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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1997
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File No. 0-24394
PENN OCTANE CORPORATION
(Exact name of registrant as specified in charter)
DELAWARE 52-1790357
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5847 SAN FELIPE, SUITE 3420, HOUSTON, TX 77057
(Address of principal executive offices) (Zip Code)
(713) 952-5703
(Registrant's telephone number, including area code)
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____
-------
As of January 31, 1997, 5,205,000 shares of the Registrant's common stock
were outstanding.
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<PAGE>
PENN OCTANE CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheet as of January 31, 1997 3
Statements of Operations for the three and six months ended
January 31, 1997 and 1996 4
Statements of Cash Flows for the three and six months ended
January 31, 1997 and 1996 5
Notes to Financial Statements 6-10
Item 2. Management's Discussion and Analysis or Plan
of Operation 11-14
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15-16
</TABLE>
<PAGE>
PENN OCTANE CORPORATION
PART I - ITEM 1
<TABLE>
<CAPTION>
BALANCE SHEET
(Unaudited)
ASSETS January 31, 1997
------------------
<S> <C>
Cash $ 49,469
Restricted cash 4,685
Trade accounts receivable 464,442
Inventories 745,977
Prepaid expenses 86,408
------------------
Total current assets 1,350,981
Property, plant and equipment (net of accumulated depreciation of $1,033,660) 3,182,561
Lease rights (net of accumulated amortization of $375,063) 778,977
Other noncurrent assets 13,257
------------------
Total assets $ 5,325,776
==================
LIABILITIES & STOCKHOLDERS' EQUITY
Short-term borrowing 772,552
Current maturities of long-term debt 1,401,403
Construction accounts payable 440,021
Trade accounts payable 554,566
Accrued liabilities 615,664
------------------
Total current liabilities 3,784,206
Long-term debt 60,043
Stockholders' equity
Preferred stock-$.01 par value, 5,000,000 shares authorized;
270,000 convertible shares issued and outstanding at
January 31, 1997 2,700
Common stock-$.01 par value, 25,000,000 shares authorized;
5,205,000 shares issued and outstanding at January 31, 1997 52,050
Additional paid-in capital 5,954,566
Accumulated deficit (4,527,789)
------------------
Total stockholders' equity 1,481,527
------------------
Total liabilities and stockholders' equity $ 5,325,776
==================
</TABLE>
See Notes to Financial Statements
<PAGE>
PENN OCTANE CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ------------------
January 31, January 31, January 31, January 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 13,513,164 $ 6,716,715 $ 16,059,657 $ 12,273,507
Cost of goods sold 12,728,248 6,327,356 15,481,213 11,592,906
------------- ------------- ------------- -------------
Gross profit 784,916 389,359 578,444 680,601
Selling, general and administrative expenses 466,011 402,947 893,200 728,924
------------- ------------- ------------- -------------
Operating income (loss) 318,905 (13,588) (314,756) (48,323)
Other income (expense)
Interest income (expense) (69,879) (63,501) (123,506) (117,862)
------------- ------------- ------------- -------------
Net income (loss) before taxes 249,026 (77,089) (438,262) (166,185)
Provision for income taxes 0 0 0 0
------------- ------------- ------------- -------------
Net income (loss) 249,026 $ (77,089) $ (438,262) $ (166,185)
============= ============= ============= =============
Earnings (loss)
per common share $ .04 $ (.02) $ (.08) $ (.03)
============= ============= ============= =============
Weighted average common
shares outstanding 5,205,000 5,085,000 5,205,000 5,082,283
============= ============= ============= =============
</TABLE>
See Notes to Financial Statements
<PAGE>
PENN OCTANE CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ------------------
January 31, January 31, January 31, January 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) $ 249,026 $ (77,089) $ (438,262) $ (166,185)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and Amortization 140,094 173,299 283,963 341,820
Changes in current assets and liabilities
Restricted cash 495,315 0 (4,685) 0
Trade accounts receivable (117,959) (75,985) (432,560) (96,191)
Interest receivable 0 134 26,233 273
Note receivable 0 0 0 100,000
NPEG note 0 0 0 190,843
Inventories 55,574 (94,661) (300,926) (94,661)
Prepaids and other current assets (1,579) 1,229 (19,289) 52,567
Construction and accounts payable (750,338) 74,217 101,422 (56,370)
Advances from and to related party (net) 0 (8,225) 0 (47,360)
Accrued liabilities (9,803) (47,942) 64,753 (49,306)
Other assets and liabilities, net (7,836) 0 (7,836) 0
------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities 52,494 (55,023) (727,187) 175,430
Cash flows from investing activities
Capital expenditures (25) 247 (5,400) (70,833)
Other 0 8,759 0 7,529
------------- ------------- ------------- -------------
Net cash provided by (used in)
investing activities (25) 9,006 (5,400) (63,574)
Cash flows from financing activities:
Short-term borrowing 0 0 100,000 (160,000)
Long-term debt borrowing 0 (2,325) 325,000 (3,842)
Reduction in long-term debt (3,000) 0 (7,469) 0
Increase (decrease) in bank overdraft 0 22,919 0 2,942
------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities (3,000) 20,574 417,531 (160,900)
Net increase (decrease) in cash 49,469 (25,423) 315,056 (49,044)
Cash at beginning of period 0 31,165 364,525 56,786
------------- ------------- ------------- -------------
Cash at end of period $ 49,469 $ 7,742 $ 49,469 $ 7,742
============= ============= ============= =============
</TABLE>
See Notes to Financial Statements
<PAGE>
PENN OCTANE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The balance sheet as of January 31, 1997, the statements of operations, and
statements of cash flows for the three and six months ended January 31, 1997
and 1996 have been prepared by Penn Octane Corporation (the "Company") without
audit. In the opinion of management, the financial statements include all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position as of January 31, 1997 and the results
of operations and cash flows for the three and six months ended January 31,
1997 and 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB for the year ended July 31, 1996 and Form 10-QSB for
the quarter ended October 31, 1996.
Certain reclassifications have been made to prior year balances to conform to
the current presentation. All reclassifications have been applied
consistently to the periods presented.
2. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per share of common stock is computed based on the weighted
average number of shares outstanding after giving effect to common stock
equivalents. Fully diluted earnings (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 that 3% of primary earnings (loss) per
share of common stock.
3. COMMITMENTS AND CONTINGENCIES
During 1994, the Company entered into discussions with International Bank of
Commerce-Brownsville, a Texas state banking association (IBC), 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 substantially 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 to 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 a 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.
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 this award was signed by the
requisite number of arbitrators (September 21, 1995) to the entry of this
Judgment and thereafter at the statutory rate (10%).
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 orders that International Energy Development Corporation
n/k/a Penn Octane Corporation shall have and recover from International Bank
of Commerce-Brownsville attorneys' 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-Brownsville filed an appeal, but the Company continues to
believe that the judgment is final, binding, collectible and will resolve the
litigation with IBC-Brownsville. The financial statements do not include any
adjustments reflecting the gain contingency (the Award), net of attorneys'
fees, or the offset (principal and interest). Short-term borrowing of
$672,552 reflects the principal amount of the offset. The Award will be
accounted for when it is actually realized and the offset will be accounted
for at such time as IBC-Brownsville has exhausted all appeals.
On April 18, 1996, the Company reached agreement to accept $400,000 to settle
a lawsuit it filed in October 1995 against a bank related to IBC-Brownsville
(related Bank). As part of the settlement agreement, the parties executed
mutual releases from future claims related to the IBC-Brownsville litigation.
Additionally, the defendant provided an indemnity agreement to the Company
against future claims from IBC-Brownsville. The amount is recorded in the
statement of operations for the year ended July 31, 1996.
On June 26, 1996, IBC-Brownsville filed 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 Company's judgment against them prevented
them 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. The Company believes the
case to be frivolous and is a breach of the settlement agreement entered into
with the related Bank. Further, the Company believes this cause of action is
covered by an indemnity agreement from that related Bank.
In connection with the IBC-Brownsville suit, IBC-Brownsville filed an appeal
with the Texas Court Of Appeals on January 21, 1997. The Company responded on
February 14, 1997.
4. PURCHASE COMMITMENT
On September 26, 1996, the Company entered into a Term Sale Agreement with its
main propane supplier. The agreement is for a one year period beginning on
October 1, 1996. The terms of this agreement, such as pricing and volumes,
mirror the terms of the Company's sales agreement with its major customer.
5. LETTERS OF CREDIT
In January of 1996, the Company obtained a standby letter of credit in favor
of a propane supplier. The standby letter of credit was for $40,000 and
expired December 1, 1996. In August of 1996, the Company obtained a $40,000
standby letter of credit for another supplier. The letter of credit expired
on September 30, 1996.
In accordance with the purchase commitment discussed above, in September of
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, accrues interest at the prime rate
(8.25% as of October 31, 1996) plus 3%, and is guaranteed by the Company's
president.
On November 5, 1996, the Company's main propane supplier presented for payment
$495,315.10, which was paid through the initial collateral deposit. As a
result of the this draw down, the balance available under the letter of credit
remained $625,000, and $4,685 represented the remaining balance of the
collateral deposit. In early March 1997, the letter of credit and collateral
was released.
In December 1995, the Company obtained a revolving line of credit for $140,000
which was renewed in December 1996 through September 30, 1997. Interest is
calculated on this credit line at the prime rate (8.25% during the six months
ended January 31, 1997) plus 3%. At January 31, 1997, the outstanding balance
was $100,000, which is reflected in short-term borrowings.
6. LONG-TERM DEBT
During October, 1996, the Company issued 6.5 units in a private placement
totaling $325,000 (the "Units"). Each Unit consists of (i) a Promissory Note
and (ii) Common Stock Purchase Warrants (the "Warrants") to purchase Fifty
Thousand (50,000) Shares of Common Stock (the "Common Stock") of the Company
at an exercise price of $3.00 per share.
The Promissory Notes accrue interest at 10% annually and are payable on
November 7, 1997 (the "Payment Date"). In the event the Company receives in
excess of two hundred fifty thousand ($250,000) dollars in connection with any
offering of its securities prior to the Payment Date, the Company shall
utilize up to one-half of the proceeds from such sale to satisfy the
Promissory Note. In the event such payment does not fully satisfy the
Promissory Note, the Company shall pay the balance due on the Payment Date.
7. COMPRESSED NATURAL GAS:
WILSON ACQUISITION CORPORATION
In connection with the Company's plans to enter the compressed natural gas
("CNG") refueling business, on March 7, 1997, Wilson Acquisition Corporation
("WAC"), a newly formed wholly-owned subsidiary of the Company, and Wilson
Technologies Incorporated. ("Wilson"), a leading supplier of CNG refueling
stations which is engaged in the business of selling, designing,
manufacturing, installing and servicing CNG refueling stations and related
products for use in the CNG industry throughout the world, had entered into a
Interim Operating Agreement ("Arrangement"). Under the terms of the
Arrangement, effective as of February 17, 1997, WAC will be granted the right
to use the Wilson name, technology and employees, subject to certain
restrictions, as well as rights to perform contracts which Wilson has
currently not begun to perform, in exchange for monthly payments of $84,000,
and royalty payments of 5% on gross revenues. WAC will be entitled to all
revenues earned by WAC and by certain businesses of Wilson commencing as of
February 17, 1997. In addition, Zimmerman Holdings Inc. ("ZHI"), the parent
of Wilson, has agreed to reimburse the Company for 50% of the net operating
cash deficit of WAC, if any. WAC will also be entitled to use the Wilson
premises as well as available inventory of Wilson in carrying out the business
at a price of cost plus 10%. The Arrangement will terminate 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 is not completed within 90
days, the Arrangement may be extended by WAC for up to three years.
Simultaneously with Arrangement, the Company, WAC, Wilson and ZHI entered into
a purchase agreement (the "Acquisition"), whereby WAC will acquire certain
assets, including trademarks and licenses, and certain ongoing businesses of
Wilson, including Wilson's Canadian and Mexican subsidiaries, in exchange for
the assumption of certain liabilities, a $3 million contingent royalty note of
WAC, a note based upon certain operating expenses issued by WAC and a $220,000
convertible debenture issued by the Company. The Acquisition is subject to
several conditions, including obtaining satisfactory restructuring of all of
Wilson's creditor obligations involving the consent of such creditors to the
proposed Acquisition.
DINA DEALERSHIP
In November 1996, the Company acquired the right to a Dina dealership (the
"Dealership") which was conditionally granted to Mr. Roberto Keoseyan
("Keoseyan") by Grupo Dina, S.A. de C.V., one of the largest bus and truck
manufacturers in Mexico. In connection with the acquisition, the Company
agreed to make certain monthly payments to Keoseyan and has agreed to issue
Keoseyan 100,000 warrants in the common stock of the Company once the
Dealership has been officially granted to the Company.
8. EQUITY
WARRANT EXCHANGE
During February 1997, the Company and certain prior officers the ("Officers")
of the Company agreed to an exchange offer whereby the Officers, on a weighted
average basis, received newly issued shares of the Company's common stock in
exchange for outstanding warrants tendered (the "Exchange"). As a result of
the Exchange, the Company will issue a total of 164,286 shares of its common
stock in exchange for receipt of 702,856 warrants.
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULT OF OPERATIONS
Revenue for the three months ended January 31, 1997 was $13,513,164 as
compared to $6,716,715 for the three months ended January 31, 1996, an
increase of 101%. The increase for the three months ended January 31, 1997,
was due to the Company's first full quarter of operations under the new sales
arrangement with a major customer, which commenced during October 1996, which
resulted in higher volumes of product sold during the three months ended
January 31, 1997 of approximately 22.6 million gallons sold compared with
approximately 16.9 million gallons sold for the three months ended January 31,
1996. In addition, the prices charged for product sold were generally higher
during the three months ended January 31, 1997 as compared to the three months
ended January 31, 1996. For the six months ended January 31, 1997 as compared
to the six months ended January 31, 1996, revenues increased to $16,059,657
from $12,273,507, an increase of 31%. This increase was primarily due to
generally higher prices charged for product sold during the six months ended
January 31, 1997 as compared to the six months ended January 31, 1996,
partially offset by lower volumes sold.
Cost of goods sold for the three months ended January 31, 1997 was $12,728,248
as compared to $6,327,356 in the same quarter during the prior year, an
increase of 101%. As described earlier, this increase is primarily due to
additional volumes sold as well as higher costs for product sold during the
three months ended January 31, 1997, partially offset from utilization of
lower priced inventory. Cost of goods sold for the six months ended January
31, 1997 was $15,481,213 as compared to $11,592,906 for the six months ended
January 31, 1996, an increase of 34%. As described earlier, this increase is
primarily due to higher costs for product sold during the six months ended
January 31, 1997, partially offset by lower volumes sold.
Gross profit for the three months ended January 31, 1997 was $784,916 as
compared to $389,359 for the three months ended January 31, 1996. The
increase was due primarily to the higher volume of LPG gas sold during the
three months ended January 31, 1996, as a result of the new sales arrangement
with a major customer described above. Gross profit for the six months ended
January 31, 1997 was $578,444 as compared to $680,601 for the six months ended
January 31, 1996. The decrease was due primarily to lower margins earned
under the new sales arrangement with a major customer combined with the
continuation of certain fixed costs which was not affected by the significant
reduction in volumes sold during the period until the new sales arrangement
with a major customer commenced during October 1996.
Selling, general and administrative (SG&A) expenses for the three months ended
January 31, 1997 were $466,011 as compared to $395,097 for the same quarter in
the prior year, an increase of 18%. This increase was due primarily to
increases in administrative costs. SG&A expenses for the six months ended
January 31, 1997 were $893,200 as compared to $721,074 for the six months
ended January 31, 1996, an increase of 24%. This increase was due primarily
to increases in administrative costs.
Interest expense was $69,879 and $63,501 for the three months ended January
31, 1997, and January 31, 1996, respectively. The minor increase was due
primarily to higher average loan balances during the three months ended
January 31, 1997, partially offset from payments of contractor loan
obligations. Interest expense was $123,506 and $117,862 for the six months
ended January 31, 1997, and January 31, 1996, respectively. The minor
increase was due primarily to higher average loan balances during the six
months ended January 31, 1997, partially offset from payments of contractor
loan obligations.
Due to the net losses for the six months ended January 31, 1997, no income tax
expense was provided.
In July 1995, due to uncertainties related to the timing of the financing of
National Power Exchange Group, Inc.'s (NPEG) power project, the Company made a
provision to reduce the amount due under the settlement agreement. During the
six months ended January 31, 1996, the Company received approximately $200,000
in connection with the settlement agreement. For additional information,
please refer to note M of the Company's form 10-KSB for the year ended July
31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1996, the Company's arrangement with its major customer expired.
After two months of negotiation, an agreement was reached. The term of the
new agreement is for a one year period commencing October 1, 1996. Under
terms of this agreement, the Company has committed to supply and the customer
has committed to purchase a minimum volume of LPG each month with seasonal
variability. The total committed annual volume exceeds the volume sold to the
customer during the year ended July 31, 1996.
Under this agreement, the Company is again responsible for the direct purchase
of LPG. As a result, the Company has negotiated an agreement with a major
supplier which mirrors the terms and conditions of the Company's sales
agreement with its primary customer. The agreements provide the Company with
a fixed margin over the cost of gas. The Company has made arrangements with
its bank for a standby letter of credit for the benefit of a major supplier
for the one year period of the agreements. This letter of credit will enable
the Company to purchase LPG on an ongoing basis. As part of the terms and
conditions of this letter of credit, the Company executed a demand promissory
note, which accrues interest at the prime rate plus 3%, is collateralized by a
bank deposit and is guaranteed by the president.
Since the Company agreed to finance the purchase of LPG, the customer agreed
to prepay for approximately 75% of the gallons committed to be purchased in
October 1996, and to make payments within ten days of invoicing thereafter.
Under the terms of the agreement, invoicing will occur weekly and should
reduce the Company's working capital requirements substantially. Beginning
November 1996, the Company has made arrangements with its major customer to
guarantee credit with the Company's main supplier.
Because the Company had complied with all terms of the settlement agreement
entered into on June 21, 1995 with the two contractors, Lauren and Janik, who
were owed money from the construction of the Company's terminal, and because
the Company had reduced the amount owed the contractors from $1,308,000 to
$437,834 as of July 1996, on October 10, 1996, the Company reached a tentative
agreement with Lauren and Janik to extend the repayment schedule to April 14,
1997, under substantially similar terms and conditions. Based on the minimum
volumes committed to by the Company's primary customer under the agreement
which commenced on October 1, 1996, the Company anticipates being able to make
repayment in full from cash flow generated by operations.
While the Company has not made commitments for additional capital expenditures
during the next twelve months, it continues to evaluate the cost of and
opportunities created by (i) installing a cooling unit and upgrading and
extending a pipeline to the loading dock on the Brownsville Navigation Channel
in order to commence unloading from and loading onto ocean-going LPG vessels
and (ii) the construction and operation of an additional LPG terminal with
storage facilities within Mexico and/or closer to U.S.- Mexico border
crossings and an extension of the pipeline to this terminal, which is subject
to regulatory approval. If determined to be advantageous to the Company's
operations, the projects would enable the Company to receive LPG for its major
customer for storage and redelivery, export LPG to Caribbean and other Latin
American markets and allow for additional sales volumes of LPG into Mexico at
substantially higher margins. The total cost of these projects are expected
to cost less than $5,000,000.
In connection with the Company's plans to enter the compressed natural gas
("CNG") refueling business, on March 7, 1997, Wilson Acquisition Corporation
("WAC"), a newly formed wholly-owned subsidiary of the Company, and Wilson
Technologies Incorporated. ("Wilson"), a leading supplier of CNG refueling
stations which is engaged in the business of selling, designing,
manufacturing, installing and servicing CNG refueling stations and related
products for use in the CNG industry throughout the world, had entered into a
Interim Operating Agreement ("Arrangement"). Under the terms of the
Arrangement, effective as of February 17, 1997, WAC will be granted the right
to use the Wilson name, technology and employees, subject to certain
restrictions, as well as rights to perform contracts which Wilson has
currently not begun to perform, in exchange for monthly payments of $84,000,
and royalty payments of 5% on gross revenues. WAC will be entitled to all
revenues earned by WAC and by certain businesses of Wilson commencing as of
February 17, 1997. In addition, Zimmerman Holdings Inc. ("ZHI"), the parent
of Wilson, has agreed to reimburse the Company for 50% of the net operating
cash deficit of WAC, if any. WAC will also be entitled to use the Wilson
premises as well as available inventory of Wilson in carrying out the business
at a price of cost plus 10%. The Arrangement will terminate 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 is not completed within 90
days, the Arrangement may be extended by WAC for up to three years.
Simultaneously with Arrangement, the Company, WAC, Wilson and ZHI entered into
a purchase agreement (the "Acquisition"), whereby WAC will acquire certain
assets, including trademarks and licenses, and certain ongoing businesses of
Wilson, including Wilson's Canadian and Mexican subsidiaries, in exchange for
the assumption of certain liabilities, a $3 million contingent royalty note of
WAC, a note based upon certain operating expenses issued by WAC and a $220,000
convertible debenture issued by the Company. The Acquisition is subject to
several conditions, including obtaining satisfactory restructuring of all of
Wilson's creditor obligations involving the consent of such creditors to the
proposed Acquisition.
WAC currently intends to pursue additional service and maintenance business
and other station development opportunities in the U.S., Mexico and other
countries.
During October 1996, the Company completed a private placement of Promissory
Notes due November 1997. Total proceeds raised from the private placement was
$325,000 of which the Company used the net proceeds for working capital
requirements.
Although IBC-Brownsville has appealed the judgment, the court which entered
the judgment issued an order on September 23, 1996, which provides that the
Company has the right to enter the judgment and free its assets from
encumbrance. Management of the Company believes that receipt of the proceeds
from the judgment against IBC-Brownsville would enable the Company to
substantially eliminate all of its outstanding obligations including all debt
and legal fees plus provide additional working capital. At January 31, 1997,
the judgment including accrued interest and legal fees approximate $3,302,511,
less contingent legal fees.
Effective October 24, 1996, Thomas P. Muse, Chairman, Mark D. Casaday,
President, and Thomas A. Serleth, Executive Vice President, Secretary,
Treasurer, and Chief Financial Officer resigned as members of the Board of
Directors and Officers of the Company. Mr. Casaday continued as President
until the expiration of his employment contract on October 31, 1996.
Effective October 29, 1996, Jerome B. Richter was elected to the positions of
Chairman of the Board of Directors, President and Chief Executive Officer, Ian
T. Bothwell was elected Vice President, Treasurer, Assistant Secretary and
Chief Financial Officer, and Jorge Bracamontes was elected Executive Vice
President and Secretary.
Through a combination of the agreements with its major customer to purchase a
minimum monthly volume of LPG and its primary LPG supplier to provide
increased volumes of LPG, and a full year of sales to U.S. Rio Grande Valley
propane distributors, the Company believes it will have cash flow adequate to
meet its obligations for the next twelve month period. In addition, the
Company expects collection of the IBC-Brownsville judgment, and intends to
expand sales to its major customer, including related products and/or
additional services.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to the Financial Statements.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The following Exhibits are included herewith:
a. Exhibits
--------
10.23 Interim Operating Agreement between the Wilson Acquisition
Corporation and Wilson Technologies Incorporated dated March 7, 1997.
10.24 Purchase Agreement between the Registrant, Wilson Acquisition
Corporation, Wilson Technologies Incorporated and Zimmerman Holdings Inc.
dated March 7, 1997.
10.25 Agreement for Exchange of Warrants for Common Stock dated February 5,
1997 between the Registrant and Mark D. Casaday.
10.26 Agreement for Exchange of Warrants for Common Stock dated February 5,
1997 between the Registrant Thomas P. Muse.
10.27 Agreement for Exchange of Warrants for Common Stock dated February
19, 1997 between the Registrant and Thomas A. Serleth.
10.28 Agreement between Roberto Keoseyan and the Registrant dated November
12, 1996.
10.29 Promissory Note between Bay Area Bank and the Registrant dated
December 20, 1996.
27.0 Financial Data Schedule
The following report on Form 8-K is incorporated herein by reference:
b. Reports on Form 8-K
----------------------
On February 7, 1997, the Registrant filed a Form 8-K Current
Report regarding the press
release of February 4, 1997 in connection with an agreement to
supply CNG buses and
refueling stations.
SIGNATURES
Pursuant to the requirements of the Securities 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
Date: March 14, 1997 By: /S/ IAN T. BOTHWELL
---------------------
Ian T. Bothwell
Vice President and
Chief Financial Officer
INTERIM OPERATING AGREEMENT
---------------------------
THIS INTERIM OPERATING AGREEMENT (the "Agreement") is made and entered
into on March 7, 1997, by and between Wilson Technologies Incorporated, a
California corporation ("Company"), a wholly-owned subsidiary of Zimmerman
Holdings, Inc., a California corporation ("ZHI"), on the one hand, and Wilson
Acquisition Corporation, Delaware corporation ("Buyer"), a wholly-owned
subsidiary of Penn Octane Corporation, a Delaware corporation ("POC"), on the
other hand.
RECITALS
--------
A. Company is engaged in the business of selling, designing,
manufacturing, installing and servicing compressed natural gas ("CNG")
refueling stations and related products for use in the CNG industry throughout
the world (the "Business"). B. Company and ZHI, on the one hand, and
Buyer and POC, on the other hand, are parties to that certain Purchase
Agreement of even date herewith the ("Purchase Agreement") pursuant to which,
among other things, Company is selling to Buyer certain of its assets and
assigning to Buyer certain of its liabilities and Buyer is purchasing from
Company such assets and assuming from Company such liabilities, on the terms
and conditions set forth therein.
<PAGE>
C. Buyer and Company desire to establish terms and conditions for the
operation by Buyer, on an interim basis, of certain of Company's Business from
and after the date hereof, as set forth herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, the parties agree as follows:
1. INTERIM OPERATION.
------------------
1.01 Contracts. During the Term of this Agreement (as defined in
---------
Section 3.01), Buyer shall, as provided herein, perform all duties and
obligations under the service agreements and other specified contracts of
Company set forth on Schedule 1.01 hereto (the "Service Contracts"). Except
in the case of the Orange County Contract, as provided in Section 1.08, all of
Company's contracts, whether or not performed by Buyer under the terms of this
Agreement, shall remain Company's contracts, and nothing in this Agreement
shall in any way make Buyer a party to any such contract. Buyer's CNG
Contracts (as defined in Section 1.03) shall remain Buyer's contracts.
1.02 Payments. During the Term of this Agreement, Buyer shall have
--------
the right to collect all payments made by customers in connection with work
performed under the Service Contracts from and after February 16, 1997 and
during the Term of this Agreement. Buyer and Company shall cooperate to
notify customers of Buyer's performance of the Service Contracts and that
payments for performance of services by Buyer related to the Service Contracts
and any other services performed by Buyer on behalf of Company shall be
directed to Buyer. In the event payments are directed to Company for Buyer's
performance of services related to the Service Contracts and any other
services performed by Buyer on behalf of Company, such payments received by
Company shall be held in trust for Buyer and Company shall promptly forward
such payments to Buyer.
1.03 Employees. Company shall make available to Buyer employees of
---------
Company, who have historically performed services required under the Service
Contracts (the "Loaned Employees"), for the performance of the Service
Contracts, and to perform such additional services as Buyer may reasonably
request in connection with Buyer's efforts to enter into new agreements and
contracts related to the CNG business ("Buyer's CNG Contracts"); provided,
however, that the Loaned Employees shall be available to Company to perform
all work necessary to complete the sales orders of Company set forth on
Schedule 1.03 (the "Unfinished Sales Orders") in an expeditious manner and to
perform any warranty work that Company may require. Until the earlier of May
30, 1997, or such time as the Unfinished Sales Orders have been completed and
Company has exercised the Cessation Option (as defined in Section 5.01), each
of the Loaned Employees shall be available for use by Company for at least
one-half of each work week for each Loaned Employee. From and after May 30,
1997, and until such time as the Unfinished Sales Orders have been completed
and Company has exercised the Cessation Option, the Loan Employees shall be
available for use by Company for at least a combined total of forty (40) hours
per week; provided, however, that Company shall designate which of its Loaned
Employees shall be utilized by Company for each forty (40) hour period each
week.
1.04 Company Name and Technology. During the Term, Company hereby
---------------------------
grants to Buyer an exclusive license to use Company's intellectual property
and proprietary and business information including, without limitation, the
name "Wilson Technologies" and any derivative thereof (the "Licensed
Intellectual Property") for use in connection with the performance of the
Service Contracts and Buyer's CNG Contracts (as defined in Section 1.03
above).
1.05 Fixed Assets and Facilities. During the Term, Buyer shall have the
---------------------------
right to the reasonable use of the fixed assets of Company and of Company's
facilities. Buyer acknowledges receipt of a copy of that certain Standard
Sublease dated December 30, 1996 (the "Sublease") between Kelly Pipe Company,
as Sublessor, and Company and ZHI, as Tenant, for Company's premises in Santa
Fe Springs, California (the "Premises"). Buyer further acknowledges that the
term of the Sublease expires on April 30, 1997 and continues month-to-month
thereafter terminable by Sublessor or Sublessee upon not less than thirty (30)
days prior written notice. Company covenants that it shall promptly notify
Buyer in the event that it receives a written notice of termination from
Sublessor and that it shall notify Buyer of its intent to terminate the
Sublease at such time as it notifies Sublessor of its intent to terminate the
Sublease pursuant to its terms.
1.06 Inventory. During the Term of this Agreement, Buyer shall use
---------
its reasonable best efforts to use Company's inventory first before purchasing
inventory. Buyer shall purchase such inventory notwithstanding the
availability of replacement inventory at a cost lower than book value of
Company's inventory. Buyer shall purchase Company's inventory at a price
equivalent to book value plus ten percent (10%) of such value, unless an
alternate price is agreed to by Buyer and Company. Buyer's right to purchase
such inventory shall be conditioned upon Company's determination, in its sole
discretion and upon a written request by Buyer to purchase particular
inventory, that such inventory is not necessary for the completion of the
Unfinished Sales Orders.
1.07 Division 10 Contract. The following provisions shall apply to
--------------------
Company's Los Angeles County Metropolitan Transit Authority Change Order No. 1
to Contract No. 6358 for construction of CNG fueling facilities at Division 8
& 10 (the "Division 10 Contract"), in addition to the other provisions herein:
(a) Company shall use its reasonable best efforts to cause its
affiliate, A and A Associates, Inc., a California corporation ("A&A"), to make
direct labor historically utilized by Company in connection with the assembly
of Company's products (the "A&A Direct Labor") available for use by Buyer to
perform unfinished work under the Division 10 Contract; and
(b) As soon as practicable after the date hereof, Company shall
calculate its actual costs incurred in connection with the Division 10
Contract prior to the date hereof (the "Division 10 Costs"). The Division 10
Costs shall include, without limitation, costs of all materials, inventory and
labor incurred prior to the date hereof and shall exclude sales, general and
administrative ("SG&A") expenses incurred by Company from and after December
16, 1996 and on or before the date hereof. Buyer shall pay to Company the
Division 10 Costs within thirty (30) days after Buyer receives notice, in
writing, of the total amount of Division 10 Costs.
1.08 Orange County Contract. The following provisions shall apply to
----------------------
County Sanitation Districts of Orange County Purchase Order No. 80057 and
Change Order, dated November 7, 1996 (the "Orange County Contract"), in
addition to the other provisions herein:
(a) Notwithstanding anything to the contrary contained herein,
Company and Buyer shall use their reasonable best efforts either (i) to obtain
the consent of the County Sanitation Districts of Orange County (the "County
of Orange") to the assignment of all of Company's right, title and interest in
and to the Orange County Contract to Buyer and to obtain a novation of the
Orange County Contract substituting Buyer in place of Company (the "Consent
and Novation"), or (ii) to obtain a new contract from the County of Orange in
the name of Buyer alone (the "New Contract"). To the extent that the County
of Orange either provides the Consent and Novation or the New Contract, then
the Orange County Contract shall be excluded from the definition of "Service
Contracts" for purposes of this Agreement and the Orange County Contract shall
be included in the definition of "Buyer's CNG Contracts" for purposes of this
Agreement.
(b) To the extent that Company and Buyer are unable, despite
their best efforts, to obtain from the County of Orange either the Consent and
Novation or the New Contract, then the following shall occur:
(i) the Orange County Contract shall remain included in the
definition of "Service Agreements" for purposes of this Agreement. In such
event, Company shall use its reasonable best efforts to cause its affiliate,
A&A, to make the A&A Direct Labor available for use by Buyer to perform work
required under the Orange County Contract; and
(ii) Buyer shall obtain, in its own name, any letter of
credit required by the County of Orange to proceed with the Orange County
Contract.
1.09 Open Bids. Company and Buyer shall use their reasonable best
---------
efforts to transfer from Company to Buyer open bids, if any, upon their
acceptance by the customer, to the extent that Buyer determines that it
desires to enter into a contract with the customer based upon the bid (each,
an "Accepted Bid"). Notwithstanding the foregoing, Company shall have no
obligation hereunder to enter into any contract with any customer in
connection with any such bid accepted by any customer.
1.10 Payments to Company's Creditors. During the Term, Buyer shall
-------------------------------
have the right, but not the obligation, with the written consent of Company
which shall not be unreasonably withheld, to make payments to any of Company's
creditors to the extent necessary to perform the Service Agreements and the
Buyer CNG Contracts, as contemplated herein. To the extent Buyer makes any
such payments, the principal amount of the Royalty Obligation (as defined in
Section 2.02) due on termination of this Agreement, in the case of termination
for any reason other than the consummation of the transactions contemplated by
this Agreement, or the principal amount of the Royalty Note (as defined in
Purchase Agreement), in the case of the consummation of the transactions
contemplated by the Purchase Agreement, shall be reduced by the amount of any
such payments. Notwithstanding the foregoing, Buyer shall continue to make,
when due, any Royalty Payments due hereunder or under the Royalty Note.
2. CONSIDERATION.
-------------
2.01 Monthly Payments. During the Term, Buyer shall pay to Company
-----------------
Eighty-Four Thousand Dollars ($84,000.00) per month, payable twice per month
in installments of Forty-Two Thousand Dollars ($42,000.00). Payments shall
commence on the date hereof, and shall continue thereafter on the 5th day of
each month, for the 1st through the 15th of each month, and on the 20th day of
each month, for the 16th through the end of each month, until the earlier to
occur of the Termination Date or the Cessation Date (as defined in Section
5.01). Buyer and Company shall cooperate to make appropriate adjustments, as
the case may be, in the case of a Termination Date or Cessation Date which
results in a final period which is less than a complete month. The parties
hereto agree and acknowledge that concurrently with the execution of this
Agreement Buyer has paid to Company the sum of Eighty-four Thousand Dollars
($84,000.00), the receipt of which is hereby acknowledged, and that the period
for which such initial payment is made commences February 16, 1997 and ends
March 15, 1997. The parties hereto further agree and acknowledge that, for
purposes of Section 3.02(a)(vii), Buyer's gross margin shall be calculated
from February 16, 1996.
2.02 Royalty. Commencing on the date hereof and continuing during the
-------
Term (the "Royalty Period"), a royalty shall accrue in an amount equal to five
percent (5%) of Net Revenues, as hereinafter defined, of Buyer (the "Royalty
Obligation"). The Royalty Obligation shall be due and payable at the end of
the Initial Term (as defined in Section 3.01(a)) and each Option Term (as
defined in Section 3.01(a); each a "Royalty Payment"). For purposes of this
Agreement, the term "Net Revenues" means the gross amount of revenues received
by Buyer or its affiliates from the sale of products or the performance of
services related to the CNG business anywhere in the world less (a) returns,
----
credits, discounts and allowances, (b) free goods programs, (c) freight,
transportation and insurance charges, and (d) sales, excise and similar taxes
added to the invoice; provided, however, that Net Revenues shall not include
revenues arising from the sale of CNG, the sale of CNG-powered vehicles or the
conversion of vehicles to CNG-powered vehicles. Buyer shall keep accurate
records of all Net Revenues, including sales made by affiliates of Buyer, and
shall deliver to Company with each Royalty Payment a report indicating the Net
Revenues. Company shall have the right, at its own expense, upon reasonable
notice and during normal business hours, to audit and inspect Buyer's records
of Net Revenues.
2.03 A&A Direct Labor. Buyer shall pay to Company on a weekly basis,
----------------
on each Wednesday of each week, an amount equivalent to the actual cost of
making the A&A Direct Labor available to Buyer in connection with the Division
10 Contract, as provided in Section 1.07(a), and the Orange County Contract,
as provided in Section 1.08(b)(i), plus the cost of employee benefits provided
----
to such labor plus ten percent (10%) of such actual cost and such employee
----
benefits.
2.04 Division 10 Costs. Buyer shall pay to Company the Division 10
-----------------
Costs in accordance with Section 1.07(b) hereof.
3. TERM.
----
3.01 Termination Events.
-------------------
The term of this Agreement (the "Term") shall commence upon the date
hereof and expire upon the earlier to occur of the following (the "Termination
Date"):
<PAGE>
(a) ninety (90) days after the date hereof (the "Initial Term");
provided, however, that Buyer shall have eleven (11) consecutive options to
extend the term hereof for an additional ninety (90) day period (each, an
"Option Term"), which, if exercised in writing by notice by Buyer to Company
prior to the expiration of the Initial Term or any Option Term, shall, in each
case, extend the term hereof for an additional ninety (90) day period;
(b) consummation of the transactions contemplated by the
Purchase Agreement;
(c) the failure of Buyer to either consummate the transactions
contemplated by the Purchase Agreement within ninety (90) days after exercise
by Company of the Put Option (as defined in Section 5.02) or to pay to Company
the SG&A Differential (as defined in Section 5.02)) within ninety (90) days of
the exercise by Company of the Put Option;
(d) mutual consent of Buyer and Company;
(e) the occurrence of a material breach of any provision
hereunder upon notice, in writing, by Buyer or Company to the other party
which breach has not been cured within thirty (30) days after receipt of such
notice, unless Buyer or Company, as the case may be, has waived such breach;
or
(f) three (3) years after the date hereof, unless Buyer
exercises the Continuation Option (as defined in Section 4.02), in which case,
the Term of this Agreement shall continue for an additional two (2) year
period.
3.02 Effect of Termination.
-----------------------
(a) In General. Except in the case of termination of this
-----------
Agreement pursuant to Section 3.01(b) (closing of the transactions
contemplated by the Purchase Agreement) or in the case of continuation of this
Agreement for the Continuation Period (as defined in Section 4.02), the
following shall occur upon termination of this Agreement as of the Termination
Date:
(i) Buyer shall cooperate with Company to notify customers
that Buyer will no longer perform any of Company's Service Contracts and that
all further payments shall be directed to Company. Any such payments received
by Buyer shall be held in trust by Buyer for Company and shall be delivered by
Buyer to Company;
(ii) Buyer shall cease doing business;
(iii) Neither Buyer nor any affiliate of Buyer, for a period of
two (2) years after the Termination Date, shall solicit any employee of
Company for employment by Buyer or any affiliate of Buyer except if Company
has exercised the Cessation Option (as defined in Section 5.01), in which
case, Buyer may retain any employees formerly employed by Company;
(iv) The license for the Licensed Intellectual Property
granted herein shall terminate and Buyer shall have no further right to
utilize the Licensed Intellectual Property for any purpose whatsoever and
Buyer shall change its name as soon as practicable to a name which does not
use the name "Wilson" or any derivation thereof;
(v) Buyer shall pay to Company any unpaid Royalty Payments
due and payable hereunder, within thirty (30) days after the Termination Date;
(vi) Buyer shall pay to Company any unpaid amounts owing
for inventory purchased pursuant to the terms of this Agreement and due and
payable hereunder, within thirty (30) days after the Termination Date;
(vii) Company shall pay to Buyer fifty percent (50%) of the
difference, if any, between Buyer's gross margin (less any Royalty Payments
paid by Buyer to Company) in connection with its operations during the
duration of this Agreement and Eighty-Four Thousand Dollars ($84,000.00) per
month from the date hereof and ending on the Cessation Date (as defined in
Section 5.01), within thirty (30) days after the Termination Date; and
(viii) If upon the Termination Date amounts are due and owing
by Buyer to Company under Subpart (v) above and/or Subpart (vi) above, and by
Company to Buyer under Subpart (vii) above, such amounts shall offset each
other, and only the net amount after offset shall be considered due and
payable;
provided, however, that, all other obligations of the parties hereto shall
- -------- -------
terminate except as otherwise set forth herein and Buyer and its affiliates
- ---
shall cease to conduct the Business.
- --
(b) Upon Closing of Purchase Agreement Transactions. The
-------------------------------------------------
following shall occur in the case of termination of this Agreement pursuant to
Section 3.01(b) (closing of the transactions contemplated by the Purchase
Agreement):
(i) Book value or any other agreed value paid or credited by
Buyer to Company for the purchase of any of Company's inventory during the
term of this Agreement shall be added to the Inventory Valuation (as provided
in Section 1.06(a) of the Purchase Agreement); and
(ii) Any Royalty Payment paid by Company to Buyer hereunder
shall reduce the principal amount due and payable under the Royalty Note (as
defined in the Purchase Agreement);
provided, however, that, all other obligations of the parties hereto shall
- -------- -------
terminate except as otherwise set forth herein or in the Purchase Agreement.
- ---
4. BUYERS' OPTIONS.
----------------
4.01 Purchase Option. If this Agreement has not been terminated in
----------------
accordance with Section 3 hereof prior to the expiration of three (3) years
after the date hereof, Buyer shall have the option to consummate the
transactions contemplated by the Purchase Agreement (the "Purchase Option") by
providing notice to Company in writing of the exercise of its option granted
by this Section 4.01 during the Option Term immediately preceding termination
of this Agreement pursuant to Section 3.01(f) above. Upon exercise of the
Purchase Option, Buyer and Company hereby waive all conditions to the
consummation of the transactions contemplated by the Purchase Agreement set
forth in Sections 9 and 10 of the Purchase Agreement, respectively, and shall
consummate the transactions contemplated by the Purchase Agreement pursuant to
its terms; provided, however, that, notwithstanding anything to the contrary
contained in the Purchase Agreement, Buyer shall pay to ZHI the sum of Two
Hundred Twenty Thousand Dollars ($220,000) cash at the Closing (as defined in
the Purchase Agreement) in lieu of the Convertible Debenture (as defined in
the Purchase Agreement).
4.02 Continuation Option. If this Agreement has not been terminated
-------------------
in accordance with Section 3 hereof prior to the expiration of three (3) years
after the date hereof and Buyer does not exercise the Purchase Option (as
defined in Section 4.01), then Buyer shall have the option to continue the
Term of this Agreement (the "Continuation Option") for an additional two (2)
year period (the "Continuation Period") by providing notice to Company in
writing of the exercise of its option granted by this Section 4.02 during the
Option Term immediately preceding termination of this Agreement pursuant to
Section 3.01(f) above. Buyer's Continuation Option shall be subject to and
shall be conditional upon payment by Buyer to Company of any unpaid Royalty
Payments then due and payable, payment by Buyer to Company of any unpaid
amounts owing for inventory purchased hereunder then due and payable, and
payment of the SG&A Differential (as defined in Section 5.02) in the event
Company has not exercised its Put Option (as defined in Section 5.02). Upon
exercise of the Continuation Option, the following shall occur:
(a) the License for the Licensed Intellectual Property shall
terminate and Buyer shall have no further right to utilize the Licensed
Intellectual Property for any purpose whatsoever and Buyer shall change its
name as soon as practicable to a name which does not use the name Wilson or
any derivation thereof;
(b) Buyer shall be entitled to solicit any remaining employees
of Company;
(c) Buyer shall continue to pay to Company the Royalty
Obligation (as defined in Section 2.02) for the Continuation Period; provided,
however, that, during the Continuation Period, Buyer shall have no obligation
to pay to Company any Royalty Obligation in excess of a total of Three Million
Dollars ($3,000,000.00);
(d) Buyer shall be entitled to engage in the Business; and
(e) Buyer shall be entitled to seek to transfer all Service
Contracts and any other contracts of Company from Company to Buyer;
provided, however, that all other obligations of the parties hereto shall
- -------- -------
terminate, except as otherwise set forth herein.
- ----
5. COMPANY'S OPTIONS.
------------------
5.01 Cessation Option. Upon completion of the Unfinished Sales
-----------------
Orders, as determined by Company in its sole discretion, Company is hereby
granted the option, upon notice to Buyer, in writing, to cease its business
operations (the "Cessation Option") on a date at least ten (10) days after
delivery of such notice (the "Cessation Date"). In such event, Buyer shall
offer to continue employment of all employees who are listed on Schedule 13.01
of the Purchase Agreement and who are then employed by Company. Each such
person who continues employment shall be employed at the same salary and wages
as were in effect immediately prior to the Cessation Date, subject to Buyer's
rights, except to the extent limited by law or agreement, to revise and modify
any terms, conditions, practices, policies, and benefits. Under such
circumstance, Buyer shall assume Company's liabilities for vacation pay, sales
incentives and other amounts accrued to such employees prior to the Cessation
Date. Upon exercise of the Cessation Option, Buyer acknowledges that Company
shall cease to have any obligation to fund any additional sales, general and
administrative ("SG&A") expenses for Company or to make its facilities
available to Buyer pursuant to Section 1.05. Upon exercise of the Cessation
Option, Buyer shall have no obligation to make any additional payments under
Section 2.01 for periods arising from and after the Cessation Date. From and
after the Cessation Date and prior to the Termination Date, at the request of
Company, in writing, Buyer shall perform warranty work in connection with
products manufactured and sold by Company prior to Closing. To the extent any
warranty work is requested, in writing, by Company in connection with such
products, Company shall reimburse Buyer in the amount of cost of such warranty
work plus ten percent (10%), within thirty (30) days of invoice. Any amounts
unpaid hereunder after sixty (60) days shall, at the option of Buyer, offset
any unpaid Royalty Obligation under Section 2.02 hereof.
5.02 Put Option. Any time after the exercise by Company of the
-----------
Cessation Option (as defined in Section 5.01), Company shall have the option
to notify Buyer, in writing, that Company waives all conditions to the closing
of the transactions set forth in Section 10 of the Purchase Agreement and that
Company is prepared to close the transactions contemplated by the Purchase
Agreement (the "Put Option"). Upon exercise of the Put Option, Buyer shall
either waive the conditions to the closing of the transactions set forth in
Section 9 of the Purchase Agreement and close the transactions contemplated by
the Purchase Agreement within ninety (90) days or pay to Company the SG&A
Differential (as hereinafter defined) within ninety (90) days. For purposes
of this Agreement, the SG&A Differential shall be the sum of $92,700.00 per
month, or portion thereof, accrued between December 16, 1996 and the Cessation
Date less (i) the Realized Sales Margin (as hereinafter defined) for the
----
period from December 16, 1996 through February 15, 1997 and (ii) $84,000 per
month, or portion thereof, actually paid by Buyer to Company pursuant to
Section 2.01 hereof, for the period from February 15, 1997 to the Cessation
Date. For purposes of the preceding sentence, the term Realized Sales Margin
shall mean the gross income realized by Company from the sale of products or
the performance of services for customers for the period commencing December
16, 1996 and
<PAGE>
ending February 16, 1997, less the cost of goods sold or the cost of providing
----
such services.
6. REPRESENTATIONS AND WARRANTIES OF COMPANY.
---------------------------------------------
Company represents and warrants to Buyer as of the date of this Agreement
and as of the date of the closing of the transactions contemplated by the
Purchase Agreement as follows:
6.01 Corporate Existence. Company is a corporation duly organized,
--------------------
validly existing and in good standing under the laws of the State of
California. Company has all requisite corporate power and authority to own,
lease and operate its property and to carry on its business in the manner in
which and in the places such business is now being conducted.
6.02 Authority; Enforceability. Company has the right, power, legal
--------------------------
capacity and authority to enter into, and to perform its obligations under,
this Agreement and the transactions herein contemplated. The execution,
delivery and performance of this Agreement by Company has been duly authorized
by its board of directors. This Agreement has been validly executed and
delivered by Company and, assuming due execution and delivery hereof by the
other parties hereto, constitutes a valid, binding and enforceable obligation
of Company subject to applicable bankruptcy, insolvency, receivership,
moratorium, reorganization or similar state or federal laws or equitable
principles relating to or affecting creditors' rights and to the discretion of
a court to grant equitable remedies.
<PAGE>
6.03 No Violation. Neither the execution, delivery or performance of
------------
this Agreement nor the consummation of the transactions contemplated hereby
nor compliance by Company with any of the provisions hereof will violate or
conflict with any provisions of the Certificate of Incorporation or bylaws of
Company or any judicial or administrative order, judgment or decree to which
Company is a party or is subject.
7. REPRESENTATIONS AND WARRANTIES OF BUYER.
-------------------------------------------
Buyer represents and warrants to Company as of the date of this Agreement
and as of the date of the closing of the transactions contemplated by the
Purchase Agreement as follows:
7.01 Corporate Existence. Buyer is a corporation duly organized,
--------------------
validly existing and in good standing under the laws of the State of Delaware.
Buyer has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business in the manner of and in
the places such business is now being conducted.
7.02 Authority; Enforceability. Buyer has the right, power, legal
--------------------------
capacity and authority to enter into, and to perform its obligations under
this Agreement and the transactions herein contemplated. The execution,
delivery and performance of this Agreement by Buyer has been duly authorized
by the board of directors of Buyer. This Agreement has been validly executed
and delivered by Buyer and, assuming due execution and delivery by the other
parties hereto, constitutes a valid, binding and enforceable obligation Buyer,
subject to applicable bankruptcy, insolvency, receivership, moratorium,
reorganization or similar state or federal laws or equitable principles
relating to or affecting creditors' rights generally and to the discretion of
a court to grant equitable remedies.
7.03 No Violation. Neither the execution, delivery or performance of
------------
this Agreement nor the consummation of the transactions contemplated hereby
nor compliance by Buyer with any of the provisions hereof will violate or
conflict with any provisions of the Certificate of Incorporation or bylaws of
Buyer or any judicial or administrative order, judgment or decree to which
Buyer is a party or is subject.
8. INDEMNIFICATION OBLIGATIONS.
----------------------------
Buyer and POC, jointly and severally, indemnify, defend and hold harmless
Company, its directors, officers, employees, shareholders, agents, successors,
assigns, attorneys and personal representatives from, against and in respect
of any and all actions, suits, proceedings, claims, demands, losses, costs,
expenses, obligations, liabilities, judgments, damages, recoveries and
deficiencies, including, without limitation, interest, penalties and
reasonable attorneys' fees (collectively "Damages") that Company shall incur
or suffer which arise out of, result from or relate to, (i) the Buyer CNG
Contracts; (ii) the Orange County Contract; (iii) the Division 10 Contract;
or, (iv) any Accepted Bid. Notwithstanding anything to the contrary contained
herein, the obligations of Buyer and POC under this Section 8 shall survive
the termination of this Agreement.
9. EXCLUSIVE DEALING.
------------------
During the Term, Company will not, directly or indirectly, through any
representative or otherwise, solicit or entertain offers from, negotiate in
any manner, encourage, discuss, accept, or consider any proposal of any other
person or entity relating to the acquisition of Company, its assets or
business, in whole or in part, whether directly or indirectly, through
purchase, merger, consolidation, or otherwise (other than sales of inventory
in the ordinary course of business).
10. COVENANT NOT TO COMPETE.
--------------------------
During the Term and except as contemplated hereby, Company agrees that it
shall not engage, it shall not permit any affiliate (including, in each case,
its directors, officers and shareholders) to engage, and it shall use best
efforts to prevent any joint venture of Company or any such affiliate from
engaging, in the Business ("Competitive Activities"); provided, however, that
-------- -------
the foregoing shall not prohibit:
(a) Company, ZHI and any of their affiliates, any such joint
venture or any of the accounts managed by them, including without limitation
any pension or other benefit plan of Company and ZHI, from owning any
outstanding capital stock or other equity interests of any person engaging in
any Competitive Activities, provided the aggregate beneficial ownership of
Company and ZHI (without reference to pension or other benefit plan assets)
does not exceed more than five percent (5%) of all issued and outstanding
securities of any such person;
(b) Company, ZHI and any of their affiliates or any such joint
venture from engaging in any other businesses other than the Business; and,
(c) Company, ZHI and any of their affiliates or any such joint
venture from acquiring a business that engages in Competitive Activities
provided that (i) such activities do not constitute more than twenty percent
(20%) of the revenues or assets of the business to be acquired (based on the
sales of such business during the preceding four full calendar quarters), and
(ii) Company, ZHI and any affiliate or joint venture, as the case may be,
divests that portion of the business to be acquired that engages in
Competitive Activities within twelve (12) months after the acquisition
thereof;
provided, further, that the prohibitions in this Section 11 shall cease to
- -------- -------
apply (effective as of the time of such transfer) to any businesses or
- ---
operations of Company, ZHI or any of their subsidiaries which are transferred
- ---
to any third party (other than to a subsidiary or affiliate or any such joint
venture of Company or ZHI) after the date hereof.
11. MISCELLANEOUS. 11.01 Headings. The subject headings of the
------------- --------
Sections of this Agreement are included for purposes of convenience only and
shall not affect the construction or interpretation of any of its provisions.
11.02 Integration; Waiver. This Agreement and the Purchase Agreement
--------------------
constitutes the entire agreement between the parties pertaining to the subject
matter herein and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties including, without
limitation, the Letter of Commitment dated November 13, 1996 among the
parties. No party hereto is making any representation or warranty whatsoever,
express or implied, oral or written, beyond those expressly given in this
Agreement or the Purchase Agreement. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by all the
parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver shall
be binding unless executed in writing by the party making the waiver. To the
extent of any inconsistency between this Agreement and the Purchase Agreement,
this Agreement shall govern.
11.03 Severability. If any term or provision of this Agreement or the
------------
application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application
of such terms or provisions to persons or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby and each
term and provision of this Agreement shall be valid and enforced to the
fullest extent permitted by law.
11.04 Other Parties. Nothing in this Agreement, whether express or
--------------
implied, is intended to confer any rights or remedies under or by reason of
this Agreement on any persons other than the parties to it and their
respective successors and assigns, nor is anything in this Agreement intended
to relieve or discharge the obligation or liability of any third persons to
any party to this Agreement, nor shall any provision give any third persons
any right of subrogation or action over against any party to this Agreement.
11.05 Inurement; Assignment. This Agreement shall be binding on, and
----------------------
shall inure to the benefit of, the parties to it and their respective heirs,
legal representatives, successors, and assigns, but may not be assigned by
either party without the prior written consent of the other party.
11.06 Notices. All notices, requests, demands, and other communications
-------
under this Agreement shall be in writing and shall be deemed to have been duly
given on the date of service if served personally on the party to whom notice
is to be given, on the date of transmission if sent by telex, telecopier or
telegraph, or on the fifth day after mailing if mailed to the party to whom
notice is to be given, by first-class mail, registered or certified\return
receipt requested, postage prepaid, and properly addressed as follows:
To Buyer: Wilson Acquisition Corporation
c/o Penn Octane Corporation
5847 San Felipe, Suite 3420
Houston, Texas 77057
Attn: Jerome B. Richter
Tel: (713) 952-5703
Fax: (713) 952-1323
Copy to: Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: Arnold H. Tracy, Esq.
Tel: (212) 626-4400
Fax: (212) 626-4120
To Company: Wilson Technologies Incorporated
c/o Zimmerman Holdings, Inc.
2600 Mission Street, Suite 100
San Marino, CA 91108-1676
Attn.: William R. Zimmerman
Tel: (818) 441-0444
Fax: (818) 441-6946
Copy to: Rodi, Pollock, Pettker, Galbraith
& Cahill, A Law Corporation
801 South Grand Avenue, Suite 400
Los Angeles, CA 90017
Attn.: Henry P. Pramov, Jr., Esq.
Tel: (213) 895-4900
Fax: (213) 895-4921
Any party may change its address for purposes of this paragraph by giving
the other party notice of the new address in the manner set forth above.
11.07 Governing Law. This Agreement shall in all respects, including all
-------------
matters of construction, validity and performance, be governed by, and
construed and enforced in accordance with, the laws of the State of California
applicable to contracts entered into in that state between citizens of that
state and to be performed wholly within that state without reference to any
rules governing conflicts of laws. The parties agree that any venue for any
suit, action, proceeding or litigation arising out of or in relation to this
Agreement shall be in any federal or state court in Los Angeles, California
having subject matter jurisdiction. Each of the parties consents to the
jurisdiction of such courts in any such action or proceeding and waives any
objection to venue in such courts in any such action or proceeding.
11.08 Attorneys' Fees. If any legal action or arbitration or other
----------------
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions of this Agreement, the successful or prevailing party shall
be entitled to recover reasonable attorneys' fees and other costs incurred in
that action or proceeding, in addition to any other relief to which it may be
entitled.
IN WITNESS WHEREOF, the parties to this Agreement have duly
executed it on the day and year first above written.
BUYER
-----
Wilson Acquisition Corporation, a Delaware
corporation
By:
Title:
COMPANY
-------
WILSON TECHNOLOGIES INCORPORATED, a California
corporation
By:
Title:
[Signatures continued on next page]
POC hereby unconditionally agrees that to the extent Buyer fails to make
a payment due hereunder, then, upon written demand of Company, POC will
promptly make such payment or cause it to be made. Company shall not be
required to seek any recovery from Buyer prior to enforcing POC's obligations
hereunder. POC further hereby agrees to be bound by and subject to the
Indemnification Obligations set forth in Section 8.
POC
---
PENN OCTANE CORPORATION,
a Delaware corporation
By: Title:
ZHI hereby unconditionally agrees that to the extent Company fails to
make a payment due to Buyer under Section 3.02(a)(vii) hereof, then, upon
written demand of Buyer, ZHI will promptly make such payment or cause it to be
made. Buyer shall not be required to seek any recovery from Company prior to
enforcing ZHI's obligations hereunder.
ZHI
---
ZIMMERMAN HOLDINGS, INC., a California corporation
By:
Title:
[Signatures continued from previous page]
<PAGE>
SCHEDULE 1.01
-------------
SERVICE CONTRACTS
1. Toronto Transit Commission Purchase Order No. PC0020255, dated November
6, 1996, for preventative maintenance and emergency service of CNG plant at
Company complex from January 1996 through October 31, 1997.
2. Coast Engineering and Construction Corp Purchase Order No. MCRN-95-002,
dated May 2, 1995, for five year maintenance contract.
3. Contract between Company and Southern California Gas Co., dated January
5, 1996, for preventative maintenance of refueling stations at U.C.L.A., City
of Irvine, P.S. Corona, L.A.U.S.D., City of Torrance, and Sunline.
4. Contract between Company and City of Monterey for CNG Fueling Station,
including service contract, executed July 5, 1994.
5. County Sanitation Districts of Orange County Purchase Order No. 80057
and Change Order, dated November 7, 1996.
6. Los Angeles County Metropolitan Transit Authority Change Order No. 1 to
Contract No. 6358 for construction of CNG fueling facilities at Division 8 &
10.
<PAGE>
SCHEDULE 1.03
-------------
UNFINISHED SALES ORDERS
1. Metro Regional Transit Authority for the City of Akron, Ohio; Purchase
Order No. 029866 for construction of compressed natural gas fueling facility.
2. Corporation of the City of Kitchener, Ontario, Canada; Purchase Order
No. P080888 for construction of CNG facility.
3. Manhattan Construction Company Job No. 2429; Subcontract for
construction of CNG facility in Fort Worth, Texas.
4. Construction Resource Group, Inc.; Purchase Order for supply of CNG
equipment in Brazos, Texas for Brazos Transportation District.
5. B & H Construction, Inc.; Subcontract No. 288-00001 to furnish
compressed natural gas system and startup at McCarran International Airport,
Project No. 626.
6. Purchase Order No. 10296-VT from San Luis Gonzaga Construction, Inc.,
dated January 18, 1996; for project known as "DPW Maintenance Yard-CNG
Station."
7. Purchase Order No. S9602 55814 from San Diego Gas & Electric Company,
dated February 21, 1996; for project known as "Camp Pendleton CNG Station."
8. Purchase Order No. 4 from Sav-On International Fixture Co., dated July
8, 1996; for project known as "Hyundai #2 Order."
9. Omnitrans Purchase Order No. 39023 to A & A Associates, dated July 14,
1995.
10. South Coast Area Transit (SCAT) Purchase Order No. A 2430 to A & A
Associates, dated March 2, 1995.
11. Enterra Compression Company Purchase Order No. 731628M to Company,
dated November 21, 1995.
<PAGE>
PURCHASE AGREEMENT
------------------
THIS PURCHASE AGREEMENT (this "Agreement") is made and entered into on
March 7, 1997, by and among Wilson Technologies Incorporated, a California
corporation ("Company"), a wholly-owned subsidiary of Zimmerman Holdings,
Inc., a California corporation ("ZHI"), and ZHI, on the one hand, and Wilson
Acquisition Corporation, a Delaware corporation ("Buyer"), a wholly-owned
subsidiary of Penn Octane Corporation, a Delaware corporation ("POC"), and
POC, on the other hand.
RECITALS
--------
A. Company is engaged in the business of selling, designing,
manufacturing, installing and servicing compressed natural gas ("CNG")
refueling stations and related products for use in the CNG industry throughout
the world (the "Business").
B. Company desires to sell to Buyer certain of its assets and to
assign to Buyer certain of its liabilities and Buyer desires to purchase from
Company such assets and to assume from Company such liabilities, on the terms
and conditions set forth herein.
C. Company also is engaged in the Business through its affiliates, ZH
Canada, Inc., a company formed under the laws of Ontario, Canada ("ZH
Canada"), Wilson Technologies Incorporated, a Company formed under the laws of
Ontario, Canada ("Wilson Canada"), and Wilson Technologies de Mexico, S.A. de
C.V., a company formed under the laws of Mexico ("Wilson Mexico"; ZH Canada,
Wilson Canada and Wilson Mexico are referred to herein collectively as the
"Affiliated Entities"); ZHI owns all of the issued and outstanding capital
stock of Company, ZH Canada and Wilson Mexico; Wilson Canada is a wholly-owned
and the sole subsidiary of ZH Canada.
E. ZHI desires to sell to Buyer, and Buyer desires to purchase from
ZHI, (i) all of the issued and outstanding shares of capital stock of ZH
Canada, the owner of all of the issued and outstanding shares of capital stock
of Wilson Canada, and (ii) all of the issued and outstanding shares of capital
stock of Wilson Mexico, on the terms and conditions set forth herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, the parties agree as follows:
1. PURCHASE OF ASSETS OF COMPANY.
---------------------------------
1.01 Purchased Assets. Subject to the terms and conditions set forth in
----------------
this Agreement, at the Closing (as defined in Section 11.01), Company agrees
to sell, convey, transfer, assign and deliver to Buyer, and Buyer agrees to
purchase from Company, all the assets, properties and business of Company
owned on the Closing Date (as defined in Section 11.01), of every kind,
character, and description, whether tangible, intangible, real, personal, or
mixed, and wherever located (other than those assets specifically excluded
from this sale pursuant to Section 1.02) (collectively referred to as the
"Purchased Assets") including, without limitation, the following:
(a) all goodwill associated with the Business as a going
concern;
(b) all accounts and notes receivable of Company, together with
any unpaid interest accrued thereon and all rights of collection with respect
thereto, including, without limitation, those set forth in Schedule 1.01(b)
(the "Assumed Accounts Receivable"), other than the Excluded Receivables (as
defined in Section 1.02(g)) and any Assumed Accounts Receivable collected by
Company between the date hereof and the Closing Date;
(c) all inventory (including, without limitation, parts, raw
materials, work in process, stock inventory, finished goods and goods in
transit) (the "Purchased Inventory"), other than the Excluded Inventory (as
defined in Section 1.02(h));
(d) all other tangible personal property including, without
limitation, all packaging, promotional materials, catalogs, supplies,
machinery, vehicles, furniture, equipment, testing equipment, computers,
office materials, tooling and all other tangible assets, wherever located,
including, without limitation, the tangible personal property set forth in
Schedule 1.01(d);
<PAGE>
(e) all intellectual property, proprietary and business
information of Company related to the Business including, without limitation,
rights to each (i) fictitious business name, trade name and other name
(including, without limitation, the name "Wilson Technologies" and any
derivative thereof), registered and unregistered trademark, service mark and
related application, including without limitation, the trademarks identified
in Schedule 1.01(e), (ii) patent, patent right and patent application
including, without limitation, the patents identified in Schedule 1.01(e), if
any, (iii) copyright in published and unpublished works, computer programs and
software, and (iv) proprietary formula, trade secret, formulation, invention,
product design and drawing, and any and all research and development related
thereto;
(f) all deposits (including, without limitation, deposits
securing orders from suppliers), prepaid value added taxes and other prepaid
expenses (including, without limitation, all prepaid personal property taxes)
other than any prepaid insurance;
(g) all right, title and interest in, to and under the leases
set forth in Schedule 1.01(g) (the "Assumed Leases");
(h) all right, title and interest in, to and under sales orders
set forth in Schedule 1.01(h) and any additional sales orders entered into
after the date hereof with the written consent of Buyer (the "Assumed Sales
Orders"), other than the Excluded Sales Orders (as defined in Section
1.02(f));
(i) all right, title and interest in, to and under all purchase
orders, contracts, agreements and all other leases of real and personal
property (including, without limitation, facilities leases, auto leases and
equipment leases) including, without limitation, the purchase orders,
contracts and agreements set forth in Schedule 1.01(i) (collectively, the
"Assumed Contracts"), other than the Excluded Contracts (as defined in Section
1.02(i));
(j) all books, records, files, papers and other documents (in
whatever form, including computer files) including, without limitation, all
such documents relating to inventory, purchasing, accounting, sales, export,
import, manufacturing, marketing, banking and shipping and all files, customer
and supplier lists, records, literature and correspondence, whether or not
physically located on the premises of Company, other than any thereof within
the definition of Excluded Assets;
(k) any other tangible or intangible assets which are used by or
of value to Company and which are of a nature not customarily reflected in the
books and records of a business, such as causes of action and legal rights and
assets which have been written off for accounting purposes (except those
relating exclusively to the Excluded Assets (as defined in Section 1.02) or
Excluded Liabilities (as defined in Section 1.04));
<PAGE>
(l) to the extent permitted by applicable law, all rights and
interest in, to and under any authorization, registration, license,
certificate, permit or approval of any nature;
(m) the health insurance policies of Company to the extent such
policies relate exclusively to Company set forth in Schedule 1.01(m) (the
"Assumed Medical Plans"), and all rights and claims of Company thereunder; and
(n) any and all rights of Company as licensor or licensee under
all licenses related to the Business (the "Assumed Licenses").
1.02 Excluded Assets. The only assets of Company that shall not be
---------------
transferred and sold to Buyer pursuant to Section 1.01 shall be the following
(the "Excluded Assets"):
(a) corporate seals, articles of incorporation, minute books,
stock books, general ledgers and books of account, tax returns and records
pertaining to Company's organization and capitalization;
(b) rights which accrue or will accrue to Company under this
Agreement;
(c) intercompany receivables due to Company from ZHI, William R.
Zimmerman ("Zimmerman"), or any other affiliate of ZHI, Zimmerman or Company
except for intercompany receivables between or among Company and/or the
Affiliated entities;
<PAGE>
(d) rights and claims of Company to any tax refunds, credits or
deductions with respect to any taxes paid by Company or ZHI;
(e) except as set forth in Section 1.01(m), all insurance
policies of Company and all rights and claims of Company, and all prepaid
insurance thereunder;
(f) the sales orders set forth in Schedule 1.02(f) (the
"Excluded Sales Orders");
(g) the accounts and notes receivable, together with any unpaid
interest accrued thereon, and all rights of collection with respect thereto,
set forth in Schedule 1.02(g) (the "Excluded Receivables");
(h) the inventory, whether work in progress or stock inventory,
which Company shall use from time to time for completion of the Excluded Sales
Orders and which Company and Buyer shall have separated, segregated, marked or
otherwise identified prior to the Closing (the "Excluded Inventory");
(i) all right, title and interest in, to and under all purchase
orders, contracts and all other leases of real and personal property set forth
on Schedule 1.02(i) (the "Excluded Contracts"); and
(j) such other assets, if any, set forth in Schedule 1.02(j).
1.03 Assumed Liabilities. At the Closing, Buyer shall assume and
-------------------
agree to pay, perform and discharge, or cause to be paid, performed and
discharged, when due, each of the following obligations and liabilities of
Company incurred in connection with the Business (other than those liabilities
and obligations excluded from assumption pursuant to Section 1.04) (the
"Assumed Liabilities"):
(a) Company's liabilities and obligations to be performed or
discharged after the Closing under the Assumed Leases;
(b) Company's liabilities and obligations to be performed or
discharged after the Closing under the Assumed Sales Orders, the Assumed
Contracts and the Assumed Licenses;
(c) Company's liabilities and obligations for vacation pay,
sales incentives and any other amounts accrued to the employees identified on
Schedule 13.01 prior to the Closing Date as set forth in Schedule 1.03(c)
including, without limitation, any increase in such amounts from the date
hereof until the Closing which result solely from the passage of time or which
are approved in writing by Buyer; and
(d) the liabilities and obligations of Company set forth in
Schedule 1.03(d) hereto, to be performed or discharged after the Closing.
1.04 Excluded Liabilities. Except as expressly provided in Section
--------------------
1.03, Buyer shall not directly or indirectly assume or be responsible for any
liabilities or obligations of Company or any of its affiliates or predecessors
of any nature whatsoever whether liquidated or unliquidated, known or unknown,
actual or
<PAGE>
inchoate, accrued, contingent or otherwise (the "Excluded Liabilities")
including, without limitation:
(a) Company's liabilities and obligations for trade accounts
payable and accrued accounts payable reflected on the books and records of
Company on the date hereof or incurred after the date hereof and prior to the
Closing Date (the "Excluded Payables");
(b) any obligation or liability for product liability for
products manufactured and sold or leased and for services performed prior to
the Closing Date;
(c) any obligation or liability of Company for any taxes,
including, without limitation, any obligation for state, local, foreign,
federal, franchise, unitary business, capital stock, sales, payroll or income
taxes (including, without limitation, deferred taxes), except to the extent
set forth in Section 1.08 hereinbelow);
(d) any liability or obligation relating to, under or in
connection with the Excluded Assets;
(e) any liability or obligation arising prior to or as a result
of the Closing, to any employees, agents or independent contractors of
Company, whether or not employed by Buyer after the Closing, or under any
benefit arrangement with respect thereto, except as expressly set forth in
Section 1.03(c) hereof;
(f) any obligation to repay any amount of indebtedness for
borrowed money incurred by Company or by any other person;
<PAGE>
(g) any obligation, duty or liability incurred prior to Closing
relating to Company's use, discharge, treatment, storage, generation or
disposal of hazardous substances as defined by any federal, state or local
statute, rule or regulation concerning or related to the protection of the
environment, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. '9601
et seq; and,
(h) such other liabilities, if any, set forth in Schedule
1.04(h).
1.05 Royalty Note. In addition to assuming the Assumed Liabilities,
------------
Buyer shall deliver to Company, at the Closing, as consideration for the
Purchased Assets, a royalty note made by Buyer in favor of Company in the form
of Exhibit A hereto (the "Royalty Note").
1.06 Royalty Note Adjustment. As of the first anniversary of the
-----------------------
Closing Date, the principal amount of the Royalty Note shall be reduced by the
-------
amount of the "Royalty Note Adjustment." The Royalty Note Adjustment shall be
the excess, if any, of One Million One Hundred Thousand Dollars
------
($1,100,000.00) over the sum of the amount of the "Inventory Valuation" and
------
the "Assumed Receivables Valuation."
(a) Inventory Valuation. For purposes of determining the amount
-------------------
of the Royalty Note Adjustment, the Inventory Valuation shall be the sum of
(i) the fair market value of the Purchased Inventory remaining on the books of
Buyer as of the first anniversary of the Closing Date, other than Excluded
Inventory (the "Remaining Purchased Inventory"), plus (ii) the book value of
----
any Purchased Inventory utilized by Buyer after the Closing and before the
first anniversary of the Closing Date; provided, however, that Company and
Buyer may agree, in writing, to a value other than book value for any item of
Purchased Inventory, plus (iii) the book value of any inventory purchased by
----
Buyer prior to the Closing pursuant to that certain Interim Operating
Agreement between Buyer and Company of even date herewith (the "Interim
Operating Agreement"); provided, however, that Company and Buyer may agree, in
writing, to a value other than book value for any item of Purchased Inventory,
as set forth in the Interim Operating Agreement. For purposes of subpart (i)
of the preceding sentence, Remaining Purchased Inventory shall include any
item of Excluded Inventory, if any, remaining on the books of Company as of
the first anniversary of the Closing Date and which Company, in its sole
discretion, deems unnecessary for the completion of the Unfinished Safeco
Orders (as defined in Section 13.02). Any such item of Excluded Inventory so
identified shall thereafter be deemed Purchased Inventory for purposes of this
Agreement. For purposes of subpart (ii) of the preceding sentence, Purchased
Inventory shall be deemed utilized if it is actually utilized or directly tied
and related to an existing contract or purchase order to be shipped within
twelve (12) months after the first anniversary of the Closing.
<PAGE>
As of the first anniversary of the Closing Date, Buyer and Company
shall in good faith determine the amount of the Inventory Valuation. If Buyer
and Company, in good faith, are unable to agree upon the Inventory Valuation
as of the first anniversary of the Closing Date, then the parties shall refer
the matter to the accounting firm of Price Waterhouse LLP which shall
determine the amount of the Inventory Valuation. Buyer and Company agree to
execute, if required by Price Waterhouse LLP, a reasonable engagement letter.
All fees and expenses relating to the work performed by Price Waterhouse LLP
shall be borne equally by the parties. Within ten (10) days after Price
Waterhouse LLP has been retained, both parties shall submit statements of
their positions and issues with respect to the Inventory Valuation. Thirty
(30) days thereafter, Price Waterhouse LLP shall determine the amount of the
Inventory Valuation. The determination by Price Waterhouse LLP shall be set
forth in a written statement and shall be binding and conclusive upon the
parties hereto absent fraud or manifest error.
(b) Assumed Accounts Receivable Valuation. For purposes of
-------------------------------------
calculating the Royalty Note Adjustment, the Assumed Accounts Receivable
Valuation shall be the actual amount collected thereon by Buyer as of the
first anniversary of the Closing Date.
<PAGE>
(c) Insufficient Royalty Note Principal. To the extent the unpaid
-----------------------------------
principal amount of the Royalty Note is less than the Royalty Note Adjustment,
Company shall pay the amount of such deficiency, if any, in cash, promptly to
Buyer.
1.07 Allocation of Purchase Price. The parties have determined the
----------------------------
fair market value of the Purchased Assets and the other rights and benefits
conferred hereunder (excluding the Shares (as defined in Section 2.01)), which
fair market values are set forth on Schedule 1.07. The parties agree that the
consideration described in this Section 1.07 (taking into account transaction
costs paid by such party) shall be allocated, for tax purposes, among the
Assets in a manner consistent with Schedule 1.07 and the provisions of Section
1060 of the Internal Revenue Code of 1986, as amended (the "Tax Code"), and
the regulations promulgated thereunder. Each of the parties hereto agrees to
report this transaction for federal tax purposes in accordance with the
provisions of this Section 1.07 and Schedule 1.07, and shall not take any
position inconsistent therewith upon examination of any tax return, in any
refund claim, in any litigation, investigation or otherwise.
1.08 Sales and Transfer Taxes. Buyer shall be responsible for and
------------------------
shall timely pay all sales and/or use taxes arising out of or relating to the
transfer of the Purchased Assets.
2. PURCHASE OF STOCK OF AFFILIATED ENTITIES.
---------------------------------------------
2.01 Purchase of Stock. At the Closing, ZHI shall transfer, assign
-----------------
and set over to Buyer all of the issued and outstanding capital stock of ZH
Canada (the "ZH Canada Shares") and all of the issued and outstanding capital
stock of Wilson Mexico (the "Wilson Mexico Shares"; the ZH Canada Shares and
the Wilson Mexico Shares are collectively referred to as the "Shares").
2.02 Convertible Debenture. As consideration for the transfer of the
---------------------
Shares at the Closing, Buyer shall deliver to ZHI a convertible debenture
issued by POC in the face amount of Two Hundred Twenty Thousand Dollars
($220,000) in the form of Exhibit B hereto (the "Convertible Debenture").
3. AS-IS, WHERE-IS. The Purchased Assets, the Shares and the Affiliated
---------------
Entities are being sold on an AS-IS, WHERE-IS basis with no representation or
warranty of any kind except as expressly set forth herein. The parties hereto
acknowledge that Company and the Affiliated Entities each has provided Buyer
with unrestricted access to its facilities, employees and records and that
Buyer's decision to enter into this Agreement and to consummate the
transactions contemplated hereby is based solely upon the results of Buyer's
due diligence investigation, except for the express representations and
warranties of Company and ZHI herein.
4. REPRESENTATIONS AND WARRANTIES OF COMPANY.
---------------------------------------------
Company represents and warrants to Buyer and POC as of the date of this
Agreement and as of the Closing Date as follows:
4.01 Corporate Existence. Company is a corporation duly organized,
--------------------
validly existing and in good standing under the laws of the State of
California. Company has all requisite corporate power and authority to own,
lease and operate its property and to carry on its business in the manner in
which and in the places such business is now being conducted.
4.02 Authority; Enforceability. Company has the right, power, legal
--------------------------
capacity and authority to enter into, and to perform its obligations under,
this Agreement and the transactions herein contemplated. The execution,
delivery and performance of this Agreement by Company has been duly authorized
by its board of directors. This Agreement has been validly executed and
delivered by Company and, assuming due execution and delivery hereof by the
other parties hereto, constitutes a valid, binding and enforceable obligation
of Company subject to applicable bankruptcy, insolvency, receivership,
moratorium, reorganization or similar state or federal laws or equitable
principles relating to or affecting creditors' rights and to the discretion of
a court to grant equitable remedies.
4.03 No Violation. Neither the execution, delivery or performance of
------------
this Agreement nor the consummation of the transactions contemplated hereby
nor compliance by Company with any of the provisions hereof will violate or
conflict with any provisions of the Certificate of Incorporation or bylaws of
Company or any judicial or administrative order, judgment or decree to which
Company is a party or is subject.
4.04 Consents and Approvals. No approval, authorization, consent or
----------------------
other action by, or filing with, any governmental authority is required in
connection with the execution and delivery by Company of this Agreement or the
consummation of the transactions contemplated hereby by Company.
4.05 Title to Assets. Except as set forth in Schedule 4.05, Company
---------------
has good and marketable title to the Purchased Assets. Except as set forth in
Schedule 4.05, the Purchased Assets are or will be at the Closing free and
clear of mortgages, liens, pledges, charges, encumbrances, equities, claims,
easements, rights of way, covenants, conditions or restrictions, except for
(a) minor imperfections of title which do not, individually or in the
aggregate, adversely affect the marketability of, or the ability of Company to
utilize, the Purchased Assets; (b) liens for current taxes not yet due and
payable; and (c) liens of landlords, carriers, warehousemen, mechanics,
materialmen and repairmen incurred in the ordinary course of business for sums
not yet due and payable.
5. REPRESENTATIONS AND WARRANTIES OF ZHI.
-----------------------------------------
ZHI represents and warrants to Buyer and POC as of the date of this
Agreement and as of the Closing Date as follows:
5.01 Corporate Existence.
--------------------
(a) ZHI is a corporation duly organized, validly existing and in
good standing under the laws of the State of California. ZHI has all
requisite corporate power and authority to own, lease and operate its property
and to carry on its business in the manner in which and in the places such
business is now being conducted.
(b) ZH Canada is a corporation duly organized, validly existing
and in good standing under the laws of Ontario, Canada. ZH Canada has all
requisite corporate power and authority to own, lease and operate its property
and to carry on its business in the manner in which and in the places such
business is now being conducted.
(c) Wilson Canada is a corporation duly organized, validly
existing and in good standing under the laws of Ontario, Canada. Wilson
Canada has all requisite corporate power and authority to own, lease and
operate its property and to carry on its business in the manner in which and
the places such business is now being conducted.
(d) Wilson Mexico is a corporation duly organized, validly
existing and in good standing under the laws of Mexico. Wilson Mexico has all
requisite corporate power and authority to own, lease and operate its property
and to carry on its business in the manner in which and in the places such
business is now being conducted.
5.02 Authority; Enforceability. ZHI has the right, power, legal
--------------------------
capacity and authority to enter into, and to perform its obligations under,
this Agreement and the transactions herein contemplated. The execution,
delivery and performance of this Agreement by ZHI has been duly authorized by
its board of directors. This Agreement has been validly executed and
delivered by ZHI and, assuming due execution and delivery hereof by the other
parties hereto, constitutes a valid, binding and enforceable obligation of ZHI
subject to applicable bankruptcy, insolvency, receivership, moratorium,
reorganization or similar state or federal laws or equitable principles
relating to or affecting creditors' rights and to the discretion of a court to
grant equitable remedies.
5.03 No Violation. Neither the execution, delivery or performance of
------------
this Agreement nor the consummation of the transactions contemplated hereby
nor compliance by ZHI with any of the provisions hereof will violate or
conflict with any provisions of the Certificate of Incorporation or bylaws of
ZHI or any judicial or administrative order, judgment or decree to which ZHI
is a party or is subject.
5.04 Consents and Approvals. No approval, authorization, consent or
----------------------
other action by, or filing with, any governmental authority is required in
connection with the execution and delivery by ZHI of this Agreement or the
consummation of the transactions contemplated hereby by ZHI.
5.05 Capitalization of Affiliated Entities. All of the issued and
----------------------------------------
outstanding shares of capital stock of each of the Affiliated Entities have
been duly authorized and are validly issued, fully paid and non-assessable.
Except as set forth in Schedule 5.05, ZHI holds of record and owns
beneficially all of the outstanding shares of capital stock of ZH Canada and
Wilson Mexico, free and clear of any restrictions on transfer (other than
restrictions under the Securities Act and state securities laws), taxes,
liens, options, warrants, purchase rights, contracts, commitments, equities,
claims and demands. ZH Canada holds of record and owns beneficially all of
the outstanding shares of capital stock of Wilson Canada, free and clear of
any restrictions on transfer (other than restrictions under the Securities Act
and state securities laws), taxes, liens, options, warrants, purchase rights,
contracts, commitments, equities, claims and demands. There are no
outstanding or authorized options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights, or other contracts or commitments
that could require ZHI or ZH Canada, as the case may be, to sell, transfer or
otherwise dispose of any capital stock of any of Company or Affiliated
Entities or that could require any of Company or the Affiliated Entities to
issue, sell, or otherwise cause to become outstanding any of its own capital
stock (other than this Agreement). There are no outstanding stock
appreciation, phantom stock, profit participation, or similar rights with
respect to Company or any of the Affiliated Entities. There are no voting
trusts, proxies, or other agreements or understandings with respect to the
voting of any capital stock of Company or any of the Affiliated Entities.
Neither Company nor any of the Affiliated Entities controls directly or
indirectly or has any direct or indirect equity participation in any
corporation, partnership, trust, or other
<PAGE>
business association which is not one of the Affiliated Entities. Neither
Wilson Mexico nor Wilson Canada has any subsidiaries.
6. REPRESENTATIONS AND WARRANTIES OF BUYER.
-------------------------------------------
Buyer represents and warrants to Company and ZHI as of the date of this
Agreement and as of the Closing Date as follows:
6.01 Corporate Existence. Buyer is a corporation duly organized,
--------------------
validly existing and in good standing under the laws of the State of Delaware.
Buyer has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business in the manner of and in
the places such business is now being conducted.
6.02 Authority; Enforceability. Buyer has the right, power, legal
--------------------------
capacity and authority to enter into, and to perform its obligations under
this Agreement and the transactions herein contemplated. The execution,
delivery and performance of this Agreement by Buyer has been duly authorized
by the board of directors of Buyer. This Agreement has been validly executed
and delivered by Buyer and, assuming due execution and delivery by the other
parties hereto, constitutes a valid, binding and enforceable obligation of
Buyer, subject to applicable bankruptcy, insolvency, receivership, moratorium,
reorganization or similar state or federal laws or equitable principles
relating to or affecting creditors' rights generally and to the discretion of
a court to grant equitable remedies.
<PAGE>
6.03 No Violation. Neither the execution, delivery or performance of
------------
this Agreement nor the consummation of the transactions contemplated hereby
nor compliance by Buyer with any of the provisions hereof will violate or
conflict with any provisions of the Certificate of Incorporation or bylaws of
Buyer or any judicial or administrative order, judgment or decree to which
Buyer is a party or is subject.
6.04 Consents and Approvals. No approval, authorization, consent or
----------------------
other action by, or filing with, any governmental authority is required in
connection with the execution and delivery by Buyer of this Agreement or the
consummation of the transactions contemplated hereby by Buyer.
7. REPRESENTATIONS AND WARRANTIES OF POC.
-----------------------------------------
POC represents and warrants to Company and ZHI as of the date of this
Agreement and as of the Closing Date as follows:
7.01 Corporate Existence. POC is a corporation duly organized, validly
-------------------
existing and in good standing under the laws of the State of Delaware. POC
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business in the manner of and in the places
such business is now being conducted.
7.02 Authority; Enforceability. POC has the right, power, legal
--------------------------
capacity and authority to enter into, and to perform its obligations under
this Agreement and the transactions herein contemplated. The execution,
delivery and performance of this Agreement by POC has been duly authorized by
the board of directors of POC. This Agreement has been validly executed and
delivered by POC and, assuming due execution and delivery by the other parties
hereto, constitutes a valid, binding and enforceable obligation of POC,
subject to applicable bankruptcy, insolvency, receivership, moratorium,
reorganization or similar state or federal laws or equitable principles
relating to or affecting creditors' rights generally and to the discretion of
a court to grant equitable remedies.
7.03 No Violation. Neither the execution, delivery or performance of
------------
this Agreement nor the consummation of the transactions contemplated hereby
nor compliance by POC with any of the provisions hereof will violate or
conflict with any provisions of the Certificate of Incorporation or bylaws of
POC or any judicial or administrative order, judgment or decree to which POC
is a party or is subject.
7.04 Consents and Approvals. No approval, authorization, consent or
----------------------
other action by, or filing with, any governmental authority is required in
connection with the execution and delivery by POC of this Agreement or the
consummation of the transactions contemplated hereby by POC.
8. OBLIGATIONS OF THE PARTIES UNTIL CLOSING.
---------------------------------------------
8.01 Conduct of the Business. From the date hereof through the
------------------------
Closing, Company shall conduct the Business in accordance with the provisions
of this Agreement and the Interim Operating Agreement; provided, however, that
Company shall not, without the consent of Buyer, incur any material
indebtedness or enter into any material transaction. Notwithstanding the
foregoing, nothing herein shall prohibit Company from entering into material
transactions with respect to (a) that certain Agreement dated December 6,
1996, between Safeco Insurance Company of America, A & A Associates, Company,
William R. Zimmerman, WRZ/VDK Acquisition Corporation, and William R.
Zimmerman Living Trust (the "Safeco Agreement"), a copy of which has been
delivered to Buyer, (b) the Excluded Sales Orders, (c) the Excluded
Receivables, and (d) the Excluded Payables.
8.02 Bulk Sales. Buyer shall give notice, in compliance with
-----------
Division 6 of the California Corporation Code, of the bulk transfer
contemplated by this Agreement. Company shall furnish Buyer with the
information necessary to prepare this notice.
8.03 Creditors of Company. Company shall use its best efforts to
--------------------
obtain the written consent of the creditors of Company to the transactions
contemplated hereby. The terms and conditions of any such consent shall be
subject to the approval of Company, in its sole discretion; provided, that,
the terms of any such consent shall not adversely affect Buyer or its
operations after the Closing and shall include a release by the creditors of
Company from any and all liability relating to or arising in connection with
Company and the transactions contemplated by this Agreement. Buyer shall use
its best efforts to cooperate fully in obtaining any such consents.
<PAGE>
8.04 Resale Certificate. Buyer shall furnish any resale certificate
------------------
or other documents reasonably requested by Company to comply with the
provisions of the sales and use taxes of the State of California.
8.05 Confidentiality.
---------------
(a) Obligations of Company and ZHI. Neither Company nor ZHI
------------------------------
(including, in each case, its directors, officers, employees, shareholders,
agents, successors, assigns, attorneys and personal representatives) shall, in
any way, directly or indirectly, use or disclose or otherwise reveal to any
person any concept, design, device, process, use, technology, trade secret,
sales data, work of authorship, customer list, prospective customer list,
customer requirement, plan, embodiment, invention, discovery, idea, research,
engineering method, practice, system, formula, development, improvement or
related work product or any other intellectual property or confidential or
financial information (the "Information") owned by Company or Buyer prior to
the date hereof and either conveyed by Buyer hereunder or made available by
Buyer to Company or ZHI in connection with this Agreement. Such obligation of
confidentiality shall not extend to any Information which is: (i) generally
known to others, other than as a result of a breach by Company or ZHI of their
obligations hereunder; (ii) part of public knowledge or literature, other than
as a result of a breach by Company or ZHI of their obligations hereunder;
(iii) lawfully received by Company or ZHI from a third party who in disclosing
such information does not breach a confidentiality obligation owed to Buyer or
Company or ZHI; or (iv) required to be disclosed in any legal or governmental
proceeding or by applicable law. If the transactions contemplated hereby are
not consummated, the foregoing shall apply only to Information made available
by Buyer to ZHI or Company, and ZHI or Company, as the case may be, shall
return to Buyer all documents containing proprietary information. The
obligations of Company and ZHI under this Section 8.05(a) shall survive
Closing.
(b) Obligations of Buyer and POC. From the date hereof until
----------------------------
the Closing and in the event that transactions contemplated hereby are not
consummated, neither Buyer nor POC (including, in each case, its directors,
officers, employees, shareholders, agents, successors, assigns, attorneys and
personal representatives) shall, in any way, directly or indirectly, use or
disclose or otherwise reveal to any person any concept, design, device,
process, use, technology, trade secret, sales data, work of authorship,
customer list, prospective customer list, customer requirement, plan,
embodiment, invention, discovery, idea, research, engineering method,
practice, system, formula, development, improvement or related work product or
any other intellectual property or confidential or financial information (the
"Wilson Information") (a) owned by Company or any of the Affiliated Entities
prior to the date hereof and made available by Company to Buyer or POC in
connection with this Agreement. Such obligation of confidentiality shall not
extend to any Information which is: (i) generally known to others, other than
as a result of a breach by Buyer or POC of their obligations hereunder; (ii)
part of public knowledge or literature, other than as a result of a breach by
Buyer or POC of their obligations hereunder; (iii) lawfully received by Buyer
or POC from a third party who in disclosing such information does not breach a
confidentiality obligation owed to Company or ZHI; or (iv) required to be
disclosed in any legal or governmental proceeding or by applicable law. In
addition, in such case, Buyer or POC, as the case may be, shall return to
Company all documents containing proprietary information. The obligations of
Buyer and POC under this Section 8.05(b) shall survive Closing.
8.08 Public Announcements. Any public announcement or similar
---------------------
publicity with respect to this Agreement shall be issued at such time and in
such manner as Buyer and Company shall mutually agree. Company and Buyer
shall consult with each other concerning the means by which Company's
employees, customers, and suppliers and others having dealings with Company
with respect to the Business will be informed of the transactions contemplated
by this Agreement.
8.09 Sales, General and Administrative Expenses. The parties
---------------------------------------------
acknowledge that from and after December 16, 1996, Company has continued to
incur sales, general and administrative expenses in connection with the
conduct of the Business ("SG&A Expenses"). At the Closing, Buyer shall pay to
Company the amount of the SG&A Differential (as defined in Section 5.02 of the
Interim Operating Agreement; the "SG&A Payment"), it being understood that,
for purposes of this Section 8.09, if there is no Cessation Date (as defined
in Section 5 of the Interim Operating Agreement), then the term "Closing Date"
shall be substituted for the term "Cessation Date" in the definition of the
SG&A Differential. Buyer shall pay the SG&A Payment to Company as follows:
one-half (1/2) in cash at the Closing (the "Closing SG&A Payment"), and
one-half (1/2) in a note due and payable within thirty (30) days after the
Closing Date in the form of Exhibit C hereto (the "SG&A Note"), which shall
bear interest at the rate of eight and one quarter percent (8.25%) per annum.
8.10 Expenses for the Benefit of Buyer. Company and Buyer acknowledge
-----------------------------------
that Company has incurred expenses at the request of Buyer as set forth in
Schedule 8.10. At the Closing, Buyer shall reimburse Company for such
expenses and any additional expenses incurred at the written request of POC
prior to the Closing (other than expenses in connection with the consummation
of this transaction), in cash (the "Expense Reimbursement").
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER AND POC. The
----------------------------------------------------
obligations of Buyer and POC to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment by or at the Closing of
each of the following conditions, any or all of which may be waived by Buyer
or POC in their sole discretion:
9.01 Representations and Warranties. The representations and
--------------------------------
warranties of Company and ZHI shall have been true and correct in all material
respects as of the date of this Agreement and shall be true and correct in all
material respects at or as of the Closing Date as though such representations
and warranties were made at such time.
9.02 Performance of Covenants. Company and ZHI shall have performed
------------------------
or complied in all material respects with all of the agreements, covenants and
conditions required by this Agreement to be performed or complied with by them
prior to or at the Closing.
9.03 Approvals. All consents or approvals listed on Schedule 9.03
---------
shall have been obtained.
9.04 Creditors. The outstanding creditors of Company shall have
---------
consented in writing to the transactions contemplated by this Agreement as set
forth in Section 8.03, and the Purchased Assets, the assets owned by the
Affiliated Entities and the Shares shall be free of all liens and
encumbrances.
9.05 Legal Matters. The Closing shall not violate any order or
--------------
decree of any court or governmental body of competent jurisdiction and no
suit, action, proceeding or investigation, shall have been brought or
threatened by any person or entity (other than Buyer or an affiliate of Buyer)
which questions the validity or legality of this Agreement or the transactions
contemplated hereby.
9.06 SG&A Payment and Expense Reimbursement Amount. Company and
---------------------------------------------
Buyer shall have agreed upon the amount of the SG&A Payment and the Expense
Reimbursement.
10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ZHI AND COMPANY.
----------------------------------------------------------------
The obligations of ZHI and Company to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment by or at
the Closing of each of the following conditions, any or all of which may be
waived by Company in its sole discretion:
10.01 Representations and Warranties. The representations and warranties
------------------------------
of Buyer and POC shall have been true and correct in all material respects as
of the date of this Agreement and shall be true and correct in all material
respects at or as of the Closing Date as though such representations and
warranties were made at such time.
10.02 Performance of Covenants. Buyer and POC shall have performed or
--------------------------
complied in all material respects with all of the agreements, covenants and
conditions required by this Agreement to be performed or complied with by them
prior to or at the Closing.
10.03 Approvals. All consents or approvals listed on Schedule 10.03
---------
shall have been obtained.
10.04 Creditors. The outstanding creditors of Company shall have
---------
consented in writing to the transactions contemplated by this Agreement as set
forth in Section 8.03.
10.05 Legal Matters. The Closing shall not violate any order or decree
--------------
of any court or governmental body of competent jurisdiction and no suit,
action, proceeding or investigation, shall have been brought or threatened by
any person or entity (other than Company or an affiliate of Company) which
questions the validity or legality of this Agreement or the transactions
contemplated hereby.
10.06 SG&A Payment and Expense Reimbursement Amount. Company and Buyer
---------------------------------------------
shall have calculated the amount of the SG&A Payment and the Expense
Reimbursement.
11. CLOSING.
-------
11.01 The Closing Date. The consummation of the sale of the Purchased
------------------
Assets and the Shares (the "Closing") shall take place at the office of Rodi,
Pollock, Pettker, Galbraith & Cahill, A Law Corporation, 801 South Grand
Avenue, Suite 400, Los Angeles, California 90017 within five (5) business days
after the conditions set forth in Sections 9 and 10 hereof are satisfied (the
"Closing Date"). Such Closing shall be deemed to be effective for all
purposes as of the close of business on the Closing Date.
11.02 Actions and Deliveries by Company and ZHI. At the Closing, Company
-----------------------------------------
and ZHI, as the case may be, shall deliver or cause to be delivered to Buyer
the following which shall be reasonably satisfactory in form and substance to
Buyer and its counsel and which shall constitute conditions precedent to
Buyer's obligations hereunder:
(a) such instruments of assignment and conveyance as are necessary
or appropriate to transfer title to the Purchased Assets by Company to Buyer,
including, without limitation, a bill of sale and assignment of contracts;
(b) duly endorsed stock assignments and certificates for the
Shares executed by ZHI;
(c) copies of resolutions by the board of directors of Company
authorizing the execution and delivery of this Agreement and the performance
of Company's covenants and obligations under it, which resolutions shall be
certified by Company's Secretary or Assistant Secretary;
(d) certificate of good standing for Company, as of a date not more
than five (5) days before the Closing Date;
(e) copies of resolutions by the board of directors of ZHI
authorizing the execution and delivery of this Agreement and the performance
of ZHI's covenants and obligations under it, which resolutions shall be
certified by ZHI's Secretary or Assistant Secretary;
(f) certificate of good standing for ZHI, as of a date not more
than five (5) days before the Closing Date;
(g) opinions from counsel for Company and ZHI, in a form
reasonably satisfactory to Buyer and its counsel in which counsel for Company
and ZHI may rely on representations of officers and directors of Company and
ZHI as to factual matters and on certificates of government officers; and
(h) a certificate in a form satisfactory to Buyer certifying
that the conditions set forth in Sections 10.01 and 10.02 have been satisfied.
<PAGE>
11.03 Actions and Deliveries by Buyer and POC. At the Closing, Buyer and
---------------------------------------
POC, as the case may be, shall deliver or cause to be delivered to Company and
ZHI, as the case may be, the following which shall be reasonably satisfactory
in form and substance to Company and its counsel and which shall constitute
conditions precedent to Company's obligations hereunder:
(a) a limited assumption of liability agreement;
(b) the Royalty Note;
(c) the Convertible Debenture;
(d) the SG&A Note;
(e) the Closing SG&A Payment;
(f) the Expense Reimbursement;
(g) copies of resolutions pertaining to Buyer's authorization of
the execution and delivery of this Agreement and the performance of Buyer's
covenants and obligations under it, which resolutions shall be certified by
Buyer's Secretary or Assistant Secretary;
(h) copies of resolutions pertaining to POC's authorization of
the execution and delivery of this Agreement and the performance of POC's
covenants and obligations under it, which resolutions shall be certified by
POC's Secretary or Assistant Secretary;
(i) certificate of good standing for Buyer, as of a date not
more than five (5) days before the Closing Date;
(j) certificate of good standing for POC, as of a date not more
than five (5) days before the Closing Date;
(k) an opinion from counsel for Buyer and POC, in a form
satisfactory to Company and its counsel in which may rely on representations
of officers and directors of Buyer and on certificates of government officers;
(l) a resale certificate or other documents reasonably requested
by Company to comply with the provisions of the sales and use tax laws of the
State of California;
(m) a check from POC in an amount sufficient to cover applicable
sales and use taxes imposed by the State of California on the transactions
contemplated by this Agreement; and
(n) a certificate in a form satisfactory to Seller certifying
that the conditions set forth in sections 9.01 and 9.02 have been satisfied.
12. TERMINATION.
-----------
12.01 Termination Events. This Agreement by notice given prior to or at
------------------
the Closing may be terminated:
(a) by either Buyer, POC, Company or ZHI if a material breach of
any provision of this Agreement or the Interim Operating Agreement has been
committed by any other party and the breach has not been waived;
(b) (i) by Buyer or POC if any of the conditions in Section
9 has not been satisfied as of the Closing Date or if satisfaction of such a
condition becomes impossible (other than through the failure of Buyer or POC
to comply with its obligations under this Agreement) and Buyer or POC, as the
case
<PAGE>
may be, has not waived such condition on or before the Closing Date, or
(ii) by Company or ZHI, if any of the conditions in Section
10 has not been satisfied as of the Closing Date or if satisfaction of such a
condition is or becomes impossible (other than through the failure of Company
or ZHI to comply with its obligations under this Agreement) and Company or
ZHI, as the case may be, has not waived such condition on or before the
Closing Date; or
(c) by mutual consent of Buyer, POC, Company and ZHI; provided,
however, that notwithstanding the foregoing, this Agreement shall terminate by
its terms if the Closing has not occurred within three (3) years after the
date hereof.
12.02 Effect of Termination. Each party's right of termination under
-----------------------
Section 12.01 is in addition to any other rights it may have under this
Agreement or otherwise, and the exercise of a right of termination shall not
be an election of remedies. If this Agreement is terminated pursuant to
Section 12.01, all further obligations of the parties under this Agreement
shall terminate, except the obligations in Section 8.05 shall survive;
provided, however, that if this Agreement is terminated by a party because of
a breach of the Agreement by the other party or parties or because one or more
of the conditions to the terminating party's obligations under this Agreement
is not satisfied as a result of the other party or parties failure to comply
with its or their obligations, the terminating party's right to pursue all
legal remedies shall survive such termination unimpaired.
13. POST-CLOSING OBLIGATIONS.
-------------------------
13.01 Employees. Effective immediately upon Closing, Buyer shall offer
---------
to continue to employ each person set forth on Schedule 13.01 who immediately
prior to Closing is an employee of Company. Each such person who continues
employment shall be employed at the same salary and wages as were in effect
immediately prior to the Closing, and on substantially the same terms and
conditions as those covering such employee immediately prior to the Closing
subject to Buyer's rights, except to the extent limited by law or agreement,
to revise and modify any terms, conditions, practices, policies, and benefits.
Nothing in this Agreement shall require Buyer to continue the employment of
any employee for any specific duration or the continuation by Buyer after
Closing of any existing terms, conditions, practices, policies, or benefit
plans of Company, nor obligate Buyer to continue such terms, conditions,
practices, policies, or benefits for any specific duration, except as required
by law or other agreements.
13.02 Unfinished Safeco Orders. Until such time as the sales orders
--------------------------
retained by Company and identified on Schedule 13.02 are complete (the
"Unfinished Safeco Orders"), Buyer shall make James E. Antinone, Mike Jadeski,
Denis Ding, Richard Remington, Murray Remington, Brad Minami and Jeff Pletch,
(the "Loaned Employees") available to Company, at no cost to Company, to
perform all work necessary to complete the Unfinished Safeco Orders in an
expeditious manner. Until the earlier of May 30, 1997 or such time as the
Unfinished Safeco Orders have been completed, each of the Loaned Employees
shall be available for use by Company for at least one-half of each work week
for each Loaned Employee. From and after May 30, 1997, until the earlier of
December 1, 1997, or the completion of the Unfinished Safeco Orders, the
Loaned Employees shall be available for use by Company for not more than a
combined total of forty (40) hours per week; provided, however, that Company
shall designate the Loaned Employees utilized for each forty (40) hour period
each week. In the event that the Unfinished Safeco Orders are not completed
by December 1, 1997, Buyer shall make such employees available to Company at
cost plus ten percent (10%). During such hours as the Loaned Employees are
available for use by Company, such employees shall work at the direction and
control of Company. Until the earlier of December 1, 1997, or such time as
Company notifies Buyer that the Unfinished Safeco Orders are complete, Buyer
shall not terminate the Loaned Employees other than for cause.
13.03 Access to Records. From and after Closing, Buyer will provide
-----------------
to Company whatever assistance Company may reasonably request, including
making records, information, witnesses and personnel available for the
purposes of (a) preparing any tax returns, audit or other examination by any
taxing authority or judicial or administrative proceeding related to liability
for taxes, or (b) for such other purposes for which access to such documents
is reasonably believed by Company to be necessary; provided, however, that
access to such books, records, documents and employees shall not unreasonably
interfere with the normal operation of Buyer. Buyer shall maintain and
preserve all such books, records and other documents for the greater of six
(6) years after Closing or any applicable statutory or regulatory retention
period, and shall notify Company before such records are destroyed.
13.04 Inventory. Commencing at the Closing and ending on the first
---------
anniversary of the Closing, Buyer shall use its reasonable best efforts to use
inventory purchased from Company pursuant to this Agreement first before
purchasing inventory to replace such inventory. Buyer shall utilize such
inventory notwithstanding the availability of replacement inventory at a cost
lower than the book value of the inventory purchased hereunder. Commencing at
the Closing and ending on the first anniversary of the Closing, Buyer shall
account for inventory for purposes of this Agreement on a first in, first out
(FIFO) basis.
13.05 Assumed Accounts Receivable. From and after the Closing, Buyer
-----------------------------
shall exercise prompt and diligent efforts to collect the Assumed Accounts
Receivable; provided, however, that Buyer may not compromise or discount any
such Assumed Accounts Receivable. To the extent that any uncollected Assumed
Accounts Receivable are excluded from the Assumed Accounts Receivable
Valuation, Buyer shall transfer, set over and assign all of its right, title
and interest to Company in and to such uncollectible Assumed Accounts
Receivable.
13.06 Covenant Not to Compete; No Raid.
-------------------------------------
(a) Company and ZHI each agree that it shall not and shall not
permit any affiliate (including, in each case, its directors, officers and
shareholders), to engage in, and shall use their best efforts to prevent any
joint venture of Company or ZHI or any such affiliate from, for a period of
five (5) years after the Closing Date, engaging in, the Business ("Competitive
Activities"); provided, however, that the foregoing shall not prohibit:
-------- -------
(i) Company, ZHI and any of their affiliates, any such joint
venture or any of the accounts managed by them, including, without limitation,
any pension or other benefit plan of Company and ZHI, from owning any
outstanding capital stock or other equity interests of any person engaging in
any Competitive Activities, provided the aggregate beneficial ownership of
Company and ZHI (without reference to pension or other benefit plan assets)
does not exceed more than five percent (5%) of all issued and outstanding
securities of any such person;
(ii) Company, ZHI and any of their affiliates or any such
joint venture from engaging in the Competitive Activities with respect to any
or all of the Excluded Assets or any other businesses other than the Business;
<PAGE>
(iii) Company, ZHI and any of their affiliates or any such
joint venture from acquiring a business that engages in Competitive Activities
provided that (x) such activities do not constitute more than twenty percent
(20%) of the revenues or assets of the business to be acquired (based on the
sales of such business during the preceding four full calendar quarters), and
(y) Company, ZHI and any affiliate or joint venture, as the case may be,
divests that portion of the business to be acquired that engages in
Competitive Activities within twelve (12) months after the acquisition
thereof; and
(iv) Company, ZHI and any of their affiliates from managing,
operating and/or disposing of any of the Excluded Assets, including, without
limitation, liquidation of the inventory constituting Excluded Assets;
provided, further, that the prohibitions in this Section 13.06 shall cease to
- -------- -------
apply (effective as of the time of such transfer) to any businesses or
operations of Company, ZHI or any of their subsidiaries which are transferred
to any third party (other than to a subsidiary or affiliate or any such joint
venture of Company or ZHI) after the date hereof.
(b) No-Raid Covenant. Except as otherwise provided in Section
----------------
13.06 of this Agreement, for a period of five (5) years following the Closing
Date, without the prior written approval of POC or Buyer, neither Company nor
ZHI (nor any of their affiliates) shall solicit or induce (or initiate
discussions relating to future employment with), any salaried employee or
person employed by Buyer in a management position in the Business on the date
of such solicitation or inducement or the initiation of such discussions to
accept employment with Company, ZHI or any affiliate thereof, except for
persons whose employment is solicited or procured through newspaper ads or
through the services of executive search firms engaged in a broad-based search
(and not engaged for the purpose of circumventing this Section 13.06).
13.07 Warranty. At the request of Company, in writing, Buyer shall
--------
perform warranty work in connection with products manufactured and sold by
Company prior to Closing. To the extent any warranty work is requested, in
writing, by Company in connection with such products, Company shall reimburse
Buyer in the amount of the cost of such warranty work plus ten percent (10%).
Payment shall be due and payable within thirty (30) days of invoice.
13.08 Guaranty. POC hereby unconditionally guarantees that to the
--------
extent Buyer fails to make a payment due under either the Royalty Note or the
SG&A Note then, upon written demand of Company, POC will promptly make such
payment or cause it to be made. Company shall not be required to seek any
recovery from Buyer prior to enforcing POC's obligations hereunder.
13.09 Change of Corporate Name. As soon as practicable after the
---------------------------
Closing, Company shall take all action necessary or
<PAGE>
appropriate to change its name to a name which does not include the name
"Wilson" or any derivation thereof.
13.10 Bids. Company and Buyer shall use their reasonable best efforts to
----
transfer from Company to Buyer open bids, if any, upon their acceptance by the
customer, to the extent that Buyer determines that it desires to enter into a
contract with the customer based upon the bid (each, an "Accepted Bid").
Notwithstanding the foregoing, Company shall have no obligation hereunder to
enter into any contract with any customer in connection with any such bid
accepted by customer.
14. INDEMNIFICATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
----------------------------------------------------------------
14.01 Indemnities by Company. Company shall indemnify, defend and hold
-----------------------
harmless Buyer, its directors, officers, employees, shareholders, agents,
successors, assigns, attorneys and personal representatives from, against and
in respect of any and all actions, suits, proceedings, claims, demands,
losses, costs, expenses, obligations, liabilities, judgments, damages,
recoveries and deficiencies, including, without limitation, interest,
penalties and reasonable attorneys' fees (collectively "Damages") that Buyer
shall incur or suffer which arise out of, result from or relate to any of the
following:
(a) any misrepresentation, breach of warranty or nonfulfillment of
any agreement on the part of Company under this Agreement or any of the
documents, agreements or instruments delivered in connection herewith or from
any misrepresentation in or omission from any certificate, schedule, exhibit
or other instrument furnished or to be furnished by Company hereunder or
thereunder to the extent, and only to the extent, that such representations,
warranties or agreements survive the Closing; and
(b) the Excluded Liabilities; provided, however, that Company shall
not have liability under this Section 14.01 to the extent, and only to the
extent, of Damages caused as a result of any action taken or omitted to be
taken by Buyer after the Closing Date.
14.02 Indemnities by ZHI. ZHI shall indemnify, defend and hold harmless
------------------
Buyer, its directors, officers, employees, shareholders, agents, successors,
assigns, attorneys and personal representatives from, against and in respect
of any and all Damages that Buyer shall incur or suffer which arise out of,
result from or relate to any of the following:
(a) any misrepresentation, breach of warranty or nonfulfillment of
any agreement on the part of ZHI under this Agreement or any of the documents,
agreements or instruments delivered in connection herewith or from any
misrepresentation in or omission from any certificate, schedule, exhibit or
other instrument furnished or to be furnished by ZHI hereunder or thereunder
to the extent, and only to the extent, that such representations, warranties
or agreements survive the Closing;
(b) any obligation or liability for product liability for products
manufactured and sole and for services performed prior to the Closing Date;
and
(c) any obligation, duty or liability incurred prior to Closing
relating to Company's use, discharge, treatment, storage, generation or
disposal of hazardous substances as defined by any federal, state or local
statute, rule or regulation concerning or related to the protection of the
environment, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. '9601
et seq; provided, however, that neither ZHI nor Company shall have any
liability under this Section 14.02 to the extent, and only to the extent, of
Damages caused as a result of any action taken or omitted to be taken by Buyer
after the Closing Date.
14.03 Indemnities by Buyer and POC. Buyer and POC, jointly and
--------------------------------
severally, shall indemnify, defend and hold harmless Company and ZHI, their
directors, officers, employees, shareholders, agents, successors, assigns,
attorneys and personal representatives against and in respect of any and all
Damages that Company or ZHI shall incur or suffer which arise out of, result
from or relate to any of the following:
(a) any misrepresentation, breach of warranty or nonfulfillment of
any agreement on the part of Buyer or POC under this Agreement or any of the
documents, agreements or instruments delivered in connection herewith or from
any misrepresentation in or omission from any certificate, schedule, exhibit
or other instrument furnished or to be furnished by Buyer or POC hereunder
<PAGE>
or thereunder to the extent, and only to the extent, that such
representations, warranties or agreements survive the Closing;
(b) the Assumed Liabilities; provided, however, that neither Buyer
or POC shall have any liability under this Section 14.03 to the extent, and
only to the extent, of Damages caused as a result of any action taken or
omitted to be taken by Company after the Closing Date; and
(c) any Accepted Bid.
14.04 Notice of Indemnifying Party. If any party (the "Indemnitee")
-------------------------------
receives notice of any claim, assertion or other commencement of any action or
proceeding or becomes aware of any matter with respect to which the other
party is obligated to provide indemnification (the "Indemnifying Party")
pursuant to Section 14.01, 14.02 or 14.03, the Indemnitee shall promptly give
the Indemnifying Party written notice thereof. Failure to give such notice
shall not affect a party's right to be indemnified hereunder; provided,
--------
however, that the Indemnifying Party's liability hereunder shall be limited to
-
that which would have existed had prompt notice been given, and the Indemnitee
shall be solely responsible for, and shall indemnify the Indemnifying Party
from, such increased liability, if any, as shall have been occasioned by its
failure to provide the Indemnifying Party with prompt notice. The
Indemnifying Party shall have the right to defend, at such Indemnifying
Party's own expense and by such Indemnifying Party's counsel, any such matter
involving the asserted liability of the Indemnitee. In such event, the
Indemnitee, the Indemnifying Party and the Indemnifying Party's counsel shall
cooperate in the defense against any such asserted liability. The Indemnitee
may participate in the defense of such asserted liability at its own expense;
provided, however, that if the Indemnitee elects not to participate in such
- -------- -------
defense, the Indemnifying Party shall keep the Indemnitee fully apprised at
- --
all times as to the status of the defense or any settlement negotiations with
- --
respect thereto. If the Indemnifying Party does not notify the Indemnitee
within thirty (30) days, or within such shorter response period as is required
to avoid prejudice to the ability to defend against such claim, assertion,
action or proceeding, after receipt of Indemnitee's notice of an action or
proceeding that the Indemnifying Party intends to assume the defense of such
claim, action, assertion or proceeding, then the Indemnitee may defend such
claim, action, assertion or proceeding. Neither party shall effect a
settlement of any action or claim without the prior written consent of the
other party, which consent shall not be unreasonably withheld; provided,
--------
however, that if the Indemnifying Party desires to effect a settlement of any
--
such action or claim for the payment of money only and in exchange for a
release of all known and unknown claims against Indemnitee, it shall present
to the Indemnitee for approval of such a bona fide settlement which is
acceptable to the other party to the claim or action (the "Proposed
Settlement") and, if the Indemnitee objects to the Proposed Settlement, the
Indemnitee shall cooperate fully in such defense and shall have the right, at
its sole expense, to proceed in the defense of such action or claim; provided,
--------
further, that, under such circumstance, in no event shall the Indemnifying
- -------
Party's liability exceed the amount of the Proposed Settlement, and that the
- ---
Indemnitee shall indemnify and hold harmless the Indemnifying Party for
liabilities, if any, in excess of the amount of the Proposed Settlement. If
the Indemnifying Party chooses to defend any claim, the Indemnitee shall
cooperate fully in such defense and shall make available to the Indemnifying
Party any books, records or other documents within its control that are
reasonably necessary or appropriate for such defense.
14.05 Limitations on Liability of Company and ZHI.
-------------------------------------------------
(a) Company and ZHI shall have no obligation to indemnify Buyer, POC
or any other person against Damages pursuant to this Section 14 unless and
until the aggregate of all such Damages suffered or incurred by Buyer or such
persons exceed the sum of Fifty Thousand Dollars ($50,000.00) and then or in
for the amount by which such Damages exceeds Fifty Thousand Dollars
($50,000.00); provided, that in no event shall the aggregate liability of
Company or ZHI for Damages pursuant to this Section 14 exceed the unpaid
principal amount of the Royalty Note, as adjusted pursuant to its terms or the
terms of this Agreement, plus all amounts paid by Buyer to Company in respect
of the Royalty Note, in the case of Company, and Two Hundred Twenty Thousand
Dollars ($220,000.00) in the case of ZHI; provided, further, however, that the
foregoing limitations shall not apply (i) to Company's indemnification
obligations under Section 14.01(b) hereof or (ii) to ZHI's indemnification
obligations under Sections 14.02(b) and 14.02(c) hereof.
(b) Notwithstanding anything to the contrary herein, Company and
ZHI shall have no obligation to indemnify Buyer, POC or any other person
against Damages resulting from a breach of representation or warranty
hereunder to the extent that Buyer or POC had actual knowledge prior to the
date hereof that such representation or warranty was untrue or incorrect, or
to the extent that Buyer or POC acquired such actual knowledge after the date
hereof and prior to the Closing and with such actual knowledge consummated the
transactions contemplated hereby.
14.06 Offset. Buyer shall have the right to offset Damages hereunder
------
against the principal amount of, and payments due under, the Royalty Note.
14.07 Survival. All representations and warranties contained in or made
--------
pursuant to this Agreement or in any agreement, certificate, document or
statement delivered pursuant hereto shall survive the Closing for a period of
two (2) years; provided, however, that Company's indemnification obligations
under Section 14.01(b) and ZHI's indemnification obligations under Section
14.02(b) and Section 14.02(c) shall survive the Closing for their applicable
statutes of limitations.
14.08 Sole Remedies. The remedies provided for in this Section 14 are
--------------
exclusive and shall be in lieu of all other remedies for breach of this
Agreement, including, without limitation, for breaches of representations,
warranties, covenants and agreements hereunder; provided, however, that the
foregoing clause of this sentence shall not be deemed a waiver by any party of
any right to specific performance or any remedy arising by way of any claim of
fraud with respect to this Agreement.
15. MISCELLANEOUS.
-------------
15.01 Disclaimers.
-----------
(a) In connection with Buyer's investigation of the Business,
certain projections, and certain business plan information for succeeding
fiscal years were made available to Buyer. Buyer acknowledges that there are
uncertainties inherent in attempting to make such projections and other
forecasts and plans, that Buyer is familiar with such uncertainties, that
Buyer is taking full responsibility for making its own evaluation of the
adequacy and accuracy of all projections and other forecasts and plans so
furnished to it, and that Buyer shall not have any claim against Company with
respect thereto. Accordingly, Company makes no representation or warranty
with respect to such projections and other forecasts and plans.
(b) Buyer acknowledges that Company is not conducting business
in the ordinary course and that there have been material adverse changes in
the business, financial condition, operations, results of operations or
further prospects of Company and the Affiliated Entities. Accordingly,
Company makes no representation that it is conducting its business in the
ordinary course or that there has not been any material adverse change in the
Business, financial condition operations, results or operation or future
prospects of Company and the Affiliated Entities.
15.02 Further Assurances.
-------------------
(a) Company, at any time after the Closing Date, shall execute,
acknowledge, and deliver any further deeds, assignments, conveyances, bills of
sale, and other assurances, documents and instruments of transfer, reasonably
requested by Buyer and will take any other action consistent with the terms of
this Agreement that may be reasonably requested by Buyer for the purpose of
transferring, assigning, granting, conveying, delivering or confirming to
Buyer, or reducing to possession, any or all of the Assets transferred to
Buyer pursuant to this Agreement as of the Closing Date or that may be
requested by Buyer as necessary to carry out the purposes and intents of this
Agreement.
(b) Buyer, at any time after the Closing Date, shall execute,
acknowledge and deliver any further documents and instruments, and shall take
any other action consistent with the terms of this Agreement, that may be
reasonably requested by Company as necessary to carry out the purposes and
intents of this Agreement.
15.03 Brokers and Finders. Each of the parties agrees to indemnify and
--------------------
hold harmless one another against any loss, liability, damage, cost, claim or
expense incurred by reason of any brokerage commission or finder's fee alleged
to be payable because of any act, omission or statement of the indemnifying
party.
15.04 Other Costs. Each of the parties shall pay all costs and expenses
-----------
incurred or to be incurred by it in negotiating and preparing this Agreement
and in closing and carrying out the transactions contemplated by this
Agreement.
15.05 Headings. The subject headings of the Sections of this Agreement
--------
are included for purposes of convenience only and shall not affect the
construction or interpretation of any of its provisions.
15.06 Integration; Waiver. This Agreement, and the other agreements,
--------------------
documents, certificates and instruments delivered hereunder and the Schedules
hereto, constitute the entire agreement between the parties pertaining to the
subject matter herein and therein and supersede all prior and contemporaneous
agreements, representations and understandings of the parties including,
without limitation, the Letter of Commitment dated November 13, 1996 among the
parties. No party hereto is making any representation or warranty whatsoever,
express or implied, oral or written, beyond those expressly given in this
Agreement. No supplement, modification or amendment of this Agreement shall
be binding unless executed in writing by all the parties. No waiver of any of
the provisions of this Agreement shall be deemed, or shall constitute, a
waiver of any other provision, whether or not similar, nor shall any waiver
constitute a continuing waiver. No waiver shall be binding unless executed in
writing by the party making the waiver.
15.07 Counterparts. This Agreement may be executed simultaneously in one
------------
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
15.08 Schedules. Each Schedule delivered pursuant to the terms of this
---------
Agreement constitutes an integral part of this Agreement.
15.09 Severability. If any term or provision of this Agreement or the
------------
application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application
of such terms or provisions to persons or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby and each
term and provision of this Agreement shall be valid and enforced to the
fullest extent permitted by law.
15.10 Other Parties. Nothing in this Agreement, whether express or
--------------
implied, is intended to confer any rights or remedies under or by reason of
this Agreement on any persons other than the parties to it and their
respective successors and assigns, nor is anything in this Agreement intended
to relieve or discharge the obligation or liability of any third persons to
any party to this Agreement, nor shall any provision give any third persons
any right of subrogation or action over against any party to this Agreement.
15.11 Inurement; Assignment. This Agreement shall be binding on, and
----------------------
shall inure to the benefit of, the parties to it and their respective heirs,
legal representatives, successors, and assigns, but may not be assigned by
either party without the prior written consent of the other party; provided,
however, that Company and ZHI, as the case may be, may assign its interest in
the, the Royalty Note or the Convertible Debenture and their respective
guarantees to any secured or unsecured creditors of Company or the Affiliated
Entities without the consent of Buyer or POC.
15.12 Notices. All notices, requests, demands, and other communications
-------
under this Agreement shall be in writing and shall be deemed to have been duly
given on the date of service if served personally on the party to whom notice
is to be given, on the date of transmission if sent by telex, telecopier or
telegraph, or on the fifth day after mailing if mailed to the party to whom
notice is to be given, by first-class mail, registered or certified\return
receipt requested, postage prepaid, and properly addressed as follows:
To Buyer: Wilson Acquisition Corporation
c/o Penn Octane Corporation
5847 San Felipe, Suite 3420
Houston, Texas 77057
Attn: Jerome B. Richter
Tel: (713) 952-5703
Fax: (713) 952-1323
<PAGE>
Copy to: Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: Arnold H. Tracy, Esq.
Tel: (212) 626-4400
Fax: (212) 626-4120
To POC: Penn Octane Corporation
5847 San Felipe, Suite 3420
Houston, Texas 77057
Attn: Jerome B. Richter
Tel: (713) 952-5703
Fax: (713) 952-1323
Copy to: Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: Arnold H. Tracy, Esq.
Tel: (212) 626-4400
Fax: (212) 626-4120
To Company: Wilson Technologies Incorporated
c/o Zimmerman Holdings, Inc.
2600 Mission Street, Suite 100
San Marino, CA 91108-1676
Attn.: William R. Zimmerman
Tel: (818) 441-0444
Fax: (818) 441-6946
Copy to: Rodi, Pollock, Pettker, Galbraith
& Cahill, A Law Corporation
801 South Grand Avenue, Suite 400
Los Angeles, CA 90017
Attn.: Henry P. Pramov, Jr., Esq.
Tel: (213) 895-4900
Fax: (213) 895-4921
<PAGE>
To ZHI: Zimmerman Holdings, Inc.
2600 Mission Street, Suite 100
San Marino, CA 91108-1676
Attn.: William R. Zimmerman
Tel: (818) 441-0444
Fax: (818) 441-6946
Copy to: Rodi, Pollock, Pettker, Galbraith
& Cahill, A Law Corporation
801 South Grand Avenue, Suite 400
Los Angeles, CA 90017
Attn.: Henry P. Pramov, Jr., Esq.
Tel: (213) 895-4900
Fax: (213) 895-4921
Any party may change its address for purposes of this paragraph by giving
the other party notice of the new address in the manner set forth above.
15.14 Governing Law.
--------------
This Agreement shall in all respects, including all matters of
construction, validity and performance, be governed by, and construed and
enforced in accordance with, the laws of the State of California applicable to
contracts entered into in that state between citizens of that state and to be
performed wholly within that state without reference to any rules governing
conflicts of laws. The parties agree that any venue for any suit, action,
proceeding or litigation arising out of or in relation to this Agreement shall
be in any federal or state court in Los Angeles, California having subject
matter jurisdiction. Each of the parties consents to the jurisdiction of such
courts in any such action or proceeding and waives any objection to venue in
such courts in any such action or proceeding.
15.15 Attorneys' Fees. If any legal action or arbitration or other
----------------
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions of this Agreement, the successful or prevailing party shall
be entitled to recover reasonable attorneys' fees and other costs incurred in
that action or proceeding, in addition to any other relief to which it may be
entitled.
IN WITNESS WHEREOF, the parties to this Agreement have duly executed it
on the day and year first above written.
BUYER
-----
WILSON ACQUISITION CORPORATION, a Delaware
corporation
By:
Title:
POC
---
PENN OCTANE CORPORATION,
a Delaware corporation
By:
Title:
[Signatures continued on next page]
<PAGE>
COMPANY
-------
WILSON TECHNOLOGIES INCORPORATED, a California
corporation
By:
Title:
ZHI
---
ZIMMERMAN HOLDINGS, INC., a California corporation
By:
Title:
[Signatures continued from previous page]
iv
TABLE OF CONTENTS
-----------------
PAGE NO.
---------
Section 1. PURCHASE OF ASSETS OF COMPANY 2
1.01 Purchased Assets 2
1.02 Excluded Assets 6
1.03 Assumed Liabilities 7
1.04 Excluded Liabilities 8
1.05 Royalty Note 10
1.06 Royalty Note Adjustment 10
1.07 Allocation of Purchase Price 13
1.08 Sales and Transfer Taxes 13
Section n 2. PURCHASE OF STOCK OF AFFILIATED ENTITIES 14
2.01 Purchase of Stock 14
2.02 Convertible Debenture 14
Sectionn 3. AS-IS, WHERE-IS 14
Sectionn 4. REPRESENTATIONS AND WARRANTIES OF COMPANY 14
4.01 Corporate Existence 15
4.02 Authority; Enforceability 15
4.03 No Violation 15
4.04 Consents and Approvals 16
4.05 Title to Assets 16
Sectionn 5. REPRESENTATIONS AND WARRANTIES OF ZHI 16
5.01 Corporate Existence 16
5.02 Authority; Enforceability 17
5.03 No Violation 18
5.04 Consents and Approvals 18
5.05 Capitalization of Affiliated Entities 18
Section 6. REPRESENTATIONS AND WARRANTIES OF BUYER 20
6.01 Corporate Existence 20
6.02 Authority; Enforceability 20
6.03 No Violation 21
6.04 Consents and Approvals 21
Section 7. REPRESENTATIONS AND WARRANTIES OF POC 21
7.01 Corporate Existence 21
7.02 Authority; Enforceability 21
7.03 No Violation 22
7.04 Consents and Approvals 22
<PAGE>
Section 8. OBLIGATIONS OF THE PARTIES UNTIL CLOSING 22
8.01 Conduct of the Business 22
8.02 Bulk Sales 23
8.03 Creditors of Company 23
8.04 Resale Certificate 24
8.05 Confidentiality 24
8.08 Public Announcements 26
8.09 Sales, General and Administrative Expenses 26
8.10 Expenses for the Benefit of Buyer 27
Sectionn 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER AND POC 27
9.01 Representations and Warranties 28
9.02 Performance of Covenants 28
9.03 Approvals 28
9.04 Creditors 28
9.05 Legal Matters 28
9.06 SG&A Payment and Expense Reimbursement Amount 28
Section n 10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ZHI
AND COMPANY 29
10.01 Representations and Warranties 29
10.02 Performance of Covenants 29
10.03 Approvals 29
10.04 Creditors 29
10.05 Legal Matters 29
10.06 SG&A Payment and Expense Reimbursement Amount 30
Section n 11. CLOSING 30
11.01 The Closing Date 30
11.02 Actions and Deliveries by Company and ZHI 30
11.03 Actions and Deliveries by Buyer and POC 32
Section n 12. TERMINATION 33
12.01 Termination Events 33
12.02 Effect of Termination 34
Section 13. POST-CLOSING OBLIGATIONS 35
13.01 Employees 35
13.02 Unfinished Safeco Orders 35
13.03 Access to Records 36
13.04 Inventory 37
13.05 Assumed Accounts Receivable 37
13.06 Covenant Not to Compete; No Raid 38
13.07 Warranty 40
13.08 Guaranty 40
13.09 Change of Corporate Name 40
13.10 Bids 41
<PAGE>
Section n 14. INDEMNIFICATION; SURVIVAL OF
REPRESENTATIONS AND WARRANTIES 41
14.01 Indemnities by Company 41
14.02 Indemnities by ZHI 42
14.03 Indemnities by Buyer and POC 43
14.04 Notice of Indemnifying Party 44
14.05 Limitations on Liability of Company and ZHI 46
14.06 Offset 47
14.07 Survival 47
14.08 Sole Remedies 47
Section 15. MISCELLANEOUS 48
15.01 Disclaimers 48
15.02 Further Assurances 49
15.03 Brokers and Finders 49
15.04 Other Costs 50
15.05 Headings 50
15.06 Integration; Waiver 50
15.07 Counterparts 51
15.08 Schedules 51
15.09 Severability 51
15.10 Other Parties 51
15.11 Inurement; Assignment 52
15.12 Notices 52
15.14 Governing Law 54
15.15 Attorneys' Fees 55
iv
SCHEDULES
---------
Schedule 1.01 (b) Assumed Accounts Receivable
Schedule 1.01 (d) Purchased Tangible
Personal Property
Schedule 1.01 (e) Purchased Intellectual
Property
Schedule 1.01 (g) Assumed Leases
Schedule 1.01 (h) Assumed Sales Orders
Schedule 1.01 (i) Assumed Contracts
Schedule 1.01 (m) Assumed Medical Plans
Schedule 1.02 (f) Excluded Sales Orders
Schedule 1.02 (g) Excluded Receivables
Schedule 1.02 (i) Excluded Contracts
Schedule 1.02 (j) Other Excluded Assets
Schedule 1.03 (c) Assumed Employee Liabilities
Schedule 1.03 (d) Other Assumed Liabilities
Schedule 1.04 (h) Other Excluded Liabilities
Schedule 1.07 Purchase Price Allocation
Schedule 4.05 Title to Assets
Schedule 5.05 Title to Shares
Schedule 8.10 Reimbursement Expenses
Schedule 9.03 Required Company Consents
Schedule 10.03 Required Buyer Consents
Schedule 13.01 Employees
Schedule 13.02 Unfinished Safeco Orders
v
EXHIBITS
--------
A Royalty Note
B Convertible Debenture
C SG&A Note
viii
PURCHASE AGREEMENT
by and among
WILSON TECHNOLOGIES INCORPORATED,
ZIMMERMAN HOLDINGS, INC.
WILSON ACQUISITION CORPORATION,
AND
PENN OCTANE CORPORATION
PENN OCTANE CORPORATION
AGREEMENTFOR EXCHANGE OF WARRANTS FOR COMMON STOCK
1. Penn Octane Corporation (Penn Octane) hereby offers to exchange shares
of its Common Stock, $0.01 par value per share (Common Stock), for all (but
not less than all) outstanding warrants to purchase Common Stock held by Mark
D. Casaday (Casaday) (200,000 warrants) at an exchange rate of four warrants
for each share of Common Stock, or an aggregate of 50,000 shares of Common
Stock.
2. Penn Octane agrees that the Common Stock so exchanged shall be included
in the next registration statement (other than with respect to an employee
benefit plan) filed by the Company, but in no event shall the Company fail to
file such a registration statement with the Securities and Exchange Commission
later than six months following the date hereof.
3. In the event that such Common Stock is registered as part of an
underwritten offering by the Company, Casaday agrees to be bound by the same
underwriters' conditions regarding sale of the registered stock and other
matters as the Company and all other sellers. Penn Octane shall use
reasonable efforts to limit Casaday's "lock up" period, if any, for any Common
Stock acquired in this exchange and not purchased by the underwriter to not
longer than ninety days, although the parties recognize that such decision is
solely that of the underwriter.
4. If the lock up period referred to in paragraph 3 exceeds ninety days,
Casaday may elect not to include his stock in the registration and the Company
shall, within a reasonable period of time but not later than six months
following the underwriting, file a separate registration for the sale of
Casaday's shares.
5. Casaday represents and warrants:
a) he is the record and beneficial owner of the warrants with full power
and authority to convey such warrants to Penn Octane free of any liens or
encumbrances or interests of third party;
b) he is familiar with the business and financial condition, properties,
operations and prospects of Penn Octane, has been given full access to all
material information with respect thereto, and has had an opportunity to ask
questions of and receive information from Penn Octane and persons acting on
its behalf;
c) he has made, either alone or with his advisors, such independent
investigation of Penn Octane, its operations and related matters as he and/or
his advisors have deemed necessary or advisable in connection with the
exchange referred to above, and has received all information and data deemed
necessary in order to reach an informed decision as to the advisability of
such exchange; and
<PAGE>
d) he is acquiring the Common Stock in such exchange for his own account
for investment and with no intention of engaging in any distribution of such
shares, will not dispose of any of such shares except in compliance with
applicable securities laws, and agrees that any certificate(s) representing
such shares may contain an appropriate legend to such effect.
6. By his execution hereof, Casaday agrees to the above-described exchange
of Common Stock for warrants on the terms herein set forth. The Closing on
such exchange shall take place at the office of the Company, 5847 San Felipe,
Suite 3420, Houston, Texas 77057, at 10:00 A.M. Houston time on Tuesday,
February 18, 1997. Promptly following the Closing, Casaday will file any
required reports of ownership changes with the Securities and Exchange
Commission.
Dated February 5, 1997 Penn Octane Corporation
By: /S/ IAN T. BOTHWELL
-----------------
Ian T. Bothwell, Vice President
/S/ MARK D. CASADAY
-----------------
Mark D. Casaday
PENN OCTANE CORPORATION
AGREEMENTFOR EXCHANGE OF WARRANTS FOR COMMON STOCK
1. Penn Octane Corporation (Penn Octane) hereby offers to exchange shares
of its Common Stock, $0.01 par value per share (Common Stock), for all (but
not less than all) outstanding warrants to purchase Common Stock held by
Thomas P. Muse (Muse) having an exercise price of $2.50 per share (242,856
warrants) at an exchange rate of 4.4 warrants for each share of Common Stock,
or an aggregate of 55,195 shares of Common Stock.
2. Penn Octane agrees that the Common Stock so exchanged shall be included
in the next registration statement (other than with respect to an employee
benefit plan) filed by the Company, but in no event shall the Company fail to
file such a registration statement with the Securities and Exchange Commission
later than six months following the date hereof.
3. In the event that such Common Stock is registered as part of an
underwritten offering by the Company, Muse agrees to be bound by the same
underwriters' conditions regarding sale of the registered stock and other
matters as the Company and all other sellers. Penn Octane shall use
reasonable efforts to limit Muse's "lock up" period, if any, for any Common
Stock acquired in this exchange and not purchased by the underwriter to not
longer than ninety days, although the parties recognize that such decision is
solely that of the underwriter.
4. If the lock up period referred to in paragraph 3 exceeds ninety days,
Muse may elect not to include his stock in the registration and the Company
shall, within a reasonable period of time but not later than six months
following the underwriting, file a separate registration for the sale of
Muse's shares.
5. Muse represents and warrants:
a) he is the record and beneficial owner of the warrants with full power
and authority to convey such warrants to Penn Octane free of any liens or
encumbrances or interests of third party;
b) he is familiar with the business and financial condition, properties,
operations and prospects of Penn Octane, has been given full access to all
material information with respect thereto, and has had an opportunity to ask
questions of and receive information from Penn Octane and persons acting on
its behalf;
c) he has made, either alone or with his advisors, such independent
investigation of Penn Octane, its operations and related matters as he and/or
his advisors have deemed necessary or advisable in connection with the
exchange referred to above, and has received all information and data deemed
necessary in order to reach an informed decision as to the advisability of
such exchange; and
<PAGE>
d) he is acquiring the Common Stock in such exchange for his own account
for investment and with no intention of engaging in any distribution of such
shares, will not dispose of any of such shares except in compliance with
applicable securities laws, and agrees that any certificate(s) representing
such shares may contain an appropriate legend to such effect.
6. By his execution hereof, Muse agrees to the above-described exchange of
Common Stock
for warrants on the terms herein set forth. The Closing on such exchange
shall take place
at the office of the Company, 5847 San Felipe, Suite 3420, Houston, Texas
77057, at
10:00 A.M. Houston time on Tuesday, February 18, 1997. Promptly following the
Closing, Muse will file any required reports of ownership changes with
the Securities and
Exchange Commission.
Dated February 5, 1997 Penn Octane Corporation
By: IAN T. BOTHWELL
-----------------
Ian T. Bothwell, Vice President
/S/ THOMAS P. MUSE
- ------------------
Thomas P. Muse
PENN OCTANE CORPORATION
AGREEMENTFOR EXCHANGE OF WARRANTS FOR COMMON STOCK
1. Penn Octane Corporation (Penn Octane) hereby offers to exchange shares
of its Common Stock, $0.01 par value per share (Common Stock), for all (but
not less than all) outstanding warrants to purchase Common Stock held by
Thomas A. Serleth (Serleth) (260,000 warrant) at an exchange rate of 4.4
warrants for each share of Common Stock, or an aggregate of 59,091 shares of
Common Stock.
2. Penn Octane agrees that the Common Stock so exchanged shall be included
in the next registration statement (other than with respect to an employee
benefit plan) filed by the Company, but in no event shall the Company fail to
file such a registration statement with the Securities and Exchange Commission
later than six months following the date hereof.
3. In the event that such Common Stock is registered as part of an
underwritten offering by the Company, Serleth agrees to be bound by the same
underwriters' conditions regarding sale of the registered stock and other
matters as the Company and all other sellers. Penn Octane shall use
reasonable efforts to limit Serleth's "lock up" period, if any, for any Common
Stock acquired in this exchange and not purchased by the underwriter to not
longer than ninety days, although the parties recognize that such decision is
solely that of the underwriter.
4. If the lock up period referred to in paragraph 3 exceeds ninety days,
Serleth may elect not to include his stock in the registration and the Company
shall, within a reasonable period of time but not later than six months
following the underwriting, file a separate registration for the sale of
Serleth's shares.
5. Serleth represents and warrants:
a) he is the record and beneficial owner of the warrants with full power
and authority to convey such warrants to Penn Octane free of any liens or
encumbrances or interests of third party;
b) he is familiar with the business and financial condition, properties,
operations and prospects of Penn Octane, has been given full access to all
material information with respect thereto, and has had an opportunity to ask
questions of and receive information from Penn Octane and persons acting on
its behalf;
c) he has made, either alone or with his advisors, such independent
investigation of Penn Octane, its operations and related matters as he and/or
his advisors have deemed necessary or advisable in connection with the
exchange referred to above, and has received all information and data deemed
necessary in order to reach an informed decision as to the advisability of
such exchange; and
<PAGE>
d) he is acquiring the Common Stock in such exchange for his own account
for investment and with no intention of engaging in any distribution of such
shares, will not dispose of any of such shares except in compliance with
applicable securities laws, and agrees that any certificate(s) representing
such shares may contain an appropriate legend to such effect.
6. By his execution hereof, Serleth agrees to the above-described exchange
of Common Stock
for warrants on the terms herein set forth. The Closing on such exchange
shall take place
at the office of the Company, 5847 San Felipe, Suite 3420, Houston, Texas
77057, at
10:00 A.M. Houston time on Friday, February 28, 1997. Promptly following
the Closing,
Serleth will file any required reports of ownership changes with the
Securities and
Exchange Commission.
Dated February 19, 1997 Penn Octane Corporation
By: /S/ IAN T. BOTHWELL
____________________________
Ian T. Bothwell, Vice President
November 12, 1996
LETTER OF ASSIGNMENT
This Letter of Assignment the ("Assignment") is being entered into between
Mr.Roberto Keoseyan ("Assignor") and Penn Octane Corporation ("Assignee").
Whereas Assignor has been granted a DINA Dealership the ("Dealership") from
Grupo Dina, S.A. de C.V. ("Dina"), and Assignee wishes to purchase the rights
to the Dealership.
Assignor confirms it has obtained the full rights to a newly granted Dina
Dealership. The Dealership will be operational once Assignor has identified a
suitable location for the Dealership which is approved by Dina and Assignor
demonstrates to Dina that it has met the required working capital requirements
(approximately Ps. 4,000,000). The Dealership has been granted for an
unlimited period of time and may not be revoked if Assignee complies with the
terms of dealerships established by Dina. There are no other contingent
obligations regarding the dealership which may affect the granting of the
Dealership from Dina. The Assignee is aware that the Dealership will need to
be constructed and that costs associated with purchase and/or rental of
property and construction of facility (collectively the "Construction") are
responsibility of Assignee. Assignor estimates that the Construction will be
approximately Ps. 4,000,000.
Assignor further represents that it has the rights to assign the Dealership to
the Assignee.
PURCHASE PRICE
Assignor agrees to sell 100% of the rights of the Dealership of which 80% will
be owned by Assignee and 20% will be owned by three other individual parties
equally the ("Individuals"), including the Assignor in exchange or the
following:
Assignor will receive the sum of $75,000 as follows:
1) $25,000 week of November 19, 1996
2) $50,000 payable $10,000 per month for 10 months
Assignor will receive 100,000 stock purchase warrants of Penn Octane
Corporation the ("Warrant"). The Warrants will be exercised at a price of
$3.00 per share and will expire 24 months from the date of this Assignment.
Assignor will receive rights to obtain future warrants in Penn Octane
Corporation based on an incentive program which will be developed within 90
days from the date of this Assignment among Penn Octane Corporation and the
individuals, and will be subject to Penn Octane Corporation's Board approval.
Assignor will receive expense allowance of USD $5,000.00 payable in arrears
from the date of this Assignment. This monthly allowance is separate from any
other arrangements between Assignor and Assignee.
Assignor will be appointed as a director for Dina Dealership. (Can't read
this sentence)
ASSISTANCE TO FULFILL DEALERSHIP RESPONSIBILITIES
Assignor will cooperate with Assignee to ensure that all requirements of the
Dealership are met and complied with: (???)
NON COMPETE
Assignor agrees that any other future opportunities connected with Dina and/or
the dealership will be considered part of this Assignment.
CONFIRMATION FROM DINA
Upon execution of this Assignment, Assignor will present Dina with details of
the Assignment and will obtain correspondence from Dina recognizing the
Assignment.
By signing below, all parties agree to the terms of this Assignment.
By: By:
Dina Dealership Penn Octane Corporation
/S/ ROBERTO KEOSEYAN /S/ JERRY RICHTER
----------------- -------------
Roberto Keoseyan Jerry Richter, President
Assignor Assignee
Dated: Dated: November 15, 1996
PROMISSORY NOTE
PRINCIPAL LOAN DATE MATURITY LOAN NO.: CALL COLLATERAL
$140,000.00 12-20-1996 9-30-1997 44117-71
- ----------- ---------- --------- --------
ACCOUNT OFFICER INITIALS
103
---
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.
--------------------------------------------------------------
Borrower: Penn Octane Corporation Lender: Bay Area Bank
900 Veterans Blvd. Suite 510 900 Veterans Blvd.
Redwood City, CA 94064 P.O. Box 2579
Redwood City, CA 94064
_____________________
=====================
Principal Amount: $140,000 Initial Rate: 11.250%
Date of Note: December 20, 1996
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 One Hundred Thousand & 00/100 Dollars
($140,000.00), together with interest on the unpaid principal balance from
December 20, 1996, 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:
Line to be at a zero balance on the 25th each month. Borrower will pay this
loan on demand, or if not demand is made, in one principal payment of
$140,000.00 plus interest on September 30, 1997. This payment due September
30, 1997, will be for all principal and accrued interest not yet paid. In
addition, Borrower will pay regular payments of all accrued due as of each
payment date, beginning January 30, 1997, with all subsequent payments to be
due on the same day of each month after that.
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 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 INTERST RATE. The interest rate on this Note is subject to change
from time to time 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 rate 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 on the 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 Banks option. The Index currently is 8.250% 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 11.250% 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, increase the number of
Borrower's payments, and (d) continue Borrower's payments at the same amount
and increase Borrower's final payment.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default),
except as otherwise required by law. Except for the foregoing, Borrower may
pay without penalty all or a portion of the amount owed earlier than it is
due. Early payments will not, unless agreed to by Lender in writing, relieve
Borrower of Borrower's obligation to continue to make payments under the
payment schedule. Rather, they will reduce the principal balance due and may
result in Borrower making fewer payments.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $25.00, whichever is greater.
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 tot his Note, or in any other agreement or loan
Borrower has with Lender. 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 benefit of creditors, or any
preceding is commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (e) Any 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. (e)
Any 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 guarantee 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. (h) Lender in good faith deems itself insecure.
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 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 this Note to 8,000
percentage points over the Index. 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 automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all 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 LENDER'S 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.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all
accounts Borrower may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note, as well as directions for payment from Borrower's accounts,
may be requested orally or in writing by Borrower or by an authorized person.
Lender may, but not, require that all requests be confirmed in writing.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this
Note at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if: (a) Borrower or any guarantor
is in default under the terms of this Note or any agreement that Borrower or
any guarantor has with Lender, including any agreement made in connection with
the signing of this Note: (b) Borrower or any guarantor ceases doing business
or is insolvent; any guarantor applied funds provided pursuant to this Note
for purchase to this Note for purposes other than those authorized by Lender;
(e) Lender in good faith deems itself insecure under this Note or any other
agreement between Lender and Borrower.
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 endorsees 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, fall 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 TOSIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS, BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE
NOTE.
BORROWER:
PENN OCTANE CORPORATION
By: /S/ JEROME RICHTER
______________________________________________
JEROME RICHTER, PRESIDENT/ASST. SECRETARY
EXHIBIT A
ROYALTY NOTE
------------
Not to Exceed $ 3,000,000.00 , 199_
FOR VALUE RECEIVED, the undersigned, WILSON ACQUISITION CORPORATION, a
Delaware corporation ("Payor"), promises to pay to WILSON TECHNOLOGIES
INCORPORATED, a California corporation ("Payee"), or order, a Royalty (as
defined below), not to exceed the sum of Three Million Dollars ($
3,000,000.00), or such lesser amount as shall be determined as herein
provided, pursuant to the manner hereinafter set forth:
1. Royalty. Commencing on the date hereof, and extending until the
-------
earlier of five (5) years after the date hereof or such time as Payor has paid
to Payee the sum of Three Million Dollars, or such lesser amount as shall be
determined in accordance with the provisions hereof, (the "Royalty Period"), a
Royalty shall accrue in an amount equal to five percent (5%) of Net Revenues
(as defined below) (the "Royalty"). The Royalty shall be due and payable by
Payor to Payee commencing forty-five days after the end of the Buyer's first
fiscal quarter arising after the date hereof and continuing thereafter within
forty-five (45) days after the end of each of Payor's successive fiscal
quarters (or portion thereof) included in the Royalty Period (collectively,
the "Royalty Payments"). The term "Net Revenues" shall mean the gross amount
of revenues received by Payor or its affiliates from the sale of products or
the performance of services related to selling, designing, manufacturing,
installing and servicing compressed natural gas ("CNG") refueling stations and
related products for use in the CNG industry throughout the world (the
"Business"), less (a) returns, credits, discounts and allowances, (b) free
----
goods programs, (c) freight, transportation and insurance charges, and (d)
sales, excise and similar taxes added to the invoice; provided, however, that
this amount shall not include revenues arising from the sale of CNG, the sale
of CNG-powered vehicles, or the conversion of vehicles to CNG-powered
vehicles.
24
2. Stock Payment Option. At the option of Payee, Royalty Payments
--------------------
may be made in restricted shares of common stock, $.01 par value, of Penn
Octane Corporation, a Delaware corporation ("POC") at a value equal to eighty
percent (80%) of the market price per share quoted by NASDAQ on the last day
of Payor's fiscal quarter for which each Royalty Payment is due; provided,
however, that, whichever election Zimmerman Holdings, Inc., a California
corporation ("ZHI"), makes with respect to the receipt of cash or stock under
that certain Convertible Debenture issued by POC in favor of ZHI of even date
herewith, such election shall be applicable to the form of additional Royalty
Payments hereunder; provided, further, however, that in the event Payee
assigns this Royalty Note to an individual or entity, other than ZHI, William
R. Zimmerman ("Zimmerman") or an affiliate thereof, such entity shall have no
right to receive stock in lieu of cash under this Royalty Note, but under such
circumstance, Payor shall have the option, but not the obligation, to pay
Royalty Payments
<PAGE>
due and payable hereunder in POC Common Stock (as defined in Section 3
hereof).
3. Registration Rights. The following registration rights shall
-------------------
apply to any shares of common stock, $.01 par value, of POC ("POC Common
Stock") received in lieu of Royalty Payments under this the Royalty Note:
(a) If POC shall determine to register any of its securities
(other than a Form S-8 or other form suitable for employee benefit plans)
either for its own account or the account of any investor who holds
registrable securities or to whom registration rights have been conferred by
POC (hereinafter "Holders"), POC shall:
(i) promptly give Payee written notice thereof; and,
(ii) include in such registration (and in any related
qualification under blue sky laws, the securities laws of any state where the
securities are to be issued, or any other compliance), and in any underwriting
involved therein, all of the securities specified in a written request made by
Payee to POC within twenty (20) days after the written notice from POC
described in clause (i) above (the ARegisterable Securities@).
(b) If the registration of which POC gives notice is for a
registered public offering involving an underwriter, POC shall so advise Payee
as part of the written notice given pursuant to Section 3(a)(i) above.
<PAGE>
(c) All registration expenses incurred in connection with any
registration, qualification or compliance pursuant to this Section 3 shall be
borne by POC; provided, however, that Payee shall bear its own legal and
accounting fees and costs and any underwriting discounts or commissions
incurred in connection with the sale of its shares of POC.
(d) In the case of registration effected by POC pursuant to this
Section 3, POC shall keep Payee advised in writing as to the initiation of
each registration and as to the completion thereof. At its expense, POC shall
use its best efforts to:
(i) Keep registration effective for a period of one hundred
twenty (120) days or until Payee has completed the distribution described in
the registration statement relating thereto, whichever first occurs; provided,
however, that such 120-day period shall be extended for a period of time equal
to the period Payee refrains from selling any securities included in such
registration at the request of an underwriter of POC;
(ii) Prepare and file with the Securities and Exchange
Commission, or any other federal agency at the time administering the
Securities Act of 1933 (the ACommission@) such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of
the Securities Act of 1933, as amended, or any similar successor federal
statute and the rules and regulations thereunder (the ASecurities Act@), with
respect to the disposition of all securities covered by such registration
statement;
(iii) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus,
as Payee may from time to time request;
(iv) Notify Payee at any time when a prospectus relating to
the Registerable Securities is required to be delivered under the Securities
Act of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
incomplete in light of the circumstances then existing, and at the request of
any such seller, prepare and furnish such seller a reasonable number of copies
of a supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such shares, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in light of the circumstances
then existing;
(v) Cause such Registerable Securities registered pursuant
to this Section 3 to be listed on each securities
<PAGE>
exchange on which similar securities issued by POC are then listed;
(vi) Provide a transfer agent and registrar for all
Registerable Securities registered pursuant hereto not later than the
effective date of such registration; and
(vii) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than 18 months,
beginning with the first month after the effective date of a registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.
(e) POC will indemnify Payee, each of its officers, directors
and partners, legal counsel and accountants and each person controlling Payee
within the meaning of Section 15 of the Securities Act and Section 13 of the
Exchange Act, with respect to which registration, qualification or compliance
has been effected pursuant hereunder, and each underwriter, if any, and each
person who controls, within the meaning of Section 15 of the Securities Act
and Section 13 of the Exchange Act, any underwriter, against all expenses,
claims, losses, damages and liabilities (or actions, proceedings or
settlements in respect thereof) arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by POC of the Securities Act or any rule or regulation thereunder
applicable to POC and relating to action or inaction required by POC in
connection with any such registration, qualification or compliance, and will
reimburse Payee, each of its officers, directors, partners, legal counsel and
accountants and each person controlling Payee, each such underwriter and each
person who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating and defending or settling
any such claim, loss, damage, liability or action.
Payee shall give notice to POC, under this section, promptly after Payee
has actual knowledge of any claim as to which indemnity might be sought, and
shall permit POC to assume the defense of any such claim or any litigation
resulting therefrom, provided that counsel for POC, who shall conduct the
defense of such claim or any litigation resulting therefrom, shall be approved
by Payee (whose approval shall not be unreasonably withheld), and Payee may
participate in such defense at Payee's expense, and provided further that the
failure of Payee to give notice as provided herein shall not relieve POC of
its obligations under this Section 3(e), to the extent such failure is not
prejudicial. POC shall not, in the defense of any such claim or litigation,
except with the consent of Payee, consent to the entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to Payee of a release from all
liability in respect to such claim or litigation. Payee shall furnish such
information regarding itself or the claim in question as POC may reasonably
request in writing and as shall be reasonably required in connection with the
defense of such claim and litigation resulting therefrom.
If the indemnification provided for in this Section 3(e) is held by a
court of competent jurisdiction to be unavailable to Payee with respect to any
loss, liability, claim, damage or expense referred to therein, then POC, in
lieu of indemnifying Payee hereunder, shall contribute to the amount paid or
payable by Payee as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of POC on
the one hand and of Payee on the other in connection with the statements or
omissions which resulted in such loss, liability, claim, damage or expense as
well as any other relevant equitable considerations. The relative fault of
POC and Payee shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission to
state a material fact relates to information supplied by POC or by Payee and
the parties= relative
<PAGE>
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in any underwriting agreement
entered into in connection with any underwritten public offering are in
conflict with the foregoing, the provisions in the underwriting agreement
shall control.
(f) With a view to making available the benefits of certain
rules and regulations of the Commission which may permit the sale of
restricted securities to the public without registration, POC agrees, so long
as Company, ZHI, Zimmerman or any affiliate thereof owns any POC Common Stock
acquired pursuant to this Royalty Note, to use its reasonable best efforts to:
(i) make and keep public information, as those terms are
understood and defined in Rule 144 as promulgated by the Commission under the
Securities Act, as such rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission ("Rule 144"), at all
times from and after ninety (90) days following the effective date of the
first registration under the Securities Act filed by POC for an offering of
its securities to the general public;
(ii) file with the Commission in a timely manner all
reports and other documents required of POC under the Securities Act and the
Securities Exchange Act of 1934, as amended, or any similar successor federal
statute and the rules
<PAGE>
and regulations thereunder (the AExchange Act@), at any time after it has
become subject to such reporting requirements; and
(iii) furnish to Payee forthwith upon written request a written
statement by POC as to its compliance with the reporting requirements of Rule
144 (at any time from ninety (90) days following the effective date of the
first registration statement filed by POC for an offering of its securities to
the general public), and of the Securities Act and the Exchange Act (at any
time after it has become subject to such reporting requirements), a copy of
the most recent annual or quarterly report of POC, and such other reports and
documents so filed as Payee may reasonably request in availing itself of any
rule or regulation of the Commission allowing Payee to sell any such
securities without registration.
(g) POC shall not limit the number of Registerable Securities to
be included in a registration pursuant to this Section 3 in order to include
in the offering any of the following:
(i) shares held by stockholders with no registration
rights;
(ii) founder=s stock or any other shares of stock issued to
employees, officers, directors or consultants pursuant to any POC employee
stock option plan; or,
(iii) securities registered for POC=s own account unless POC
determines in good faith based upon the advice of its underwriter that an
offering of Registerable Securities in conjunction with securities registered
for POC's own account is not feasible or impracticable and will not be
successful in the marketplace.
(h) Payee's rights under this Section 3 shall expire upon the
earlier to occur of the following:
(i) expiration of the applicable holding periods
restricting the resale of POC Common Stock set forth in Rule 144; and
(ii) the occurrence of two (2) registrations effected by
POC after the last issuance of POC Common Stock hereunder.
(i) Any share certificates delivered pursuant hereto shall bear
appropriate legends.
4. Investment Representations.
---------------------------
(a) Payee is familiar with the business and financial condition,
properties, operations and prospects of POC;
(b) Payee has been given full access to all material information
concerning the condition, properties, operations and prospects of POC. Payee
and its advisors have had an opportunity to ask questions of, and to receive
information from, POC and persons acting on its behalf concerning the terms
and conditions of Payee's receipt of POC Common Stock, and to obtain any
additional information necessary to verify the accuracy of the information and
date received by Payee. Payee is satisfied that there is no material
information concerning the condition,
<PAGE>
properties, operations and prospects of POC of which the Payee is unaware;
and,
(c) Payee has made, either alone or together with its advisors,
such independent investigation of POC, its management and related matters as
Payee deems to be, or Payee's advisors have advised to be, necessary or
advisable in connection with its receipt of POC Common Stock; and Payee and
its advisors have received all information and data which Payee and its
advisors believe to be necessary in order to reach in informed decision as to
the advisability of receiving POC Common Stock; and,
(d) Any POC Common Stock acquired by Payee hereunder is being
acquired for investment purposes for its own account and not with a view
towards distribution; Payee shall not dispose of any POC Common Stock except
in compliance with applicable securities laws.
5. Cessation of Business. In the event that Payor is unable to
----------------------
realize a rate of return from the Business customary for the CNG business or
businesses similar to the CNG business, Payor shall have the right to cease
operations of the Business and shall have no further obligation under this
Royalty Note; provided, however, that no affiliate of Payor continues in
activities related to or a part of the Business other than the sale of CNG and
CNG-powered vehicles and the conversion of vehicles to CNG-powered vehicles.
<PAGE>
6. Sale of Business. Should Payor elect to sell the Business prior
----------------
to the expiration of the Royalty Period, Payor shall pay to Payee fifty
percent (50%) of the total consideration received from the sale of the
Business up to the total amount of Three Million Dollars ($3,000,000.00) less
----
the total Royalty Payments received prior thereto by Payee and offsets, if
any, against the total amount of Royalty owing hereunder as set forth in
Section 7 hereof; provided, however, that in the event that Buyer should sell
the Business prior to one (1) year after the date hereof, Buyer shall not be
entitled to any offsets against this Royalty Note for the Royalty Adjustment
(as defined in Section 8 below).
7. Offset. The total amount of Royalty due and payable hereunder
------
shall be subject to offset for (a) Royalty Payments paid by Payor to Payee
pursuant to that certain Interim Operating Agreement between Payor and Payee,
(b) the Royalty Note Adjustment (as defined in Section 1.06 of that certain
Purchase Agreement (the "Purchase Agreement") among Payee, and ZHI, on the one
hand, and Payor and POC, on the other hand), (c) any amounts due for warranty
work performed by Buyer as provided in Section 13.07 of the Purchase
Agreement, (d) Damages (as defined in Section 14.01 of the Purchase
Agreement), and (e) any amounts paid by Payee to Company's creditors pursuant
to Section 1.10 of the Interim Operating Agreement. Notwithstanding the
foregoing, Payee shall continue to make, when due, Royalty Payments hereunder.
8. Inspection Rights. During the Royalty Period, Payor shall keep
-----------------
accurate records of all Net Revenues (as defined in Section 1 hereof),
including sales made by affiliates of Buyer, and with each payment made
pursuant to this Royalty Note shall deliver to Payee a report indicating the
Net Revenues for the corresponding fiscal quarter, and Payee and its
representatives shall have the right, not more than once in each of Payor's
fiscal quarters during the Royalty Period, and upon reasonable notice and
during normal business hours, to audit and inspect, at Payee's sole cost and
expense, Payor's records of Net Revenues for all such fiscal quarters;
provided, however, that in no event shall Payee have the right to audit any
period more than once.
9. Royalty Payments Pending Royalty Note Adjustment. Notwithstanding
------------------------------------------------
anything to the contrary contained herein, Payor shall have no obligation to
pay to Payee Royalty Payments hereunder in excess of One Million Nine Hundred
Thousand Dollars ($1,900,000) during the period commencing the date hereof and
ending as of the first anniversary of the date hereof.
10. Late Charge. Any payment of accrued Royalty which is not paid on
-----------
the due date therefor, and which remains unpaid after ten (10) business days
written notice by Payee to Payor, shall bear a late charge equal to five
percent (5%) of the amount of the accrued Royalty which is not paid when due.
Payor acknowledges that this late charge represents fair compensation for any
loss which would be sustained by Payee for administrative expenses and cost of
money wrongfully withheld by Payor. Such late charge shall be paid with the
accrued Royalty with respect to which it is accrued. In the event that the
late charge is deemed to constitute interest and to exceed the maximum rate of
interest allowable under applicable law, then the obligation to be fulfilled
shall be reduced automatically to the extent necessary to prevent the
effective rate of interest from exceeding the maximum legal rate.
11. Costs of Collection. Should Payor fail to pay any amounts due
-------------------
under this Royalty Note or any portion thereof in a timely manner, Payee shall
be entitled to, and Payor agrees to pay to Payee immediately upon demand
therefor by Payee, all costs and expenses of collection, including, without
limitation, attorney's fees and all other expenses of enforcing payment.
12. Waiver. The rights and remedies of Payee under this Royalty Note
------
shall be cumulative and not alternative. No waiver by Payee of any right or
remedy under this Royalty Note shall be effective unless in a writing signed
by Payee. Neither the failure nor any delay in exercising any right, power or
privilege under this Royalty Note will operate as a waiver of such right,
power or privilege and no single or partial exercise of any such right, power
or privilege by Payee will preclude any other or further exercise of such
right, power or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right of Payee arising out of this Royalty Note can be
discharged by Payee, in whole or in part, by a waiver or renunciation of the
claim or right unless in a writing, signed by Payee; (b) no waiver that may be
given by Payee will be applicable except in the specific instance for which it
is given; and, (c) no notice or demand on Payor will be deemed to be a waiver
of any obligation of Payor or the right of Payee to take further action
without notice or demand as provided in this Royalty Note. Payor hereby
waives presentment, demand, protest and notice of dishonor and protest and any
other notice of any kind, except as expressly provided for herein.
13. Notice. Any notice or other communication provided for in this
------
Royalty Note shall be in writing and sent to the parties named at the
addresses listed below or at such other address as the parties may from time
to time in writing designate.
To Payor: Wilson Acquisition Corporation
c/o Penn Octane Corporation
5847 San Felipe, Suite 3420
Houston, Texas 77057
Attn: Jerome B. Richter
Tel: (713) 952-5703
Fax: (713) 952-1323
Copy to: Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: Arnold H. Tracy, Esq.
Tel: (212) 626-4400
Fax: (212) 626-4120
To Payee: Wilson Technologies Incorporated
c/o Zimmerman Holdings, Inc.
2600 Mission Street, Suite 100
San Marino, CA 91108-1676
Attn.: William R. Zimmerman
Tel: (818) 441-0444
Fax: (818) 441-6946
Copy to: Rodi, Pollock, Pettker, Galbraith
& Cahill, A Law Corporation
801 South Grand Avenue, Suite 400
Los Angeles, CA 90017
Attn.: Henry P. Pramov, Jr., Esq.
Tel: (213) 895-4900
Fax: (213) 895-4921
Any notice or communication that is properly addressed as provided in this
Paragraph, will be deemed received (a) upon delivery, if delivered personally,
(b) on the third business day after deposit in a regular depository of the
United States mail, if delivered by United States registered or certified
first class mail, (c) on the day of transmission, if delivered by facsimile,
unless such transmission is sent after 3:00 p.m. (time of the receiving
party), or on a day which is not a business day of the receiving party, in
which case such transmission will be deemed received on the first business day
after the transmission, and (d) on the first business day of the receiving
party after the delivery to the courier, if delivered by overnight courier.
Any party from time to time may change its address for the purpose of this
provision by furnishing a notice in accordance with this Section.
14. Severability. If any provision of this Royalty Note is held
------------
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Royalty Note will remain in full force and effect. Any
provision of this Royalty Note held unenforceable only in part or degree will
remain in
<PAGE>
full force and effect to the extent not held invalid or unenforceable.
15. Governing Law. This Royalty Note shall be governed by the laws
-------------
of the State of California without regard to conflicts of laws principles.
16. Parties in Interest. This Royalty Note shall bind Payor and
-------------------
Payee and their successors and assigns.
17. Security. This Royalty Note is guaranteed by POC pursuant to
--------
Section 13.08 of that certain Purchase Agreement dated March 7, 1997, among
Payee and ZHI, on the one hand, and Payor and POC, on the other hand.
18. Assignment. This Royalty Note may be assigned by Payee to any
----------
affiliate of Payee or any creditor of Payee without prior consent of Payor;
provided, however, that in the event Payee assigns this Royalty Note to an
individual or entity, other than ZHI, Zimmerman or an affiliate thereof, such
individual or entity shall have no right to receive stock in lieu of cash
under this Royalty Note.
IN WITNESS WHEREOF, the undersigned has duly executed this Royalty Note
on the day and year first above written.
WILSON ACQUISITION CORPORATION,
a Delaware Corporation
By:
Its:
[Signatures continued on next page]
<PAGE>
The undersigned hereby acknowledges and agrees to be bound by Section 3
hereof.
PENN OCTANE CORPORATION, a
Delaware corporation
By:
Its:
[Signatures continued from previous page]
<PAGE>
EXHIBIT B
CONVERTIBLE DEBENTURE
---------------------
$ 220,000.00 Los Angeles, California
, 199
FOR VALUE RECEIVED, the undersigned, PENN OCTANE CORPORATION, a Delaware
corporation, its successors and assigns ("POC"), promises to pay to ZIMMERMAN
HOLDINGS INCORPORATED, a California corporation, its successors and assigns
("ZHI"), the principal sum of Two Hundred Twenty Thousand Dollars
($220,000.00), together with interest from and after the date hereof on said
principal balance as shall from time to time remain unpaid at the rate of
eight and one quarter percent (8.25%) per annum, in the manner hereinafter set
forth. The principal sum shall be due and payable on the business day which
is twelve months from the date hereof (the "Maturity Date"), or, in the event
the Maturity Date shall fall on a Saturday, Sunday or holiday, on the last
business day immediately preceding the Maturity Date, at which time all
principal and interest outstanding shall be due and payable. Interest on this
Convertible Debenture shall be calculated on the basis of a 365-day year for
the actual number of days elapsed in any portion of a month for which interest
may be due.
This Convertible Debenture is the "Convertible Debenture" referred to in
that certain Purchase Agreement, of even date herewith, among Wilson
Technologies Incorporated, a California corporation ("Wilson"), a wholly-owned
subsidiary of ZHI, and ZHI, on the one hand, and Wilson Acquisition
Corporation, a Delaware corporation, a wholly-owned subsidiary of POC, and
POC, on the other hand (the "Purchase Agreement"). Capitalized terms used
herein and not otherwise defined herein which are defined in the Purchase
Agreement shall have the same meaning herein as set forth in the Purchase
Agreement.
19
ARTICLE I
CONVERSION RIGHT
1.01 Conversion Right. Subject to and upon compliance with the
----------------
provisions of this Article I, ZHI shall have the right, at its option, upon
written notice to POC not later than two (2) business days prior to the
Maturity Date, to convert, at the Maturity Date, the principal amount of this
Convertible Debenture into restricted Common Stock (as defined in Section 1.04
below) of POC, at a conversion price per share equal to eighty percent (80%)
of the average market price per share quoted by NASDAQ for the twenty (20)
trading days immediately preceding the date of conversion, upon surrender of
this Convertible Debenture. For purposes of this paragraph, market price per
share of POC Common Stock for any day shall mean the average of the bid and
asked prices for such day.
1.02 Issuance of Common Stock. As soon as practicable after surrender
------------------------
of this Convertible Debenture for conversion, as provided herein, POC shall
deliver to ZHI certificates representing the restricted Common Stock of POC
into which this Convertible Debenture has been converted. Such conversion
shall be deemed to have been made at the close of business on the Maturity
Date, so that all rights of ZHI under the Convertible Debenture shall cease at
such time, and ZHI shall be treated for all purposes as having become the
record holder of such Common Stock at such time.
1.03 Reserves. POC covenants that it will at all times reserve and keep
--------
available, free from preemptive rights, out of its authorized but unissued
Common Stock, shares sufficient to satisfy the conversion obligations
hereunder. POC covenants that all shares of Common Stock which shall be so
issuable shall, upon issuance, be duly and validly issued, fully paid and
non-assessable. POC shall from time-to-time, in accordance with applicable
law, increase the authorized amount of Common Stock if at any time the
authorized amount of its Common Stock remaining unissued shall not be
sufficient to permit the conversion hereunder.
1.04 Common Stock. Whenever reference is made herein to the issue of
-------------
Common Stock, the term "Common Stock" shall include only shares of the class
designated Common Stock, $.01 par value, of POC as of the date hereof, which
shall have registration rights, but which have no preference in respect of
dividends or of amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of POC and which are not subject to
redemption by POC.
1.05 Registration Rights. Any Common Stock of POC acquired by ZHI
--------------------
pursuant to this Convertible Debenture shall be subject to the registration
rights set forth below:
(a) If POC shall determine to register any of its securities
(other than a Form S-8 or other form suitable for employee benefit plans)
either for its own account or the account of any investor who holds
registrable securities or to whom registration rights have been conferred by
POC (hereinafter "Holders"), POC shall:
(i) promptly give ZHI written notice thereof; and,
(ii) include in such registration (and in any related
qualification under blue sky laws, the securities laws of any state where the
securities are to be issued, or any other compliance), and in any underwriting
involved therein, all of the securities specified in a written request made by
ZHI to POC within twenty (20) days after the written notice from POC described
in clause (i) above (the "Registerable Securities").
(b) If the registration of which POC gives notice is for a
registered public offering involving an underwriter, POC shall so advise ZHI
as part of the written notice given pursuant to Section 1.05(a)(i) above.
(c) All registration expenses incurred in connection with any
registration, qualification or compliance pursuant to this Section 1.05 shall
be borne by POC; provided, however, that ZHI shall bear its own legal and
accounting fees and costs and any underwriting discounts or commissions
incurred in connection with the sale of its shares of POC.
<PAGE>
(d) In the case of registration effected by POC pursuant to this
Section 1.05, POC shall keep ZHI advised in writing as to the initiation of
each registration and as to the completion thereof. At its expense, POC shall
use its best efforts to:
(i) Keep registration effective for a period of one hundred
twenty (120) days or until ZHI has completed the distribution described in the
registration statement relating thereto, whichever first occurs; provided,
however, that such 120-day period shall be extended for a period of time equal
to the period ZHI refrains from selling any securities included in such
registration at the request of an underwriter of POC;
(ii) Prepare and file with the Securities and Exchange
Commission, or any other federal agency at the time administering the
Securities Act of 1933 (the "Commission") such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of
the Securities Act of 1933, as amended, or any similar successor federal
statute and the rules and regulations thereunder (the "Securities Act"), with
respect to the disposition of all securities covered by such registration
statement;
(iii) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus,
as ZHI may from time to time request;
(iv) Notify ZHI at any time when a prospectus relating to
the Registerable Securities is required to be delivered under the Securities
Act of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
incomplete in light of the circumstances then existing, and at the request of
any such seller, prepare and furnish such seller a reasonable number of copies
of a supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such shares, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in light of the circumstances
then existing;
(v) Cause such Registerable Securities registered pursuant
to this Section 1.05 to be listed on each securities exchange on which similar
securities issued by POC are then listed;
(vi) Provide a transfer agent and registrar for all
Registerable Securities registered pursuant hereto not later than the
effective date of such registration; and
<PAGE>
(vii) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than 18 months,
beginning with the first month after the effective date of a registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.
(e) POC will indemnify ZHI, each of its officers, directors and
partners, legal counsel and accountants and each person controlling ZHI within
the meaning of Section 15 of the Securities Act and Section 13 of the Exchange
Act, with respect to which registration, qualification or compliance has been
effected pursuant hereunder, and each underwriter, if any, and each person who
controls, within the meaning of Section 15 of the Securities Act and Section
13 of the Exchange Act, any underwriter, against all expenses, claims, losses,
damages and liabilities (or actions, proceedings or settlements in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering circular
or other document (including any related registration statement, notification
or the like) incident to any such registration, qualification or compliance,
or based on any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or any violation by POC of the Securities Act or any rule or
regulation thereunder applicable to POC and relating to action or inaction
required by POC in connection with any such registration, qualification or
compliance, and will reimburse ZHI, each of its officers, directors, partners,
legal counsel and accountants and each person controlling ZHI, each such
underwriter and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating
and defending or settling any such claim, loss, damage, liability or action.
ZHI shall give notice to POC, under this section, promptly after ZHI
has actual knowledge of any claim as to which indemnity might be sought, and
shall permit POC to assume the defense of any such claim or any litigation
resulting therefrom, provided that counsel for POC, who shall conduct the
defense of such claim or any litigation resulting therefrom, shall be approved
by ZHI (whose approval shall not be unreasonably withheld), and ZHI may
participate in such defense at ZHI's expense, and provided further that the
failure of ZHI to give notice as provided herein shall not relieve POC of its
obligations under this Section 1.05(e), to the extent such failure is not
prejudicial. POC shall not, in the defense of any such claim or litigation,
except with the consent of ZHI, consent to the entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof
the giving by the claimant or plaintiff to ZHI of a release from all liability
in respect to such claim or litigation. ZHI shall furnish such information
regarding itself or the claim in question as POC may reasonably request in
writing and as shall be reasonably required in connection with the defense of
such claim and litigation resulting therefrom.
If the indemnification provided for in this Section 1.05(e) is held
by a court of competent jurisdiction to be unavailable to ZHI with respect to
any loss, liability, claim, damage or expense referred to therein, then POC,
in lieu of indemnifying ZHI hereunder, shall contribute to the amount paid or
payable by ZHI as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of POC on
the one hand and of ZHI on the other in connection with the statements or
omissions which resulted in such loss, liability, claim, damage or expense as
well as any other relevant equitable considerations. The relative fault of
POC and ZHI shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission to
state a material fact relates to information supplied by POC or by ZHI and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in any underwriting agreement
entered into in connection with any
<PAGE>
underwritten public offering are in conflict with the foregoing, the
provisions in the underwriting agreement shall control.
(f) With a view to making available the benefits of certain
rules and regulations of the Commission which may permit the sale of
restricted securities to the public without registration, POC, so long as
Wilson, ZHI, William R. Zimmerman ("Zimmerman") or any affiliate thereof owns
any POC Common Stock acquired pursuant to this Convertible Debenture, agrees
to use its reasonable best efforts to:
(i) make and keep public information, as those terms are
understood and defined in Rule 144 as promulgated by the Commission under the
Securities Act, as such rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission ("Rule 144"), at all
times from and after ninety (90) days following the effective date of the
first registration under the Securities Act filed by POC for an offering of
its securities to the general public;
(ii) file with the Commission in a timely manner all
reports and other documents required of POC under the Securities Act and the
Securities Exchange Act of 1934, as amended, or any similar successor federal
statute and the rules and regulations thereunder (the "Exchange Act"), at any
time after it has become subject to such reporting requirements; and,
(iii) so long as ZHI owns any Common Stock of POC acquired
pursuant to this Agreement, furnish to ZHI forthwith upon written request a
written statement by POC as to its compliance with the reporting requirements
of Rule 144 (at any time from ninety (90) days following the effective date of
the first registration statement filed by POC for an offering of its
securities to the general public), and of the Securities Act and the Exchange
Act (at any time after it has become subject to such reporting requirements),
a copy of the most recent annual or quarterly report of POC, and such other
reports and documents so filed as ZHI may reasonably request in availing
itself of any rule or regulation of the Commission allowing ZHI to sell any
such securities without registration.
(g) POC shall not limit the number of Registerable Securities to
be included in a registration pursuant to this Section 1.05 in order to
include in the offering any of the following:
(i) shares held by stockholders with no registration
rights;
(ii) founder's stock or any other shares of stock issued to
employees, officers, directors or consultants pursuant to any POC employee
stock option plan; or,
(iii)securities registered for POC=s own account unless POC
determines in good faith based upon the advice of its underwriter that an
offering of Registerable Securities in conjunction with securities registered
for POC's own account is not feasible or impracticable and will not be
successful in the marketplace.
<PAGE>
(h) ZHI's rights under this Section 1.05 shall expire upon the
earlier to occur of the following:
(i) expiration of the applicable holding periods
restricting the resale of POC Common Stock set forth in Rule 144; and
(ii) the occurrence of two (2) registrations effected by
POC after the last issuance of POC Common Stock hereunder.
(i) Any share certificates delivered pursuant hereto shall bear
appropriate legends.
ARTICLE II
PREPAYMENT RIGHT
2.01 Prepayment Right. POC shall have the right, without premium
----------------
or penalty, to prepay any or all of this Convertible Debenture on any date
prior to the Maturity Date upon five (5) business days written notice to ZHI
and upon payment of any or all of the principal amount and accrued interest,
if any, then outstanding on this Convertible Debenture, in either shares or
cash, at the option of ZHI. If a partial prepayment is made, such payment
shall be allocated first to interest accrued but unpaid, and thereafter to
principal either in direct order of maturity or inverse order of maturity as
POC may elect at the time such prepayment is made.
2.02 Conversion Option on Prepayment. In the event that POC elects
-------------------------------
to prepay any or all of this Convertible Debenture prior to the Maturity Date,
POC shall provide ZHI with no less than five (5) business days written notice
prior to prepayment of this Convertible Debenture which notice shall state
POC's intention prepay the full principal amount of this Convertible
Debenture, or any portion thereof, and the date on which such prepayment shall
be made (the "Prepayment Date"). ZHI shall have the option to notify POC
prior to the Prepayment Date of ZHI's election to receive fully paid and
non-assessable shares of Common Stock of POC, in an amount equal to the
product of the amount of principal POC elects to prepay multiplied by eighty
percent (80%) of the market price per share quoted by NASDAQ on the Prepayment
Date, as payment of the unpaid principal amount, in lieu of cash on prepayment
of this Convertible Debenture.
ARTICLE III
COVENANTS OF POC
3.01 Manner of Payment. Except as set forth herein, all payments made
-----------------
on account of the indebtedness evidenced by this Convertible Debenture shall
be made in currency and coin of the United States of America which shall be
legal tender for the public and private debts at the time of payment.
3.02 Place of Payment. Payments are to be made at such place as ZHI may
----------------
from time to time in writing designate.
ARTICLE IV
REMEDIES IN EVENT OF DEFAULT
4.01 Event of Default. The following shall constitute an event of
------------------
default under this Convertible Debenture (an "Event of Default"):
(a) Non-payment of interest or principal on this Convertible
Debenture within five (5) business days after the due date thereof in
accordance with the terms hereof; or,
(b) In the event that: (i) POC shall file a voluntary petition
in bankruptcy or for arrangement, reorganization or other relief under the
Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), or any similar
law, state or federal, now or hereafter in effect; (ii) POC shall file an
answer or other pleading in any proceeding admitting insolvency, bankruptcy,
or inability to pay its debts as they mature or shall make an assignment for
the benefit of creditors; (iii) within sixty (60) days after the filing
against POC of any involuntary proceeding under the Bankruptcy Code or similar
law, state or federal, now or hereafter in effect, such proceedings shall not
have been dismissed or stayed; (iv) any order appointing a custodian,
receiver, trustee or liquidator of POC with respect to all or a major part of
its property is not stayed or vacated within sixty (60) days following the
entry thereof.
4.02 Acceleration. At any time after the occurrence of an Event of
------------
Default, at the election of ZHI and upon written notice to POC, the principal
balance remaining unpaid hereon, together with accrued interest thereon, shall
become at once due and payable.
<PAGE>
ARTICLE V
MISCELLANEOUS
5.01 Voting. ZHI, as a holder of this Convertible Debenture, shall
------
not be entitled to vote or receive dividends or be considered a shareholder of
POC for any purposes, nor shall anything in this Convertible Debenture be
construed to confer on ZHI, as holder of this Convertible Debenture, any
rights of a shareholder of POC or any right to vote, to give or withhold
consent to any corporate action, to receive notice of meetings of
shareholders, to receive dividends or subscription rights or otherwise.
5.02 Investment Representations.
---------------------------
(a) ZHI is familiar with the business and financial condition,
properties, operations and prospects of POC;
(b) ZHI has been given full access to all material information
concerning the condition, properties, operations and prospects of POC. ZHI
and its advisors have had an opportunity to ask questions of, and to receive
information from, POC and persons acting on its behalf concerning the terms
and conditions of ZHI's receipt of POC Common Stock, and to obtain any
additional information necessary to verify the accuracy of the information and
data received by ZHI. ZHI is satisfied that there is no material information
concerning the condition, properties, operations and prospects of POC of which
ZHI is unaware; and,
<PAGE>
(c) ZHI has made, either alone or together with its advisors,
such independent investigation of POC, its management and related matters as
ZHI deems to be, or ZHI's advisors have advised to be, necessary or advisable
in connection with its receipt of POC Common Stock; and ZHI and its advisors
have received all information and data which ZHI and its advisors believe to
be necessary in order to reach in informed decision as to the advisability of
receiving POC Common Stock; and
(d) ZHI is acquiring this Convertible Debenture for investment
purposes for its own account and not with a view towards distribution, and
shall not dispose of any POC Common Stock except in compliance with applicable
securities laws.
5.03 Transfer. Title to this Convertible Debenture shall be
--------
transferrable by ZHI, at the sole and absolute discretion of ZHI, upon five
(5) business days written notice to POC of such intent to transfer; provided,
however, that in the event ZHI assigns this Convertible Debenture to an
individual or entity other than an affiliate of ZHI, such entity or individual
shall have no conversion right under Article I hereof or any right to receive
POC Common Stock upon prepayment under Section 2.01 hereof. Under such
circumstances, POC shall have the option to convert the principal and any
interest outstanding into its common stock pursuant to Article I hereof or
Section 2.01 hereof, as the case may be.
5.04 Attorneys' Fees. If any legal action or arbitration or other
---------------
proceeding is brought for enforcement of this Convertible Debenture, or
because of an alleged dispute, breach, default or misrepresentation in
connection with any provisions of this Convertible Debenture, the successful
or prevailing party shall be entitled to recover reasonable attorneys' fees
and other costs incurred in that action or proceeding in addition to any other
relief to which it may be entitled.
5.05 Interpretation. Wherever possible, each provision of this
--------------
Convertible Debenture shall be interpreted in such a manner as to be effective
and valid under applicable law, but if any provision of this Convertible
Debenture shall be prohibited 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 Convertible Debenture. No delay or failure on the part of ZHI in the
exercise of any right or remedy hereunder shall operate as a waiver thereof,
nor as an acquiescence in any default, nor shall any single or partial
exercise by ZHI of any right or remedy preclude any other right or remedy.
5.06 Amendment. This Convertible Debenture may not be changed
---------
orally, but only by an agreement in writing signed by the party against whom
enforcement of any waiver, change, modification or discharge is sought.
5.07 Governing Law. POC agrees that this Convertible Debenture and the
-------------
rights and obligations of all parties hereunder shall be governed by and
construed under the substantive laws of the State of California.
5.08 Late Charge. Any payment hereunder which is not paid on the due
-----------
date thereof and which shall remain unpaid after ten (10) business days
written notice by ZHI to POC shall bear a late charge equal to five percent
(5%) of the amount of the payment which is not paid when due. POC
acknowledges that this late charge represents fair compensation for any loss
which would be sustained by ZHI for administrative expenses and cost of money
wrongfully withheld by POC. Such late charge shall be paid with the payment
with respect to which it is accrued. In the event that the late charge is
deemed to constitute interest and to exceed the maximum rate of interest
allowable under applicable law, then the obligation to be fulfilled shall be
reduced automatically to the extent necessary to prevent the effective rate of
interest from exceeding the maximum legal rate.
IN WITNESS WHEREOF, the undersigned has caused this Convertible Debenture
to be executed as of the day and year first above written.
"POC"
PENN OCTANE CORPORATION, a Delaware corporation
By:
Title:
EXHIBIT C
SG&A NOTE
----------
$ , 199
FOR VALUE RECEIVED, the undersigned, WILSON ACQUISITION CORPORATION, a
Delaware corporation ("Payor"), promises to pay to WILSON TECHNOLOGIES
INCORPORATED, a California corporation ("Payee"), or order, the aggregate
principal sum of _______________________ ($____________), together with
interest thereon at the rate of 8.25% per annum until paid, in the manner
hereinafter set forth:
1. Principal and Interest. Principal together with interest thereon
----------------------
shall be due and payable in full on __________________ ___, 199__ [six months
after the date hereof].
2. Payments. Each payment shall be credited on interest then due and
--------
the remainder on principal; and the interest shall thereupon cease upon the
principal so credited. Principal and interest shall be payable in lawful
money of the United States.
3. Costs of Collection. Should Payor fail to pay this Note or any
-------------------
portion thereof in a timely manner, Payee shall be entitled to, and Payor
agrees to pay to Payee immediately upon demand therefor by Payee, all costs
and expenses of collection, including, without limitation, attorney's fees and
all other expenses of enforcing payment.
4. Event of Default. The occurrence of any of the following shall be
----------------
deemed to be an event of default ("Event of Default") hereunder:
4
(a) any payment due hereunder (whether principal, interest, late
charge or any combination thereof) which is not paid when due;
(b) Payor makes a general assignment for the benefit of
creditors, or becomes insolvent (however such insolvency is evidenced);
(c) any petition for relief under the Bankruptcy Code or similar
state insolvency or debt moratorium statute is filed by or against Payor and
not dismissed within thirty (30) days after filing; or,
(d) any governmental authority, court or court appointed receiver
or officer shall take possession and control of all or a substantial portion
of the property and assets of and affairs of Payor and such possession and
control is not relinquished within ten (10) days.
5. Acceleration. If any Event of Default shall occur for any reason
------------
whatsoever, Payee, or its assignees, may at any time by a notice in writing to
Payor declare this Note to be immediately due and payable in full, whereupon
it shall become due and payable in full.
6. Late Charge. Any payment of principal and/or interest which is
-----------
not paid on the due date therefor, and which shall remain unpaid after ten
(10) business days written notice of non-payment from Payee to Payor, shall
bear a late charge equal to five percent (5%) of the amount of the installment
of principal and/or interest which is not paid when due. Payor acknowledges
that this late charge represents fair compensation for any loss which would be
sustained by Payee for administrative expenses and cost of money wrongfully
withheld by Payor. Such late charge shall be paid with the unpaid installment
with respect to which it is accrued. In the event that the late charge is
deemed to constitute interest and to exceed the maximum rate of interest
allowable under applicable law, then the obligation to be fulfilled shall be
reduced automatically to the extent necessary to prevent the effective rate of
interest from exceeding the maximum legal rate.
7. Prepayment. At the option of Payor, the principal and interest of
----------
this Note may be prepaid in whole or in part at any time without premium or
penalty. Any prepayment of principal, if less than the entire outstanding
principal balance, shall be credited against installments thereafter falling
due in inverse order of maturity.
8. Waiver. The rights and remedies of Payee under this Note shall be
------
cumulative and not alternative. No waiver by Payee of any right or remedy
under this Note shall be effective unless in a writing signed by Payee.
Neither the failure nor any delay in exercising any right, power or privilege
under this Note will operate as a waiver of such right, power or privilege and
no single or partial exercise of any such right, power or privilege by Payee
will preclude any other or further exercise of such right, power or privilege.
To the maximum extent permitted by applicable law, (a) no claim or right of
Payee arising out of this Note can be discharged by Payee, in whole or in
part, by a waiver or renunciation of the claim or right unless in a writing,
signed by Payee; (b) no waiver that may be given by Payee will be applicable
except in the specific instance for which it is given; and (c) no notice or
demand on Payor will be deemed to be a waiver of any obligation of Payor or
the right of Payee to take further action without notice or demand as provided
in this Note. Payor hereby waives presentment, demand, protest and notice of
dishonor and protest and any other notice of any kind, except as expressly
provided for herein.
9. Notice. Any notice or other communication provided for in this
------
Note shall be in writing and sent to the parties named at the addresses listed
below or at such other address as the parties may from time to time in writing
designate.
To Payor: Wilson Acquisition Corporation
c/o Penn Octane Corporation
5847 San Felipe, Suite 3420
Houston, Texas 77057
Attn: Jerome B. Richter
Tel: (713) 952-5703
Fax: (713) 952-1323
Copy to: Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Attn: Arnold H. Tracy, Esq.
Tel: (212) 626-4400
Fax: (212) 626-4120
<PAGE>
To Payee: Wilson Technologies Incorporated
c/o Zimmerman Holdings, Inc.
2600 Mission Street, Suite 100
San Marino, CA 91108-1676
Attn.: William R. Zimmerman
Tel: (818) 441-0444
Fax: (818) 441-6946
Copy to: Rodi, Pollock, Pettker, Galbraith
& Cahill, A Law Corporation
801 South Grand Avenue, Suite 400
Los Angeles, CA 90017
Attn.: Henry P. Pramov, Jr., Esq.
Tel: (213) 895-4900
Fax: (213) 895-4921
Any notice or communication that is properly addressed as provided in this
Paragraph, will be deemed received (a) upon delivery, if delivered personally,
(b) on the third business day after deposit in a regular depository of the
United States mail, if delivered by United States registered or certified
first class mail, (c) on the day of transmission, if delivered by facsimile,
unless such transmission is sent after 3:00 p.m. (time of the receiving
party), or on a day which is not a business day of the receiving party, in
which case such transmission will be deemed received on the first business day
after the transmission, and (d) on the first business day of the receiving
party after the delivery to the courier, if delivered by overnight courier.
Any party from time to time may change its address for the purpose of this
provision by furnishing a notice in accordance with this Section.
<PAGE>
10. Severability. If any provision of this Note is held invalid or
------------
unenforceable by any court of competent jurisdiction, the other provisions of
this Note will remain in full force and effect. Any provision of this Note
held unenforceable only in part or degree will remain in full force and effect
to the extent held invalid or unenforceable.
11. Governing Law. This Note shall be governed by the laws of the
-------------
State of California without regard to conflicts of laws principles.
12. Parties in Interest. This Note shall bind Payor and its
---------------------
successors and assigns.
13. Security. This Note is guaranteed by Penn Octane Corporation, a
--------
Delaware corporation ("POC"), pursuant to Section 13.08 of that certain
Purchase Agreement dated March 7, 1997, among Payee and Zimmerman Holdings,
Inc., a California corporation, on the one hand, and Payor and POC, on the
other hand.
IN WITNESS WHEREOF, the undersigned has duly executed this Note on the
day and year first above written.
WILSON ACQUISITION CORPORATION,
a Delaware Corporation
By:
Its:
