 million credit facility (the "RZB Credit Facility") with RZB Finance,
L.L.C. ("RZB Finance"), which can be terminated at any time by RZB. As a
result of the letter of credit, PMI no longer provides credit guarantees to
Exxon on behalf of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources - Credit Arrangements." In November 1997, the Company and Exxon
entered into a new supply agreement pursuant to which Exxon agreed to provide
minimum monthly volumes of LPG to the Company through September 1998 under
payment terms similar to the PMI Sales Agreement. The Company believes it has
access to an adequate supply of LPG to satisfy the requirements of PMI under
the PMI Sales Agreement. The LPG purchased from Exxon is delivered to the
Company at the opening of the Pipeline in Kleberg County, Texas, and then
transported through the Pipeline to the Brownsville Terminal Facility.
COMPRESSED NATURAL GAS
OVERVIEW. Extracted from underground reservoirs, natural gas is a fossil
fuel composed primarily of methane, hydrocarbons and inert gases. Natural gas
is widely available and in abundant supply. North American supplies are
reported to be sufficient to meet an estimated 150 years of demand at current
usage rates. CNG is measured by volume in cubic feet and sold by mass, energy
units or gasoline liter or gallon equivalents. CNG requires no refining and
is normally distributed to fueling stations via natural gas pipelines that
operate at a pressure of approximately 250 to 1,000 pounds per square inch
(psi). For use in vehicles, the gas is pressurized from 3,000 to 3,600 psi
and stored in the vehicle's gas storage tanks.
In the United States, federal and state legislation have tightened
pollution control measures to meet federal air quality standards and
encouraged the use of alternative fuels. Other countries, including Mexico,
have also enacted legislation promoting the use of alternative fuels, such as
CNG.
COMPANY CNG PRODUCTS AND SERVICES. In March 1997, the Company entered
the business for the design, construction, installation and maintenance of
equipment for CNG fueling stations after purchasing certain assets from, and
hiring personnel formerly employed by WTI, a company previously engaged in
such operations. See Note C to the Consolidated Financial Statements.
Equipment comprising a CNG fueling station typically consists of a compressor
skid package (engine, compressor and cooler), dispensing equipment, storage
bottles and gas dryers.
As of October 31, 1997, the Company had substantially completed work
under a subcontract for the design and construction of equipment for a CNG
fueling station for the New York City Department of Transportation ("NYCDOT")
valued at approximately $1.5 million, and under a contract with the Orange
County Sanitation District in California worth approximately $250,000 to
provide equipment for a CNG fueling station. The Company is actively pursuing
additional contracts to provide equipment for CNG fueling stations for other
large CNG fleet operators.
EXPANSION OF CNG OPERATIONS. The Company currently intends to expand its
CNG operations into Mexico City, a city which has been identified as having
one of the world's worst air pollution problems. In an effort to improve the
deteriorating air quality caused by vehicle emissions, the Mexican Government
has enacted legislation to decrease the number of gasoline powered vehicles
operating in Mexico City. The Company believes that vehicle owners in Mexico
City have been reluctant or unable to acquire CNG-powered vehicles or to
convert their vehicles to CNG due to the lack of CNG-powered vehicles,
facilities to convert vehicles to CNG and CNG stations in Mexico City.
In connection with the proposed Mexico City Project, the Company intends
to (i) construct and operate a flagship CNG fueling station in Mexico City;
(ii) acquire a franchise dealership from Grupo Dina S.A. de C.V. ("Dina"), one
of the largest truck and bus manufacturers in Mexico, to sell CNG-powered
buses and trucks to operators of public and private fleets; and (iii) supply
CNG-powered vehicles with CNG.
PROPYLENE
In September 1997, the Company began limited sales of PPL purchased in
Mexico from PMI for resale to industrial PPL consumers in the United States.
PPL is a liquid petroleum based product from which polypropylene is made.
Polypropylene is used in the manufacture of a variety of household and
industrial products including clothing and plastics. Although the Company has
no formal contract for the supply of PPL, the Company purchases available
quantities of PPL from PMI under a month-to-month arrangement. The Company
has entered into a one year contract with Union Carbide pursuant to which
Union Carbide has agreed to purchase nine million pounds of high-grade PPL per
month, if available, from the Company at a variable posted price through July
31, 1998. The Company hires independent contractors to transport the PPL
purchased from PMI by truck from Mexico to the United States. The Company is
currently seeking to obtain adequate supplies of high-grade PPL from PMI and
other suppliers.
COMPETITION
LPG. The Company competes with several major oil and gas and trucking
companies for the export of LPG from Texas to northeastern Mexico. In many
cases these companies own or control their LPG supply and have significantly
greater financial resources than the Company.
The Company competes in the supply of LPG on the basis of price. As
such, LPG providers who own or control their LPG supply may have a competitive
advantage over the Company. Pipelines generally provide a relatively low-cost
alternative for the transportation of petroleum products, however, at certain
times of the year, trucking companies may reduce their rates to levels lower
than those charged by the Company. The Company believes that such reductions
are limited in both duration and volumes and that on an annualized basis the
Pipeline provides a transportation cost advantage over the Company's trucking
competitors.
The Company believes that its Pipeline and the location of the
Brownsville Terminal Facility leave it well positioned to successfully compete
for LPG supply contracts with PMI and upon deregulation of the Mexican LPG
market with local distributors in northeast Mexico.
CNG. Several companies offer products and services that compete directly
with the Company's provision of CNG equipment and services, including the
design, packaging, construction and maintenance of equipment for CNG fueling
stations. If the market for CNG-fueled vehicles develops as anticipated by
the Company, it is likely that new competitors will enter the market. The
Company competes in the provision of equipment and services to the CNG
industry principally on the basis of price and product performance. Many of
the Company's competitors have significantly greater financial, technical and
marketing resources and greater name recognition than the Company. There can
be no assurance that the Company will compete successfully with its existing
competitors or with any new competitors.
In order to meet the emissions standards that have been established by
United States and Mexican federal and state mandates over the past several
years, several alternative fuels in addition to CNG are being used or have
been proposed for use in alternative fuel vehicles. These include
electricity, LPG, methanol, ethanol, hydrogen, reformulated gasoline and
liquefied natural gas. Each of these other fuels has comparative advantages
and disadvantages over CNG and each is expected to occupy part of the market
for alternative fuels. In addition, research is being conducted to develop a
gasoline powered engine that would compete with alternative fuel vehicles in
emissions, the successful development of which could impact the size of the
alternative fuels market.
PPL. The Company competes with several major oil and gas, petrochemical
and trucking companies for the supply of PPL to U.S. consumers. In many cases
these companies own or control their PPL supply and have significantly greater
financial resources than the Company. Historically, PMI, the Company's sole
supplier of PPL, has not supplied PPL for export to the U.S. market. The
Company currently purchases PPL from PMI on a month-to-month basis.
ENVIRONMENTAL AND TARIFF REGULATIONs
The operations of the Company are subject to certain federal, state and
local laws and regulations relating to the protection of the environment, and
future regulations may impose additional requirements. Although the Company
believes that its operations are in compliance with applicable environmental
laws and regulations, because the requirements imposed by environmental laws
and regulations are frequently changed, the Company is unable to predict with
certainty the ultimate cost of compliance with their requirements and their
effect on the Company operations and business prospects.
The intrastate petroleum pipeline operations of the Company are subject
to regulation by the Texas Railroad Commission. The Texas regulation requires
that intrastate tariffs be filed with the Railroad Commission and allows
shippers to challenge such tariffs. The Company believes it is in compliance
with all applicable regulations of the Texas Railroad Commission.
EMPLOYEES
As of July 31, 1997, the Company had 41 employees, including two in
finance, 10 in sales and administration, three in design, and 26 in
production. The Company's engineers and supervisors generally oversee
operation of the Pipeline and the Brownsville Terminal Facility and the
design, construction, transportation and installation of CNG equipment. In
addition, the Company occasionally retains subcontractors and consultants in
connection with its operations.
Seventeen of the Company's employees are covered by a collective
bargaining agreement. Thirteen of the Company's employees are covered by the
Southern California MEA Maintenance Agreement between the Millwright and
Machine Erectors Local 1607, an affiliate of the United Brotherhood of
Carpenters and Joiners of America. Four of the Company's welders are covered
by a Standard Form of Union Agreement between the Company and Local Union
Number 102 of the Sheet Metal Workers' International Association.
The Company has not experienced any work stoppages and considers
relations with its employees to be satisfactory.
<PAGE>
ITEM 2. PROPERTIES.
As of July 31, 1997, the Company owned or leased the following
facilities:
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APPROXIMATE LEASED OR
LOCATION TYPE OF FACILITY SIZE OWNED
<S> <C> <C> <C>
Brownsville, Texas Pipeline and Storage Facility, On-site 31 acres Leased(1)(2)(3)
Administrative Offices
Brownsville, Texas Brownsville Terminal Facility Building 19,200 square feet Owned(1)(2)
Extending from Kleberg Seadrift Pipeline 132 miles Leased(2)(4)
County, Texas to
Cameron County, Texas
Santa Fe Springs, CNG Manufacturing Facilities and 17,347 square Leased(2)(5)
California Administrative Offices feet and
4,000 square feet
Redwood City, Penn Octane Corporation Headquarters 1,559 square feet Leased(2)(6)
California
<FN>
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(1) The Company's lease with respect to the Brownsville Terminal Facility expires on October
15, 1998 and the Company has a five-year renewal option to extend the lease through October 15,
2003.
(2) Pursuant to a $6.0 million credit facility, the Company has agreed to grant a mortgage
security interest and assignment in any and all of the Company's real property, buildings,
pipelines, fixtures, and interests therein, including, without limitation, the lease agreement with
the Navigation District of Cameron County, Texas, and the Pipeline Lease. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources - Credit Arrangements."
(3) The Company's leasehold rights with respect to 14.51 acres of this land are subject to a
subordinated perfected security interest held by Western Wood Equipment Corporation (Hong Kong)
("Western Wood") pursuant to a Purchase Agreement, Secured Promissory Note and Security Agreement
dated June 16, 1997 entered into by and between Western Wood and the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Private Placements and Other Transactions."
(4) The Company's lease with Seadrift expires on March 31, 2013.
(5) The Company's lease with respect to the Santa Fe Springs, California site and facilities
expires December 31, 1997.
(6) The Company's lease with respect to its headquarters offices is in the name of Jerome B.
Richter, the Company's Chairman, President and Chief Executive Officer. The lease expires on June
30, 1998.
</TABLE>
For information concerning the Company's operating lease commitments, see Note
N to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
On August 24, 1994, the Company filed an Original Petition and
Application for Injunctive Relief against the International Bank of
Commerce-Brownsville ("IBC-Brownsville"), a Texas state banking association,
seeking (i) either enforcement of a credit facility between the Company and
IBC-Brownsville or a release of the Company's property granted as collateral
thereunder consisting of significantly all of the Company's business and
assets; (ii) declaratory relief with respect to the credit facility; and (iii)
an award for damages and attorneys' fees. After completion of an arbitration
proceeding, on February 28, 1996, the 197th District Court in and for Cameron
County, Texas entered judgment (the "Judgment") confirming the arbitral award
for $3,246,754 to the Company by IBC-Brownsville.
On April 18, 1996, the Company reached an agreement (the "IBC Settlement
Agreement") to accept $400,000 to settle a lawsuit it filed in October 1995
against International Bank of Commerce-San Antonio, a bank related to
IBC-Brownsville ("IBC-San Antonio"). As part of the settlement agreement, the
parties, including IBC-Brownsville and IBC-San Antonio, executed mutual
releases from future claims related to the IBC-Brownsville litigation.
Additionally, IBC-San Antonio agreed to indemnify the Company for any such
claims made or asserted.
On June 26, 1996, IBC-Brownsville filed a suit against the Company (Case
No. 96-06-3502) in the 357th Judicial District Court of Cameron County
alleging that the Company, in filing the Judgment against IBC-Brownsville in
order to clear title to its assets, slandered the name of IBC-Brownsville.
IBC-Brownsville contends that the Judgment against it prevented it from
selling certain property. IBC-Brownsville has claimed actual damages of
$600,000 and requested punitive damages of $2,400,000.
On September 23, 1996, the court which entered the Judgment on behalf of
the Company indicated in a preliminary ruling that the Company was privileged
in filing the Judgment to clear title to its assets. In connection with the
lawsuit, IBC-Brownsville filed an appeal with the Texas Court of Appeals on
January 21, 1997. The Company responded on February 14, 1997. On September
18, 1997, the appeal was heard by the Texas Court of Appeals. A decision is
expected sometime in 1998. The Company believes the case to be frivolous and
a breach of the IBC Settlement Agreement. Further, the Company believes this
cause of action is covered by an indemnity agreement from IBC-San Antonio.
The Company continues to believe that the Judgment is final, binding and
collectible.
On July 30, 1996, the Company filed suit in the District Court of Harris
County, Texas against Jorge V. Duran, former Chairman of the Board of the
Company, regarding alleged conversion and fraud by Mr. Duran during his time
as an employee of the Company. The Company has not yet quantified its damages
and is seeking a declaration that the termination of employment of Mr. Duran
was lawful and within the rights of the Company based on Mr. Duran's status as
an at-will employee of the Company. On December 12, 1996, Mr. Duran filed a
counterclaim in the District Court of Harris County, Texas asserting the
following claims: breach of contract against the Company and Mr. Richter;
wrongful discharge against the Company, Mr. Richter, and Mark Casaday, a
former officer and director of the Company; defamation against the Company,
Mr. Richter, Mark Casaday, and Jorge Bracamontes; and interference with
contract against Jorge Bracamontes. On February 27, 1997, the two actions
were consolidated into Case No. 96-37447, Penn Octane Corporation v. Jorge V.
Duran, in the 164th District Court of Harris County, Texas. Mr. Duran is
seeking (i) judgment against the Company and Messrs. Richter, Casaday and
Bracamontes for unspecified money damages, punitive damages in the amount of
$10.0 million, prejudgment interest as provided for by law, and attorneys'
fees; (ii) 400,000 shares of Common Stock from the Company, (iii) 100,000
shares of common stock from Mr. Richter; and (iv) such further relief to which
he may be justly entitled. The Company intends to vigorously defend against
Mr. Duran's counterclaim.
In October 1996, the Company and Mr. Richter, without admitting or
denying the findings contained therein (other than as to jurisdiction),
consented to the issuance of an order by the Securities and Exchange
Commission (the "SEC") in which the SEC (i) made findings that the Company and
Mr. Richter had violated portions of Section 13 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), relating to the filing of periodic
reports and the maintenance of books and records, and certain related rules
under the Exchange Act, and (ii) ordered respondents to cease and desist from
committing or causing any current or future violation of such section and
rules.
For further information concerning the aforementioned legal proceedings,
see Note N to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1997 Annual Meeting of Stockholders of the Company (the Meeting) was
held on May 29, 1997 at the Companys executive offices. The record date for
the Meeting was April 18, 1997. Proxies for the meeting were solicited
pursuant to Regulation 14A under the Exchange Act. There was no solicitation
in opposition to managements five proposals, and all of the nominees for
election as director were elected. The results of the voting by the
stockholders for each proposal are presented below.
Proposal #1 Election of Directors
<TABLE>
<CAPTION>
Name of Director Elected Votes For Votes Withheld
- ------------------------ --------- --------------
<S> <C> <C>
Jerome B. Richter 6,672,950 18,150
Ian T. Bothwell 6,672,950 18,150
Jorge R. Bracamontes 6,672,850 18,250
John P. Holmes 6,672,950 18,150
Kenneth G. Oberman 6,672,950 18,150
Stewart J. Paperin 6,672,850 18,250
John H. Robinson 6,672,950 18,150
</TABLE>
Proposal #2 Proposal to amend the Companys Restated Certificate of
Incorporation to authorize 5,000,000 shares, $.01 par value per share, of a
new class of senior preferred stock for possible future issuance in connection
with acquisitions and general corporate purposes, including public or private
offerings of shares for cash and stock dividends. The Board of Directors has
made no determination with respect to the issuance of any shares of the new
preferred stock and has no present commitment, arrangement or plan which would
require the issuance of such additional shares of new preferred stock in
connection with any equity offering, merger, acquisition or otherwise.
<TABLE>
<CAPTION>
For Against Abstain Broker Non Votes
<S> <C> <C> <C>
5,053,429 153,850 15,050 1,468,771
</TABLE>
Proposal #3 Proposal to approve the amendment and restatement of the
Companys Amended and Restated By-Laws to allow, among other things, the Board
of Directors of the Company to amend the by-laws and to take certain other
actions and to effect certain other matters by an affirmative vote of a
majority of the Board of Directors.
<TABLE>
<CAPTION>
For Against Abstain Broker Non Votes
<S> <C> <C> <C>
4,950,749 255,730 15,850 1,468,771
</TABLE>
Proposal #4 Proposal to approve and ratify certain private
transactions entered into by the Company involving the issuance of shares of
common stock of the Company and warrants to purchase shares of common stock of
the Company or the incurrence of indebtedness in excess of $100,000.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
6,643,571 39,980 7,549
</TABLE>
Proposal #5 Proposal to ratify the appointment of Burton McCumber &
Prichard, L.L.P. as the independent auditors of the Company.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
6,673,701 15,450 1,949
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock began trading in the over-the-counter ("OTC")
market on the Nasdaq SmallCap Market under the symbol "POCC" in December 1995.
The following table sets forth the reported high and low bid quotations
of the Common Stock for the periods indicated. Such quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED JULY 31, 1996:
First Quarter $4.750 $3.500
Second Quarter 4.750 3.125
Third Quarter 6.750 3.625
Fourth Quarter 6.063 3.500
FISCAL YEAR ENDED JULY 31, 1997:
First Quarter $4.625 $2.375
Second Quarter 4.000 1.750
Third Quarter 4.063 2.250
Fourth Quarter 4.938 2.125
</TABLE>
On October 31, 1997, the closing bid price of the Common Stock as
reported on the Nasdaq SmallCap Market was $5.94 per share. On October 31,
1997, the Company had 8,694,600 shares of Common Stock outstanding and
approximately 319 holders of record of the Common Stock.
The Company has not paid and does not intend to pay any dividends to
shareholders in the foreseeable future and intends to retain any future
earnings for capital expenditures and otherwise to fund the Company's
operations.
On October 31, 1997, the Company had outstanding 270,000 shares of
Preferred Stock, convertible into 3.333 shares of Common Stock per share of
Preferred Stock. On September 10, 1997, the Board of Directors approved the
proposed issuance of 100,000 shares of Common Stock to the holders of
Preferred Stock, pro rata according to ownership, as inducement to convert
their shares of Preferred Stock into shares of Common Stock, issuable upon
conversion, and in consideration for the waiver by the holders of Preferred
Stock of any rights relating to such Preferred Stock, including dividends, if
any. The Company expects conversion of substantially all shares of Preferred
Stock to occur prior to December 31, 1997.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data for each of the years
in the five-year period ended July 31, 1997, have been derived from the
audited consolidated financial statements of the Company. The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and related notes included elsewhere
herein. All information is in thousands, except per share data.
<TABLE>
<CAPTION>
Year Ended July 31,
1993 1994 1995 1996 1997
------ -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ -(1) $ 475(1) $14,787 $26,271 $30,367(1)
Loss from continuing operations (83) (1,234) (2,047) (724) (2,923)
Loss per common share (.03) (.37) (.47) (.14) (.48)
Total assets 444 6,747 6,159 5,190 5,496
Long-term obligations - 1,589 95 1,060 1,113
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
liquidity and capital resources should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto
appearing elsewhere herein. References to specific years preceded by "fiscal"
(e.g. fiscal 1997) refer to the Company's fiscal year ended July 31. The
results of operations of PennWilson, which began operations in March 1997,
have been included in the Company's results of operations for fiscal 1997
discussed below.
OVERVIEW
The Company is principally engaged in the purchase, transportation and
sale of LPG and the provision of equipment and services to the CNG industry.
Since July 1994, the Company has bought and sold LPG for distribution into
northeast Mexico and the U.S. Rio Grande Valley. In March 1997, the Company
expanded its operations to include the design, construction, installation and
maintenance of turnkey CNG fueling stations. In September 1997, the Company
commenced limited sales of PPL, purchased from PMI in Mexico, to consumers in
the United States.
Historically, the Company has derived substantially all of its revenues
from sales to PMI, its primary customer, of LPG purchased from Exxon. In
fiscal 1997, the Company derived approximately 97.8% of its revenues from
sales of LPG, of which sales to PMI accounted for 95.0% of total sales.
As part of its business strategy, in March 1997 the Company acquired
certain assets and hired certain former employees from WTI, a company engaged
in the engineering, design and construction of equipment for turnkey CNG
fueling stations. In connection with this acquisition, the Company paid
$394,000 and is committed to pay up to $2.0 million in royalty payments based
on future sales, if any. The acquisition was accounted for as a purchase and
is reflected as such in the Company's financial statements for fiscal 1997.
The Company provides products and services through a combination of
fixed-margin and fixed-priced contracts. Under the Company's agreements with
its customers and suppliers, the buying and selling prices of LPG and PPL are
based on variable posted prices that provide the Company with a fixed margin.
Costs included in costs of goods sold other than the purchase price of LPG and
PPL may affect actual profits from sales, including costs relating to
transportation, storage, leases, maintenance and financing. The Company
generally attempts to purchase in volumes commensurate with projected sales.
However, mismatches in volumes and prices of LPG purchased from Exxon and
resold to PMI could result in unanticipated costs.
The Company's CNG revenues are principally derived from contracts awarded
on a fixed-price, as-completed basis. In competing for contracts to construct
CNG fueling stations or components thereof, the Company normally must submit
bids for specific projects. The Company's ability to achieve a profit margin
for a specific project is dependent on the accuracy of its assessment of the
costs associated with that project.
LPG SALES
The following table shows the Company's volume sold in gallons, average
sales price and average purchase price of LPG for fiscal 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Fiscal Year Ended July 31,
------------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Volume Sold
LPG (millions of gallons) 37.9 65.4 61.7
Average sales price
LPG (per gallon) $0.39 $0.40 $0.48
Average purchase price
LPG (per gallon) $0.33 $0.36 $0.43
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1997 COMPARED WITH JULY 31, 1996
Revenues. Revenues for fiscal 1997 were $30.4 million compared with
$26.3 million for fiscal 1996, an increase of $4.1 million or 15.6%. Of this
increase (i) $4.9 million was attributable to increased average sales prices
for LPG in fiscal 1997 partially offset by a decrease in volumes of LPG sold
in fiscal 1997 resulting in a decrease in sales of $1.5 million, and (ii)
$663,000 was attributable to revenues from sales of equipment for CNG fueling
stations. The decrease in volume of LPG sales in fiscal 1997 resulted from
the lack of sales to PMI during the first two months of fiscal 1997 due to the
expiration of the Company's sales agreement with PMI on July 31, 1996. Sales
of LPG to PMI totaled $3.5 million (9.6 million gallons) for the first two
months of fiscal 1996.
Cost of sales. Cost of sales for fiscal 1997 was $29.7 million compared
with $25.0 million for fiscal 1996, an increase of $4.7 million or 18.8%. Of
this increase (i) $5.1 million was attributable to an increased average
purchase prices for LPG purchased in fiscal 1997 partially offset by the
reduction in volumes of LPG sold in fiscal 1997 resulting in a decrease in
cost of goods sold of $897,000, and (ii) $547,000 was attributable to costs
associated with sales of equipment for CNG fueling stations.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $3.4 million in fiscal 1997 compared with $2.2
million in fiscal 1996, an increase of $1.2 million or 54.5%. This increase
was primarily attributable to (i) $838,000 of compensation associated with the
issuance of warrants to an employee and a consultant, and (ii) $372,000 of
consulting and professional fees and travel costs associated with the
commencement of the CNG business, litigation and other legal matters. The
increase in fiscal 1997 was partially offset by reductions in amortization
expense related to prepaid commissions totaling $341,000 which was fully
amortized in fiscal 1996.
Other income and expense, net. Other income (expense), net was
($163,000) in fiscal 1997 compared with $221,000 in fiscal 1996. Income in
fiscal 1996 included an award from litigation of $400,000.
Income tax. Due to the net losses for fiscal 1997 and fiscal 1996, there
was no income tax expense in either year. At July 31, 1997, the Company had
net operating loss carryforwards for federal income tax purposes of
approximately $5.3 million. The ability to utilize such net operating loss
carryforwards, which expire in the years 2009 to 2012, may be significantly
limited by the application of the change of ownership rules under Section 382
of the Internal Revenue Code.
YEAR ENDED JULY 31, 1996 COMPARED WITH JULY 31, 1995
Revenues. Revenues for fiscal 1996 were $26.3 million compared with
$14.8 million for fiscal 1995, an increase of $11.5 or 77.7%. Of this
increase (i) $10.7 million was attributable to the increase in volumes of LPG
sold in fiscal 1996, and (ii) $654,000 was attributable to increased average
prices for LPG sold in fiscal 1996.
Cost of Sales. Cost of sales for fiscal 1996 were $25.0 million compared
with $14.7 for fiscal 1995, an increase of $10.3 or 70.1%. Of this increase
(i) $9.7 million was attributable to the increase in volumes of LPG sold in
fiscal 1996, and (ii) $1.1 million was attributable to the increased average
costs for LPG purchased in fiscal 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.2 million in fiscal 1996 compared with $1.8
million in fiscal 1995, an increase of $400,000 or 22.2%. Of this increase
(i) $208,000 was attributable to an increase in executive salaries, and (ii)
$101,000 was attributable to increased commissions.
Other income and expense, net. Other income (expense), net was $221,000
in fiscal 1996 compared with ($365,000) in fiscal 1995. Primary differences
in fiscal 1996 compared to fiscal 1995 were (i) a decrease in interest expense
of $827,000 in fiscal 1996 due to the payoff of a factoring agreement in
August 1995, (ii) a gain of $722,000 on the sale of the Companys option to
purchase National Power Exchange Group in fiscal 1995, and (iii) an award from
litigation of $400,000 in fiscal 1996.
Income tax. Due to the net losses for fiscal 1996 and fiscal 1995, there
was no income tax expense in either year.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain condensed unaudited quarterly
financial information for each of the eight most recent quarters in the period
ended July 31, 1997. This information is derived from unaudited consolidated
financial statements of the Company that include, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of results of operations for such periods,
when read in conjunction with the audited Consolidated Financial Statements of
the Company and notes thereto appearing elsewhere in this Annual Report. All
information is in thousands, except per share data.
<TABLE>
<CAPTION>
Quarter Ended
Oct. 31, Jan. 31, Apr. 30, July 31, Oct. 31, Jan. 31, Apr. 30, July 31,
1995 1996 1996 1996 1996 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 5,557 $ 6,717 $ 7,832 $ 6,165 $ 2,546 $ 13,513 $ 8,021 $ 6,287
Gross Profit 262 389 376 265 (206) 785 386 (317)
Net income (loss) (89) (77) 113 (671) (687) 249 (99) (2,386)
Earnings (loss) per
common and common
equivalent share $ ( .02) $ ( .02) $ .02 $ ( .12) $ ( .13) $ .04 $ ( .02) $ ( .37)
</TABLE>
The net loss for the quarter ended July 31,1997 was primarily
attributable to increases in the following selling, general and administrative
expenses: (1) stock based compensation of $838,000, (2) PennWilson expenses
of $125,000, (3) professional fees of $388,000, and (4) travel expenses of
$125,000.
Historically, the Company has received the majority of its total annual
revenues during the months of October through March. Such pattern is
attributable to the seasonal demand for LPG, which is typically greatest
during the winter months of the second and third quarters of the Company's
fiscal year. The Companys quarterly earnings may vary considerably due to the
impact of such seasonality. Upon expiration of the Company's sales
arrangement with PMI, effective during the period from August 1, 1995 to July
31, 1996, sales of LPG to PMI were interrupted during August and September
1996 pending the negotiation of a new sales contract that became effective
in October 1996.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company has incurred losses since its inception in 1992,
has used cash in operations and has a deficit in working capital. In
addition, the Company is involved in litigation, the outcome of which cannot
be determined at the present time. The Company depends heavily on sales to
one major customer. In addition, there is no significant operating history on
which to base the results of the additional business generated through
PennWilson or contracts to purchase and sell PPL. The Company's sources of
liquidity and capital resources historically have been provided by sales of
LPG and CNG-related equipment, proceeds from the issuance of short-term and
long-term debt, revolving credit facilities and credit arrangements, private
placements and proceeds from the exercise of warrants to purchase shares of
the Company's Common Stock.
The following summary table reflects comparative cash flows for fiscal
1995, 1996 and 1997. All information is in thousands.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1995 1996 1997
<S> <C> <C> <C>
Net cash used in operating activities $(2,103) $(808) $(1,847)
Net cash provided by (used in) investing
activities 209 347 (514)
Net cash provided by financing activities 1,951 769 2,027
-------- ------ --------
Net increase (decrease) in cash $ 57 $ 308 $ (334)
======== ====== ========
</TABLE>
The Company's LPG sales agreement with PMI, its primary customer, is
effective for the period from October 1, 1997 through September 30, 1998 and
provides for the purchase by PMI of minimum monthly volumes of LPG aggregating
a minimum annual volume of 69 million gallons, representing a 15% increase
over minimum volume requirements under the previous sales agreement with PMI
effective during the months of October 1, 1996 to September 30, 1997. In
November 1997, the Company entered into a new supply agreement with Exxon
pursuant to which Exxon has agreed to supply minimum volumes of LPG to the
Company under payment terms similar to those required in the PMI Sales
Agreement. The Company believes it has access to an adequate supply of LPG as
a result of its supply agreement with Exxon to satisfy the requirements of PMI
under the LPG sales agreement with PMI. Under the current agreement with
Exxon, the Company's current sole source of supply of LPG, the Company
anticipates greater gross margins on its LPG sales as a result of lower LPG
costs. In addition, the Company anticipates increased gross margins as a
result of the elimination of certain costs associated with transportation,
mixing and testing of LPG purchased from Exxon, which are no longer incurred
in the Company's operations.
The Company has substantially completed two contracts for the supply of
CNG-related equipment totaling approximately $1.7 million, one for the NYCDOT
and one for the Orange County Sanitation District. Under the terms of these
contracts, the Company anticipates that there will be adequate cash flow to
fund the Company's performance of its obligations thereunder. The Company
intends to bid on additional contracts for the supply of CNG-related equipment
and services in the future. See Note N to the Consolidated Financial
Statements.
On October 21, 1997, the Company announced that it is contemplating
filing a registration statement with the SEC for the sale to the public of
additional shares of its Common Stock. While the Company is still
contemplating such a filing, no assurance can be given as to the timing of
such offering or that the Company will be successful in raising additional
capital.
Pipeline Lease. In May 1997, the Company entered into the Pipeline Lease
Amendment with Seadrift which, once effective, will extend the term of the
lease through 2013. Under the Pipeline Lease Amendment, the Company will be
required to make minimum monthly lease payments of $75,000, subject to
abatement during the first two years of the extended term, an increase of
$21,000 per month over the Company's current Pipeline Lease Agreement. The
Pipeline Lease Amendment will be effective no later than April 1, 1998. See
Note N to the Consolidated Financial Statements.
Credit Arrangements. In connection with the PMI Sales Agreement,
invoicing is to occur weekly. Between November 1996 and early November 1997,
the Company and PMI made an arrangement under which PMI guaranteed credit with
the Company's main supplier and invoicing occurred on a monthly, rather than a
weekly basis.
On October 22, 1997, the Company entered into a $6.0 million credit
facility with RZB to finance the Company's purchase of LPG and PPL. Under the
RZB Credit Facility, the Company has agreed to pay a fee with respect to each
letter of credit thereunder in an amount equal to the greater of (i) $500,
(ii) 1.5% of the maximum face amount of such letter of credit, or (iii) such
higher amount as may be agreed between the Company and RZB. Any amounts
outstanding under the RZB Credit Facility shall accrue interest at a rate
equal to the rate announced by the Chase Manhattan Bank as its prime rate plus
2.5%. Pursuant to the RZB Facility, RZB has sole and absolute discretion to
terminate the RZB Credit Facility and to make any loan or issue any letter of
credit thereunder. RZB also has the right to demand payment of any and all
amounts outstanding under the RZB Credit Facility at any time. In connection
with the RZB Credit Facility, the Company has agreed to grant a mortgage,
security interest and assignment in any and all of the Company's real
property, buildings, pipelines, fixtures and interests therein or relating
thereto, including, without limitation, the Brownsville Lease, the Pipeline
Lease, and in connection therewith to enter into leasehold deeds of trust,
security agreements, financing statements and assignments of rent, in forms
satisfactory to RZB. The Company has also agreed that it shall not permit to
exist any lien, security interest, mortgage, charge or other encumbrance of
any nature on any of its properties or assets, except in favor of RZB. In
connection with the RZB Credit Facility, Western Wood has agreed to
subordinate its security interest in the Brownsville Terminal Facility. See
"-Private Placements and Other Transactions." On November 5, an irrevocable
letter of credit was established under the RZB Credit Facility in favor of
Exxon in the amount of $3.8 million. Mr. Richter, the Company's Chairman and
Chief Executive Officer, has personally guaranteed all of the Company's
payment obligations with respect to the RZB Credit Facility. See "Certain
Relationships and Related Transactions."
In March 1997, the Company obtained a letter of credit from the Bay Area
Bank in the amount of approximately $251,000 in connection with the obligation
of PennWilson to complete certain work for the Orange County Sanitation
District. In September 1997, the letter of credit was extended to November
26, 1997. Any amounts outstanding under the letter of credit shall accrue
interest at the prime rate plus 3%. Mr. Richter, the Company's Chairman and
Chief Executive Officer, has personally guaranteed all of the Company's
payment obligations with respect to the letter of credit. No amounts have
been drawn down under the letter of credit. See "Certain Relationships and
Related Transactions."
Private Placements and Other Transactions. During October 1996, the
Company completed a private placement of warrants and promissory notes due
November 1997. Proceeds raised from the private placement totaled $325,000,
which the Company used for working capital. During April 1997, 250,000
warrants to purchase 250,000 shares of the Common Stock issued in connection
with the private placement were exercised at prices below the original stated
exercise price in exchange for a cash payment of $188,000, and cancellation of
$250,000 of indebtedness from the private placement, plus accrued interest
thereon. During August 1997, 75,000 warrants to purchase 75,000 shares of the
Common Stock of the Company issued in connection with the private placement
were exercised at prices below the original stated exercise price in exchange
for a cash payment of $56,000, and cancellation of $75,000 of indebtedness
from the private placement, plus accrued interest thereon.
On June 15, 1997, the Company completed a private placement with Western
Wood, pursuant to which it issued a $1.0 million promissory note and warrants
to purchase 500,000 shares of Common Stock exercisable until June 15, 2002 at
an exercise price of $2.50 per share. Proceeds raised from the private
placement totaled $1.0 million, which the Company used for working capital
requirements. The promissory note accrues interest at the rate of 10.5% per
annum, payable semi-annually on December 15 and June 15 of each year. The
promissory note is secured by certain specified assets of the Company,
including the Brownsville Terminal Facility. In addition, the Company is
required to prepay the promissory note if the Company receives proceeds of
$5.0 million or more in a single debt and/or equity financing transaction.
On October 21, 1997, the Company completed a private placement pursuant
to which it issued promissory notes in the amount of $1.5 million and warrants
to purchase 250,000 shares of Common Stock exercisable until October 21, 2000
at an exercise price of $6.00 per share. The notes are unsecured. Proceeds
raised from the private placement totaled $1.5 million, which the Company used
for working capital requirements. The promissory notes accrue interest at the
rate of 10% per annum. Payment of the principal and any accrued and unpaid
interest on the promissory notes is due on the earlier to occur of June 30,
1998, and the closing of any public offering of debt or equity securities of
the Company resulting in net proceeds to the Company in excess of $5.0
million. The purchasers in the private placement were granted one-time demand
registration rights with respect to the shares issuable upon exercise of the
warrants.
In March and April 1997, warrants to purchase 2,790,000 shares of Common
Stock were exercised, resulting in cash proceeds and debt repayments of
$894,000 and promissory notes to the Company in the aggregate principal amount
of $2.8 million. The Company used the net cash proceeds from the exercises of
these warrants for working capital. In January 1997, the Company issued
10,000 shares of Common Stock to a consultant in payment for services rendered
to the Company. In February 1997, warrants to purchase 702,856 shares of
Common Stock were exchanged for 164,286 shares of Common Stock.
In August and September 1997, warrants to purchase a total of 505,000
shares of Common Stock were exercised, resulting in cash proceeds to the
Company of $1.2 million. The proceeds of such exercises were used for working
capital and repayment of Company debt. Pursuant to the 1997 Stock Award Plan,
in October 1997, the Company issued 20,314 shares of Common Stock to a Mexican
consultant in payment for services rendered to the Company valued at $113,000.
See "Executive Compensation - 1997 Stock Award Plan."
On August 29, 1997, in connection with the exercise of warrants to
purchase 100,000 shares of Common Stock by an unrelated third party, the
Company entered into a Registration Rights Agreement agreeing to register the
Common Stock issued upon exercise on or before February 1, 1998. In the event
the Company fails to register the Common Stock by February 1, 1998, for each
month thereafter until September 1, 1998, during which the shares have not
been not registered, the Company will be required to issue the holder Common
Stock warrants to purchase 10,000 shares of Common Stock at an exercise price
of $2.50 per share, exercisable within a year from the date of issuance.
For a detailed listing of Common Stock and warrant transactions during
fiscal 1995, 1996 and 1997, see Note L to Consolidated Financial Statements.
Judgment in favor of the Company. Judgment has been rendered in favor of
the Company in connection with its litigation against IBC-Brownsville in the
amount of approximately $3.5 million including accrued interest and legal fees
and expenses, which Judgment is being appealed by the defendant. Although no
assurance can be made, management believes that the Company will ultimately
prevail on appeal and will receive the proceeds from such Judgment. A former
officer of the Company is entitled to 5% of the net proceeds. A significant
portion of the Judgment, upon realization by the Company, will be used to pay
attorneys' fees incurred in connection with the IBC-Brownsville litigation.
See "Legal Proceedings" and Note N to the Consolidated Financial Statements.
Realization of Assets. Recoverability of a major portion of the recorded
asset amounts on the Company's balance sheet is dependent upon the collection
of the Judgment, the Company's ability to obtain additional financing and to
raise additional equity capital, and the success of the Company's future
operations. See Note Q to the Consolidated Financial Statements.
To provide the Company with the ability it believes necessary to continue
in existence, management is taking steps to (i) collect the Judgment, (ii)
increase sales to its current customers, (iii) increase its customer base,
(iv) expand its product lines and (v) raise additional debt and/or equity
capital.
FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings per
Share. SFAS 128 supersedes APB Opinion No. 15 (Opinion No. 15), Earnings per
Share, and requires the calculation and dual presentation of basic and diluted
earnings per share (EPS), replacing the measures of primary and fully-diluted
EPS as reported under Opinion No. 15. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. Accordingly, EPS for fiscal 1995, 1996 and 1997
presented on the accompanying statements of income are calculated under the
guidance of Opinion No. 15.
The Company does not expect a material change in earnings per share data
in any of the periods presented in the accompanying Consolidated Statements of
Operations as a result of adopting SFAS 128, except for the quarter ended
April 30, 1996, during which fully diluted EPS, as defined in APB 15, was
$0.02 per share and diluted EPS, as defined in SFAS 128, would have been $0.01
per share.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income and Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosure about Segments of an Enterprise and Related Information. Both are
effective for periods beginning after December 15, 1997, with earlier
application encouraged for SFAS 131. The Company adopted SFAS 131 in fiscal
1997. The Company will adopt SFAS 130 in fiscal 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors
Penn Octane Corporation
We have audited the accompanying consolidated balance sheets of Penn Octane
Corporation and its subsidiary (Company) as of July 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended July 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of July 31, 1996 and 1997, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended July 31, 1997 in conformity with generally accepted
accounting principles.
We have also audited Schedule II of the Company for each of the three years in
the period ended July 31, 1997. In our opinion, this schedule presents fairly
in all material respects, the information required to be set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note Q, conditions
exist which raise substantial doubt about the Company's ability to continue as
a going concern including 1) the Company has not achieved profitable
operations, 2) outstanding litigation and 3) a deficit in working capital.
Management's plans in regard to these matters are described in Note Q. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
As discussed in note B, the Company adopted the provisions of SFAS 107,
"Disclosures about Fair Value of Financial Instruments", and SFAS 123,
"Accounting for Stock Based Compensation" during the year ended July 31, 1996.
As discussed in note S, the Company adopted the provisions of SFAS 131,
Disclosures about Segments of an Enterprise and Related Information during the
year ended July 31, 1997.
BURTON McCUMBER & PRICHARD, L.L.P.
Brownsville, Texas
October 3, 1997
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JULY 31
ASSETS
1996 1997
<S> <C> <C>
Current Assets
Cash $ 364,525 $ 31,142
Trade accounts receivable, less allowance for doubtful accounts
of $0 and $53,406 29,463 281,500
Related party receivables (note D) - 171,601
Interest receivable (note D) 26,233 -
Costs and estimated earnings in excess of billings on uncompleted
contracts (notes B8 and F) - 196,888
Inventories (notes B1 and F) 445,051 795,797
Prepaid expenses and other current assets 47,810 83,082
Total current assets 913,082 1,560,010
Property, plant and equipment - net (notes B2 and E) 3,395,150 3,185,148
Lease rights (net of accumulated amortization of $317,361 and
432,765) (note B2) 836,679 721,274
Other noncurrent assets (notes B2, D and G) 45,421 29,935
Total assets $5,190,332 $5,496,367
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - CONTINUED
JULY 31
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1997
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt (note K) $ 83,871 $ 1,152,391
Revolving line of credit (note K) - 140,000
Construction accounts payable (note J) 609,107 121,801
Trade accounts payable 284,057 481,348
Billings in excess of costs and estimated earnings in excess of
billings on uncompleted contracts (notes B8 and F) - 7,596
Borrowings from IBC-Brownsville (note N) 672,552 672,552
Accrued liabilities 560,912 1,055,237
Total current liabilities 2,210,499 3,630,925
Long-term debt, less current maturities (note K) 1,060,044 1,112,833
Commitments and contingencies (notes C, N and R) - -
Stockholders' Equity (note L)
Senior Preferred stock-$.01 par value, 5,000,000 shares
authorized; 0 shares issued and outstanding at July 31, 1996 and 1997 - -
Preferred stock-$.01 par value, 5,000,000 shares authorized;
270,000 convertible shares issued and outstanding at July 31,
1996 and 1997 2,700 2,700
Common stock-$.01 par value, 25,000,000 shares authorized;
5,205,000 and 8,169,286 shares issued and outstanding at July
31, 1996 and 1997 52,050 81,693
Additional paid-in capital 5,954,565 10,515,266
Notes receivable from the president of the Company and a
related party for exercise of warrants - (2,834,865)
Accumulated deficit (4,089,526) (7,012,185)
Total stockholders' equity 1,919,789 752,609
Total liabilities and stockholders' equity $ 5,190,332 $ 5,496,367
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31
1995 1996 1997
<S> <C> <C> <C>
Revenues (note B8) $14,787,467 $26,270,673 $30,367,134
Cost of goods sold 14,615,431 24,978,265 29,718,734
Gross profit 172,036 1,292,408 648,400
Selling, general and administrative expenses
Commissions 240,529 341,464 -
Legal and professional fees 755,950 789,761 1,075,824
Salaries and payroll related expenses 288,018 548,409 707,884
Stock based compensation (note M) - - 837,600
Travel 199,225 143,102 229,506
Other 370,878 414,666 556,955
1,854,600 2,237,402 3,407,769
Operating loss (1,682,564) (944,994) (2,759,369)
Other income (expense)
Interest expense (1,087,137) (259,608) (239,431)
Interest income - 4,161 71,893
Gain on sale of option (note O) 722,212 10,886 -
Other income - 65,447 4,248
Award from litigation (note N) - 400,000 -
Net loss before taxes (2,047,489) (724,108) (2,922,659)
Provision for income taxes (notes B3 and I) - - -
Net loss $(2,047,489) $ (724,108) $(2,922,659)
Loss per common share (note B4) $ (0.47) $ (0.14) $ (0.48)
Weighted average common shares outstanding 4,340,632 5,130,191 6,144,724
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31
1995 1996 1997
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
SENIOR PREFERRED STOCK - $ - - $ - - $ -
PREFERRED STOCK
Beginning balance 300,000 $ 3,000 270,000 $ 2,700 270,000 $ 2,700
Conversion of 30,000 shares of Preferred
Stock to 100,000 shares of Common Stock
On May 15, 1995 (30,000) (300) - - - -
Ending balance 270,000 $ 2,700 270,000 $ 2,700 270,000 $ 2,700
COMMON STOCK
Beginning balance 3,750,000 $ 37,500 5,065,000 $ 50,650 5,205,000 $ 52,050
Issuance of common stock on September
29, 1994 to stockholder for partial payment
on promissory note 300,000 3,000 - - - -
Issuance of common stock on January 31,
1995 to stockholder for payment on
promissory note 300,000 3,000 - - - -
Issuance of common stock on March 1, 1995
For cancellation of commission agreement 200,000 2,000 - - - -
Issuance of common stock on April 12, 1995
To stockholder in exchange for a note 150,000 1,500 - - - -
Issuance of common stock on April 19, 1995 to
stockholder in exchange for a note 100,000 1,000 - - - -
Conversion of 30,000 shares of preferred
Stock to 100,000 shares of common stock on
May 15, 1995 100,000 1,000 - - - -
Issuance of common stock on July 5, 1995, in
exchange for a note 165,000 1,650 - - - -
Issuance of 40,000 shares of common stock
For services and settlement of accrued
Liability - - 40,000 400 - -
Issuance of common stock upon exercise of
Warrants on February 16, 1996, in exchange
For future legal services - - 100,000 1,000 - -
Issuance of common stock for services in
January 1997 - - - - 10,000 100
Issuance of common stock in connection
With Exchange Agreements between the
Company and certain warrant holders to
Purchase shares of common stock in the
Company - - - - 164,286 1,643
Issuance of common stock upon exercise of
Warrants on April 1, 1997, in connection
With retirement of $250,000 debt
Obligations - - - - 250,000 2,500
Issuance of common stock upon exercise of
Warrants in April 1997, in exchange for
Settlement of $46,759 of outstanding
Contractor payables - - - - 25,000 250
Issuance of common stock upon exercise of
Warrants during April 1997, in exchange for
Promissory note - - - - 2,200,000 22,000
Issuance of common stock upon exercise of
Warrants during March 1997, in exchange
For promissory note - - - - 15,000 150
Issuance of common stock upon exercise of
Warrants during April 1997 - - - - 300,000 3,000
Ending balance 5,065,000 $ 50,650 5,205,000 $ 52,050 8,169,286 $ 81,693
1995 1996 1997
Amount Amount Amount
ADDITIONAL PAID-IN CAPITAL
Beginning balance $ 3,019,500 $ 5,637,965 $ 5,954,565
Issuance of common stock for notes,
cancellation of commission agreements,
services and payment on promissory note 2,619,165 238,600 13,200
Conversion of preferred stock to common
stock (700) - -
Grant of warrants for services - 78,000 917,785
Exercise of warrants in connection with
retirement of debt - - 494,009
Exercise of warrants - - 3,135,707
Ending balance $ 5,637,965 $ 5,954,565 $10,515,266
STOCKHOLDERS' NOTES
Beginning balance $ - $ - $ -
Notes receivable from the President and a
related party for exercise of warrants - - (2,834,865)
Ending balance $ - $ - $(2,834,865)
ACCUMULATED DEFICIT
Beginning balance $(1,317,929) $(3,365,418) $(4,089,526)
Net loss for the year (2,047,489) (724,108) (2,922,659)
Ending balance $(3,365,418) $(4,089,526) $(7,012,185)
</TABLE>
PENN OCTANE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
FOR THE YEARS ENDED JULY 31
s
om0fFilled0lineWidth0fLine0fShadow0 1
1
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
PENN OCTANE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31
1995 1996 1997
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net loss $(2,047,489) $ (724,108) $(2,922,659)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 378,431 414,412 448,019
Amortization of lease rights and other non-current
assets 173,940 620,807 132,188
Compensation cost - 36,000 929,785
Gain on sale of option (722,212) (10,886) -
NPEG interest (79,957) - -
Changes in current assets and liabilities:
Trade accounts receivable 474,885 (29,463) (252,037)
Related party receivable - - (171,601)
Interest receivable 7,208 495 26,233
Costs and estimated earnings in excess of billings on
uncompleted contracts - - (196,888)
Inventories 57,208 (71,756) (74,746)
Prepaids and other current assets 45,820 113,322 (35,272)
Construction and accounts payable (601,402) (1,201,307) (263,082)
Advances from related party (140,353) (67,977) -
Billings in excess of costs and estimated earnings in
excess of billings on uncompleted contracts - - 7,596
Accrued liabilities 350,620 112,722 525,716
Net cash used in operating activities (2,103,301) (807,739) (1,846,748)
Cash flows from investing activities:
Acquisition of inventory and fixed assets from WTI - - (394,000)
NPEG note 300,000 790,843 -
Capital expenditures (78,518) (451,826) (120,017)
Other (12,874) 7,846 -
Net cash provided by (used in) investing
activities 208,608 346,863 (514,017)
Cash flows from financing activities:
Revolving credit facilities - - 140,000
Issuance of debt 2,630,907 1,000,000 1,502,033
Issuance of common stock 2,231,315 - 516,073
Shareholder notes 500,000 100,000 -
Reduction in debt (3,447,955) (198,252) (130,724)
Increase (decrease) in bank overdraft 37,212 (133,133) -
Net cash provided by financing activities 1,951,479 768,615 2,027,382
Net increase (decrease) in cash 56,786 307,739 (333,383)
Cash at beginning of period - 56,786 364,525
Cash at end of period $ 56,786 $ 364,525 $ 31,142
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 827,400 $ 308,458 $ 165,964
Supplemental disclosures of noncash transactions:
Common stock and warrants issued (notes K, L and M) $ 400,000 $ 318,000 $ 4,004,756
</TABLE>
The accompanying notes are an integral part of these statements.
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Penn Octane Corporation, which was formerly International Energy Development
Corporation (IEDC) and The Russian Fund, is a Delaware corporation which was
incorporated on August 27, 1992. On October 21, 1993, IEDC acquired Penn
Octane Corporation (POC), a Texas corporation, whose primary asset was a
liquid petroleum gas (LPG) pipeline lease agreement with Seadrift Pipeline
Corporation, a subsidiary of Union Carbide Corporation. On January 6, 1995,
the Board of Directors approved the change of IEDC's name to Penn Octane
Corporation. The Company is engaged primarily in the business of purchasing,
transporting and selling LPG and providing services and equipment to the
compressed natural gas (CNG) industry. A significant portion of the sales
volume since inception has been to one major customer. This customer
purchases LPG at the Company's terminal in Brownsville, Texas where the
customer transports the LPG across the border for distribution throughout
northeastern Mexico.
POC was in the "development stage" until the business was established and
planned principal operations commenced during the year ended July 31, 1995.
In February 1997, POC formed Wilson Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary, for the purpose of engaging in the
business of selling, designing, constructing, installing and servicing CNG
fueling stations and related products for use in the CNG industry throughout
the world. The subsidiarys name was changed to PennWilson CNG, Inc.
(PennWilson) in August 1997.
BY-LAWS
- -------
At the 1997 Annual Meeting of Stockholders of the Company on May 29, 1997, the
stockholders approved an amendment and restatement of POCs by-laws to, among
other things, allow the Board of Directors of POC to amend the by-laws and to
take certain other actions and to effect certain other matters without the
further approval of the stockholders.
BASIS OF PRESENTATION
- -----------------------
The accompanying financial statements include POC and its subsidiary,
PennWilson (Company). All significant intercompany accounts and transactions
are eliminated.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. INVENTORIES
Inventories are stated at the lower of cost or market. For valuing propane
and butane gas, the Company changed costing methods from the weighted average
method to the first-in, first-out method for the year ended July 31, 1997.
The Company determined that the first-in, first-out method was preferable for
matching costs with income. The effect of this change in accounting method
was immaterial to the consolidated financial statements. For valuing
CNG-related inventory, cost is determined on the first-in, first-out basis.
2. PROPERTY, PLANT AND EQUIPMENT, LEASE RIGHTS AND CONSULTING SERVICES
CONTRACTS
Property, plant and equipment are recorded at cost. Assets are depreciated
and amortized using the straight-line method over their estimated useful lives
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
LPG terminal, building and leasehold
improvements 10 years
Automobiles 3-5 years
Furniture, fixtures and equipment 3-7 years
Trailers 8 years
</TABLE>
The lease rights, consulting services and service contracts are being
amortized as follows:
<TABLE>
<CAPTION>
<S> <C>
Lease rights 10 years
Consulting services (note D) 41 - 48 months
Financial advisory services (note G) 12 months
Legal services (note G) 36 months
</TABLE>
Maintenance and repair costs are charged to expense as incurred, and renewals
and improvements that extend the useful life of the assets are added to the
property, plant and equipment accounts.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
effective for fiscal years beginning after December 15, 1995. The provisions
of SFAS 121 require the Company to review long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an impairment has occurred, the amount
of the impairment is charged to operations. No impairments were recognized.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
3. INCOME TAXES
The Company will file a consolidated income tax return for the year ended July
31, 1997. Penn Wilson will be included for the period from February 12, 1997
through July 31, 1997.
The Company accounts for deferred taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes". Under the liability method specified by SFAS 109, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted
tax rates which will be in effect when these differences reverse. Deferred
tax expense is the result of changes in deferred tax assets and liabilities.
The principal types of differences between assets and liabilities for
financial statement and tax return purposes are accumulated depreciation,
start up costs, amortization of professional fees and deferred compensation
expense.
4. LOSS PER COMMON SHARE
Loss per share of common stock is computed based solely on the weighted
average number of shares outstanding because the Company incurred losses in
each of the three years presented; therefore, giving effect to common stock
equivalents would be antidilutive. Fully diluted loss per share of common
stock assumes the conversion of preferred stock and is only presented in
periods where such computation results in dilution greater than 3% of primary
earnings (loss) per share of common stock.
The FASB issued Statement of Financial Accounting Standards No. 128 (SFAS
128), Earnings Per Share, which supersedes Accounting Principles Board Opinion
No. 15 (APB 15), Earnings Per Share. The statement is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods. Early adoption is not permitted. The Company does not expect
a material change in earnings per share data as a result of adopting SFAS 128.
5. CASH EQUIVALENTS
For purposes of the cash flow statement, the Company considers cash in banks
and securities purchased with a maturity of three months or less to be cash
equivalents.
6. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures
about Fair Value of Financial Instruments", requires the disclosure of fair
value information about financial instruments, whether or not recognized on
the balance sheet, for which it is practicable to estimate the value. SFAS
107 excludes certain financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts are not intended to represent
the underlying value of the Company. The carrying amounts of cash and cash
equivalents, current receivables and payables and long-term liabilities
approximate fair value because of the short-term nature of these instruments.
8. REVENUES AND COST RECOGNITION
Certain of the Companys work is performed under fixed-price contracts.
Revenues are recognized on the percentage-of-completion method, measured by
the percentage of total costs incurred to date to estimated total costs for
each contract. This method is used because management considers expended
costs to be the best available measure of progress on these contracts.
Contracts in progress at July 31, 1997 are for a duration of less than one
year.
Contract costs include all direct materials and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools
and repair costs. General and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income. These revisions are recognized in
the period in which the revisions are determined.
The asset, Costs and estimated earnings in excess of billings on uncompleted
contracts, represents revenues recognized in excess of amounts billed. The
liability, Billings in excess of cost and estimated earnings on uncompleted
contracts, represents billings in excess of revenues recognized.
9. STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, which establishes financial accounting and reporting standards
for stock-based employee compensation plans and for transactions in which an
entity issues its equity instruments to acquire goods and services from
nonemployees.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
9. STOCK-BASED COMPENSATION-CONTINUED
The Company has elected under the guidance provided by SFAS 123 to continue to
account for employee stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25 (APB 25), Accounting
for Stock Issued to Employees and related Interpretations.
10. RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform to
the current presentation.
NOTE C - COMPRESSED NATURAL GAS
ACQUISITION OF ASSETS FROM WILSON TECHNOLOGIES INCORPORATED
- -----------------------------------------------------------------
In connection with POCs plans to enter the CNG fueling business, on March 7,
1997, PennWilson and Wilson Technologies Incorporated (Wilson), a leading
supplier of CNG fueling stations engaged in the business of selling,
designing, constructing, installing and servicing CNG fueling stations and
related products for use in the CNG industry throughout the world, entered
into an Interim Operating Agreement (the Arrangement). Under the terms of the
Arrangement, effective as of February 17, 1997, PennWilson was granted the
right to use the Wilson name, technology and employees, subject to certain
restrictions, as well as rights to perform contracts which Wilson had not
begun to perform, in exchange for monthly payments of $84,000, and royalty
payments not to exceed $3,000,000 cumulatively, less certain adjustments, if
any, based on 5% of net revenues. The arrangement provided that PennWilson
was entitled to all revenues earned by PennWilson and by certain businesses of
Wilson commencing as of February 17, 1997. In addition, Zimmerman Holdings
Inc. (ZHI), the parent of Wilson, agreed to reimburse the Company for 50% of
the net operating cash deficit of PennWilson, if any. In carrying out the
business, PennWilson was also entitled to use the Wilson premises as well as
available inventory of Wilson at cost plus 10% or any other amount mutually
agreed upon by PennWilson and Wilson. The Arrangement was to have terminated
on the earlier to occur of 90 days from the date of the Arrangement or the
closing of the Acquisition described below. If the Acquisition was not
completed within 90 days, the Arrangement could be extended by PennWilson for
up to three years.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - COMPRESSED NATURAL GAS - CONTINUED
ACQUISITION OF ASSETS FROM WILSON TECHNOLOGIES INCORPORATED - Continued
- -----------------------------------------------------------------
Simultaneously with the Arrangement, POC, PennWilson, Wilson and ZHI entered
into a purchase agreement (the Acquisition), whereby PennWilson would acquire
certain assets, including trademarks and licenses, and certain ongoing
businesses of Wilson, in exchange for the assumption of certain liabilities, a
$3,000,000 contingent royalty note, a promissory note based upon certain
operating expenses and a $220,000 convertible debenture issued by POC. The
Acquisition was subject to several conditions, including obtaining
satisfactory restructuring of all of Wilsons creditor obligations including
the consent of such creditors to the proposed Acquisition.
Effective as of March 21, 1997, the Arrangement was amended (the Amendment) so
that PennWilson agreed to acquire $394,000 of Wilsons inventory and/or other
assets to be paid for through the application of $294,000 previously paid
under the Arrangement, plus other adjustments. In addition, PennWilson issued
a promissory note in the amount of $100,000 to Wilson which is payable in
equal annual installments of $20,000 plus interest at the prime rate (8.5% at
July 31, 1997) beginning June 5, 1998. Furthermore, the cumulative royalty to
be paid to Wilson was reduced from $3,000,000 to $2,000,000, less certain
adjustments. Also under the Amendment, effective June 1, 1997, the Company
ceased making the monthly payment and assumed direct responsibility for
expenses relating to the operation of Wilsons facilities, including the lease
of the premises and the hiring of certain employees formerly employed by
Wilson. Pursuant to the Amendment, and except as provided for therein, the
Arrangement and Acquisition were terminated effective as of March 21, 1997.
The acquisition was accounted for as a purchase. Accordingly, the results of
operations of PennWilson are included in the consolidated financial statements
from the effective date of the acquisition.
Proforma operating results for the years ended July 31, 1997 and 1996, as if
the acquisition had been completed on August 1, 1995, are not available.
However, WTIs revenues for the period from August 1, 1995 to March 21, 1997
were not significant.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - RELATED PARTIES
DIRECTORS, OFFICERS AND SHAREHOLDERS
- ---------------------------------------
During the year ended July 31, 1996, POC made advances to, and received
advances from, three of the Company's nine directors. As of July 31, 1996, a
director owed the Company a balance of $26,233 for interest on loans that the
Company made to the director's related businesses. All previous loans and
receivables from the director had been settled as of July 31, 1996 and the
interest receivable referred to above was settled as of July 31, 1997.
In March 1996 and April 1996, the Company received $500,000 loans from two
shareholders. The notes bear interest at 10% and had accrued interest at
July 31, 1996 of $20,833 and $15,000, respectively, and accrued interest at
July 31, 1997 of $17,594 and $15,068, respectively. During the year ended
July 31, 1997, the Company paid interest totaling $98,794 and reduced the
principal balance outstanding by $100,000. During September and October 1997,
the Company repaid the amount owing on the loans (note K).
During March 1997, the Company received advances from its President in the
amount of $85,000. This amount was repaid during April 1997.
As of July 31, 1997, the Company had a receivable from a corporation owned by
an officer of the Company in the amount of $171,601 of which approximately
$130,000 was repaid in September 1997 (see note L for other related party
transactions).
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - RELATED PARTIES- Continued
COMMISSION AGREEMENT
- ---------------------
During the year ended July 31, 1994, the Company entered into a commission
agreement with a consulting firm covering a forty-one month period. The firm
assisted the Company in its efforts to negotiate purchase orders with its
major customer. The former Chairman of the Company is related to a person in
the consulting firm who had a decision-making role.
On March 1, 1995, the consulting firm accepted 200,000 shares of the Company's
common stock in lieu of any future commissions due under the original
agreement signed on February 10, 1994. The stock was valued at $400,000
($2.00 per share). The consulting firm remained liable for the services to be
performed; therefore, the $400,000 was being amortized over the remaining life
of the original agreement.
On July 31, 1996, the Company determined that no future benefit would be
derived from the consulting services contract, and the remaining balance was
charged to operations.
NOTE E - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Property, plant and equipment consists of the following as of July 31,:
1996 1997
------------- -------------
<S> <C> <C>
LPG:
Building $ 173,500 $ 173,500
LPG terminal 3,426,440 3,426,440
Automobile and equipment 389,431 378,039
Office equipment 17,589 22,202
Leasehold improvements 220,629 237,899
CNG:
Furniture, fixtures and equipment - 162,161
Automobiles - 40,023
Leasehold improvements - 8,575
------------- -------------
4,227,589 4,448,839
Less: accumulated depreciation and
amortization ( 832,439) ( 1,263,691)
------------- -------------
$ 3,395,150 $ 3,185,148
============= =============
</TABLE>
Depreciation and amortization expense of property, plant and equipment totaled
$378,431, $414,412 and $448,019 for the years ended July 31, 1995, 1996 and
1997, respectively.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following as of July 31:
1996 1997
------------ ---------
<S> <C> <C>
LPG
Pipeline $ 413,820 $ 406,371
LPG terminal 31,231 86,180
CNG
Raw material and supplies - 199,519
Work in progress - 103,727
------------ ---------
$ 445,051 $ 795,797
============ =========
</TABLE>
Costs and estimated earnings on uncompleted contracts consist of the following
at July 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Uncompleted contracts consist of:
Costs incurred on uncompleted contracts $ 488,560
Estimated earnings 101,294
----------
589,854
Less: billings to date 400,562
----------
189,292
==========
Included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 196,888
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 7,596)
----------
189,292
==========
</TABLE>
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - OTHER ASSETS
On August 25, 1995, the Company entered into a one year contract with an
investment advisory firm for future financial advisory services in exchange
for 20,000 shares of common stock. In February 1996, an attorney exercised
his 100,000 warrants to purchase 100,000 shares of common stock for $1.25 per
share in exchange for legal services for a three year period.
On July 31, 1996, the Company determined that the attorney would not be
required to render future services. The Company has retained another
attorney; therefore, the remaining balance was charged to operations. Other
assets consist of the following at July 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Prepaid compensation cost $ 30,000 $ 18,000
Other 15,421 11,935
-------- --------
45,421 29,935
======== ========
</TABLE>
NOTE H - SHORT-TERM BORROWING
The Company had short-term borrowings of $672,552 from International Bank of
Commerce-Brownsville as of July 31, 1997 and 1996 (note N).
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - INCOME TAXES
At July 31, 1997, the approximate amount of net operating loss carryforwards
and expiration dates for U.S. income tax purposes were as follows:
<TABLE>
<CAPTION>
Year ending Tax Loss
July 31 Carryforward
- ----------- -------------
<S> <C> <C>
2009 $ 930,000
2010 2,370,000
2012 2,048,000
-------------
$ 5,348,000
=============
</TABLE>
Deferred tax assets and liabilities were as follows as of July 31,:
<TABLE>
<CAPTION>
1996 1997
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Depreciation $ 20,000 $ - $ 15,000 $ -
Capitalized start-up costs 5,000 - 3,000 -
Warranty reserves - - 1,000 -
Bad debt reserve 11,000 - 19,000 -
Amortization of professional fees 112,000 - 58,000 -
Deferred compensation expense 12,000 - 318,000 -
Net operating loss carryforward 1,122,000 - 1,818,000 -
---------- ------------ ---------- ------------
1,282,000 - 2,232,000 -
Less: valuation allowance 1,282,000 - 2,232,000 -
---------- ------------ ---------- ------------
$ - $ - $ - $ -
========== ============ ========== ============
</TABLE>
Management believes that the valuation allowance reflected above is
warranted because of the uncertainty that sufficient taxable income will be
generated in future taxable years by the Company to absorb the entire amount
of such net operating losses.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - CONSTRUCTION PAYABLES
As of July 31, 1995, two companies: Lauren Constructors, Inc. (Lauren) and
Thomas G. Janik & Associates, Inc. (Janik), had filed Mechanic's and
Materialmen's Liens against the Company's Brownsville terminal. The Company
was in litigation with Lauren and Janik but the parties reached a settlement
agreement on June 21, 1995. Under the terms of the settlement agreement, the
parties agreed to stay the pending legal proceedings provided the Company
adhered to an agreed-upon payment schedule. The minimum monthly payment due
according to the payment schedule was $34,445, which included interest at 12%
per annum. In addition, the agreement provided for additional payments
related to the monthly volume of gallons of LPG sold by the Company through
its Brownsville terminal. At July 31, 1996, the principal amount owed Lauren
and Janik was $360,145 and $77,689, respectively. Under terms of the
settlement agreement, the Company was to have paid the remaining balance on
August 15, 1996. The Company did not make the required payment but because
the Company had complied with all other terms and conditions of the settlement
agreement and had made combined principal and interest payments of $984,480 to
Lauren and Janik, the parties agreed to extend the settlement agreement to
April 14, 1997, under substantially similar terms and conditions. In exchange
for this extension, the Company made an immediate lump sum payment of
approximately $50,000 and executed a promissory note for the remaining balance
due. In addition, the Company provided Lauren and Janik a first lien position
on the improvements at the Brownsville terminal and a mortgagee's title policy
for the full amount of the principal and accrued interest remaining due. If
the entire amount due Lauren and Janik was not paid by April 14, 1997, the
Company would be considered to be in breach of the agreement and the interest
rate would escalate to 18% or the maximum rate allowed by law, whichever is
lower.
During April 1997, Janik agreed to exercise 25,000 warrants to purchase 25,000
shares of common stock of the Company at an exercise price below the stated
exercise price of $2.50 per share, and the Company agreed to accept in lieu of
cash payment on the exercise of the warrants, full cancellation of the
remaining approximately $46,000 principal amount of indebtedness and interest
thereon due Janik. In connection with the remaining obligation owed to Lauren
of approximately $212,000, which was due in April 1997, the Company and Lauren
reached an agreement whereby the Company paid Lauren $100,000 in April 1997,
and the remaining balance was paid in four equal monthly installments during
the period from May 15, 1997 through August 15, 1997.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - LONG-TERM DEBT
Long-term debt consists of the following as of July 31:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Contract for Bill of Sale; due in semi-annual payments of $22,469, including
interest at 11.8%; due in October 1998; collateralized by a building $ 143,915 $ 113,191
Subordinated note with warrants to purchase 50,000 shares of common
stock at $2.50 per share expiring February 28, 2001; principal due August
31, 1997, or upon receipt of proceeds from secondary equity offering in the
minimum amount of $5,000,000; interest at 10% due annually on the
anniversary date of the note; collateralized by all tanks, pumps, equipment
and other terminal property, and proceeds from a judgment or settlement
of litigation (Paid in September 1997) 500,000 400,000
Subordinated note with warrants to purchase 50,000 shares of common
stock at $2.50 per share expiring April 11, 2001; principal due October 11,
1997, or upon receipt of proceeds from secondary equity offering in the
minimum amount of $5,000,000; interest at 10% due annually on the
anniversary date of the note; collateralized by all tanks, pumps, equipment
and other terminal property and proceeds from the judgment or settlement
of litigation (Paid in October 1997) 500,000 500,000
Unsecured note with warrants to purchase 75,000 shares of common stock
at $3.00 per share expiring October 10, 1997; principal due November 7,
1997, or upon receipt of proceeds from offering of securities prior to
payment date in excess of $250,000; Company shall utilize one half of
proceeds from such sale to satisfy this note; interest at 10% due annually on
the anniversary date of the note (Paid in August 1997) - 75,000
Unsecured note with principal due in equal annual installments of $20,000
beginning June 5, 1998, plus interest at the prime rate (8.5% at July 31,
1997); due June 5, 2002 - 100,000
Unsecured promissory note due May 29, 1998 - 33,000
Secured promissory note with warrants to purchase 500,000 shares of
common stock at $2.50 per share expiring June 15, 2002; principal due June
15, 1999, or upon receipt of proceeds from secondary debt or equity
offering in the minimum amount of $5,000,000; interest at 10.5% due semi-
annually on December 15 and June 15; collateralized by certain specified
assets of the Company - 1,000,000
Capitalized lease obligations payable in monthly installments totaling
3,138; due on various dates through January 1999 - 44,033
---------- ----------
1,143,915 2,265,224
Current maturities 83,871 1,152,391
---------- ----------
$1,060,044 $1,112,833
========== ==========
</TABLE>
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - LONG-TERM DEBT - CONTINUED
Scheduled maturities are as follows:
<TABLE>
<CAPTION>
Year ending July 31,
- --------------------
<S> <C>
1998 $1,152,391
1999 1,052,833
2000 20,000
2001 20,000
2002 20,000
----------
$2,265,224
==========
</TABLE>
In December 1995, the Company obtained a revolving line of credit for
$140,000. The credit line was renewed in December 1996 for the period
through September 30, 1997. Interest is calculated on this credit line at the
prime rate (8.5% at July 31, 1997) plus 3%. At July 31, 1997, the outstanding
balance under the revolving line of credit totaled $140,000.
NOTE L - STOCKHOLDERS' EQUITY
SENIOR PREFERRED STOCK
- ------------------------
At the 1997 Annual Meeting of Stockholders of the Company held on May 29,
1997, the stockholders authorized the amendment of the Companys Restated
Certificate of Incorporation to authorize 5,000,000 shares, $.01 par value per
share, of a new class of senior preferred stock for possible future issuance
in connection with acquisitions and general corporate purposes, including
public or private offerings of shares for cash and stock dividends. The Board
of Directors has made no determination with respect to the issuance of any
shares of the new preferred stock and has no present commitment, arrangement
or plan which would require the issuance of such additional shares of new
preferred stock in connection with any equity offering, merger, acquisition or
otherwise.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS EQUITY - CONTINUED
PREFERRED STOCK
- ----------------
On September 18, 1993, the Company entered into a private placement offering
for the sale of 150,000 shares of its $.01 par value, 11% convertible,
cumulative to the extent of net earnings, non-voting preferred stock at a
purchase price of $10.00 per share. The Company has had no earnings to date
and therefore no dividends have been declared or paid. The preferred stock is
convertible, at the option of the holder for a period of 5 years, into common
voting shares of the Company at a conversion ratio of one share of preferred
stock for 3.333 shares of common stock. The preferred stock is not redeemable
by the Company. On September 10, 1997, the Board of Directors of the Company
approved the issuance of an additional 100,000 shares of common stock as an
inducement for the preferred shareholders to convert the shares of preferred
stock under certain circumstances.
COMMON STOCK
- -------------
On September 29, 1994, the Company issued 300,000 common shares at
approximately $2.25 per share in exchange for partial payment of a promissory
note to a shareholder.
On January 31, 1995, the Company issued 300,000 common shares at
approximately $2.42 per share in exchange for full payment of a promissory
note to a shareholder.
Effective March 1, 1995, the Company issued 200,000 common shares at $2.00 per
share to the Company's sales agent in exchange for canceling the original
agreement which was to have expired June 30, 1998. The value assigned to the
commission agreement was being amortized over the life of the original
agreement.
On April 12, 1995 and April 19, 1995, the Company issued 150,000 and 100,000
common shares.
On May 15, 1995, one shareholder converted 30,000 preferred shares to 100,000
common shares.
On July 5, 1995, the Company issued 165,000 common shares at $2.00 per share
to a new shareholder in exchange for promissory notes. The notes were paid in
full on August 23, 1995.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS EQUITY - CONTINUED
On August 25, 1995, the Company issued 20,000 shares of common stock to an
investment advisory firm as compensation for financial advisory services to be
provided for a period of one year. As additional compensation, the firm was
to receive a "cash success" fee and common stock warrants based on capital
raised.
On February 16, 1996, the Company allowed the holder of 100,000 of the
Company's $1.25 per share warrants to convert the warrants into common stock
in exchange for a three year retainer contract for future legal fees.
On February 26, 1996, the Company granted 330,000 warrants to a director to
purchase 330,000 shares of common stock for $2.50 per share through February
8, 2000, in exchange for advisory services during that period.
On February 26, 1996, the Company granted 200,000 warrants to the new Chairman
of the Board to purchase 200,000 shares of common stock for $2.50 per share
through February 29, 2000.
On July 16, 1996, the Company issued 20,000 shares of common stock as
settlement for consulting services previously accrued during the year ended
July 31, 1995.
In November 1996, the Company issued 100,000 warrants to a third party to
obtain the rights to construct, own and operate a Dina dealership in Mexico.
Grupo Dina, S.A. de C.V. (Dina) is one of the largest bus and truck
manufacturers in Mexico.
In January 1997, the Company issued 10,000 shares of common stock to an
advertising firm for services provided.
During February 1997, the Company and certain prior officers of the Company
(the Officers) agreed to an exchange offer whereby the Officers, on a weighted
average basis, received 164,286 shares of the Companys common stock in
exchange for 702,856 outstanding warrants to purchase 702,856 shares of common
stock of the Company. The warrants were canceled.
During March 1997, the Company reduced from $5.00 per share to $2.50 per share
the exercise price of 100,000 warrants to purchase 100,000 shares of common
stock of the Company held or controlled by a director of the Company.
During March 1997, the Company approved the issuance of 200,000 warrants to
purchase 200,000 shares of common stock of the Company to a director and
officer of the Company, at an exercise price of $3.625 per share, exercisable
on or before March 24, 2000. As a bonus for the year ended July 31, 1997, on
September 10, 1997, the Company reduced the exercise price of the warrants to
$2.50 per share.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS EQUITY - CONTINUED
During March 1997, the Company approved the issuance of 200,000 warrants to
purchase 200,000 shares of common stock of the Company to a director and
officer of the Company upon his one-year anniversary of employment with the
Company. The exercise price of the warrants was to be based on the closing
stock price the day prior to the issuance of the warrants and are exercisable
three years from the date of issuance. On September 10, 1997, the Company
agreed to waive the one year requirement and immediately granted the warrants
as a bonus for the year ended July 31, 1997 at an exercise price of $2.50 per
share exercisable on or before September 9, 2000.
During March 1997, a related party exercised 15,000 warrants to purchase
15,000 shares of common stock of the Company at an exercise price of $2.50 per
share. The consideration for the exercise of the warrants included $150 in
cash and a $37,350 promissory note. The note accrues interest at the rate of
8.25% per annum to be paid annually on March 26 until the note is due in full
on March 26, 2000. The promissory note has been recorded as a reduction of
stockholders equity.
In April 1997, 250,000 warrants were exercised for 250,000 shares of common
stock of the Company in exchange for the cancellation of $250,000 in
outstanding notes plus accrued interest thereon, and a cash payment received
by the Company of $188,438.
During April 1997, Janik agreed to exercise 25,000 warrants to purchase 25,000
shares of common stock of the Company (note J).
During April 1997, the Companys President exercised 2,200,000 warrants to
purchase 2,200,000 shares of common stock of the Company at an exercise price
of $1.25 per share. The consideration for the exercise of the warrants
included $22,000 in cash and a $2,728,000 promissory note. The note accrues
interest at the rate of 8.25% per annum and is payable annually on April 11
until maturity on April 11, 2000. The promissory note is collateralized by
1,000,000 shares of common stock of the Company owned by the President and has
been recorded as a reduction of stockholders equity.
During April 1997, an additional 300,000 warrants to purchase 300,000 shares
of common stock of the Company at an exercise price of $1.25 per share were
exercised by a director of the Company and other third parties.
During June 1997, in connection with the Secured Note, the Company approved
the issuance of 500,000 warrants to purchase 500,000 shares of common stock of
the Company (note K).
In August 1997, 75,000 warrants to purchase 75,000 shares of common stock of
the Company were exercised in exchange for cancellation of a $75,000 note
payable, plus accrued interest thereon, and a cash payment to the Company of
$56,250.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCKHOLDERS EQUITY - CONTINUED
During September 1997, an additional 430,000 warrants to purchase 430,000
shares of common stock of the Company were exercised by a director of the
Company (130,000) and other third parties at an exercise price of $2.50 per
share resulting in a cash payment received by the Company of $1,075,000. In
connection with the exercise of 100,000 of these warrants (the Exercised
Securities), the Company entered into a Registration Rights Agreement,
agreeing to register the Exercised Securities on or before February 1, 1998.
In the event the Company fails to register the Exercised Securities by
February 1, 1998, for each month beginning March 1, 1998 and ending on
September 1, 1998, the Company will be required to issue the holder of the
Exercised Securities warrants to purchase 10,000 shares of common stock of the
Company at an exercise price of $2.50 per share, exercisable within one year
from the date of issuance.
NOTE M - STOCK WARRANTS
The Company applies APB 25 for warrants granted to the Companys employees.
The compensation cost recorded in the consolidated statements of operations
for warrants granted to employees totaled $0, $0 and $837,600 for the years
ended July 31, 1995, 1996 and 1997, respectively.
Had compensation cost related to the warrants granted to employees been
determined based on the fair value at the grant dates, consistent with the
methodology of SFAS 123, the Company?s pro forma net loss and loss per share
would have been as follows for the year ended July 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Net loss as reported $( 2,922,659)
Net loss proforma ( 3,054,615)
Loss per common share as reported ( 0.48)
Loss per common share proforma ( 0.50)
</TABLE>
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCK WARRANTS - Continued
The following assumptions were used for two grants of warrants to
employees in the year ended July 31, 1997 to compute the fair value of the
warrants using the Black-Scholes option-pricing model: dividend yield of 0%
for both grants; expected volatility of 95% and 90%; risk-free interest rate
of 7% for both grants; and expected lives of 3 years for both grants.
For warrants granted to nonemployees, the Company applies the methodology
of SFAS 123 to determine the fair market value of the warrants issued. Costs
associated with warrants granted to nonemployees for the years ended July 31,
1995, 1996 and 1997, totaled $0, $36,000, and $92,185, respectively. Warrants
granted to nonemployees simultaneously with the issuance of debt are accounted
for based on the guidance provided by Accounting Principles Board Opinion No.
14 (APB 14), ?Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants?.
A summary of the status of the Company?s warrants as of July 31, 1995,
1996 and 1997, and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
1995 1996 1997
Warrants Shares Weighted Shares Weighted Shares Weighted
Average Average Average
Exercise Price Exercise Price Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,980,000 $ 1.25 4,150,000 $ 1.66 4,680,000 $ 1.84
Granted 1,170,000 2.71 630,000 2.90 1,325,000 2.66
Exercised - (100,000) 1.25 (3,492,856) 1.55
Expired - - (297,144) 2.56
Outstanding at end of year 4,150,000 $ 1.66 4,680,000 $ 1.84 2,215,000 $ 2.61
Warrants exercisable at year-end 4,150,000 4,680,000 2,015,000
</TABLE>
The following table summarizes information about the warrants outstanding
at July 31, 1997:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at Contractual Exercise at Exercise
Range of Exercise Prices July 31, 1997 Life Price July 31, 1997 Price
- ------------------------- ------------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
1.25 to $3.00 2,165,000 2.53 years $ 2.49 1,965,000 $ 2.49
7.50 50,000 .25 7.50 50,000 7.50
------------- -------------
1.25 to $7.50 2,215,000 2.48 $ 2.61 2,015,000 $ 2.61
============= =============
</TABLE>
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES
LITIGATION
During 1994, the Company entered into discussions with International Bank of
Commerce-Brownsville (IBC), a Texas state banking association, for a proposed
letter of credit, term loan, and working capital financing. In anticipation
of receiving funding, the Company executed various documents including a
Security Agreement dated July 1, 1994, assigning and granting to IBC a
security interest in significantly all of the Company's business and assets,
including its pipeline lease agreement, its leased land at the Port of
Brownsville, its terminal facilities and related equipment, inventories and
all contracts and accounts receivable.
Beginning July 1, 1994, IBC advanced the Company directly or made payments
directly to certain of the Company's creditors a total of $1,507,552 against
the collateral. On August 5, 1994, IBC notified the Company that it would not
honor certain of the Company's checks but would continue to honor its
irrevocable letters of credit issued on behalf of the Company.
On August 24, 1994, the Company filed an Original Petition and Application for
Injunctive Relief against IBC seeking 1) either enforcement of the credit
facility between the Company and IBC or a release of the Company's collateral
consisting of significantly all of the Company's business and assets, 2)
declaratory relief with respect to the credit facility and 3) an award for
damages and attorney's fees.
In response to the Company's request for injunctive relief, IBC filed a motion
on August 29, 1994, to compel arbitration and to stay the proceedings. On
September 12, 1994, a State District Court in Cameron County, Texas signed an
order compelling the Company and IBC to resolve all of the Company's claims
against IBC in final arbitration. The arbitration was conducted through the
American Arbitration Association, Commercial Arbitration No. B 70 148 0133 94
A.
On November 3, 1994, IBC filed a Responsive Pleading in Arbitration alleging
that there was no loan agreement between the Company and IBC. In addition,
IBC requested that the arbitrators declare that IBC was not liable to the
Company as alleged, and that IBC was entitled to an award of $25,000,000 for
Business Disparagement/Defamation and $100,000,000 in Punitive Damages plus
reasonable attorney's fees.
On November 7, 1994, the Company and IBC agreed to a partial release of
certain collateral (accounts receivable) after the Company made cumulative
payments through that date to IBC totaling $800,000. The remaining unpaid
balance to IBC at that date totaled $672,552, excluding interest ($30,448) and
fees ($39,853).
On May 5, 1995, IBC filed a First Amended Responsive Pleading in Arbitration
again alleging there was no loan agreement between the Company and IBC and
requesting damages in excess of $750,000 plus $3,500,000 for Business
Disparagement/Defamation plus an amount of Punitive Damages to be determined
by the trier of fact.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - Continued
The arbitration hearing, held before a panel of three neutral arbitrators,
commenced on July 19, 1995 and concluded on August 2, 1995. On October 10,
1995, the Company received notification of the Award of Arbitrators (Award)
which called for IBC to pay to the Company the sum of (a) $3,246,754 for
Breach of Contract and (b) attorneys' fees of $568,000. In addition, the
Award stated that IBC was entitled to an offset of (a) the sum of $804,016 and
(b) attorneys' fees of $200,000 on IBC's counterclaim against the Company for
Breach of Contract. Both parties' awards accrue post-award interest at 9.75%
compounded annually.
On February 28, 1996, after hearing and denying IBC-Brownsville's motion to
vacate the arbitration award, the following judgment was ordered:
International Energy Development Corporation n/k/a Penn Octane
Corporation shall have a judgment against International Bank of
Commerce-Brownsville in the sum of $2,810,737, plus post-award interest at a
rate of 9.75% compounded annually to begin running 10 days after the date the
award was signed by the requisite number of arbitrators (September 21, 1995)
to the entry of this Judgment and thereafter at the statutory rate.
Upon the entry of this Judgment International Bank of
Commerce-Brownsville shall release all collateral transferred to it by
International Energy Development Corporation n/k/a Penn Octane Corporation.
The Court further ordered that International Energy Development
Corporation n/k/a Penn Octane Corporation shall have and recover from
International Bank of Commerce-Brownsville attorney's fees in the sum of
$100,000 for services rendered in pursuing the entry of Judgment in this case,
together with interest at the statutory rate from date of entry of this
Judgment until paid and conditionally $7,500 for any appeal to the Court of
Appeals and $5,000 for any appeal to the Texas Supreme Court and $2,500 in the
event Writ is granted by the Supreme Court.
On June 3, 1996, IBC filed an appeal, but the Company continues to believe
that the judgment is final, binding, collectible and will resolve the
litigation with IBC.
The financial statements do not include any adjustments reflecting the gain
contingency of the Award, net of attorney's fees, or the offset (principal and
interest). Short-term borrowing of $672,552 and accrued interest of $191,192
reflect the amount of the offsets at July 31, 1997. The Award will be
accounted for when it is actually realized and the offset will be accounted
for at the time IBC has exhausted all appeals.
A former officer of the Company is entitled to a payment of 5% of the net
proceeds (after expenses and legal fees) received by the Company arising from
the above-mentioned litigation.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - Continued
On April 18, 1996, the Company reached agreement to accept $400,000 to settle
a lawsuit it filed in October 1995 against International Bank of Commerce-San
Antonio, a bank related to IBC (IBC-San Antonio). As part of the settlement
agreement, the parties executed mutual releases from future claims related to
the IBC litigation. Additionally, the defendant provided an indemnity
agreement to the Company against future claims from IBC. The amount is
recorded in the statement of operations for the year ended July 31, 1996.
On June 26, 1996, IBC filed suit against the Company, Case No. 96-06-3502 in
the 357th Judicial District Court of Cameron County, Texas alleging that the
Company, in filing the Judgment against IBC in order to clear title to its
assets, slandered the name of IBC. IBC contends that the Company's Judgment
against them prevented them from selling certain property. IBC has claimed
actual damages of $600,000 and requested punitive damages of $2,400,000. On
September 23, 1996, the court which entered the Judgment on behalf of the
Company indicated in a preliminary ruling that the Company was privileged in
filing the Judgment to clear title to its assets. The Company believes the
case to be frivolous and is a breach of the settlement agreement entered into
with IBC-San Antonio. Further, the Company believes this cause of action is
covered by an indemnity agreement from IBC-San Antonio.
In connection with the lawsuit, IBC filed an appeal with the Texas Court of
Appeals on January 21, 1997. The Company responded on February 14, 1997. On
September 18, 1997, the appeal was heard by the Texas Court of Appeals.
On July 30, 1996, the Company filed suit in the District Court of Harris
County, Texas against the former Chairman of the Company, Jorge V. Duran,
regarding alleged conversion and fraud by Mr. Duran during his time as an
employee of the Company. The Company has not yet quantified its damages and
is seeking a declaration that the termination of employment of Mr. Duran was
lawful and within the rights of the Company based on Mr. Durans status as an
at-will employee of the Company. On December 12, 1996, Mr. Duran filed a
counterclaim against the Company in the District Court of Harris County, Texas
alleging, among other things, wrongful termination and seeking compensation in
an unspecified amount. On February 27, 1997, the two actions were
consolidated into one.
LETTERS OF CREDIT
In January 1996, the Company obtained a standby letter of credit in favor of a
propane supplier. The standby letter of credit is for $40,000 and expired
December 1, 1996. In August 1996, the Company obtained a $40,000 standby
letter of credit for another supplier. The letter of credit expired on
September 30, 1996.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - Continued
In connection with the Term Sale Agreement, in September 1996 the Company
obtained a $625,000 letter of credit in favor of its main propane supplier.
As part of the terms and conditions of this letter of credit, which was due to
expire September 30, 1997, the Company executed a $625,000 demand promissory
note to the issuing bank. The note was initially collateralized by a $500,000
deposit, accrued interest at the prime rate (8.25% as of October 31, 1996)
plus 3%, and was guaranteed by the Companys president.
On November 5, 1996, the Companys main propane supplier presented for payment
a $495,315 invoice, which was paid through the initial $500,000 collateral
deposit. After such payment, the balance available under the letter of credit
remained $625,000 and the remaining balance of the collateral deposit totaled
$4,685. In March 1997, the letter of credit, collateral and guaranty were
released.
During March 1997, the Company obtained a letter of credit in the amount of
approximately $251,000 in connection with the obligation of PennWilson to
complete certain work under contract by WTI to be performed by PennWilson.
During September 1997, the letter of credit was extended to November 26, 1997.
This letter of credit is guaranteed by the Companys president.
During June 1997, PennWilson entered into a performance and payment bond (the
Bonds) in connection with a contract to design, construct and install
equipment totaling approximately $1,487,000. The Bonds will remain
outstanding until the equipment is delivered to the customer, estimated to be
completed as prescribed under the contract in November 1997. There are no
liquidating damages under the contract.
OPERATING LEASE COMMITMENTS
The Company has lease commitments for its pipeline, land, office space and
office equipment. The pipeline lease requires fixed monthly payments of
$45,834 and monthly service payments of $8,690 through March 2004. The
service payments are subject to an annual adjustment based on a labor cost
index and an electric power cost index. The lessor has the right to terminate
the lease agreement under certain limited circumstances, which management
believes are remote, as provided for in the lease agreement at specific times
in the future by giving twelve months written notice. The Company can also
terminate the lease at any time after the first twelve months by giving thirty
days notice only if its sales agreement with its main customer is terminated.
The Company can also terminate the lease at any time after the fifth
anniversary date of the lease by giving twelve months notice. Upon
termination by the lessor, the lessor has the obligation to reimburse the
Company the lesser of 1) net book value of its liquid propane gas terminal at
the time of such termination or 2) $2,000,000.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - Continued
In May 1997, the Company reached an agreement to amend (the Amendment) its
lease agreement (the Seadrift Lease) with Seadrift Pipeline Corporation
(Seadrift), a subsidiary of Union Carbide Corporation, pursuant to which the
Company leases a pipeline running from Exxon USAs King Ranch Gas Plant in
Kleberg County, Texas (the Pipeline) to the fence line of certain property
owned by the Brownsville Navigation District of Cameron County, Texas. On the
effective date of the Amendment, the term of the Seadrift Lease will be
extended until March 31, 2013, and may provide, among other things, for
additional storage access, and inter-connection with another pipeline
controlled by Seadrift thereby providing greater access to and from the
Pipeline. Pursuant to the Amendment, the Companys fixed annual fee associated
with use of the Pipeline will increase by $350,000. Under certain conditions
described below, $250,000 and $125,000 of the annual fee will be waived for
the first two years, respectively, from the effective date of the Amendment.
The Amendment will become effective on the earlier of April 1, 1998 or the
date that Seadrift notifies the Company of the completion by the Company of
certain Pipeline enhancements, which, if undertaken, are anticipated to cost
no more than $5,000,000. The Amendment may also require the Company to make
available to Seadrift, under certain conditions, access to the Pipeline based
on specified volumes at specified rates.
The operating lease for the land requires semi-annual payments of $17,712
through October 1998, and gives the Company the option of one additional five
year term. In May 1997, the Company amended its lease with the Brownsville
Navigation District to include rental of additional space adjacent to the
existing terminal location. Effective April 15, 1997, the lease amount was
increased to $74,784 annually. The additional space will allow the Company to
develop additional storage, add railroad access to its storage facility and
facilitate port activities.
In May 1997, the Company renewed the lease for its executive offices located
in Redwood City, California. The monthly rental is $3,508 through June 1998.
Rent expense was $730,011, $773,847 and $781,750 for the years ended July 31,
1995, 1996 and 1997, respectively. As of July 31, 1997, the minimum
lease payments are as follows:
<TABLE>
<CAPTION>
Year ending July 31,
- ---------------------
<S> <C>
1998 $ 894,119
1999 710,973
2000 820,393
2001 900,835
2002 900,000
Thereafter 9,600,000
-----------
$13,826,320
===========
</TABLE>
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - Continued
The Company has not made all payments required by the lease agreements.
Approximately $65,000 is owed under the pipeline lease for reimbursement for
repairs to the pipeline made prior to the commencement of the lease. The July
and June 1997 monthly pipeline lease payments were paid in August 1997. The
lessor has not made demand for payment. The Company has included the amounts
owed in the accompanying consolidated balance sheet as trade accounts payable.
EMPLOYMENT CONTRACTS
The Company has a six year employment agreement with the President for the
period through January 31, 2001. Under that agreement, he is entitled to
receive $300,000 in annual compensation equal to a monthly salary of $25,000
until earnings exceed a gross profit of $500,000 per month, whereupon he is
entitled to an increase in his salary to $40,000 per month for the first year
of the agreement increasing to $50,000 per month during the second year of the
agreement. He is also entitled to (i) an annual bonus of 5% of all pre-tax
profits of the Company, (ii) 200,000 options for the purchase of 200,000
shares of Common Stock that can be exercised under certain circumstances at an
option price of $7.50 per share (giving effect to a 2-for-1 stock split on
June 10, 1994), and (iii) a term life insurance policy commensurate with the
term of employment agreement, equal to six times his annual salary and three
times his annual bonus. The employment agreement also entitles him to a right
of first refusal to participate in joint venture opportunities in which the
Company may invest, contains a covenant not to compete until one year from the
termination of the agreement and restrictions on use of confidential
information. Through July 31, 1997, he waived his rights to his full salary,
receipt of the stock options and the purchase by the Company of a term life
insurance policy. In the future, he may elect not to waive such rights.
Aggregate compensation under employment agreements totaled $196,000, $327,692
and $174,524 for the years ended July 31, 1995, 1996 and 1997, respectively,
which included agreements with former executives. Minimum salaries under the
remaining agreement amount to $300,000 per year.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - OPTION TO ACQUIRE NATIONAL POWER EXCHANGE GROUP, INC.
On October 30, 1994, the Company signed an agreement to sell its option to
purchase National Power Exchange Group, Inc. (NPEG) in exchange for a
promissory note of $2,000,000 to be paid over various periods no later than
January 1, 1996. A gain of $1,222,212 was recorded during the quarter ended
October 31, 1994, which reflected the settlement agreement discounted by the
Company's incremental borrowing rate less the funds advanced to NPEG during
the fiscal year ended July 31, 1994. NPEG made a payment of $300,000 during
the quarter ended January 31, 1995, and a payment of $200,000 during the
quarter ended October 31, 1995. Due to uncertainties related to the timing of
the financing of NPEG's power project, the Company made a provision to reduce
the amount due under the settlement agreement to $779,957 at July 31, 1995.
At October 31, 1995, the net amount due was $589,114. On April 5, 1996, NPEG
made a final payment of $600,000. In accordance with the settlement agreement
with two of the contractors involved in constructing the terminal, most of
these funds were used to reduce construction payables.
NOTE P - ACCOUNTS RECEIVABLE FACTORING AND SECURITY AGREEMENT
On October 24, 1994, the Company entered into an Accounts Receivable Factoring
and Security Agreement under which the Company submitted all invoices and was
advanced funds sufficient to pay for LPG purchases. As of July 31, 1995, the
Company and the factor negotiated an acceptable payoff schedule for the
outstanding balance due under the agreement. The principal balance of
$160,000 outstanding at July 31, 1995, was paid in August 1995.
NOTE Q - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. The Company has incurred losses since
inception, has used cash in operations and has a deficit in working capital.
In addition, the Company is involved in litigation, the outcome of which
cannot be determined at the present time. As discussed in Note A, the Company
has historically depended heavily on sales to one major customer. In
addition, there is no significant operating history on which to base the
results of the additional business generated through PennWilson or contracts
to purchase and sell propylene.
In view of the matters described in the preceding paragraph, recoverability of
a major portion of the recorded asset amounts as shown in the accompanying
consolidated balance sheet is dependent upon the collection of the Award, the
Company's ability to obtain additional financing and to raise additional
equity capital, and the success of the Company's future operations. The
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.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - REALIZATION OF ASSETS-Continued
To provide the Company with the ability it believes necessary to continue in
existence, management is taking steps to 1) collect the Award, 2) increase
sales to its current customers, 3) increase its customer base, 4) expand its
product lines and 5) raise additional debt and/or equity capital.
At July 31, 1997, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $5,348,000 (note I). The ability to
utilize such net operating loss carryforwards may be significantly limited by
the application of the change of ownership rules under Section 382 of the
Internal Revenue Code.
NOTE R - CONTRACTS
LPG BUSINESS
The Company has entered into a sales agreement (Agreement) with its major
customer, P.M.I. Trading Limited (PMI), a subsidiary of Petroleos Mexicanos
(PEMEX), the state-owned Mexican oil company, to provide a minimum monthly
volume of LPG to PMI through September 30, 1998. Sales to PMI for the years
ended July 31, 1995, 1996 and 1997 totaled $13,299,169, $25,336,151 and
$28,836,820, respectively, representing 90%, 96% and 95% of total revenues for
each year. The Company currently is purchasing LPG on a month-to-month basis
from a major supplier to meet the minimum monthly volumes required in the
Agreement (See Note T). The suppliers price is below the sales price provided
for in the Agreement.
PPL BUSINESS
In August 1997, the Company entered into an agreement to sell (Sales
Agreement) propylene (PPL) to Union Carbide Corporation through July 31, 1998.
In order to supply the PPL, the Company is currently purchasing PPL on a month
to month basis from PMI at a price per pound less than the price provided for
in the Sales Agreement.
CNG BUSINESS
Prior to July 31, 1997, the Company was awarded two contracts for the design,
construction and installation of CNG fueling station components for A.E.
Schmidt Environmental in connection with CNG fueling stations being
constructed for the New York City Department of Transportation (total contract
amount of approximately $1,487,000) and the Orange County Sanitation District
(total contract amount of approximately $236,000). The Company anticipates
completion of the projects during the second quarter of its 1998 fiscal year.
The Company intends to pursue additional CNG contracts; however, the Company
has not entered into any other CNG contracts subsequent to July 31, 1997.
<PAGE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - SEGMENT INFORMATION
The FASB issued Statement of Financial Accounting Standards No. 131 (SFAS No.
131), Disclosure about Segments of an Enterprise and Related Information,
effective for years beginning after December 15, 1997, with earlier
application encouraged. The Company adopted SFAS 131 in 1997.
The Company has the following reportable segments: LPG and CNG. The LPG
segment is a distributor of fuel and the CNG segment designs, constructs and
installs fueling stations.
The accounting policies used to develop segment information correspond to
those described in the summary of significant accounting policies. Segment
profit or loss is based on profit or loss from operations before income taxes.
The reportable segments are distinct business units operating in similar
industries. They are separately managed, with separate marketing and
distribution systems. The following information about the segments is for
the year ended July 31, 1997.
<TABLE>
<CAPTION>
LPG CNG Totals
<S> <C> <C> <C>
Revenues from external customers $ 29,703,650 $ 663,484 $ 30,367,134
Interest expense 236,236 3,195 239,431
Depreciation and amortization 434,960 13,059 448,019
Segment profit (loss) ( 2,886,067) ( 36,592) ( 2,922,659)
Segment assets 4,550,915 945,452 5,496,367
Segment liabilities ( 3,762,714) ( 981,044) ( 4,743,758)
Expenditure for segment assets 27,257 210,760 238,017
Reconciliation to Consolidated Amounts
Revenues
Total revenues for reportable segments $ 30,367,134
Other revenues -
Elimination of intersegment revenues -
--------------------
Total consolidated revenues $ 30,367,134
====================
Profit or Loss
Total profit or loss for reportable segments $ ( 2,922,659)
Other profit or loss -
Elimination of intersegment profits -
Unallocated amounts
Corporate headquarters expense -
Other expenses -
--------------------
Consolidated income before income taxes $ (2,922,659)
====================
Assets
Total assets for reportable segments $ 5,496,367
Other assets -
Corporate headquarters -
Other unallocated amounts -
--------------------
Total consolidated assets $ 5,496,367
====================
Geographic Information Revenues Assets
--------------- --------------------
United States $ 30,337,208 $5,496,367
Canada 29,926 -
--------------------
$ 30,367,134 $5,496,367
=============== ============
</TABLE>
PENN OCTANE CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOTE T - SUBSEQUENT EVENTS - UNAUDITED
PRIVATE PLACEMENT
On October 21, 1997, the Company closed a private placement (the Private
Placement), pursuant to which it issued and sold $1,500,000 principal amount
of promissory notes and warrants to purchase 250,000 shares of the Company's
common stock exercisable during a three year period ending October 21, 2000 at
an exercise price of $6.00 per share, resulting in net proceeds to the Company
of approximately $1,400,000. The promissory notes accrue interest at the rate
of 10% per annum. Payment of the principal and any accrued and unpaid
interest on the promissory notes is due on the earlier to occur of June 30,
1998, and the closing of any public offering of debt or equity securities of
the Company resulting in net proceeds to the Company in excess of $5,000,000.
The purchasers in the Private Placement were granted one-time demand
registration rights with respect to the shares issuable upon exercise of the
warrants.
STOCK AWARD PLAN
On October 21, 1997, the Company adopted the 1997 Stock Award Plan (Plan).
Under the terms of the Plan, the Company has reserved for issuance 150,000
shares of common stock. The purpose of the Plan is to compensate consultants
who have rendered significant services to the Company. The Plan will be
administered by the compensation committee of the Company which shall have
complete authority to select participants, determine the awards of common
stock to be granted and the times such awards will be granted.
CREDIT FACILITY
On October 22, 1997, the Company entered into a $6.0 million credit facility
with RZB Finance L.L.C. (RZB) for demand loans and standby letters of credit
(RZB Credit Facility) to finance the Company's purchase of LPG and PPL. Under
the RZB Credit Facility, the Company has agreed to pay a fee with respect to
each letter of credit thereunder in an amount equal to the greater of (i)
$500, (ii) 1.5% of the maximum face amount of such letter of credit, or (iii)
such higher amount as may be agreed between the Company and RZB. Any amounts
outstanding under the RZB Credit Facility shall accrue interest a rate equal
to the rate announced by the Chase Manhattan Bank as its prime rate plus 2.5%.
Pursuant to the RZB Facility, RZB has sole and absolute discretion to
terminate the RZB Credit Facility and to make any loan or issue any letter of
credit thereunder. RZB also has the right to demand payment of any and all
amounts outstanding under the RZB Credit Facility at any time. In connection
with the RZB Credit Facility, the Company has agreed to grant a mortgage,
security interest and assignment in any and all of the Company's real
property, buildings, pipelines, fixtures and interests therein or relating
thereto, including, without limitation, the lease with the Brownsville
Navigation District of Cameron County for the land on which the Brownsville
Terminal Facility is located, the Pipeline Lease, and in connection therewith
to enter into leasehold deeds of trust, security agreements, financing
statements and assignments of rent, in forms satisfactory to RZB. The Company
has also agreed that it shall not permit to exist any lien, security interest,
mortgage, charge or other encumbrance of any nature on any of its properties
or assets, except in favor of RZB. In connection with the RZB Credit
Facility, Western Wood has agreed to subordinate its security interest in the
Brownsville Terminal Facility. On November 5, an irrevocable letter of credit
was established under the RZB Credit Facility in favor of Exxon in the amount
of $3.8 million. The Company's Chairman and Chief Executive Officer has
personally guaranteed all of the Company's payment obligations with respect to
the RZB Credit Facility.
LPG SUPPLY CONTRACT
On November 12, 1997, the Company entered into a supply contract with a major
supplier to purchase minimum monthly volumes of LPG through September 1998
under payment terms similar to those required in the Agreement (Note R). The
supply price is below the sales price provided for in the Agreement.
<PAGE>
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Description Balance at Charged to Charged to
Beginning of Costs and Other Balance at End
Period Expenses Accounts Deductions of Period
<S> <C> <C> <C> <C> <C>
Year ended
- -------------
July 31, 1997
- -------------
Allowance for $ - $ 53,406 $ - $ - $ 53,406
doubtful
accounts
Year ended
- -------------
July 31, 1996
- -------------
Allowance for $ - $ - $ - $ - $ -
doubtful
accounts
Year ended
- -------------
July 31, 1995
- -------------
Allowance for $ - $ - $ - $ - $ -
doubtful
accounts
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND OFFICERS OF THE COMPANY
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name of Director Age Positions and Offices Held
- -------------------- --- ------------------------------------------------
<S> <C> <C>
Jerome B. Richter 61 Chairman, President, Chief Executive Officer
and Director
Ian T. Bothwell 37 Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer and Director
Jorge R. Bracamontes 33 Executive Vice President, Secretary and Director
John P. Holmes 59 Director
Kenneth G. Oberman 37 Director
Stewart J. Paperin 49 Director
John H. Robinson 74 Director
</TABLE>
All directors were elected at the 1997 Annual Meeting of Stockholders of
the Company held on May 29, 1997 and hold office until the next annual meeting
of shareholders and until their successors are duly elected and qualified.
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
JEROME B. RICHTER founded the Company and served as its Chairman of the
Board and Chief Executive Officer from the date of its organization in August
1992 to December 1994, when he resigned from such positions and became
Secretary and Treasurer of the Company, positions he held until he resigned
therefrom on August 1, 1996. Effective October 29, 1996, Mr. Richter was
elected Chairman of the Board, President and Chief Executive Officer of the
Company.
IAN T. BOTHWELL was elected Vice President, Treasurer, Assistant
Secretary and Chief Financial Officer of the Company on October 29, 1996 and a
director of the Company on March 25, 1997. Since July 1993, Mr. Bothwell has
been a principal of Bothwell & Asociados, S.A. de C.V., a Mexican management
consulting and financial advisory company that was founded by Mr. Bothwell in
1993 and specializes in financing infrastructure projects in Mexico. During
the period from February 1992 through November 1993, Mr. Bothwell was a senior
manager with Ruiz, Urquiza y Cia., S.C., the affiliate in Mexico of Arthur
Andersen L.L.P., an accounting firm. From 1987 through 1992, Mr. Bothwell was
Controller and Director of Financial Analysis for Brooke Management Inc., a
management company which is an affiliate of Brooke Group Ltd., a financial
services and investment company.
JORGE R. BRACAMONTES was elected a director of the Company in February
1996. Effective October 29, 1996, he was elected Executive Vice President and
Secretary of the Company. Mr. Bracamontes also serves as President and Chief
Executive Officer of PennMex. Prior to joining the Company, Mr. Bracamontes
was General Counsel for Environmental Matters at PMI, for the period from May
1994 to March 1996. During the period from November 1992 to May 1994, Mr.
Bracamontes was legal representative for PMI in New York. From May 1990
through November 1992, Mr. Bracamontes served as in-house counsel for PMI in
Houston, Texas.
JOHN P. HOLMES was elected a director of the Company in February 1996.
Since 1991, Mr. Holmes has served as President and Chief Executive Officer of
John P. Holmes and Co., a private investment company. Mr. Holmes is also a
member of the Board of Directors of Village Green Books, an operator of retail
book stores.
KENNETH G. OBERMAN has been a director of the Company since its
organization in August 1992. Since 1996, Mr. Oberman has been Senior Director
of Fujitsu Computer Products of America, a San Jose, California-based computer
peripherals company. From 1994 through 1995, Mr. Oberman held the position of
business unit manager for Conner Peripherals, a computer peripherals company,
in San Jose, California. During the period from 1992 through 1994, Mr.
Oberman served as Vice President of International Economic Development
Corporation in Moscow, Russia, a consulting company to the Ministry of Sports
of the Government of Russia involved in the sale of sporting goods and sports
apparel. From 1989 through 1992, Mr. Oberman was employed by Conner
Peripherals, where he was a sales and world accounts manager.
STEWART J. PAPERIN was elected a director of the Company in February
1996. Mr. Paperin has been Managing Director of Lionrock Partners Ltd., a
management consulting and investment firm, and Managing Director of Capital
Resources East, a management consulting firm, since 1993. From 1990 to 1993,
Mr. Paperin served as President of Brooke Group International, an
international trading company and a subsidiary of Brooke Group Ltd., a
financial services and investment company.
JOHN H. ROBINSON was elected a director of the Company in February 1996.
Mr. Robinson serves as Vice Chairman of Commonwealth Associates, an investment
banking firm. Prior to 1993, Mr. Robinson served as Chairman of the Harper
Group, an international transportation and information management company.
Mr. Robinson is also a member of the Board of Directors of Lukens Medical
Corp., a specialized medical products company.
Mr. Oberman is Mr. Richter's son. There are no other family
relationships among the Company's officers and directors.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
In October, 1996 the Company and Mr. Richter, Chairman and President,
without admitting or denying the findings contained therein (other than as to
jurisdiction), consented to the issuance of an order by the SEC in which the
SEC (i) made findings that the Company and Richter has violated portions of
Section 13 of the Exchange Act relating to the filing of periodic reports and
the maintenance of books and records, and certain related rules under said
Act, and (ii) ordered respondents to crease and desist from committing or
causing any current or future violation of such sections and rules.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of Exchange Act, requires the Company's directors and
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file initial reports of ownership and reports
of changes in ownership with the SEC. Such persons are required by the SEC to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of Forms 3, 4 and 5 received by it, the
Company believes that, with the exception of those persons indicated below,
all directors, officers and 10% stockholders complied with such filing
requirements.
According to the Company's records, the following filings appear not to
have been timely made. A Form 3 for Mr. Bothwell relating to his election as
an officer of the Company in October 1996 was not filed on a timely basis. A
Form 3 correcting this matter was filed in April 1997.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
Other than reimbursement for out-of-pocket expenses incurred to attend
Board and committee meetings, directors do not receive any compensation for
their services as such.
EXECUTIVE COMPENSATION
The following table sets forth annual and all other compensation for
services rendered in all capacities to the Company and its subsidiaries during
each of the fiscal years indicated of those persons who, at July 31, 1997,
were (i) the Company's Chief Executive Officer and a former executive officer
who acted in a similar capacity, and (ii) the other two most highly
compensated executive officers (collectively, the "Named Executive Officers").
No other executive officer received compensation in excess of $100,000 during
fiscal 1997. This information includes the dollar values of base salaries,
bonus awards, the number of warrants granted and certain other compensation,
if any, whether paid or deferred. The Company does not grant stock
appreciation rights and has no stock option or other long-term compensation
plans.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------------------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION($)
- ------------------------------ ---- -------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Jerome B. Richter, President, 1997 $138,603 - - -
Chairman of the Board and 1996 132,923 - - -
Chief Executive Officer 1995 - - - -
Ian T. Bothwell, 1997 90,077 418,800(1) - -
Vice President, Treasurer, 1996 - - - -
Assistant Secretary and 1995 - - - -
Chief Financial Officer
Jorge R. Bracamontes, 1997 - - - 526,921(2)
Executive Vice President 1996 - - - -
and Secretary 1995 - - - -
Mark D. Casaday, (3) 1997 35,921 - - -
Former President 1996 111,692 - - -
1995 78,312 - - -
<FN>
(1) As a bonus for the year ended July 31, 1997, on September 10, 1997 the Board of
Directors granted to Mr. Bothwell warrants to purchase 200,000 shares of Common Stock for
$2.50 per share to expire on September 9, 2000.
(2) Mr. Bracamontes received consulting fees totaling $108,121 for services performed
on behalf of the Company in Mexico. On March 25, 1997, the Board of Directors granted to
Mr. Bracamontes warrants to purchase 200,000 shares of Common Stock for $3.625 per share
to expire on March 24, 2000. An additional consulting fee for the year ended July 31,
1997, on September 10, 1997, the Board of Directors lowered the exercise price of the
200,000 warrants granted to Mr. Bracamontes from $3.625 to $2.50.
(3) In October 1996, Mr. Casaday resigned as Director and President of the Company.
In connection with his resignation, the Company agreed to extend 200,000 warrants held by
Mr. Casaday for an additional three year period. In February 1997, Mr. Casaday exchanged
200,000 warrants for 50,000 shares of Common Stock.
</TABLE>
AGGREGATED WARRANT EXERCISES IN FISCAL 1997 AND WARRANT VALUES ON JULY
31, 1997
The following table provides certain information with respect to
warrants exercised by the Named Executive Officers during fiscal 1997 by the
persons named below. The table also presents information as to the number of
warrants outstanding as of July 31, 1997.
<TABLE>
<CAPTION>
Number Of
Securities Value Of
Number of Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Value Warrants Warrants
Upon Realized At July 31, 1997 At July 31, 1997
Exercise of Upon Exercisable/ Exercisable/
Name Warrants Exercise Unexercisable Unexercisable
- -------------------- ----------- ---------- ---------------- ------------------
<S> <C> <C> <C> <C>
Jerome B. Richter 2,200,000 $5,088,600 0/0 $ 0/0
Jorge R. Bracamontes 0 $ 0 200,000/0 $ 450,000/0(1)
Ian T. Bothwell 0 $ 0 0/200,000 $ 0/450,000(1)
Mark D. Casaday 50,000 $ 0 0/0 $ 0/0
<FN>
(1) Based on a closing price of $4.75 per share of Common Stock on July 31,
1997.
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into a six year employment agreement with
Mr. Richter, the President of the Company, through January 31, 2001. Under
Mr. Richter's agreement, he is entitled to receive $300,000 in annual
compensation equal to a monthly salary of $25,000 until earnings exceed a
gross profit of $500,000 per month, whereupon Mr. Richter is entitled to an
increase in his salary to $40,000 per month for the first year of the
agreement increasing to $50,000 per month during the second year of the
agreement. Mr. Richter is also entitled to (i) an annual bonus of 5% of all
pre-tax profits of the Company; (ii) 200,000 stock options for the purchase of
200,000 shares of Common Stock that can be exercised under certain
circumstances at an option price of $7.50 (giving effect to a 2-for-1 stock
split on June 10, 1994), and (iii) a term life insurance policy commensurate
with the term of the employment agreement, equal to six times Mr. Richter's
annual salary and three times his annual bonus. Mr. Richter's employment
agreement also entitles him to a right of first refusal to participate in
joint venture opportunities in which the Company may invest, contains a
covenant not to compete until one year from the termination of the agreement
and restrictions on use of confidential information. To date, Mr. Richter has
waived his rights to his full salary, receipt of the options and the purchase
by the Company of a term life insurance policy. In the future, Mr. Richter
may elect not to waive such rights.
1997 STOCK AWARD PLAN
Under the Company's 1997 Stock Award Plan, the Company has reserved
for issuance 150,000 shares of Common Stock, of which 129,686 shares were
unissued as of the date of this Annual Report, to compensate consultants who
have rendered significant services to the Company. The Plan is administered
by the Compensation Committee of the Board of Directors of the Company which
has complete authority to select participants, determine the awards of Common
Stock to be granted and the times such awards will be granted, interpret and
construe the 1997 Stock Award Plan for purposes of its administration and make
determinations relating to the 1997 Stock Award Plan, subject to its
provisions, which are in the best interests of the Company and its
stockholders. Only consultants who have rendered significant advisory
services to the Company are eligible to be participants under the Plan. Other
eligibility criteria may be established by the Compensation Committee as
administrator of the Plan.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of October
31, 1997, regarding the beneficial ownership of the Company's Common Stock by
(i) each stockholder known by the Company to beneficially own more than five
percent of the Company's Common Stock, (ii) each director and (iii) each Named
Executive Officer of the Company.(() The number of shares of Common Stock
issued and outstanding on October 31, 1997 was 8,694,600 and all calculations
and percentages are based on such number. The beneficial ownership indicated
in the table includes shares of Common Stock subject to common stock purchase
warrants held by the respective persons as of October 31, 1997, that are
exercisable on the date hereof or within 60 days thereafter. Unless otherwise
indicated, each person has sole voting and sole investment power with respect
to the shares shown as beneficially owned.)
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME BENEFICIALOWNERSHIP(1) PERCENT OF CLASS
- ----------------------------------- ---------------------- -----------------
<S> <C> <C>
Jerome B. Richter 3,902,000(4) 44.87%
Western Wood Equipment Corporation 500,000((5) 5.44%
(Hong Kong)
20/F Tung Way Commercial Building
Wanchai, Hong Kong
John Holmes 230,000 2.65%
Ian T. Bothwell 218,600(5) 2.46%
Jorge R. Bracamontes 215,500(5) 1.81%
Kenneth G. Oberman 89,000 1.02%
Stewart J. Paperin 16,500 *
John H. Robinson 12,500 *
Mark D. Casaday 0((7) *
</TABLE>
As a group, the current officers and directors of the Company are
beneficial owners of 4,284,100 shares of Common Stock or 49.27% of the voting
power of the Company excluding warrants held by members of such group and
4,684,100 shares of Common Stock or 57.94% of the voting power of the Company
including warrants so held.
<PAGE>
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On October 21, 1996, Thomas P. Muse resigned as a Director and as
Chairman of the Board of the Company. In connection with his resignation, the
Company agreed to extend the expiration date of warrants to purchase 42,856
shares of Common Stock held by Mr. Muse for an additional three year period.
In February 1997, the Company issued 55,195 shares of Common Stock to Mr. Muse
in exchange for warrants to purchase 242,856 shares of Common Stock then owned
by Mr. Muse.
On October 24, 1996, Thomas A. Serleth resigned as a Director and
Executive Vice President of the Company. In connection with his resignation,
the Company agreed to enter into a two month consulting agreement, at a fee of
$10,000 per month, through December 31, 1996 and agreed that Mr. Serleth would
be entitled to a payment of 5% of the net proceeds (after expenses and legal
fees) received by the Company arising out of the lawsuit with IBC-Brownsville.
In February 1997, the Company issued 59,091 shares of Common Stock to Mr.
Serleth in exchange for warrants to purchase 260,000 shares of Common Stock
then owned by Mr. Serleth. See "Legal Proceedings" for information concerning
the IBC-Brownsville litigation
In October 1996, Mr. Casaday resigned as Director and President of the
Company. In connection with his resignation, the Company agreed to extend the
expiration date of warrants to purchase 200,000 shares of Common Stock held
by Mr. Casaday for an additional three year period. In February 1997, the
Company issued 50,000 shares of Common Stock to Mr. Casaday in exchange for
warrants to purchase 200,000 shares of Common Stock then owned by the Company.
In addition, the Company agreed to sell Mr. Casaday the Company car that he
was using for $1.00.
On March 25, 1997, the Board of Directors granted to Jorge R.
Bracamontes, an officer and director, warrants to purchase 200,000 shares of
Common Stock of the Company exercisable until March 24, 2000 with an exercise
price of $3.625 per share. As additional consulting fees for the year ended
July 31, 1997, on September 10, 1997, the Company agreed to adjust the
exercise price of the 200,000 warrants owned by Mr. Bracamontes to $2.50 per
share.
In March 1997, Jerome B. Richter, the President, Chief Executive Officer
and Chairman, made an interest free demand loan to the Company in the amount
of $85,000 for working capital purposes. The loan was fully repaid by the
Company in April 1997.
On March 25, 1997, the Company agreed to allow Mr. Richter to exercise
warrants to purchase 2,200,000 shares of Common Stock at an exercise price of
$1.25 through payment of $22,000 and issuance of a promissory note to the
Company in the amount of $2.7 million which accrues interest at the rate of
8.25% annually payable on April 11 and is payable in full on April 11, 2000.
In connection with the promissory note, Mr. Richter entered into a security
agreement with the Company pursuant to which a security interest was granted
to the Company in one million shares of Common Stock owned by Mr. Richter.
On March 25, 1997, the Company agreed to adjust the exercise price per
share of warrants to purchase 50,000 shares of Common Stock held by Mr.
Robinson and 50,000 warrants held by TRAKO International Company Limited to
$2.50 from $5.00. In all other respects, the terms of the warrants remain the
same.
In April 1997, an additional 300,000 warrants to purchase 300,000 shares
of common stock of the Company at an exercise price of $1.25 per share were
exercised by a director of the Company and other third parties.
On April 2, 1997, in connection with the Company's irrevocable standby
letter of credit with Bay Area Bank in the amount of $251,495, Mr. Richter
granted a security interest in 1.7 million shares of Common Stock of the
Company owned by him to Bay Area Bank to secure the obligations of the Company
thereunder. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Credit Arrangements."
During the fiscal year ended July 31, 1997, the Company made an interest
free demand loan in the amount of $170,000 to PennMex. In September 1997,
PennMex repaid $130,000 on the loan. The Company currently intends to acquire
ownership of PennMex for a nominal sum plus assumption of any outstanding
liabilities of PennMex. PennMex's operation since inception have been
minimal.
In September 1997, John P. Holmes, a director, exercised warrants to
purchase 130,000 shares of Common Stock of the Company at an exercise price of
$2.50 per share.
In August 1997, an additional 430,000 warrants to purchase 430,000 shares
of Common Stock were exercised by a director of the Company and other third
parties at an exercise price of $2.50 per share resulting in a cash payment
received by the Company of $1,075,000. In connection with the exercise of
100,000 of these warrants Common Stock issued upon exercise, the Company
entered into a Registration Rights Agreement, agreeing to register the Common
Stock issued upon exercise on or before February 1, 1998. In the event that
the Company fails to register the Common Stock by February 1, 1998, for each
month thereafter until September 1, 1998, during which the shares have not
been registered, the Company will be required to issue the holder Common Stock
warrents to purchase 10,000 shares of Common Stock at an exercise price of
$2.50 per share, exercisable within a year from the date of issuance.
As a bonus for the year ended July 31, 1997, on September 10, 1997, the
Board of Directors granted to Ian T. Bothwell, an officer and director,
warrants to purchase 200,000 shares of Common Stock exercisable until
September 10, 2000 with an exercise price of $2.50 per share.
In October 1997, the Company made payment of $500,000 plus accrued
interest to TRAKO International Limited, a company affiliated with John H.
Robinson, in full satisfaction of amounts owing under a promissory note dated
March 1, 1996. In August 1997, the Company made payment of $400,000 plus
accrued interest to John H. Robinson, a director, in full satisfaction of
amounts owing under a promissory note dated March 1, 1996.
In October 1997, in connection with the RZB Credit Facility, Mr. Richter
entered into a Guaranty & Agreement pursuant to which Mr. Richter personally
guaranteed all of the Company's payment obligations with respect to the RZB
Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Credit Arrangements."
The lease for the Company's executive offices located at 900 Veterans
Boulevard in Redwood City, California is between Mr. Richter, as an
individual, and Nine-C Corporation, as landlord. The Company currently makes
monthly payments directly to Nine-C Corporation in satisfaction of obligations
under such lease.
Operator: Please take care in this section, Item 14 - There are a number of
"Color: White" codes. PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. Financial Statements and Financial Statement Schedules.
The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
Penn Octane Corporation
Independent Auditor's Report
Consolidated Balance Sheet as of July 31, 1996 and 1997
Consolidated Statement of Operations for the years ended July
31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended July 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended July
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
b. Exhibits.
The following Exhibits are incorporated herein by reference:
Exhibit No.
------------
3.1 Restated Certificate of Incorporation, as amended. (Incorporated
by reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File No.
000-24394).
3.2 Amended and Restated By-Laws of the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10 10.1 Employment Agreement dated July 12, 1993 between the
Registrant and Jerome B. Richter. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended October 31,
1993 filed on March 7, 1994, SEC File No. 000-24394).
10.2 Security Agreement dated July 1, 1994 between International Bank
of Commerce and the Company. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended October 31,
1993 filed on March 7, 1994, SEC File No. 000-24394).
10.3 Security Agreement dated December 6, 1995 between Bay Area Bank
and Registrant. (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the annual period ended July 31, 1996 filed on November 13,
1996, SEC File No. 000-24394).
10.4 Purchase Agreement dated February 22, 1996 between Eagle Oil
Company and Registrant. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the annual period ended July 31, 1996 filed on
November 13, 1996, SEC File No. 000-24394).
10.5 Judgment from litigation with International Bank of Commerce -
Brownsville dated February 28, 1996. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the annual period ended July 31,
1996 filed on November 13, 1996, SEC File No. 000-24394).
10.6 Loan Agreement, Promissory Note, Security Agreement, and Common
Stock Purchase Warrant Agreement dated March 1, 1996 between John H. Robinson
and Registrant. (Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the annual period ended July 31, 1996 filed on November 13,
1996, SEC File No. 000-24394).
10.7 Loan Agreement, Promissory Note, Security Agreement, and Common
Stock Purchase Warrant Agreement dated as of April 30, 1996 between TRAKO
International Company LTD and Registrant. (Incorporated by reference to the
Company's Annual Report on Form 10-KSB for the annual period ended July 31,
1996 filed on November 13, 1996, SEC File No. 000-24394).
10.8 Extension of June 16, 1996 Payout Agreement between Penn Octane
Corporation and Lauren Constructors, Inc., and Tom Janik and Associates, Inc.
dated October 10, 1996 (Including June 16, 1995 Payout Agreement).
(Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the annual period ended July 31, 1996 filed on November 13, 1996, SEC File No.
000-24394).
10.9 LPG Purchase Agreement dated October 1, 1996 between Exxon
Company U.S.A. and Registrant. (Incorporated by reference to the Company's
Annual Report on Form 10-KSB for the annual period ended July 31, 1996 filed
on November 13, 1996, SEC File No. 000-24394).
10.10 Promissory Note, Letter of Credit and Security Agreement dated
October 3, 1996 between Bay Area Bank and Registrant. (Incorporated by
reference to the Company's Annual Report on Form 10-KSB for the annual period
ended July 31, 1996 filed on November 13, 1996, SEC File No. 000-24394).
10.11 Promissory Note dated October 7, 1996 between Jerry Williams
and Registrant. (Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarterly period ended October 31, 1996 filed on
December 16, 1996, SEC File No. 000-24394).
10.12 Promissory Note dated October 9, 1996 between Richard Serbin
and Registrant. (Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarterly period ended October 31, 1996 filed on
December 16, 1996, SEC File No. 000-24394).
10.13 LPG Sales Agreement dated October 10, 1996 between P.M.I.
Trading Ltd. and Registrant. (Incorporated by reference to the Company's
Annual Report on Form 10-KSB for the annual period ended July 31, 1996 filed
on November 13, 1996, SEC File No. 000-24394).
10.14 Promissory Note dated October 29, 1996 between James Mulholland
and Registrant. (Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarterly period ended October 31, 1996 filed on
December 16, 1996, SEC File No. 000-24394).
10.15 Promissory Note between Frederick Kassner and Registrant dated
October 29, 1996. (Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended October 31, 1996 filed on
December 16, 1996, SEC File No. 000-24394).
10.16 Agreement between Roberto Keoseyan and the Registrant dated
November 12, 1996. (Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended January 31, 1997 filed on
March 17, 1997, SEC File No. 000-24394).
10.17 Promissory Note between Bay Area Bank and the Registrant dated
December 20, 1996. (Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended January 31, 1997 filed on
March 17, 1997, SEC File No. 000-24394).
10.18 Agreement for Exchange of Warrants for Common Stock dated
February 5, 1997 between the Registrant and Mark D. Casaday. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended January 31, 1997 filed on March 17, 1997, SEC File No.
000-24394).
10.19 Agreement for Exchange of Warrants for Common Stock dated
February 5, 1997 between the Registrant Thomas P. Muse. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended January 31, 1997 filed on March 17, 1997, SEC File No.
000-24394).96, SEC File No. 000-24394).
10.20 Agreement for Exchange of Warrants for Common Stock dated
February 19, 1997 between the Registrant and Thomas A. Serleth. (Incorporated
by reference to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended January 31, 1997 filed on March 17, 1997, SEC File No.
000-24394).
10.21 Interim Operating Agreement between Wilson Acquisition
Corporation and Wilson Technologies Incorporated dated March 7, 1997.
(Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended January 31, 1997 filed on March 17, 1997, SEC
File No. 000-24394).
10.22 Purchase Agreement dated March 7, 1997 between the Registrant,
Wilson Acquisition Corporation, Wilson Technologies Incorporated and Zimmerman
Holdings Inc. (Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended January 31, 1997 filed on March 17,
1997, SEC File No. 000-24394).
10.23 Amendment of the Interim Operating Agreement dated March 21,
1997 between the Registrant, Wilson Acquisition Corporation, Wilson
Technologies Incorporated and Zimmerman Holdings Inc. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.24 Promissory Note and Pledge and Security Agreement dated March
26, 1997 between M.I. Garcia Cuesta and the Registrant. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.25 Real Estate Lien Note, Deed of Trust and Security Agreement
dated April 9, 1997 between Lauren Constructors, Inc. and the Registrant .
(Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File
No. 000-24394).
10.26 Promissory Note and Pledge and Security Agreement dated April
11, 1997 between Jerome B. Richter and the Registrant. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.27 Lease dated October 20, 1993 between Brownsville Navigation
District of Cameron County, Texas and Registrant with respect to the Company's
land lease rights, including related amendment to the Lease dated as of
February 11, 1994 and Purchase Agreement. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB filed for the quarterly period ended
April 30, 1994 on February 25, 1994, SEC File No. 000-24394).
10.28 Lease Amendment dated May 7, 1997 between Registrant and
Brownsville Navigation District of Cameron County, Texas. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.29 Lease dated May 22, 1997 between Nine-C Corporation and J.B.
Richter, Capital resources and J.B. Richter and J.B. Richter, an individual,
as amended with respect to the Company's executive offices. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
10.30 Promissory Note dated May 28, 1997 between Bay Area Bank and
the Registrant. (Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarterly period ended April 30, 1997 filed on June 16,
1997, SEC File No. 000-24394).
10.31 Lease dated September 1, 1993 between Seadrift Pipeline
Corporation and Registrant with respect to the Company's pipeline rights.
(Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended October 31, 1993 filed on March 7, 1994, SEC
File No. 000-24394).
10.32 Lease Amendment dated May 29, 1997 between Seadrift Pipeline
Corporation and the Registrant . (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended April 30, 1997
filed on June 16, 1997, SEC File No. 000-24394).
The following material contracts are filed as part of this report:
10.33 Irrevocable Standby Letter of Credit No. 310 dated April 2,
1997 between Bay Area Bank and the Company.
10.34 Commercial Guaranty dated April 2, 1997 between Bay Area Bank
and Jerome B. Richter.
10.35 Commercial Pledge and Security Agreement dated April 2, 1997
between Bay Area Bank and the Company.
10.36 Promissory Note dated April 2, 1997 between Bay Area Bank and
the Company.
10.37 Amendment to Irrevocable Standby Letter of Credit No. 310 dated
September 15, 1997.
10.38 Warrant Purchase Agreement, Promissory Note and Common Stock
Warrant dated June 15, 1997 between Western Wood Equipment Corporation and the
Company.
10.39 Security Agreement, Common Stock Warrant and Promissory Note
dated June 15, 1997 between Western Wood Equipment Corporation and the
Company.
10.40 Performance Bond dated June 25, 1997 between PennWilson CNG and
Amwest Surety Insurance Company.
10.41 Labor and Material Payment Bond dated June 11, 1997 between
PennWilson CNG and Amwest Surety Insurance Company.
10.42 Subcontract Agreement dated between A.E. Schmidt and PennWilson
CNG June 25, 1997.
10.43 Propylene Purchase Agreement dated July 31, 1997 between Union
Carbide and the Company.
10.44 Release of Lien dated August 1997 by Lauren Constructors, Inc.
10.45 LPG Purchase Agreement dated August 28, 1997 between PMI
Trading Company Ltd and the Company.
10.46 Continuing Agreement for Private Letters of Credit dated
October 14, 1997 between RZB Finance LLC and the Company.
10.47 Promissory Note dated October 14, 1997 between RZB Finance LLC
and the Company.
10.48 General Security Agreement dated October 14, 1997 between RZB
Finance LLC and the Company.
10.49 Guaranty and Agreement dated October 14, 1997 between RZB
Finance LLC and Jerome Richter.
10.50 Purchase Agreement dated October 21, 1997 among Castle Energy
Corporation, Clint Norton, Southwest Concept, Inc., James F. Meara, Jr.,
Donaldson Luftkin Jenrette Securities Corporation Custodian SEP FBO James F.
Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the Company.
10.51 Registration Rights Agreement dated October 21, 1997 among
Castle Energy Corporation, Clint Norton, Southwest Concept, Inc., James F.
Meara, Jr., Donaldson Luftkin Jenrette Securities Corporation Custodian SEP
FBO James F. Meara IRA, Lincoln Trust Company FBO Perry D. Snavely IRA and the
Company.
10.52 Promissory Note dated October 21, 1997 between Castle Energy
Corporation and the Company.
10.53 Common Stock Purchase Warrant dated October 21, 1997 issued to
Castle Energy Corporation by the Company.
10.54 Promissory Note dated October 21, 1997 between Clint Norton and
the Company.
10.55 Common Stock Purchase Warrant dated October 21, 1997 issued to
Clint Norton by the Company.
10.56 Promissory Note dated October 21, 1997 between Southwest
Concept, Inc. and the Company.
10.57 Common Stock Purchase Warrant dated October 21, 1997 issued to
Southwest Concept, Inc. by the Company.
10.58 Promissory Noted dated October 21, 1997 between James F. Meara,
Jr. and the Company.
10.59 Common Stock Purchase Warrant dated October 21, 1997 issued to
James F. Meara, Jr. by the Company.
10.60 Promissory Note dated October 21, 1997 between Donaldson
Luftkin Jenrette Securities Corporation Custodian SEP FBO James F. Meara IRA
and the Company.
10.61 Common Stock Purchase Warrant dated October 21, 1997 issued to
Donaldson Luftkin Jenrette Securities Corporation Custodian SEP FBO James F.
Meara IRA and the Company.
10.62 Promissory Note dated October 21, 1997 between Lincoln Trust
Company FBO Perry D. Snavely IRA and the Company.
10.63 Common Stock Purchase Warrant dated October 21, 1997 issued to
Lincoln Trust Company FBO Perry D. Snavely IRA by the Company.
10.64 Agreement dated November 7, 1997 between Ernesto Rubio del
Cueto and the Company.
10.65 LPG Sales Agreement dated November 12, 1997 between Exxon and
the Company.
21.1 Subsidiaries of the registrant. (Filed herewith.)
27.1 Financial Data Schedule. (Filed herewith.)
b. Reports on Form 8-K.
The following Reports on Form 8-K are incorporated herein by reference:
Company's Current Report on Form 8-K filed on October 28, 1997 regarding the
Company's (i) completion of a $1.5 million private placement consisting of
promissory notes and warrants and (ii) contemplation to file a registration
statement with the Securities and Exchange Commission for the sale of its
Common Stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PENN OCTANE CORPORATION
By: /s/Ian T. Bothwell
--------------------
Ian T. Bothwell
Vice President, Treasurer, Assistant Secretary,
Chief Financial Officer
November 12, 1997
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- ------------------------------------------------ ----
<S> <C> <C>
/s/Jerome B. Richter Jerome B. Richter
- -----------------------------
Chairman, President and Chief
Executive Officer November 12, 1997
/s/Jorge R.Bracamontes Jorge R. Bracamontes
- -----------------------------
Executive Vice President,
Secretary and Director November 12, 1997
/s/Ian T.Bothwell Ian T. Bothwell
- -----------------------------
Vice President, Treasurer,
Assistant Secretary, Chief
Financial Officer, Principal
Accounting Officer and Director November 12, 1997
/s/John P.Holmes John P. Holmes
- -----------------------------
Director November 12, 1997
/s/Kenneth G.Oberman Kenneth G. Oberman
- -----------------------------
Director November 12, 1997
/s/Stewart J.Paperin Stewart J. Paperin
- -----------------------------
Director November 12, 1997
/s/John H.Robinson John H. Robinson
- -----------------------------
Director November 12, 1997
</TABLE>
Letterhead of Bay Area Bank
April 2, 1997
Irrevocable Standby Letter of Credit No. 310
Attn: Thomas L. Woodruff, General Counsel
County Sanitation District of Orange County
10844 Ellis Avenue
Fountain Valley, CA 92708
We hereby establish our irrevocable standby letter of credit in your favor for
the account of Penn Octane Corporation, 900 Veterans Blvd., Suite 240, Redwood
City, CA 94063, in the amount of Two Hundred Fifty-One Thousand Four Hundred
Ninety-Five and no/100 U.S. Dollars ($251,495.00) available at Bay Area Bank
by payment against your drafts at sight to be accompanied by:
A written Certificate of Default from the County Sanitation Districts of
Orange County, California (hereafter "Districts"), signed by both the General
Manager (or his designee) and the Districts' General Counsel advising Bay Area
Bank that:
A. Districts have paid to Penn Wilson, or its successor-in-interest
Penn Octane Corporation (hereafter "Wilson") the sum of $________ (to be
inserted on the original Certificate of Default), but not to exceed Two
Hundred Fifty-One Thousand Four Hundred Ninety-Five and no\100 Dollars
($251,495.00);
B. Said payments were for the purchase of certain equipment described
in Districts' contract entitled "Purchase of Equipment for Compressed Natural
Gas (CNG) Fueling Station, Specification No. E-266 (the "Agreement")'
C. Wilson was obligated to deliver said equipment prior to the date
of the Certificate of Default; and
D. Districts made demand on Wilson to deliver said equipment, which
demand has not been met, and Wilson is now in default.
The term of this Letter of Credit shall begin and be effective immediately.
This Letter of Credit shall continue in effect until the date the Districts
deliver to Bay Area Bank a written agreement, signed by both the Districts and
Wilson, stating that the equipment is operational and capable of providing
beneficial use to the Districts, or until the term of the Letter of Credit
expires, whichever is sooner.
This irrevocable letter of credit will expire on September 15, 1997. Drafts
must be presented at Bay Area Bank on or before that date.
County Sanitation District of Orange County
Letter of Credit No. 310
April 2, 1997
Page Two
Partial drawings are permitted.
We engage with you that all documents presented under and in compliance with
the terms of this credit will be duly honored.
This letter of credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication Number 500.
/s/John O. Brooks
- -------------------
John O. Brooks
President/CEO
Bay Area Bank
Borrower: PENN OCTANE CORPORATION Lender: Bay Area Bank
900 VETERANS BLVD. 900 Veterans Blvd.
SUITE 240 P.O. Box 2579
REDWOOD CITY, CA 94063 Redwood City, CA 94064
Guarantor: JEROME B. RICHTER
26280 DORI LANE
LOS ALTOS HILLS, CA 94022
AMOUNT OF GUARANTY. The amount of this Guaranty is Unlimited
CONTINUING UNLIMITED GUARANTY. For good and valuable consideration, JEROME B.
RICHTER ("Guarantor") absolutely and unconditionally guarantees and promises
to pay to Bay Area Bank ("Lender") or its order, on demand, in legal tender of
the United States of America, the Indebtedness (as that term is defined below)
of PENN OCTANE CORPORATION ("Borrower") to Lender on the terms and conditions
set forth in this Guaranty. Under this Guaranty, the liability of Guarantor
is unlimited and the obligations of Guarantor are continuing.
Borrower. The work "Borrower" means PENN OCTANE CORPORATION.
Guarantor. The word "Guarantor" means JEROME B. RICHTER.
Guaranty. The word "Guaranty" means this Guaranty made by Guarantor for
the benefit of Lender dated April 2, 1997.
Indebtedness. The word "Indebtedness" is used in its most comprehensive
sense and means and includes any and all of Borrower's liabilities,
obligations, debts, and indebtedness to Lender, now existing or hereinafter
incurred or created, including, without limitation, all loans, advances,
interest, costs, debts, overdraft indebtedness, credit card indebtedness,
lease obligations, other obligations, and liabilities or Borrower, or any of
them, and any present or future judgments against Borrower, or any of them;
and whether any such indebtedness in voluntarily or involuntarily incurred,
due or not due, absolute or contingent, liquidated or unliquidated, determined
or undetermined; whether Borrower may be liable individually or jointly with
others, or primarily or secondarily, or as guarantor or surety; whether
recovery on the indebtedness may be or may become barred or unenforceable
against Borrower for any reason whatsoever, and whether the indebtedness
arises from transactions which may be voidable on account of infancy,
insanity, ultra vires, or otherwise.
Lender. The word "Lender" means Bay Area Bank, its successors and
assigns.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guarantees, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the indebtedness.
NATURE OF GUARANTY. Guarantor's liability under this Guaranty shall be open
and continuous for so long as this Guaranty remains in force. Guarantor
intends to guarantee at all times the performance and prompt payment when due,
whether at maturity or earlier by reason of acceleration or otherwise, of all
Indebtedness. Accordingly, no payments made upon the indebtedness will
discharge or diminish the continuing liability of Guarantor in connection with
any remaining portions of the Indebtedness or any of the Indebtedness which
subsequently arises or is thereafter incurred or contracted. Any married
person who signs this Guaranty hereby expressly agrees that recourse may be
had against both his or her separate property and community property.
DURATION OF GUARANTY. The Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor
or to Borrower, and will continue in full force until all indebtedness
incurred or contracted before receipt by Lender of any notice of revocation
shall have been fully and finally paid and satisfied and all other obligations
of Guarantor under this Guaranty shall have been performed in full. If
Guarantor elects to revoke this Guaranty, Guarantor may only do so in writing.
Guarantor's written notice of revocation must be mailed to Lender, by
certified mail, at the address of Lender listed above or such other place as
Lender may designate in writing. Written revocation of the Guaranty will
apply only to advances or new Indebtedness created after actual receipt by
Lender of Guarantor's written revocation. For this purpose and without
limitation, the term "new Indebtedness" does not include Indebtedness which at
the time of notice of revocation is contingent, unliquidated, undetermined or
not due and which later becomes absolute, liquidated, determined or due. This
Guaranty will continue to bind Guarantor for all Indebtedness incurred by
Borrower or committed by Lender prior to receipt of Guarantor's written
notice of revocation, including any extensions, renewals, substitutions or
modifications of the Indebtedness. All renewals, extensions, substitutions,
and modifications of the Indebtedness granted after Guarantor's revocation are
contemplated under this Guaranty and, specifically will not be considered to
be new Indebtedness. This Guaranty shall bind the estate of Guarantor as to
Indebtedness created both before and after the death or incapacity of
Guarantor, regardless of Lender's actual notice of Guarantor's death. Subject
to the foregoing, Guarantor's executor or administrator or other legal
representative may terminate this Guaranty in the same manner in which the
Guarantor might have terminated it and with the same effect. Release of any
other guarantor or termination of any other Guarantors shall not affect the
liability of any remaining Guarantors under this Guaranty. The obligations of
Guarantor under this Guaranty shall be in addition to any obligations of
Guarantor , or any of them, under any other guaranties of the Indebtedness of
Borrower or any other person heretofor or hereafter given to Lender unless
such other guaranties are modified or revoked in writing; and this Guaranty
shall not, unless herein provided, affect, invalidate, or supersede any such
other guaranties are modified or revoked in writing; and this Guaranty shall
not, unless herein provided, affect, invalidate, or supersede any such other
guaranty. it is anticipated that fluctuations may occur in the aggregate
amount of indebtedness covered by this Guaranty, and it is specifically
acknowledged and agreed by Guarantor that reductions in the amount of
Indebtedness, even to zero dollars($0.00), prior to written revocation of this
Guaranty by Guarantor shall not constitute a termination of this Guaranty.
This Guaranty is binding upon Guarantor and Guarantor's heirs, successors and
assigns so long as any of the guaranteed Indebtedness remains unpaid and even
though the Indebtedness guaranteed may from time to time be zero dollars
($0.00).
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either
before or after any revocation hereof, without notice or demand and without
lessening Guarantor's liability under this Guaranty, from time to time: (a)
prior to revocation as set forth above, to make one or more additional secured
or unsecured loans to Borrower, to lease equipment or other goods to Borrower,
or otherwise to extend additional credit to Borrower; (b) to alter,
compromise, renew, extend, accelerate, or otherwise change one or more times
the time for payment or other terms of the Indebtedness or any part of the
Indebtedness, including increases and decreases of the rate of interest on the
Indebtedness; extensions may be repeated and may be for longer than the
original loan term; (c) to take and hold security for the payment of this
Guaranty or the Indebtedness and exchange, enforce, waive, subordinate, fail
or decide not to perfect, and release any such security, with or without the
substitution of new collateral; (d) to release, substitute, agree not to sue,
or deal with any one or more of Borrower's sureties, endorsers, or other
guarantors on any terms or in any manner Lender may choose; (e) to determine
how, when and what application of payments and credits shall be made on the
Indebtedness; (f) to apply such security and direct the order or manner of
sale thereof, including without limitation, any nonjudicial sale permitted by
the terms of the controlling security agreement or deed of trust, as Lender in
its discretion may determine; (g) to sell, transfer, assign, or grant
participations in all or any part of the Indebtedness; and (h) to assign or
transfer this Guaranty in whole or in part.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants
to Lender that (a) no representations or agreements of any kind have been made
to Guarantor which would limit or qualify in any way the terms of this
Guaranty; (b) this Guaranty is executed at Borrower's request and not at the
request of Lender; (c) Guarantor has full power, right and authority to enter
into this Guaranty; (d) the provisions of this Guaranty do not conflict with
or result in a default under any agreement or other instrument binding upon
Guarantor and do not result in a violation of any law, regulation, court
decree or order applicable to Guarantor; (e) Guarantor has not and will not,
without the prior written consent of Lender, sell, lease, assign, encumber,
hypothecate, transfer, or otherwise dispose of all or substantially all of
Guarantor's assets or any interest therein; (f) upon Lender's request,
Guarantor will provide to Lender financial and credit information in form
acceptable to Lender, and all such financial information which currently has
been, and all future financial information which will be provided to Lender is
and will be true and correct in all material respects and which currently has
been, and all future financial information which will be provided to Lender is
and will be true and correct in all material respects and fairly present the
financial condition of Guarantor as of the dates the financial information is
provided; (g) no material adverse change has occurred in Guarantor's financial
condition since the date of the most recent financial statements provided to
Lender and no event has occurred which may materially adversely affect
Guarantor's financial condition; (h) no litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid taxes)
against Guarantor is pending or threatened; (i) Lender has made no
representation to Guarantor as to the creditworthiness of Borrower; and (j)
Guarantor has established adequate means of obtaining From Borrower on a
continuing basis information regarding Borrower's financial condition.
Guarantor agrees to keep adequately informed from such means of any facts,
events or circumstances which might in any way affect Guarantor's risks under
this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender to (a) make any presentment, protest, demand, or
notice of any kind, including notice of change of any terms of repayment of
the indebtedness, default by Borrower or any other guarantor or surety, any
action or nonaction taken by Borrower, Lender, or any other guarantor or
surety of Borrower, or the creation of new or additional indebtedness; (b)
proceed against any person, including Borrower, before proceeding against
Guarantor, (c) proceed against any collateral for the Indebtedness, including
Borrower's collateral, before proceeding against Guarantor; (d) apply any
payments or proceeds received against the Indebtedness in any order; (e) give
notice of the terms, time and place of any sale of the collateral pursuant to
the Uniform Commercial Code or any other law governing such sale; (f) disclose
any information about the indebtedness, the Borrower, the collateral, or any
other guarantor or surety, or about any action or nonaction of Lender; or (g)
pursue any remedy or course of action in Lender's power whatsoever.
Guarantor also waives any and all rights or defenses arising by reason of (h)
any disability or other defense of Borrower any other guarantor or surety or
any other person; (i) the cessation from any cause whatsoever, other than
payment in full, of the Indebtedness; (j) the application of proceeds of the
Indebtedness by Borrower for purposes other than the purposes understood and
intended by Guarantor and Lender; (k) any act of omission or commission by
Lender which directly or indirectly results in or contributes to the discharge
of Borrower or any other guarantor or surety, or the Indebtedness, or the loss
or release of any collateral by operation of law or otherwise; (l) any statute
of limitations in any action under this Guaranty or on the Indebtedness; or
(m) any modification or change in terms of the Indebtedness, whatsoever,
including without limitation, the renewal, extension, acceleration, or other
change in the time payment of the Indebtedness is due and any change int he
interest rate, and including any such modification or change in terms after
revocation of this Guaranty on Indebtedness incurred prior to such revocation.
Until all indebtedness is paid in full, Guarantor waives all rights and any
defenses Guarantor may have arising out of an election of remedies by Lender
even tough that election of remedies, such as a nonjudicial foreclosure with
respect to security for a guaranteed obligation, has destroyed Guarantor's
rights of subrogation and reimbursement against Borrower or any other
guarantor or surety by operation of Section 580a, 580b, 580d and 726 of the
California Code of Civil Procedure or otherwise. This waiver includes,
without limitation, any loss of rights Guarantor may suffer by reason of any
rights or protections of Borrower in connection with any anti-deficiency laws
or other laws limiting or discharging the Indebtedness or Borrower's
obligations (including, without limitation, Sections 726, 580a, 580b, and 580d
of the California Code of Civil Procedure). Guarantor waives all rights and
protections of any kind which Guarantor may have for any reason, which would
affect or limit the amount of any recovery by Lender from Guarantor following
a nonjudicial sale or judicial foreclosure of any real or personal property
security for the Indebtedness including, but not limited to, the right to any
fair market value hearing pursuant to California Code of Civil Procedure
Section 580a. Guarantor understands and agrees that the foregoing waivers are
waivers of substantive rights and defenses to which Guarantor might otherwise
be entitled under state and federal law. The rights and defenses waived
include, without limitation, those provided by California laws of suretyship
and guaranty, anti-deficiency laws, and the Uniform Commercial Code.
Guarantor acknowledges that Guarantor has provided these waivers of rights and
defenses with the intention that they be fully relied upon by Lender. Until
all indebtedness is paid in full, Guarantor waives any right to enforce any
remedy Lender may have against Borrower or any other guarantor, surety, or
other person, and further, Guarantor waives any right to participate in any
collateral for the Indebtedness now or hereafter held by Lender.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquire against Borrower,
by subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and
agrees that each of the waivers set forth above is made with full knowledge of
its significance and consequences and that, under the circumstances, the
waivers are reasonable and not contrary to public policy or law. If any such
waiver is determined to be contrary to any applicable law or public policy,
such waiver shall be effective only to the extent permitted by law or public
policy.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets
of Borrower, through bankruptcy by an assignment for the benefit of creditors,
by voluntary liquidation, or otherwise, the assets of Borrower applicable to
the payment of the claims of both Lender and Guarantor shall be paid to Lender
and shall be first applied by Lender to the Indebtedness of Borrower to
Lender. Guarantor does hereby assign to Lender all claims which it may have
or acquire against Borrower or against any assignee or trustee in bankruptcy
of Borrower; provided however, that such assignment shall be effective only
for the purpose of assuring to Lender full payment in legal tender of the
Indebtedness. If Lender so requests, any notes or credit agreements now or
hereafter evidencing any debts or obligations of Borrower to Guarantor shall
be marked with a legend that the same are subject to this Guaranty and shall
be delivered to Lender. Guarantor agrees, and Lender hereby is authorized, in
the name of Guarantor, from time to time to execute and file financing
statements and continuation statements and to execute such other documents and
to take such other actions as Lender deems necessary or appropriate to
perfect, preserve and enforce its rights under this Guaranty.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Guaranty:
Integration Amendment> Guarantor warrants, represents and agrees that
this Guaranty, together with any exhibits or schedules incorporated herein,
fully incorporates the agreements and understandings of Guarantor with Lender
with respect to the subject matter hereof and all prior negotiations,
drafts,and other extrinsic communications between Guarantor and Lender shall
have no evidentiary effect whatsoever. Guarantor further agrees that
Guarantor has read and fully understands the terms of this Guaranty; Guarantor
has had the opportunity to be advised by Guarantor's attorney with respect to
this Guaranty; the Guaranty fully reflects Guarantor's intentions and parol
evidence is not required to interpret the terms of this Guaranty. Guarantor
hereby indemnifies and holds Lender harmless from all losses, claims, damages,
and costs (including Lender's attorney's fees) suffered or incurred by Lender
as a result of any breach by Guarantor of the warranties, representations and
agreements of this paragraph. No alteration or amendment to this Guaranty
shall be effective unless given in writing and signed by the parties sought to
be charged or bound by the alteration or amendment.
Applicable Law. This Guaranty has been delivered to Lender and accepted
by Lender in the State of California. If there is a lawsuit, Guarantor agrees
upon Lender's request to submit to the jurisdiction of the courts of San Mateo
County, State of California. This Guaranty shall be governed by and construed
in accordance with the laws of the State of California.
Attorneys' Fees; Expenses. Guarantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses incurred in connection with the enforcement of this Guaranty. Lender
may pay someone else to help enforce this Guaranty, and Guarantor shall pay
the costs and expenses of such enforcement. Costs and expenses include
Lender's attorneys' fees and legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings (and
including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Guarantor
also shall pay all court costs and such additional fees as may be directed by
the court.
Notices. All notices required to be given by either party to the other
under this Guaranty shall be in writing, may be sent by telefacsimile,and,
except for revocation notices by Guarantor, shall be effective when actually
delivered or when deposited with a nationally recognized overnight courier, or
when deposited in the United States mail, first class postage prepaid,
addressed to the party to whom the notice is to be given at the address shown
above or to such other addresses as either party may designate to the other in
writing. All revocation notices by Guarantor shall be in writing and shall be
effective only upon delivery to Lender as provided above in the section titled
"DURATION OF GUARANTY." If there is more than one Guarantor, notice to any
Guarantor will constitute notice to all Guarantors. For notice purposes,
Guarantor agrees to keep Lender informed at all times of Guarantor's current
address.
Interpretation. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall be
deemed to have been used int he plural where the context and construction so
require; and where there is more than one Borrower named in this Guaranty or
when this Guaranty is executed by more than one Guarantor, the words
"Borrower" and "Guarantor" respectively shall mean all and any one or more of
them. The words "Guarantor," "Borrower," and "Lender" include the heirs,
successors, assigns, and transferees of each of them. caption headings in
this Guaranty are for convenience purposes only and are not to be used to
interpret or define the provisions of this Guaranty. If a court of competent
jurisdiction finds any provision of this Guaranty to be invalid or
unenforceable as to any person or circumstance, such finding shall not render
that provision invalid or unenforceable as to any other persons or
circumstances, and all provisions of this Guaranty in all other respects shall
remain valid and enforceable. In any one or more of Borrower or Guarantor are
corporations or partnerships, it is not necessary for Lender to inquire into
the powers of Borrower or Guarantor or of the officers, directors, partners,
or agents acting or purporting to act on their behalf, and any Indebtedness
made or created in reliance upon the professed exercise of such powers shall
be guaranteed under this Guaranty.
Waiver. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall operate
as a waiver of such right or any other right. A waiver by Lender of a
provision of this Guaranty shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Guaranty. No prior waiver by Lender, nor any
course of dealing between Lender and Guarantor, shall constitute a waiver of
any of Lender's rights or of any of Guarantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this Guaranty,
the granting of such consent by Lender in any instance shall not constitute
continuing consent to subsequent instances where consent is required and in
all cases such consent may be granted or withheld in the sold discretion of
Lander.
ADDITIONAL PROVISIONS - GUARANTOR. AS AN INDUCEMENT TO LENDER TO EXTEND OR
CONTINUE CREDIT TO BORROWER, THE UNDERSIGNED AGREE(S) NOT TO FURTHER PLEDGE,
ENCUMBER OR SELL THE REAL PROPERTY LOCATED AT 26280 DORI LANE, LOS ALTOS
HILLS, CA. IN ADDITION, IN THE EVENT OF BORROWER'S DEFAULT UNDER THE TERMS OF
ANY NOTE OR SECURITY AGREEMENT EXECUTED IN FAVOR OF LENDER, THE UNDERSIGNED
AGREE(S) TO EXECUTE A DEED OF TRUST IN FAVOR OF LENDER COVERING THE ASSETS
LISTED ABOVE.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS
THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF
THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED
IN THE MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO
FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE.
THIS GUARANTY IS DATED APRIL 2, 1997.
/s/ JEROME B. RICHTER
COMMERCIAL PLEDGE AND SECURITY AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO L/C 310 CALL COLLATERAL ACCOUNT OFFICER INITIALS
251,495.00 04-02-1997 103
<FN>
References in the shaded area are for Lender's use only and do not limit the applicability of
this document to any particular loan or item.
</TABLE>
Borrower: PENN OCTANE CORPORATION Lender: Bay Area Bank
900 VETERANS BLVD., SUITE 240 900 Veterans Blvd.
REDWOOD CITY, CA 94063 P.O. Box 2579
Redwood City, CA 94064
Grantor: JEROME B. RICHTER
26280 DORI LANE
LOS ALTOS, CA 94022
THIS COMMERCIAL PLEDGE AND SECURITY AGREEMENT is entered into among PENN
OCTANE CORPORATION (referred to below as "Lender").
GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to
Lender a security interest in the Collateral to secure the Indebtedness and
agrees that Lender shall have the rights stated in this Agreement with respect
to the Collateral, in addition to all other rights which Lender may have by
law.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement:
AGREEMENT. The work "Agreement" means this Commercial Pledge and
Security Agreement, as this Commercial Pledge and Security Agreement may be
amended or modified from time to time, together with all exhibits and
schedules attached to this Commercial Pledge and Security Agreement form time
to time.
BORROWER. The word "Borrower" means each and every person or entity
signing the Note, including without limitation PENN OCTANE CORPORATION.
COLLATERAL. The word "Collateral" means the following specifically
described property, which Grantor has delivered or agrees to deliver (or cause
to be delivered or appropriate book-entries made) immediately to Lender,
together with all Income and Proceeds as described below:
850,000 (1,700,000 POST SPLIT SHARES OF INTERNATIONAL ENERGY DEVELOPMENT
CORPORATION "IEDC") IN THE NAME OF J.B. RICHTER.
In addition, the word "Collateral" includes all property of Grantor, in the
possession of Lender (or in the possession of a third party subject to the
control of Lender), whether now or hereafter existing and whether tangible or
intangible in character, including without limitation each of the following:
(a) All property to which Lender acquires title or documents of
title.
(b) All property assigned to Lender.
(c) All promissory notes, bills, of exchange, stock certificates,
bonds, savings passbooks, time certificates of deposit, insurance, policies,
and all other instruments and evidences of an obligation.
(d) All records relating to any of the property described in this
Collateral section, whether in the form of a writing, microfilm, microfiche,
or electronic media.
EVENT OF DEFAULT. The words "Events of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"Events of Default".
GRANTOR. The word "Grantor" means JEROME B. RICHTER. Any Grantor who
signs this Agreement, but does not sign the Note, is signing this Agreement
only to grant a security interest in Grantor's interest in the Collateral to
Lender and is not personally liable under the Note except as otherwise
provided by contract or law (e.g., personal liability under a guaranty or as a
surety).
GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
INCOME AND PROCEEDS. The words "Income and Proceeds' mean all present
and future income, proceeds, earnings, increases, and substitutes from or for
the Collateral of every kind and nature, including without limitation all
payments, interests, profits, distributions, benefits, rights, options,
warrants, dividends, stock dividends, stock splits, stock rights, regulatory
dividends, distributions, subscriptions, monies, claims for money due and to
become due, proceeds of any insurance on the Collateral, shares of stock of
different par value or no par value issued in substitution or exchange for
shares. Included in the Collateral, and all other property Grantor is
entitled to receive on account of such Collateral, including accounts,
documents, instruments, chattel paper, and general intangibles.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced
by the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Borrower or Grantor is
responsible under this Agreement or under any of the Related Documents.
LENDER. The word "Lender" means Bay Area Bank, its successors and
assigns.
NOTE. The word "Note" means the note or credit agreement dated April 2,
1997, in the principal amount of $251,495.00 from Borrower to Lender, together
with all renewals of extensions of, modifications of, refinancings of,
consolidations of and substitutions for the note or credit agreement.
OBLIGOR. The word "Obligor" means and includes without limitation any
and all persons or entities obligated to pay money or to perform some other
act under the Collateral.
RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
BORROWER'S WAIVERS AND RESPONSIBILITIES. Except as otherwise required under
this Agreement or by applicable law, (a) Borrower agrees that Lender need not
tell Borrower about any action or inaction Lender takes in connection with
this Agreement; (b) Borrower assumes the responsibility for being and keeping
informed about the Collateral; and (c) Borrower waives any defenses that may
arise because of any action or inaction of Lender, including without
limitation any failure of Lender to realize upon the Collateral or any delay
or any delay by Lender in realizing upon the Collateral, and Borrower agrees
to remain liable under the Note no matter what action Lender takes of fails to
take under this Agreement.
GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (a) this
Agreement is executed at Borrower's request and not at the request of Lender;
(b) Grantor has the full right, power and authority to enter into this
Agreement and to pledge the Collateral to Lender; (c) Grantor has established
adequate means of obtaining from Borrower on a continuing basis information
about Borrower's financial condition; and (d) Lender has made no
representation to Grantor about Borrower or Borrower's creditworthiness
GRANTOR'S WAIVERS. Except as prohibited by applicable law, Grantor waives any
right to require Lender to (a) make any presentment, protest, demand, or
notice of any kind, including notice of change of any terms of repayment of
the Indebtedness, default by Borrower or any other guarantor or surety, any
action or nonaction taken by Borrower, Lender, or any other guarantor or
surety of Borrower, or the creation of new or additional Indebtedness; (b)
proceed against any person, including Borrower, before proceeding against
Grantor; (c) proceed against any collateral for the Indebtedness, including
Borrower's collateral, before proceeding against Grantor; (d) apply any
payments or proceeds received against the Indebtedness in any order, (e) give
notice of the terms, time, and place of any sale of any collateral pursuant to
the Uniform Commercial Code or any other law governing such sale, (f) disclose
any information about the Indebtedness, the Borrower, any collateral, or any
other guarantor or surety, or about any action or nonaction of Lender; or (g)
pursue any remedy or course of action in Lender's power whatsoever.
Grantor also waives any and all rights or defenses arising by reason of (h)
disability or other defense of Borrower, any other guarantor or surety or any
other person; (i) the cessation from any cause whatsoever, other than payment
in full, of the Indebtedness; (j) the application of proceeds of the
Indebtedness by Borrower for purposes other than the purposes understood and
intended by Grantor and Lender; (k) any act of omission or commission by
Lender which directly or indirectly results in or contributes to the discharge
of Borrower or any other guarantor or surety, or the Indebtedness, or the loss
or release of any collateral by operation of law or otherwise; (l) any
statute of limitations in any action under this Agreement or on the
Indebtedness; or (m) any modification or change in terms of the Indebtedness,
whatsoever, including without limitation, the renewal, extension,
acceleration, or other change in the time payment of the Indebtedness is due
and any change in the interest rate. Until all indebtedness is paid in full,
Grantor waives all rights and defenses arising out of an election of remedies
by Lender, even though that election of remedies, such as nonjudicial
foreclosure with respect to security for a guaranteed obligations, has
destroyed Grantor's rights of subrogation and reimbursement against Borrower
or any other grantor or surety by the operation of Section 580a, 580b, 580d or
726 of the California Code of Civil Procedure, or otherwise. This waiver
includes, without limitation, any loss of rights Grantor may suffer by reason
of any rights or protections of Borrower in connection with any
anti-deficiency laws or other laws limiting or discharging the Indebtedness or
Borrower's obligations (including, without limitation, Section 726, 580a,
580b, and 580d of the California Code of Civil Procedure). Grantor waives all
rights and protections of any kind which Grantor may have for any reason,
which would affect or limit the amount of any recovery by Lender from Grantor
following a nonjudicial sale or judicial foreclosure of any real or personal
property security for the Indebtedness including, but not limited to, the
right to any fair market value hearing pursuant to California Code of Civil
Procedure Section 580a. Grantor understands and agrees that the foregoing
waivers are waivers of substantive rights and defenses to which Grantor might
otherwise be entitled under state and federal law. The rights and defenses
waived include, without limitation, those provided by California laws of
suretyship and guaranty, anti-deficiency laws, and the Uniform Commercial
Code. Grantor acknowledges that Grantor has provided these waivers of rights
and defenses with the intention that they be fully relied upon by Lender.
Until all Indebtedness is paid in full, Grantor waives any right to enforce
any remedy Lender may have against Borrower or any other guarantor, surety, or
other person, and further, Grantor waives any right to participate in any
collateral for the Indebtedness now or hereafter held by Lender.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Grantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Grantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at not time shall Grantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL.
Grantor represents and warrants to Lender that:
OWNERSHIP. Grantor is the lawful owner of the Collateral free and clear
of all security interests, liens, encumbrances and claims of others except as
disclosed to and accepted by Lender in writing prior to execution of this
Agreement.
RIGHT TO PLEDGE. Grantor has the full right, power and authority to
enter into this Agreement and to pledge the Collateral.
BINDING EFFECT. This Agreement is binding upon Grantor, as well as
Grantor's heirs, successors, representatives and assigns, and is legally
enforceable in accordance with its terms.
NO FURTHER ASSIGNMENT. Grantor has not, and will not, sell, assign,
transfer, encumber or otherwise dispose of any of Grantor's rights in the
Collateral except as provided in this Agreement.
NO DEFAULTS. There are no defaults existing under the Collateral, and
there are no offsets or counterclaims to the same. Grantor will strictly and
promptly perform each of the terms, conditions, covenants and agreements
contained in the Collateral which are to be performed by Grantor, if any.
NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a party.
LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO COLLATERAL. Lender may hold
the Collateral until all the Indebtedness has been paid and satisfied and
thereafter may deliver the Collateral to any Grantor. Lender shall have the
following rights in addition to all other rights it may have by law.
MAINTENANCE AND PROTECTION OF COLLATERAL. Lender may, but shall not be
obligated to, take such steps as it deems necessary or desirable to protect,
maintain, insure, store, or care for the Collateral, including payment of any
liens or claims against the Collateral. Lender may charge any cost incurred
in so doing to Grantor.
INCOME AND PROCEEDS FROM THE COLLATERAL. Lender may receive all Income
and Proceeds and add it to the Collateral. Grantor agrees to deliver to
Lender immediately upon receipt in the exact form received and without
commingling with other property, all Income and Proceeds from the Collateral
which may be received by paid, or delivered to Grantor or for Grantor's
account, whether as an addition to, in discharge of, in substitution of, or in
exchange for any of the Collateral.
APPLICATION OF CASH. At Lender's option, Lender may apply any cash,
whether included in the Collateral or received as Income and Proceeds or
through liquidation, sale, or retirement of the Collateral, to the
satisfaction of the Indebtedness or such portion thereof as Lender shall
choose, whether or not matured.
TRANSACTIONS WITH OTHERS. Lender may (a) extend time for payment or
other performance, (b) grant a renewal or change in terms or conditions, or
(c) compromise, compound or release any obligation, with any one or more
Obligors, endorsers, or Guarantors of the Indebtedness as Lender deems
advisable, without obtaining the prior written consent of Grantor, and no such
act or failure to act shall affect Lender's rights against Grantor or
Collateral.
ALL COLLATERAL SECURED INDEBTEDNESS. All Collateral shall be security
for the Indebtedness, whether the Collateral is located at one or more offices
or branches or Lender and whether or not the office or branch where the
Indebtedness is created is aware of or relies upon the Collateral.
COLLECTION OF COLLATERAL. Lender, at Lender's option may, but need not,
collect directly from the Obligors on any of the Collateral all Income and
Proceeds or other sums of money and other property due and to become due under
the Collateral, and Grantor authorizes and directs the Obligors, if Lender
exercises such option, to pay and deliver to Lender all Income and Proceeds
and other sums of money and other property payable by the terms of the
Collateral and to accept Lender's receipt for the payments.
POWER OF ATTORNEY. Grantor irrevocably appoints Lender as Grantor's
attorney-in-fact, with full power of substitution, (a) to demand, collect,
receive, receipt for, sue and recover all Income and Proceeds and other sums
of money and other property which may now or hereafter become due, owing or
payable from the Obligors in accordance with the terms of the Collateral; (b)
to execute, sign and endorse any and all instruments, receipts, checks, drafts
and warrants issued in payment for the Collateral; (c) to settle or compromise
any and all claims arising under the Collateral, and in the place and stead of
Grantor, execute and deliver Grantor's release and acquittance for Grantor;
(d) to file any claim or claims or to take any action or Institute or take
part in any proceedings, either in Lender's own name or in the name of
Grantor, or otherwise, which in the discretion of Lender may seem to be
necessary or advisable; and (e) to execute in Grantor's name and to deliver
the Obligors on Grantor's behalf, at the time and in the manner specified by
the Collateral, any necessary instruments or documents.
PERFECTION OF SECURITY INTEREST. Upon request of Lender, Grantor will
deliver to Lender any and all of the documents evidencing or constituting the
Collateral. When applicable law provides more than one method of perfection
of Lender's security interest, Lender may choose the method(s) to be used.
Upon request of Lender, Grantor will sign and deliver any writings necessary
to perfect Lender's security interest. If the Collateral consists of
securities for which no certificate has been issued, Grantor agrees, at
Lender's option, either to request issuance of an appropriate certificate or
to execute appropriate instructions on Lender's forms instructing the issuer,
transfer agent, mutual fund company, or broker, as the case may be, to record
on its books or records, by book-entry or otherwise, Lender's security
interest in the Collateral. Grantor hereby appoints Lender as Grantor's
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue the security interest granted in this
Agreement.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without
limitation all taxes, liens, security interests, encumbrances, and other
claims, at any time levied or placed on the Collateral. Lender also may (but
shall not be obligated to) pay all costs for insuring, maintaining and
preserving the Collateral. All such expenditures incurred or paid by Lender
for such purposes will then bear interest at the rate charged under the Note
from the date incurred or paid by Lender to the date of repayment by Grantor.
All such expenses shall become a part of the Indebtedness and, at Lender's
option, will (a) be payable on demand, (b) be added to the balance of the Note
and be apportioned among and be payable with any Installments payments to
become due during either (i) the term of any applicable insurance policy or
(ii) the remaining term of the Note, or (c) be treated as a balloon payment
which will be due and payable at the Note's maturity. This Agreement also
will secure payment of these amounts. Such right shall be in addition to all
other rights and remedies to which Lender may be entitled upon the occurrence
of an Event of Default.
LIMITATIONS ON OBLIGATIONS OF LENDER. Lender shall use ordinary reasonable
care in the physical preservation and custody of the Collateral in Lender's
possession, but shall have no other obligation to protect the Collateral or
its value. In particular, but without limitation, Lender shall have no
responsibility for (a) any depreciation in value of the Collateral or for the
collection or protection of any Income and Proceeds from the Collateral, (b)
preservation of rights against parties to the Collateral or against third
persons, (c) ascertaining any maturities, calls, conversions, exchanges,
offers, tenders, or similar matters relating to any of the Collateral, or (d)
informing Grantor about any of the above, whether or not Lender has or is
deemed to have knowledge of such matters. Except as provided above, Lender
shall have no liability for depreciation or deterioration of the Collateral.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement.
DEFAULTS OF INDEBTEDNESS. Failure of Borrower to make any payment when
due on the Indebtedness.
OTHER DEFAULTS. Failure of Borrower or Grantor to comply with or to
perform any other terms, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents or failure of Borrower to comply
with or to perform any term, obligation, covenant or condition contained in
any other agreement between Lender and Borrower.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or Grantor under this
Agreement, the Note or the Related Documents is false or misleading in any
material respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral documents to create a valid and perfected security interest or
lien) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Borrower or Grantor
existence as a going business, the insolvency of Borrower or Grantor, the
appointment of a receiver for any part of Borrower or Grantor's property, any
assignment for the benefit of creditors, any type of creditor workout, or the
commencement of any proceeding under any bankruptcy or insolvency laws by or
against Borrower or Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower or Grantor or by
any governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of Borrower or
Grantor's deposit accounts with Lender. However, this Event of Default shall
not apply if there is a good faith dispute by Borrower or Grantor as to the
validity or reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Borrower or Grantor gives Lender written notice
of the creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount determined
by Lender, in its sole discretion, as being an adequate reserve or bond for
the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to lender, and, in doing
so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor has not been given a prior notice of a
breach of the same provision of this Agreement, if amy be cured (and no Event
of Default will have occurred) if Borrower or Grantor, after Lender sends
written notice demanding cure of such default, (a) cures the default within
fifteen (15) days; or (b), if the cure requires more than fifteen (15) days,
immediately initiates steps which Lender deems in Lender's sole discretion to
be sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter,k Lender may exercise any one or more of the
following rights and remedies:
ACCELERATE INDEBTEDNESS. Declare all Indebtedness, including any
prepayment penalty which Borrower would be required to pay, immediately due
and payable without notice of any kind to Borrower or Grantor.
COLLECT THE COLLATERAL. Collect any of the Collateral and, at Lender's
option and to the extent permitted by applicable law, retain possession of the
Collateral while suing on the Indebtedness.
SELL THE COLLATERAL. Sell the Collateral, at Lender's discretion, as a
unit or in parcels, at one or more public or private sales. Unless the
Collateral is perishable or threatens to decline speedily in value or is of a
type customarily sold on a recognized market. Lender shall give or mail to
Grantor or any of them, notice at least ten (10 days in advance of the time
and place of any public sale, or of the date after which any private sale may
be made. Grantor agrees that any requirement of reasonable notice is
satisfied if Lender mails notice by ordinary mail addressed to Grantor, or any
of them, at the last address Grantor has given Lender in writing. If a public
sale is held, there shall be sufficient compliance with all requirements of
notice to the public by a single publication in any newspaper of general
circulation in the county where the Collateral is located, setting forth the
time and place of sale and a brief description of the property to be sold.
Lender may be a purchaser at any public sale.
REGISTER SECURITIES. Register any securities included in the Collateral
in Lender's name and exercise any rights normally incident to the ownership of
securities.
SELL SECURITIES. Sell any securities included in the Collateral in a
manner consistent with applicable federal and state securities laws,
notwithstanding any other provision of this or any other agreement. If,
because of restrictions under such laws, Lender is or believes it is unable to
sell the securities in an open market transaction, Grantor agrees that Lender
shall have no obligation to delay sale until the securities can be registered,
and may make a private sale to one or more persons or to a restricted group of
persons, even though such sale may result in a price that is less favorable
than might be obtained in an open market transaction, and such a sale shall be
considered commercially reasonable. If any securities held as Collateral are
"restricted securities" as defined in the Rules of the Securities and Exchange
Commission (such as Regulation D or Rule 144) or state securities departments
under state "Blue Sky" laws, or if Borrower or Grantor is an affiliate of the
issuer of the securities, Borrower and Grantor agree that neither Grantor nor
any member of Grantor family will sell or dispose of any securities of such
issuer without obtaining Lender's prior written consent.
FORECLOSURE. Maintain a judicial suit for foreclosure and sale of the
Collateral.
TRANSFER TITLE. Effect transfer of title upon sale of all or part of the
Collateral. For this purpose, Grantor irrevocably appoints Lender as its
attorney-in-fact to execute endorsements, assignments, and instruments in the
name of Grantor and each of them (if more than one) as shall be necessary or
reasonable.
OTHER RIGHTS AND REMEDIES. Have and exercise any or all of the rights
and remedies of a secured creditor under the provisions of the Uniform
Commercial Code, at law, in equity, or otherwise.
APPLICATION OF PROCEEDS. Apply any cash which is part of the Collateral,
or which is received from the collection or sale of the Collateral, to
reimbursement of any expenses, including any costs for registration of
securities, commissions incurred in connection with a sale, attorney fees as
provided below, and court costs, whether or not there is a lawsuit and
including any fees on appeal, incurred by Lender in connection with the
collection and sale of such Collateral and to the payment of the Indebtedness
of Borrower to Lender, with any excess funds to be paid to Grantor as the
interested of Grantor may appear. Borrower agrees, to the extent permitted by
law, to pay any deficiency after application of the proceeds of the Collateral
to the Indebtedness.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or by any other writing, shall be cumulative and
may be exercised singularly or concurrently. Election by Lender to pursue any
remedy shall not exclude pursuit of any other remedy, and an election not make
expenditures or to take action to perform an obligation of Grantor under this
Agreement, after Grantor's failure to perform, shall not affect Lender's right
to declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the party
or parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED
BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AND
GRANTOR AGREE UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE
COURTS OF SAN MATEO COUNTY, THE STATE OF CALIFORNIA. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.
ATTORNEYS' FEES; EXPENSES. Borrower and Grantor agree to pay upon demand
all of Lender's costs and expenses, including attorneys' fees and Lender's
legal expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Borrower and
Grantor shall pay the costs and expenses of such enforcement. Costs and
expense include Lender's attorneys' fees and legal expenses whether or not
there is a lawsuit, including attorneys' fees and legal expenses for
bankruptcy proceedings (and including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. Borrower and Grantor also shall pay all court costs and
such additional fees as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower and
Grantor under this Agreement shall be joint and several, and all references to
Borrower shall mean each and every Borrower, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage prepaid,
addressed to the party to whom the notice is to be given at the address shown
above. Any party may change its address for notices under this Agreement by
giving formal written notice to the other parties, specifying that the purpose
of the notice is to change the party's addresses. To the extent permitted by
applicable law, if there is more than one Borrower or Grantor, notice to any
Borrower or Grantor will constitute notice to all Borrower and Grantors. For
notice purposes, Borrower and Grantor will keep Lender informed at all times
of Borrower and Grantor's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any such
offending provision shall be deemed to be modified to be within the limits of
enforceability or validity; however, if the offending provision cannot be so
modified, it shall be stricken and all other provisions of this Agreement in
all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and inure to
the benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall operate
as a waiver of such right or any other right. A waiver by Lender of a
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of any
of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER AND GRANTOR ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS PLEDGE
AND SECURITY, AND BORROWER AND GRANTOR AGREE TO ITS TERMS. THIS AGREEMENT IS
DATED APRIL 2, 1997.
BORROWER:
PENN OCTANE CORPORATION
BY: /S/ JEROME B. RICHTER
---------------------
JEROME B. RICHTER, PRESIDENT/ASSISTANT SECURITY
GRANTOR:
/S/ JEROME B. RICHTER
- ---------------------
JEROME B. RICHTER
Borrower: PENN OCTANE CORPORATION Lender: Bay Area Bank
900 VETERANS BLVD. 900 Veterans Blvd.
SUITE 240 P.O. Box 2579
REDWOOD CITY, CA 94063 Redwood City, CA 94064
Principal Amount: $251,495.00 Initial Rate: 11.50% Date of Note: April 2, 1997
PROMISE TO PAY, PENN OCTANE CORPORATION ("Borrower") promises to pay to Bay
Area Bank ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Two Hundred Fifty One Thousand Four Hundred
Ninety Five & 00/100 Dollars ($251,495.00), together with interest on the
unpaid principal balance from April 2, 1997, until paid in full.
PAYMENT. Subject to any payment changes resulting from changes in the Index,
Borrower will pay this loan in accordance with the following payment schedule:
STAND-BY LETTER OF CREDIT IN FAVOR OF COUNTY SANITATION DISTRICT OF
ORANGE COUNTY. PAYMENT IS ON DEMAND.
Interest on this Note is computed on a 365/365 simple interest basis; that is,
by applying the ratio of the annual interest rate over the number of days in a
year, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs and any late
charges, then to any unpaid interest and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the Rate
as listed in The Wall Street Journal "Money Rates" section, referred to as
"Prime Rate" (the "Index"). The index is not necessarily the lowest charged
by Lender on its loans. If the Index becomes unavailable during the term of
this loan, Lender may designate a substitute index after notice to Borrower.
Lender will tell Borrower the current index rate upon Borrower's request.
Borrower understands that Lender may make loans based on other rates as well.
The interest rate change will not occur more often than each month and is
based ont he published rate in effect on the first business day each month.
If more than one Prime Rate is published, the prime rate chosen shall be
solely at Bank's option. The Index currently is 8.500% per annum. The
interest rate to be applied to the unpaid principal balance of this Note will
be at a rate of 3,000 percentage points over the Index, resulting in a current
rate of 11.500% per annum. NOTICE: Under no circumstances will the interest
rate on this Note be more than the maximum rate allowed by applicable law.
Whenever increases occur in the interest rate, Lender at its option, may do
one or more of the following: (a) increase Borrower's payments to ensure
Borrower's loan will pay off by its original final maturity date, (b) increase
Borrower's payments to cover accruing interest, (c) increase the number of
Borrower's payments, and (d) continue Borrower's payments at the same amount
and increase Borrower's final payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or Loan
Borrower has with Lender. (c) Any representation or statement made or
furnished to Lender by Borrower or on Borrower's behalf is false or misleading
in any material respect either now or at the time made or furnished. (d)
Borrower becomes insolvent, a receiver is appointed for any part of Borrower's
property, Borrower makes an assignment for the creditor tries to take any of
Borrower's property on or in which Lender has a lien or security interest.
This includes a garnishment of any of Borrower's accounts with Lender. (f)
any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (g) A material
adverse change occurs in Borrower's financial condition, or Lender believes
the prospect of payment or performance of the Indebtedness is impaired.
If any default, other than a default in payment, is curable and if Borrower
has not been given a notice of a breach of the same provision of this Note
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default (a) cures the default within fifteen
(15) days; or (b) if the cure requires more than fifteen (15) days immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due without
notice, and then Borrower will pay that amount. Upon Borrower's failure to
pay all amounts declared due pursuant to this section, including failure to
pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on the Note to 8,000
percentage points over the Index. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender
that amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses whether or not there is a
lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any other sums provided by
law. This Note has been delivered to Lender and accepted by Lender in the
State of California. If there is a lawsuit, Borrower agrees upon Lenders
request to submit to the jurisdiction of the courts of San Mateo County, the
State of California. This Note shall be governed by and construed in
accordance with the laws of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $12.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
ADDITIONAL PROVISIONS - GUARANTOR. AS AN INDUCEMENT TO LENDER TO EXTEND OR
CONTINUE CREDIT TO BORROWER, THE UNDERSIGNED AGREE(S) NOT TO FURTHER PLEDGE,
ENCUMBER OR SELL THE REAL PROPERTY LOCATED AT 26280 DORI LANE, LOS ALTOS
HILLS, CA. IN ADDITION, IN THE EVENT OF BORROWER'S DEFAULT UNDER THE TERMS OF
ANY NOTE OR SECURITY AGREEMENT EXECUTED IN FAVOR OF LENDER, THE UNDERSIGNED
AGREE(S) TO EXECUTE A DEED OF TRUST IN FAVOR OF LENDER COVERING THE ASSET
LISTED ABOVE.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of
specific default provisions or rights of Lender shall not preclude Lender's
right to declare payment of this Note on its demand. Lender may delay or
forgo enforcing any of its rights or remedies under this Note without losing
them. Borrower and any other person who signs, guarantees or endorses this
Note, to the extent allowed by law, waive any applicable statute of
limitations, presentment, demand for payment, protest and notice of dishonor.
Upon any change in the terms of this Note, and unless otherwise expressly
stated in writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length
of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the
party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS.
BORROWER AGREES TOT HE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A
COMPLETED COPY OF THE NOTE.
BORROWER::
PENN OCTANE CORPORATION
/S/ JEROME B. RICHTER, PRESIDENT/ASSISTANT SECRETARY
September 15, 1997
IRREVOCABLE STANDBY LETTER OF CREDIT NO. 310
AMENDMENT #1
Attn: Thomas L. Woodruff, General Counsel
County Sanitation Districts of Orange County, California
10844 Ellis Avenue
Fountain Valley, CA 92708
Our Irrevocable Letter of Credit #310 dated April 2, 1997 for the account of
Penn Octane Corporation, 900 Veterans Blvd., Suite 240, Redwood City, CA
94063, is hereby amended as follows:
Expiration date is extended to November 26, 1997.
This Amendment and the original letter of credit should be read together as
one document. Except as amended above, all other terms and conditions of the
Letter of Credit continue in full force and effect, without change.
/s/ John O. Brooks
- ------------------
John O. Brooks
President/CEO
Bay Area Bank
PURCHASE AGREEMENT
------------------
THIS PURCHASE AGREEMENT made and entered into as of the date indicated on
the signature page hereof, by and between Western Wood Equipment Corporation
(Hong Kong) (the "Purchaser") and Penn Octane Corporation, a Delaware
corporation (the "Company").
WHEREAS, the Company wishes to sell and the Purchaser wishes to purchase
(i) a $1,000,000 principal amount 10% Secured Promissory Note due June 15,
1999 in substantially the form annexed as Exhibit 1 hereto (the "Note"), and
(ii) warrants, exercisable until June 15, 2002 at $2.50 per share (subject to
adjustment), to purchase 500,000 shares of Common Stock, $0.01 par value (the
"Common Stock") of the Company in substantially the form of Exhibit 2 hereto
(the "Warrants"; the Note and the Warrants being herein collectively referred
to as the "Securities"), all on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the agreements and obligations herein
contained, the Purchaser and the Company hereby agree as follows:
1. Purchase and Sale of the Securities. Subject to the terms and
-----------------------------------
conditions set forth in this Agreement, the Company agrees to sell to the
Purchaser, and the Purchaser agrees to purchase from the Company, the
Securities for a purchase price equal to 100% of the principal amount of the
Note so purchased.
2. The Closing. The closing (the "Closing") of the purchase and sale
-----------
of the Securities shall take place on June 16, 1997 at 10:00 A.M. local time
at the offices of the Company in Redwood City, CA, or at such other time and
place as the Company and the Purchaser shall agree. At the Closing, the
Purchaser shall deliver to the Company payment for the Securities being
purchased in immediately available funds and the Company shall deliver the
Note and Warrants to the Purchaser.
3. Representations and Warranties of the Company, As of the Closing,
---------------------------------------------
the Company represents and warrants that:
(a) the Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and has
the requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder;
(b) the execution, delivery and performance of this Agreement,
and the sale and delivery of the Securities have been duly authorized by all
necessary corporate action on the part of the Company; and
(c) shares of Common Stock, when issued upon exercise of the
Warrants and payment therefor, will be legally and validly issued, fully paid
and nonassessable.
4. Representations and Warranties of the Purchaser. The Purchaser
-----------------------------------------------
represents and warrants as follows:
(a) General:
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(i) The Purchaser has all requisite authority to enter into
this Agreement and to perform all of the obligations required to be performed
by the undersigned hereunder.
(ii) Neither the Company nor any person acting on behalf of
the Company has offered or sold the Securities to the Purchaser by means of
any form of general solicitation or general advertising. The undersigned has
not received, paid or given, directly or indirectly, any commission or
remuneration for or on account of any sale, or the solicitation of any sale,
of the Securities.
(b) Information Concerning the Company:
-------------------------------------
(i) The Purchaser is familiar with the business and
financial condition, properties, operations and prospects of the Company.
(ii) The Purchaser has been given full access to all
material information concerning the condition, properties, operations and
prospects of the Company. The Purchaser and his advisors (if any) have had an
opportunity to ask questions of, and to receive information from, the Company
and persons acting on its behalf concerning the terms and conditions of the
Purchaser's investment in the Securities, and to obtain any additional
information necessary to verify the accuracy of the information and data
received by the undersigned. The Purchaser is satisfied that there is no
material information concerning the condition, properties, operations and
prospects of the Company of which Purchaser is unaware.
(iii) The Purchaser has made, either alone or together with
his advisors (if any), such independent investigation of the Company, its
management, and related matters as the Purchaser deems to be, or the
Purchaser's advisors (if any) have advised to be, necessary or advisable in
connection with this investment; and the Purchaser and his advisors (if any)
have received all information and data which the Purchaser and his advisors
(if any) believe to be necessary in order to reach an informed decision as to
the advisability of investing in the Securities.
(iv) The Purchaser understands that all the Purchaser's
representations and warranties contained in this Agreement will be deemed to
have been reaffirmed and confirmed as of the Closing.
(v) The Purchaser understands that the purchase of the
Securities involves various risks, including the risk that it is unlikely that
any market will exist for any resale of the Note or the Warrants and that
resale of the Note, the Warrants and the shares of Common Stock underlying the
Warrants will be restricted as herein provided.
(c) Status of Purchaser:
---------------------
(i) The Purchaser either alone or with Purchaser's advisors
(if any) has such knowledge, skill and experience in business, financial and
investment matters as to be capable of evaluating the merits and risks of an
investment in the Securities. To the extent that the Purchaser has deemed it
appropriate to do so, the Purchaser has retained at Purchaser's own expense,
and relied upon, appropriate professional advice regarding the investment, tax
and legal merits and consequences of this Agreement and owning the Note,
Warrants and Common Stock, as the case may be.
(d) Restrictions on Transfer or Sale
------------------------------------
(i) The Purchaser is acquiring the Securities and any
shares of Common Stock purchased upon exercise of the Warrants solely for his
own beneficial account, for investment purposes, and not with a view to, or
for resale in connection with, any distribution of the Note, the Warrants or
such shares of Common Stock. The Purchaser understands that neither the Note,
the Warrants nor such underlying Common Stock have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or the securities
laws of any state (collectively referred to as "State Securities Laws") by
reason of specific exemptions under the provisions thereof which depend in
part upon the investment intent of the Purchaser and of the other
representations made by the Purchaser in this Agreement. The Purchaser
understands that the Company is relying upon the representations and
agreements contained in this Agreement (and any supplemental information) for
the purpose of determining whether this transaction meets the requirements for
such exemptions.
(ii) The Purchaser understands that the Note, the Warrants
and such underlying Common Stock are "restricted securities" under applicable
federal securities laws and that the Securities Act and the rules of the
Securities and Exchange Commission (the "Commission") provide in substance
that the Purchaser may dispose of such securities or any of them only pursuant
to an effective registration statement under the Securities Act or an
exemption therefrom, and understands that the Company has no obligation or
intention to register any of such securities thereunder, or to take any other
action so as to permit sales pursuant to the Securities Act. Accordingly, the
Purchaser understands that under the Commission's rules the undersigned may
dispose of the Note, Warrants and underlying Common Stock only in accordance
with the provisions of Rule 144 under the Securities Act, to the extent
available, or in "private placements" which are exempt from registration under
the Securities Act, in which event the transferee will acquire "restricted
securities" subject to the same limitations as in the hands of the Purchaser.
As a consequence, the Purchaser understands that he may be required to bear
the economic risks of the investment in the Securities (and the underlying
Common Stock) for an indefinite period of time.
(iii) The Purchaser agrees that (a) he will not sell,
assign, pledge, give, transfer, of otherwise dispose of the Note, the Warrants
or such underlying Common Stock or any interest in any thereof or therein, or
make any offer or attempt to do any of the foregoing, except pursuant to
registration of such securities under the Securities Act and any applicable
State Securities Laws or in a transaction which, in the opinion of counsel for
the Purchaser satisfactory to the Company (which requirement may be waived by
the Company upon advice of counsel), is exempt from the registration
provisions of the Securities Act and any applicable State Securities Laws; (b)
the Note and the Warrants and any certificate(s) representing shares of Common
Stock issued upon exercise of the Warrants may bear a legend making reference
to the foregoing restrictions; and (c) the Company and any transfer agent for
shares of its Common Stock shall not be required to give effect to any
purported transfer of any of such securities except upon compliance with the
foregoing restrictions.
5. Conditions to Obligations of Purchaser and the Company. The
-------------------------------------------------------
obligations of the Purchaser to purchase and pay for the Securities specified
herein and of the Company to sell and deliver such Securities are subject to
the satisfaction at or prior to the Closing of the following conditions
precedent:
(a) The representations and warranties of the Company contained
in Section 3 hereof and of the Purchaser contained in Section 4 hereof shall
be true and correct on and as of the Closing in all respects with the same
effect as though such representations and warranties had been made on and as
of the Closing.
(b) The Company and the Purchaser shall each have received a
certificate from the other party to the effect set forth in Section 5(a)
hereof with respect to the party delivering such certificate.
6. Mandatory Prepayment. If at any time prior to the maturity of the
--------------------
Note, the Company shall receive $5,000,000 or more as proceeds of a single
debt and/or equity financing transaction, the Company shall, within three (3)
business days of the receipt of such proceeds, give notice of such event to
the Purchaser (or any permitted assignee(s) of the Note) as provided in
Section 13 hereof. Upon receipt of such notice, the Purchaser or any such
assignee may, upon notice to the Company given within thirty (30) days
thereafter, elect to have the Company prepay a1l or such portion of the Note
as shall be designated in such notice on a date and at a place and time
specified in the notice. If less than all of the Note shall be so prepaid,
the Company will issue a new note of the same tenor as the Note in the
principal amount not so prepaid.
7. Fee. In connection with the purchase and sale of the Securities,
---
Purchaser shall receive at the Closing a fee from the Company in the amount of
$50,000 payable in immediately available funds.
8. Waiver, Amendment. Neither this Agreement nor any provisions
-----------------
hereof shall be modified, changed, discharged or terminated except by an
instrument in writing signed by the party against whom any waiver, change,
discharge or termination is sought.
9. Assignability. Neither this Agreement nor any right, remedy,
-------------
obligation or liability arising hereunder or by reason hereof shall be
assignable by either the Company or the Purchaser without the prior written
consent of the other party.
10. Applicable Law. This Agreement shall be governed by and
---------------
construed in accordance with the law of the State of New York, regardless of
the law that might be applied under principles of conflicts of law.
11. Section and Other Headings. The section and other headings
---------------------------
contained in this Agreement are for reference purposes only and shall not
affect the meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which together shall be deemed to be one and the
same agreement.
13. Notices. All notices and other communications provided for
-------
herein shall be in writing and shall be deemed to have been duly given if
delivered personally or by facsimile (with proof of receipt) or sent by
registered or certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 540
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: Arnold H. Tracy, Esq.
(b) If to the Purchaser, at the following address:
Western Wood Equipment Corporation (Hong Kong)
20/F Tung Wai Commercial Building
109-111 Gloucester Road
Waichai, Hong Kong
Attn: T. Li
or at such other address as either party shall have specified by notice in
writing to the other.
14. Binding Effect. The provisions of this Agreement shall be
---------------
binding upon and accrue to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and permitted assigns.
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 16th day of June, 1997.
Western Wood Equipment Corporation
(Hong Kong)
By: /S/ T. Li
----------------------------------------
Name: T. Li
Title: Secretary
Penn Octane Corporation
By: /s/ J. B. Richter
----------------------------------------
Name: J. B. Richter
Title: President
DATE: JUNE 16, 1997 EXHIBIT 1
SECURED PROMISSORY NOTE
-----------------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation
("Company"), promises to pay to Western Wood Equipment Corporation (Hong Kong)
or registered assigns ("Holder"), at the office of the Company in Redwood
City, California or such other place as Holder may designate in writing at
least three business days prior to the date fixed for such payment, the entire
principal sum of One Million Dollars ($1,000,000), together with interest
thereon, from the date hereof at the rate of ten and one-half percent (10%)
per annum, payable semi-annually on December 15 and June 15 in each year until
June 15, 1999, (the "Payment Date"), at which time all principal and any
accrued and unpaid interest thereon shall be due and owing. This Note may be
prepaid at any time prior to maturity without penalty in an amount equal to
the principal amount hereof plus interest thereon to the date fixed for
prepayment.
All payments of principal and interest hereunder shall be payable in
lawful money of the United States.
The Company shall be in default hereunder upon the occurrence of any of
the following events: (i) the failure by the Company to make any payment of
principal or interest when due hereunder and such failure shall have continued
for a period of ten (10) days; (ii) the commencement by the Company of a
voluntary case in a bankruptcy or insolvency proceeding or the entry of a
decree or order by a court of competent jurisdiction adjudicating the Company
a bankrupt or the appointment of a receiver or trustee of the Company upon the
application of any creditor in an insolvency or bankruptcy proceeding or other
creditor's suit; (iii) the entry of an order for relief approving a petition
for reorganization or arrangement filed against the Company under the Federal
bankruptcy laws and such order remains in force and unvacated thirty (30)
days; (iv) an assignment for the benefit of creditors by the Company; (v) the
Company consenting to the appointment of a receiver or trustee in an
insolvency or bankruptcy proceeding or other creditors' suit; (vi) the
occurrence of any event of default under the terms of any indebtedness of the
Company for borrowed money in excess of $50,000, provided that such
indebtedness has been accelerated because of such default; or (vii) the
existence of any judgment in excess of $50,000 against, or any attachment of
material property, of the Company.
At any time when an event of default hereunder shall have occurred and
shall be continuing, Holder at its option may accelerate the maturity of this
Note and declare all of the indebtedness thereof to be immediately due and
payable, together with accrued interest thereon, and payment thereof may be
enforced by suit or other process of law.
If this Note is not paid when due, whether at maturity or by
acceleration, the Company agrees to pay all reasonable costs of collection and
such costs shall include without limitation all costs, attorneys' fees and
expenses incurred by Holder hereof in connection with any insolvency,
bankruptcy, reorganization, arrangement or similar proceedings involving
Holder, or involving any endorser or guarantor hereof, which in any way
affects the exercise by Holder hereof of its rights and remedies under this
Note.
This Note is secured by and entitled to the benefits of a Security
Agreement dated the date hereof pursuant to which this Note is secured by
certain specified assets of the Company.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Note and all notices of every kind are hereby waived.
The terms "Company" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to such state's conflicts
of law provisions. Each of the parties hereto irrevocably consents to the
jurisdiction and venue of the federal and state courts located in the State of
New York, County of New York.
PENN OCTANE CORPORATION
By: /s/ J. B. Richter
----------------------
Authorized Signatory
EXHIBIT 2
----------
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after June 15, 2002
Warrant to Purchase 500,000 Shares
of Common Stock, $.01 par value
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
WESTERN WOOD EQUIPMENT CORPORATION (HONG KONG)
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on June 15, 2002 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 500,000 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $2.50 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below.
The exercise price of a share of Common Stock in effect at any time and as
adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price". For purposes of this Warrant, a "Business Day" shall mean
any day other than a Saturday, a Sunday or a day on which banking institutions
in New York, New York, or in Redwood City, California, are authorized by law
or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are
sometimes herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time and from time to time by presentation and surrender hereof of
the Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this
Warrant is exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the shares purchasable
hereunder. Upon receipt by the Company of this Warrant at the office of the
Company, in proper form for exercise, accompanied by payment of the Exercise
Price, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that certificates
representing such shares of Common Stock shall not then be actually delivered
to the Holder. The issuance of certificates for shares of Common Stock upon
the exercise of this Warrant shall be made without charge to the Holder for
any issuance tax in respect thereof (with the exception of any federal or
state income taxes applicable thereto), all such taxes to be paid by the
Company, it being understood however that the Holder shall be required to pay
any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the
Holder. The Company will at no time close its transfer books against the
transfer of this Warrant or the issuance of any shares of Common Stock
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that
---------------------------------------
at all times there shall be authorized and reserved for issuance upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance or delivery upon exercise of this Warrant. All shares which may
be issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such
-----------------
manner as to require the issuance of fractional shares. If, as a result of
adjustment in the Exercise Price or the number of shares of Common Stock to be
received upon exercise of this Warrant, fractional shares would be issuable,
no such fractional shares shall be issued. In lieu thereof, the Company shall
pay the Holder an amount in cash equal to such fraction multiplied by the Fair
Market Value of a share of Common Stock. The term "Fair Market Value" shall
mean, as of a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be
the last sale price on such day on the New York Stock Exchange, or, if the
Common Stock is not then listed or admitted to trading on the New York Stock
Exchange, on such other principal stock exchange (including the NASDAQ Stock
Exchange) on which such stock is then listed or admitted to trading, or, if no
sale takes place on such day on any such exchange, the average of the closing
bid and asked prices on such day as officially quoted on any such exchange,
or, if the Common Stock is not then listed or admitted to trading on any stock
exchange, the average of the reported closing bid and asked prices on such day
in the over-the-counter market as quoted on the National Association of
Securities Dealers Automated Quotation System or, if not so quoted, then as
furnished by any member of the National Association of Securities Dealers,
Inc. selected by the Company. If there shall be no meaningful
over-the-counter market, then Fair Market Value shall be such amount, not less
than book value, as may be determined by the Board of Directors of the
Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable
---------------------------------
without expense (other than applicable transfer taxes) at the option of the
Holder, upon presentation and surrender hereof to the Company for any other
Warrants of different denominations entitling the holder thereof to purchase
in the aggregate the same number of shares of Common Stock purchasable
hereunder. Subject to the provisions of Section 11 below and any restriction
on transfer applicable hereto pursuant to the securities laws of the United
States or any State, upon surrender of this Warrant to the Company with an
assignment form duly executed, and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant in the
name of the assignee named in such instrument of assignment, and this Warrant
shall promptly be cancelled. This Warrant may be divided or combined with
other Warrants which carry the same rights upon presentation hereof at the
principal office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrants into
which this Warrant may be divided or exchanged, and the term "Holder" as used
herein includes any holder of any Warrant into which this Warrant may be
divided or for which this Warrant may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price. (a) If, and whenever, after the
----------------------------
date hereof and prior to delivery by the Company pursuant to exercise of this
Warrant of all shares of Warrant Stock purchasable upon exercise of this
Warrant:
(i) The number of outstanding shares of the Company's stock
of the class at the time purchasable upon exercise of this Warrant is
increased as the result of (x) a subdivision of such outstanding shares of
such class into a greater number of shares or (y) the issuance of additional
shares of stock of such class in payment of a dividend declared upon the
outstanding shares of stock of such class, then the number of shares of
Warrant Stock at the time remaining subject to issuance upon exercise of this
Warrant shall thereupon be increased proportionately, and the Exercise Price
at the time in effect shall thereupon be decreased proportionately; or
(ii) The number of outstanding shares of the Company's
stock of the class at the time purchasable upon exercise of this Warrant is
decreased as the result of a combination of outstanding shares into a smaller
number of shares, then the number of shares of Warrant Stock at the time
remaining subject to issuance upon exercise of this Warrant shall thereupon be
decreased proportionately, and the Exercise Price at the time in effect shall
thereupon be increased proportionately; or
(iii) The outstanding shares of the Company's stock of the
class at the time purchasable upon exercise of this Warrant are changed
(including a change in par value) as the result of a reclassification (other
than a reclassification resulting solely in a change to which the provisions
of clause (i) or (ii) is applicable), or the Company merges with another
corporation or corporations in a merger in which the Company is the resulting
corporation (except a merger that does not result in a reclassification of the
outstanding shares of the Company's stock of the class at the time purchasable
upon exercise of this Warrant), then, thereafter, upon any exercise of this
Warrant, the registered holder hereof will, at no additional cost, be entitled
to receive (subject to any required action by stockholders), in lieu of the
number and class of shares of stock theretofore purchasable upon such
exercise, the number and class of shares of stock and/or other securities
and/or property receivable, as a result of such reclassification or merger, by
a holder of that number and class of shares of stock therefore purchasable
upon such exercise; or
(iv) Any capital reorganization or any reclassification of
the capital stock of the Company shall occur, this Warrant shall thereafter be
exercisable for the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock of the Company
issuable upon exercise of this Warrant would have been entitled upon such
reorganization or reclassification and, in any such case, appropriate
adjustment (as determined by the Board of Directors) shall be made in the
application of the provisions herein set forth with respect to the rights and
interests thereafter of the Holder of this Warrant to the end that the
provisions set forth herein (including provisions with respect to adjustments
of the Exercise Price) shall thereafter be applicable, as nearly as reasonably
practicable, in relation to any shares of stock or other property thereafter
deliverable upon the exercise of this Warrant; or
(v) The Company shall enter into any consolidation with or
merger into any other corporation wherein the Company is not the surviving
corporation, or shall sell or convey (other than as collateral to secure
indebtedness) its property as an entirety or substantially as an entirety,
and, in connection with such consolidation, merger, sale or conveyance, shares
of stock or other securities or property shall be issuable or deliverable in
exchange for the Common Stock of the Company, the Holder shall thereafter be
entitled to purchase (in lieu of the number of shares of Common Stock which
such Holder would have been entitled to purchase immediately prior to such
consolidation, merger, sale or conveyance) the shares of stock or other
securities or property to which such number of shares of Common Stock would
have been entitled at the time of such consolidation, merger, sale or
conveyance, at an aggregate Exercise Price equal to that which would have been
payable if such number of shares of Common Stock had been purchased
immediately prior thereto and, in such event, appropriate provision (as
determined by resolution of the Board of Directors of the Company) shall be
made with respect to the rights and interests thereafter of the Holders of the
Warrant, to the end that all the provisions of this Warrant (including
adjustment provisions) shall thereafter be applicable, as nearly as reasonably
practicable, in relation to such stock or other securities or property.
(b) No adjustment for Small Amounts. Anything herein to the
-------------------------------
contrary notwithstanding, no adjustment of the Exercise Price shall be made if
the amount of such adjustment shall be less than $.05 per share, but in such
case, any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to $.05 per share or more.
(c) Statement of Adjustments. Whenever the Exercise Price and
------------------------
number of shares of Common Stock purchasable hereunder is required to be
adjusted as provided herein, the Company shall promptly prepare a certificate
signed by its President or any Vice President and its Treasurer or Assistant
Treasurer, setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description hereunder), and the Exercise Price and
number of shares of Common Stock purchasable hereunder after giving effect to
such adjustment, and shall promptly cause copies of such certificates to be
mailed to the Holder.
7. Notice to Warrant Holders. So long as this Warrant shall be
--------------------------
outstanding, (i) if the Company shall pay any dividend or make any
distribution upon its Common Stock, or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any shares of
stock or securities of any class or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the capital stock or the
Company, consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of
the Company, or voluntary or involuntary dissolution or liquidation of the
Company shall be effected, then, in any such case, the Company shall cause to
be mailed to the Holder, at least twenty-one (21) days prior to the date
specified in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record
is to be taken for the purpose of such dividend, distribution or rights, or
(y) such reclassification, reorganization, consolidation, merger, conveyance,
dissolution or liquidation is to take place and the date, if any is to be
fixed, as of which the holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution or liquidation.
8. Certain Obligations of the Company. The Company agrees that it
----------------------------------
will not increase the par value of the shares of Warrant Stock issuable upon
exercise of this Warrant above the prevailing and currently applicable
Exercise Price hereunder, and that before taking any action that would cause
an adjustment reducing the prevailing and current applicable Exercise Price
hereunder below the then par value of the Warrant Stock at the time issuable
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations
and demands to or upon the Company in respect of this Warrant may be made and
will give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
9. Repurchase Right. Notwithstanding any other provisions of this
----------------
Warrant, the Company may, upon not less than seven (7) days notice in writing
to the Holder, repurchase all or any portion of the rights represented by this
Warrant at a purchase price equal to $6.00 in respect of the right to purchase
each share of Common Stock covered hereby, such purchase price to be
proportionally adjusted each time the Excise Price is adjusted pursuant to
Section 6 hereof. The closing on such repurchase shall occur on the date and
at the time set forth in such notice at the office of the Company in Redwood
City, California or at such other place as shall be agreed upon by the Company
and the Holder. At the Closing, the Company shall deliver to the Holder an
amount equal to the purchase price in immediately available funds and the
Holder will deliver this Warrant to the Company for cancellation. To the
extent any repurchase hereunder is of less than all of the rights represented
by this Warrant, the Company will deliver to the Holder a new Warrant covering
the rights not so purchased.
10. Determination by Board of Directors. All determinations by the
-----------------------------------
Board of Directors of the Company under the provisions of this Warrant will be
made in good faith with due regard to the interest of the Holder and in
accordance with sound financial practices.
11. Notice. All notices to the Holder shall be in writing, and all
------
notices and certificates given to the Holder shall be sent registered or
certified mail, return receipt requested, to such Holder at his address
appearing on the records of the Company.
12. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants.
------------------------------------------------------------
Upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon delivery of any indemnity bond in such
reasonable amount as the Company may determine in the case of any such
mutilation, upon the surrender of such Warrant for cancellation, the Company
at its expense, will execute and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor.
13. Number and Gender. Whenever herein the singular number is used,
-----------------
the same shall include the plural where appropriate, and words of any gender
shall include each other gender where appropriate.
14. Applicable Law. This Warrant shall be governed by, and construed
--------------
in accordance with, the laws of the State of Delaware.
PENN OCTANE CORPORATION
By:
Authorized Signatory
Dated: June 16, 1997
<PAGE>
PURCHASE
The undersigned pursuant to the provisions
-----------------------------
of the within Warrant hereby elects to purchase shares of Common
---------
Stock of covered by the within Warrant.
-------------------------------------
Date: Signature:
---------------------- ----------------------------------
Witness:
-----------------------------------
ASSIGNMENT
FOR VALUED RECEIVED hereby sells assigns and
--------------------------
transfers unto the within Warrant and all rights
----------------------------
evidenced thereby and does irrevocably appoint his
------------------------
attorney to transfer the said Warrant on the books of the within named
Company.
Date: Signature:
---------------------- ----------------------------------
Witness:
-----------------------------------
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED hereby sells, assigns and
transfers unto the within Warrant and all rights
evidenced thereby to the extent of the rights to purchase shares of
Common Stock and does irrevocably appoint his
attorney to transfer that part of the said Warrant on the books of the within
named company.
Date: Signature:
---------------------- ----------------------------------
Witness:
-----------------------------------
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement") is dated this 16th day of June,
1997 by and between Penn Octane Corporation, a corporation duly organized and
validly existing under the laws of the State of Delaware (the "Borrower"), and
Western Wood Equipment Corporation (Hong Kong), a company organized and
existing under Hong Kong law, as the secured party (the "Secured Party").
W I T N E S S E T H:
-------------------
WHEREAS, the Borrower has entered into a Purchase Agreement dated the
date hereof (the "Purchase Agreement") with the Secured Party pursuant to
which the Secured Party has agreed, among other things, to lend to the
Borrower the aggregate principal amount of One Million Dollars
($1,000,000.00)(the "Loan").
WHEREAS, pursuant to the Purchase Agreement, the Borrower has agreed to
enter into this Agreement in order to provide security for the prompt payment
when due of the Loan and all other amounts payable to the Secured Party under
the Purchase Agreement and the Note (the "Note") issued pursuant thereto (the
"Secured Obligations");
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and to induce the Secured Party to enter into the Purchase
Agreement, the Borrower hereby agrees with the Secured Party as follows:
SECTION 1. Definitions
-----------
Capitalized terms not otherwise defined herein shall have the meanings
set forth in the Purchase Agreement. The following terms shall have the
meanings set forth below:
"Certificate of Title" shall mean any certificate evidencing the
Borrower's ownership of any Equipment, which certificate shall be necessary to
establish the Borrower's ownership of such Equipment.
"Collateral" shall mean all right, title and interest of the Borrower in
and to (a) the General Intangibles, (b) the Equipment, and (c) any and all
proceeds, rents, royalties, profits, revenues, income and products or other
benefits of any of the above and any future rights, benefits and claims
arising therefrom and thereto, including, without limitation, all payments
under insurance or any indemnity, warranty or guaranty, payable by reason of
loss or damage to, or otherwise with respect to, any of the foregoing
Collateral.
"Default" shall mean the occurrence of an event of default under the Note
and, in addition, shall mean the failure or refusal by the Borrower to
perform, or the breach or violation by the Borrower of any of the terms of, or
covenants or warranties contained in, this Agreement which failure or refusal
shall continue unremedied for five (5) days after notice thereof to the
Borrower.
"Equipment" shall mean all tanks, pumps, equipment, and other personal
property owned by the Borrower located on, in or about the following leased
premises: The property described in a Contract between Brownsville Navigation
District of Cameron County, Texas, and Penn Octane Corp. dated October 5, 1993
covering 11.29 acres of land and as amended on February 11, 1994, to increase
the leased premises to 14.51 acres of land.
"Excepted Liens" shall mean those security interests set forth on
Schedule I hereto.
----
"General Intangibles" shall mean any of the Borrower's (i) contract
rights in and to that certain contract between Brownsville Navigation District
of Cameron County, Texas, and the Borrower dated October 5, 1993 covering
11.29 acres and as amended on February 11, 1994, to increase the leased
premises to 14.51 acres of land and (ii) rights to any cash recovery from
litigation involving Penn Octane Corporation or International Energy
Development Corp. and International Bank of Commerce-Brownsville.
"Lien" shall mean a pledge, assignment, lien, charge, mortgage,
encumbrance or other security interest obtained under this Agreement or under
any other agreement or instrument with respect to any present or future
assets, property, contract rights or revenues of the Borrower in order to
secure the payment of indebted-ness of the party referred to in the context in
which the term is used.
"Obligations" shall mean the Secured Obligations and the obligations of
the Borrower under this Agreement, including, without limitation, the
obligation to pay all costs and expenses incurred by the Secured Party in
connection with the exercise of any rights or remedies hereunder or the
conduct of any enforcement proceedings with respect hereto.
SECTION 2. Assignment and Grant of Liens
-----------------------------
The Borrower hereby assigns and grants to the Secured Party a Lien in all
of its respective right, title and interest in and to the Collateral as
security for the timely payment and performance of the Obligations.
Notwithstanding any other provision hereof, the Lien granted herein is subject
to the prior rights, if any, in the Collateral of John H. Robinson, TRAKO
International Company Limited and Lauren Constructors, Inc.
SECTION 3. Security for Obligations
------------------------
This Agreement and the grant herein of Liens in the Collateral shall
secure the payment of the Obligations. All property and contract rights
constituting Collateral are assigned hereunder as security for the payment of
the Obligations, and, after satisfaction in full of the Obligations, all Liens
granted hereunder shall be automatically released and discharged, and the
Secured Party agrees to execute instru-ments of release and satisfaction in a
form and number reasonably requested for its own purposes or for recording in
any jurisdictions in which the Liens may have been recorded.
SECTION 4. Borrower Remains Liable
-----------------------
Anything herein to the contrary notwithstanding, (a) the Borrower shall
remain liable under any agreements to which it is a party (the "Third Party
Agreements") to perform all of its duties and obligations thereunder to the
same extent as if this Agreement had not been executed; (b) the exercise by
the Secured Party of any of its rights hereunder shall not release the
Borrower from any of its duties or obligations under any Third Party
Agreement; and (c) the Secured Party shall not have any obligation or
liability under any Third Party Agreement by reason of this Agreement, nor
shall the Secured Party be obligated to perform any of the obligations or
duties of the Borrower thereunder or to take any action to collect or enforce
any claim for payment assigned hereunder.
SECTION 5. Delivery and Perfection
-----------------------
(a) The Borrower hereby authorizes the Secured Party to file one or
more mortgages or financing or continuation statements, and amendments
thereto, relating to all or any part of the Collateral, without the signature
of the Borrower where permitted by applicable law, and agrees itself to take
all such other actions and to execute and deliver and file or cause to be
filed such other documents, as the Secured Party may reasonably require in
order to establish and maintain a perfected, valid and continuing security
interest of the Secured Party in the Collateral in accordance with this
Agreement.
(b) The Borrower shall, at the written request of the Secured Party:
(i) promptly deliver any and all documents and instruments
(including without limitation any Certificates of Title) evidencing or
relating to the Collateral to the Secured Party at the time and place and
manner as may be specified in the Secured Party's request;
(ii) promptly execute and deliver to the Secured Party (or file
or record in such offices as the Secured Party may deem necessary or
appropriate) any and all financing and continuation statements, other
agree-ments, instruments or other documents or amendments thereto, and perform
any acts which may be necessary (A) to create, perfect, preserve or otherwise
protect the security interest granted herein or (B) to enable the Secured
Party to exercise and enforce its rights hereunder; and
(iii) mark all Certificates of Title in the manner specified in
a written notice of the Secured Party to the Borrower requesting such marking,
to evidence the fact that they are subject to the security interest of the
Secured Party herein.
(c) Without limiting any of the foregoing, upon the occurrence and
during the continuance of a Default, the Secured Party shall have all rights
and remedies of a secured party under the Uniform Commercial Code.
SECTION 6. Records and Information
-----------------------
The Borrower agrees to keep at its address specified in the Purchase
Agreement or at its Santa Fe Springs, California address its records
concerning the Collateral, which records shall be sufficiently accurate to
enable the Secured Party or its designee to determine at any time the status
thereof. The Borrower agrees to promptly furnish to the Secured Party such
information concerning itself or the Collateral as the Secured Party may
reasonably request.
SECTION 7. Inspection
----------
The Borrower agrees, upon reasonable notice provided by the Secured
Party, to permit the Secured Party, through its officers and agents, to
examine and inspect the Collateral and all records pertaining thereto, and to
make extracts from such records as the Secured Party may reasonably require.
SECTION 8. Use of Collateral
-----------------
Except during the continuance of any Default, the Borrower may in the
ordinary course of its business use, consume, exhibit, demonstrate, sell,
lease or otherwise dispose of the Collateral in carrying on its businesses
substantially in the same manner as now conducted; provided, however, that a
sale in the ordinary course of business shall not include any transfer or sale
that is unlawful or inconsistent with the terms of this Agreement or of any
policy of insurance covering the Collateral.
SECTION 9. Representations and Warranties
------------------------------
The Borrower represents and warrants to the Secured Party that:
(a) The Borrower is a corporation duly organized, validly existing
and in good standing under the laws of State of Delaware and is qualified to
do business in all jurisdictions in which it is doing business.
(b) The execution, delivery and performance of this Agreement and the
grant of a security interest and Liens in the Collateral to the Secured Party
by the Borrower have been duly and validly authorized and consented to by all
necessary action and are not contrary to or in violation of any provision of
law, any order of a court or government agency, the Borrower's certificate of
incorporation or by-laws, or any other agreement or other document to which
the Borrower is a party or by which the Borrower or any of its assets may be
bound. The persons signing on behalf of the Borrower are duly authorized to
execute and deliver this Agreement.
(c) This Agreement has been duly and validly executed and delivered
by the Borrower and constitutes the legal, valid and binding obligation of the
Borrower enforce-able in accordance with its terms, and creates a valid and
enforceable security interest in the Collateral, except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization or similar
laws of general application relating to or affecting the rights and remedies
of creditors and (subject to the making of any filings required pursuant to
Section 5 hereof and the delivery of any Collateral to the Secured Party
pursuant to said Section) creates a perfected security interest in the
Collateral, and the Borrower is duly authorized to make all filings and take
all other actions necessary or desirable to perfect and to continue perfected
such security interest, and all of the Borrower's right, title and interest in
and to the Collateral is free and clear of all Liens, except for the Excepted
Liens, and the security interest granted to the Secured Party herein and
except as otherwise permitted under the Purchase Agreement.
(d) The Borrower is and will be the legal and beneficial owner of the
Collateral now owned and hereafter acquired by the Borrower, free and clear of
any Lien except for the Excepted Liens and the Liens created by this Agreement
and except as otherwise permitted under the Purchase Agreement.
SECTION 10. Covenants
---------
(a) The Borrower shall:
(i) Maintain, or cause to be maintained, all material items of
the Collateral in good condition and repair, ordinary wear and tear excepted,
and pay, or cause to be paid, the costs of repairs to or maintenance of that
Collateral which is of a type that could be repaired or maintained;
(ii) Pay or cause to be paid when due all taxes, assessments and
other charges relating to the Collateral, the Loan or this Agreement and
reimburse the Secured Party for all costs of and fees incurred in connection
with the filing of the documents and instruments referred to in Section 5
hereof.
(b) The Borrower shall not without the prior written consent of the
Secured Party permit anything to be done that might impair the value of the
Collateral or the security intended to be afforded by this Agreement nor sell,
assign, transfer, exchange, lease or otherwise dispose of the Collateral or
any portion thereof or any of the Borrower's rights therein (1) except in the
ordinary course of the Borrower's business and (2) except for replace-ments or
additions to its constituent parts on account of the normal wear and tear
resulting from its operations and which do not in any way materially reduce
the fair market value of the Collateral.
SECTION 11. Secured Party Appointed Attorney-in-Fact
----------------------------------------
The Borrower hereby appoints the Secured Party as its attorney-in-fact,
with full authority in the place and stead of the Borrower and in the name of
the Borrower or otherwise, from time to time in the Secured Party's discretion
following the occurrence and during the continuance of a Default, to take any
action and to execute any instrument which the Secured Party may deem
necessary or advisable to accomplish the purposes of this Agreement,
including, without limitation, to receive, endorse and collect all instruments
made or payable to the Borrower representing any dividends, interest payments
or other distributions in respect of the Collateral pledged by the Borrower or
any part thereof and to give full discharge for the same.
SECTION 12. Remedies upon Default
---------------------
On and after the occurrence of a Default by the Borrower, the entire
amount of the Loan, together with accrued interest and other sums payable
under the Purchase Agreement, shall become immedi-ately due and payable, upon
notice by the Secured Party to the Borrower in default in the manner provided
in Section 13 of the Purchase Agreement. In addition, the Secured Party may
(a) enforce collection of any of the Collateral by suit or any other lawful
means available to the Secured Party, (b) surrender, release or exchange all
or any part of the Collateral, or compromise, extend or renew for any period
any indebtedness thereunder or evidenced thereby; and (c) assert all other
rights of a secured party under the Uniform Commercial Code or other
applicable law, including, without limitation, the right to foreclose, take
possession of, hold, collect, sell, lease or otherwise retain, liquidate or
dispose of all or any portion of the Collateral. The proceeds of any
collection, liquidation or other disposition of the Collateral shall be
applied by the Secured Party first to the payment of all expenses (including,
without limitation, all fees, taxes, reasonable attorney's fees and legal
expenses) incurred by the Secured Party in connection with retaking, holding,
collecting, or liquidating the Collateral. The balance of such proceeds, if
any, shall, to the extent permitted by law, be applied to the payment of the
Obligations secured by this Agreement. In case of any deficiency, the
Borrower shall, whether or not then due, remain liable therefor. If notice
prior to disposition of the Collateral or any portion thereof is necessary
under applicable law, written notice mailed to the Borrower at the addresses
specified in Section 18 hereof seven business days prior to the date of such
disposition shall constitute reasonable notice, but notice given in any other
reasonable manner shall be sufficient. Without precluding any other methods
of sale, the sale of the Collateral or any portion thereof shall have been
made in a commercially reasonable manner if conducted in conformity with
reasonable commercial practices of creditors disposing of similar property;
but in any event the Secured Party may sell on such terms and to such
purchaser(s) as it may choose, without assuming any credit risk and without
any obligation to advertise or give notice of any kind other than that
necessary under applicable law.
SECTION 13. Security Interest Absolute
--------------------------
All rights of the Secured Party and all Liens hereunder, and all
obligations of the Borrower hereunder, shall be absolute and unconditional
irrespective of:
(i) any lack of validity or enforceability of the Purchase
A-greement or any other agreement or instrument relating thereto;
(ii) any change in the time, manner or place of payment of, or
in any other term of, all or any of the amounts payable under the Purchase
Agreement, or any other amendment of or waiver of, any provision of the
Purchase Agreement or any other agreement or instrument relating thereto;
(iii) any release or non-perfection of any portion of the
Collateral or any exchange, release or non-perfection of any other collateral,
or any release, amendment or waiver of any guaranty for all or any of the
amounts payable under the Purchase Agreement; or
(iv) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, any Borrower in respect of the
Obligations or this Agreement.
SECTION 14. Information and Reports
-----------------------
The Borrower shall, from time to time as and when the Secured Party may
request, deliver to the Secured Party (a) such certified schedules, lists,
descriptions and designations as the Secured Party may require to identify the
nature, extent, value, age and location of the Collateral and (b) such
financial statements, reports, certificates and other data concerning the
Collateral or the Borrower's business or financial condition as the Secured
Party may require of the Borrower pursuant to the Purchase Agreement. Any
such schedule, report, list or financial statement shall be executed by a duly
authorized officer of the Borrower delivering such schedule, report, list or
financial statement and shall be in such form and detail as the Secured Party
may specify.
SECTION 15. The Secured Party's Duties
--------------------------
The powers conferred on the Secured Party hereunder are solely to protect
the Secured Party's interest in the Collateral and shall not impose any duty
upon it to exercise any such powers. Except for the safe custody of any
Collateral or any portion thereof in its possession the Secured Party shall
have no duty as to the Collateral or as to the taking of any necessary steps
to preserve rights against prior parties or any other rights pertaining to the
Collateral.
SECTION 16. Indemnity and Expenses
----------------------
(a) The Borrower agrees to indemnify the Secured Party from and
against any and all claims, losses and liabilities arising out of or connected
with this Agreement (including, without limitation, enforcement of this
Agreement), except claims, losses or liabilities resulting solely from the
Secured Party's gross negligence or wilful misconduct.
(b) The Borrower agrees to pay all expenses incurred by the Secured
Party in foreclosing, retaking, holding, collecting, preparing for sale and
selling or otherwise realizing upon or liquidating the Collateral (including,
without limitation, all fees, taxes and reasonable attorneys' fees and other
legal expenses incurred by the Secured Party in connection therewith) and all
legal and other expenses incurred by the Secured Party in connection with the
enforcement of its rights hereunder.
SECTION 17. Continuing Security Interest
----------------------------
This Agreement shall create a continuing Lien in the pledged Collateral
and shall (i) remain in full force and effect until payment in full of all
amounts payable under the Purchase Agreement, (ii) be binding upon the
Borrower, its successors and assigns, and (iii) inure to the benefit of the
Secured Party, and its successors, transferees and assigns. Upon the payment
in full of all amounts payable under the Purchase Agreement, the Borrower
shall be entitled to the return, upon its request and at its expense, of such
of the Collateral as shall not have been sold or otherwise applied pursuant to
the terms hereof.
SECTION 18. Notices
-------
All notices and other communications required or permitted hereunder
shall be deemed given if given in writing and delivered personally, by
commercial delivery service, by courier or by facsimile transmission, telexed
or mailed by registered or certified mail (return receipt requested) fax,
telex or postage fees prepaid, to the party to receive the same at its
respective address set forth below, or at such other address as may from time
to time be designated by such party to the others in accordance with this
Section 18 (provided, that written notice given in any other manner shall
nonetheless be effective upon its actual receipt by the party entitled to
receive it):
If to the Borrower:
- ----------------------
Penn Octane Corporation
900 Veterans Boulevard, Suite 240
Redwood City, California 94603
Tel: (415) 368-1501
Fax: (415) 368-1505
If to the Secured Party:
- ----------------------------
Western Wood Equipment Corporation (Hong Kong)
20/F Tung Wai Commercial Building
109-111 Gloucester Road
Wanchai, Hong Kong
Tel.: (011) (852) 2598-0023
Fax: (011) (852) 2519-9675
SECTION 19. Binding Effect; Assignment
--------------------------
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Neither
this Agreement nor any rights, duties or obligations shall be assigned by any
party hereto without the prior written consent of the other parties, and any
attempted assignment or transfer without such prior written consent shall be
null and void; provided that, the Secured Party shall have the right, without
the prior written consent of the Borrower, to assign its rights and delegate
its duties under this Agreement to any direct or indirect wholly-owned
subsidiary of the Secured Party, provided that no such assignment or
delegation shall relieve the Secured Party of any liabilities or obligations
hereunder unless agreed to in writing by the Borrower.
SECTION 20. No Third Party Beneficiary
--------------------------
Neither this Agreement nor any provision hereof, nor any statement,
schedule, certificate, instrument or other document delivered or to be
delivered pursuant hereto, nor any agreement entered into or to be entered
into pursuant hereto or any provision thereof, is intended to create any
right, claim or remedy in favor of, or impose any obligation upon, any person
or entity other than the parties hereto and their respective successors and
permitted assigns.
SECTION 21. Captions and Paragraph Headings
-------------------------------
Captions and paragraph headings used herein are for convenience only and
are not intended to be a part of this Agreement and shall not be used in
construing it.
SECTION 22. Entire Agreement; Modifications; Severability
---------------------------------------------
The making, execution and delivery of this Agreement by the parties
hereto has been induced by no representations, statements, warranties or
agreements other than those herein expressed. This Agreement embodies the
entire agreement of the parties pertaining to the subject matter hereof and
supersedes all prior or contemporaneous agreements or understandings, written
or oral, of the parties relating to the subject matter hereof. This Agreement
may be amended or modified only by an instrument signed by the parties or
their duly authorized agents. The Borrower and the Secured Party make no
representations or warranties not specifically referred to in this Agreement.
Any provision of this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability but that shall not invalidate the
remaining provisions of this Agreement or affect the validity or
enforceability of such provision in any other jurisdiction.
SECTION 23. Waivers
-------
No failure or delay by the Secured Party in the exercise of any right or
remedy under this Agreement or under the Uniform Commercial Code or any other
applicable law shall operate as a waiver hereunder or thereunder, and no
partial exercise by the Secured Party of any right or remedy of the Secured
Party hereunder or thereunder shall preclude the further exercise by the
Secured Party of any other right or remedy hereunder or thereunder.
SECTION 24. Counterparts
------------
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
SECTION 25. Governing Law
-------------
The parties hereby agree that this Agreement, and the respective rights,
duties and obligations of the parties hereunder, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to principles of conflicts of law thereunder.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
PENN OCTANE CORPORATION WESTERN WOOD EQUIPMENT
CORPORATION (HONG KONG)
By: /s/ J. B. Richter By: /s/ T. Li
----------------------------------- -----------------------------------
Name: J. B. Richter Name: T. Li
Title: President Title: Secretary
SCHEDULE I
to the
Security Agreement
1. Lien on the Collateral securing claim of Lauren Contractors, Inc. in
the approximate amount of $82,000 as of June 12, 1997 for work performed on
the Company's LPG terminal.
2. Lien on the Collateral securing 10% Promissory Note in favor of John H.
Robinson in the aggregate principal amount of $450,000 plus accrued interest.
3. Lien on the Collateral securing 10% Promissory Note in favor of TRAKO
International Company Limited in the aggregate principal amount of $500,000,
plus accrued interest.
AMERICAN INSTITUTE OF ARCHITECTS
AIA Document A311
PERFORMANCE BOND
Bond Number 1328406
KNOW ALL MEN BY THESE PRESENTS: that Penn Wilson CNG as Principal, hereinafter
called Contractor, and Amwest Surety Insurance Company 330 North Brand, Suite
550, Glendale, CA 91203 as Surety, hereinafter called Surety, are held and
firmly bound unto A.E. Schmidt Environmental as Obligee, hereinafter called,
Owner, in the amount of One Million Four Hundred Thirty One Thousand Three
Hundred Nine Dollars ($1,431,309.00), for the payment whereof Contractor and
Surety bind themselves, their heirs, executors, administrators, successors
and assigns, jointly and severally, firmly by these presents.
WHEREAS,
Contractor has by written agreement dated June 25, 1997, entered into a
contract with Owner for
Supply and install compressed natural gas fueling station
which contract is by reference made a part hereof, and is hereinafter referred
to as the Contract.
<PAGE>
NOW, THEREFORE THE CONDITION OF THIS OBLIGATION is such that, if Contractor
shall promptly and faithfully perform said Contract, then this obligation
shall be null and void: otherwise it shall remain in full force and effect.
The Surety hereby waives notice of any alteration or extension of time
made by the Owner.
Whenever Contractor shall be, and declared by Owner to be in default
under the Contract, the Owner having performed Owner's obligations thereunder,
the Surety may promptly remedy the default, or shall promptly
1) Complete the contract in accordance with its terms and conditions, or
2) Obtain a bid or bids for completing the Contract in accordance with its
terms and conditions, and upon determination by Surety of the lowest
responsible bidder, or, if the owner elects, upon determination by the Owner
and the Surety jointly of the lowest responsible bidder, arrange for a
contract between such bidder and Owner, and make available as Work progresses
(even though there should be a default or succession of defaults under the
contract or contracts of completion arranged under this paragraph) sufficient
funds to pay the cast of completion less the balance of the contract price;
but not exceeding, including other costs and damages for which the Surety may
be liable hereunder, the amount set forth in the first paragraph hereof. The
term "balance of the contract price," as used in this paragraph, shall mean
the total amount payable by Owner to Contractor under the Contract and any
amendments thereto, less the amount properly paid by Owner to Contractor.
Any suit under this bond must be instituted before the expiration of two
(2) years from the date on which final payment under the Contract falls due.
No right of action shall accrue on this bond to or for the use of any
person or corporation other that the Owner named herein are the heirs,
executors, administrators or successors of the Owner.
Signed and sealed this 11th day of June 1997.
/s/ John Weber
Penn Wilson CNG
/s/ Dennis Ding -------------------------------------------
- --------------------------------- (Principal) (Seal)
(Witness)
-------------------------------------------
(Title)
/s/ Kathy R. Mair
Amwest Surety Insurance Company
/s/ Fraizer Badran -------------------------------------------
- --------------------------------- (Surety) (Seal)
(Witness)
/s/ Jeffrey Strassner
-------------------------------------------
Jeffrey Strassner (Title)
Attorney-in-Fact
THE AMERICAN INSTITUTE OF ARCHITECTS
AIA Document A311
LABOR AND MATERIAL PAYMENT BOND
THIS BOND IS ISSUED SIMULTANEOUSLY WITH PERFORMANCE BOND IN FAVOR OF
THE OWNER CONDITIONED ON THE FULL AND FAITHFUL PERFORMANCE OF THE CONTRACT
Bond Number 1328406
KNOW ALL MEN BY THESE PRESENTS: that Penn Wilson CNG, as Principal,
hereinafter called Principal, and Amwest Surety Insurance Company, 330 North
Brand, Suite 550, Glendale, CA 91203, as Surety, hereinafter called Surety,
are held and firmly bound unto A.E. Schmidt Environmental as Obligee,
hereinafter called, Owner, for the use and benefit of claimants as hereinbelow
defined, in the amount of One Million Four Hundred Thirty One Thousand Three
Hundred Nine Dollars ($1,431,309.00), for the payment whereof Principal and
Surety bind themselves, their heirs, executors, administrators, successors and
assigns, jointly and severally, firmly by these presents.
WHEREAS,
Principal has by written agreement dated ____________________, entered into a
contract with Owner for
Supply and install compressed natural gas fueling station
which contract is by reference made a part hereof, and is hereinafter referred
to as the Contract.
<PAGE>
LABOR AND MATERIAL PAYMENT BOND
NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION, is such that, if Principal
shall promptly make payment to all claimants as hereinafter defined, for all
labor and material used or reasonably required for use in the performance of
the Contract, then this obligation shall be void; otherwise it shall remain
in full force and effect, subject, however, to the following conditions:
1. A claimant is defined as one having a direct contract with the
Principal or with a Subcontractor of the Principal for labor, material, or
both used or reasonably required for use in the performance of the Contract,
labor and material being construed to include that part of water, gas, power,
light, heat, oil, gasoline, telephone service or rental of equipment directly
applicable to the Contract.
2. The above named Principal an Surety hereby jointly and severally
agree with the owner that every claimant as herein defined, who has not been
paid in full before the expiration of a period of ninety (90) days after the
date on which the last of such claimant's work or labor was done or performed,
or materials were furnished by such claimant, may sue on this bond for the use
of such claimant, prosecute the suit to final judgment for such sum or sums as
may be justly due claimant, and have execution thereon. The Owner shall not
be liable for the payment of any costs or expenses of any such suit.
3. No suit or action shall be commenced hereunder by any claimant:
a. Unless claimant, other than one having a direct contract with
the Principal, shall have given written notice to any two of the following:
the Principal, the Owner, or the Surety above named, within ninety (90) days
after such claimant did or performed the last of the work or labor, or
furnished the last of the materials for which said claim is made, stating with
substantial accuracy the amount claimed and the name of the party to whom the
materials were furnished, or for whom the work or labor was done or performed.
Such notice shall be served by mailing the same by registered mail or
certified mail, postage prepaid, in an envelope addressed to the Principal,
Owner or Surety, at any place where an office is regularly maintained for the
transaction of business, or served in any manner in which legal process may be
served in the state in which the aforesaid project is located, save that such
service need not be made by a public officer.
b. After the expiration of one (1) year following the date on
which Principal ceased Work on said Contract, it being understood, however
that if any limitation embodied in this bond is prohibited by any law
controlling the construction hereof such limitation shall be deemed to be
amended so as to be equal to the minimum period of limitation permitted by
such law.
c. Other than in a state court of competent jurisdiction in and
for the county or other political subdivision of the state in which the
Project, or any party thereof, is situated, or in the United States District
Court for the district in which the Project, or any part thereof, is situated,
and not elsewhere.
4. The amount of this bond shall be reduced by and to the extent of
any payment or payments made in good faith hereunder, inclusive of the payment
by Surety of mechanics' lien which may be filed of record against said
improvement, whether or not claim for the amount of such lien be presented
under and against this bond.
Signed and sealed this 11th day of June 1997.
/s/ John Weber
Penn Wilson CNG
/s/ Dennis Ding -------------------------------------------
- --------------------------------- (Principal) (Seal)
(Witness)
-------------------------------------------
(Title)
/s/ Kathy R. Mair
Amwest Surety Insurance Company
-------------------------------------------
- --------------------------------- (Surety) (Seal)
(Witness)
/s/ Jeffrey Strassner
-------------------------------------------
Jeffrey Strassner (Title)
Attorney-in-Fact
STANDARD FORM OF AGREEMENT BETWEEN
CONTRACTOR AND SUBCONTRACTOR
AIA DOCUMENT A401-ELECTRONIC FORMAT
THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES: CONSULTATION WITH AN ATTORNEY
IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION. AUTHENTICATION
OF THIS ELECTRONICALLY DRAFTED AIA DOCUMENT MAY BE MADE BY USING AIA DOCUMENT
D401.
This document has been approved and endorsed by the American Subcontractors
Association and the Associated Specialty Contractors, Inc.
Copyright 1915, 1925, 1951, 1958, 1961, 1962, 1966, 1967, 1972, 1978, 1987 by
The American Institute of Architects, 1735 New York Avenue, N.W., Washington
D.C. 20006-5292. Reproduction of the material herein or substantial quotation
of its provisions without written permission of the AIA violates the
copyrights laws of the United States and will be subject to legal prosecution.
AGREEMENT
made as of the 25th day of June in the year of Nineteen Hundred and 97.
BETWEEN the Contractor
(Name and Address)
A.E. Schmidt Environmental (AESE), 16509 Saticov Street, Van Nuys, California
91406
and the Subcontractor
(Name and Address)
Glenn Wilson CNG, 12118 S. Bloomfield, Santa Fe Springs, California 90670
The Contractor has made a contract for construction dated with the Owner.
(Name and location)
Meridian Engineers on behalf of New York Department of Transportation, 128-10
26th Avenue, Flushing, New York 11354
The Project is:
(Name and location)
CNG Facility, College Point, New York
which Contract is hereinafter referred to as the Prime Contract and which
provides for the furnishing of labor, materials, equipment and services in
connection with the construction of the Project. A copy of the Prime
Contract, consisting of the Agreement Between Owner and Contractor (from which
compensation amounts may be deleted) and the other Contractor Documents
enumerated therein has been made available to the Subcontractor.
The Architect Engineer for the Project is:
(Name and Address)
Meridian Engineers, 128-10 26th Avenue, Flushing, New York 11354
The Contract and the Subcontractor agree as set forth below.
TERMS AND CONDITIONS OF AGREEMENT
BETWEEN CONTRACTOR AND SUBCONTRACTOR
ARTICLE 1
THE SUBCONTRACT DOCUMENTS
1.1 The Subcontract Documents consist of (1) this Agreement; (2) the
Prime Contract, consisting of the Agreement between the Owner and Contractor
and the other Contract Documents enumerated therein, including Conditions of
the Contract (General, Supplementary and other Conditions), Drawings,
Specifications, Addenda issued prior to execution of the Agreement between the
Owner and Contractor and Modifications issued subsequent to the execution of
the Agreement between the Owner and Contractor, whether before or after the
execution of this Agreement, and other Contract Documents, if any, listed in
the Owner-Contractor Agreement; (3) other documents listed in Article 16 of
this Agreement; and (4) Modifications to this Subcontract issued after
execution of this Agreement. These form the Subcontract, and are as fully a
part of the Subcontract as if attached to this Agreement or repeated herein.
The Subcontract represents the entire and integrated agreement between the
parties hereto and supersedes prior negotiations, representations or
agreements, either written or oral. An enumeration of the Subcontract
Documents, other than Modifications issued subsequent to the execution of this
Agreement, appears in Article 16.
1.2 The Subcontractor shall be furnished copies of the Subcontract
Documents upon request, but the Contractor may charge the Subcontractor for
the cost of reproduction.
ARTICLE 2
MUTUAL RIGHTS AND RESPONSIBILITIES
2.1 The Contractor and Subcontractor shall be mutually bound by the
terms of this Agreement and, to the extent that provisions of the Prime
Contract apply to the Work of the Subcontractor, the Contractor shall assume
toward the Subcontractor all obligations and responsibilities that the Owner,
under the Prime Contract, assumes toward the Contractor, and the Subcontractor
shall assume toward the Contractor all obligations and responsibilities which
the Contractor, under the Prime Contract, assumes toward the Owner and the
Architect Engineer. The Contractor shall have the benefit of all rights,
remedies and redress against the Subcontractor which the Owner, under the
Prime Contract, has against the Contractor, and the Subcontractor shall have
the benefit of all rights, remedies and redress against the Contract which the
Contractor, under the Prime Contract, has against the Owner, insofar as
applicable to this Subcontract. Where a provision of the Prime Contract is
inconsistent with a provision of this Agreement, this Agreement shall govern.
2.2 The Contractor may require the Subcontractor to enter into
agreements with Sub-subcontractors performing portions of the Work of this
Subcontract by which the Subcontractor and the Sub-subcontractor are mutually
bound, to the extent of the Work to be performed by the Sub-subcontractor,
assuming toward each other all obligations and responsibilities which the
Contractor and Subcontractor assume toward each other and having the benefit
of all rights, remedies and redress each against the other which the
Contractor and Subcontractor have by virtue of the provisions of this
Agreement.
ARTICLE 3
CONTRACTOR
3.1 SERVICES PROVIDED BY THE CONTRACTOR
3.1.1 The Contractor shall cooperate with the Subcontractor in
scheduling and performing the Contractor's Work to avoid conflicts or
interference in the Subcontractor's Work and shall expedite written responses
to submittals made by the Subcontractor in accordance with Paragraph 4.1 and
Article 5. As soon as practicable after execution of this Agreement, the
Contractor shall provide the Subcontractor copies of the Contractor's
construction schedule and schedule of submittals, together with such
additional scheduling details as will enable the Subcontractor to plan and
perform the Subcontractor's Work properly. The Subcontractor shall be
notified promptly of subsequent changes in the construction and submittal
schedules and additional scheduling details.
3.1.2 The Contractor shall provide suitable areas for storage of
the Subcontractor's materials and equipment during the course of the Work.
Additional costs to the Subcontractor resulting from relocation of such
facilities at the direction of the Contractor, except as previously agreed
upon, shall be reimbursed by the Contractor.
3.1.3 .1.3 Except as provided in Article 14, the Contractor's
equipment will be available to the Subcontractor only at the Contractor's
discretion and on mutually satisfactory terms.
3.2 COMMUNICATIONS
3.2.1 The Contractor shall promptly make available to the
Subcontractor information which affects this Subcontract and which becomes
available to the Contractor subsequent to execution of this Subcontract.
3.2.2 The Contractor shall not give instructions or orders
directly to employees or workmen of the Subcontractor, except to persons
designated as authorized representatives of the Subcontractor.
3.2.3 The Contractor shall permit the Subcontractor to request
directly from the Architect Engineer information regarding the percentages of
completion and the amount certified on account of Work done by the
Subcontractor.
3.2.4 If hazardous substances of a type of which an employer is
required by law to notify its employees are being used on the site by the
Contractor, a subcontractor or anyone directly or indirectly employed by them
(other than the Subcontractor), the Contractor shall, prior to harmful
exposure of the Subcontractor's employees to such substance, give written
notice of the chemical composition thereof to the Subcontractor in sufficient
detail and time to permit the Subcontractor's compliance with such laws.
3.3 CLAIMS BY THE CONTRACTOR
3.3.1 Liquidated damages for delay, if provided for in Paragraph
9.3 of this Agreement, shall be assessed against the Subcontractor only to the
extent caused by the Subcontractor, the Subcontractor's employees and agents,
Sub-subcontractors, suppliers or any person or entity for whose acts the
Subcontractor may be liable, and in no case for delays or causes arising
outside the scope of this Subcontract.
3.3.2 Except as may be indicated in this Agreement, the
Contractor agrees that no claim for payment for services rendered or materials
and equipment furnished by the Contractor to the Subcontractor shall be valid
without prior notice to the Subcontractor and unless written notice thereof is
given by the Contractor to the Subcontractor not later than the tenth day of
the calendar month following that in which the claim originated.
3.4 CONTRACTOR'S REMEDIES
3.4.1 If the Subcontractor defaults or neglects to carry out the
Work in accordance with this Agreement and fails within three working days
after receipt of written notice from the Contractor to commence and continue
correction of such default or neglect with diligence and promptness, the
Contractor may, after three days following receipt by the Subcontractor of an
additional written notice, and without prejudice to any other remedy the
Contractor may have, make good such deficiencies and may deduct the cost
thereof from the payments then or thereafter due the Subcontractor, provided,
however, that if such action is based upon faulty workmanship or materials and
equipment, the Architect Engineer shall first have determined that the
workmanship or materials and equipment are not in accordance with requirements
of the Prime Contract.
ARTICLE 4
SUBCONTRACTOR
4.1 EXECUTION AND PROGRESS OF THE WORK
4.1.1 The Subcontractor shall cooperate with the Contractor in
scheduling and performing the Subcontractor's Work to avoid conflict, delay in
or interference with the Work of the Contractor, other subcontractors or
Owner's own forces.
4.1.2 The Subcontractor shall promptly submit Shop Drawings,
Product Data, Samples and similar submittals required by the Subcontract
Documents with reasonable promptness and in such sequence as to cause no delay
in the Work or in the activities of the Contractor or other subcontractors.
4.1.3 The Subcontractor shall submit to the Contractor a
schedule of values allocated to the various parts of the Work of this
Subcontract, aggregating the Subcontract Sum, made out in such detail as the
Contractor and Subcontractor may agree upon or as required by the Owner, and
supported by such evidence as the Contractor may direct. In applying for
payment, the Subcontractor shall submit statements based upon this schedule.
4.1.4 The Subcontractor shall furnish to the Contractor periodic
progress reports on the Work of this Subcontract as mutually agreed, including
information on the status of materials and equipment which may be in the
course of preparation or manufacture.
4.1.5 The Subcontractor agrees that the Architect, Engineer will
have the authority to reject Work which does not conform to the Prime
Contract. The Architect's Engineer's decisions on matters relating to
aesthetic effect shall be final if consistent with the intent expressed in the
Prime Contract.
4.1.6 The Subcontractor shall pay for materials, equipment and
labor used in connection with the performance of this Subcontract through the
period covered by previous payments received from the Compliance, and shall
furnish satisfactory evidence, when requested by the Contractor, to verify
compliance with the above requirements.
4.1.7 The Subcontractor shall take necessary precautions to
protect properly the Work of other subcontractors from damage caused by
operations under this Subcontract.
4.1.8 The Subcontractor shall cooperate with the Contractor,
other subcontractors and the Owner's own forces whose Work might interfere
with the Subcontractor's Work. The Subcontractor shall participate in the
preparation of coordinated drawings in areas of congestion, if required by the
Prime Contract, specifically noting and advising the Contractor of potential
conflicts between the Work of the Subcontractor and that of the Contractor,
other subcontractors or the Owner's own forces.
4.2 LAWS, PERMITS, FEES AND NOTICES
4.2.1 The Subcontractor shall give notices and comply with laws,
ordinances, rules, regulations and orders of public authorities bearing on
performance of the Work of this Subcontract. The Subcontractor shall secure
and pay for permits and governmental fees, licenses and inspections necessary
for proper execution and completion of the Subcontractor's Work, the
furnishing of which is required of the Contractor by the Prime Contract
pertaining only to the subcontractor work statement.
4.2.2 The Subcontractor shall comply with Federal, state and
local tax laws, social security acts, unemployment compensation acts and
workers' or workmen's compensation acts insofar as applicable to the
performance of this Subcontract.
4.3 SAFETY PRECAUTIONS AND PROCEDURES
4.3.1 The Subcontractor shall take reasonable safety precautions
with respect to performance of this Subcontract, shall comply with safety
measures initiated by the Contractor and with applicable laws, ordinances,
rules, regulations and orders of public authorities for the safety of persons
or property in accordance with the requirements of the Prime Contract. The
Subcontractor shall report to the Contractor within three days an injury to an
employee or agent of the Subcontractor which occurred at the site.
4.3.2 If hazardous substances of a type of which an employer is
required by law to notify its employees are being used on the site by the
Subcontractor, the Subcontractor's Sub-subcontractors or anyone directly or
indirectly employed by them, the Subcontractor shall, prior to harmful
exposure of any employees on the site to such substance, give written notice
of the chemical composition thereof to the Contractor in sufficient detail and
time to permit compliance with such laws by the Contractor, other
subcontractors and other employers on the site.
4.3.3 In the event the Subcontractor encounters on the site
material reasonably believed to be asbestos or polychlorinated biphenyl (PCB)
which has not been rendered harmless, the Subcontractor shall immediately stop
Work in the area affected and report the condition to the Contractor in
writing. The Work in the affected area shall resume in the absence of
asbestos or polychlorinated biphenyl (PCB), or when it has been rendered
harmless, by written agreement of the Contractor and Subcontractor, or in
accordance with final determination by the Architect Engineer on which
arbitration has not been demanded, or by arbitration as provided in this
Agreement. The Subcontractor shall not be required pursuant to Article 5 to
perform without consent any Work relating to asbestos or polychlorinated
biphenyl (PCB).
4.3.4 To the fullest extent permitted by law, the Contractor
shall indemnify and hold harmless the Subcontractor, the Subcontractor's
Sub-subcontractors, and agents and employees of any of them from and against
claims, damages, losses and expenses, including but not limited to attorneys'
fees, arising out of or resulting from performance of the Work in the affected
area if in fact the material is asbestos or polychlorinated biphenyl (PCB)
and has not been rendered harmless, provided that such claim, damage, loss or
expense is attributable to bodily injury, sickness, disease or death, or to
injury to or destruction of tangible property (other than the Work itself)
including loss of use resulting therefrom, but only to the extent caused in
whole or in part by negligent acts or omissions of the Contractor, Architect
Engineer, Owner, anyone directly or indirectly employed by any of them, or
anyone for whose acts any of them may be liable, regardless of whether or not
such claim, damage, loss or expense is caused in part by a party indemnified
hereunder. Such obligation shall not be construed to negate, abridge, or
reduce other rights or obligations of indemnity which would otherwise exist as
to a party or person described in this Subparagraph 4.3.4.
4.4 CLEANING UP
4.4.1 The Subcontractor shall keep the premises and surrounding
area free from accumulation of waste materials or rubbish caused by operations
performed under this Subcontract. The Subcontractor shall not be held
responsible for unclean conditions caused by other contractors or
subcontractors.
4.5 WARRANTY
4.5.1 The Subcontractor warrants to the Owner, Architect,
Engineer and Contractor that materials and equipment furnished under this
Subcontract will be of good quality and new unless otherwise required or
permitted by the Subcontract Documents, that the Work of this Subcontract will
be free from defects not inherent in the quality required or permitted, and
that the Work will conform with the requirements of the Subcontract Documents.
Work not conforming to these requirements, including substitutions not
properly approved and authorized, may be considered defective. The
Subcontractor's warranty excludes remedy for damage or defect caused by abuse,
modifications not executed by the Subcontractor, improper or insufficient
maintenance, improper operation, or normal wear and tear under normal usage.
This warranty shall be in addition to and not in limitation of any other
warranty or remedy required by law or by the Subcontract Documents.
4.6 INDEMNIFICATION
4.6.1 To the fullest extent permitted by law, the Subcontractor
shall indemnify and hold harmless the Owner, Contractor, Architect, Engineer,
Architect's Engineers consultants, and agents and employees of any of them
from and against claims, damages, losses and expenses, including but not
limited to attorney's fees, arising out of or resulting from performance of
the Subcontractor's Work under this Subcontract, provided that such claim,
damage, loss or expense is attributable to bodily injury, sickness, disease or
death, or to injury to or destruction of tangible property (other than the
Work itself) including loss of use resulting therefrom, but only to the extent
caused in whole or in part by negligent acts or omissions of the
Subcontractor, the Subcontractor's Sub-subcontractors, anyone directly or
indirectly employed by them or anyone for whose acts they may be liable,
regardless of whether or not such claim, damage, loss or expense is caused in
part by a party indemnified hereunder. Such obligation shall not be construed
to negate, abridge, or otherwise reduce other rights or obligations of
indemnity which would otherwise exist as to a party or person described in
this Paragraph 4.6.
4.6.2 In claims against any person or entity indemnified under
this Paragraph 4.6 by an employee of the Subcontractor, the Subcontractor's
Sub-subcontractors, anyone directly or indirectly employed by them or anyone
for whose acts they may be liable, the indemnification obligation under this
Paragraph 4.6 shall not be limited by a limitation on amount or type of
damages, compensation or benefits payable by or for the Subcontractor or the
Subcontractor's Sub-subcontractors under workers' or workmen's compensation
acts, disability benefit acts or other employee benefit acts.
4.6.3 The obligations of the Subcontractor under this Paragraph
4.6 shall not extent to the liability of the Architect Engineer, the
Architect's Engineer's consultants, and agents and employees of any of them
arising out of (1) the preparation or approval of maps, drawings, opinions,
reports, surveys, Change Orders, designs or specifications, or (2) the giving
of or the failure to give directions or instructions by the Architect
Engineer, the Architect's Engineer's consultants, and agents and employees of
any of them, provided such giving or failure to give is the primary cause of
the injury or damage.
4.7 REMEDIES FOR NONPAYMENT
4.7.1 If the Contractor does not pay the Subcontractor through
no fault of the Subcontractor, within seven days from the time payment should
be made as provided in this Agreement, the Subcontractor may, without
prejudice to other available remedies, upon several additional days' written
notice to the Contractor, stop the Work of this Subcontract until payment of
the amount owing has been received. The Subcontract Sum shall, by appropriate
adjustment, be increased by the amount of the Subcontractor's reasonable costs
of shutdown, delay and start-up.
ARTICLE 5
CHANGES IN THE WORK
5.1 The Owner may make changes in the Work by issuing Modifications
to the Prime Contract. Upon receipt of such a Modification issued subsequent
to the execution of the Subcontract Agreement, the Contractor shall promptly
notify the Subcontractor of the Modification. Unless otherwise directed by
the Contractor, the Subcontractor shall not thereafter order materials or
perform Work which would be inconsistent with the changes made by the
Modifications to the Prime Contract.
5.2 The Subcontractor may be ordered in writing by the Contractor,
without invalidating this Subcontract, to make changes in the Work within the
general scope of this Subcontract consisting of additions, deletions or other
revisions, including those required by Modifications to the Prime Contract
issued subsequent to the execution of this Agreement, the Subcontract Sum and
the Subcontract Time being adjusted accordingly. The Subcontractor, prior to
the commencement of such changed or revised Work, shall submit promptly to the
Contractor written copies of a claim for adjustment to the Subcontract Sum and
Subcontract Time for such revised Work in a manner consistent with
requirements of the Subcontract Documents.
5.3 The Subcontractor shall make claims promptly to the Contractor
for additional cost, extensions of time and damages for delays or other causes
in accordance with the Subcontract Documents. A claim which will affect or
become part of a claim which the Contractor is required to make under the
Prime Contract within a specified time period or in a specified manner shall
be made in sufficient time to permit the Contractor to satisfy the
requirements of the Prime Contract. Such claims shall be received by the
Contractor not less than two working days preceding the time by which the
Contractor's claim must be made. Failure of the Subcontractor to make such a
timely claim shall bind the Subcontractor to the same consequences as those to
which the Contractor is bound.
ARTICLE 6
ARBITRATION
6.1 Any controversy or claim between the Contractor and the
Subcontractor arising out of or related to this Subcontractor, or the breach
thereof, shall be settled by arbitration, which shall be conducted in the same
manner and under the same procedure as provided in the Prime Contract with
respect to claims between the Owner and the Contractor, except that a decision
by the Architect Engineer shall not be a condition precedent to arbitration.
If the Prime Contract does not provide for arbitration or fails to specify the
manner and procedure for arbitration, it shall be conducted in accordance with
the Construction Industry Arbitration Rules of the American Arbitration
Association currently in effect unless the parties mutually agree otherwise.
6.2 Except by written consent of the person or entity sought to be
joined, no arbitration arising out of or relating to the Subcontract shall
include, by consolidation or joinder or in any other manner, any person or
entity not a party to the Agreement under which such arbitration arises,
unless it is shown at the time the demand for arbitration is filed that (1)
such person or entity is substantially involved in a common question of fact
or law, (2) the presence of such person or entity is required if complete
relief is to be accorded in the arbitration, (3) the interest or
responsibility of such person or entity in the matter is not insubstantial,
and (4) such person or entity is not the Architect Engineer, the Architect's
Engineer's employee, the Architect's Engineer's consultant, or an employee or
agent of any of them. This agreement to arbitrate and any other written
agreement to arbitrate with an additional person or persons referred to herein
shall be specifically enforceable under applicable law in any court having
jurisdiction thereof.
6.3 The Contractor shall give the Subcontractor prompt written notice
of any demand received or made by the Contractor for arbitration if the
dispute involves or relates to the Work, materials, equipment, rights or
responsibilities of the Subcontractor. The Contractor shall consent to
inclusion of the Subcontractor in the arbitration proceeding whether by
joinder, consolidation or otherwise, if the Subcontractor requests in writing
to be included within ten days after receipt of the Contractor's notice.
6.4 The award rendered by the arbitrator or arbitrators shall be
final, and judgment may be entered upon it in accordance with applicable law
in any court having jurisdiction thereof.
6.5 This Article 6 shall not be deemed a limitation of rights or
remedies which the Subcontractor may have under Federal law, under state
mechanics' lien laws, or under applicable labor or material payment bonds
unless such rights or remedies are expressly waived by the Subcontractor.
ARTICLE 7
TERMINATION, SUSPENSION OR ASSIGNMENT OF THE SUBCONTRACT
7.1 TERMINATION BY THE SUBCONTRACTOR
7.1.1 The Subcontractor may terminate the Subcontract for the
same reasons and under the same circumstances and procedures with respect to
the Contractor as the Contractor may terminate with respect to the Owner under
the Prime Contract, or for nonpayment of amounts due under this Subcontract
for 60 days or longer. In the event of such termination by the Subcontractor
for any reason which is not the fault of the Subcontractor, Sub-subcontractors
or their agents or employees or other persons performing portions of the Work
under contract with the Subcontractor, the Subcontractor shall be entitled to
recover from the Contractor payment for Work executed and for proven loss with
respect to materials, equipment, tools, and construction equipment and
machinery, including reasonable overhead, profit and damages.
7.2 TERMINATION BY THE CONTRACTOR
7.2.1 If the Subcontractor persistently or repeatedly fails or
neglects to carry out the Work in accordance with the Subcontract Documents or
otherwise to perform in accordance with this Agreement and fails within seven
days after receipt of written notice to commence and continue correction of
such default or neglect with diligence and promptness, the Contractor may,
after seven days following receipt by the Subcontractor of an additional
written notice and without prejudice to any other remedy the Contractor may
have, terminate the Subcontract and finish the Subcontractor's Work by
whatever method the Contractor may deem expedient. If the unpaid balance of
the Subcontract Sum exceeds the expense of finishing the Subcontractor's Work,
such excess shall be paid to the Subcontractor, but if such expense exceeds
such unpaid balance, the Subcontractor shall pay the difference to the
Contractor.
7.3 ASSIGNMENT OF THE SUBCONTRACTOR
7.3.1 In the event of termination of the Prime Contract by the
Owner, the Contractor may assign this Subcontract to the Owner, with the
Owner's agreement, subject to the provisions of the Prime Contract and to the
prior rights of the surety, if any, obligated under bonds relating to the
Prime Contract. If the Work of the Prime Contract has been suspended for more
than 30 days, the Subcontractor's compensation shall be equitably adjusted.
7.3.2 The Subcontractor shall not assign the Work of this
Subcontract without the written consent of the Contractor, nor subcontract the
whole of this Subcontract without the written consent of the Contractor, nor
further subcontract portions of this Subcontract without written notification
to the Contractor when such notification is required by the Contractor.
ARTICLE 8
THE WORK OF THIS SUBCONTRACT
8.1 The Subcontractor shall execute the following portion of the Work
described in the Subcontract Documents, including all labor, materials,
equipment, services and other items required to complete such portion of the
Work, except to the extent specifically indicated in the Subcontract Documents
to be the responsibility of others:
(Insert a precise description of the Work of this Subcontract, referring where
appropriate to numbers of Drawings, sections of Specifications and pages of
Addenda, Modifications and accepted Alternates.)
Supply complete CNG System including shipping to College Point site as per
proposal. Provide installation assistance and start-up. HVAC to be connected
by installation contractor.
ARTICLE 9
DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION
9.1 The Subcontractor's date of commencement is the date from which
the Contract Time of Paragraph 9.3 is measured; it shall be the date of this
Agreement, as first written above, unless a different date is stated below or
provision is made for the date to be fixed in a notice to proceed issued by
the Contractor.
(Insert the date of commencement, if it differs from the date of this
Agreement or, if applicable, state that the date will be fixed in a notice to
proceed.)
Date Established by Purchase Order.
9.2 Unless the date of commencement is established by a notice to
proceed issued by the Contractor, or the Contractor has commenced visible Work
at the site under the Prime Contract, the Subcontractor shall notify the
Contractor in writing not less than five days before commencing the
Subcontractor's Work to permit the timely filing of mortgages, mechanic's
liens and other security interests.
9.3 The Work of this Subcontract shall be substantially completed not
later than
(Insert the calendar date or number of calendar days after the Subcontractor's
date of commencement. Also insert any requirements for earlier Substantial
Completion of certain portions of the Subcontractor's Work, if not stated
elsewhere in the Subcontract Documents.)
November 7, 1997
Equipment shall be delivered in accordance with the attached schedule, subject
to adjustments of this Subcontract Time as provided in the Subcontract
Documents.
(Insert provisions, if any, for liquidated damages relating to failure to
complete on time.)
9.4 Time is of the essence of this Subcontract.
9.5 No extension of time will be valid without the Contractor's
written consent after claim made by the Subcontractor in accordance with
Paragraph 5.2.
ARTICLE 10
SUBCONTRACT SUM
10.1 The Contractor shall pay the Subcontractor in current funds for
performance of the Subcontract the Subcontract Sum of Dollar ($ See Attached
------------
Schedule of Prices), subject to additions and deductions as provided in the
-------------------
Subcontract Documents.
-
10.2 The Subcontract Sum is based upon the following alternates, if
any, which are described in the Subcontract Documents and have been accepted
by the Owner and the Contractor:
(Insert the numbers or other identification of accepted alternates.)
10.3 Unit prices, if any, are as follows:
See Attached Schedule of Prices
- -----------------------------------
ARTICLE 11
PROGRESS PAYMENTS
11.1 Based upon applications for payment submitted to the Contractor
by the Subcontractor, corresponding to Applications for Payment submitted by
the Contractor to the Architect Engineer, and Certificates for Payment issued
by the Architect Meridian, the Contractor shall make progress payments on
account of the Subcontract Sum to the Subcontractor as provided below and
elsewhere in the Subcontract Documents.
11.2 The period covered by each application for payment shall be one
calendar month ending on the last day of the month, or as follows:
See attached supplemental payment schedule.
- ----------------------------------------------
11.3 Provided an application for payment is received by the
Contractor not later than the 1st day of a month, the Contractor shall include
the Subcontractor's Work covered by that application in the next Application
for Payment which the Contractor is entitled to submit to the Architect. The
Contractor shall pay the Subcontractor each progress payment within three
working days after the Contractor receives payment from the Owner. If the
Architect does not issue a Certificate for Payment or the Contractor does not
receive payment for any cause which is not the fault of the Subcontractor, the
Contractor shall pay the Subcontractor, on demand, a progress payment computed
as provided in Paragraphs 11.7 and 11.8.
11.4 If an application for payment is received by the Contract after
the application date fixed above, the Subcontractor's Work covered by it shall
be included by the Contractor in the next Application for Payment submitted to
the Architect.
11.5 Each application for payment shall be based upon the most recent
schedule of values submitted by the Subcontractor in accordance with the
Subcontract Documents. The schedule of values shall allocate the entire
Subcontract Sum among the various portions of the Subcontractor's Work and be
prepared in such form and supported by such data to substantiate its accuracy
as the Contractor may require. This schedule, unless objected to by the
Contractor, shall be used as a basis for reviewing the Subcontractor's
applications for payment.
11.6 Applications for payment submitted by the Subcontractor shall
indicate the percentage of completion of each portion of the Subcontractor's
Work as of the end of the period covered by the application for payment.
11.7 Subject to the provisions of the Subcontract Documents, the
amount of each progress payment shall be computed as follows: See
---
Supplemental Payment Terms Attachment.
- ----------------------------------------
11.7.1 Take that portion of the Subcontract Sum properly
allocable to completed Work as determined by multiplying the percentage
completion of each portion of the Subcontractor's Work by the share of the
total Subcontract Sum allocated to that portion of the Subcontractor's Work in
the schedule of values, less than percentage actually retained, if any, from
payments to the Contractor on account of the Work of the Subcontractor.
Pending final determination of cost to the Contractor of changes in the Work
which have been properly authorized by Construction Change Directive, amounts
not in dispute may be included to the same extent provided in the Prime
Contract, even though the Subcontract Sum has not yet been adjusted;
11.7.2 Add that portion of the Subcontract Sum properly
allocable to materials and equipment delivered and suitably stored at the site
by the Subcontract for subsequent incorporation in the Subcontractor's Work
or, if approved in advance by the Owner, suitably stored off the site at a
location agreed upon in writing, less the same percentage retainage required
by the Prime Contract to be applied to such materials and equipment in the
Contractor's Application for Payment;
11.7.3 Subtract the aggregate of previous payments made by the
Contractor; and
11.7.4 Subtract amounts, if any, calculated under Subparagraph
11.7.1 or 11.7.2 which are related to Work of the Subcontractor for which the
Architect has withheld or nullified, in whole or in part, a Certificate of
Payment for a cause which is the fault of the Subcontractor.
11.8 SUBSTANTIAL COMPLETION
11.8.1 When the Subcontractor's Work or a designated portion
thereof is substantially complete and in accordance with the requirements of
the Prime Contract, the Contractor shall, upon application by the
Subcontractor, make prompt application for payment for such Work. Within 30
days following issuance by the Architect of the Certificate for Payment
covering such substantially completed Work, the Contractor shall, to the full
extent allowed in the Prime Contract, make payment to the Subcontractor,
deducting any portion of the funds for the Subcontractor's Work withheld in
accordance with the Certificate to cover costs of items to be completed or
corrected by the Subcontractor. Such payment to the Subcontractor shall be
the entire unpaid balance of the Subcontract Sum if a full release of
retainage is allowed under the Prime Contract for the Subcontractor's Work
prior to the completion of the entire Project. If the Prime Contract does not
allow for a full release of retainage, then such payment shall be an amount
which, when added to previous payments to the Subcontractor, will reduce the
retainage on the Subcontractor's substantially completed Work to the same
percentage of retainage as that on the Contractor's Work covered by the
Certificate.
ARTICLE 12
FINAL PAYMENT
12.1 Final payment, constituting the entire unpaid balance of the
Subcontract Sum, shall be made by the Contractor to the Subcontractor when the
Subcontractor's Work is fully performed in accordance with the requirements of
the Contract Documents, the Architect has issued a Certificate for Payment
covering the Subcontractor's Completed Work and the Contractor has received
payment from the Owner. If, for any cause which is not the fault of the
Subcontractor, a Certificate for Payment is not issued or the Contractor does
not receive timely payment or does not pay the Subcontractor within three
working days after receipt of payment from the Owner, final payment to the
Subcontractor shall be made upon demand.
(Insert provisions for earlier final payment to the Subcontractor, if
applicable.)
12.2 Before issuance of the final payment, the Subcontractor, if
required, shall submit evidence satisfactory to the Contractor that all
payrolls, bills for materials and equipment, and all known indebtedness
connected with the Subcontractor's Work have been satisfied.
ARTICLE 13
INSURANCE AND BONDS
13.1 The Subcontractor shall purchase and maintain insurance of the
following types of coverage and limits of liability:
13.2 Coverages, whether written on an occurrence or claims-made
basis, shall be maintained without interruption from date of commencement of
the Subcontractor's Work until date of final payment and termination of any
coverage required to be maintained after final payment.
13.3 Certificates of insurance acceptable to the Contractor shall be
filed with the Contractor prior to commencement of the Subcontractor's Work.
These certificates and the insurance policies required by this Article 13
shall contain a provision that coverages afforded under the policies will not
be cancelled or allowed to expire until at least 30 days' prior written notice
has been given to the Contractor. If any of the foregoing insurance coverages
are required to remain in force after final payment and are reasonably
available, an additional certificate evidencing continuation of such coverage
shall be submitted with the final application for payment as required in
Article 12. If any information concerning reduction of coverage is not
furnished by the insurer, it shall be furnished by the Subcontractor with
reasonable promptness according to the Subcontractor's information and belief.
13.4 The Contractor shall furnish to the Subcontractor satisfactory
evidence of insurance required of the Contractor under the Prime Contract.
13.5 Waives of Subrogation. The Contractor and Subcontractor waive
all rights against (1) each other and any of their Subcontractors,
Sub-subcontractors, agents and employees, each of the other, and (2) the
Owner, the Architect, the Architect's consultants, separate contractors, and
any of their subcontractors, sub-subcontractors, agents and employees for
damages caused by fire or other perils to the extent covered by property
insurance provided under the Prime Contract or other property insurance
applicable to the Work, except such rights as they may have to proceeds of
such insurance held by the Owner as fiduciary. The Subcontractor shall
require of the Subcontractor's Sub-subcontractors, agents and employees, by
appropriate agreements, written where legally required for validity, similar
waivers in favor of other parties enumerated herein. The policies shall
provide such waivers of subrogation by endorsement or otherwise. A waiver of
subrogation shall be effective as to a person or entity even though that
person or entity would otherwise have a duty of indemnification, contractual
or otherwise, did not pay the insurance premium directly or indirectly, and
whether or not the person or entity had an insurable interest in the property
damaged.
13.6 The Contractor shall promptly, upon request of the
Subcontractor, furnish a copy or permit a copy to be made of any bond covering
payment of obligations arising under the Subcontract.
13.7 Performance Bond and Payment Bond:
(If the Subcontractor is to furnish bonds, insert the specific requirements
here.)
100% Performance and Payment Bonds in a form acceptable to the Contractor
- ------------------------------------------------------------------------------
(Contractor Provided Form).
- ----------------------------
ARTICLE 14
TEMPORARY FACILITIES AND WORKING CONDITIONS
14.1 The Contractor shall furnish and make available to the
Subcontractor the following temporary facilities, equipment and services;
these shall be furnished at no cost to the Subcontractor unless otherwise
indicated below:
None
- ----
14.2 Specific working conditions:
(Insert any applicable arrangements concerning working conditions and labor
matters for the project.)
Subcontractor is familiar with and shall be responsible for all working
- ------------------------------------------------------------------------------
conditions including labor laws and other applicable New York City and State
- ------------------------------------------------------------------------------
laws pertaining to the subcontractor's work statement.
- -----------------------------------------------------------
ARTICLE 15
MISCELLANEOUS PROVISIONS
15.1 Where reference is made in this Agreement to a provision of the
General Conditions or another Subcontract Document, the reference refers to
that provision as amended or supplemented by other provisions of the
Subcontract Documents.
15.2 Payments due and unpaid under this Subcontract shall bear
interest from the date payment is due at such rate as the parties may agree
upon in writing or, in the absence thereof, at the legal rate prevailing from
time to time at the place where the Project is located.
(Insert rate of interest agreed upon, if any.)
(Usury Law's and requirements under the Federal Truth in Lending Act similar
state and local consumer credit Law's and other regulations at the Owner's,
Contractor's and Subcontractor's principal places of business, the location of
the Project and elsewhere may affect the validity of this provision. Legal
advice should be obtained with respect to deletions or modifications, and also
regarding requirements such as written disclosures or waivers.)
ARTICLE 16
ENUMERATION OF SUBCONTRACT DOCUMENTS
16.1 The Subcontract Documents, except for Modifications issued after
execution of this Agreement, are enumerated as follows: Proposal Ref No.
----------------
97-10350 from Penn Wilson CNG to AESE Inc. herein by referenced Purchase Order
--------------------------------------------------------------------------
Ref. No. 1114 from AESE to Penn Wilson CNG.
- --------------------------------------------------
16.1.1 This executed Standard Form of Agreement Between
Contractor and Subcontractor, AIA Document A401, 1987 Edition;
16.1.2 The Prime Contract, consisting of the Agreement between
the Owner and Contractor dated as first entered above and the other Contract
Documents enumerated in the Owner-Contractor Agreement; Conditions of the
Contract (General, Supplementary and other Conditions), Drawings,
Specifications, Addenda and other documents enumerated therein;
16.1.3 The following Modifications to the Prime Contract, if
any, issued subsequent to the execution of the Owner-Contractor Agreement but
prior to the execution of this Agreement:
MODIFICATION DATE
16.1.4 Other Documents, if any, forming part of the Subcontract
Documents are as follows:
(List any additional documents which are intended to from part of the
Subcontract Documents. Requests for proposal and the Subcontractors bid or
proposal should be listed here only if intended to be part of the Subcontract
Documents).
The following documents are incorporated by reference: Proposal from Penn
- ------------------------------------------------------------------------------
Wilson CNG to AESE, Joint Proposal to NYC DOT, Contract Specifications,
- ------------------------------------------------------------------------------
Technical Specifications, Tables proided by Penn Wilson CNG, Supplemental
- ------------------------------------------------------------------------------
Payment Schedule and Project Schedule.
- -----------------------------------------
This Agreement entered into as of the day and year first written above.
CONTRACTOR SUBCONTRACTOR
(Signature) (Signature)
/s/ Tom Soper /s/ John Weber
- ------------- ---------------
Tom Soper Penn wilson CNG
- ---------- ---------------
(Printed name and title) (Printed name and title)
<PAGE>
SUPPLEMENTAL PAYMENT SCHEDULE
1. Bimonthly billings will be permitted.
2. Regular progress payments shall be based on the Engineers estimate of
percent complete.
3. Payment for completed major equipment components including engines,
compressors, dryers and storage vessels shall be based on the engineers shop
floor inspection. Subcontractor shall be entitled to payment of 85% of line
item totals for each major component items based on Engineers inspection.
4. Subcontractor shall be entitled to bill contractor up to 95% of
contract amount upon arrival of equipment on site.
5. Contract shall provide $100,000 to subcontractor for initial
mobilization cost.
6. Contract shall provide a copy of his performance and payment bond to
the subcontractor.
7. This subcontract shall take precedence in the event of any discrepancy
between this subcontract and the prime contract.
8. Certificate of Insurance for stored equipment/storage facility shall be
required as a condition of shop floor equipment payments.
9. Evidence of sale shall be provided to state NYC DOT as the owner of the
equipment.
UNION CARBIDE CORPORATION
39 Old Ridgebury Road Danbury, CT 06817-0001
D.B. Jones Phone: (203) 794-3443
BUSINESS CONFIDENTIAL
July 31, 1997
Mr. Jerry Richter
Penn Octane Corporation
900 Veterans Boulevard, Suite 240
Redwood City, CA 94063
Re: Purchase Agreement 0515-007182
Dear Jerry,
Confirming our conversation today, it is agreed that for deliveries by tank
trucks, the price of propylene will be the US Gulf Coast Polymer Grade marker
price, as reported by CMAI, less 2.0 cents per pound. The discount will be
2.5 cents per pound once shipments are made by rail cars, or as of September
15, 1997 which ever comes first.
Please sign both originals of this letter and return one signed original to me
for our files.
Very truly yours,
D.B. Jones
Agreed to by:
/s/ Jerry Richter
- -------------------------------------- --------------------------------------
PENN OCTANE COMPANY DATE
DBJ/lr
<PAGE>
UNION CARBIDE CORPORATION
PURCHASE AGREEMENT
Sellers Agreement No. UCC.#1 Union Carbide Corporation
Agreement No. 0515-007182
AGREEMENT made this 1st day of July, 1997 between UNION CARBIDE CORPORATION, a
New York corporation (hereinafter called "UCC") and Penn Octane Corporation
(hereinafter called "SELLER") 900 Veterans Boulevard, Suite 240, Redwood City,
California 94063 a Corporation.
SELLER shall sell and deliver to UCC and UCC shall purchase from SELLER the
PRODUCT described below, upon the terms contained in the BOXES below, in the
GENERAL PROVISIONS hereinafter set forth, and in each RIDER, if and, listed
below, all attached hereto and made a part hereof.
Fill in required information in appropriate BOXES. If insufficient space,
attach a RIDER containing the appropriate information, mark it with
identifying Number and Title and insert in the applicable BOX. "See Rider No.
(insert identifying number)."
<TABLE>
<CAPTION>
<S> <C> <C>
A. PRODUCT Propylene
B. SPECIFICATIONS See Rider No. 1
C. PLACE OF DELIVERY UCC's Plant at Texas City, Texas
D. MEANS OF TRANSPORTATION Rail Cars and Tank Trucks
E. CONTAINERS Tank Trucks and Rail Cars
SELLER is responsible for furnishing tank trucks
and rail cars that meet DOT requirements.
F. DELIVERY PERIOD August 1, 1997 through July 31, 1998 and
continuing thereafter unless terminated by either
party giving written notice not less than ninety
(90) days prior to the effective date of
termination.
G. RATE OF DELIVERY Nine (9) million pounds per month or as mutually
agreed by both parties.
H. QUANTITY One hundred eight (108) Million Pounds
I. PRICE The monthly price for Product will be the final
US Gulf Coast Polymer Grade contract marker
price for such month as reported in the CMAI
Monomers Market Report less 2.5 cents per
pound.
For reference, the final US Gulf Coast Polymer
Grade market price for product in June 1997 was
21.25 cents per pound and the monthly price
would have been 18.75 cents per pound.
J. INVOICES AND TERMS OF
PAYMENT INVOICE PAYMENT TERMS:
NET TEN (10) DAYS from receipt of invoice
and supporting documentation.
Payment will be by wire transfer:
PENN OCTANE CORPORATION
c/o Bay Area Bank
Account No. 04479601
ABA No. 121137661
SEND INVOICES TO:
UNION CARBIDE CORPORATION
Attn: Dawna Kessler
Building 2000, Room 1414
P.O. Box 8361
South Charleston, WV 25303
Please refer to UCC's Agreement Number 0515--
007182 on all invoices and supporting
documentation.
K. QUANTITY AND QUALITY
DETERMINATION UCC's truck or rail scale tickets for Tank Trucks
or Rail Cars.
L. FREIGHT CHARGES Account of SELLER
M. COMMUNICATIONS ADDRESS UNION CARBIDE CORPORATION
39 Old Ridgebury Road
Danbury, CT 06817-0001
ATTN: D.B. Jones - Olefins Supply and Product Manager
SELLER'S Address:
PENN OCTANE CORPORATION
900 Veterans Boulevard, Suite 240
Redwood City, CA 94063
Attn: J. Richter
</TABLE>
PENN OCTANE CORPORATION UNION CARBIDE CORPORATION
(Name of SELLER)
By: /s/ J. Richter By: /s/ D.B. Jones
---------------------------------- --------------------------------------
D.B. Jones
TITLE: President TITLE: Olefins Supply and Product Manager
PLACE OF SIGNING: Danbury, CT
LIST OF RIDERS
RIDER NO. TITLE OF RIDER
1 Refinery Grade Propylene Specifications
<PAGE>
GENERAL PROVISIONS UNION CARBIDE CORPORATION
AGREEMENT NO. 0515-007182
SECTION 1. PRICE
Except as set forth in this Agreement or as otherwise agreed upon in
writing by the parties hereto, all prices specified in this Agreement are firm
and are not subject to adjustment except as set forth in Rider No. 3 and no
charge shall made by SELLER to UCC for any CONTAINERS or other packaging
materials or services furnished by SELLER in connection with PRODUCT.
SECTION 2. INVOICES AND PAYMENT TERMS
Unless otherwise specified in the BOX entitled "INVOICES AND TERMS OF
PAYMENT", an invoice shall be rendered by SELLER to UCC at the address
specified for such purposes in said BOX within a reasonable time after each
delivery made hereunder and setting forth the quantity of PRODUCT included in
such delivery and the amount due hereunder for such quantity, and payment
shall be made by UCC to SELLER at the address specified for such purposes in
said invoice for the correct amount of such invoice so rendered.
SECTION 3. TAXES
Except as provided in Section 4 with respect to Sales and Use Taxes, and
except as otherwise agreed in writing by UCC and SELLER, SELLER shall be
liable for all taxes, excises, and other governmental charges which are
enacted prior to the date of this Agreement and required to be paid or
collected by SELLER under any federal, state or other law, applicable to the
production, processing,l severance, transportation, storage or delivery of any
or all PRODUCT hereunder, or to income, profits, or receipts received by
SELLER for such PRODUCT.
SECTION 4. RELEASES
UCC shall issue written releases to SELLER covering all deliveries to be
made by SELLER hereunder,r in no event shall SELLER make any delivery
hereunder until after its receipt of the authorized release issued by UCC
covering such delivery. UCC shall notify SELLER in writing of the person or
persons authorized to issue such releases. Each such release shall set forth
the following: A statement identifying such release to this Agreement, the
number by which such release shall be identified; a description for PRODUCT to
be shipped, the quantity of PRODUCT to be delivered; the means of
transportation and name of carrier, a description of container; the date of
delivery, the place of delivery, the Sales and/or Use Tax Status of the
quantity of PRODUCT to be delivered; and invoicing instructions. In case of a
conflict between any of the terms of any such release and any of the terms set
forth in the BOXES, GENERAL PROVISION or RIDERS, the former terms shall
control. There shall be no limitation on the number of releases issued
hereunder.
SECTION 5. DELIVERIES
Where the PLACE OF DELIVERY of PRODUCT is the place of shipment, SELLER
shall, at its own expense, provide, maintain and operate suitable facilities
for making deliveries of such PRODUCT, and when the PLACE OF DELIVERY of
PRODUCT is the place of destination, UCC shall, at its own expense, provide,
maintain and operate suitable facilities for receiving deliveries of such
PRODUCT; provided, however, that, except as hereinafter provided in this
SECTION, all loading and unloading equipment customarily furnished with the
CONTAINERS shall be provided, maintained and operated by the party hereto
responsible for furnishing such CONTAINERS. Unless otherwise agreed upon in
writing by the parties hereto, SELLER shall perform all loading functions, at
its own expense, and UCC shall perform all unloading functions,l at its own
expense. Deliveries shall be made at the applicable RATE OF DELIVERY and at
the applicable PLACE OF DELIVERY; provided, however, that the particular time
and quantity of each delivery shall be specified UCC to SELLER reasonably in
advance of such delivery, together with all necessary shipping instructions
for such delivery which are not set forth in the BOXES.
SECTION 6. TRANSPORTATION, CONTAINERS
When the PLACE OF DELIVERY of PRODUCT is the place of shipment, UCC shall
either transport such PRODUCT from such place or cause a carrier or carriers
to transport such PRODUCT from such place; and if such transportation is by
means of ship or barge, such ship or barge shall also be furnished by UCC or
such carrier or carriers shall either be named by UCC in the BOX entitled
"MEANS OF TRANSPORTATION" or by UCC at a later date. When the PLACE OF
DELIVERY of PRODUCT is the place of destination SELLER shall either transport
such PRODUCT to destination or cause a carrier or carriers to transport such
PRODUCT to such destination; and if such transportation is by means of ship or
barge, such ship or barge shall also be furnished by SELLER or such carrier or
carriers. Such carrier or carriers shall either be named by SELLER in the BOX
entitled "MEANS OF TRANSPORTATION" or by SELLER at a later date. When hopper
cars, tank cars or other rail cars are furnished by SELLER as CONTAINERS for
making any shipment hereunder and such hopper cars, tank cars or other rail
cars are not supplied by a common carrier, then such hopper cars, tank cars or
other rail cars shall be trip leased by SELLER to UCC. Upon mutually agreed
terms and conditions.
SECTION 7. TITLE AND RISK OF LOSS
Title to, and risk of loss of, PRODUCT delivered hereunder shall pass at
the following applicable points:
(a) when the PLACE OF DELIVERY is the place of shipment and such
PRODUCT leaves the place of shipment by ship or barge or truck, at the point
such PRODUCT enters such barge, ship or truck at the point such PRODUCT enters
such barge, s hip or truck, or if prior to entering such ship or barge or
truck such PRODUCT enters the loading equipment furnished by and attached or
affixed to such ship or barge or truck, then at the point such PRODUCT enters
such loading equipment;
(b) when the PLACE OF DELIVERY is the place of shipment and such
PRODUCT leaves the place of shipment by rail, at the point where the carrier
accepts the shipment;
(c) when the PLACE OF DELIVERY is the place of destination and such
PRODUCT arrives at the place of destination by barge or ship or truck, at the
point such barge, ship or truck is ready for unloading facilities designated
by UCC for unloading;
(d) when the PLACE OF DELIVERY is the place of destination and such
PRODUCT arrives at the place of destination by rail, at the point where the
shipment is delivered by the carrier to UCC.
SECTION 8. QUANTITY AND QUALITY DETERMINATION
The quantity of PRODUCT delivered to SELLER shall be determined in
accordance with the method specified in the BOX entitled "QUANTITY AND QUALITY
DETERMINATION," or if a method is not specified, in accordance with customary
industry procedures. The quality of PRODUCT delivered hereunder shall be
determined in accordance with the method specified in the BOX entitled
'QUANTITY AND QUALITY DETERMINATION," or if a method is not so specified, by
sampling and analysis in accordance with customary industry procedures. In
the event and to the extent it is not specified in the BOX entitled "QUALITY
AND QUALITY DETERMINATION" that the quantity and/or quality determination of
PRODUCT delivered is to be made by an independent Party, such determination
shall be made by SELLER in accordance with the applicable method or procedure
provided for in this Section, and shall be final and binding with respect to
such PRODUCT so delivered unless proven to be in error. Promptly following
each delivery of PRODUCT hereunder, SELLER shall give a written report to UCC
setting forth the quantity and quality determination of the PRODUCT so
delivered. In the event it is specified in the BOX entitled "QUANTITY AND
QUALITY DETERMINATION" that the quantity and/or quality determination of
PRODUCT delivered hereunder is to be made by an independent Party, SELLER
shall make all necessary arrangements with such independent Party and shall
require that such determination be made in accordance with the applicable
method and procedures described above and that a written report of such
quantity and/or determination shall be promptly given by such independent
Party to each party hereto at the applicable address provided for in Section
15 of these GENERAL PROVISIONS. The quantity and/or quality determination of
such Independent Party, as set forth in such report, shall be final and
binding with respect to such PRODUCT so delivered, and the expense of hiring
such independent Party shall be shared equally by the parties hereto, unless
otherwise specified in said BOX. If an independent Party is specified, but
not named, in said BOX, Seller shall select such Independent Party.
SECTION 9. FORCE MAJEURE
Neither party shall be liable for its failure to perform hereunder due to
any occurrence beyond its reasonable control, including but not limited to
Seller's failure to perform as a result of its failure to produce, transport
or deliver PRODUCT due to any such occurrence, or Buyer's failure to perform
as a result of its failure to use or consume PRODUCT due to any such
occurrence. The aforesaid occurrences shall include acts of God, fires,
floods,l wars, sabotage, accidents, labor disputes or shortages, governmental
laws, ordinances, rules and regulations,l whether valid or invalid (including
but not limited to priorities, requisitions, allocations,l and price
adjustment restrictions), inability to obtain material, equipment or
transportation,a nd any other similar or different occurrence. The failing
party shall notify the other party thereof in writing as soon as its
reasonably possible after the commencement of such occurrence, setting forth
the full particulars in connection therewith, shall remedy such occurrence
with all reasonable dispatch, and shall promptly give written notice to the
other party of the cessation of such occurrence. Any delivery of PRODUCT
omitted at the time or times required for such delivery hereunder due to
either party's failure to perform its obligations hereunder due to any such
occurrence shall be omitted from this Agreement and the DELIVERY PERIOD for
such PRODUCT shall not be extended. If, due to any such occurrence, SELLER is
unable to make any delivery or deliveries at the time or times required under
this Agreement, SELLER shall have the right to allocate its available supply
among its customers and its departments and divisions in a fair and equitable
manner. In no event shall SELLER be obligated to purchase PRODUCT from others
in order to enable it to deliver product to UCC hereunder.
SECTION 10. WARRANTIES
SELLER warrants that PRODUCT delivered by it hereunder meets the
specifications for such PRODUCT hereunder and that such PRODUCT is adequately
contained, packages and labeled and conforms to the promises and affirmations
of fact made on the CONTAINER and label. NO WARRANTIES, INCLUDING BUT NOT
LIMITED WARRANTY OF MERCHANTABILITY AND WARRANTY OF FITNESS FOR A PARTICULAR
PURPOSE SHALL BE IMPLIED.
SECTION 11. CHANGES
Should SELLER contemplate as to PRODUCT any change in (i) formulation,
(ii) specifications or test methods, (iii) manufacturing or production methods
or processes, and/or (iv) raw materials or their source, SELLER shall promptly
notify UCC in writing prior to implementing any such change, setting forth
sufficient information as to the nature of the change and SELLER'S assessment
of (a) the impact of such change on PRODUCT, and (b) if known to SELLER, the
impact of such change on the use or uses for PRODUCT. SELLER shall not
implement such change with respect to PRODUCT to be delivered hereunder
without UCC's prior written approval. Should SELLER proceed without such
approval, UCC may suspend further purchases and terminate this Agreement as to
such PRODUCT without prejudice to UCC's exercise of any other rights and
remedies it may have against SELLER. SELLER shall indemnify and hold UCC, its
successors and assigns, harmless from any and all claims, losses, liabilities,
damages and expenses of every character whatsoever arising out of or in
connection with any unapproved change affecting PRODUCT delivered hereunder.
SECTION 12. PATENT INDEMNITY
Except as hereinafter limited, SELLER shall protect and indemnify UCC
from and against any and all claims, damages, judgments, expenses and loss
arising from infringement or alleged infringement of any patent of the United
States by any of the PRODUCT delivered hereunder, and SELLER shall defend or
settle, at its own expense, any suit or proceeding brought against UCC for
such infringement; provided that SELLER is notified promptly in writing of the
commencement of such suit or proceeding and is given authority, information
and assistance by UCC for the defense or settlement thereof; and provide
further that UCC shall not settle or compromise any such suit or proceeding
without the prior written consent of SELLER. Furthermore, in the event that
UCC should be enjoined in such suit or proceeding from suing any of the
PRODUCT delivered hereunder. SELLER, at its option, shall promptly either (i)
secure liability, (ii) replace said PRODUCT with noninfringing PRODUCT or
modify same to become noninfringing, all at SELLER'S expense and to UCC's
satisfaction, or (iii) remove said PRODUCT at SELLER'S expense and refund to
UCC the amount paid to SELLER therefore. The provisions of this Section,
however, shall not apply to the use of any of the PRODUCT delivered hereunder
in combination with other materials or in the practice of any process, or to
infringement by reason of such use.
SECTION 13. CLAIMS
Receipt by UCC of any PRODUCT delivered hereunder shall be an unqualified
acceptance of,a nd a waiver by UCC of any and all claims with respect to, such
PRODUCT, unless UCC gives SELLER written notice of claim within thirty (30)
days after (a) the date of such PRODUCT arrives at the destination specified
by UCC to SELLER in the shipping instructions for such PRODUCT; or (b) the
earliest date on which the basis for such claim becomes reasonably
discoverable by UCC, whichever date is the later. UCC assumes all risk and
liability for the results obtained by the use in manufacturing processes of
UCC or in combination with other substances or any product which is delivered
to it hereunder and which meets the specifications of such PRODUCT contained
in or referred to in this Agreement. In no event shall either party be liable
for special , indirect or consequential damages.
SECTION 14. FAIR LABOR STANDARDS ACT
SELLER agrees that all Product delivered by it hereunder will be produced
in compliance with the Fair Labor Standards Act, as amended, and agrees to so
certify on its invoices if so directed by a stamp placed on the face of this
Agreement.
SECTION 15. NOTICES
Any notice, request, report, statement or other communication to be given
in writing under this Agreement shall be deemed to have been given by either
party to the other party:
(a) upon the date of the mailing thereof to such other party by
registered or certified mail, as shown on the Post Office receipt, at the
applicable address set forth in the BOX entitled "COMMUNICATIONS ADDRESS" or
at such other address as such other party may specify from time to time in
writing;
(b) if not so mailed by registered or certified mail, upon the date
of the receipt thereof such other party.
SECTION 16. MISCELLANEOUS
No modification of, addition to, or waiver of any of the terms of this
Agreement (a) shall be binding upon either party unless in writing and signed
by an authorized representative of such party; or (b) shall be effected by the
acknowledgement or acceptance of purchase order or other forms containing
additional or different terms of conditions, whether or not signed by an
authorized representative of such party. No waiver by either party of any
breach by the other party of any of the terms of this Agreement shall be
construed as a waiver of any subsequent breach, whether of the same or of a
different term of this Agreement. Any assignment of this Agreement by SELLER
without the written consent of UCC shall be void. THE VALIDITY,
INTERPRETATION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAW
OF THE STATE OF TEXAS, WITHOUT REFERENCE TO ITS PRINCIPLES OF CONFLICTS OF
LAW. The rights and remedies of the parties set forth in this Agreement shall
not be exclusive and are in addition to all other rights and remedies of the
parties hereto. This Agreement sets forth the entire agreement between the
parties hereto with respect to the subject matter of this Agreement and
supersedes all prior understandings, negotiations and dealings between the
parties hereto with respect to such subject matter. Neither course of
performance, nor course of dealing, nor usage of trade shall be used to
qualify, explain or supplement any of the terms of this Agreement.
<PAGE>
UNION CARBIDE CORPORATION
AGREEMENT NO. 0515-007182
-----------
<TABLE>
<CAPTION>
RIDER NO. 1
POLYMER GRADE PROPYLENE
SPECIFICATION
REQUIREMENTS LIMITS METHOD
- ---------------------------- --------------------------------------- -----------
<S> <C> <C>
1. Propylene 98% by volume, min. Equivalent to 98% 1B-1C2-1.22
by weight, min.
2. Sulfur 3 ppm by weight, max. 1B-1C2-1.22
3. Total C4's 1100 ppm by volume, max. Equivalent to 1B-1C2-1.22
1400 ppm by weight, max.
4. Methylacetylene (propyne) 200 ppm by volume, max. Equivalent to 1B-1C2-1.22
and propadienc (allene) 190 ppm by weight, max.
5. Ethylene 1000 ppm by volume, max. Equivalent to 1B-1C2-1.22
650 ppm by weight, max.
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL QUALITY DESCRIPTIONS
The Supplier guarantees that this product also meets the following, but
analytical data is not required on the product quality report.
<S> <C> <C>
6. Acetylene 60 ppm by volume, max. Equivalent to 40 1B-1C2-1.22
ppm by weight, max.
7. Chlorides 10 ppm by weight, max. 1B-1C2-1.22
8. Methane plus ethane plus 2% by volume, max. Equivalent to 2% by 1B-1C2-1.22
propane weight, max.
9. Butadiene 100 ppm by volume, max. Equivalent to 1B-1C2-1.22
130 ppm by weight, max.
</TABLE>
RELEASE OF LIEN
Date: August __, 1997
Note:
Date: April 9, 1997
Original Amount: One Hundred Eighteen Thousand Two Hundred Forty-six
and 84/100 Dollars ($118,246.84)
Maker: Penn Octane Corporation
Payee: Lauren Constructors, Inc.
Date of Maturity: August 15, 1997
Holder of Note and Lien: Lauren Constructors, Inc.
Holder's Mailing Address: P.O. Box 1761, Abilene, Texas 79604-1761
Note and Lien are described
in the following document:
Deed of Trust dated April 9, 1997, executed by Penn Octane Corporation,
recorded in Volume 4305, Page 200, of the Official Records of Cameron County,
Texas, securing the payment of a note in the amount of One Hundred Eighteen
Thousand Two Hundred Forty-six and 84/100 Dollars ($118,246.84), payable to
the order of Lauren Constructors, Inc.
Property to be released from lien:
Grantor's leasehold interest in two tracts of land in Cameron County, Texas
described on Exhibit A.
Holder of the note acknowledges its payment and releases the property from the
lien(s).
When the context requires, singular nouns and pronouns include the plural.
Lauren Constructors, Inc.
BY: /s/ Cleve Whitener
--------------------
Cleve Whitener
ITS:
--------------------
P.M.I. TRADING LIMITED
SEPTEMBER 11, 1997.
DTIR-0242-1997.
TO: PENN OCTANE CORPORATION
ATT'N: MR. J.B. RICHTER
FAX: (415) 368-1505
P.M.I. TRADING LIMITED, IS PLEASED TO CONFIRM THE "LPG MIX" CONTRACT PURCHASE,
ACCORDING TO THE FOLLOWING TERMS AND CONDITIONS:
<TABLE>
<CAPTION>
<C> <S> <C>
(1) PMI ORDER NO.: WILL BE INFORMED MONTH BY MONTH IN OUR FAX OPERATION.
PLEASE REFER IN ALL DOCUMENTS TO PMI'S REFERENCE NUMBER.
(2) BUYER: P.M.I. TRADING LIMITED
----------------------------------------------------------
ADDRESS: AV. MARINA NACIONAL NO. 329
TORRE EJECUTIVA, PISO 20
COL. HUASTECA
11311 MEXICO, D.F.
COMMERCIAL CONTACT
------------------
NAME: LEOPOLDO SIMON / LORENA ROSAS / RODRIGO ARANDA
TELEPHONE No.: (52-5) 227-0121 / 227-0169 / 227-0158
TELEX No.: 1773671 / 1773509
FAX No.: (52-5) 227-0140 / (713) 567-0140
OPERATIONS CONTACT
------------------
NAME: VICTOR GOMEZ / ELIN VAZQUEZ / TYRONE PRATS
TELEPHONE No.: (52-5) 227-0114 / 227-1049 / 227-0157
TELEX No.: 1773871 / 1773509
FAX No.: (52-5) 227-0111 / (713) 567-0111
FINANCIAL CONTACT
------------------
NAME: LUIS GARNICA / JUAN CARLOS CABALLERO / FRANCISCO CERVANTES
TELEPHONE No.: (52-5) 227-0073
TELEX No.: 1773671 / 1773509
FAX No.: (52-5) 227-0072 / (713) 567-0072
(3) SELLER: PENN OCTANE CORPORATION
ADDRESS: 12118 SOUTH BLOOMFIELD
SANTA FE SPRINGS, CA 90670
COMMERCIAL CONTACT
------------------
NAME: MR. JORGE R. BRACAMONTES
TELEPHONE No.: (525) 667-6513 / 687-1189
TELEX No.: (525) 543-6837
OPERATIONS CONTACT
------------------
NAME: MR. JOE MARTINEZ
TELEPHONE No.: (210) 831-9442
FAX No.: (210) 831-9447
FINANCIAL CONTACT
------------------
NAME: MR. IAN BOTHWELL
TELEPHONE No.: (562) 929-1984
FAX No.: (562) 929-1921
</TABLE>
(4) GENERAL AGREEMENT
------------------
4.1. SUBJECT TO ALL TERMS AND CONDITIONS OF THIS AGREEMENT, BUYER
SHALL PURCHASE "LPG MIX" (AS HEREIN DEFINED) FROM SELLER AND SELLER AGREES TO
SELL "LPG MIX" TO BUYER UNDER THE TERMS OF THIS AGREEMENT. AS USED IN THIS
AGREEMENT, "LPG MIX" IS A PROPANE/BUTANE PRODUCT MIXTURE CONSISTING OF 90
PERCENT PROPANE AND 10 PERCENT COMMERCIAL BUTANE.
4.2. COMMERCIAL TERMS:
------------------
FCA (FREE CARRIER) BROWNSVILLE, TEXAS AT PENN OCTANE'S LOADING RACK IN
ACCORDANCE WITH INCOTERM$ 1990.
(5) TERM
----
UNLESS EITHER PARTY BREACHES IT'S OBLIGATION UNDER THIS AGREEMENT, THE
TERM SHALL BE ONE YEAR COMMENCING ON OCTOBER 1ST, 1997 AND CONCLUDING ON
SEPTEMBER 30, 1998.
IN CASE SELLER OBTAINS LEGAL RIGHTS TO IMPORT PROPANE INTO MEXICO OR/AND
IF BURGOS BASIN STARTS PRODUCING, THEN EITHER PARTY SHALL HAVE THE RIGHT TO
NOTIFY THE OTHER PARTY ITS INTENTION TO BEGIN A RENEGOTIATION PROCESS OF THIS
CONTACT. SUCH RENEGOTIATION PROCESS SHALL START NO LATER THAN 10 DAYS AFTER
THE NOTIFICATION IS GIVEN. RENEGOTIATION PROCESS CAN NOT ENDURE MORE THAN 80
DAYS. IF AN AGREEMENT IS REACHED DURING THE RENEGOTIATION PROCESS THIS
CONTACT SHALL BE MODIFIED BY MUTUALLY AGREEMENT, OTHERWISE SHALL CONTINUE
UNTIL ITS TERMINATION.
(6) VOLUMES
-------
6.1. BUYER WILL SCHEDULE, PURCHASE AND ACCEPT AND SELLER WILL DELIVER
A ANNUAL VOLUME OF "LPG MIX" EQUAL TO 81,180,000 GALLONS +/- 15% BUYER'S
OPTION COMPLYING WITH THE FOLLOWING MINIMUM MONTHLY VOLUMES:
WINTER SEASON MINIMUM 7,500,000 GALLONS PER MONTH
SUMMER SEASON MINIMUM 4,000,000 GALLONS PER MONTH
SUCH VOLUMES TO BE REFERRED HEREIN AS "MINIMUM MONTHLY VOLUME"
------------------------
SEASONALITY IS DEFINED AS DESCRIBED BELOW:
------------------------------------------
WINTER SEASON IS COMPOSED BY THE MONTHS OF OCTOBER, NOVEMBER, DECEMBER,
--------------
1997, JANUARY, FEBRUARY AND MARCH 1998.
SUMMER SEASON IS COMPOSED BY THE MONTHS OF APRIL, MAY, JUNE, JULY, AUGUST
-------------
AND SEPTEMBER 1998.
6.2. NOTWITHSTANDING THE FOREGOING, BUYER MAY REQUEST ADDITIONAL
VOLUMES TO THE MINIMUM MONTHLY VOLUME, IN ANY MONTH, IN ACCORDANCE WITH CLAUSE
12 NOMINATION OF THIS AGREEMENT. THEREFORE, SELLER SHALL MAKE AVAILABLE TO
BUYER THE ADDITIONAL VOLUME REQUESTED AS PROVIDED HEREIN.
6.3. BUYER WILL SCHEDULE ITS LISTING OF "LPG MIX" WITH SELLER FOR
EACH DELIVERY MONTH AT LEAST THREE WORKING DAYS BEFORE THE BEGINNING MONTH OF
DELIVERIES.
6.4. BUYER WILL ACCEPT DELIVERY OF THE "LPG MIX" VIA TRUCK AT
SELLER'S TERMINAL IN BROWNSVILLE, TEXAS (THE TERMINAL) AS SCHEDULED BY BUYER,
AS LONG AS IT MEETS THE SPECS DESCRIBED IN ATTACHMENT "A".
(7) PRICE OF "LPG MIX"
---------------------
7.1. PRICE FORMULA FOR PROPANE AND BUTANE SHALL BE BASED ON THE
MONTHLY AVERAGE OF THE DELIVERY MONTH, AS PUBLISHED BY OPIS (OIL PRICE
INFORMATION SERVICE) UNDER MT. BELVIEU NON-TET SPOT POSTINGS FOR 90% PROPANE
AND 10% BUTANE, PLUS A SERVICE COST TO BE DETERMINED IN ACCORDANCE WITH CLAUSE
8 OF THIS AGREEMENT.
7.2. THE ESTIMATED PRICE FOR TEMPORARY INVOICING PURPOSES WILL BE THE
POSTING PRICE OF THE FIFTH DAY QUOTATIONS PRIOR OF THE DELIVERY MONTH PLUS THE
SERVICE OF 0.0326 USD/GAL. AFTER DELIVERY MONTHS ENDS, AN ADJUSTMENT SHALL BE
MADE (AS DESCRIBED IN PARAGRAPH 9.2 BELOW) SO AS TO REFLECT THE FINAL PRICE
COMPUTED AS PER CLAUSE 7.1.
(8) SERVICE COST DETERMINATION
----------------------------
8.1. WHEN BUYER LIFTS THE MINIMUM MONTHLY VOLUME OR LESS OF THE
MINIMUM MONTHLY VOLUME, BUYER SHALL PAY TO BUYER A SERVICE COST OF:
(i) USD - PER MONTH DURING WINTER SEASON MONTHS.
(ii) USD - PER MONTH DURING SUMMER SEASON MONTHS.
THESE AMOUNTS REFLECT A SERVICE COST OF USD/GAL. FOR EACH MINIMUM
MONTHLY VOLUME.
8.2 IF BUYER LIFTS MORE VOLUME THAN THE MINIMUM MONTHLY VOLUME,
SCHEDULED AS PER SUBCLAUSE 6.2., THEN BUYER SHALL PAY TO SELLER A SERVICE COST
CORRESPONDING TO THE DIFFERENTIAL VOLUME BETWEEN THE MINIMUM MONTHLY VOLUME
AND THE ACTUAL VOLUME LIFTED (ATTACHMENT "B"). SUCH SERVICE COST FOR
ADDITIONAL VOLUME SHALL BE COMPUTED AS FOLLOWS:
CSF = LESS ADJ.
WHERE
CSF = SERVICE COST FOR ADDITIONAL VOLUMES.
ADJ = ADJUSTMENT FOR THE INCREMENTAL VOLUME.
WHERE
ADJ = USD/GAL ( * MMV) / 2
--------------
AVL
THUS
ADJ = ( (1 * MMV) / 2
---
AVL
THUS
ADJ = (1 * MMV) / 2
---
AVL
WHERE
MMV = MINIMUM MONTHLY VOLUME.
AVL = ACTUAL VOLUME LIFTED DURING THE DELIVERY MONTH.
(9) INVOICING
---------
9.1. SELLER WILL INVOICE BUYER EVERY WEEK FOR THE TOTAL VOLUME LOADED
DURING THE IMMEDIATELY PRECEDING WEEK.
9.2. THE PRICE PER GALLON INVOICED WILL BE, ACCORDING TO THE
ESTIMATED PRICE AS DESCRIBED IN SUBCLAUSE 7.2. THE ADJUSTMENT FOR THE ACTUAL
PRICE AND SERVICE COST SHOULD BE INVOICED THROUGH DEBIT/CREDIT NOTES TO BUYER
IN THE FIRST WEEK OF THE FOLLOWING MONTH TO DELIVERY MONTH.
9.3. ALL THE INVOICES MUST COMPLY WITH BUYER'S TREASURY DEPARTMENT
INSTRUCTIONS AND SHALL BE SENT TO THE ATTENTION OF LUIS GARNICA / JUAN CARLOS
CABALLERO.
(10) PAYMENT TERMS
--------------
FULL NET CASH IN U.S. DOLLARS PAYABLE WITH 12 DAYS AFTER ORIGINAL INVOICE
IN HARD COPY IS RECEIVED BY BUYER IN ITS OFFICES, TREASURY DEPARTMENT (AV.
MARINA NACIONAL 329, TORRE EJECUTIVA PISO 20).
A FAX TRANSMISSION OF THE CORRESPONDING INVOICE WILL BE ACCEPTABLE TO
BUYER IN ORDER TO REVIEW IT AS SOON AS POSSIBLE AND TO ASSURE PROMPT PAYMENT
AS OUTLINED IN THE ABOVE PARAGRAPH TO SELLER, IN ACCORDANCE WITH THE PAYMENT
TERMS HEREIN AGREED. HOWEVER, ORIGINAL INVOICE MUST BE RECEIVED AT LEAST 7
DAYS PRIOR TO PAYMENT DUE DATE.
IN CASE THAT THE PAYMENT DATE FALLS ON A SUNDAY OR HOLIDAY, THEN THE
PAYMENT DATE WILL BE THE NEXT WORKING DATE. IN CASE THAT THE PAYMENT DATE
FALLS ON A SATURDAY, THEN THE PAYMENT DATE WILL BE THE PRIOR WORKING DATE.
(11) OFFICE EXPENSE
---------------
BUYER SHALL PAY TELEPHONE, TELEFAX AND SECRETARIAL EXPENSES INCURRED BY
ITS REPRESENTATIVES SUPERVISING RECEIPT OF THE "LPG MIX" DELIVERIES AT THE
TERMINAL. BUYER SHALL ARRANGE, AT ITS COST, FOR TELEPHONE AND COPIER SERVICE,
AND SHALL SET UP ITS OWN CREDIT AND DIRECT PAYMENT FOR THOSE SERVICES. ANY OF
ABOVE EXPENSES OF BUYER THAT ARE PAID BY SELLER SHALL BE INVOICED BY SELLER
AND SHALL BE PAID BY BUYER SEVEN BUSINESS DAYS AFTER RECEIPT OF THE INVOICE.
IF THE SEVENTH BUSINESS DAY IS A WEEKEND OR HOLIDAY, PAYMENT SHALL BE MADE ON
THE NEXT BUSINESS DAY.
(12) NOMINATION
----------
EXCEPT FOR THE SCHEDULE OF THE "MINIMUM MONTHLY VOLUME" OF THIS
AGREEMENT, AT LEAST FIFTEEN (15) DAYS PRIOR TO EACH MONTH, BUYER SHALL SUBMIT
TO SELLER AN ADDITIONAL VOLUME REQUEST. BESIDES, BUYER SHALL PROVIDE SELLER
WITH A THREE MONTH FORECAST NOMINATION, FOR VOLUMES TO BE SCHEDULED WITH A
RANGE OF +/- 15% BUYER'S OPTION. SELLER WILL ACCEPT AND DELIVER TO BUYER
ADDITIONAL VOLUME REQUEST AT LEAST BETWEEN THE 15% RANGE OF BUYER'S THREE
MONTH FORECAST.
(13) SCHEDULE OF SERVICE
---------------------
13.1. SELLER WILL PROVIDE LOADING SERVICES AT THE TERMINAL SEVEN DAYS
A WEEK, TWENTY-FOUR HOURS PER DAY. HOWEVER, HOURS OF SERVICE SHALL BE SUBJECT
TO AVAILABILITY OF BUYER'S AUTHORIZED PERSON(S) TO DISPATCH THE "LPG MIX" FROM
THE TERMINAL.
13.2. SELLER WILL PROVIDE BUYER A DAILY ACTIVITY REPORT SPECIFYING
THE QUANTITY (WEIGHT AND VOLUME) AND QUALITY OF THE "LPG MIX" DELIVERED TO
BUYER AT THE TERMINAL, AS PER INDEPENDENT INSPECTOR REPORTS.
(14) QUALITY
-------
THE "LPG MIX" SHALL MEET THE SPECIFICATIONS ATTACHED AS EXHIBIT "A"
(15) MEASUREMENT
-----------
15.1 THE QUANTITY OF PRODUCT DELIVERED SHALL BE DETERMINED BY NET
WEIGHT, AND FOR PAYMENT PURPOSES, THE WEIGHT OF THE "LPG MIX" DELIVERED TO
BUYER WILL BE CONVERTED TO VOLUME (CORRECTED TO 60F) VIA ANALYSIS OF SAMPLES
USING A GAS CHROMATOGRAPH. THE CHROMATOGRAPH MUST BE CALIBRATED ACCORDING TO
THE ASTM AND GPA PROCEDURES. BUYER AND SELLER WILL CAUSE AN INDEPENDENT
INSPECTOR, MUTUALLY AGREED BY THE PARTIES, TO SAMPLE AND ANALYZE EACH LOAD OF
THE "LPG MIX". THE COST OF SUCH INSPECTIONS WILL BE BORNED BY BUYER.
15.2. BEFORE ENTERING THE TERMINAL, EMPTY TRUCKS WILL BE WEIGHTED AT
THE PORT OF BROWNSVILLE PUBLIC SCALES OR OTHER SCALE MUTUALLY AGREED BY BOTH
PARTIES. LOADED TRUCK WILL BE WEIGHTED AT THE SAME SCALE UPON DEPARTURE. THE
VOLUME OBTAINED BY THE DIFFERENTIAL BETWEEN THESE TWO MEASUREMENTS SHALL BE
THE VOLUME TO BE INVOICED BY SELLER AND PAID BY BUYER. THE SCALE WILL BE
TESTED AND ADJUSTED TO ACCURACY AT LEAST ONCE EVERY 30 DAYS OR ACCORDING TO
GOVERNMENT REGULATIONS. THE COSTS OF WEIGHING THE TRUCK BEFORE AND AFTER
LOADING, AND/OR IF A THIRD PARTY IS REQUIRED TO TEST OR CALIBRATE THE SCALE,
WILL BE SHARED BY THE PARTIES ON A 50%/50% BASIS. IF SELLER, AT ANY TIME,
INSTALLS SCALES AT THE TERMINAL, THEY WILL THEREAFTER BE THE SCALES FOR ALL
TRUCKS RECEIVING "LPG MIX" AT THE TERMINAL, AND THEY SHOULD BE OPERATED AND
MAINTAINED IN ACCORDANCE WITH THE ABOVE PROVISIONS. THE CHARGE FOR SUCH
SCALES SHALL BE 1005 FOR SELLERS ACCOUNT.
IF SELLER'S SCALE IS USED, THEN BUYER SHALL HAVE THE RIGHT TO SEND TRUCKS
TO AN INDEPENDENT SCALE IN A RANDOMLY BASIS EVERY WEEK, IN ORDER TO CHECK
SELLER'S SCALE ACCURACY. COST OF INDEPENDENT SCALE SHALL BE ON BUYER'S
ACCOUNT.
(16) TITLE AND RISK
----------------
TITLE AND RISK OF LOSS OF THE "LPG MIX" WILL PASS FROM SELLER TO BUYER AT
OUTLET FLANGE OF THE TRUCK AT THE LOADING RACKS LOCATED AT THE TERMINAL. AT
SUCH POINT, THE "LPG MIX" SHALL BE DEEMED TO BE DELIVERED.
(17) LAW AND ARBITRATION
---------------------
THE AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK. ALL DISPUTES ARISING OUT OF OR RELATING TO THE
AGREEMENT SHALL BE SETTLED BY FINAL ARBITRATION IN THE STATE OF NEW YORK, CITY
OF N.Y. CONDUCTED IN ACCORDANCE WITH THE RULES OF CONCILIATION AND ARBITRATION
OF THE INTERNATIONAL CHAMBER OF COMMERCE IN EFFECT AT SUCH TIME. THE NUMBER
OF ARBITRATORS SHALL BE THREE.
(18) SPILL/ENVIRONMENTAL POLLUTION
------------------------------
IN THE EVENT OF ANY "LPG MIX" SPILL OR OTHER ENVIRONMENTAL POLLUTING
DISCHARGE OCCURS PRIOR TO DELIVERY, AS THE SAME IS DEFINED IN ARTICLE 16 OF
THIS AGREEMENT, ALL CLEAN-UP OPERATIONS THAT MAY BE REQUIRED BY ANY
GOVERNMENTAL AUTHORITIES, SHALL BE FOR SELLER'S ACCOUNT.
IF SUCH SPILL OR ENVIRONMENTAL POLLUTING DISCHARGE OCCURS AFTER DELIVERY,
AS THE SAME IS DEFINED IN ARTICLE 16 OF THIS AGREEMENT, ALL CLEAN-UP
OPERATIONS THAT MAY BE REQUIRED, SHALL BE FOR BUYER'S ACCOUNT.
IN THE EVEN THAT SUCH SPILL OR ENVIRONMENTAL POLLUTING DISCHARGE OCCURS
AFTER DELIVERY, AT THE TERMINAL, BUYER AUTHORIZES SELLER TO COMMENCE
CONTAINMENT OR CLEAN-UP OPERATIONS AS DEEMED APPROPRIATE OR NECESSARY BY
SELLER OR AS MAY BE REQUIRED BY ANY GOVERNMENTAL AUTHORITIES. SELLER WILL
NOTIFY BUYER IMMEDIATELY OF SUCH OPERATIONS. SELLER SHALL HAVE THE RIGHT TO
DIRECT ALL CONTAINMENT AND CLEAN-UP OPERATIONS. ALL COSTS OF CONTAINMENT AND
CLEAN-UP FOR SUCH SPILL WILL BE BORNE BY BUYER, AND BUYER SHALL INDEMNIFY AND
HOLD SELLER HARMLESS FROM ANY AND ALL EXPENSES, CLAIMS, LIABILITIES, DAMAGES,
PENALTIES, FINES AND OTHER COST (INCLUDING, WITHOUT LIMITATION, ATTORNEYS
FEES) RESULTING OR RELATED TO SUCH INCIDENT. FOLLOWING THE INDEMNITY OF
SELLER BY BUYER, SELLER WILL COOPERATE WITH BUYER FOR THE PURPOSE OF OBTAINING
REIMBURSEMENT IN THE EVENT THAT ANY NON-AGENT THIRD PARTY IS LEGALLY
RESPONSIBLE FOR ANY COSTS OR EXPENSES BORNE BY BUYER UNDER THIS PARAGRAPH.
IN THE EVENT THAT SUCH SPILL OR ENVIRONMENTAL POLLUTING DISCHARGE OCCURS
AFTER DELIVERY, OUT OF THE TERMINAL, BUYER MAY AUTHORIZE SELLER TO COMMENCE
CONTAINMENT OR CLEAN-UP OPERATIONS AS DEEMED APPROPRIATE OR NECESSARY BY
SELLER OR AS MAY BE REQUIRED BY ANY GOVERNMENTAL AUTHORITIES. SELLER WILL
NOTIFY BUYER IMMEDIATELY OF SUCH OPERATIONS. SELLER SHALL HAVE THE RIGHT TO
DIRECT ALL CONTAINMENT AND CLEAN-UP OPERATIONS. ALL COSTS OF CONTAINMENT AND
CLEAN-UP FOR SUCH SPILL WILL BE BORNE BY BUYER, AND BUYER SHALL INDEMNIFY AND
HOLD SELLER HARMLESS FROM ANY AND ALL EXPENSES, CLAIMS, LIABILITIES, DAMAGES,
PENALTIES, FINES AND OTHER COST (INCLUDING, WITHOUT LIMITATION, ATTORNEYS
FEES) RESULTING OR RELATED TO SUCH INCIDENT. FOLLOWING THE INDEMNITY OF
SELLER BY BUYER, SELLER WILL COOPERATE WITH BUYER FOR THE PURPOSE OF OBTAINING
REIMBURSEMENT IN THE EVENT THAT ANY NON-AGENT THIRD PARTY IS LEGALLY
RESPONSIBLE FOR ANY COSTS OR EXPENSES BORNE BY BUYER UNDER THIS PARAGRAPH.
(19) SAFETY
------
BUYER WILL COMPLY, AND WILL CAUSE BUYER'S EMPLOYEES, AGENTS AND OTHERS
ENTERING THE TERMINAL ON BEHALF OF BUYER TO COMPLY, WITH ALL TERMINAL SAFETY
AND HEALTH REGULATIONS. SELLER WILL EXECUTE IN ITS NAME, PAY FOR, AND FURNISH
TO BUYER PRIOR TO ACCEPTING ANY "LPG MIX" AT THE TERMINAL, ALL INFORMATION
(INCLUDING APPLICABLE MATERIAL DATA SHEETS), DOCUMENTS, LABELS, PLACARDS,
CONTAINERS, AND OTHER MATERIALS WHICH MAY BE REQUIRED TO BE FURNISHED BY BUYER
BY STATUTES, ORDINANCES, RULES OR REGULATIONS OF ANY PUBLIC AUTHORITY RELATING
TO THE DESCRIBING, PACKAGING, RECEIVING, STORING, HANDLING, OR SHIPPING OF THE
"LPG MIX" AT OR FROM THE TERMINAL.
(20) FORCE MAJEURE
--------------
NEITHER PARTY SHALL BE LIABLE FOR FAILURE OR DELAY IN THE PERFORMANCE OF
THIS AGREEMENT DUE TO ACTS OF GOD, EARTHQUAKE, FLOOD, FIRE, WAR, HOSTILITIES,
CIVIL COMMOTIONS, GOVERNMENTAL ACTS, STRIKES, TRANSPORTATION PROBLEMS,
PIPELINE STOPPED DUE TO LEAK OR EXPLOSION AND ANY OTHER CAUSE BEYOND THE
CONTROL OF EITHER OF THE PARTIES.
ANY PARTY CLAIMING FORCE MAJEURE SHALL PROMPTLY NOTIFY THE OTHER OF THE
OCCURRENCE OF THE EVENT OF FORCE MAJEURE RELIED UPON.
EVENTS OF FORCE MAJEURE SHALL NOT RELIEVE ANY PARTY FROM MAKING ANY
PAYMENT FOR PRODUCT DELIVERED AND/OR SERVICE RENDERED HEREUNDER.
(21) LIMITATION OF LIABILITY
-------------------------
SELLER SHALL NOT BE LIABLE FOR MORE THAN THE ACTUAL COST TO REPLACE ANY
"LPG MIX" NOT DELIVERED HEREUNDER. SELLER SHALL NOT BE LIABLE TO BUYER FOR
SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES.
(22) MISCELLANEOUS
-------------
22.1. AMENDMENTS, WAIVER. THIS AGREEMENT MAY NOT BE CHANGED OR
-------------------
MODIFIED, EXCEPT IN WRITING BY MUTUAL AGREEMENT OF BOTH PARTIES. THE FAILURE
OF ANY PARTY TO ENFORCE ANY OF THE PROVISIONS OF THIS AGREEMENT WILL NOT BE
CONSTRUED TO BE A WAIVER OF THOSE PROVISIONS, OR A WAIVER OF THE RIGHT OF ANY
PARTY TO ENFORCE THEM.
22.2. SEVERABILITY. IF ANY PROVISION OF THIS AGREEMENT IS DETERMINED
------------
TO BE INVALID OR UNENFORCEABLE, THE REMAINDER OF THIS AGREEMENT SHALL REMAIN
IN FULL FORCE AND EFFECT.
22.3. ASSIGNMENT. NEITHER PARTY MAY ASSIGN THIS AGREEMENT OR ANY
----------
PORTION OF IT WITHOUT THE PRIOR WRITTEN CONSENT OF THE OTHER PARTY.
22.4. OTHER TERMS AND CONDITIONS. WHERE NOT IN CONFLICT WITH THE
--------------------------
ABOVE, INCOTERMS 1990 FOR FCA TRANSACTIONS WITH LATEST AMENDMENTS SHALL APPLY.
THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF
GOODS SHALL NOT APPLY TO THIS CONTRACT.
22.5. ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE ENTIRE
-----------------
AGREEMENT AMONG THE PARTIES AND SUPERSEDES ALL PREVIOUS NEGOTIATIONS,
COMMITMENTS AND WRITINGS WITH RESPECT TO SUCH SUBJECT MATTER OF THIS
AGREEMENT.
(23) CONFIDENTIALITY
---------------
THIS AGREEMENT TO BE HELD STRICTLY PRIVATE AND STRICTLY CONFIDENTIAL BY
ALL PARTIES INVOLVED.
IF THIS MEETS WITH YOUR UNDERSTANDING AND APPROVAL, PLEASE SIGN IN THE
APPROPRIATE SPACE.
BUYER SELLER
/s/ ROSENDO ZAMBRANDO /s/ J.B. RICHTER
---------------------- -----------------
ROSENDO ZAMBRANDO J.B. RICHTER
PMI TRADING LIMITED PENN OCTANE CORPORATION
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT "A"
GPM MIX CHARACTERISTICS MAX TEST METHODS
<S> <C> <C>
COMPOSITION
PROPANE/BUTANE 90/10 PCT OF VOL
ETHANE 2.0 PCT. VOL. OF PROPANE
PROPYLENE 5.0 PTC. VOL. OF PROPANE
PENTANES & HEAVIES 2.0 PCT. VOL. OF BUTANE
VAPOR PRESSURE 190 ASTM D-1267-75
CHROMATOGRAPH ANALYSIS ASTM D-2163
SPECIFIC GRAVITY ASTM D-1657
CORROSION COOPER STRIP AT 100
F.DEG. 1B ASTM D-1638-74
OTHER DELETERIONS SUBSTANCES NONE
</TABLE>
EXHIBIT "B"
PRICE FORMULA AND SERVICE COST DETERMINATION
Month:
---------------------------------
PMI Order No:
---------------------------------
Price formula for C3 AND C4 shall be based on the monthly average of the
delivery month, published by OPIS Mont Belvieu NON-TET spot posting for 90%
Propane and 10% Butane, plus the service cost
A) Estimated price for Invoice: The fifth day quotations prior of the
delivery month, plus the service cost
Calculation date, for the Estimated Price Invoice:
0-Jan-00
---------
Propane price 0.9 Butane price 0.1
USCTS/GAL USD/GAL USD/GAL USD/GAL SC
0.000 0.00000 0.000 0.00000 USD/GAL
B) CLAUSE 8.2 Service Cost Formula, if buyer lift more than the minimum
monthly volume:
Formula: CSF = 5USD/GAL - ADJ
Where: CSF: Service Cost for Additional Volume.
ADJ: Adjustment for the Incremental
Volume Lifted.
Where: ADJ = [ USD/GAL -( - MMV)] /2
---
AVL
Where: MMV: Minimum Monthly Volume
AVL: Actual Volume Lifted duringthe delivery Month
MMV Minimum Monthly Volume 7,500,000 GAL
AVL Actual Volume Lifted: 0 GAL
Service Cost Minimum Volume: USD/GAL
Propane Monthly Average: 0.000 USCTS/GAL For 90 % 0.00000 USD/GAL
Butane Monthly Average: 0.000 USCTS/GAL For 10 % 0.00000 USD/GAL
COMMODITY PRICE FORMULA 0.00000 USD/GAL
CSF SERVICE COST FORMULA
- ---------------------------
ADJ ( *[MMV/AVL] * 1 EQUAL TO + EQUAL CSF
#DIV/01 #DIV/01 #DIV/01 USD/GAL
GALLONS USD/GAL
PRICE FOR MINIMUM MONTHLY VOLUME: 7,500,000 USD
PRICE FOR ACTUAL VOLUME LIFTED: -7,500,000 #DIV/01 #DIV/01 USD
PRICE IN USD/GAL FOR THE CURRENT MONTH: #DIV/01 USD/GAL
TOTAL PRICE FOR THE CURRENT MONTH: 0.00 #DIV/01 USD
CONTINUING AGREEMENT FOR PRIVATE
LETTERS OF CREDIT
October 14, 1997
To: RZB FINANCE LLC
Gentlemen:
In consideration of your issuing from time to time, at our request, your
Commercial and/or Standby Letters of Credit (herein called individually, the
"Credit" and, collectively, the "Credits") substantially in accordance with
our application or request, we, the undersigned (jointly and severally if more
than one), hereby agree as follows:
1. As to drafts or other demands or acceptances under or purporting to
be under any Credit, which are payable in United States currency, we agree (a)
in the case of each draft or demand, to reimburse you at your office
designated above or as otherwise instructed by you, on demand, in United
States currency, the amount paid on such drafts or other demand, or, if so
demanded by you, to pay to you, in such currency at your office designated
above or as otherwise instructed by you, in advance, the amount required to
pay such draft or other demand, and (b) in the case of each acceptance, to pay
to you, at your office, in United States currency, the amount thereof on
demand but in any event not later than one Business Day prior to maturity, or,
in case the acceptance is not payable at your office, then on demand but in
any event in time to reach the place of payment in the course of the mails not
later than one Business Day prior to maturity.
2. As to drafts or other demands or acceptances under or purporting to
be under any Credit, which are payable in currency other than United States
currency, we agree (a) in the case of each draft or demand, to reimburse you,
at your office designated above or as otherwise instructed by you, on demand,
the equivalent of the amount paid, in United States currency, or, if so
demanded by you, to pay to you at such office, in advance one Business Day
prior to the date of your payment of such draft or other demand, the
equivalent of the amount required to pay such draft or other demand, in United
States currency, in each case at the rate of exchange current in New York for
cable or telex transfers to the place of payment in the currency in which such
draft or other demand is drawn, or if there be no such rate at said time then
at such rate as you shall fix, and (b) in the case of each acceptance, to
furnish you, at such office, on demand, but in any event in time to reach the
place of payment in the course of the mails not later than one Business Day
prior to maturity, with first class bankers' demand bills of exchange to be
approved by you for the amount of the acceptance, payable in the currency of
the acceptance, and bearing our endorsement, or, if you so request, to pay to
you, at your office, on demand, the equivalent of the acceptance, in United
States currency, in each case at the rate of exchange current in New York for
cable or telex transfers at the time of transmission to the place of payment
in the currency in which such draft or other demand is drawn, or if there be
no such rate at said time then at such rate as you shall fix. In any event,
we hereby agree to indemnify and hold you harmless from and against any
foreign exchange losses which you may suffer.
3. In the event that any United States Currency drafts are drawn by us
on you in order to refinance any obligation set forth in the preceding two
sections, and such drafts, at your option, are accepted by you, we agree to
pay to you on demand, but in any event not later than the maturity date, the
amount of each such acceptance, and this agreement shall be applicable to all
such drafts so accepted by you as if such drafts were drawn under a Credit.
4. We also agree to pay you, on demand or such other dates as may be
agreed by you, your commission and all obligations, liabilities, interest,
charges and expenses paid or incurred or due you in connection with any Credit
or this agreement, in each case at the rate agreed between you and us or, in
the absence of such agreement, at a rate per annum equal to 2% in excess of
the Base Lending Rate (as hereinafter defined). Interest shall accrue and be
paid by us on the amount of each drawing, from the date of payment by you on
any draft or other demand or acceptance under any Credit to the date of our
payment to you in full.
The term "Base Lending Rate" means, for any day, the higher of (i)
the rate announced by you from time to time at the principal office of The
Chase Manhattan Bank (the "Bank") in New York, New York as its prime rate for
domestic (United States) commercial loans in effect on such day and (ii) the
Federal Funds Rate in effect on such day plus 1/2%. (Such Base Lending Rate
is not necessarily intended to be the lowest rate of interest charged by the
Bank in connection with extensions of credit.) Each change in the Base
Lending Rate shall result in a corresponding change in the interest rate and
such change shall be effective on the effective date of such change in the
Base Lending Rate.
The term "Federal Funds Rate" means, for any day, the overnight
federal funds rate in New York City, as published for such day (or, if such
day is not a New York business day, for the next preceding New York business
day) in the Federal Reserve Statistical Release H.15 (519) or any successor
publication, or if such rate is not so published for any day which is a New
York business day, the average of the quotations for such day on overnight
federal funds transactions in New York City received by the Bank from three
federal funds brokers of recognized standing selected by the Bank.
We agree to pay expenses, including attorneys' fees, paid or
incurred by you in connection with any Credit, including such attorneys' fees
as may arise out of any controversy which develops among any of the parties to
any Credit or the enforcement of any of your rights hereunder and also
including such charges as may result from the storage of goods shipped under
or purporting to be under any Credit.
5. We hereby recognize and admit your ownership in and unqualified right
to the possession and disposal of and grant to you a security interest in any
property shipped under or pursuant to or in connection with any Credit or in
any way relative thereto or to the drafts drawn thereunder, whether or not
released to us on trust or bailee receipt, and also in and to all accounts,
accounts receivable, contract rights, inventory, general intangibles, claims,
credits, monies, demands, patent and trademark rights relative to or arising
out of any Credit or drafts drawn under any Credit and all shipping documents,
warehouse receipts, documents of title, bills of lading, policies or
certificates of insurance and other documents and instruments accompanying or
relative to or arising out of any Credit or drafts drawn under any Credit, and
in and to the proceeds and products of each and all of the foregoing, and all
additions and accessions thereto and substitutions therefor (collectively, the
"Collateral"), until such time as all the obligations and liabilities of us or
any of us to you at any time existing under or with reference to any Credit or
this agreement, or any other obligation or liability to you, have been fully
paid and discharged, all as security for such obligations and liabilities; and
we agree that all or any of such property and documents, and the proceeds of
any thereof, coming into the possession of you or any of your correspondents,
may be held and disposed of by you as herein or by applicable law provided;
and the receipt by you, or any of your correspondents, at any time of other
security, of whatsoever nature, including cash, shall not be deemed a waiver
of any of your rights or powers herein recognized.
6. In the event that you deliver to us any of the documents, goods,
wares or merchandise covered by any Credit prior to your having received
reimbursement with respect to the relative drafts or acceptances as herein
provided, your security interest therein as provided above shall continue and
we agree to sign and deliver to you a Financing Statement under the terms of
the Uniform Commercial Code of New York or any other applicable jurisdiction,
hereby granting you full power to sign and file such Financing Statement on
our behalf, and at our expense, and we further agree that your rights
specified herein shall be in addition to and not in limitation of your rights
under the said statute or any other applicable statute.
7. In the event you receive some but not all of the documents against
which drawings, by whatsoever method, may be made and, at our request, you
deliver such document to us, against trust receipt or otherwise, prior to the
presentation of the relative draft, we agree to pay to you on demand the
amount of any claim made against you by reason thereof and irrevocably
authorize you to pay or accept (as the case may be) such draft when it is
presented regardless of whether or not such draft or any document which may
accompany it complies with the terms of the relevant Credit.
8. Except in so far as instructions have been heretofore given by us in
writing to the contrary, you and any of your correspondents may receive and
accept as "Bills of Lading" under any Credit any documents issued or
purporting to be issued by or on behalf of any carrier which acknowledges
receipt of property for transportation, whatever the specific provisions of
such documents, and the date of each such document shall be deemed the date of
shipment of the property mentioned therein; and you may receive and accept as
documents of insurance either insurance policies or insurance certificates.
Commercial invoices presented under any Credit may be referred to for the
description of the goods and you may accept such description as controlling
and may receive and accept bills of lading, insurance and other documents
however variant in description from that contained in such invoice; unless
otherwise specified in this agreement, wherever the goods are described in
other documents, description in general terms is acceptable.
9. Except in so far as instructions have been heretofore given by us in
writing expressly to the contrary, we agree that part shipments may be made
under any Credit and you may honor the relative drafts; and if any Credit
specifies shipments in installments within stated periods, and the shipper
fails to ship in any designated period, such Credit shall cease to be
available for that or any subsequent installment, at your sole discretion.
10. We agree that in the event of any extension of the maturity or time
for presentation of drafts or other demands or documents, or any other
modification of the terms of any Credit, at the request of any of us, with or
without notification to the others, or in the event of any increase in the
amount of any Credit at the request of any of us, with or without notification
to the others, this agreement shall be binding upon us with regard to any
Credit so extended, increased or otherwise modified, to drafts or other
demands or acceptances and documents and property covered thereby, and to any
action taken by you or any of your correspondents in accordance with such
extension, increase or other modification. We agree that you and any of your
correspondents may accept or pay any draft dated on or before the expiration
of any time limit expressed in any Credit, regardless of when drawn and
whether or when negotiated, provided that the other required documents are
dated on or prior to the expiration date of any such Credit.
11. The users, beneficiaries and transferees of each Credit shall be
deemed our agents and we assume all risks of their acts or omissions. Neither
you nor your correspondents shall be responsible for and our obligations
hereunder shall not be affected by: (a) acts or omissions of any other
person, including, without limitation, any beneficiary or transferee of any
Credit; (b) the validity or sufficiency of any instrument transferring or
assigning or purporting to transfer or assign any Credit or rights or benefits
thereof or proceeds thereunder in whole or in part, which may prove to be
invalid or ineffective for any reason; (c) the form, validity, sufficiency, or
genuineness of documents or drafts, even if such documents or drafts should in
fact prove to be in any or all respects invalid, insufficient, fraudulent or
forged; (d) failure of any draft to bear any reference or adequate reference
to any Credit, or failure of documents to accompany any draft, or failure of
any person to note the amount of any draft on the reverse of any Credit or to
surrender or take up any Credit or to send forward documents apart from drafts
as required by the terms of any Credit; each of which provisions, if contained
in any Credit itself, it is agreed may be waived by you; (e) any laws, customs
and regulations which may be effective in countries of negotiation and/or
payment of any Credit; (f) errors, omissions, interruptions or delays in
transmission or delivery of any messages, by mail, cable, telegraph, wireless
or otherwise, whether or not they be in cipher, or errors in translation or in
interpretation of technical terms; (g) any error, neglect, insolvency, failure
of business or default of any of your correspondents; (h) any loss or delay in
the transmission or otherwise of any document or draft or proceeds thereof;
(i) the existence, character, quality, quantity, condition, packing, value or
delivery of the property purporting to be represented by documents; (j) any
difference in character, quality, quantity, condition or value of the property
from that expressed in documents; (k) the time, place, manner or order in
which shipment is made; (l) any partial or incomplete shipment or failure or
omission to ship any or all of the property referred to in any Credit; (m) the
character, adequacy, validity or genuineness of any insurance; (n) the
solvency or responsibility of any insurer, or any other risk connected with
insurance; (o) any deviation from instructions, delay, default or fraud by the
shipper or anyone else in connection with the property or the shipping
thereof; (p) the solvency, responsibility or relationship to the property of
any party issuing any documents in connection with the property; (q) any delay
in arrival or failure to arrive of either the property or any of the documents
relating thereto; (r) any delay in giving or failure to give notice of arrival
or any other notice; (s) any breach of contract between the shippers or
vendors and ourselves or any of us; or (t) without limiting the foregoing, any
consequences arising from causes beyond your control or any act or omission by
you or any of your correspondents, affiliates or agents not done or omitted
with your bad faith; and none of the above shall affect, impair or prevent the
vesting of any of your rights or powers hereunder. If any Credit provides
that payments are to be made by your correspondent, neither you nor such
correspondent shall be responsible for the failure of any of the documents
specified in such Credit to come into your hands or for any delay in
connection therewith, and our obligations under this agreement shall not be
affected by such failure or delay in the receipt by you of any such documents.
In furtherance and extension and not in limitation of the specified provisions
hereinbefore set forth, we agree that any action taken by you or by any
correspondent of yours under or in connection with any Credit or the relative
drafts or documents, if not taken in bad faith, shall be binding on us and
shall not put you or your correspondent under any resulting liability to us;
and we make like agreement as to any inaction or omission, unless in bad
faith. We agree to hold you and your correspondents indemnified and harmless
against any and all loss, liability, claim, action and expense, including,
without limitation, legal fees and expenses, which you and your correspondents
may suffer or incur howsoever arising from or in connection with any Credit or
any draft or document related thereto, including, without limitation, any of
the foregoing which you may suffer in respect of your obligations or
liabilities to any financial institution which confirms or advises any Credit,
except to the extent involving your bad faith.
12. We agree to procure promptly any necessary import and export or
other licenses for the import or export or shipping of the property and to
comply with all foreign and domestic regulations in regard to the shipment of
the property or the financing thereof, and to furnish such certificates in
that respect as you may at any time require, and to keep the property
adequately covered by insurance satisfactory to you, in companies satisfactory
to you, and to assign the policies or certificates of insurance to you, or to
make the loss or adjustment, if any, payable to you, at your option; and to
furnish you if demanded with evidence of acceptance by the insurers of such
assignment. Should the insurance upon said goods for any reason be
unsatisfactory to you, you may, at our expense, obtain insurance satisfactory
to you.
13. We agree that if any of our obligations and liabilities to you under
this agreement or otherwise shall not be paid or performed when due; or if any
of us shall become insolvent (however such insolvency may be evidenced) or
commit any act of insolvency, or make a general assignment for the benefit of
creditors; or if any of us shall suspend the transaction of his or our usual
business or be expelled or suspended from any exchange; or if an application
is made under Article 52 of the New York Civil Practice Law and Rules by any
judgment creditor of any of us for an order directing you to pay over money;
or if a petition in bankruptcy shall be filed by or against any of us; or if a
petition shall be filed by or against any of us or any proceeding shall be
instituted by or against any of us for any relief under any bankruptcy or
insolvency laws or any laws relating to the relief of debtors, readjustment of
indebtedness, reorganizations, composition or extensions; or if any
governmental authority, or any court at the instance of any governmental
authority, shall take possession of any substantial part of the property of
any of us or shall assume control over the affairs or operations of any of us;
or if a receiver or custodian shall be appointed of, or a writ or order of
attachment or garnishment shall be issued or made against, any of the property
or assets of any of us; or if any material judgment shall be rendered against
any of us; or if any of the foregoing events shall occur with respect to any
guarantor of the obligations of any of us to you; or if any statement,
representation or warranty made by any of us to you herein or in any other
document or financial statement of any of us delivered to you shall prove to
be false in any material respect when made; or if you shall in any way deem
yourself insecure; thereupon, unless you shall otherwise elect, any and all
obligations and liabilities of each of us to you, whether now existing or
hereafter incurred, whether absolute or contingent, shall become and be due
and payable forthwith without further notice or demand; and we shall be
obligated immediately to deposit with you cash collateral in an amount equal
to the aggregate amount available or which may become available for drawing
under all Credits; and each of us expressly authorizes you, in any such event,
to set off and apply the balance of deposits and any sums credited by or due
from you to any or all of us in general accounts or otherwise, to the payment
of any and all of our obligations or liabilities to you, however arising,
including, without limitation, such obligation to deposit cash collateral.
You shall not be bound to take any steps necessary to preserve any rights in
any such cash collateral against prior parties, which the undersigned hereby
assumes to do. In addition, in any such event, each of us expressly
authorizes you to sell immediately, without demand for payment and without
advertisement which are hereby expressly waived, any and all Collateral,
arrived or to arrive, at private sale or at public auction or at brokers'
board or otherwise, at your option, in such parcel or parcels and at such time
or times and at such place or places and for such price or prices and upon
such terms and conditions as you may deem proper, and to apply the net
proceeds of such sale or sales, together with any balance of deposits and any
sums credited by or due from you to us in general account or otherwise, to the
payment of any and all of our obligations or liabilities to you, however
arising. You shall not be bound to take any steps necessary to preserve any
rights in such Collateral against prior parties, which the undersigned hereby
assumes to do. If any such sale be at brokers' board or at public auction,
you may yourself be a purchaser at such sale, free from any right of
redemption, which each of us hereby expressly waives and releases. Unless
such Collateral is perishable or threatens to decline steadily in value or is
of a type customarily sold on a recognized market, you will give the
undersigned reasonable notice of the time and place of any public sale thereof
or of the time after which any private sale or other intended disposition is
to be made. The requirement of reasonable notice shall be met if mailed
postage prepaid to the undersigned at the last address appearing on your
records at least five days before the time of such sale or disposition.
14. In the event that any action taken under or in connection with any
Credit could, in your sole judgment, have the effect of violating any law,
regulation or decree or order of the United States or of the State of New
York, or of any other jurisdiction, or of any court or governmental agency,
you may take or refuse to take any action as you deem necessary, including
dishonoring any draft, demand or acceptance presented thereunder, and you will
be indemnified and held harmless by us from any claim arising out of such
action or non-action on your part.
15. (a) If you shall have determined that the applicability of any
law, rule, regulation or guideline (domestic or foreign) adopted (whether
before or after the date hereof) pursuant to or arising out of the July 1988
report of the Basle Committee on Banking Regulations and Supervisory Practices
entitled "International Convergence of Capital Measurement and Capital
Standards", or the adoption after the date hereof of any other law, rule,
regulation or guideline (domestic or foreign) regarding capital adequacy, or
any change in any of the foregoing or in the enforcement or interpretation or
administration of any of the foregoing by any court or any governmental
authority, central bank or comparable agency charged with the enforcement or
interpretation or administration thereof, or compliance by you or any
corporation or other entity which directly or indirectly controls you (each
such corporation or other entity is hereinafter referred to as a "Controlling
Person") (or any lending office of yours or any Controlling Person) with any
request or directive regarding capital adequacy (whether or not having the
force of law) of any such authority, central bank or comparable agency, has or
would have the effect of reducing the rate of return on your capital or on the
capital of a Controlling Person, if any, as a consequence of the issuance or
maintenance of any Credit or your commitment or obligations (if any) under
this Agreement to a level below that which you or such Controlling Person
could have achieved but for such applicability, adoption, change or compliance
(taking into consideration your policies and the policies of such Controlling
Person with respect to capital adequacy) by an amount deemed by you to be
material, then, upon demand by you, we shall pay to you from time to time as
specified by you such additional amount or amounts as will compensate you or
such Controlling Person for any such reduction suffered.
(b) If any change in law, rule, regulation or guideline
(domestic or foreign) or in the enforcement, interpretation or administration
thereof by any court or any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof shall at any
time (i) impose, modify or deem applicable any reserve, special deposit or
similar requirement (including, without limitation, pursuant to Regulation D
of the Board of Governors of the Federal Reserve System) against letters of
credit issued by you, or (ii) subject letters of credit issued by you to any
assessment or other cost imposed by the Federal Deposit Insurance Corporation
or any successor thereto or (iii) impose on you any other or similar condition
regarding this Agreement or any Credit, your commitment or obligations
hereunder and the result of any event referred to in clause (i), (ii) or (iii)
above shall be to increase the cost to you of agreeing to issue, issuing or
maintaining any Credit or making, funding or maintaining (or agreeing to fund
or maintain) drawings under any Credit by an amount which you shall deem to be
material (which increase in cost shall be the result of the reasonable
allocation by you of the aggregate of such cost increases resulting from such
events), then, upon demand by you, we shall pay to you from time to time as
specified by you, additional amount or amounts as will compensate you for such
increased cost from the date of such change. Our obligation to pay
compensation contained in this subsection (b) shall be applicable as well to
any financial institution which confirms or advises any Credit and which
incurs or is subjected to any increased cost as a result of the imposition,
modification or applicability of any such reserve, special deposit or similar
requirement, the subjecting of Credits to any such assessment or other cost,
or the imposition of any such other or similar condition.
(c) The provisions of this Section 15 shall survive the
termination of this Agreement.
16. We hereby certify and agree that no shipments will be made or other
transactions undertaken under any Credit in violation of the laws of the
United States, any applicable foreign law or the applicable regulations of any
United States or foreign governmental agency or authority.
17. Except as you may otherwise expressly agree in writing, we agree that all
trade transactions made under any acceptance Credit shall be on such terms and
conditions as shall enable the resulting acceptances to satisfy all
requirements for eligibility for discount by Federal Reserve Banks pursuant to
Section 13 of the Federal Reserve Act as such may be amended from time to
time, and all applicable regulations and administrative interpretations having
reference thereto.
18. (a) No single or partial exercise of any power or right hereunder
shall operate as a waiver of any power or right hereunder or preclude other or
further exercise thereof or the exercise of any other power or right. The
rights and remedies herein expressly specified are cumulative and not
exclusive of any other rights or remedies which you may otherwise have
hereunder, under any other agreement and under applicable laws. If any
provision of this agreement shall be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this agreement.
(b) You shall not be deemed to have modified this agreement or
waived any of your rights hereunder, unless you or your authorized agent shall
have signed such amendment or waiver in writing. No such waiver unless
expressly stated therein shall be effective as to any transaction which occurs
subsequent to the date of such waiver, nor as to any continuance of a breach
after such waiver.
19. The obligations hereunder shall continue in force and apply,
notwithstanding any change in the membership of any of the undersigned which
is a partnership, whether arising from the death or retirement of one or more
partners or the accession of one or more new partners. The obligations
hereunder shall bind the heirs, executors, administrators, successors and
assigns of the undersigned, and all rights, benefits and privileges hereby
conferred on you shall be and hereby are extended to and conferred upon and
may be enforced by your successors and assigns.
20. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAW OF THE STATE OF NEW YORK (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW).
Each of us hereby agrees that ANY LEGAL ACTION OR PROCEEDING AGAINST
ANY OF US WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE
STATE OF NEW YORK IN THE CITY OF NEW YORK OR OF THE UNITED STATES OF AMERICA
FOR THE SOUTHERN DISTRICT OF NEW YORK as you may elect, and, by execution and
delivery hereof, each of us accepts and consents to, for ourselves and in
respect to our respective property, generally and unconditionally, the
jurisdiction of the aforesaid courts and agrees that such jurisdiction shall
be exclusive, unless waived by you in writing, with respect to any action or
proceeding brought by any of us against you and any questions relating to
usury. Nothing herein shall limit your right to bring proceedings against us
in the courts of any other jurisdiction. Service of process out of any such
courts may be made by mailing copies thereof by registered or certified mail,
postage prepaid, to us at our address set forth below our signature at the end
of this Agreement and will become effective 30 days after such mailing. Each
of us agrees that Sections 5-1401 and 5-1402 of the General Obligations Law of
the State of New York shall apply to this Agreement and, to the maximum extent
permitted by law, waives any right to stay or to dismiss any action or
proceeding brought before said courts on the basis of forum non conveniens.
AFTER REVIEWING THIS PROVISION SPECIFICALLY WITH ITS RESPECTIVE
COUNSEL, EACH OF US AND YOU HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVE ANY AND ALL RIGHTS ANY OF US AND YOU MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION
WITH, THIS AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN), OR ACTIONS OF ANY OF US OR YOU. THIS PROVISION
IS A MATERIAL INDUCEMENT FOR YOU TO ISSUE CREDITS TO US.
You shall have all of the rights and remedies of a secured party
under the Uniform Commercial Code of the State of New York in addition to your
rights and remedies hereunder and under other applicable law.
21. We consent that, without notice to or further assent by any of us, the
obligations of any party hereunder or under any guaranty with respect to such
obligations, or any collateral for any of the foregoing obligations, may from
time to time, in whole or in part, be renewed, extended, modified,
compromised, or settled for cash, credit or otherwise upon any terms and
conditions you may deem advisable, and that you may discharge or release any
party from its obligations hereunder or under any such guaranty, and that any
collateral may from time to time, in whole or in part, be exchanged, sold or
surrendered by you, all without in any way releasing the obligations of any of
us hereunder.
22. Any notice to be given hereunder shall be deemed to have been
sufficiently given when mailed, postage prepaid, or when telegraphed, telexed
or telecopied to any of us at the address set forth opposite our respective
names below or at such other address as may be designated by us in writing and
delivered to you.
23. Notice of your acceptance of this agreement is hereby waived.
24. As used in this agreement:
a. the word "property" includes goods, merchandise, securities, funds,
choses in action and any and all other forms of property, whether real,
personal or mixed and any right or interest therein; and
b. "Business Day" shall mean any day other than Saturday, Sunday or other
day on which commercial banks in New York City are authorized or required to
close under the laws of New York.
25. If this agreement is executed by a single entity or individual, the
terms "we", "our" and "us" shall be read throughout as "I", "my" and "me", as
the case may be, and if this agreement is executed by a single entity or
individual, all references herein to the terms "we", "our" and "us" shall be
deemed to be references to such entity or individual. If this agreement is
executed by two or more parties, all references to the terms "we", "our" and
"us" shall mean all or any one or more of such parties, as you may in your
sole discretion elect. In such case, all such parties shall be jointly and
severally liable with respect to all obligations hereunder, and the
agreements, representations and warranties of all such parties shall likewise
be joint and several; and you may avail yourself of all rights and remedies
against any such party and Collateral of such party and against any or all of
other such parties and their Collateral as you may in your sole discretion
elect. Further in such case each of us shall be deemed to be the agent of all
the others of us, and you may, except to the extent expressly otherwise
provided herein, act at the direction or request of any one or more of us,
return or turn over Collateral to any one or more of us, and give any notices,
whether or not required to be given, to any one or more of us, all as you may
elect and without notice to any other of us.
26. We agree that you may act upon oral, telex or facsimile instructions
which are received by you from person(s) purporting to be, or which
instructions appear to be, authorized by any of us. We further agree to
indemnify and hold you harmless from any claims by virtue of your acting upon
such oral, telex or facsimile instructions as such instructions were
understood by you. In the event we send you a manually signed confirmation of
the previously sent oral, telex or facsimile instructions, you shall have no
duty to compare it against the previous instructions received by you nor shall
you have any responsibility should the contents of the written confirmation
differ from the oral, telex or facsimile instructions as acted upon by you.
27. We shall not assign any rights or delegate any obligations hereunder
without your express prior written consent.
28. All payments to be made by us hereunder shall be made to you without
setoff or counterclaim and free and clear of, and without deduction for or on
account of, any present or future stamp or other taxes, levies, imposts,
duties or other charges of any kind now or hereafter imposed through
withholding or deduction. If, notwithstanding the provisions of the
immediately preceding sentence, any such taxes, duties, levies, imposts or
other charges are so levied or imposed on any such payment, we will pay
additional interest or will make additional payments in such amounts as may be
necessary so that the net amount received by you, after withholding or
deduction therefor, will be equal to the amount provided for herein. We agree
to furnish promptly to you official receipts evidencing payment of any taxes,
levies, imposts, duties or other charges so withheld or deducted.
29. Each Credit, except as otherwise herein expressly stated, is subject to
the Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500, as from time to time
amended, and to the extent not inconsistent therewith, shall also be subject
to the New York Uniform Commercial Code.
Very truly yours,
PENN OCTANE CORPORATION
By /s/ J.B. Richter
------------------
Title: President
Address: 900 Veterans Blvd., Suite 240
Redwood City, CA 94063
Facsimile Number: (415) 368-1505
ACCEPTED:
RZB FINANCE LLC
By /s/ Pearl S. Geffers Vice President
By /s/ F. Dieter Beintrexler President
PROMISSORY NOTE
PROMISSORY NOTE (the "Note") of the Borrower named below delivered to RZB
Finance LLC ("RZB") dated October 14, 1997.
1. SPECIAL TERMS
The following terms and provisions shall apply to this Note; definitions
of terms in this or other sections of this Note expressed in the singular
shall include the plural and vice versa.
Borrower: Penn Octane Corporation
a Delaware Corporation
(jurisdiction of incorporation)
Principal Amount of this Note:
Six Million Dollars
($6,000,000)
Margin: 1% p.a.
Loan Documents: Line Letter dated October 14, 1997, between the Borrower
and RZB, General Security Agreement dated October 14, 1997, between the
Borrower and RZB, Continuing Agreement for Letters of Credit dated October 14,
1997, between the Borrower and RZB, Guaranty and Agreement dated October 14,
1997 between Jerome Richter (the "Guarantor") and RZB, and all other
agreements from time to time executed by the Borrower or the Guarantor for the
benefit of RZB, in each case as amended, modified or supplemented from time to
time.
Minimum Repayment Amount: $100,000
2. PRINCIPAL AND INTEREST
FOR VALUE RECEIVED, the Borrower promises to pay to the order of RZB, ON
DEMAND, the Principal Amount of this Note specified in Section 1 or, if less,
the then-outstanding principal amount of all loans (each a "Loan" and
collectively, the "Loans") made to the Borrower by RZB pursuant to the Loan
Documents. In no event shall the maturity date of any Loan be more than 30
days after the date such Loan is made.
The Borrower promises also to pay interest on the unpaid principal amount
of each Loan (after as well as before judgment) from the date thereof until
maturity (whether on demand, by acceleration or otherwise) at a rate per annum
equal to the Margin specified in Section 1 plus the Base Lending Rate from
time to time in effect, such interest to be payable on the last Business Day
of each calendar month and at such maturity.
Notwithstanding the preceding sentence, the Borrower shall also pay
interest at a rate per annum equal to 2% plus the Margin plus the Base Lending
Rate from time to time in effect, on any principal of the Loan and, to the
extent permitted by law, on any interest or other amount payable by the
Borrower hereunder which shall not be paid in full when due (whether on
demand, by acceleration or otherwise) from such due date until paid in full
(after as well as before judgment), such interest to be payable on demand.
All interest shall be computed on the basis of the number of days
actually elapsed in a 360-day year.
Definitions
The term "Business Day" means any day other than a Saturday, Sunday, or
any day which shall be in New York City a legal holiday or a day on which
banking institutions are authorized by law to close.
The term "Base Lending Rate" means, for any day, the higher of (i) the
rate announced by The Chase Manhattan Bank (the "Bank") from time to time at
its principal office in New York, New York as its prime rate for domestic
(United States) commercial loans in effect on such day and (ii) the Federal
Funds Rate in effect on such day plus 1/2%. (Such Base Lending Rate is not
necessarily intended to be the lowest rate of interest charged by the Bank in
connection with extensions of credit.) Each change in the Base Lending Rate
shall result in a corresponding change in the interest rate and such change
shall be effective on the effective date of such change in the Base Lending
Rate.
The term "Federal Funds Rate" means, for any day, the overnight federal
funds rate in New York City, as published for such day (or, if such day is not
a Business Day, for the next preceding Business Day) in the Federal Reserve
Statistical Release H.15 (519) or any successor publication, or if such rate
is not so published for any day which is a Business Day, the average of the
quotations for such day on overnight federal funds transactions in New York
City received by the Bank from three federal funds brokers of recognized
standing selected by the Bank.
3. ALL PAYMENTS
Each payment by the Borrower pursuant to this Note shall be made prior to
1:00 P.M. (New York time) on the date due and shall be made without set-off or
counterclaim to RZB at such account as RZB shall designate, or in the absence
of such designation, to RZB at its office, presently located at 1133 Avenue of
the Americas, New York, NY 10036, or as RZB may otherwise direct and in such
amounts as may be necessary in order that all such payments (after withholding
for or on account of any present or future taxes, levies, imposts, duties or
other similar charges of whatsoever nature imposed by any government or any
political subdivision or taxing authority thereof, other than any tax on or
measured by the net income of RZB pursuant to the income tax laws of the
jurisdiction where RZB's principal or lending office is located) shall not be
less than the amounts otherwise specified to be paid under this Note. Each
such payment shall be made in lawful currency of the United States of America
and in immediately available funds. If the stated due date of any payment
required hereunder is other than a Business Day, such payment shall be made on
the next succeeding Business Day and interest at the applicable rate shall
accrue thereon during such extension.
The Borrower will have the right to repay all or any portion of a Loan
prior to demand only if RZB has been notified prior to 10:00 a.m. (New York
time) on the day of any repayment, provided that each partial repayment shall
not be less than the Minimum Repayment Amount. All repayments pursuant to
this paragraph shall be accompanied by the payment of all accrued interest on
the principal amount so paid.
4. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that all acts, filings, conditions
and things required to be done and performed and to have happened (including,
without limitation, the obtaining of necessary governmental approvals)
precedent to the issuance of this Note to constitute this Note the duly
authorized, legal, valid and binding obligation of the Borrower, enforceable
in accordance with its terms, have been done, performed and have happened in
due and strict compliance with all applicable laws.
5. DEFAULT
Without limiting the right of RZB to demand payment of the Loans
evidenced hereby at any time in its sole discretion, if any of the following
events shall occur: default in payment of any amount due hereunder to the
holder hereof, whether on demand or otherwise; suspension or liquidation by
the Borrower of its usual business or suspension or expulsion of the Borrower
from any exchange; calling of a meeting of creditors; assignment by the
Borrower for the benefit of creditors; dissolution, bulk sale or notice
thereof effected or given by the Borrower; creation of a security interest in
any assets of the Borrower which are or shall be subject to liens granted to
the holder hereof by the Borrower without consent of the holder hereof;
insolvency of any kind, attachment, distraint, garnishment, levy, execution,
judgment, application for or appointment of a receiver or custodian, filing of
a voluntary or involuntary petition under any provision of the U.S. Bankruptcy
Code or amendments thereto, of, by or against the Borrower or any property or
rights of the Borrower; filing of a petition or institution of any proceeding
by or against the Borrower for any relief under any bankruptcy or insolvency
laws or any laws relating to the relief of debtors, readjustment of
indebtedness, reorganizations, compositions or extensions; any governmental
authority or any court at the instance of any governmental authority shall
take possession of any substantial part of the property of the Borrower or
shall assume control over the affairs or operations of the Borrower; any
statement, representation or warranty made by the Borrower in any document,
agreement or financial statement delivered to RZB shall prove to be false in
any material respect when made; failure of the Borrower or any other party
thereto to comply with any term of any of the Loan Documents; failure of the
Borrower, on request, to furnish to RZB any financial information, or to
permit inspection by RZB of any books or records; any change in, or discovery
with regard to, the condition or affairs of the Borrower which, in RZB's
opinion, increases its credit risk; or if RZB for any other reason deems
itself insecure; then, the indebtedness evidenced by this Note, and all
accrued interest thereon shall become absolute, due and payable without demand
or notice to the Borrower. Upon default in the due payment of this Note, or
whenever the same or any installment of principal or interest hereof shall
become due in accordance with any of the provisions hereof (whether on demand
or otherwise), RZB may, but shall not be required to, exercise any or all of
its rights and remedies, whether existing by contract, law or otherwise, with
respect to any collateral security delivered in respect of the indebtedness
evidenced hereby.
6. MISCELLANEOUS
This Note is delivered pursuant to, and entitled to the benefits of, the
Loan Documents.
The Loans and principal repayments thereof may be recorded on the records
of RZB and, prior to any transfer of, or any action to collect, this Note, the
outstanding principal amount of each Loan shall be endorsed on this Note,
together with the date of such endorsement. Any such recordation or
endorsement shall constitute prima facie evidence of the accuracy of the
information so recorded or endorsed (provided, however, that the failure of
RZB to record any of the foregoing shall not limit or otherwise affect the
obligation of the Borrower to repay all the Loans (including interest thereon)
and its other obligations hereunder and under the Loan Documents). The Bank
may charge any account of the Borrower with the Bank for amounts payable under
this Note.
Each payment of principal of, or interest on, the Loans shall constitute
an acknowledgment of the indebtedness of the Borrower under the Loan Documents
and this Note. The Borrower:
a. waives presentment, demand, protest and other notice of any kind
in connection with this Note, and
b. agrees to pay to the holder hereof, on demand, all costs and
expenses (including reasonable legal fees) incurred in connection with the
enforcement and collection of this Note.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW),
BUT THIS SHALL NOT LIMIT THE RATE OF INTEREST WHICH MAY BE CHARGED BY RZB
UNDER OTHER APPLICABLE LAW.
The Borrower hereby agrees that ANY LEGAL ACTION OR PROCEEDING AGAINST
THE BORROWER WITH RESPECT TO THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE
STATE OF NEW YORK IN THE CITY OF NEW YORK OR OF THE UNITED STATES OF AMERICA
FOR THE SOUTHERN DISTRICT OF NEW YORK as RZB may elect, and, by execution and
delivery hereof, the Borrower accepts and consents to, for itself and in
respect to its property, generally and unconditionally, the jurisdiction of
the aforesaid courts and agrees that such jurisdiction shall be exclusive,
unless waived by RZB in writing, with respect to any action or proceeding
brought by it against RZB and any questions relating to usury. Nothing herein
shall limit the right of RZB to bring proceedings against the Borrower in the
courts of any other jurisdiction. Service of process out of any such courts
may be made by mailing copies thereof by registered or certified mail, postage
prepaid, to the Borrower at its address for notices as specified herein and
will become effective 30 days after such mailing. The Borrower agrees that
Sections 5-1401 and 5-1402 of the General Obligations Law of the State of New
York shall apply to this Note and, to the maximum extent permitted by law,
waives any right to stay or to dismiss any action or proceeding brought before
said courts on the basis of forum non conveniens.
AFTER REVIEWING THIS PROVISION SPECIFICALLY WITH ITS RESPECTIVE COUNSEL,
EACH OF THE BORROWER AND RZB HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS
NOTE OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
OR WRITTEN), OR ACTIONS OF THE BORROWER OR RZB. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR RZB MAKING THE LOANS TO THE BORROWER.
Nothing contained in this Note shall be deemed to establish or require
the payment of a rate of interest in excess of the maximum rate permitted by
applicable law (the "Maximum Rate"). If the amount of interest payable for
any interest payment period ending on any interest payment date calculated in
accordance with the provisions of this Note (said amount, the "Calculated
Interest") exceeds the amount of interest that would be payable for such
interest payment period had interest for such interest payment period been
calculated at the Maximum Rate, there shall be paid on such interest payment
date an amount of interest calculated on the basis of the Maximum Rate for
such interest payment period. If on any subsequent interest payment date, (i)
the Calculated Interest for the interest payment period ending on such
subsequent interest payment date (the "Current Interest Period") is less than
the amount of interest that would be payable for such Current Interest Period
had interest for such Current Interest Period been calculated on the basis of
the Maximum Rate and (ii) any portion of the excess (if any) of Calculated
Interest for any prior interest payment period over interest calculated at the
Maximum Rate for such prior interest payment period (the "Outstanding Interest
Amount") remains unpaid, then on such subsequent interest payment date there
shall be paid, as provided herein, additional interest for such Current
Interest Period in an amount equal to the lesser of (i) the theretofore unpaid
Outstanding Interest Amounts for all prior interest payment periods or (ii) an
amount that, when added to the amount of Calculated Interest
payable for such Current Interest Period, results in the payment of interest
for such Current Interest Period at the Maximum Rate.
IN WITNESS WHEREOF, the undersigned has caused this Note to be duly
executed and delivered by its duly authorized officer(s).
PENN OCTANE CORPORATION.
By: /s/ Jerome B. Richter
----------------------
Name: Jerome B. Richter
Title: President
Address of Borrower for Notices:
900 Veterans Blvd, Suite 240
Redwood City, CA 94063
GENERAL SECURITY AGREEMENT
In consideration of loans, credit or other financial accommodations extended
or continued from time to time to, or on the guaranty, endorsement or other
assurance of, the undersigned ("Obligor") by RZB Finance LLC (together with
its successors and assigns, "RZB"), Obligor hereby agrees as follows:
1. Security Interest.
a. To secure the full and punctual payment and performance of all of the
Obligations (as hereinafter defined), Obligor hereby grants to RZB a
continuing security interest in, and assigns and pledges to RZB, the
Collateral (as hereinafter defined).
b. "Obligations" shall mean and include all indebtedness, liabilities,
obligations, covenants and duties of Obligor to RZB or any Affiliate of RZB
(including those which RZB or such Affiliate may have acquired from others) of
every kind, nature and description, direct or indirect, absolute or
contingent, due or not due, contractual or tortious, liquidated or
unliquidated, arising by operation of law or otherwise, now existing or
hereafter arising, and whether or not evidenced by any note or other
instrument or agreement and whether or not for the payment of money,
including, but not limited to, indebtedness, obligations and liabilities to
RZB or such Affiliate of Obligor as a member of any partnership, syndicate,
association or other group.
c. Affiliate and certain other terms used herein are defined in Section
15 hereof.
d. "Collateral" shall mean and include all personal property and
fixtures of Obligor, whether now or hereafter existing or now owned or
hereafter acquired and wherever located, of every kind and description,
tangible or intangible, including, but not limited to, the following (each as
hereinafter defined):
(i) Accounts;
(ii) Inventory;
(iii) General Intangibles;
(iv) Documents;
(v) Instruments;
(vi) Equipment;
(vi) All books and records (including, without limitation, customer
lists, credit files, computer programs, printouts and other computer materials
and records) of Obligor pertaining to any of the Collateral; and
(vii) All Proceeds of all or any of the foregoing.
e. "Accounts" means all "accounts" (as defined in the UCC) now owned or
hereafter acquired by Obligor, and shall also mean and include all accounts
receivable, contract rights, book debts, notes, drafts and other obligations
or indebtedness owing to Obligor arising from the sale, lease or exchange of
goods or other property by it and/or the performance of services by it
(including, without limitation, any such obligation which might be
characterized as an account, contract right or general intangible under the
Uniform Commercial Code in effect in any jurisdiction) and all of Obligor's
rights in, to and under all purchase orders for goods, services or other
property, and all of Obligor's rights to any goods, services or other property
represented by any of the foregoing (including returned or repossessed goods
and unpaid sellers' rights of rescission, replevin, reclamation and rights to
stoppage in transit) and all monies due to or to become due to Obligor under
all contracts for the sale, lease or exchange of goods or other property
and/or the performance of services by it (whether or not yet earned by
performance on the part of Obligor), in each case whether now in existence or
hereafter arising or acquired including, without limitation, the right to
receive the proceeds of said purchase orders and contracts and all collateral
security and guarantees of any kind given by any person, corporation or other
entity with respect to any of the foregoing.
f. "Documents" means all "documents" (as defined in the UCC) or other
receipts covering, evidencing or representing goods, now owned or hereafter
acquired by Obligor and shall include, without limitation, all bills of
lading, dock warrants, dock receipts, warehouse receipts and orders for the
payment of goods and pipeline tickets.
g. "Equipment" means all "equipment" (as defined in the UCC) now owned
or hereafter acquired by Obligor, including without limitation all motor
vehicles, trucks, trailers, railcars and barges.
h. "General Intangibles" means all "general intangibles" (as defined in
the UCC) now owned or hereafter acquired by Obligor, including, without
limitation, (i) all obligations or indebtedness owing to Obligor (other than
Accounts) from whatever source arising, (ii) Obligor's right, title and
interest in, to and under all tax refund claims, (iii) Obligor's right, title
and interest in, to and under any and all accounts for the purchase and sale
of commodity futures contracts, commodity options, commodity swaps, caps,
collars or floors, forward or leverage contracts and/or actual or cash
commodities, any and all property or funds held in or for such accounts, any
and all agreements with brokers with respect to such accounts, and any rights
to receive payments in respect of such accounts and agreements, and (iv) all
patent licenses, patents, trademark licenses, trademarks, rights in
intellectual property, goodwill, trade names, service marks, trade secrets,
copyrights, permits and licenses.
i. "Instruments" means all "instruments", "chattel paper" and "letters
of credit" (each as defined in the UCC), including, without limitation, any
thereof evidencing, representing, arising from or existing in respect of,
relating to, securing or otherwise supporting the payment of, any of the
Accounts or General Intangibles, including (but not limited to) promissory
notes, drafts, bills of exchange and trade acceptances, now owned or hereafter
acquired by Obligor.
j. "Inventory" means all "inventory" (as defined in the UCC), now owned
or hereafter acquired by Obligor, wherever located, and shall also mean and
include, without limitation, all commodities, all raw materials and other
materials and supplies, work-in-process and finished goods and any products
made or processed therefrom and all substances, if any, commingled therewith
or added thereto.
k. "Proceeds" has the meaning set forth in the UCC.
l. "UCC" means the Uniform Commercial Code in effect on the date hereof
in the State of New York; provided that if by reason of mandatory provisions
of law, the perfection or the effect of perfection or non-perfection of the
security interest in any Collateral is governed by the Uniform Commercial Code
as in effect in a jurisdiction other than New York, "UCC" means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or
non-perfection.
2. Rank and Perfection of Security Interest.
a. Obligor will not create or permit to exist, nor shall there exist,
any security interest in, lien, attachment, levy or encumbrance upon, or
assignment or pledge as security of, any of the Collateral, except the
security interest of and assignment and pledge to RZB hereunder and Permitted
Liens.
(i) Obligor will from time to time, at its expense, take all action
requested by RZB, or which may be necessary or desirable, to perfect,
continue, evidence, preserve, protect or validate the security interest of and
assignment and pledge to RZB hereunder to enable RZB to exercise and enforce
its rights hereunder, including, but not limited to, (A) executing and
delivering one or more notices, financing statements, agreements or other
writings, and (B) delivering to RZB, and stamping or otherwise marking, in
such manner as RZB may specify, any and all chattel paper, Instruments,
letters and advice of credit and Documents constituting part of the
Collateral, in each case endorsed or accompanied by such instruments of
assignment as RZB may specify.
(ii) Obligor hereby authorizes RZB, at its option but without any
obligation so to do, to file financing and continuation statements and
amendments to financing statements, naming Obligor as debtor, with respect to
any of the Collateral without the signature of Obligor, and agrees that a
carbon, photographic or other reproduction of this Agreement or of a financing
statement is sufficient as a financing statement. Obligor shall pay the costs
of any recording or filing of any financing or continuation statements, or
amendments thereto, concerning the Collateral.
3. Covenants.
a. Obligor shall at all times: (i) be the sole owner of each and every
item of Collateral, (ii) defend the Collateral against the claims and demands
of all persons and (iii) in the case of tangible property constituting part of
the Collateral, (A) properly maintain and keep in good order and repair such
property and (B) keep such property fully insured with responsible companies
acceptable to RZB against such risks as such Collateral may be subject to, or
as RZB may request, under policies containing loss payable clauses naming RZB
as loss payee as its interests may appear and otherwise in form and substance
satisfactory to RZB, and providing that: (1) all proceeds thereof shall be
payable to RZB, (2) such insurance shall not be affected by any act or neglect
of Obligor or other owner of the property described in such policy, and (3)
such policy and loss payable clause may not be cancelled or amended except
upon ten days' prior written notice to RZB.
b. Obligor will comply with the requirements of all leases, mortgages
and other instruments relating to premises where any Collateral is located.
c. Obligor will not sell or otherwise dispose of any of the Collateral,
except that, if the same constitute Collateral, until notice terminating such
authority is given by RZB to Obligor, (i) accounts may be collected in the
ordinary course of business as heretofore conducted and (ii) Inventory or farm
products may be sold in the ordinary course of business as heretofore
conducted.
d. Obligor will give RZB not less than 30 days prior written notice of
(i) any change in (A) its name, identity or corporate structure, (B) the
location of its chief executive office or any other place of business, or (C)
the location of any of the Collateral or its books and records concerning any
Accounts, (ii) the location of each new place of business opened by Obligor,
and (iii) each new location of any Collateral. Obligor will give RZB prompt
notice of any loss or depreciation in the value of any of the Collateral. Set
forth on Schedule A annexed hereto are all trade names or trade styles used by
Obligor, the location of Obligor's chief executive office, all locations of
Collateral and all locations of Obligor's books and records.
e. At any time and from time to time (i) RZB may and is hereby
authorized to transfer into or register in the name of itself or its nominee
any Instruments or Documents constituting a part of the Collateral without
notice to Obligor, (ii) with respect to Instruments, if any, constituting a
part of the Collateral that are registered in the name of RZB, RZB may receive
and retain all Distributions (as hereinafter defined in Section 15), (iii)
Obligor will permit representatives of RZB during normal business hours to
inspect its premises and books and records pertaining to the Collateral and
make extracts from and copies of such books and records, and (iv) upon
request, Obligor will enter into warehousing, lockbox or other custodial
arrangements satisfactory to RZB.
f. If any Collateral is at any time in the possession or control of any
warehouseman, bailee or any of Obligor's agents or processors, Obligor shall
notify such warehouseman, bailee, agent or processor of the security interests
created hereby and to hold all such Collateral for RZB'S account subject to
RZB's instructions.
g. Obligor shall keep full and accurate books and records relating to
the Collateral, and stamp or otherwise mark such books and records in such
manner as RZB may reasonably require in order to reflect the security interest
granted hereby.
h. Obligor will immediately deliver and pledge to RZB or RZB's agent
each Instrument, now owned or hereafter acquired, appropriately endorsed to
RZB or RZB's agent.
i. Obligor shall use its best efforts to cause to be collected from its
account debtors and obligors, as and when due, any and all amounts owing under
or on account of each Account, each General Intangible and each Instrument
(including, without limitation, Accounts, General Intangibles and Instruments
which are delinquent, such Accounts, General Intangibles and Instruments to be
collected in accordance with lawful collection procedures) and apply forthwith
upon receipt thereof all such amounts as are so collected to the outstanding
balance of such Account, General Intangible and Instrument. From and after
the occurrence of an Event of Default (as hereinafter defined), (i) any such
amounts so collected by Obligor shall be promptly remitted to RZB, in
precisely the form received (except for endorsement by Obligor when required),
and until so remitted to RZB, shall be held by Obligor in trust for RZB, and
shall not be commingled with other funds or property of Obligor, and RZB shall
be entitled to apply such amounts to the Obligations in such manner as RZB in
its sole discretion shall determine, and (ii) Obligor will not renew or extend
the time of payment of any Account without the written consent of RZB. The
costs and expenses (including, without limitation, attorneys' fees) of
collection, whether incurred by Obligor or RZB, shall be borne by Obligor.
j. Upon request by RZB, Obligor will promptly notify (and Obligor hereby
authorizes RZB so to notify) each account debtor or obligor in respect of any
Account, General Intangible or Instrument that such Collateral has been
assigned to RZB hereunder, and that any payments due or to become due in
respect of such Collateral are to be made directly to RZB or its designee.
k. Obligor will, promptly upon request, provide to RZB all information
and evidence it may reasonably request concerning the Collateral, and in
particular the Accounts, to enable RZB to enforce the provisions of this
Agreement.
4. General Authority. Obligor hereby irrevocably appoints RZB its true and
lawful attorney, with full power of substitution, in the name of Obligor, RZB,
or otherwise, for the sole use and benefit of RZB, but at Obligor's expense,
to the extent permitted by law to exercise, at any time and from time to time
while an Event of Default (as hereinafter defined) exists, all or any of the
following powers with respect to all or any of the Collateral:
a. to demand, sue for, collect, receive and give acquittance for any and
all monies due or to become due thereon or by virtue thereof,
b. to settle, compromise, compound, prosecute or defend any action or
proceeding with respect thereto,
c. to take any action or do any thing which Obligor is required to do
hereunder,
d. to extend the time of payment of any or all thereof and to make any
allowance and other adjustments with reference thereto, and
e. to do all other acts and things necessary and advisable in the sole
discretion of RZB to carry out and enforce this Agreement.
5. Events of Default. Without limiting the right of RZB to demand
payment of any or all of the Obligations at any time in its sole discretion,
it shall be an Event of Default if any of the following events shall occur:
(i) default in payment of any of the Obligations when due, whether on demand
or otherwise; or (ii) the occurrence of any "Event of Default" or "default" as
defined or specified in any agreement, instrument or document evidencing or
providing for the Obligations or any guaranty thereof.
6. Remedies upon Event of Default Rights. Upon the occurrence of an Event of
Default and at any time or from time to time thereafter:
a. RZB may declare, by notice to Obligor, any and all of the Obligations
immediately due and payable, without any other presentment, demand, protest or
notice of any kind, anything in any other agreement to the contrary
notwithstanding, and in the case of any bankruptcy, insolvency or similar
proceeding relating to Obligor or its property, all of the Obligations shall
automatically become due and payable (provided, however, that the foregoing
shall not be deemed to limit or impair in any way whatsoever the absolute
right of RZB to demand payment of the Obligations at any time in its sole
discretion, to the extent the agreements and instruments pertaining to such
Obligations provide for such demand);
b. RZB shall have no obligation to make further loans, extensions of
credit or other financial accommodations to or on behalf of Obligor, anything
in any other agreement to the contrary notwithstanding (provided, however,
that the foregoing shall not be deemed to limit or impair in any way
whatsoever the sole and absolute discretion of RZB to make or refrain from
making such loans, extensions of credit or financial accommodations to the
extent the agreements and instruments pertaining thereto provide for such
discretion);
c. RZB may exercise all other rights to which it is entitled hereunder
or under applicable law;
d. RZB may exercise all rights of a secured party under the UCC (whether
or not in effect in the jurisdiction where such rights are exercised) and, in
addition, RZB may sell the Collateral or any part thereof at public or private
sales, for cash, upon credit or for future delivery, and at such price or
prices as RZB may deem satisfactory. RZB may be the purchaser of any or all
of the Collateral so sold at any public sale (or, if the Collateral is of a
type customarily sold in a recognized market or is of a type which is the
subject of widely distributed standard price quotations, at any private sale)
and thereafter hold the same, absolutely, free from any right or claim of
whatever kind. Obligor will execute and deliver such documents and take such
other action as RZB deems necessary or advisable in order that any such sales
may be made in compliance with law. Upon any such sales RZB shall have the
right to deliver, assign and transfer to the purchaser thereof the Collateral
so sold. Each purchaser at any such sales shall hold the Collateral so sold
to it absolutely, free from any claim or right of whatever kind, including any
equity or right of redemption of Obligor, and to the extent permitted by law,
Obligor hereby specifically waives all rights of redemption, stay or appraisal
which it has or may have under any law now existing or hereafter adopted. The
notice (if any) of such sale required herein shall (i) in the case of a public
sale, state the time and place fixed for such sale, and (ii) in the case of
private sale, state the day after which such sale may be consummated. Any
such public sale shall be held at such time or times within ordinary business
hours and at such place or places as RZB may fix in the notice of such sale.
Unless the Collateral is perishable or threatens to decline speedily in value
or is of a type customarily sold on a recognized market, RZB will give Obligor
reasonable notice of the time and place of any such public sale or of the time
after which any private sale or any other intended disposition thereof is to
be made, and Obligor agrees that five (5) days prior notice shall be deemed
reasonable notice. At any such sale the Collateral may be sold in one lot as
an entirety or in separate parcels, as RZB may determine. RZB shall not be
obligated to make any such sale pursuant to any such notice. RZB may without
notice or publication, adjourn any public or private sale or cause the same to
be adjourned from time to time by announcement at the time and place fixed for
the sale, and such sale may be made at any time or place to which the same may
be so adjourned. In case of any sale of all or any part of Collateral on
credit or for future delivery, the Collateral sold may be retained by RZB
until the selling price is paid by the purchaser thereof, but RZB shall not
incur any liability in case of the failure of such purchaser to take up and
pay for the Collateral so sold and, in case of any such failure, such
Collateral may again be sold upon like notice. RZB, instead of exercising the
power of sale herein conferred upon it, may proceed by a suit or suits at law
or in equity to foreclose the security interests granted herein and sell the
Collateral, or any portion thereof, under a judgment or decree of a court or
courts of competent jurisdiction.
e. For the purposes of enforcing any and all rights and remedies under
this Agreement, RZB may (i) require Obligor to, and Obligor agrees that it
will, at its expense and upon the request of RZB, forthwith assemble all or
any part of the Collateral as directed by RZB and make it available at a place
designated by RZB which is, in its opinion, reasonably convenient to RZB
whether at the premises of Obligor or otherwise, (ii) to the extent permitted
by applicable law, enter, with or without process of law and without breach of
the peace, any premises where any of the Collateral is or may be located, and
without charge or liability to it, seize and remove such Collateral from such
premises, (iii) have access to and use Obligor's books and records relating to
the Collateral and (iv) prior to the disposition of the Collateral, store or
transfer it without charge in or by means of any storage or transportation
facility owned or leased by Obligor or any other person, corporation or other
entity, process, repair or recondition it or otherwise prepare it for
disposition in any manner and to the extent RZB deems appropriate and, in
connection with such preparation and disposition, use without charge any
trademark, trade name, copyright, patent or technical process used by Obligor.
f. If the Collateral consists in whole or in part of Instruments and RZB
elects to sell or otherwise dispose of such Instruments, (i) Obligor will, if
it controls the issuer of such Instruments, or it otherwise has the right to
effect such registration, and if RZB deems such registration to be desirable,
cause such Instruments to be registered under the Securities Act of 1933, as
amended, and take all other action, including but not limited to complying
with the "blue sky" or securities laws of the several states and delivering to
RZB appropriate quantities of prospectuses, necessary or appropriate so as to
permit the public sale or other disposition thereof by RZB in such
jurisdictions as RZB may select, and indemnify, in the form then customary,
all persons who are underwriters, statutory or otherwise, of such Instruments
in connection with such sale or disposition, such indemnity, to the extent
applicable to RZB, to be in addition to that afforded RZB under Section 10(c)
hereof, and (ii) RZB may elect not to exercise its rights under clause (i) and
in that event may, if in its judgment it shall be necessary or desirable so to
do, restrict the number of prospective bidders so as to comply with the
provisions of Section 5 of such Securities Act, and restrict such prospective
bidders to persons who will represent and agree that they are purchasing the
Instruments in question for their own account for investment and not with a
view to the distribution or release of any thereof and who will further agree
that such Instruments purchased by them may bear an appropriate restrictive
legend to that effect.
Limitation 7. on Duty of RZB in Respect of Collateral. Beyond the safe
custody thereof, RZB shall have no duty as to any Collateral in its possession
or control or in the possession or control of any agent or bailee or as to any
income thereon or as to the preservation of rights against prior parties or
any other rights pertaining thereto. RZB shall be deemed to have exercised
reasonable care in the custody and preservation of the Collateral in its
possession if the Collateral is accorded treatment substantially equal to that
which it accords its own property, and shall not be liable or responsible for
any loss or damage to any of the Collateral, or for any diminution in value
thereof, by reason of the act or omission of any warehouseman, carrier,
forwarding agency, consignee or other agent or bailee selected by RZB in good
faith.
8. Application of Proceeds. Upon any demand for payment of any or all of the
Obligations or upon the occurrence and during the continuance of any other
Event of Default, the proceeds of any sale of, or other realization upon, all
or any part of the Collateral shall be applied by RZB in the following order
of priority:
a. to payment of the expenses of such sale or other realization,
including reasonable compensation to (and costs and disbursements of) agents
and counsel for RZB, and all expenses, liabilities and advances incurred or
made by RZB in connection therewith, and any other unreimbursed expenses for
which RZB is to be reimbursed pursuant to the documents or instruments
evidencing or governing any of the Obligations;
b. to the payment of accrued but unpaid interest on the Obligations in
accordance with the provisions of any promissory note, letter of credit
reimbursement agreement or other agreement or instrument evidencing any of the
Obligations;
c. to the payment of unpaid principal of the Obligations;
d. to the payment of all other Obligations, until all Obligations shall
have been paid in full; and
e. to payment to Obligor or its successors or assigns, or to whomsoever
may be entitled thereto, or as a court of competent jurisdiction may direct,
of any surplus then remaining from such proceeds.
If, upon the sale, lease or other disposition of the Collateral, the
proceeds thereof are insufficient to pay all amounts to which RZB is legally
entitled, Obligor will remain liable for the deficiency, together with
interest thereon at the rate provided for post-maturity interest in the
agreements and instruments evidencing the Obligations.
9. General Representations, Warranties and Agreements. Obligor hereby
represents, warrants and agrees that:
a. The execution, delivery and performance of this Agreement are within
its powers, corporate or otherwise, have been duly authorized by all required
action and do not and will not contravene any law or any agreement or
undertaking to which it is a party or by which it may in any way be bound or,
if Obligor is a corporation, its certificate of incorporation or by-laws.
b. Each of the representations and warranties contained herein is true
and correct on the date hereof and all other information, including financial
statements and projections, furnished to RZB at any time by or on behalf of
Obligor was and will be complete and correct in all respects to the extent
necessary for the purpose of presenting the subject matter thereof fairly to
RZB.
10. Expenses of Obligor's Duties; RZB's Rights to Perform on Obligor's
Behalf; RZB's Expenses and Indemnification.
a. Obligor's agreements and duties hereunder shall be performed by it at
its sole cost and expense.
b. If Obligor shall fail to do any act or thing which it has covenanted
to do hereunder, RZB may (but shall not be obligated to) do the same or cause
it to be done, either in its name or in the name and on behalf of Obligor, and
Obligor hereby irrevocably authorizes RZB so to act.
c. Obligor agrees to reimburse RZB for all costs and expenses, including
attorneys' fees and disbursements, incurred, and to indemnify and hold RZB
harmless from and against all losses suffered, by RZB in connection with (i)
RZB's exercise of any right or remedy granted to it hereunder, (ii) any claim
and the prosecution or defense thereof arising out of or in any way connected
with this Agreement, and (iii) the collection or enforcement of the
Obligations.
d. Amounts payable by Obligor under this Section 10 shall constitute
Obligations which shall be payable on demand.
11. No Waivers of Rights Hereunder; Rights Cumulative.
a. No delay by RZB in exercising any right hereunder, or under any of
the other Obligations, shall operate as a waiver thereof, nor shall any single
or partial exercise of any right preclude other or further exercises thereof
or the exercise of any other right. No waiver or amendment of any provision
of this Agreement or of any of the other agreements, instruments or documents
evidencing the Obligations shall be enforceable against RZB unless it shall be
in writing, be signed by RZB, and expressly refer to the provision affected;
any such waiver shall be limited solely to the specific event waived.
b. All rights granted to RZB hereunder shall be cumulative and shall be
supplementary of and in addition to those granted or available to RZB with
respect to the other Obligations or under applicable law and nothing herein
shall be construed as limiting any such other right.
12. Assignment, Participations.
a. RZB may assign any or all of the Obligations and may transfer
therewith any or all of the Collateral therefor and the transferee shall have
the same rights with respect thereto as had RZB. Upon such transfer, RZB
shall be released from all responsibility for the Collateral so transferred.
b. RZB may from time to time sell or otherwise grant participations in
any of the Obligations and any Collateral for the Obligations. Obligor agrees
that each such holder of a participation may exercise any and all rights of
banker's lien, set-off and counterclaim with respect to its participation in
the Obligations as fully as though Obligor were directly indebted to such
holder in the amount of such participation.
13. Continuing Agreement; Termination.
a. This Agreement shall be a continuing agreement and shall apply to all
present and future Obligations, notwithstanding that at any particular time
all of the Obligations then outstanding shall have been paid in full.
b. This Agreement shall continue in full force and effect until written
notice of termination shall have been signed by RZB.
14. Governing Law; Jurisdiction; Certain Waivers.
a. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK, EXCEPT AS OTHERWISE REQUIRED BY MANDATORY
PROVISIONS OF LAW.
b. OBLIGOR HEREBY AGREES THAT ANY LEGAL ACTION OR PROCEEDING AGAINST
OBLIGOR WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE
STATE OF NEW YORK IN THE CITY OF NEW YORK OR OF THE UNITED STATES OF AMERICA
FOR THE SOUTHERN DISTRICT OF NEW YORK AS RZB MAY ELECT, AND, BY EXECUTION AND
DELIVERY HEREOF, OBLIGOR ACCEPTS AND CONSENTS TO, FOR ITSELF AND IN RESPECT TO
ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS AND AGREES THAT SUCH JURISDICTION SHALL BE EXCLUSIVE, UNLESS WAIVED BY
RZB IN WRITING, WITH RESPECT TO ANY ACTION OR PROCEEDING BROUGHT BY IT AGAINST
RZB. NOTHING HEREIN SHALL LIMIT THE RIGHT OF RZB TO BRING PROCEEDINGS AGAINST
OBLIGOR IN THE COURTS OF ANY OTHER JURISDICTION. OBLIGOR AGREES THAT SECTIONS
5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK
SHALL APPLY TO THIS AGREEMENT AND, TO THE MAXIMUM EXTENT PERMITTED BY LAW,
WAIVES ANY RIGHT TO STAY OR TO DISMISS ANY ACTION OR PROCEEDING BROUGHT BEFORE
SAID COURTS ON THE BASIS OF FORUM NON CONVENIENS.
c. Obligor waives personal service of process and consents that service
of process upon it may be made by certified or registered mail, return receipt
requested, directed to Obligor at its address last specified for notices
hereunder, and service so made shall be deemed completed five days after the
same shall have been so mailed.
d. EACH OF RZB AND OBLIGOR HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN CONNECTION
WITH THIS AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF OBLIGOR OR RZB. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR RZB'S EXTENDING CREDIT TO OBLIGOR.
15. Definitions. As used herein:
a. Except as otherwise specifically defined herein, all terms defined in
Article 1 or 9 of the New York Uniform Commercial Code as in effect on the
date of this Agreement (other than the term "Collateral") are used herein with
the meanings therein given.
b. The following terms shall have the indicated meanings:
"Affiliate" of RZB shall mean a corporation that directly or
indirectly controls or is controlled by, or is under common control with, RZB.
"Distributions" shall mean cash dividends and other distributions
and interest paid in cash, in each case with respect to all Instruments
constituting part of the Collateral.
"Guarantor" shall mean any maker, drawer, acceptor, endorser,
guarantor, surety, accommodation party or other person liable upon or for any
of the Obligations.
"Permitted Liens" shall mean liens specifically consented to by RZB
in writing, and liens of any other financial institution which is a party to
an intercreditor agreement with RZB in form and substance satisfactory to RZB.
16. Notices. Any notice or request hereunder may be given to Obligor or to
RZB at their respective addresses set forth below or at such other address as
may hereafter be specified in a notice designated as a notice of change of
address under this Section. Any notice or request hereunder may be given by,
in the case of notices or requests to Obligor, mail, commercial courier
service, telex, or telegram, or by telephone subsequently confirmed by mail,
commercial courier service, return receipt requested, or by and in the case of
notices to RZB, registered mail, telex or telegram, subsequently confirmed by
such registered mail. Notices and requests to Obligor shall, in the case of
those by mail, commercial courier service, telex or telegram, be deemed to
have been given when deposited in the mail, first-class postage prepaid, or
delivered to such courier service, the telegraph office or telex operator,
addressed as provided in this Section, and in the case of those by telephone,
when so communicated to Obligor; notices to RZB shall be deemed to have been
given only when actually received by RZB at its address determined as provided
in this Section. Any requirement under applicable law of reasonable notice by
RZB to Obligor of any event shall be met if notice is given to Obligor in the
manner prescribed above at least seven days before (a) the date of such event
or (b) the date after which such event will occur.
17. General.
a. If this Agreement is executed by two or more Obligors, they shall be
jointly and severally liable hereunder, all provisions hereof regarding the
Obligations or the Collateral shall apply to the Obligations and Collateral of
any or all of them and the termination of this Agreement as to one or more of
such Obligors shall not terminate this Agreement as to any remaining Obligors.
b. This Agreement shall be binding upon the heirs, executors,
administrators, assigns or successors of each of the undersigned Obligors and
shall inure to the benefit of and be enforceable by RZB, its successors,
transferees and assigns.
c. If any provision hereof is invalid and unenforceable in any
jurisdiction, then, to the fullest extent permitted by law, (i) the other
provisions hereof shall remain in full force and effect in such jurisdiction
and shall be liberally construed in favor of RZB in order to carry out the
intentions of the parties hereto as nearly as may be possible, and (ii) the
invalidity or unenforceability of any provision hereof in any jurisdiction
shall not affect the validity or enforceability of such provision in any other
jurisdiction.
Dated: 10/17, 1997 .
PENN OCTANE CORPORATION
By: /s/ J.B. Richter
Title: President
By:
Title:
Address of Obligor:
One William Street Telephone:
New York, New York 10004 Telefax:
Telex:
Accepted: 10/22, 1997
RZB FINANCE LLC
By: Pearl Geffers
Title: Vice President
By: Dieter Beintrexler
Title: President
Address of RZB:
RZB FINANCE LLC Telephone:
1133 Avenue of the Americas Telefax: New York, New York
10036 Telex:
SCHEDULE A
1. Trade Names or Trade Styles used by Obligor.
2. Obligor's Chief Executive Office.
3. All Locations of Collateral.
4. All Locations of Obligor's Books and Records.
GUARANTY & AGREEMENT
Guaranty and Agreement ("Guaranty") between the Guarantor named below and RZB
FINANCE LLC (together with its successors and assigns, "RZB"), dated as of
October 14, 1997.
Special Terms
The following terms and provisions shall apply to this Guaranty; the
meaning of any term in this or other sections of this Guaranty expressed in
the singular shall apply, mutatis mutandis, to the same term expressed in the
plural and vice versa.
Borrower: Penn Octane Corporation
a __________________________corporation
(jurisdiction of incorporation)
Guarantor: Jerome Richter
Guaranteed Obligations: All indebtedness, liabilites and obligations of
the Borrower to RZB now existing or hereafter arising including, but not
limited to, those arising under the following documents (including any
modifications thereof or substitutions therefor, the "Loan Documents"):
Documents: Letter Agreeement, General Security
Agreement, Continuing Agreement for Letters of Credit and
Promissory Note, all dated October 14, 1997
2. Guaranty
2.1 Continuing Guaranty of Payment. In consideration of RZB agreeing to
the Loan Documents and/or extending or continuing credit to the Borrower in
connection therewith, the Guarantor irrevocably, absolutely and
unconditionally guarantees to RZB the payment when due of all Guaranteed
Obligations, together with interest thereon and other charges related thereto.
For purposes of this Guaranty, the Guaranteed Obligations shall be due on the
earliest of:
2.a. the due date thereof (by acceleration or otherwise),
2.b. with respect to any obligation due on demand, upon demand
therefor made by RZB upon the Borrower or the Guarantor,
2.c. the giving of notice by RZB to the Borrower or Guarantor of the
occurrence of any default by the Guarantor hereunder (including any material
misrepresentation by the Guarantor herein or in connection herewith),
2.d. the occurrence of a material adverse change in the Borrower or
the Guarantor,
2.e. the Borrower shall disaffirm or disavow any of its obligations
under the Loan Documents or the Guarantor shall disaffirm any of its
obligations hereunder,
2.f. the Borrower or the Guarantor shall admit in writing its
inability to pay its debts as they become due,
2.g. any indebtedness (direct or contingent) for borrowed money of
the Borrower or the Guarantor shall not be paid as and when the same becomes
due and payable, including any applicable grace period, or
2.h. the commencement of any bankruptcy, insolvency or similar
proceeding by or against the Borrower or the Guarantor.
This is a guaranty of payment rather than of collection; this is also a
continuing guaranty and all liabilities to which this Guaranty applies, or may
apply, under the terms hereof shall be presumed to have been created in
reliance hereon.
2.2 Nature of Obligations. The obligations of the Guarantor to make
payments to RZB hereunder are direct and primary obligations which shall not
be discharged for any reason until RZB has been indefeasibly paid in full.
Without limiting the generality of the foregoing, the obligations of the
Guarantor hereunder shall remain in force irrespective of:
2. a. any invalidity, illegality or unenforceability of, or any
defect in, any of the Loan Documents or Guaranteed Obligations or any defense
which the Borrower may have with respect thereto,
2. b. the existence or absence of any legal action to enforce the
Guaranteed Obligations or the Loan Documents or any security therefor, the
issuance of any judgment therefor or the execution of any such judgment, or
2. c. any other circumstance which might otherwise constitute a
defense available to or discharge of, a guarantor or surety of any type.
This guaranty is several and independent of, and may be enforced
regardless of, any other obligation (direct or contingent) of the Guarantor or
any other "Person" (such term to include any person or legal or governmental
entity, association, agency or instrumentality) with respect to the Guaranteed
Obligations.
2.3 Payments. All payments by the Guarantor hereunder shall be made to
RZB without set-off, recoupment, deduction or counterclaim at its office set
forth below (or as RZB may otherwise direct) in lawful currency of the United
States of America and in immediately available funds. Without limiting the
foregoing, all payments hereunder shall be made free and clear of, and without
deduction for, any present or future withholding or other taxes or duties,
including stamp duties, or other charges of any nature imposed on such
payments by or on behalf of any government or any political subdivision or
agency thereof or therein. If any such taxes, duties or charges are so levied
or imposed on any such payment, the Guarantor will make additional payments in
such amounts as may be necessary so that the net amount received by RZB, after
deduction for or on account of all such taxes, duties or charges, will be
equal to the amount provided for herein. The Guarantor shall furnish promptly
to RZB official receipts evidencing the payment of any such taxes, duties or
charges paid by the Guarantor.
3. Special Agreements of Guarantor
3.1 Subordination. Subject to the next following sentence of this Section
3.1:
3.a. all claims of the Guarantor against the Borrower shall be
subject and subordinate to the prior payment to RZB of all Guaranteed
Obligations and all obligations of the Guarantor hereunder, and
3.b. the Guarantor shall not be entitled to receive any payment or
exercise any set-off in respect of any such claim and, to the extent any such
payment is received (whether directly, by way of dividend in bankruptcy,
set-off or otherwise), the Guarantor will forthwith deliver the same (or the
value thereof) to RZB in precisely the form received (except for endorsement
or assignment where necessary), for application to the Guaranteed Obligations
and, until so delivered, the same shall be held in trust as the property of
RZB.
Notwithstanding the foregoing, except as provided in Section 3.2, until
the occurrence of any default or event of default under the Loan Documents or
this Guaranty, or any demand for payment of any of the Guaranteed Obligations,
the Guarantor may receive and retain payment in respect of any obligation owed
to it by the Borrower. If the Guarantor fails to make any necessary
endorsement or assignment of any instrument of payment to which RZB is
entitled, RZB and any of its officers or employees are hereby irrevocably
authorized to make the same on behalf of the Guarantor.
3.2 No Subrogation. The Guarantor hereby waives any right of
subrogation that it may have with respect to any payment that it may have made
to RZB hereunder.
3.3 No Contribution. The Guarantor agrees that it shall have no legal
or equitable right or claim (by way of indemnification, contribution or
otherwise) against any subsidiary or affiliate of RZB which has issued a
guaranty to RZB in respect of the Guaranteed Obligations.
3.4 Waivers. Except to the extent required by law which cannot be
waived, the Guarantor waives notice of acceptance of this Guaranty and notice
of any liability to which it may apply, and waives diligence, presentment,
demand for payment, protest, notice of dishonor or nonpayment of any such
liabilities, suit or taking other action or making any demand by RZB against,
and any other notice to, any party liable thereon (including the Guarantor).
The Guarantor agrees that RZB may at any time and from time to time, upon or
without any terms or conditions and in whole or in part:
3. a. change the manner, place or terms of, and/or change or extend
the time of payments of, renew or alter, any of the Guaranteed Obligations,
any security therefor, or any liability incurred directly or indirectly in
respect thereof, and this Guaranty shall apply to the Guaranteed Obligations
so changed, extended, renewed or altered,
3.b. fail to record, perfect or protect, or sell, exchange, release,
surrender, realize upon or otherwise deal with in any manner and in any order,
any property or Person whatsoever at any time securing or guaranteeing the
Guaranteed Obligations or any liabilities (including any of those hereunder)
incurred directly or indirectly in respect thereof or hereof, and/or any
offset thereagainst,
3.c. exercise or refrain from exercising any rights against the
Borrower or any other Person (including any guarantor) or otherwise act or
refrain from acting,
3.d. settle, release or compromise any of the Guaranteed Obligations,
any security therefor or any liability (including any of those hereunder)
incurred directly or indirectly in respect thereof or hereof, and may
subordinate the payment of all or any part of the Guaranteed Obligations to
the payment of any other liability (whether due or not) of the Borrower to the
creditors of the Borrower (including RZB),
3.e. apply any sums by whomsoever paid or howsoever realized to any
liability or liabilities of the Borrower to RZB regardless of what liability
or liabilities of the Borrower remain unpaid, provided that payments by the
Guarantor pursuant to this Guaranty shall be applied to its obligations
hereunder, but in such order as RZB may determine,
3.f. consent to or waive any breach of or act, omission or default
under, or modify or amend any provision of, the Loan Documents, and/or
3.g. increase the amount of indebtedness of the Borrower to RZB, whether
under the Loan Documents or otherwise.
It is understood and agreed that RZB may take any such action without the
consent of, or notice to, the Guarantor, without incurring responsibility to
the Guarantor, and without impairing or releasing the obligations of the
Guarantor hereunder.
3.5 Amounts Reclaimed. If claim is made upon RZB for repayment or
recovery of any amount received on account of any of the Guaranteed
Obligations and RZB repays all or part of said amount by reason of:
3.a any judgment, decree or order of any court, administrative body
or trustee in bankruptcy (or other Person acting on behalf of the Borrower or
its estate) or,
3.b any settlement or compromise of any such claim effected by RZB
with any such claimant (including the Borrower), or
3.c. any other reason,
then, and in any such event, the Guarantor agrees that any such repayment
(by reason of any such judgment, decree, order, settlement or compromise or
otherwise) shall be binding upon the Guarantor, notwithstanding any
cancellation of the Loan Documents or this Guaranty, and the Guarantor shall
be and remain liable to RZB hereunder for the amount so repaid or recovered to
the same extent as if such amount had never been received by RZB.
3.6 Interest. If the Guarantor fails to pay when due any obligation
hereunder, then, to the extent permitted by law, such obligation shall bear
interest, payable on demand, from the due date thereof until paid at a
fluctuating rate per annum equal to 2% in excess of the Base Lending Rate (as
hereinafter defined); provided that no such additional interest shall be
payable in respect of any such obligation on which interest is simultaneously
accruing pursuant to the Loan Documents. The term "Base Lending Rate" means,
for any day, the higher of (i) the rate announced by The Chase Manhattan Bank
(the "Bank") from time to time at its principal office in New York, New York
as its prime rate for domestic (United States) commercial loans in effect on
such day and (ii) the Federal Funds Rate (as hereinafter defined) in effect on
such day plus 1/2%. (Such Base Lending Rate is not necessarily intended to be
the lowest rate of interest charged by the Bank in connection with extensions
of credit.) Each change in the Base Lending Rate shall result in a
corresponding change in the interest rate and such change shall be effective
on the effective date of such change in the Base Lending Rate.
The term "Federal Funds Rate" means, for any day, the overnight federal
funds rate in New York City, as published for such day (or, if such day is not
a New York Business Day, for the next preceding New York Business Day) in the
Federal Reserve Statistical Release H.15 (519) or any successor publication,
or if such rate is not so published for any day which is a New York Business
Day, the average of the quotations for such day on overnight federal funds
transactions in New York City received by RZB or the Bank from three federal
funds brokers of recognized standing selected by RZB or the Bank.
3.7 The Borrower. The Guarantor will not cease to own (directly or
indirectly), free and clear of all liens and encumbrances, the interest in the
Borrower which it presently owns (if any) and will not agree to sell or
subject to any lien, encumbrance or any other security device such interest at
any future time, until the Loan Documents are terminated and all Guaranteed
Obligations and all obligations of the Guarantor hereunder are paid in full.
3.8 Information. The Guarantor will promptly furnish to RZB such
information regarding its and the Borrower's business, affairs and financial
condition as RZB may from time to time reasonably request.
3.9 Secured Obligations. The Guarantor shall not grant, create, assume,
incur or suffer to exist a security interest in or lien or encumbrance upon
any of its property for the purpose of securing the obligations of the
Borrower and/or itself to any other Person unless such Person shall have
entered into an intercreditor agreement with RZB in form and substance
satisfactory to RZB.
4. Representations, Warranties and Agreements
In order to induce RZB to agree to the Loan Documents, to extend or
continue the credit provided thereby and to accept this Guaranty, the
Guarantor makes the following representations, warranties and agreements which
shall survive the execution and delivery of this Guaranty:
4.1 Organizational Status and Power. The Guarantor:
4.a is, and will continue to be, duly organized and validly existing
under the law of the jurisdiction of its organization, as indicated in Section
1, and
4.b has the power to own its assets, to conduct its business as now
conducted and to enter into and perform the provisions of this Guaranty.
4.2 Legality. The entering into and performance by the Guarantor of
this Guaranty has been duly authorized by all necessary corporate and
stockholder action or other action required by its organizational documents,
and do not contravene any existing law or any legal order applicable to, or
license or permit granted to, the Guarantor, or any agreement or instrument to
which the Guarantor is a party or to which it or any of its assets is subject
or any provision of the Guarantor's organizational documents.
This Guaranty is the legal, valid and binding obligation of the
Guarantor, enforceable in accordance with its terms.
4.3 Governmental Approvals. Neither any action by or with any
governmental or public body or authority (including, without limitation, any
exchange control or monetary authority), or any subdivision thereof, nor any
other legal formality is required in connection with the entering into,
performance or enforcement of this Guaranty (collectively, "Governmental
Approvals"), except such as has been obtained or taken and with respect to
which a copy or other satisfactory evidence thereof has been furnished to RZB.
The Guarantor will maintain all requisite Governmental Approvals until the
Loan Documents are terminated and the Guaranteed Obligations and all of its
obligations hereunder are paid in full.
4.4 Financial Condition. The most recent year-end financial statements
of the Guarantor furnished to RZB prior to the date hereof have been prepared
in accordance with generally accepted accounting principles consistently
applied and fairly present the financial condition and the results of
operations of the Guarantor as at the end of and for the reporting period
covered thereby. There are no material liabilities or any material unrealized
or anticipated losses from unfavorable commitments which are not disclosed in
such financial statements. There has been no material adverse change in the
operations, business or financial condition of the Guarantor from that set
forth in such financial statements; and there are no legal proceedings pending
or, to the knowledge of the Guarantor threatened, against or affecting the
Guarantor which might (individually or in the aggregate) result in such a
material adverse change.
4.5 Investment Company Act. The Guarantor is not required to register
under the Investment Company Act of 1940, as amended (the "Act"), and the
entering into of this Guaranty and the performance thereof do not violate any
provision of the Act.
On each anniversary of the date of this Agreement, the Guarantor shall
deliver to RZB a certificate of an authorized officer of the Guarantor wherein
the Guarantor shall reaffirm to RZB the continuing truth and validity of the
representations and warranties set forth in the foregoing Section 4. The
failure of the Guarantor to deliver and/or RZB to demand such delivery of the
foregoing certificate shall in no way affect or invalidate the continuing
nature of the representations and warranties set forth in the foregoing
Section 4.
5. Miscellaneous
5.1 Payment of Expenses. The Guarantor agrees to pay all out-of-pocket
costs and expenses of RZB arising in connection with its administration and
enforcement of, or preservation of its rights under, this Guaranty (including,
without limitation, the reasonable fees and expenses of counsel for RZB), and
all stamp taxes (including interest and penalties, if any) which may be
payable in respect of this Guaranty or of any modification of this Guaranty.
5.2 Modification. This Guaranty may be modified or waived only by an
instrument in writing signed by the party against whom enforcement of the
modification or waiver is sought.
5.3 THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF
THE STATE OF NEW YORK (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW).
5.4 Notices. Communications given to any party in connection with this
Guaranty shall be in English and in writing and shall be effective when
delivered at its address set forth herein, as the same may be changed by
written notice to the other party. Written communications may be in any form
of writing howsoever transmitted.
5.5 Waiver. RZB's rights, powers, privileges and remedies under this
Guaranty or applicable law are cumulative and not exclusive and shall not be
waived, precluded or limited by any failure or delay in the exercise thereof
or by RZB's exercise, or partial exercise, of any thereof or by any course of
dealing between the Guarantor and RZB. No notice to or demand on the
Guarantor in any case shall entitle the Guarantor to any other or further
notice or demand in similar or other circumstances or constitute a waiver of
the right of RZB to any other or further action in any circumstance without
notice or demand.
5.6 Descriptive Headings. The descriptive headings used in this
Guaranty are for convenience only and shall not be deemed to affect the
meaning or construction of any provision hereof.
5.7 Benefit of Guaranty. This Guaranty shall be binding upon the
Guarantor and its successors and assigns and shall inure to the benefit of,
and be enforceable by, RZB and its successors and assigns and, in particular,
any holder or assignee from time to time of the Loan Documents; provided that
the Guarantor may not assign any of its rights or obligations hereunder
without the prior written consent of RZB.
5.8 Set-Off. RZB is authorized at any time and from time to time,
without notice to the Guarantor or to any other Person, any such notice being
hereby expressly waived, to set off and apply any and all deposits (general or
special) and any other indebtedness at any time held or owing by RZB to or for
the credit or the account of the Guarantor against and on account of the
obligations of the Guarantor under this Guaranty, irrespective of whether or
not RZB shall have made any demand hereunder or any demand for payment of any
Guaranteed Obligation and although said obligations, liabilities or claims, or
any of them, shall be contingent or unmatured, and the Guarantor hereby grants
to RZB a security interest in all such deposits and indebtedness.
5.9 Jurisdiction and Immunity. The Guarantor represents and agrees that
it is not entitled to, and to the extent it hereafter becomes so entitled
hereby waives, any immunity, sovereign or otherwise, with respect to itself
and its property from jurisdiction, service, attachment (both before and after
judgment) and execution in legal proceedings wherever commenced to enforce or
collect upon this Guaranty.
5.10 Survival. The provisions of Sections 3.5, 5.1 and 5.11 shall
survive the termination and cancellation of this Guaranty and, after
cancellation and return to the Guarantor, a photocopy hereof may be submitted
as evidence of such surviving obligations. Nothing herein shall preclude RZB
from establishing such obligations by other means.
5.11 WAIVER OF JURY TRIAL. EACH OF THE GUARANTOR AND RZB HEREBY
KNOWINGLY, VOLUNTARY AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH THIS GUARANTY OR ANY OTHER DOCUMENT OR AGREEMENT
EXECUTED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE GUARANTOR, THE
BORROWER OR RZB. THIS PROVISION IS A MATERIAL INDUCEMENT FOR RZB'S EXTENDING
TO THE BORROWER THE CREDIT FACILITY TO WHICH THIS GUARANTY RELATES.
5.12 Consent to Jurisdiction. The Guarantor hereby agrees that ANY
LEGAL ACTION OR PROCEEDING AGAINST THE GUARANTOR WITH RESPECT TO THIS GUARANTY
OR ANY LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK IN
THE CITY OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN
DISTRICT OF NEW YORK, as RZB may elect, and, by execution and delivery hereof,
the Guarantor accepts and consents to, for itself and in respect of its
property, generally and unconditionally, the jurisdiction of the aforesaid
courts and agrees that such jurisdiction shall be exclusive, unless waived by
RZB in writing, with respect to any action or proceeding brought by it against
RZB and any question relating to usury. Nothing herein shall limit the right
of RZB to bring proceedings against the Guarantor in the courts of any other
jurisdiction. Service of process out of any such courts may be made by
mailing copies thereof by registered or certified mail, postage prepaid, to
the Guarantor at its address for notices as specified herein and will become
effective 30 days after such mailing. The Guarantor agrees that Sections
5-1401 and 5-1402 of the General Obligations Law of the State of New York
shall apply to this Guaranty and the Loan Documents and, to the maximum extent
permitted by law, waives any right to any defense of, or to dismiss any action
or proceeding brought before said court on the basis of, forum non conveniens.
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed and
delivered by its duly authorized officer(s) as of the date first above
written.
Name of Guarantor:
JEROME RICHTER
By: /s/ Jerome B. Richter
Title: President
Address of Guarantor:
26280 Dori Lane
Los Altos Hills, CA 94022
Accepted as of the date first above written:
RZB FINANCE LLC
By: Pearl S. Geffers
Title: Vice President
By: F. Dieter Beintrexter
Title: President
PURCHASE AGREEMENT
------------------
THIS PURCHASE AGREEMENT made and entered into as of October 21, 1997, by
and between the Purchasers set forth on Schedule I hereto (each a "Purchaser",
collectively, the "Purchasers") and Penn Octane Corporation, a Delaware
corporation (the "Company").
WHEREAS, the Company wishes to sell and each Purchaser wishes to purchase
(i) a 10% Promissory Note in such principal amount as is set forth opposite
such Purchaser's name on Schedule I hereto, due on the earlier of (A) the
closing of a public offering of debt or equity securities of the Company
resulting in net proceeds to the Company in excess of $5 million (a
"Financing") and (B) June 30, 1998, substantially in the form annexed as
Exhibit 1 hereto (the "Note"), and (ii) warrants to purchase Common Stock,
$.01 par value (the "Common Stock") of the Company, exercisable until October
21, 2000 at $6.00 per share of Common Stock (subject to adjustment), in such
number as is set forth opposite such Purchaser's name on Schedule I hereto
(the "Warrant Shares"), substantially in the form of Exhibit 2 hereto (the
"Warrants"; the Note and the Warrants being herein collectively referred to as
the "Securities"); and
WHEREAS, the Company and each of the Purchasers desire to enter into a
Registration Rights Agreement with respect to the Warrant Shares,
substantially in the form annexed as Exhibit 3 hereto (the "Registration
Rights Agreement"), all on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the agreements and obligations herein
contained, the Purchasers and the Company hereby agree as follows:
1. Purchase and Sale of the Securities. Subject to the terms and
-----------------------------------
conditions set forth in this Agreement, the Company agrees to sell to each
Purchaser, and each Purchaser agrees, severally and not jointly, to purchase
from the Company, such Securities set forth opposite such Purchaser's name on
Schedule I hereto for a purchase price equal to the amount set forth opposite
such Purchaser's name on Schedule I hereto.
2. The Closing. The closing (the "Closing") of the purchase and sale
-----------
of the Securities shall take place on October 21, 1997 at 10:00 A.M. local
time at the offices of the Company in Redwood City, California, or at such
other time and place as the Company and the Purchasers shall agree. At the
Closing, each Purchaser shall deliver to the Company payment for the
Securities being purchased by such Purchaser in immediately available funds
and the Company shall deliver a Note and Warrants to each Purchaser in the
amount and number set forth opposite each Purchaser's name on Schedule I
hereto.
3. Registration Rights. The Purchasers shall have such registration
-------------------
rights with respect to the Warrant Shares as are set forth in the Registration
Rights Agreement.
4. Representations and Warranties of the Company, As of the Closing,
---------------------------------------------
the Company represents and warrants that:
(a) the Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and has
the requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder;
(b) the execution, delivery and performance of this Agreement,
and the sale and delivery of the Securities have been duly authorized by all
necessary corporate action on the part of the Company and do not violate any
covenant contained in any agreement to which the Company is a party; and
(c) the Warrant Shares, when issued upon exercise of the
Warrants and payment therefor, will be legally and validly issued, fully paid
and nonassessable.
5. Representations and Warranties of the Purchasers. Each of the
------------------------------------------------
Purchasers, severally and not jointly, represents and warrants to the Company,
as to itself, as follows:
(a) General:
-------
(i) The Purchaser has all requisite authority to enter into
this Agreement and to perform all of the obligations required to be performed
by it hereunder.
(ii) Neither the Company nor any person acting on behalf of
the Company has offered or sold the Securities to the Purchaser by means of
any form of general solicitation or general advertising. The Purchaser has
not received, paid or given, directly or indirectly, any commission or
remuneration for or on account of any sale, or the solicitation of any sale,
of the Securities.
(b) Information Concerning the Company:
-------------------------------------
(i) The Purchaser is familiar with the business and
financial condition, properties, operations and prospects of the Company.
(ii) The Purchaser has been given full access to all
material information concerning the condition, properties, operations and
prospects of the Company. The Purchaser and his advisors (if any) have had an
opportunity to ask questions of, and to receive information from, the Company
and persons acting on its behalf concerning the terms and conditions of the
Purchaser's investment in the Securities, and to obtain any additional
information necessary to verify the accuracy of the information and data
received by the Purchaser. The Purchaser is satisfied that there is no
material information concerning the condition, properties, operations and
prospects of the Company of which Purchaser is unaware.
(iii) The Purchaser has made, either alone or together with
his advisors (if any), such independent investigation of the Company, its
management, and related matters as the Purchaser deems to be, or the
Purchaser's advisors (if any) have advised to be, necessary or advisable in
connection with this investment; and the Purchaser and his advisors (if any)
have received all information and data which the Purchaser and his advisors
(if any) believe to be necessary in order to reach an informed decision as to
the advisability of investing in the Securities.
(iv) The Purchaser understands that all the Purchaser's
representations and warranties contained in this Agreement will be deemed to
have been reaffirmed and confirmed as of the Closing.
(v) The Purchaser understands that the purchase of the
Securities involves various risks, including the risk that it is unlikely that
any market will exist for any resale of the Note or the Warrants and that
resale of the Note, the Warrants and the Warrant Shares will be restricted as
herein provided.
(c) Status of Purchaser:
---------------------
(i) The Purchaser either alone or with Purchaser's advisors
(if any) has such knowledge, skill and experience in business, financial and
investment matters as to be capable of evaluating the merits and risks of an
investment in the Securities. To the extent that the Purchaser has deemed it
appropriate to do so, the Purchaser has retained at Purchaser's own expense,
and relied upon, appropriate professional advice regarding the investment, tax
and legal merits and consequences of this Agreement and owning the Note,
Warrants and Warrant Shares, as the case may be.
(d) Restrictions on Transfer or Sale
------------------------------------
(i) The Purchaser is acquiring the Securities and any
shares of Common Stock purchased upon exercise of the Warrants solely for its
own account, for investment purposes, and not with a view to, or for resale in
connection with, any distribution of the Note, the Warrants or such shares of
Common Stock. The Purchaser understands that neither the Note, the Warrants
nor such underlying Common Stock have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), or the securities laws of any
state (collectively referred to as "State Securities Laws") by reason of
specific exemptions under the provisions thereof which depend in part upon the
investment intent of the Purchaser and of the other representations made by
the Purchaser in this Agreement. The Purchaser understands that the Company
is relying upon the representations and agreements contained in this Agreement
(and any supplemental information) for the purpose of determining whether this
transaction meets the requirements for such exemptions.
(ii) The Purchaser understands that the Note, the Warrants
and such underlying Common Stock are "restricted securities" under applicable
federal securities laws and that the Securities Act and the rules of the
Securities and Exchange Commission (the "Commission") provide in substance
that the Purchaser may dispose of such securities or any of them only pursuant
to an effective registration statement under the Securities Act or an
exemption therefrom, and understands that the Company has no obligations or
intentions to register any of such securities thereunder, or to take any other
action so as to permit sales pursuant to the Securities Act, except as set
forth in the Registration Rights Agreement. Accordingly, the Purchaser
understands that under the Commission's rules, unless disposed of pursuant to
an effective registration statement under the Securities Act, the Purchaser
may dispose of the Note, Warrants and underlying Common Stock only in
accordance with the provisions of Rule 144 under the Securities Act, to the
extent available, or in "private placements" which are exempt from
registration under the Securities Act, in which event the transferee will
acquire "restricted securities" subject to the same limitations as in the
hands of the Purchaser. As a consequence, absent such an effective
registration statement under the Securities Act, the Purchaser understands
that it may be required to bear the economic risks of the investment in the
Securities (and the underlying Common Stock) for an indefinite period of time.
(iii) The Purchaser agrees that (a) it will not sell,
assign, pledge, give, transfer, of otherwise dispose of the Note, the Warrants
or such underlying Common Stock or any interest in any thereof or therein, or
make any offer or attempt to do any of the foregoing, except pursuant to
registration of such securities under the Securities Act and any applicable
State Securities Laws or in a transaction which, in the opinion of counsel for
the Purchaser satisfactory to the Company (which requirement may be waived by
the Company upon advice of counsel), is exempt from the registration
provisions of the Securities Act and any applicable State Securities Laws; (b)
the Note and the Warrants and any certificate(s) representing shares of Common
Stock issued upon exercise of the Warrants may bear a legend making reference
to the foregoing restrictions; and (c) the Company and any transfer agent for
shares of its Common Stock shall not be required to give effect to any
purported transfer of any of such securities except upon compliance with the
foregoing restrictions.
(iv) The registration rights granted to the Purchaser in
the Registration Rights Agreement are not assignable or otherwise
transferrable by the Purchaser. In no event shall any sale, assignment,
pledge or transfer of the Warrants or Common Stock issuable upon conversion of
the Warrants by the Purchaser to a transferee give rise to any rights under
the Registration Rights Agreement.
6. Conditions to Obligations of Purchaser and the Company. The
-------------------------------------------------------
obligations of each of the Purchasers under this Agreement to purchase any
Securities specified herein and of the Company to sell and deliver such
Securities are subject to the satisfaction at or prior to the Closing of the
following conditions precedent:
(a) The representations and warranties of the Company contained
in Section 4 hereof and of the Purchaser contained in Section 5 hereof shall
be true and correct on and as of the Closing in all respects with the same
effect as though representations and warranties had been made on and as of the
Closing.
(b) The Company shall have received from the Purchaser and the
Purchaser shall have received from the Company a certificate from the other
party (and, in the event such party is a corporate entity, an executive
officer of such party) to the effect that its representations and warranties
are still valid.
(c) The Company and the Purchaser shall each have executed and
delivered the Registration Rights Agreement.
7. Mandatory Prepayment. If at any time prior to the maturity of the
--------------------
Note, there shall have occurred a closing of a Financing, the Company shall,
within ten (10) business days of the receipt of such proceeds, prepay (without
penalty) all of the Note, including any accrued and unpaid interest thereon,
at the office of the Company in Redwood City, California or such other place
as the Purchasers and the Company may agree.
8. Fee. In connection with the purchase and sale of the Securities,
---
Pennsylvania Merchant Group Ltd, as placement agent for the Company ("PMG"),
shall receive at the Closing a fee from the Company equal to $120,000 plus
reimbursement of expenses, not to exceed $25,000.
9. Waiver, Amendment. Neither this Agreement nor any provisions
-----------------
hereof shall be modified, changed, discharged or terminated except by an
instrument in writing signed by the party against whom any waiver, change,
discharge or termination is sought.
10. Assignability. Neither this Agreement nor any right, remedy,
-------------
obligation or liability arising hereunder or by reason hereof shall be
assignable by either the Company or any Purchaser hereunder without the prior
written consent of the other party, which consent shall not be unreasonably
withheld.
11. Applicable Law. This Agreement shall be governed by and
---------------
construed in accordance with the law of the State of New York, regardless of
the law that might be applied under principles of conflicts of law.
12. Section and Other Headings. The section and other headings
---------------------------
contained in this Agreement are for reference purposes only and shall not
affect the meaning or interpretation of this Agreement.
13. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which together shall be deemed to be one and the
same agreement.
14. Notices. All notices and other communications provided for
-------
herein shall be in writing and shall be deemed to have been duly given if
delivered personally or by facsimile (with proof of receipt) or sent by
registered or certified mail, return receipt requested, postage prepaid:
(a) If to the Company, to it at the following address:
Penn Octane Corporation
900 Veterans Boulevard, Suite 240
Redwood City, California 94603
Attn: Jerome B. Richter,
President
with a copy to:
Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: Arnold H. Tracy, Esq.
(b) If to a Purchaser, at the address set forth beneath such
Purchaser's name on Schedule I hereto; or at such other address as any party
shall have specified by notice in writing to the other parties.
15. Binding Effect. The provisions of this Agreement shall be
---------------
binding upon and accrue to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and permitted assigns.
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 21st day of October, 1997.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 21st day of October, 1997.
CASTLE ENERGY CORPORATION
By: /s/ Joeseph L. Castle
---------------------
Name: Joeseph L. Castle
Title: Chairman and CEO
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 21st day of October, 1997.
/s/ Clint Norton
--------------------------------------
Clint Norton
SOUTHWEST CONCEPT INC.
By: /s/ Clint Norton
-----------------
Name: Clint Norton
Title:
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 21st day of October, 1997.
/s/ James F. Meara
--------------------------------------
James F. Meara, Jr.
SEP FBO JAMES F. MEARA IRA
By: Donaldson, Lufkin & Jenrette as
Securities Corporation Custodian
By: /s/ James F. Meara
-------------------------------
Name: James F. Meara, Jr.
Title:
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement as of this 21st day of October, 1997.
LINCOLN TRUST COMPANY FBO PERRY D. SNAVELY IRA
By: /s/ Perry D. Snavely
-------------------------------
Name: Perry D. Snavely
Title:
<TABLE>
<CAPTION>
SCHEDULE I
Purchasers and Addresses Securities Purchased
- -------------------------------------- --------------------------------------------------
<S> <C>
Castle Energy Corporation Principal amount of promissory note: $1,000,000
c/o CEC, Inc. Warrant to purchase 166,667 shares of Common Stock
One Radnor Corporate Center Purchase Price: $1,000,000
100 Matsonford Road, Suite 250
Radnor, Pennsylvania 19087
(610) 995-9400
Attention: Mr. Joseph Castle
with a copy to:
Tom Spencer, Esq.
Duane Morris & Hecksher
One Liberty Place, 42nd floor
Philadelphia, Pennsylvania 19103-7396
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
Purchasers and Addresses Securities Purchased
- ------------------------------- -------------------------------------------------
<S> <C>
Clint Norton Principal amount of promissory note: $90,000
17110 Dallas Parkway, Suite 120 Warrant to purchase 15,000 shares of Common Stock
Dallas, Texas 75248 Purchase Price: $90,000
(972) 931-8509
Southwest Concept Inc. Principal amount of promissory note: $60,000
17110 Dallas Parkway, Suite 120 Warrant to purchase 10,000 shares of Common Stock
Dallas, Texas 75248 Purchase Price: $60,000
Attn: Clint Norton
(972) 931-8509
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
Purchasers and Addresses Securities Purchased
- --------------------------------------- -------------------------------------------------
<S> <C>
James F. Meara, Jr. Principal amount of promissory note: $75,000
8150 N. Central Expressway, #795 Warrant to purchase 12,500 shares of Common Stock
Dallas, Texas 75206 Purchase Price: $75,000
(214) 692-7066
Donaldson Lufkin Jenrette Principal amount of promissory note: $75,000
Securities Corporation Custodian Warrant to purchase 12,500 shares of Common Stock
SEP FBO James F. Meara IRA Purchase Price: $75,000
Pershing Division of Donaldson Lufkin &
Jenrette Securities Corporation
P.O. Box 2050
Jersey City, New Jersey 07399
(214) 692-7006
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
Purchasers and Addresses Securities Purchased
- ------------------------ -------------------------------------------------
<S> <C>
Lincoln Trust Company Principal amount of promissory note: $200,000
FBO Perry D. Snavely IRA Warrant to purchase 33,333 shares of Common Stock
P.O. Box 5831 Purchase Price: $200,000
Denver, Colorado 80217
Attn: Monique Rice
(610) 260-6388
</TABLE>
DATE: OCTOBER ___, 1997 EXHIBIT 1
PROMISSORY NOTE
---------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation
("Company"), promises to pay to __________________________, a
__________________, or registered assigns ("Holder"), at the office of the
Company in Redwood City, California or such other place as Holder may
designate in writing at least three business days prior to the date fixed for
such payment, the entire principal sum of _____________________($_________),
together with interest thereon, on the earlier of (i) a date determined by the
Company within ten (10) business days of the closing date of any public
offering of debt or equity securities of the Company, resulting in net
proceeds to the Company in excess of $5,000,000, and (ii) June 30, 1998, (the
"Payment Date"), at which time all principal and any accrued and unpaid
interest thereon shall be due and owing. This Note shall accrue interest from
the date hereof at the rate of ten (10%) per annum, payable quarterly on March
31, June 30, September 30 and December 31 in each year. This Note may be
prepaid at any time prior to maturity without penalty in an amount equal to
the principal amount hereof plus interest thereon to the date fixed for
prepayment.
All payments of principal and interest hereunder shall be payable in
lawful money of the United States.
The Company shall be in default hereunder upon the occurrence of any of
the following events: (i) the failure by the Company to make any payment of
principal or interest when due hereunder and such failure shall have continued
for a period of ten (10) days; (ii) the commencement by the Company of a
voluntary case in a bankruptcy or insolvency proceeding or the entry of a
decree or order by a court of competent jurisdiction adjudicating the Company
a bankrupt or the appointment of a receiver or trustee of the Company upon the
application of any creditor in an insolvency or bankruptcy proceeding or other
creditor's suit; (iii) the entry of an order for relief approving a petition
for reorganization or arrangement filed against the Company under the Federal
bankruptcy laws and such order remains in force and unvacated thirty (30)
days; (iv) an assignment for the benefit of creditors by the Company; (v) the
occurrence of any event of default under the terms of any indebtedness of the
Company for borrowed money in excess of $50,000, provided that such
indebtedness has been accelerated because of such default; or (vi) the
existence of any judgment in excess of $50,000 against, or any attachment of
material property, of the Company.
At any time when an event of default hereunder shall have occurred and
shall be continuing, Holder at its option may accelerate the maturity of this
Note and declare all of the indebtedness thereof to be immediately due and
payable, together with accrued interest thereon, and payment thereof may be
enforced by suit or other process of law.
If this Note is not paid when due, whether at maturity or by
acceleration, the Company agrees to pay all reasonable costs of collection and
such costs shall include without limitation all costs, attorneys' fees and
expenses incurred by Holder hereof in connection with any insolvency,
bankruptcy, reorganization, arrangement or similar proceedings involving
Holder, or involving any endorser or guarantor hereof, which in any way
affects the exercise by Holder hereof of its rights and remedies under this
Note.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Note and all notices of every kind are hereby waived.
The terms "Company" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to such state's conflicts
of law provisions. Each of the parties hereto irrevocably consents to the
jurisdiction and venue of the federal and state courts located in the State of
New York, County of New York.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Jerome B. Richter
Chairman, President and
Chief Executive Officer
EXHIBIT 2
---------
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after October __, 2000
Warrant to Purchase ______ Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
[Name of Purchaser]
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on October __, 2000 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), _______ shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $6.00 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below.
The exercise price of a share of Common Stock in effect at any time and as
adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price". For purposes of this Warrant, a "Business Day" shall mean
any day other than a Saturday, a Sunday or a day on which banking institutions
in New York, New York, or in Redwood City, California, are authorized by law
or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are
sometimes herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time and from time to time by presentation and surrender hereof to
the Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this
Warrant is exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the shares purchasable
hereunder. Upon receipt by the Company of this Warrant at the office of the
Company, in proper form for exercise, accompanied by payment of the Exercise
Price, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that certificates
representing such shares of Common Stock shall not then be actually delivered
to the Holder. The issuance of certificates for shares of Common Stock upon
the exercise of this Warrant shall be made without charge to the Holder for
any issuance tax in respect thereof (with the exception of any federal or
state income taxes applicable thereto), all such taxes to be paid by the
Company, it being understood however that the Holder shall be required to pay
any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the
Holder. The Company will at no time close its transfer books against the
transfer of this Warrant or the issuance of any shares of Common Stock
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that
---------------------------------------
at all times there shall be authorized and reserved for issuance upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance or delivery upon exercise of this Warrant. All shares which may
be issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such
-----------------
manner as to require the issuance of fractional shares. If, as a result of
adjustment in the Exercise Price or the number of shares of Common Stock to be
received upon exercise of this Warrant, fractional shares would be issuable,
no such fractional shares shall be issued. In lieu thereof, the Company shall
pay the Holder an amount in cash equal to such fraction multiplied by the Fair
Market Value of a share of Common Stock. The term "Fair Market Value" shall
mean, as of a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be
the last sale price on such day on the NASDAQ Stock Market, or, if the Common
Stock is not then listed or admitted to trading on the NASDAQ Stock Market, on
such other principal stock exchange on which such stock is then listed or
admitted to trading, or, if no sale takes place on such day on any such
exchange, the average of the closing bid and asked prices on such day as
officially quoted on any such exchange, or, if the Common Stock is not then
listed or admitted to trading on any stock exchange, the average of the
reported closing bid and asked prices on such day in the over-the-counter
market as quoted on the National Association of Securities Dealers Automated
Quotation System or, if not so quoted, then as furnished by any member of the
National Association of Securities Dealers, Inc. selected by the Company. If
there shall be no meaningful over-the-counter market, then Fair Market Value
shall be such amount, not less than book value, as may be determined by the
Board of Directors of the Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable
---------------------------------
without expense (other than applicable transfer taxes) at the option of the
Holder, upon presentation and surrender hereof to the Company for any other
Warrants of different denominations entitling the holder thereof to purchase
in the aggregate the same number of shares of Common Stock purchasable
hereunder. Subject to the provisions of Section 12 below and any restriction
on transfer applicable hereto pursuant to the securities laws of the United
States or any State, upon surrender of this Warrant to the Company with an
assignment form duly executed, and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant in the
name of the assignee named in such instrument of assignment, and this Warrant
shall promptly be cancelled. This Warrant may be divided or combined with
other Warrants which carry the same rights upon presentation hereof at the
principal office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrants into
which this Warrant may be divided or exchanged, and the term "Holder" as used
herein includes any holder of any Warrant into which this Warrant may be
divided or for which this Warrant may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and
-------------------------------------------------
kind of securities purchasable upon the exercise or exchange of this Warrant
and the Exercise Price shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
--------------------------------------
date hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock
in shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(C) combines its outstanding shares of Common Stock into a
smaller number of shares;
(D) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of
its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that the Holder may receive, upon exercise or exchange of this
Warrant and payment of the same aggregate consideration, the number of shares
of capital stock of the Company which the Holder would have owned immediately
following such action if the Holder had exercised or exchanged the Warrant
immediately prior to such action.
The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the
----------------------------------
date hereof, the Company distributes to all holders of its Common Stock any of
its assets or debt securities, the Exercise Price following the record date
shall be adjusted in accordance with the following formula:
E'= E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares
of Common Stock.
The adjustment shall be made successively whenever any such distribution
is made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions
paid out of consolidated current or retained earnings as shown on the books of
the Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise
Price be made effective as of a record date, the Company may elect to defer
making such adjustment until the occurrence of such event by (i) issuing to
the Holder, if this Warrant is exercised after such record date but before the
occurrence of such event, the shares of Common Stock and other capital stock
of the Company, if any, issuable upon such exercise, had such adjustment been
made as of the record date, over and above the shares of Common Stock or other
capital stock of the Company, if any, issuable upon such exercise on the basis
of the Exercise Price as unadjusted, and (ii) paying to the Holder by check
any amount in lieu of the issuance of fractional shares pursuant to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
---------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by
its President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of
shares of Common Stock purchasable hereunder after giving effect to such
adjustment, and shall promptly cause copies of such certificates to be mailed
to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
---------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No adjustment for Small Amounts. Anything herein to the contrary
-------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the
amount of such adjustment shall be less than $.05 per share, but in such case,
any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to $.05 per share or more.
(h) Common Stock Defined. Subject to the provisions of Section 7
--------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification
or reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the
---------------------------------------------------------
event of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or in the event of any consolidation or merger of
the Company with or into another corporation (other than a merger in which
merger the Company is the continuing corporation and that does not result in
any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the class issuable upon exercise or exchange of this
Warrant) or in the event of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent to
such transaction, cause effective provisions to be made so that the Holder
shall have the right thereafter, by exercising this Warrant, to purchase the
kind and amount of shares of stock and other securities and property
(including cash) receivable upon such reclassification, capital reorganization
and other change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock that might have been received upon exercise
or exchange of this Warrant immediately prior to such reclassification,
capital reorganization, change, consolidation, merger, sale or conveyance.
Any such provision shall include provisions for adjustments in respect of such
shares of stock and other securities and property that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section 7 shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
In the event that in connection with any such capital reorganization or
classification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for, or of, a security of the Company other than
Common Stock, any such issue shall be treated as an issue of Common Stock
covered by the provisions of subsection (a) of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be
--------------------------
outstanding, (i) if the Company shall pay any dividend or make any
distribution upon its Common Stock, or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any shares of
stock or securities of any class or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of
the Company, or voluntary or involuntary dissolution or liquidation of the
Company shall be effected, then, in any such case, the Company shall cause to
be mailed to the Holder, at least thirty (30) days prior to the date specified
in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record
is to be taken for the purpose of such dividend, distribution or rights, or
(y) such reclassification, reorganization, consolidation, merger, conveyance,
dissolution or liquidation is to take place and the date, if any is to be
fixed, as of which the holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it
----------------------------------
will not increase the par value of the shares of Warrant Stock issuable upon
exercise of this Warrant above the prevailing and currently applicable
Exercise Price hereunder, and that before taking any action that would cause
an adjustment reducing the prevailing and current applicable Exercise Price
hereunder below the then par value of the Warrant Stock at the time issuable
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations
and demands to or upon the Company in respect of this Warrant may be made and
will give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this
----------------
Warrant, the Company may, in the event that the average trading price of the
Company's Common Stock, as reported on the NASDAQ SmallCap Market or such
other exchange on which the Company's Common Stock may then be quoted, exceeds
$10.00 for a period of twenty (20) consecutive trading days, upon not less
than thirty (30) days' notice in writing to the Holder, repurchase all or any
portion of this Warrant at a purchase price equal to $.10 per share of Common
Stock covered hereby, such purchase price to be proportionally adjusted each
time the Exercise Price is adjusted pursuant to Section 6 hereof. During such
thirty (30) day period, the Holder may exercise such Warrants in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in
Redwood City, California or at such other place as shall be agreed upon by the
Company and the Holder. At the Closing, the Company shall deliver to the
Holder an amount equal to the purchase price in immediately available funds
and the Holder will deliver this Warrant to the Company for cancellation. To
the extent any repurchase hereunder is of less than all of the rights
represented by this Warrant, the Company will deliver to the Holder a new
Warrant covering the rights not so purchased.
11. Determination by Board of Directors. All determinations by the
-----------------------------------
Board of Directors of the Company under the provisions of this Warrant will be
made in good faith with due regard to the interest of the Holder and in
accordance with sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all
------
notices and certificates given to the Holder shall be sent registered or
certified mail, return receipt requested, to such Holder at his address
appearing on the records of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants.
------------------------------------------------------------
Upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon delivery of any indemnity bond in such
reasonable amount as the Company may determine in the case of any such
mutilation, upon the surrender of such Warrant for cancellation, the Company
at its expense, will execute and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein,
-----------------
the same shall include the plural where appropriate, and words of any gender
shall include each other gender where appropriate.
15. Applicable Law. This Warrant shall be governed by, and construed
--------------
in accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By: /s/Jerome B. Richter
----------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
Dated: October 21, 1997
<PAGE>
PURCHASE FORM
-------------
Dated __________ , ____
The undersigned hereby irrevocably elects to exercise the within
Warrant to purchase ___________ shares of Common Stock and hereby makes
payment of $____________ in payment of the exercise price thereof.
Signature______________________________
Exhibit 3
---------
PENN OCTANE CORPORATION
____________________________________________
REGISTRATION RIGHTS AGREEMENT
_____________________________________________
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into as
of the Closing Date (as defined herein) by and among Penn Octane Corporation,
a Delaware corporation, and the persons whose signatures appear on the
execution pages of this Agreement.
This Agreement is entered into pursuant to the Purchase Agreement between
the Company and each of the Purchasers listed (the "Purchase Agreement"). In
order to induce the Purchasers to enter into the Purchase Agreement, the
Company has agreed to provide the registration rights set forth in this
Agreement. The execution of this Agreement by the Company is a condition to
the closing under the Purchase Agreement.
The parties hereby agree as follows:
1. Definitions
-----------
Capitalized terms used herein without definition shall have the
respective meanings set forth in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
Closing Date: The date on which the Closing occurs pursuant to the
--------------
Purchase Agreement.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
--------------
rules and regulations of the Commission promulgated thereunder.
Losses: The term "Losses" shall have the meaning set forth in Section 6
------
hereof.
Placement Agent: Pennsylvania Merchant Group Ltd, a Delaware
-----------------
corporation.
------
Prospectus: The prospectus included in any Registration Statement
-----------
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Securities Act Rule 430A), as amended
or supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities covered by such
Registration Statement and all other amendments and supplements to the
prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such prospectus.
Purchase Agreement: The Purchase Agreement by and among the Company and
--------------------
the Purchasers thereunder pursuant to which the Warrants were issued.
Registrable Securities: All shares of Common Stock issuable upon
------------------------
exercise of the Warrants, plus any Common Stock issued or issuable to the
Purchasers in respect of the Warrant Shares, pursuant to any stock split,
stock dividend, recapitalization, or similar event. The Warrants are not
Registrable Securities hereunder. As to any Registrable Securities, such
securities shall cease to be Registrable Securities when (i) a registration
statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been
disposed of pursuant to such effective registration statement, (ii) such
securities shall have been distributed pursuant to Rule 144 or any similar
provision then in force, under the Securities Act, (iii) such securities shall
have been otherwise transferred, new certificates or other evidences of
ownership for them not bearing a legend restricting further transfer and not
subject to any stop transfer order or other restrictions on transfer shall
have been delivered by the Company and subsequent disposition of such
securities shall not require registration or qualification of such securities
under the Securities Act or any state securities laws then in force or (iv)
the sale of such securities by a Purchaser shall no longer require
registration under the Securities Act or such securities shall cease to be
outstanding.
Registration Expenses: All reasonable expenses incurred by the Company
----------------------
in complying with Section 3 hereof, including all registration and filing
fees, printing expenses, fees and disbursements of counsel for the Company,
and blue sky fees and expenses.
Registration Statement: Any registration statement of the Company which
------------------------
covers any of the Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
all material incorporated by reference or deemed to be incorporated reference
in such registration statement.
Restricted Securities: The Warrant Shares upon original issuance
-----------------------
thereof, and at all times subsequent thereto, until, in the case of any such
security, it is no longer required to bear the legend set forth on such
security pursuant to the terms of the security, the Purchase Agreement and
applicable law.
Rule 144: Rule 144 under the Securities Act, as such Rule may be amended
---------
from time to time, or any similar rule or regulation hereafter adopted by the
Commission (excluding Rule 144A).
Shelf Registration Period: The term "Shelf Registration Period" shall
----------------------------
have the meaning set forth in Section 3 hereof.
Shelf Registration Statement: The term "Shelf Registration Statement"
-------------------------------
shall have the meaning set forth in Section 3 hereof.
2. Securities Subject to this Agreement
----------------------------------------
The securities entitled to the benefits of this Agreement are the
Registrable Securities.
3. Filing of Shelf Registration Statement.
------------------------------------------
(a) If the Company shall receive from a Purchaser at any time prior
to the earlier of (i) ninety (90) days after the closing of a public offering
of debt or equity securities of the Company resulting in net proceeds to the
Company in excess of $5 million, and (ii) June 30, 1998, a written request
that the Company effect any registration on Form S-3 or another appropriate
form with respect to all or a part of the Registrable Securities, the Company
will:
(i) promptly give written notice of the proposed
registration to all other Purchasers;
(ii) as soon as practicable, use its best efforts to file
with the Commission and use its best efforts to cause to be declared effective
under the Securities Act, a shelf registration statement (the "Shelf
Registration Statement") relating to the offer and sale of the Registrable
Securities by the Purchasers from time to time and set forth in such Shelf
Registration Statement;
(iii) use its reasonable best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the
Prospectus forming a part thereof to be usable by Holders for a period no
longer than three (3) years from the date of this Agreement, or such shorter
period that will terminate when (x) all the Registrable Securities covered by
the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement or otherwise, or (y) the date on which there ceases to
be outstanding any Registrable Securities (in any such case, such period being
called the "Shelf Registration Period"). The Company shall not be deemed to
have failed to use its reasonable best efforts if such Shelf Registration
Statement shall cease to be available for sale of Registrable Securities
during the requisite period because such action is required by applicable law
or because such action is taken by the Company in good faith and for valid
business reasons (not including avoidance of the Company's obligations
hereunder), including any financing, the acquisition or divestiture of assets,
corporate reorganization or other material transaction involving the Company
so long as the Company as soon as practicable thereafter takes such action as
would again permit the sale of the Registrable Securities in accordance with
the requirements of the Securities Act; and
(iv) prepare and file with the Commission such amendments,
including post effective amendments, to the Shelf Registration Statement as
may be necessary to keep such Registration Statement continuously effective
for the applicable time period; cause the related Prospectus to be
supplemented by any required Prospectus supplement and as so supplemented to
be filed pursuant to Rule 424 (or any similar provisions then in force) under
the Securities Act; and comply with the provisions of the Securities Act and
the Exchange Act with respect to the disposition of all securities covered by
such Shelf Registration Statement during the applicable period set forth in
such Shelf Registration Statement as so amended or in such Prospectus as so
supplemented.
(b) Priority on Shelf Registration. If any of the Registrable
--------------------------------
Securities to be registered pursuant to Shelf Registration are to be sold in a
firm commitment underwritten offering, and if the managing underwriters advise
the Company and the holders of such Registrable Securities that in their
opinion the amount of Registrable Securities proposed to be sold by such
holders in such offering exceeds the amount of Registrable Securities which
the managing underwriters believe can be sold in such offering, there shall be
included in such firm commitment underwritten offering the amount of such
Registrable Securities requested to be included in such registration which in
the opinion of such underwriters can be sold, and such amount shall be
allocated pro rata among the holders of such Registrable Securities requested
to be included in such registration on the basis of the number shares of
Common Stock represented by Registrable Securities requested to be included
therein by such holders.
(c) One-Time Demand Registration Rights. The Company shall be
-------------------------------------
obligated to use its best efforts to file and to cause to be declared
effective under the Securities Act with respect to the Registrable Securities
one Shelf Registration Statement. Any Purchaser whose Registrable Securities
are not covered by such Shelf Registration Statement shall have no further
demand registration rights under this Agreement.
(d) Mandatory Registration. If the Company should file a
-----------------------
registration statement under which the Registrable Securities are eligible for
registration, the Company may satisfy its obligations under this Section 3 by
allowing the holders of the Registrable Securities to include the Registrable
Securities in such registration statement and complying with subclauses (i) -
(iv) of clause (a) of this Section 3.
4. Holdback Agreements.
--------------------
(a) Restrictions on Public Sale by Holders of Registrable Securities.
----------------------------------------------------------------
Each holder of Registrable Securities whose Registrable Securities are covered
by a Registration Statement filed pursuant to Section 3 hereof agrees, if
requested by the managing underwriters in an underwritten offering (to the
extent timely notified in writing by the Company or the managing
underwriters), not to effect any public sale or distribution of securities of
the Company of any class included in such Registration Statement, including a
sale pursuant to Rule 144 (except as part of such underwritten offering),
during the 10-day period prior to, and the 90-day period beginning on, the
effective date of any Registration Statement.
The foregoing provisions shall not apply to any holder of Registrable
Securities if such holder is prevented by applicable statute or regulation
from entering into any such agreement; provided, however, that any such holder
-----------------
shall undertake in its request to participate in any such underwritten
offering not to effect any public sale or distribution of the class of
Registrable Securities covered by such Registration Statement (except as part
of such underwritten offering) during such period unless it has provided five
(5) business days prior written notice of such sale or distribution to the
managing underwriter or underwriters.
5. Expenses and Procedures.
-------------------------
(a) Expenses of Registration. All Registration Expenses (exclusive
------------------------
of underwriting discounts and commissions) shall be borne by the Company.
Each holder shall bear all underwriting discounts, selling commissions, sales
concessions and similar expenses applicable to the sale of the Registrable
Securities sold by such holder.
(b) Registration Procedures. In the case of each registration,
------------------------
qualification or compliance effected by the Company pursuant to Section 3, the
Company will keep the holders advised as to the initiation of registration,
qualification and compliance and as to the completion thereof. At its
expense, the Company will furnish such number of Prospectuses and other
documents incident thereto as the holders from time to time may reasonably
request.
(c) Information. The Company may require each seller of Registrable
-----------
Securities as to which any registration is being effected to furnish such
information regarding the distribution of such Registrable Securities as the
Company may from time to time reasonably request and the Company may exclude
from such registration the Registrable Securities of any seller who
unreasonably fails to furnish such information after receiving such request.
(d) Delay or Suspension. Notwithstanding anything herein to the
-------------------
contrary, the Company may, at any time, delay the filing of the Shelf
Registration for a period of up to 60 days following the filing date or
suspend the effectiveness of any Registration Statement for a period of up to
90 days in the aggregate in any calendar year, as appropriate (a "Suspension
Period"), by giving notice to each holder of Registrable Securities to be
included in the Registration Statement, if the Company shall have determined
that the Company may be required to disclose any material corporate
development or other event which disclosure may have a material effect on the
Company. Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of a
Suspension Period, such holder shall forthwith discontinue disposition of such
Registrable Securities covered by such Registration Statement or Prospectus
until such holder (i) is advised in writing by the Company that the use of the
applicable Prospectus may be resumed, (ii) has received copies of a
supplemental or amended prospectus, if applicable, and (iii) has received
copies of any additional or supplemental filings which are incorporated or
deemed to be incorporated by reference in such Prospectus. The Company shall
prepare, file and furnish to each holder of Registrable Securities immediately
upon the expiration of any Suspension Period, appropriate supplements or
amendments, if applicable, to the Prospectus and appropriate documents, if
applicable, incorporated by reference in the Registration Statement.
6. Indemnification
---------------
(a) Indemnification by Company. The Company shall indemnify and hold
--------------------------
harmless, to the full extent permitted by law, each holder of Registrable
Securities, its officers, directors, agents and employees, each person who
controls such holder (within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act), and the officers, directors, agents or
employees of any such controlling person, from and against all losses, claims,
damages, liabilities, costs (including, without limitation, all reasonable
attorneys' fees) and expenses (collectively, "Losses"), arising out of or
based upon any untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary prospectus, or arising out
of or based upon any omission of a material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances
under which they were made (in the case of any Prospectus) not misleading,
except insofar as the same are based solely upon information furnished to the
Company by such holder for use therein; provided, however, that the Company
-----------------
shall not be liable in any such case to the extent that any such Loss arises
out of or is based upon an untrue statement or omission made in any
preliminary prospectus or Prospectus if (i) such holder failed to send or
deliver a copy of the Prospectus or Prospectus supplement with or prior to the
delivery of written confirmation of the sale of Registrable Securities and
(ii) the Prospectus or Prospectus supplement would have corrected such untrue
statement or omission.
(b) Indemnification by Holder of Registrable Securities. In
-------------------------------------------------------
connection with any Registration Statement in which a holder of Registrable
Securities is participating, such holder of Registrable Securities shall
furnish to the Company in writing such information as the Company may
reasonably request for use in connection with any Registration Statement or
Prospectus. Each Purchaser shall indemnify and hold harmless, to the full
extent permitted by law, the Company, and its officers, directors, agents and
employees, each person who controls the Company (within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents or employees of any such controlling person, from and
against all Losses arising out of or based upon any untrue statement of a
material fact contained in any Registration Statement, Prospectus or
preliminary prospectus, or arising out of or based upon any omission of a
material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they were made
(in the case of any Prospectus) not misleading, to the extent, but only to the
extent, that such untrue statement or omission is contained in any information
so furnished in writing by such holder to the Company for use in such
Registration Statement, Prospectus or preliminary prospectus. Such indemnity
shall remain in full force and effect regardless of any investigation made by
or on behalf of the Company or any holder and any of their respective
directors, officers, agents, employees or controlling persons (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
and shall survive the transfer of such securities by such holder.
(c) Conduct of Indemnification Proceedings. If any action or
------------------------------------------
proceeding (including any governmental investigation or inquiry) shall be
brought or any claim shall be asserted against any person entitled to
indemnity hereunder (an "indemnified party"), such indemnified party shall
promptly notify the party from which such indemnity is sought (the
"indemnifying party") in writing, and the indemnifying party shall assume the
defense thereof, including the employment of counsel reasonably satisfactory
to the indemnified party and the payment of all fees and expenses incurred in
connection with the defense thereof. All such fees and expenses (including
any fees and expenses incurred in connection with investigating or preparing
to defend such action or proceeding) incurred by the indemnified party, shall
be paid to the indemnified party, as incurred, within 20 days of written
notice thereof to the indemnifying party; provided, however, that if, in
-----------------
accordance with this Section 6, the indemnifying party is not liable to the
indemnified party, such fees and expenses shall be returned promptly to the
indemnifying party. Any such indemnified party shall have the right to employ
separate counsel in any such action, claim or proceeding and to participate in
the defense thereof, but the fees and expenses of such counsel shall be the
expense of such indemnified party unless (a) the indemnifying party has agreed
to pay such fees and expenses, (b) the indemnifying party shall have failed
promptly to assume the defense of such action, claim or proceeding and to
employ counsel reasonably satisfactory to the indemnified party in any such
action, claim or proceeding, or (c) the named parties to any such action,
claim or proceeding (including any impleaded parties) include both such
indemnified party and the indemnifying party, and such indemnified party shall
have been advised by counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to
the indemnifying party (in which case, if such indemnified party notifies the
indemnifying party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action, claim or proceeding on behalf of
such indemnified party, it being understood, however, that the indemnifying
party shall not, in connection with any one such action, claim or proceeding
or separate but substantially similar or related actions, claims or
proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses
of more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the opinion
of counsel for such indemnified party a conflict of interest may exist between
such indemnified party and any other of such indemnified parties with respect
to such action, claim or proceeding, in which event the indemnifying party
shall be obligated to pay the fees and expenses of such additional counsel or
counsels). No indemnifying party will consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the release of such indemnified party from all liability in respect to
such claim or litigation without the written consent (which consent will not
be unreasonably withheld) of the indemnified party. No indemnified party
shall consent to entry of any judgment or enter into any set-tlement without
the written consent (which consent will not be unreasonably withheld) of the
indemnifying party from which indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this
------------
Section 6 from the indemnifying party is unavailable to an in-demnified party
in respect of any Losses, then each applicable indemnifying party in lieu of
indemnifying such indemnified party hereunder shall contribute to the amount
paid or payable by such indemnified party as a result of such Losses, in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified party in connection with the actions, statements or
omissions which resulted in such Losses as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
the indemnified party shall be determined by reference to, among other things,
whether any action in question, including any untrue statement of a material
fact or omission of a material fact, has been taken or made by, or relates to
information supplied by, such indemnifying party or indemnified party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include,
subject to the limitations set forth in Section 6(c), any legal or other fees
or expenses reasonably incurred by such party in connection with any action,
suit, claim, investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
7. Rule 144
---------
The Company shall file the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by
the Commission thereunder, and will take such further action as any holder of
Registrable Securities may reasonably request, all to the extent required from
time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemption
provided by Rule 144 or Rule 144A. Upon the request of any holder of
Registrable Securities, the Company shall deliver to such holder a written
statement as to whether the Company has complied with such information and
requirements. Notwithstanding the foregoing, nothing in this Section 7 shall
be deemed to require the Company to register any of its securities under any
section of the Exchange Act.
8. Underwritten Registrations
---------------------------
If any of the Registrable Securities covered by any Shelf Registration
are to be sold in an underwritten offering, the investment banker or
investment bankers and manager or managers that will administer the offering
will be selected by the Company.
No person may participate in any underwritten registration hereunder
unless such person (i) agrees to sell such person's Registrable Securities on
the basis provided in any underwriting arrangements approved by the [persons
entitled hereunder to approve such arrangements], and (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents required under the terms of such underwriting
arrangements.
9. Miscellaneous
-------------
(a) Amendments and Waivers. The provisions of this Agreement,
------------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company obtains the written consent of holders of
at least a majority of the then outstanding Registrable Securities affected by
such amendment, modification or supplement. Notwithstanding the foregoing, a
waiver or consent to depart from the provisions hereof with respect to a
matter which relates exclusively to the rights of holders of Registrable
Securities whose securi-ties are being sold pursuant to a Registration
Statement and which does not directly or indirectly affect the rights of
holders of Registrable Securities whose securities are not being sold pursuant
to such Registration Statement may be given by holders of a majority of the
Registrable Securities being sold by such holders.
(b) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, next day air courier, telex, or telecopy: (i) if to a holder
of Registrable Securities, at the most current address given by such holder to
the Company in accordance with the provisions of this Section 9(b), which
address initially is, with respect to each Purchaser, the address set forth on
Schedule I to the Purchase Agreement; and (ii) if to the Company, at 900
Veterans Boulevard, Suite 240, Redwood City California 94063, attention:
Secretary, and thereafter at such other address, notice of which is given in
accordance with the provisions of this Section 9(b), with a copy to Coudert
Brothers, 1114 Avenue of the Americas, New York, New York 10036, attention:
John F. Watkins.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; two business days
after being deposited in the mail, postage prepaid, if mailed; one business
day after being sent by next day air courier; when answered back, if telexed;
and when receipt acknowledged, if telecopied.
(c) Transfer of Registration Rights. The rights granted to the
--------------------------------
holders pursuant to this Agreement to cause the Company to register securities
may not be assigned or otherwise transferred in any way.
(d) Counterparts. This Agreement may be executed in any number of
------------
counterparts by the parties hereto, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
(e) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(f) Governing Law. This Agreement shall be governed by and construed
--------------
in accordance with the laws of the State of New York without regard to
principles of conflict of laws.
(g) Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall
in no way be affected, impaired or invalidated, and the parties hereto shall
use their best efforts to find and employ an alternative means to achieve the
same or substantially the same result as that contemplated by such term,
provision, covenant or restriction. It is hereby stipulated and declared to
be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such
which may be hereafter declared invalid, void or unenforceable.
(h) Entire Agreement. This Agreement is intended by the parties to
----------------
be a final expression of their agreement and a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect
of the subject matter contained herein. There are no restrictions, promises,
warranties nor undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the securities sold pursuant to the Purchase Agreement. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
(i) Attorneys' Fees. If any action or proceeding is brought to
-----------------
enforce any provision of this Agreement, or where any provision hereof is
validly asserted as a defense, the successful party shall be entitled to
recover reasonable attorneys' fees in addition to its costs and expenses and
any other available remedy.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of
October 21, 1997.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Jerome B. Richter
Chairman, President and Chief Executive Officer
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of October 21,
1997.
CASTLE ENERGY CORPORATION
By: /s/ Joseph L. Castle
------------------------
Name: Joseph L. Castle
Title: Chairman and CEO
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of
October 21, 1997.
/s/ Clint Norton
--------------------------------------
Clint Norton
SOUTHWEST CONCEPT INC.
By: /s/ Clint Norton
------------------------
Name: Clint Norton
Title: President
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of
October 21, 1997.
/s/ James F. Meara, Jr.
--------------------------------------
James F. Meara, Jr.
SEP FBO JAMES F. MEARA IRA
By: Donaldson, Lufkin & Jenrette as
Securities Corporation Custodian
By: /s/ James F. Meara
------------------------
Name: James F. Meara
Title:
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of
October 21, 1997.
LINCOLN TRUST COMPANY FBO PERRY D. SNAVELY IRA
By: /s/ Perry D. Snavely
------------------------
Name: Perry D. Snavely
Title:
DATE: OCTOBER 21, 1997
PROMISSORY NOTE
---------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation
("Company"), promises to pay to Castle Energy Corporation, a Delaware
corporation, or registered assigns ("Holder"), at the office of the Company in
Redwood City, California or such other place as Holder may designate in
writing at least three business days prior to the date fixed for such payment,
the entire principal sum of One Million Dollars ($1,000,000), together with
interest thereon, on the earlier of (i) a date determined by the Company
within ten (10) business days of the closing date of any public offering of
debt or equity securities of the Company, resulting in net proceeds to the
Company in excess of $5,000,000, and (ii) June 30, 1998, (the "Payment
Date"), at which time all principal and any accrued and unpaid interest
thereon shall be due and owing. This Note shall accrue interest from the date
hereof at the rate of ten (10%) per annum, payable quarterly on March 31, June
30, September 30 and December 31 in each year. This Note may be prepaid at
any time prior to maturity without penalty in an amount equal to the principal
amount hereof plus interest thereon to the date fixed for prepayment.
All payments of principal and interest hereunder shall be payable in
lawful money of the United States.
The Company shall be in default hereunder upon the occurrence of any of
the following events: (i) the failure by the Company to make any payment of
principal or interest when due hereunder and such failure shall have continued
for a period of ten (10) days; (ii) the commencement by the Company of a
voluntary case in a bankruptcy or insolvency proceeding or the entry of a
decree or order by a court of competent jurisdiction adjudicating the Company
a bankrupt or the appointment of a receiver or trustee of the Company upon the
application of any creditor in an insolvency or bankruptcy proceeding or other
creditor's suit; (iii) the entry of an order for relief approving a petition
for reorganization or arrangement filed against the Company under the Federal
bankruptcy laws and such order remains in force and unvacated thirty (30)
days; (iv) an assignment for the benefit of creditors by the Company; (v) the
occurrence of any event of default under the terms of any indebtedness of the
Company for borrowed money in excess of $50,000, provided that such
indebtedness has been accelerated because of such default; or (vi) the
existence of any judgment in excess of $50,000 against, or any attachment of
material property, of the Company.
At any time when an event of default hereunder shall have occurred and
shall be continuing, Holder at its option may accelerate the maturity of this
Note and declare all of the indebtedness thereof to be immediately due and
payable, together with accrued interest thereon, and payment thereof may be
enforced by suit or other process of law.
If this Note is not paid when due, whether at maturity or by
acceleration, the Company agrees to pay all reasonable costs of collection and
such costs shall include without limitation all costs, attorneys' fees and
expenses incurred by Holder hereof in connection with any insolvency,
bankruptcy, reorganization, arrangement or similar proceedings involving
Holder, or involving any endorser or guarantor hereof, which in any way
affects the exercise by Holder hereof of its rights and remedies under this
Note.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Note and all notices of every kind are hereby waived.
The terms "Company" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to such state's conflicts
of law provisions. Each of the parties hereto irrevocably consents to the
jurisdiction and venue of the federal and state courts located in the State of
New York, County of New York.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
-----------------------
Jerome B. Richter
Chairman, President and
Chief Executive Officer
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after October 21, 2000
Warrant to Purchase 166,667 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Castle Energy Corporation
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on October 21, 2000 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 166,667 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $6.00 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below.
The exercise price of a share of Common Stock in effect at any time and as
adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price". For purposes of this Warrant, a "Business Day" shall mean
any day other than a Saturday, a Sunday or a day on which banking institutions
in New York, New York, or in Redwood City, California, are authorized by law
or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are
sometimes herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time and from time to time by presentation and surrender hereof to
the Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this
Warrant is exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the shares purchasable
hereunder. Upon receipt by the Company of this Warrant at the office of the
Company, in proper form for exercise, accompanied by payment of the Exercise
Price, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that certificates
representing such shares of Common Stock shall not then be actually delivered
to the Holder. The issuance of certificates for shares of Common Stock upon
the exercise of this Warrant shall be made without charge to the Holder for
any issuance tax in respect thereof (with the exception of any federal or
state income taxes applicable thereto), all such taxes to be paid by the
Company, it being understood however that the Holder shall be required to pay
any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the
Holder. The Company will at no time close its transfer books against the
transfer of this Warrant or the issuance of any shares of Common Stock
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that
---------------------------------------
at all times there shall be authorized and reserved for issuance upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance or delivery upon exercise of this Warrant. All shares which may
be issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such
-----------------
manner as to require the issuance of fractional shares. If, as a result of
adjustment in the Exercise Price or the number of shares of Common Stock to be
received upon exercise of this Warrant, fractional shares would be issuable,
no such fractional shares shall be issued. In lieu thereof, the Company shall
pay the Holder an amount in cash equal to such fraction multiplied by the Fair
Market Value of a share of Common Stock. The term "Fair Market Value" shall
mean, as of a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be
the last sale price on such day on the NASDAQ Stock Market, or, if the Common
Stock is not then listed or admitted to trading on the NASDAQ Stock Market, on
such other principal stock exchange on which such stock is then listed or
admitted to trading, or, if no sale takes place on such day on any such
exchange, the average of the closing bid and asked prices on such day as
officially quoted on any such exchange, or, if the Common Stock is not then
listed or admitted to trading on any stock exchange, the average of the
reported closing bid and asked prices on such day in the over-the-counter
market as quoted on the National Association of Securities Dealers Automated
Quotation System or, if not so quoted, then as furnished by any member of the
National Association of Securities Dealers, Inc. selected by the Company. If
there shall be no meaningful over-the-counter market, then Fair Market Value
shall be such amount, not less than book value, as may be determined by the
Board of Directors of the Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable
---------------------------------
without expense (other than applicable transfer taxes) at the option of the
Holder, upon presentation and surrender hereof to the Company for any other
Warrants of different denominations entitling the holder thereof to purchase
in the aggregate the same number of shares of Common Stock purchasable
hereunder. Subject to the provisions of Section 12 below and any restriction
on transfer applicable hereto pursuant to the securities laws of the United
States or any State, upon surrender of this Warrant to the Company with an
assignment form duly executed, and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant in the
name of the assignee named in such instrument of assignment, and this Warrant
shall promptly be cancelled. This Warrant may be divided or combined with
other Warrants which carry the same rights upon presentation hereof at the
principal office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrants into
which this Warrant may be divided or exchanged, and the term "Holder" as used
herein includes any holder of any Warrant into which this Warrant may be
divided or for which this Warrant may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and
-------------------------------------------------
kind of securities purchasable upon the exercise or exchange of this Warrant
and the Exercise Price shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
--------------------------------------
date hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock
in shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(C) combines its outstanding shares of Common Stock into a
smaller number of shares;
(D) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of
its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that the Holder may receive, upon exercise or exchange of this
Warrant and payment of the same aggregate consideration, the number of shares
of capital stock of the Company which the Holder would have owned immediately
following such action if the Holder had exercised or exchanged the Warrant
immediately prior to such action.
The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the
----------------------------------
date hereof, the Company distributes to all holders of its Common Stock any of
its assets or debt securities, the Exercise Price following the record date
shall be adjusted in accordance with the following formula:
E'= E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares
of Common Stock.
The adjustment shall be made successively whenever any such distribution
is made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions
paid out of consolidated current or retained earnings as shown on the books of
the Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise
Price be made effective as of a record date, the Company may elect to defer
making such adjustment until the occurrence of such event by (i) issuing to
the Holder, if this Warrant is exercised after such record date but before the
occurrence of such event, the shares of Common Stock and other capital stock
of the Company, if any, issuable upon such exercise, had such adjustment been
made as of the record date, over and above the shares of Common Stock or other
capital stock of the Company, if any, issuable upon such exercise on the basis
of the Exercise Price as unadjusted, and (ii) paying to the Holder by check
any amount in lieu of the issuance of fractional shares pursuant to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
---------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by
its President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of
shares of Common Stock purchasable hereunder after giving effect to such
adjustment, and shall promptly cause copies of such certificates to be mailed
to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
---------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No adjustment for Small Amounts. Anything herein to the contrary
-------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the
amount of such adjustment shall be less than $.05 per share, but in such case,
any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to $.05 per share or more.
(h) Common Stock Defined. Subject to the provisions of Section 7
--------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification
or reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the
---------------------------------------------------------
event of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or in the event of any consolidation or merger of
the Company with or into another corporation (other than a merger in which
merger the Company is the continuing corporation and that does not result in
any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the class issuable upon exercise or exchange of this
Warrant) or in the event of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent to
such transaction, cause effective provisions to be made so that the Holder
shall have the right thereafter, by exercising this Warrant, to purchase the
kind and amount of shares of stock and other securities and property
(including cash) receivable upon such reclassification, capital reorganization
and other change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock that might have been received upon exercise
or exchange of this Warrant immediately prior to such reclassification,
capital reorganization, change, consolidation, merger, sale or conveyance.
Any such provision shall include provisions for adjustments in respect of such
shares of stock and other securities and property that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section 7 shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
In the event that in connection with any such capital reorganization or
classification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for, or of, a security of the Company other than
Common Stock, any such issue shall be treated as an issue of Common Stock
covered by the provisions of subsection (a) of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be
--------------------------
outstanding, (i) if the Company shall pay any dividend or make any
distribution upon its Common Stock, or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any shares of
stock or securities of any class or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of
the Company, or voluntary or involuntary dissolution or liquidation of the
Company shall be effected, then, in any such case, the Company shall cause to
be mailed to the Holder, at least thirty (30) days prior to the date specified
in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record
is to be taken for the purpose of such dividend, distribution or rights, or
(y) such reclassification, reorganization, consolidation, merger, conveyance,
dissolution or liquidation is to take place and the date, if any is to be
fixed, as of which the holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it
----------------------------------
will not increase the par value of the shares of Warrant Stock issuable upon
exercise of this Warrant above the prevailing and currently applicable
Exercise Price hereunder, and that before taking any action that would cause
an adjustment reducing the prevailing and current applicable Exercise Price
hereunder below the then par value of the Warrant Stock at the time issuable
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations
and demands to or upon the Company in respect of this Warrant may be made and
will give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this
----------------
Warrant, the Company may, in the event that the average trading price of the
Company's Common Stock, as reported on the NASDAQ SmallCap Market or such
other exchange on which the Company's Common Stock may then be quoted, exceeds
$10.00 for a period of twenty (20) consecutive trading days, upon not less
than thirty (30) days' notice in writing to the Holder, repurchase all or any
portion of this Warrant at a purchase price equal to $.10 per share of Common
Stock covered hereby, such purchase price to be proportionally adjusted each
time the Exercise Price is adjusted pursuant to Section 6 hereof. During such
thirty (30) day period, the Holder may exercise such Warrants in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in
Redwood City, California or at such other place as shall be agreed upon by the
Company and the Holder. At the Closing, the Company shall deliver to the
Holder an amount equal to the purchase price in immediately available funds
and the Holder will deliver this Warrant to the Company for cancellation. To
the extent any repurchase hereunder is of less than all of the rights
represented by this Warrant, the Company will deliver to the Holder a new
Warrant covering the rights not so purchased.
11. Determination by Board of Directors. All determinations by the
-----------------------------------
Board of Directors of the Company under the provisions of this Warrant will be
made in good faith with due regard to the interest of the Holder and in
accordance with sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all
------
notices and certificates given to the Holder shall be sent registered or
certified mail, return receipt requested, to such Holder at his address
appearing on the records of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants.
------------------------------------------------------------
Upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon delivery of any indemnity bond in such
reasonable amount as the Company may determine in the case of any such
mutilation, upon the surrender of such Warrant for cancellation, the Company
at its expense, will execute and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein,
-----------------
the same shall include the plural where appropriate, and words of any gender
shall include each other gender where appropriate.
15. Applicable Law. This Warrant shall be governed by, and construed
--------------
in accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
Dated: October 21, 1997
DATE: OCTOBER 21, 1997
PROMISSORY NOTE
---------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation
("Company"), promises to pay to Clint Norton, or registered assigns
("Holder"), at the office of the Company in Redwood City, California or such
other place as Holder may designate in writing at least three business days
prior to the date fixed for such payment, the entire principal sum of Ninety
Thousand Dollars ($90,000), together with interest thereon, on the earlier of
(i) a date determined by the Company within ten (10) business days of the
closing date of any public offering of debt or equity securities of the
Company, resulting in net proceeds to the Company in excess of $5,000,000, and
(ii) June 30, 1998, (the "Payment Date"), at which time all principal and any
accrued and unpaid interest thereon shall be due and owing. This Note shall
accrue interest from the date hereof at the rate of ten (10%) per annum,
payable quarterly on March 31, June 30, September 30 and December 31 in each
year. This Note may be prepaid at any time prior to maturity without penalty
in an amount equal to the principal amount hereof plus interest thereon to the
date fixed for prepayment.
All payments of principal and interest hereunder shall be payable in
lawful money of the United States.
The Company shall be in default hereunder upon the occurrence of any of
the following events: (i) the failure by the Company to make any payment of
principal or interest when due hereunder and such failure shall have continued
for a period of ten (10) days; (ii) the commencement by the Company of a
voluntary case in a bankruptcy or insolvency proceeding or the entry of a
decree or order by a court of competent jurisdiction adjudicating the Company
a bankrupt or the appointment of a receiver or trustee of the Company upon the
application of any creditor in an insolvency or bankruptcy proceeding or other
creditor's suit; (iii) the entry of an order for relief approving a petition
for reorganization or arrangement filed against the Company under the Federal
bankruptcy laws and such order remains in force and unvacated thirty (30)
days; (iv) an assignment for the benefit of creditors by the Company; (v) the
occurrence of any event of default under the terms of any indebtedness of the
Company for borrowed money in excess of $50,000, provided that such
indebtedness has been accelerated because of such default; or (vi) the
existence of any judgment in excess of $50,000 against, or any attachment of
material property, of the Company.
At any time when an event of default hereunder shall have occurred and
shall be continuing, Holder at its option may accelerate the maturity of this
Note and declare all of the indebtedness thereof to be immediately due and
payable, together with accrued interest thereon, and payment thereof may be
enforced by suit or other process of law.
If this Note is not paid when due, whether at maturity or by
acceleration, the Company agrees to pay all reasonable costs of collection and
such costs shall include without limitation all costs, attorneys' fees and
expenses incurred by Holder hereof in connection with any insolvency,
bankruptcy, reorganization, arrangement or similar proceedings involving
Holder, or involving any endorser or guarantor hereof, which in any way
affects the exercise by Holder hereof of its rights and remedies under this
Note.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Note and all notices of every kind are hereby waived.
The terms "Company" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to such state's conflicts
of law provisions. Each of the parties hereto irrevocably consents to the
jurisdiction and venue of the federal and state courts located in the State of
New York, County of New York.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Jerome B. Richter
Chairman, President and
Chief Executive Officer
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after October 21, 2000
Warrant to Purchase 15,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Clint Norton
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on October 21, 2000 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 15,000 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $6.00 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below.
The exercise price of a share of Common Stock in effect at any time and as
adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price". For purposes of this Warrant, a "Business Day" shall mean
any day other than a Saturday, a Sunday or a day on which banking institutions
in New York, New York, or in Redwood City, California, are authorized by law
or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are
sometimes herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time and from time to time by presentation and surrender hereof to
the Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this
Warrant is exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the shares purchasable
hereunder. Upon receipt by the Company of this Warrant at the office of the
Company, in proper form for exercise, accompanied by payment of the Exercise
Price, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that certificates
representing such shares of Common Stock shall not then be actually delivered
to the Holder. The issuance of certificates for shares of Common Stock upon
the exercise of this Warrant shall be made without charge to the Holder for
any issuance tax in respect thereof (with the exception of any federal or
state income taxes applicable thereto), all such taxes to be paid by the
Company, it being understood however that the Holder shall be required to pay
any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the
Holder. The Company will at no time close its transfer books against the
transfer of this Warrant or the issuance of any shares of Common Stock
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that
---------------------------------------
at all times there shall be authorized and reserved for issuance upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance or delivery upon exercise of this Warrant. All shares which may
be issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such
-----------------
manner as to require the issuance of fractional shares. If, as a result of
adjustment in the Exercise Price or the number of shares of Common Stock to be
received upon exercise of this Warrant, fractional shares would be issuable,
no such fractional shares shall be issued. In lieu thereof, the Company shall
pay the Holder an amount in cash equal to such fraction multiplied by the Fair
Market Value of a share of Common Stock. The term "Fair Market Value" shall
mean, as of a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be
the last sale price on such day on the NASDAQ Stock Market, or, if the Common
Stock is not then listed or admitted to trading on the NASDAQ Stock Market, on
such other principal stock exchange on which such stock is then listed or
admitted to trading, or, if no sale takes place on such day on any such
exchange, the average of the closing bid and asked prices on such day as
officially quoted on any such exchange, or, if the Common Stock is not then
listed or admitted to trading on any stock exchange, the average of the
reported closing bid and asked prices on such day in the over-the-counter
market as quoted on the National Association of Securities Dealers Automated
Quotation System or, if not so quoted, then as furnished by any member of the
National Association of Securities Dealers, Inc. selected by the Company. If
there shall be no meaningful over-the-counter market, then Fair Market Value
shall be such amount, not less than book value, as may be determined by the
Board of Directors of the Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable
---------------------------------
without expense (other than applicable transfer taxes) at the option of the
Holder, upon presentation and surrender hereof to the Company for any other
Warrants of different denominations entitling the holder thereof to purchase
in the aggregate the same number of shares of Common Stock purchasable
hereunder. Subject to the provisions of Section 12 below and any restriction
on transfer applicable hereto pursuant to the securities laws of the United
States or any State, upon surrender of this Warrant to the Company with an
assignment form duly executed, and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant in the
name of the assignee named in such instrument of assignment, and this Warrant
shall promptly be cancelled. This Warrant may be divided or combined with
other Warrants which carry the same rights upon presentation hereof at the
principal office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrants into
which this Warrant may be divided or exchanged, and the term "Holder" as used
herein includes any holder of any Warrant into which this Warrant may be
divided or for which this Warrant may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and
-------------------------------------------------
kind of securities purchasable upon the exercise or exchange of this Warrant
and the Exercise Price shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
--------------------------------------
date hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock
in shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(C) combines its outstanding shares of Common Stock into a
smaller number of shares;
(D) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of
its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that the Holder may receive, upon exercise or exchange of this
Warrant and payment of the same aggregate consideration, the number of shares
of capital stock of the Company which the Holder would have owned immediately
following such action if the Holder had exercised or exchanged the Warrant
immediately prior to such action.
The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the
----------------------------------
date hereof, the Company distributes to all holders of its Common Stock any of
its assets or debt securities, the Exercise Price following the record date
shall be adjusted in accordance with the following formula:
E'= E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares
of Common Stock.
The adjustment shall be made successively whenever any such distribution
is made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions
paid out of consolidated current or retained earnings as shown on the books of
the Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise
Price be made effective as of a record date, the Company may elect to defer
making such adjustment until the occurrence of such event by (i) issuing to
the Holder, if this Warrant is exercised after such record date but before the
occurrence of such event, the shares of Common Stock and other capital stock
of the Company, if any, issuable upon such exercise, had such adjustment been
made as of the record date, over and above the shares of Common Stock or other
capital stock of the Company, if any, issuable upon such exercise on the basis
of the Exercise Price as unadjusted, and (ii) paying to the Holder by check
any amount in lieu of the issuance of fractional shares pursuant to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
---------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by
its President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of
shares of Common Stock purchasable hereunder after giving effect to such
adjustment, and shall promptly cause copies of such certificates to be mailed
to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
---------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No adjustment for Small Amounts. Anything herein to the contrary
-------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the
amount of such adjustment shall be less than $.05 per share, but in such case,
any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to $.05 per share or more.
(h) Common Stock Defined. Subject to the provisions of Section 7
--------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification
or reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the
---------------------------------------------------------
event of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or in the event of any consolidation or merger of
the Company with or into another corporation (other than a merger in which
merger the Company is the continuing corporation and that does not result in
any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the class issuable upon exercise or exchange of this
Warrant) or in the event of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent to
such transaction, cause effective provisions to be made so that the Holder
shall have the right thereafter, by exercising this Warrant, to purchase the
kind and amount of shares of stock and other securities and property
(including cash) receivable upon such reclassification, capital reorganization
and other change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock that might have been received upon exercise
or exchange of this Warrant immediately prior to such reclassification,
capital reorganization, change, consolidation, merger, sale or conveyance.
Any such provision shall include provisions for adjustments in respect of such
shares of stock and other securities and property that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section 7 shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
In the event that in connection with any such capital reorganization or
classification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for, or of, a security of the Company other than
Common Stock, any such issue shall be treated as an issue of Common Stock
covered by the provisions of subsection (a) of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be
--------------------------
outstanding, (i) if the Company shall pay any dividend or make any
distribution upon its Common Stock, or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any shares of
stock or securities of any class or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of
the Company, or voluntary or involuntary dissolution or liquidation of the
Company shall be effected, then, in any such case, the Company shall cause to
be mailed to the Holder, at least thirty (30) days prior to the date specified
in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record
is to be taken for the purpose of such dividend, distribution or rights, or
(y) such reclassification, reorganization, consolidation, merger, conveyance,
dissolution or liquidation is to take place and the date, if any is to be
fixed, as of which the holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it
----------------------------------
will not increase the par value of the shares of Warrant Stock issuable upon
exercise of this Warrant above the prevailing and currently applicable
Exercise Price hereunder, and that before taking any action that would cause
an adjustment reducing the prevailing and current applicable Exercise Price
hereunder below the then par value of the Warrant Stock at the time issuable
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations
and demands to or upon the Company in respect of this Warrant may be made and
will give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this
----------------
Warrant, the Company may, in the event that the average trading price of the
Company's Common Stock, as reported on the NASDAQ SmallCap Market or such
other exchange on which the Company's Common Stock may then be quoted, exceeds
$10.00 for a period of twenty (20) consecutive trading days, upon not less
than thirty (30) days' notice in writing to the Holder, repurchase all or any
portion of this Warrant at a purchase price equal to $.10 per share of Common
Stock covered hereby, such purchase price to be proportionally adjusted each
time the Exercise Price is adjusted pursuant to Section 6 hereof. During such
thirty (30) day period, the Holder may exercise such Warrants in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in
Redwood City, California or at such other place as shall be agreed upon by the
Company and the Holder. At the Closing, the Company shall deliver to the
Holder an amount equal to the purchase price in immediately available funds
and the Holder will deliver this Warrant to the Company for cancellation. To
the extent any repurchase hereunder is of less than all of the rights
represented by this Warrant, the Company will deliver to the Holder a new
Warrant covering the rights not so purchased.
11. Determination by Board of Directors. All determinations by the
-----------------------------------
Board of Directors of the Company under the provisions of this Warrant will be
made in good faith with due regard to the interest of the Holder and in
accordance with sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all
------
notices and certificates given to the Holder shall be sent registered or
certified mail, return receipt requested, to such Holder at his address
appearing on the records of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants.
------------------------------------------------------------
Upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon delivery of any indemnity bond in such
reasonable amount as the Company may determine in the case of any such
mutilation, upon the surrender of such Warrant for cancellation, the Company
at its expense, will execute and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein,
-----------------
the same shall include the plural where appropriate, and words of any gender
shall include each other gender where appropriate.
15. Applicable Law. This Warrant shall be governed by, and construed
--------------
in accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
--------------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
Dated: October 21, 1997
DATE: OCTOBER 21, 1997
PROMISSORY NOTE
---------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation
("Company"), promises to pay to Southwest Concept Inc., or registered assigns
("Holder"), at the office of the Company in Redwood City, California or such
other place as Holder may designate in writing at least three business days
prior to the date fixed for such payment, the entire principal sum of Sixty
Thousand Dollars ($60,000), together with interest thereon, on the earlier of
(i) a date determined by the Company within ten (10) business days of the
closing date of any public offering of debt or equity securities of the
Company, resulting in net proceeds to the Company in excess of $5,000,000, and
(ii) June 30, 1998, (the "Payment Date"), at which time all principal and any
accrued and unpaid interest thereon shall be due and owing. This Note shall
accrue interest from the date hereof at the rate of ten (10%) per annum,
payable quarterly on March 31, June 30, September 30 and December 31 in each
year. This Note may be prepaid at any time prior to maturity without penalty
in an amount equal to the principal amount hereof plus interest thereon to the
date fixed for prepayment.
All payments of principal and interest hereunder shall be payable in
lawful money of the United States.
The Company shall be in default hereunder upon the occurrence of any of
the following events: (i) the failure by the Company to make any payment of
principal or interest when due hereunder and such failure shall have continued
for a period of ten (10) days; (ii) the commencement by the Company of a
voluntary case in a bankruptcy or insolvency proceeding or the entry of a
decree or order by a court of competent jurisdiction adjudicating the Company
a bankrupt or the appointment of a receiver or trustee of the Company upon the
application of any creditor in an insolvency or bankruptcy proceeding or other
creditor's suit; (iii) the entry of an order for relief approving a petition
for reorganization or arrangement filed against the Company under the Federal
bankruptcy laws and such order remains in force and unvacated thirty (30)
days; (iv) an assignment for the benefit of creditors by the Company; (v) the
occurrence of any event of default under the terms of any indebtedness of the
Company for borrowed money in excess of $50,000, provided that such
indebtedness has been accelerated because of such default; or (vi) the
existence of any judgment in excess of $50,000 against, or any attachment of
material property, of the Company.
At any time when an event of default hereunder shall have occurred and
shall be continuing, Holder at its option may accelerate the maturity of this
Note and declare all of the indebtedness thereof to be immediately due and
payable, together with accrued interest thereon, and payment thereof may be
enforced by suit or other process of law.
If this Note is not paid when due, whether at maturity or by
acceleration, the Company agrees to pay all reasonable costs of collection and
such costs shall include without limitation all costs, attorneys' fees and
expenses incurred by Holder hereof in connection with any insolvency,
bankruptcy, reorganization, arrangement or similar proceedings involving
Holder, or involving any endorser or guarantor hereof, which in any way
affects the exercise by Holder hereof of its rights and remedies under this
Note.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Note and all notices of every kind are hereby waived.
The terms "Company" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to such state's conflicts
of law provisions. Each of the parties hereto irrevocably consents to the
jurisdiction and venue of the federal and state courts located in the State of
New York, County of New York.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Jerome B. Richter
Chairman, President and
Chief Executive Officer
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after October 21, 2000
Warrant to Purchase 10,000 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Southwest Concept Inc.
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on October 21, 2000 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 10,000 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $6.00 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below.
The exercise price of a share of Common Stock in effect at any time and as
adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price". For purposes of this Warrant, a "Business Day" shall mean
any day other than a Saturday, a Sunday or a day on which banking institutions
in New York, New York, or in Redwood City, California, are authorized by law
or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are
sometimes herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time and from time to time by presentation and surrender hereof to
the Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this
Warrant is exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the shares purchasable
hereunder. Upon receipt by the Company of this Warrant at the office of the
Company, in proper form for exercise, accompanied by payment of the Exercise
Price, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that certificates
representing such shares of Common Stock shall not then be actually delivered
to the Holder. The issuance of certificates for shares of Common Stock upon
the exercise of this Warrant shall be made without charge to the Holder for
any issuance tax in respect thereof (with the exception of any federal or
state income taxes applicable thereto), all such taxes to be paid by the
Company, it being understood however that the Holder shall be required to pay
any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the
Holder. The Company will at no time close its transfer books against the
transfer of this Warrant or the issuance of any shares of Common Stock
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that
---------------------------------------
at all times there shall be authorized and reserved for issuance upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance or delivery upon exercise of this Warrant. All shares which may
be issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such
-----------------
manner as to require the issuance of fractional shares. If, as a result of
adjustment in the Exercise Price or the number of shares of Common Stock to be
received upon exercise of this Warrant, fractional shares would be issuable,
no such fractional shares shall be issued. In lieu thereof, the Company shall
pay the Holder an amount in cash equal to such fraction multiplied by the Fair
Market Value of a share of Common Stock. The term "Fair Market Value" shall
mean, as of a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be
the last sale price on such day on the NASDAQ Stock Market, or, if the Common
Stock is not then listed or admitted to trading on the NASDAQ Stock Market, on
such other principal stock exchange on which such stock is then listed or
admitted to trading, or, if no sale takes place on such day on any such
exchange, the average of the closing bid and asked prices on such day as
officially quoted on any such exchange, or, if the Common Stock is not then
listed or admitted to trading on any stock exchange, the average of the
reported closing bid and asked prices on such day in the over-the-counter
market as quoted on the National Association of Securities Dealers Automated
Quotation System or, if not so quoted, then as furnished by any member of the
National Association of Securities Dealers, Inc. selected by the Company. If
there shall be no meaningful over-the-counter market, then Fair Market Value
shall be such amount, not less than book value, as may be determined by the
Board of Directors of the Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable
---------------------------------
without expense (other than applicable transfer taxes) at the option of the
Holder, upon presentation and surrender hereof to the Company for any other
Warrants of different denominations entitling the holder thereof to purchase
in the aggregate the same number of shares of Common Stock purchasable
hereunder. Subject to the provisions of Section 12 below and any restriction
on transfer applicable hereto pursuant to the securities laws of the United
States or any State, upon surrender of this Warrant to the Company with an
assignment form duly executed, and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant in the
name of the assignee named in such instrument of assignment, and this Warrant
shall promptly be cancelled. This Warrant may be divided or combined with
other Warrants which carry the same rights upon presentation hereof at the
principal office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrants into
which this Warrant may be divided or exchanged, and the term "Holder" as used
herein includes any holder of any Warrant into which this Warrant may be
divided or for which this Warrant may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and
-------------------------------------------------
kind of securities purchasable upon the exercise or exchange of this Warrant
and the Exercise Price shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
--------------------------------------
date hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock
in shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(C) combines its outstanding shares of Common Stock into a
smaller number of shares;
(D) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of
its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that the Holder may receive, upon exercise or exchange of this
Warrant and payment of the same aggregate consideration, the number of shares
of capital stock of the Company which the Holder would have owned immediately
following such action if the Holder had exercised or exchanged the Warrant
immediately prior to such action.
The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the
----------------------------------
date hereof, the Company distributes to all holders of its Common Stock any of
its assets or debt securities, the Exercise Price following the record date
shall be adjusted in accordance with the following formula:
E'= E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares
of Common Stock.
The adjustment shall be made successively whenever any such distribution
is made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions
paid out of consolidated current or retained earnings as shown on the books of
the Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise
Price be made effective as of a record date, the Company may elect to defer
making such adjustment until the occurrence of such event by (i) issuing to
the Holder, if this Warrant is exercised after such record date but before the
occurrence of such event, the shares of Common Stock and other capital stock
of the Company, if any, issuable upon such exercise, had such adjustment been
made as of the record date, over and above the shares of Common Stock or other
capital stock of the Company, if any, issuable upon such exercise on the basis
of the Exercise Price as unadjusted, and (ii) paying to the Holder by check
any amount in lieu of the issuance of fractional shares pursuant to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
---------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by
its President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of
shares of Common Stock purchasable hereunder after giving effect to such
adjustment, and shall promptly cause copies of such certificates to be mailed
to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
---------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No adjustment for Small Amounts. Anything herein to the contrary
-------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the
amount of such adjustment shall be less than $.05 per share, but in such case,
any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to $.05 per share or more.
(h) Common Stock Defined. Subject to the provisions of Section 7
--------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification
or reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the
---------------------------------------------------------
event of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or in the event of any consolidation or merger of
the Company with or into another corporation (other than a merger in which
merger the Company is the continuing corporation and that does not result in
any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the class issuable upon exercise or exchange of this
Warrant) or in the event of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent to
such transaction, cause effective provisions to be made so that the Holder
shall have the right thereafter, by exercising this Warrant, to purchase the
kind and amount of shares of stock and other securities and property
(including cash) receivable upon such reclassification, capital reorganization
and other change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock that might have been received upon exercise
or exchange of this Warrant immediately prior to such reclassification,
capital reorganization, change, consolidation, merger, sale or conveyance.
Any such provision shall include provisions for adjustments in respect of such
shares of stock and other securities and property that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section 7 shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
In the event that in connection with any such capital reorganization or
classification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for, or of, a security of the Company other than
Common Stock, any such issue shall be treated as an issue of Common Stock
covered by the provisions of subsection (a) of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be
--------------------------
outstanding, (i) if the Company shall pay any dividend or make any
distribution upon its Common Stock, or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any shares of
stock or securities of any class or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of
the Company, or voluntary or involuntary dissolution or liquidation of the
Company shall be effected, then, in any such case, the Company shall cause to
be mailed to the Holder, at least thirty (30) days prior to the date specified
in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record
is to be taken for the purpose of such dividend, distribution or rights, or
(y) such reclassification, reorganization, consolidation, merger, conveyance,
dissolution or liquidation is to take place and the date, if any is to be
fixed, as of which the holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it
----------------------------------
will not increase the par value of the shares of Warrant Stock issuable upon
exercise of this Warrant above the prevailing and currently applicable
Exercise Price hereunder, and that before taking any action that would cause
an adjustment reducing the prevailing and current applicable Exercise Price
hereunder below the then par value of the Warrant Stock at the time issuable
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations
and demands to or upon the Company in respect of this Warrant may be made and
will give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this
----------------
Warrant, the Company may, in the event that the average trading price of the
Company's Common Stock, as reported on the NASDAQ SmallCap Market or such
other exchange on which the Company's Common Stock may then be quoted, exceeds
$10.00 for a period of twenty (20) consecutive trading days, upon not less
than thirty (30) days' notice in writing to the Holder, repurchase all or any
portion of this Warrant at a purchase price equal to $.10 per share of Common
Stock covered hereby, such purchase price to be proportionally adjusted each
time the Exercise Price is adjusted pursuant to Section 6 hereof. During such
thirty (30) day period, the Holder may exercise such Warrants in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in
Redwood City, California or at such other place as shall be agreed upon by the
Company and the Holder. At the Closing, the Company shall deliver to the
Holder an amount equal to the purchase price in immediately available funds
and the Holder will deliver this Warrant to the Company for cancellation. To
the extent any repurchase hereunder is of less than all of the rights
represented by this Warrant, the Company will deliver to the Holder a new
Warrant covering the rights not so purchased.
11. Determination by Board of Directors. All determinations by the
-----------------------------------
Board of Directors of the Company under the provisions of this Warrant will be
made in good faith with due regard to the interest of the Holder and in
accordance with sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all
------
notices and certificates given to the Holder shall be sent registered or
certified mail, return receipt requested, to such Holder at his address
appearing on the records of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants.
------------------------------------------------------------
Upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon delivery of any indemnity bond in such
reasonable amount as the Company may determine in the case of any such
mutilation, upon the surrender of such Warrant for cancellation, the Company
at its expense, will execute and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein,
-----------------
the same shall include the plural where appropriate, and words of any gender
shall include each other gender where appropriate.
15. Applicable Law. This Warrant shall be governed by, and construed
--------------
in accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
Dated: October 21, 1997
DATE: OCTOBER 21, 1997
PROMISSORY NOTE
---------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation
("Company"), promises to pay to James F. Meara, Jr., or registered assigns
("Holder"), at the office of the Company in Redwood City, California or such
other place as Holder may designate in writing at least three business days
prior to the date fixed for such payment, the entire principal sum of
Seventy-Five Thousand Dollars ($75,000), together with interest thereon, on
the earlier of (i) a date determined by the Company within ten (10) business
days of the closing date of any public offering of debt or equity securities
of the Company, resulting in net proceeds to the Company in excess of
$5,000,000, and (ii) June 30, 1998, (the "Payment Date"), at which time all
principal and any accrued and unpaid interest thereon shall be due and owing.
This Note shall accrue interest from the date hereof at the rate of ten (10%)
per annum, payable quarterly on March 31, June 30, September 30 and December
31 in each year. This Note may be prepaid at any time prior to maturity
without penalty in an amount equal to the principal amount hereof plus
interest thereon to the date fixed for prepayment.
All payments of principal and interest hereunder shall be payable in
lawful money of the United States.
The Company shall be in default hereunder upon the occurrence of any of
the following events: (i) the failure by the Company to make any payment of
principal or interest when due hereunder and such failure shall have continued
for a period of ten (10) days; (ii) the commencement by the Company of a
voluntary case in a bankruptcy or insolvency proceeding or the entry of a
decree or order by a court of competent jurisdiction adjudicating the Company
a bankrupt or the appointment of a receiver or trustee of the Company upon the
application of any creditor in an insolvency or bankruptcy proceeding or other
creditor's suit; (iii) the entry of an order for relief approving a petition
for reorganization or arrangement filed against the Company under the Federal
bankruptcy laws and such order remains in force and unvacated thirty (30)
days; (iv) an assignment for the benefit of creditors by the Company; (v) the
occurrence of any event of default under the terms of any indebtedness of the
Company for borrowed money in excess of $50,000, provided that such
indebtedness has been accelerated because of such default; or (vi) the
existence of any judgment in excess of $50,000 against, or any attachment of
material property, of the Company.
At any time when an event of default hereunder shall have occurred and
shall be continuing, Holder at its option may accelerate the maturity of this
Note and declare all of the indebtedness thereof to be immediately due and
payable, together with accrued interest thereon, and payment thereof may be
enforced by suit or other process of law.
If this Note is not paid when due, whether at maturity or by
acceleration, the Company agrees to pay all reasonable costs of collection and
such costs shall include without limitation all costs, attorneys' fees and
expenses incurred by Holder hereof in connection with any insolvency,
bankruptcy, reorganization, arrangement or similar proceedings involving
Holder, or involving any endorser or guarantor hereof, which in any way
affects the exercise by Holder hereof of its rights and remedies under this
Note.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Note and all notices of every kind are hereby waived.
The terms "Company" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to such state's conflicts
of law provisions. Each of the parties hereto irrevocably consents to the
jurisdiction and venue of the federal and state courts located in the State of
New York, County of New York.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Jerome B. Richter
Chairman, President and
Chief Executive Officer
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after October 21, 2000
Warrant to Purchase 12,500 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
James F. Meara, Jr.
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on October 21, 2000 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 12,500 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $6.00 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below.
The exercise price of a share of Common Stock in effect at any time and as
adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price". For purposes of this Warrant, a "Business Day" shall mean
any day other than a Saturday, a Sunday or a day on which banking institutions
in New York, New York, or in Redwood City, California, are authorized by law
or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are
sometimes herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time and from time to time by presentation and surrender hereof to
the Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this
Warrant is exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the shares purchasable
hereunder. Upon receipt by the Company of this Warrant at the office of the
Company, in proper form for exercise, accompanied by payment of the Exercise
Price, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that certificates
representing such shares of Common Stock shall not then be actually delivered
to the Holder. The issuance of certificates for shares of Common Stock upon
the exercise of this Warrant shall be made without charge to the Holder for
any issuance tax in respect thereof (with the exception of any federal or
state income taxes applicable thereto), all such taxes to be paid by the
Company, it being understood however that the Holder shall be required to pay
any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the
Holder. The Company will at no time close its transfer books against the
transfer of this Warrant or the issuance of any shares of Common Stock
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that
---------------------------------------
at all times there shall be authorized and reserved for issuance upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance or delivery upon exercise of this Warrant. All shares which may
be issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such
-----------------
manner as to require the issuance of fractional shares. If, as a result of
adjustment in the Exercise Price or the number of shares of Common Stock to be
received upon exercise of this Warrant, fractional shares would be issuable,
no such fractional shares shall be issued. In lieu thereof, the Company shall
pay the Holder an amount in cash equal to such fraction multiplied by the Fair
Market Value of a share of Common Stock. The term "Fair Market Value" shall
mean, as of a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be
the last sale price on such day on the NASDAQ Stock Market, or, if the Common
Stock is not then listed or admitted to trading on the NASDAQ Stock Market, on
such other principal stock exchange on which such stock is then listed or
admitted to trading, or, if no sale takes place on such day on any such
exchange, the average of the closing bid and asked prices on such day as
officially quoted on any such exchange, or, if the Common Stock is not then
listed or admitted to trading on any stock exchange, the average of the
reported closing bid and asked prices on such day in the over-the-counter
market as quoted on the National Association of Securities Dealers Automated
Quotation System or, if not so quoted, then as furnished by any member of the
National Association of Securities Dealers, Inc. selected by the Company. If
there shall be no meaningful over-the-counter market, then Fair Market Value
shall be such amount, not less than book value, as may be determined by the
Board of Directors of the Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable
---------------------------------
without expense (other than applicable transfer taxes) at the option of the
Holder, upon presentation and surrender hereof to the Company for any other
Warrants of different denominations entitling the holder thereof to purchase
in the aggregate the same number of shares of Common Stock purchasable
hereunder. Subject to the provisions of Section 12 below and any restriction
on transfer applicable hereto pursuant to the securities laws of the United
States or any State, upon surrender of this Warrant to the Company with an
assignment form duly executed, and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant in the
name of the assignee named in such instrument of assignment, and this Warrant
shall promptly be cancelled. This Warrant may be divided or combined with
other Warrants which carry the same rights upon presentation hereof at the
principal office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrants into
which this Warrant may be divided or exchanged, and the term "Holder" as used
herein includes any holder of any Warrant into which this Warrant may be
divided or for which this Warrant may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and
-------------------------------------------------
kind of securities purchasable upon the exercise or exchange of this Warrant
and the Exercise Price shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
--------------------------------------
date hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock
in shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(C) combines its outstanding shares of Common Stock into a
smaller number of shares;
(D) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of
its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that the Holder may receive, upon exercise or exchange of this
Warrant and payment of the same aggregate consideration, the number of shares
of capital stock of the Company which the Holder would have owned immediately
following such action if the Holder had exercised or exchanged the Warrant
immediately prior to such action.
The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the
----------------------------------
date hereof, the Company distributes to all holders of its Common Stock any of
its assets or debt securities, the Exercise Price following the record date
shall be adjusted in accordance with the following formula:
E'= E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares
of Common Stock.
The adjustment shall be made successively whenever any such distribution
is made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions
paid out of consolidated current or retained earnings as shown on the books of
the Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise
Price be made effective as of a record date, the Company may elect to defer
making such adjustment until the occurrence of such event by (i) issuing to
the Holder, if this Warrant is exercised after such record date but before the
occurrence of such event, the shares of Common Stock and other capital stock
of the Company, if any, issuable upon such exercise, had such adjustment been
made as of the record date, over and above the shares of Common Stock or other
capital stock of the Company, if any, issuable upon such exercise on the basis
of the Exercise Price as unadjusted, and (ii) paying to the Holder by check
any amount in lieu of the issuance of fractional shares pursuant to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
---------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by
its President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of
shares of Common Stock purchasable hereunder after giving effect to such
adjustment, and shall promptly cause copies of such certificates to be mailed
to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
---------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No adjustment for Small Amounts. Anything herein to the contrary
-------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the
amount of such adjustment shall be less than $.05 per share, but in such case,
any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to $.05 per share or more.
(h) Common Stock Defined. Subject to the provisions of Section 7
--------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification
or reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the
---------------------------------------------------------
event of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or in the event of any consolidation or merger of
the Company with or into another corporation (other than a merger in which
merger the Company is the continuing corporation and that does not result in
any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the class issuable upon exercise or exchange of this
Warrant) or in the event of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent to
such transaction, cause effective provisions to be made so that the Holder
shall have the right thereafter, by exercising this Warrant, to purchase the
kind and amount of shares of stock and other securities and property
(including cash) receivable upon such reclassification, capital reorganization
and other change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock that might have been received upon exercise
or exchange of this Warrant immediately prior to such reclassification,
capital reorganization, change, consolidation, merger, sale or conveyance.
Any such provision shall include provisions for adjustments in respect of such
shares of stock and other securities and property that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section 7 shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
In the event that in connection with any such capital reorganization or
classification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for, or of, a security of the Company other than
Common Stock, any such issue shall be treated as an issue of Common Stock
covered by the provisions of subsection (a) of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be
--------------------------
outstanding, (i) if the Company shall pay any dividend or make any
distribution upon its Common Stock, or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any shares of
stock or securities of any class or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of
the Company, or voluntary or involuntary dissolution or liquidation of the
Company shall be effected, then, in any such case, the Company shall cause to
be mailed to the Holder, at least thirty (30) days prior to the date specified
in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record
is to be taken for the purpose of such dividend, distribution or rights, or
(y) such reclassification, reorganization, consolidation, merger, conveyance,
dissolution or liquidation is to take place and the date, if any is to be
fixed, as of which the holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it
----------------------------------
will not increase the par value of the shares of Warrant Stock issuable upon
exercise of this Warrant above the prevailing and currently applicable
Exercise Price hereunder, and that before taking any action that would cause
an adjustment reducing the prevailing and current applicable Exercise Price
hereunder below the then par value of the Warrant Stock at the time issuable
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations
and demands to or upon the Company in respect of this Warrant may be made and
will give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this
----------------
Warrant, the Company may, in the event that the average trading price of the
Company's Common Stock, as reported on the NASDAQ SmallCap Market or such
other exchange on which the Company's Common Stock may then be quoted, exceeds
$10.00 for a period of twenty (20) consecutive trading days, upon not less
than thirty (30) days' notice in writing to the Holder, repurchase all or any
portion of this Warrant at a purchase price equal to $.10 per share of Common
Stock covered hereby, such purchase price to be proportionally adjusted each
time the Exercise Price is adjusted pursuant to Section 6 hereof. During such
thirty (30) day period, the Holder may exercise such Warrants in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in
Redwood City, California or at such other place as shall be agreed upon by the
Company and the Holder. At the Closing, the Company shall deliver to the
Holder an amount equal to the purchase price in immediately available funds
and the Holder will deliver this Warrant to the Company for cancellation. To
the extent any repurchase hereunder is of less than all of the rights
represented by this Warrant, the Company will deliver to the Holder a new
Warrant covering the rights not so purchased.
11. Determination by Board of Directors. All determinations by the
-----------------------------------
Board of Directors of the Company under the provisions of this Warrant will be
made in good faith with due regard to the interest of the Holder and in
accordance with sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all
------
notices and certificates given to the Holder shall be sent registered or
certified mail, return receipt requested, to such Holder at his address
appearing on the records of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants.
------------------------------------------------------------
Upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon delivery of any indemnity bond in such
reasonable amount as the Company may determine in the case of any such
mutilation, upon the surrender of such Warrant for cancellation, the Company
at its expense, will execute and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein,
-----------------
the same shall include the plural where appropriate, and words of any gender
shall include each other gender where appropriate.
15. Applicable Law. This Warrant shall be governed by, and construed
--------------
in accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
Dated: October 21, 1997
DATE: OCTOBER 21, 1997
PROMISSORY NOTE
---------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation
("Company"), promises to pay to Donaldson, Lufkin & Jenrette Securities
Corporation Custodian SEP FBO James F. Meara IRA, or registered assigns
("Holder"), at the office of the Company in Redwood City, California or such
other place as Holder may designate in writing at least three business days
prior to the date fixed for such payment, the entire principal sum of
Seventy-Five Thousand Dollars ($75,000), together with interest thereon, on
the earlier of (i) a date determined by the Company within ten (10) business
days of the closing date of any public offering of debt or equity securities
of the Company, resulting in net proceeds to the Company in excess of
$5,000,000, and (ii) June 30, 1998, (the "Payment Date"), at which time all
principal and any accrued and unpaid interest thereon shall be due and owing.
This Note shall accrue interest from the date hereof at the rate of ten (10%)
per annum, payable quarterly on March 31, June 30, September 30 and December
31 in each year. This Note may be prepaid at any time prior to maturity
without penalty in an amount equal to the principal amount hereof plus
interest thereon to the date fixed for prepayment.
All payments of principal and interest hereunder shall be payable in
lawful money of the United States.
The Company shall be in default hereunder upon the occurrence of any of
the following events: (i) the failure by the Company to make any payment of
principal or interest when due hereunder and such failure shall have continued
for a period of ten (10) days; (ii) the commencement by the Company of a
voluntary case in a bankruptcy or insolvency proceeding or the entry of a
decree or order by a court of competent jurisdiction adjudicating the Company
a bankrupt or the appointment of a receiver or trustee of the Company upon the
application of any creditor in an insolvency or bankruptcy proceeding or other
creditor's suit; (iii) the entry of an order for relief approving a petition
for reorganization or arrangement filed against the Company under the Federal
bankruptcy laws and such order remains in force and unvacated thirty (30)
days; (iv) an assignment for the benefit of creditors by the Company; (v) the
occurrence of any event of default under the terms of any indebtedness of the
Company for borrowed money in excess of $50,000, provided that such
indebtedness has been accelerated because of such default; or (vi) the
existence of any judgment in excess of $50,000 against, or any attachment of
material property, of the Company.
At any time when an event of default hereunder shall have occurred and
shall be continuing, Holder at its option may accelerate the maturity of this
Note and declare all of the indebtedness thereof to be immediately due and
payable, together with accrued interest thereon, and payment thereof may be
enforced by suit or other process of law.
If this Note is not paid when due, whether at maturity or by
acceleration, the Company agrees to pay all reasonable costs of collection and
such costs shall include without limitation all costs, attorneys' fees and
expenses incurred by Holder hereof in connection with any insolvency,
bankruptcy, reorganization, arrangement or similar proceedings involving
Holder, or involving any endorser or guarantor hereof, which in any way
affects the exercise by Holder hereof of its rights and remedies under this
Note.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Note and all notices of every kind are hereby waived.
The terms "Company" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to such state's conflicts
of law provisions. Each of the parties hereto irrevocably consents to the
jurisdiction and venue of the federal and state courts located in the State of
New York, County of New York.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Jerome B. Richter
Chairman, President and
Chief Executive Officer
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after October 21, 2000
Warrant to Purchase 12,500 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Donaldson, Lufkin & Jenrette Securities Corporation
Custodian SEP FBO James F. Meara IRA
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on October 21, 2000 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 12,500 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $6.00 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below.
The exercise price of a share of Common Stock in effect at any time and as
adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price". For purposes of this Warrant, a "Business Day" shall mean
any day other than a Saturday, a Sunday or a day on which banking institutions
in New York, New York, or in Redwood City, California, are authorized by law
or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are
sometimes herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time and from time to time by presentation and surrender hereof to
the Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this
Warrant is exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the shares purchasable
hereunder. Upon receipt by the Company of this Warrant at the office of the
Company, in proper form for exercise, accompanied by payment of the Exercise
Price, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that certificates
representing such shares of Common Stock shall not then be actually delivered
to the Holder. The issuance of certificates for shares of Common Stock upon
the exercise of this Warrant shall be made without charge to the Holder for
any issuance tax in respect thereof (with the exception of any federal or
state income taxes applicable thereto), all such taxes to be paid by the
Company, it being understood however that the Holder shall be required to pay
any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the
Holder. The Company will at no time close its transfer books against the
transfer of this Warrant or the issuance of any shares of Common Stock
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that
---------------------------------------
at all times there shall be authorized and reserved for issuance upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance or delivery upon exercise of this Warrant. All shares which may
be issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such
-----------------
manner as to require the issuance of fractional shares. If, as a result of
adjustment in the Exercise Price or the number of shares of Common Stock to be
received upon exercise of this Warrant, fractional shares would be issuable,
no such fractional shares shall be issued. In lieu thereof, the Company shall
pay the Holder an amount in cash equal to such fraction multiplied by the Fair
Market Value of a share of Common Stock. The term "Fair Market Value" shall
mean, as of a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be
the last sale price on such day on the NASDAQ Stock Market, or, if the Common
Stock is not then listed or admitted to trading on the NASDAQ Stock Market, on
such other principal stock exchange on which such stock is then listed or
admitted to trading, or, if no sale takes place on such day on any such
exchange, the average of the closing bid and asked prices on such day as
officially quoted on any such exchange, or, if the Common Stock is not then
listed or admitted to trading on any stock exchange, the average of the
reported closing bid and asked prices on such day in the over-the-counter
market as quoted on the National Association of Securities Dealers Automated
Quotation System or, if not so quoted, then as furnished by any member of the
National Association of Securities Dealers, Inc. selected by the Company. If
there shall be no meaningful over-the-counter market, then Fair Market Value
shall be such amount, not less than book value, as may be determined by the
Board of Directors of the Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable
---------------------------------
without expense (other than applicable transfer taxes) at the option of the
Holder, upon presentation and surrender hereof to the Company for any other
Warrants of different denominations entitling the holder thereof to purchase
in the aggregate the same number of shares of Common Stock purchasable
hereunder. Subject to the provisions of Section 12 below and any restriction
on transfer applicable hereto pursuant to the securities laws of the United
States or any State, upon surrender of this Warrant to the Company with an
assignment form duly executed, and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant in the
name of the assignee named in such instrument of assignment, and this Warrant
shall promptly be cancelled. This Warrant may be divided or combined with
other Warrants which carry the same rights upon presentation hereof at the
principal office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrants into
which this Warrant may be divided or exchanged, and the term "Holder" as used
herein includes any holder of any Warrant into which this Warrant may be
divided or for which this Warrant may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and
-------------------------------------------------
kind of securities purchasable upon the exercise or exchange of this Warrant
and the Exercise Price shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
--------------------------------------
date hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock
in shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(C) combines its outstanding shares of Common Stock into a
smaller number of shares;
(D) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of
its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that the Holder may receive, upon exercise or exchange of this
Warrant and payment of the same aggregate consideration, the number of shares
of capital stock of the Company which the Holder would have owned immediately
following such action if the Holder had exercised or exchanged the Warrant
immediately prior to such action.
The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the
----------------------------------
date hereof, the Company distributes to all holders of its Common Stock any of
its assets or debt securities, the Exercise Price following the record date
shall be adjusted in accordance with the following formula:
E'= E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares
of Common Stock.
The adjustment shall be made successively whenever any such distribution
is made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions
paid out of consolidated current or retained earnings as shown on the books of
the Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise
Price be made effective as of a record date, the Company may elect to defer
making such adjustment until the occurrence of such event by (i) issuing to
the Holder, if this Warrant is exercised after such record date but before the
occurrence of such event, the shares of Common Stock and other capital stock
of the Company, if any, issuable upon such exercise, had such adjustment been
made as of the record date, over and above the shares of Common Stock or other
capital stock of the Company, if any, issuable upon such exercise on the basis
of the Exercise Price as unadjusted, and (ii) paying to the Holder by check
any amount in lieu of the issuance of fractional shares pursuant to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
---------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by
its President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of
shares of Common Stock purchasable hereunder after giving effect to such
adjustment, and shall promptly cause copies of such certificates to be mailed
to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
---------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No adjustment for Small Amounts. Anything herein to the contrary
-------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the
amount of such adjustment shall be less than $.05 per share, but in such case,
any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to $.05 per share or more.
(h) Common Stock Defined. Subject to the provisions of Section 7
--------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification
or reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the
---------------------------------------------------------
event of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or in the event of any consolidation or merger of
the Company with or into another corporation (other than a merger in which
merger the Company is the continuing corporation and that does not result in
any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the class issuable upon exercise or exchange of this
Warrant) or in the event of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent to
such transaction, cause effective provisions to be made so that the Holder
shall have the right thereafter, by exercising this Warrant, to purchase the
kind and amount of shares of stock and other securities and property
(including cash) receivable upon such reclassification, capital reorganization
and other change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock that might have been received upon exercise
or exchange of this Warrant immediately prior to such reclassification,
capital reorganization, change, consolidation, merger, sale or conveyance.
Any such provision shall include provisions for adjustments in respect of such
shares of stock and other securities and property that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section 7 shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
In the event that in connection with any such capital reorganization or
classification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for, or of, a security of the Company other than
Common Stock, any such issue shall be treated as an issue of Common Stock
covered by the provisions of subsection (a) of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be
--------------------------
outstanding, (i) if the Company shall pay any dividend or make any
distribution upon its Common Stock, or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any shares of
stock or securities of any class or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of
the Company, or voluntary or involuntary dissolution or liquidation of the
Company shall be effected, then, in any such case, the Company shall cause to
be mailed to the Holder, at least thirty (30) days prior to the date specified
in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record
is to be taken for the purpose of such dividend, distribution or rights, or
(y) such reclassification, reorganization, consolidation, merger, conveyance,
dissolution or liquidation is to take place and the date, if any is to be
fixed, as of which the holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees that it
----------------------------------
will not increase the par value of the shares of Warrant Stock issuable upon
exercise of this Warrant above the prevailing and currently applicable
Exercise Price hereunder, and that before taking any action that would cause
an adjustment reducing the prevailing and current applicable Exercise Price
hereunder below the then par value of the Warrant Stock at the time issuable
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations
and demands to or upon the Company in respect of this Warrant may be made and
will give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this
----------------
Warrant, the Company may, in the event that the average trading price of the
Company's Common Stock, as reported on the NASDAQ SmallCap Market or such
other exchange on which the Company's Common Stock may then be quoted, exceeds
$10.00 for a period of twenty (20) consecutive trading days, upon not less
than thirty (30) days' notice in writing to the Holder, repurchase all or any
portion of this Warrant at a purchase price equal to $.10 per share of Common
Stock covered hereby, such purchase price to be proportionally adjusted each
time the Exercise Price is adjusted pursuant to Section 6 hereof. During such
thirty (30) day period, the Holder may exercise such Warrants in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in
Redwood City, California or at such other place as shall be agreed upon by the
Company and the Holder. At the Closing, the Company shall deliver to the
Holder an amount equal to the purchase price in immediately available funds
and the Holder will deliver this Warrant to the Company for cancellation. To
the extent any repurchase hereunder is of less than all of the rights
represented by this Warrant, the Company will deliver to the Holder a new
Warrant covering the rights not so purchased.
11. Determination by Board of Directors. All determinations by the
-----------------------------------
Board of Directors of the Company under the provisions of this Warrant will be
made in good faith with due regard to the interest of the Holder and in
accordance with sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all
------
notices and certificates given to the Holder shall be sent registered or
certified mail, return receipt requested, to such Holder at his address
appearing on the records of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants.
------------------------------------------------------------
Upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon delivery of any indemnity bond in such
reasonable amount as the Company may determine in the case of any such
mutilation, upon the surrender of such Warrant for cancellation, the Company
at its expense, will execute and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein,
-----------------
the same shall include the plural where appropriate, and words of any gender
shall include each other gender where appropriate.
15. Applicable Law. This Warrant shall be governed by, and construed
--------------
in accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
Dated: October 21, 1997
DATE: OCTOBER 21, 1997
PROMISSORY NOTE
---------------
Redwood City, California
FOR VALUE RECEIVED, PENN OCTANE CORPORATION, a Delaware corporation
("Company"), promises to pay to Lincoln Trust Company FBO Perry D. Snavely
IRA, or registered assigns ("Holder"), at the office of the Company in Redwood
City, California or such other place as Holder may designate in writing at
least three business days prior to the date fixed for such payment, the entire
principal sum of Two Hundred Thousand Dollars ($200,000), together with
interest thereon, on the earlier of (i) a date determined by the Company
within ten (10) business days of the closing date of any public offering of
debt or equity securities of the Company, resulting in net proceeds to the
Company in excess of $5,000,000, and (ii) June 30, 1998, (the "Payment
Date"), at which time all principal and any accrued and unpaid interest
thereon shall be due and owing. This Note shall accrue interest from the date
hereof at the rate of ten (10%) per annum, payable quarterly on March 31, June
30, September 30 and December 31 in each year. This Note may be prepaid at
any time prior to maturity without penalty in an amount equal to the principal
amount hereof plus interest thereon to the date fixed for prepayment.
All payments of principal and interest hereunder shall be payable in
lawful money of the United States.
The Company shall be in default hereunder upon the occurrence of any of
the following events: (i) the failure by the Company to make any payment of
principal or interest when due hereunder and such failure shall have continued
for a period of ten (10) days; (ii) the commencement by the Company of a
voluntary case in a bankruptcy or insolvency proceeding or the entry of a
decree or order by a court of competent jurisdiction adjudicating the Company
a bankrupt or the appointment of a receiver or trustee of the Company upon the
application of any creditor in an insolvency or bankruptcy proceeding or other
creditor's suit; (iii) the entry of an order for relief approving a petition
for reorganization or arrangement filed against the Company under the Federal
bankruptcy laws and such order remains in force and unvacated thirty (30)
days; (iv) an assignment for the benefit of creditors by the Company; (v) the
occurrence of any event of default under the terms of any indebtedness of the
Company for borrowed money in excess of $50,000, provided that such
indebtedness has been accelerated because of such default; or (vi) the
existence of any judgment in excess of $50,000 against, or any attachment of
material property, of the Company.
At any time when an event of default hereunder shall have occurred and
shall be continuing, Holder at its option may accelerate the maturity of this
Note and declare all of the indebtedness thereof to be immediately due and
payable, together with accrued interest thereon, and payment thereof may be
enforced by suit or other process of law.
If this Note is not paid when due, whether at maturity or by
acceleration, the Company agrees to pay all reasonable costs of collection and
such costs shall include without limitation all costs, attorneys' fees and
expenses incurred by Holder hereof in connection with any insolvency,
bankruptcy, reorganization, arrangement or similar proceedings involving
Holder, or involving any endorser or guarantor hereof, which in any way
affects the exercise by Holder hereof of its rights and remedies under this
Note.
Presentment, demand, protest, notice of protest, dishonor and non-payment
of this Note and all notices of every kind are hereby waived.
The terms "Company" and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
permitted assigns.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to such state's conflicts
of law provisions. Each of the parties hereto irrevocably consents to the
jurisdiction and venue of the federal and state courts located in the State of
New York, County of New York.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Jerome B. Richter
Chairman, President and
Chief Executive Officer
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF MAY BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF REGISTRATION OR QUALIFICATION OR AN EXEMPTION
THEREFROM UNDER APPLICABLE LAW.
COMMON STOCK PURCHASE WARRANT
Void after October 21, 2000
Warrant to Purchase 33,333 Shares
of Common Stock, $.01 par value
of Penn Octane Corporation
PENN OCTANE CORPORATION (POCC)
This is to Certify That, FOR VALUE RECEIVED,
Lincoln Trust Company FBO Perry D. Snavely IRA
or registered assign(s) (herein referred to as the "Holder") is entitled to
purchase, subject to the provisions hereof, from PENN OCTANE CORPORATION, a
Delaware corporation (the "Company"), but not later than 5:00 p.m., California
time, on October 21, 2000 (or, if such date is not a Business Day in Redwood
City, California, then on the next succeeding day which shall be a Business
Day), 33,333 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock") at an exercise price of $6.00 per share, subject to adjustment
as to number of shares and purchase price as set forth in Section 6 below.
The exercise price of a share of Common Stock in effect at any time and as
adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price". For purposes of this Warrant, a "Business Day" shall mean
any day other than a Saturday, a Sunday or a day on which banking institutions
in New York, New York, or in Redwood City, California, are authorized by law
or regulation to close.
The shares of Common Stock issuable upon exercise of the Warrants are
sometimes herein called the "Warrant Stock."
1. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time and from time to time by presentation and surrender hereof to
the Company at its principal office with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price in immediately
available funds for the number of shares specified in such form. If this
Warrant is exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the shares purchasable
hereunder. Upon receipt by the Company of this Warrant at the office of the
Company, in proper form for exercise, accompanied by payment of the Exercise
Price, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that certificates
representing such shares of Common Stock shall not then be actually delivered
to the Holder. The issuance of certificates for shares of Common Stock upon
the exercise of this Warrant shall be made without charge to the Holder for
any issuance tax in respect thereof (with the exception of any federal or
state income taxes applicable thereto), all such taxes to be paid by the
Company, it being understood however that the Holder shall be required to pay
any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the
Holder. The Company will at no time close its transfer books against the
transfer of this Warrant or the issuance of any shares of Common Stock
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.
2. Reservation of Shares; Stock Fully Paid. The Company agrees that
---------------------------------------
at all times there shall be authorized and reserved for issuance upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance or delivery upon exercise of this Warrant. All shares which may
be issued upon exercise hereof will, upon issuance, and receipt of payment
therefor, be duly authorized, validly issued, fully paid and non-assessable.
3. Fractional Shares. This Warrant shall not be exercisable in such
-----------------
manner as to require the issuance of fractional shares. If, as a result of
adjustment in the Exercise Price or the number of shares of Common Stock to be
received upon exercise of this Warrant, fractional shares would be issuable,
no such fractional shares shall be issued. In lieu thereof, the Company shall
pay the Holder an amount in cash equal to such fraction multiplied by the Fair
Market Value of a share of Common Stock. The term "Fair Market Value" shall
mean, as of a particular date, the market price on such date.
For purposes of this Warrant, the market price on any day shall be
the last sale price on such day on the NASDAQ Stock Market, or, if the Common
Stock is not then listed or admitted to trading on the NASDAQ Stock Market, on
such other principal stock exchange on which such stock is then listed or
admitted to trading, or, if no sale takes place on such day on any such
exchange, the average of the closing bid and asked prices on such day as
officially quoted on any such exchange, or, if the Common Stock is not then
listed or admitted to trading on any stock exchange, the average of the
reported closing bid and asked prices on such day in the over-the-counter
market as quoted on the National Association of Securities Dealers Automated
Quotation System or, if not so quoted, then as furnished by any member of the
National Association of Securities Dealers, Inc. selected by the Company. If
there shall be no meaningful over-the-counter market, then Fair Market Value
shall be such amount, not less than book value, as may be determined by the
Board of Directors of the Company.
4. Exchange or Assignment of Warrant. This Warrant is exchangeable
---------------------------------
without expense (other than applicable transfer taxes) at the option of the
Holder, upon presentation and surrender hereof to the Company for any other
Warrants of different denominations entitling the holder thereof to purchase
in the aggregate the same number of shares of Common Stock purchasable
hereunder. Subject to the provisions of Section 12 below and any restriction
on transfer applicable hereto pursuant to the securities laws of the United
States or any State, upon surrender of this Warrant to the Company with an
assignment form duly executed, and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant in the
name of the assignee named in such instrument of assignment, and this Warrant
shall promptly be cancelled. This Warrant may be divided or combined with
other Warrants which carry the same rights upon presentation hereof at the
principal office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrants into
which this Warrant may be divided or exchanged, and the term "Holder" as used
herein includes any holder of any Warrant into which this Warrant may be
divided or for which this Warrant may be exchanged.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
6. Adjustment of Exercise Price and Number of Shares. The number and
-------------------------------------------------
kind of securities purchasable upon the exercise or exchange of this Warrant
and the Exercise Price shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
--------------------------------------
date hereof, the Company:
(A) pays a dividend or makes a distribution on its Common Stock
in shares of its Common Stock;
(B) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(C) combines its outstanding shares of Common Stock into a
smaller number of shares;
(D) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(E) issues by reclassification of its Common Stock any shares of
its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that the Holder may receive, upon exercise or exchange of this
Warrant and payment of the same aggregate consideration, the number of shares
of capital stock of the Company which the Holder would have owned immediately
following such action if the Holder had exercised or exchanged the Warrant
immediately prior to such action.
The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.
(b) Adjustment for Other Distributions. If at any time after the
----------------------------------
date hereof, the Company distributes to all holders of its Common Stock any of
its assets or debt securities, the Exercise Price following the record date
shall be adjusted in accordance with the following formula:
E'= E x M-F
---
M
where: E' = the adjusted Exercise Price.
E = the Exercise Price immediately prior to the adjustment.
M = the current market price (as defined in (e) below) per
share of Common Stock on the record date of the
distribution.
F = the aggregate fair market value (as conclusively
determined by the Board of Directors of the Company) on
the record date of the assets or debt securities to be
distributed divided by the number of outstanding shares
of Common Stock.
The adjustment shall be made successively whenever any such distribution
is made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution. In the
event that such distribution is not actually made, the Exercise Price shall
again be adjusted to the Exercise Price as determined without giving effect to
the calculation provided hereby. In no event shall the Exercise Price be
adjusted to an amount less than zero.
This subsection does not apply to cash dividends or cash distributions
paid out of consolidated current or retained earnings as shown on the books of
the Company and paid in the ordinary course of business.
(c) Deferral of Issuance or Payment. In any case in which an event
-------------------------------
covered by this Section 6 shall require that an adjustment in the Exercise
Price be made effective as of a record date, the Company may elect to defer
making such adjustment until the occurrence of such event by (i) issuing to
the Holder, if this Warrant is exercised after such record date but before the
occurrence of such event, the shares of Common Stock and other capital stock
of the Company, if any, issuable upon such exercise, had such adjustment been
made as of the record date, over and above the shares of Common Stock or other
capital stock of the Company, if any, issuable upon such exercise on the basis
of the Exercise Price as unadjusted, and (ii) paying to the Holder by check
any amount in lieu of the issuance of fractional shares pursuant to Section 3.
(d) When No Adjustment Required. No adjustment need be made for a
---------------------------
change in the par value or no par value of the Common Stock.
(e) Statement of Adjustments. Whenever the Exercise Price and number
------------------------
of shares of Common Stock purchasable hereunder is required to be adjusted as
provided herein, the Company shall promptly prepare a certificate signed by
its President or any Vice President and its Treasurer or Assistant Treasurer,
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description hereunder), and the Exercise Price and number of
shares of Common Stock purchasable hereunder after giving effect to such
adjustment, and shall promptly cause copies of such certificates to be mailed
to the Holder.
(f) No Adjustment Upon Exercise of Warrants. No adjustments shall be
---------------------------------------
made under any Section herein in connection with the issuance of Warrant Stock
upon exercise or exchange of the Warrants.
(g) No adjustment for Small Amounts. Anything herein to the contrary
-------------------------------
notwithstanding, no adjustment of the Exercise Price shall be made if the
amount of such adjustment shall be less than $.05 per share, but in such case,
any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to $.05 per share or more.
(h) Common Stock Defined. Subject to the provisions of Section 7
--------------------
hereof, shares issuable upon exercise or exchange hereof shall include only
shares of the class designated as Common Stock of the Company as of the date
hereof or shares of any class or classes resulting from any reclassification
or reclassifications thereof or as a result of any corporate reorganization as
provided for in Section 7 hereof.
7. Reclassification, Reorganization, Consolidation or Merger. In the
---------------------------------------------------------
event of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or in the event of any consolidation or merger of
the Company with or into another corporation (other than a merger in which
merger the Company is the continuing corporation and that does not result in
any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the class issuable upon exercise or exchange of this
Warrant) or in the event of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent to
such transaction, cause effective provisions to be made so that the Holder
shall have the right thereafter, by exercising this Warrant, to purchase the
kind and amount of shares of stock and other securities and property
(including cash) receivable upon such reclassification, capital reorganization
and other change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock that might have been received upon exercise
or exchange of this Warrant immediately prior to such reclassification,
capital reorganization, change, consolidation, merger, sale or conveyance.
Any such provision shall include provisions for adjustments in respect of such
shares of stock and other securities and property that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section 7 shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
In the event that in connection with any such capital reorganization or
classification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for, or of, a security of the Company other than
Common Stock, any such issue shall be treated as an issue of Common Stock
covered by the provisions of subsection (a) of Section 6.
8. Notice to Warrant Holders. So long as this Warrant shall be
--------------------------
outstanding, (i) if the Company shall pay any dividend or make any
distribution upon its Common Stock, or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any shares of
stock or securities of any class or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, or any conveyance of all or substantially all of the assets of
the Company, or voluntary or involuntary dissolution or liquidation of the
Company shall be effected, then, in any such case, the Company shall cause to
be mailed to the Holder, at least thirty (30) days prior to the date specified
in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record
is to be taken for the purpose of such dividend, distribution or rights, or
(y) such reclassification, reorganization, consolidation, merger, conveyance,
dissolution or liquidation is to take place and the date, if any is to be
fixed, as of which the holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution or liquidation.
9. Certain Obligations of the Company. The Company agrees t hat it
----------------------------------
will not increase the par value of the shares of Warrant Stock issuable upon
exercise of this Warrant above the prevailing and currently applicable
Exercise Price hereunder, and that before taking any action that would cause
an adjustment reducing the prevailing and current applicable Exercise Price
hereunder below the then par value of the Warrant Stock at the time issuable
upon exercise of this Warrant, the Company will take such corporate action, as
in the opinion of its counsel, may be necessary in order that the Company may
validly issue fully paid, nonassessable shares of such Warrant Stock. The
Company will maintain an office or agency (which shall initially be the
Company's principal office in Redwood City, California) where presentations
and demands to or upon the Company in respect of this Warrant may be made and
will give notice in writing to the registered holders of the then outstanding
Warrants, at their addresses as shown on the books of the Company, of each
change of location thereof.
10. Repurchase Right. Notwithstanding any other provisions of this
----------------
Warrant, the Company may, in the event that the average trading price of the
Company's Common Stock, as reported on the NASDAQ SmallCap Market or such
other exchange on which the Company's Common Stock may then be quoted, exceeds
$10.00 for a period of twenty (20) consecutive trading days, upon not less
than thirty (30) days' notice in writing to the Holder, repurchase all or any
portion of this Warrant at a purchase price equal to $.10 per share of Common
Stock covered hereby, such purchase price to be proportionally adjusted each
time the Exercise Price is adjusted pursuant to Section 6 hereof. During such
thirty (30) day period, the Holder may exercise such Warrants in accordance
with the terms hereof. The closing on such repurchase shall occur on the date
and at the time set forth in such notice at the office of the Company in
Redwood City, California or at such other place as shall be agreed upon by the
Company and the Holder. At the Closing, the Company shall deliver to the
Holder an amount equal to the purchase price in immediately available funds
and the Holder will deliver this Warrant to the Company for cancellation. To
the extent any repurchase hereunder is of less than all of the rights
represented by this Warrant, the Company will deliver to the Holder a new
Warrant covering the rights not so purchased.
11. Determination by Board of Directors. All determinations by the
-----------------------------------
Board of Directors of the Company under the provisions of this Warrant will be
made in good faith with due regard to the interest of the Holder and in
accordance with sound financial practices.
12. Notice. All notices to the Holder shall be in writing, and all
------
notices and certificates given to the Holder shall be sent registered or
certified mail, return receipt requested, to such Holder at his address
appearing on the records of the Company.
13. Replacement of Lost, Stolen, Destroyed or Mutilated Warrants.
------------------------------------------------------------
Upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon delivery of any indemnity bond in such
reasonable amount as the Company may determine in the case of any such
mutilation, upon the surrender of such Warrant for cancellation, the Company
at its expense, will execute and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor.
14. Number and Gender. Whenever the singular number is used herein,
-----------------
the same shall include the plural where appropriate, and words of any gender
shall include each other gender where appropriate.
15. Applicable Law. This Warrant shall be governed by, and construed
--------------
in accordance with, the laws of the State of New York, without regard to its
conflict of laws principles.
PENN OCTANE CORPORATION
By: /s/ Jerome B. Richter
------------------------
Name: Jerome B. Richter
Title: Chairman, President and Chief
Executive Officer
Dated: October 21, 1997
AGREEMENT
This Agreement dated as of November 7, 1997 by and among Penn Octane
Corporation, a Delaware corporation (the "Company"), Ernesto Rubio del Cueto,
a citizen of the United Mexican States (the "Consultant"), and Rubio del
Cueto, Monroy, Irurita y Vez, S.C., a law firm organized under the laws of the
United Mexican States ("RCMIV").
WHEREAS, the Consultant rendered consulting and advisory services (the
"Services") to the Company in connection with the negotiation and execution by
the Company of the Agreement entered into between the Company and P.M.I.
Limited, a wholly-owned subsidiary of Petroleos Mexicanos, a state-owned
Mexican company, dated October 7, 1996;
WHEREAS, the Company issued a promissory note (the "Promissory Note")
dated December 12, 1996 in the principal amount of U.S.$100,000.00 in favor of
the Consultant, and entered into a subsequent agreement with RCMIV dated June
23, 1997 (the "June Agreement"), in each case to provide for payment for the
Services; and
WHEREAS, the Company, the Consultant and RCMIV desire (i) to satisfy
payment for the Services through the issuance to the Consultant of Common
Stock, par value $.01 per share, of the Company ("Common Stock"), and (ii) to
cancel the Promissory Note and June Agreement.
NOW THEREFORE, in consideration of the mutual promises and of the mutual
covenants and conditions herein contained, the parties hereto, intending to be
legally bound hereby, agree as follows:
1. The Company, RCMIV and the Consultant hereby agree that the Consultant
alone rendered all of the Services to the Company; and the Company and the
Consultant hereby agree that the value of such Services are U.S.$113,000.00.
2. The Company hereby agrees to issue to and in the name of the
Consultant, and the Consultant hereby agrees to accept, 20,314 shares of
Common Stock, in each case, as compensation for, and in full satisfaction of,
all amounts owed to the Consultant for the Services.
3. RCMIV and the Company hereby agree that the June Agreement is null and
void and of no further force or effect upon execution of this Agreement and
issuance to the Consultant of 20,314 shares of Common Stock.
4. The Company and the Consultant agree to cancel the Promissory Note and
the Consultant agrees to surrender such Promissory Note to the Company upon
execution of this Agreement and issuance to the Consultant of 20,314 shares of
Common Stock.
5. The Consultant agrees, in his capacity as partner of RCMIV, and on
behalf of RCMIV, that the Company has no unfulfilled payment or other
obligations to RCMIV.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to the conflicts of law
principles thereof. This Agreement may be executed in two or more
counterparts.
Accepted and Agreed to by:
PENN OCTANE CORPORATION
/s/ Ernesto Rubio del Cueto By: /s/ Ian T. Bothwell
- ----------------------------- ---------------------
Ernesto Rubio del Cueto Name: Ian T. Bothwell
Title: Chairman, President and
Chief Executive Officer
RUBIO DEL CUETO, MONROY, IRURITA Y VEZ, S.C.
By:/s/ Ernesto Rubio del Cueto
--------------------------------
Name: Ernesto Rubio del Cueto
Title:
PENN OCTANE CORPORATION/EXXON COMPANY, U.S.A.
SALE AGREEMENT
PENN NO. ___/EXXON NO. PEB221
This Agreement is entered into effective November 1, 1997, by and between
Exxon Company, U.S.A., a division of Exxon Corporation ("Exxon"), and Penn
Octane Corporation ("Penn").
Penn and Exxon agree to a product sale as outline below:
1. TERM OF AGREEMENT
This Agreement shall begin with the first shipment to Penn in November
1997 (about November 10, 1997) and shall continue through September 30, 1998.
2. PRODUCT VOLUMES/PRICES
Exxon agrees to deliver to Penn the approximate product volumes show on
Exhibit A during the term of this Agreement at the location and pricing basis
outlined in Exhibit A.
3. PRODUCT SPECIFICATIONS
Exxon shall deliver to Penn products that meets applicable federal, state
and local requirements, as shown on Exhibit B, which is made a part hereof.
4. GENERAL PROVISIONS
Exxon's General Provisions dated December 1996 and attached as Exhibit C
are incorporated herein by reference and made a part hereof.
5. EXPORTS/IMPORTS
This is a domestic transaction.
6. ACCOUNTING
Forward all shipping documents, statements, and invoices to:
EXXON COMPANY U.S.A.
P.O. Box 2180
Room 3614-G, E
Houston, Texas 77252
FAX NO. (713) 656-2052
7. INVOICE PAYMENT METHOD/TERMS
In accordance with Exhibit C, General Provisions, except that invoices
shall be issued weekly and shall be paid by wire transfer with payment due
twelve (12) working days from receipt of invoice and acceptable supporting
documentation. If the invoice and acceptable supporting documentation are
received at the billing address on or before 12:00 noon on a working day,
working day 1 begins on that day. If the invoice and acceptable supporting
documentation are received at the billing address after 10:00 noon (or on a
non-working day), working day 1 begins on the first working day following
receipt.
If the transaction if effected via book transfer, quantity to be exact
barrels. Payment due date shall be the effective book transfer date, provided
the invoice and book transfer confirmation have been received by 12:00 noon on
the day preceding the effective book transfer date; otherwise, the payment due
date shall be the next business day following receipt of invoices and book
transfer confirmation.
8. CREDIT PROVISIONS
Penn agrees to provide a letter of credit acceptable to Exxon. Credit
balances shall be monitored by Exxon, and amendments to the letter of credit
may be required when it appears that those balances may exceed current
security levels. Timely receipt by Exxon of acceptable security and
amendments is a condition precedent to Exxon's performance under this
Agreement. Any letter of credit provided to Exxon must be issued in a format,
for and amount, by a bank and for a time duration acceptable to Exxon.
9. EXHIBITS
The following Exhibits are attached and are a part of this Agreement.
All references herein to the Agreement shall include the applicable Exhibits.
Exhibit A - Product Volumes/Locations/Differentials
Exhibit B - Product Specifications
Exhibit C - General Provisions
EXXON COMPANY, U.S.A. PENN OCTANE CORPORATION
a division of Exxon Corporation
BY /s/ M.W. Schwehr BY /s/ Jerome B. Richter
------------------ -----------------
M.W. Schwehr TITLE: Chairman
Manager, Products and Gas Liquids --------
DATE November 12, 1997 DATE November 12, 1997
------------------- ---------------------
<TABLE>
<CAPTION>
Exhibit A
Product Volumes/Locations/Differentials
Penn No. _______/Exxon No. PEB221
Sale Agreement
EXXON DELIVERS
Quantity
Product Method Approximate Exxon Receives
Location Description of Delivery Measurement k Bbls/Daily Price
<S> <C> <C> <C> <C> <C>
Katy Gas Plant Propane/Butane To Pipeline By meter ticket at origin 6,500 (1)
============== ============== =========== ========================= ============ ===============
<FN>
(1) Price - Mt. Belvieu OPIS NON TET price average for the first business day for interim pricing
less 1.5 cents per gallon for each product. Invoices will be issued weekly. At the end of the
month, pricing will be adjusted to the Mt. Belvieu OPIS NON TET day weighted average for the delivery
month for each product less 1.5 cents per gallon.
</TABLE>
Exhibit B
Product Specification
Penn No. _____/Exxon No. PEB221
Product
-------
Propane Butane Mix = 90% Propane and 10% Butane
<PAGE>
EXHIBIT C
<TABLE>
<CAPTION>
EXXON COMPANY, U.S.A. (A DIVISION OF EXXON CORPORATION)
PETROLEUM PRODUCTS & NATURAL GAS LIQUIDS
December 1996
Index to General Provisions
Page Number
-----------
<C> <S> <C>
1. Special Provisions Shall Govern 1
2. Deliveries 1
3. Volumes 1
4. Measurements 1
5. D___ Integrity 1
6. Inspection 2
7. Title 2
8. Importer/Exporter of Record 2
9. Drawback 2
10. Warranty 2
11. Additional Equipment 3
12. Safety Regulations 3
13. Safety and Health Information 3
14. Statements and Invoices (Exchanges) 3
Payment (Purchases and Sales) 3
15. Taxes 4
16. Financial Responsibility 4
17. Exchange Basis 4
Balances Products 5
Balances Natural Gas Liquids 5
Exchange Imbalances 5
18. Set-Off 5
19. Continuing Obligation 5
20. Applicable Laws 5
21. Compliance with Laws and Regulations 5
22. Product Compliance and Documentation 5
23. Indemnity 6
24. Claims 6
25. Waiver 6
26. Force Majeure and Contingencies 6
27. Business Practices 7
28. Conflict of Interest 7
29. Audit 7
30. Assignment 7
31. Odorization 7
32. Quality 8
33. Storage 8
34. Demurrage on Tank Cars 8
</TABLE>
<PAGE>
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT.
<TABLE>
<CAPTION>
Name of Subsidiary State of Organization Trade Names
- ----------------------- --------------------- -----------
<S> <C> <C>
Penn Wilson CNG, Inc. Delaware None
Penn CNG Holdings, Inc. Delaware None
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Penn Octane
Corporation's Annual Report on Form 10-K for the year ended July 31, 1997 and
is qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 31142
<SECURITIES> 0
<RECEIVABLES> 453101
<ALLOWANCES> 53406
<INVENTORY> 795797
<CURRENT-ASSETS> 1560010
<PP&E> 4448839
<DEPRECIATION> 1263691
<TOTAL-ASSETS> 5496367
<CURRENT-LIABILITIES> 3630925
<BONDS> 1112833
<COMMON> 81693
0
2700
<OTHER-SE> 668216
<TOTAL-LIABILITY-AND-EQUITY> 5496367
<SALES> 30367134
<TOTAL-REVENUES> 30367134
<CGS> 29718734
<TOTAL-COSTS> 29718734
<OTHER-EXPENSES> 3407769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 239431
<INCOME-PRETAX> (2922659)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2922659)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2922659)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
